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Home | Blog | The Myth of the Great Depression of 1873

The Myth of the Great Depression of 1873

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.” It might be useful to quote Rothbard in depth on the “myth of the ‘great depression’ of the 1870s.
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 the 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 [emphasis mine]? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum 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.
And he continues:
It should be clear, then, that the "great depression" of the 1870s is merely a myth – a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. …  Unfortunately most historians and economists are conditioned to believe that steadily fall prices must [emphasis original] result in depression: hence amazement at the obvious prosperity and economic growth during this era.
Rothbard. 2002. A History of Money and Banking in the United States: The Colonial Era to World War II. Pp. 154-55 Appears to be a very complete explanation.

Jeffrey Herbener teaches economics at Grove City College and is chairman of the economics department. He is assistant editor of the Quarterly Journal of Austrian Economics.

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