Saturday, July 02, 2011

Why The 1870s Wasn't As Bad As Some Say

In an attempt to attack laissez faire policies, historian Francois Furstenberg describes United States in the 1870s as a period of widespread misery, poverty and social unrest that finally convinced the "robber barons" that according to him controlled politicians to embrace the welfare state.

I have no idea whether his numbers about strikes and other forms of social unrest during that period are accurate, so I won't discuss them. What seems clear however is that his description of economic growth in the 1870s is misleading to say the least.

One problem that immediately should be apparent is that if the 1870s was so bad that it made the "robber barons" embrace the welfare state, and if they controlled politics, why wasn't the welfare state introduced until 60 years later?

And if the slump was as bad or worse than the Great Depression, then how come historical sources indicate that the 1870s as a whole was a period of unprecedented growth?

According to this estimate, the U.S. share of global industrial production rose from 23% in 1870 to 29% in 1883, implying a relative gain of nearly 2% per year. And given the fact that global production rose too, this implies very big absolute gains.

As Murray Rothbard puts it:

"Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-perannum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita"

While the fact that data over the economy weren't gathered as systematically as today means that you should treat these numbers with extra grains of salts, the fact is that the indicators of economic activity that does exist indicates that the 1870s was a period of economic strength, not weakness, for the United States in particular, despite the cyclical setbacks caused by some bank failures.


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