The Myth of the Depression of 1873: More Evidence of a Bright Future for Austrian Economics
More evidence the future of Austrian economics is in good hands is Patrick Newman’s (a PhD student at George Mason University and a participant in the 2012 Mises Institute Summer Fellowship program) excellent piece of scholarship recently published in the Quarterly Journal of Austrian Economics as “The Depression of 1873: An Austrian Perspective.” The paper is extremely important and timely as the Great Depression of 1873-1879 is often used against Austrians as a counter example of a long depression with relatively laissez-faire macro policies and no central bank. An example is provided by Jeffrey M. Herbener in a short blog that provides a response based on work by Rothbard. The Herbener’s example which is representative of many critics:
In a comment at Coordination Problem, “Is This How the Myth of the Laissez Faire Herbert Hoover Was Invented?” Barkley Rosser challenges Austrians with the following, “As it is, I await somebody explaining the 1870s to us, still the second worst depression in US history, and one where there was pretty much complete wage and price flexibility as well as no Fed, although as Steve Horwitz points out, there was a lot of state regulation of banks.”
If the criticism is valid, it is a real challenge to Austrian policies and to work that attempts to show the failure of the Federal Reserve System. Newman important contribution provides a detailed and scholarly refutation. He, in detail shows how ABCT applied to the period which had no central bank, but had special privileges to banks that allowed excessive credit creation through pyramided fractional reserve banking. He then clearly documents the Panic of 1873 and a Bust from 1873 to 1875. However, despite (or maybe because of) continuing deflation the 1875-1879 was a period of robust real growth. His concludes by citing Rothbard, “On this period Rothbard ( 2005, pp. 154–155) appropriately writes, “It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth—a sharply during the entire period.” myth brought about by misinterpretation that prices in general fell.
This paper analyzes the period 1867–1879 in American economic history from an “Austrian” perspective. The post-Civil War boom, the Panic of 1873, and the subsequent downturn are investigated in light of Austrian Business Cycle Theory (ABCT) and its structure of production framework. This paper shows how recent legislation allowed for monetary inflation and a boom to develop that inevitably turned into a bust. However, since the federal government pursued a policy of relative laissez faire, the economy successfully recovered. Consequently, there was no prolonged depression in the 1870s.
Overall a very strong scholarly rebuttal to the Rosser critique. With this quality of scholarship, the future of Austrian economics is in good hands.