There is a common belief among keynesians that a situation of a falling prices will result in a recession, that is, the business cycle is related to the fluctuations in prices. The periods running from 1873 to 1879 and 1879 to 1896 show a huge increase in GNP per capita, see Rothbard (2002) “A History of Money and Banking in the United States” (see pages 360-361, 400-403, 154-155, 159-161, 164). He explains that deflation causes unemployment when wages are held constant by labor unions. See also Selgin’s book "Less Than Zero" (pages 49-53).
But the question of unemployment rate seems to be systematically avoided by austrians (as far as I know). Milton Friedman and Anna J. Schwartz in their famous book “A Monetary History of the United States” (1963, see chart 8 & 8 bis, and also chart 3 for a comparison) reached the conclusion that the business cycle is not related at all to the fluctuations in prices. Page 93, they wrote :
Was economic growth more rapid during the earlier period of declining prices or during the later period of rising prices? Unfortunately, the readily available figures do not yield a simple, clear-cut answer. Kuznets’ aggregate net national product in constant prices rises at the rate of 3.7 per cent per year from 1879 to 1897, and at the rate of 3.2 per cent from 1897 to 1914. This implies a rise in per capita net national product of 1.5 per cent a year for the earlier period, of 1.4 per cent for the later. However, the results of such a calculation are extraordinarily sensitive to the choice of dates: the use of 1880, 1896, and 1913, instead of 1879, 1897, and 1914, gives a rise in aggregate net national product of 2.6 per cent per year from 1880 to 1896 and of 4.4 per cent from 1896 to 1913. Inspection of the graph of net national product (see Chart 8, below) suggests little significant change in the rate of growth over the period as a whole, but rather a sharp retardation from something like 1892 to 1896 and then a sharp acceleration from 1896 to 1901, which just about made up for lost time. If this be right, generally declining or generally rising prices had little impact on the rate of growth, but the period of great monetary uncertainty in the early nineties produced sharp deviations from the longer-term trend. This evidence reinforces the tentative conclusion reached in the preceding chapter that the forces making for economic growth over the course of several business cycles are largely independent of the secular trend in prices.
And previously, the authors (p. 42, footnote 40) have said that :
Kuznets’ figures for the United States give no clear indication whether output per capita grew more or less rapidly during the generally deflationary period before 1896 than during the generally inflationary period thereafter; the result obtained depends critically on the particular initial and terminal years used for comparison (see Chap. 3 below). According to available estimates of income per head in constant prices for the United Kingdom, the deflationary period was characterized by a definitely higher rate of growth than the later inflationary period.
In chapter 6, they have an interesting discussion (see p. 242) on these three periods : 1873-92, 1892-1913, and 1920-1929. See their table 11.
Perhaps the most interesting feature of the comparison, as in our earlier comparison of the first two periods, is the difference between the behavior of money and real magnitudes during the periods of moderately stable growth. The rate of growth of real income, both total and per capita, was very similar; of prices, highly varied. Wholesale prices declined by 3½ per cent per year in the first period, rose by over 1½ per cent in the second, and declined by nearly 1 per cent per year in the third. Implicit prices declined by 2 per cent in the first period, rose by 2 per cent in the second, and were roughly unchanged in the third. Yet in all three stable-growth periods, total real income grew at a rate close to 3½ per cent per year and real income per capita at a rate between 1.3 and 2.0 per cent per year. These results reinforce our earlier conclusion that there seems to be no necessary relation between the direction of movement of prices over a period covering several business cycles and the corresponding secular rate of growth of real output. Apparently the steadiness of the price movement is far more important than its direction.
If you want some figures about the unemployment rates, see Romer (1986, Table 9). And here. During the period running from 1893 to 1898, unemployment was high. However, Selgin, Lastrapes and Whites “Has the Fed Been a Failure?” (2010, their figure 6) reported a lower figure, based on Vernon’s estimate.
Unsurprisingly, Selgin and co. have been criticized by “Lord Keynes” (the blogger). See here. As always, LK missed the point and distorted the facts (especially regarding the free banking episodes during the 19th century).
Anyway, have a look at the Chart 8 from Friedman and Swhartz, and at the Figure 6 from Selgin and co. There was a huge deflation from 1873 to 1896 but unemployment rates did not keep pace with the secular decline in prices (Friedman & Schwartz, 1963, pp. 93-94). See also Ethel D. Hoover “Retail Prices after 1850” (1960, Tables 1 & 8). Deflation was steeper during the 1880s than it was during the period running from 1892 to 1898.
“Economic Growth With Price Deflation, 1873-1896” (1977) by Roger Elwood Shields gives further details. Chart IV-5 (below) shows a comparison of four price indexes (1872-1896). The same pattern emerges.
Selgin and co. (2010) cite an interesting study by Atkeson and Kehoe showing no correlation between deflation and depression :
Historically, benign deflation has been the far more common type. Surveying the 20th-century experience of 17 countries, including the United States, Atkeson and Kehoe (2004, p. 99) find “many more periods of deflation with reasonable growth than with depression, and many more periods of depression with inflation than with deflation.” Indeed, they conclude “that the only episode in which there is evidence of a link between deflation and depression is the Great Depression (1929-1934).”
[…] There have in fact been other 20th-century instances in which deflation coincided with recession or depression in individual countries over shorter time intervals. In the U.S. this was certainly the case, for example, during the intervals 1919-1921, 1937-1938, 1948-1949 (Bordo and Filardo 2005, pp. 814-19), and, most recently, 2008-2009. It remains true, nonetheless, that taking both 19th and 20th-century experience into account, it is, as Bordo and Filardo (ibid., p. 834) observe, “abundantly clear that deflation need not be associated with recessions, depressions, and other unpleasant conditions.”
Although the classical gold standard made deflation far more common before the Fed‘s establishment than afterwards, episodes of “bad” deflation were actually less common under that regime than they were during the Fed‘s first decades (ibid., p. 823). Benign deflation was the rule: downward price level trends, like that of 1873-1896, mainly reflected strong growth in aggregate supply.
Also, “Lord Keynes” (the blogger) gives some figures in the following posts :
Real US GNP Growth Rates, 1873–1896
US Real GNP Estimates 1869–1879
US Real GNP Growth in the 1880s
US GNP Estimates in the Recession of the 1890s
Finally, in this post :
It is amusing to see how he considers the period running from 1873 to 1896 as less performant than the “Thirty Glorious” (1945-1973) when the european economies were more regulated. It is easy to blow up this assertion :
- Empirically, you can read the fascinating studies by Heiner Rindermann (2012, p. 110, and figures 1, 2 & 3) (2008b, p. 316, section 5.4, and figure 7) (2011, figures 4 & 6). Economic freedom affects economic performance, cognitive competences and education.
- Theoretically, we can say that economic growth is much easier when the economy has to recover from the damages caused by the war. The comparison therefore does not hold. As Landier & Thesmar pointed out in “Le grand méchant marché” (p. 110) :
When it comes to rebuild, import and implement existing technologies, there is no uncertainty about the way forward, the point of arrival is known. Investments to accomplish and their relative importance are visible and consensual … (-my translation-)
As for the causes of the panics of 1873, 1884, 1893 (and 1907 incidentally), Rothbard attributes the crisis to the practice of the fractional reserve (in his 2002 book, see pp. 154, 160, 168, 240). However, George Selgin has a more convincing explanation in “The Theory of Free Banking: Money Supply under Competitive Note Issue” [PDF] (1988, ch. 1 & 8). The root causes stem from the incapacity of the banking system to satisfy the increase in the public demand for money due to the banking regulation at that time. Rothbard (2002) gives a complementary explanation for the economic disturbance during the 1890s (see pp. 168-169, 184-186).
For further details on the period of 1873-1896, see here. If you think I missed something, let me know. (I hope my english is readable)
P.S. I have an electronic copy of the book “A Monetary History of the United States, 1867-1960”. If you’re interested, let me know. (rodolphe.topffer @ gmail.com)