Growth Before and After the 20th Century

Evan Soltas disagrees with the notion that Early America (the 19th century basically) had higher growth rates than the 20th century (presumably after 1913, or 1945, either date has been used by those who support Evans motion). He presents his contention as follows:

I recognize the tremendous growth in production of natural resources and industrial production, but were the recessions the necessary byproduct of America’s metamorphosis, or rather a hindrance? Remember, this was an era of no central bank, of price volatility but not inflation, of well-known socioeconomic inequality. In libertarian circles, the late 19th-century is seen as the pinnacle of growth and of laissez-faire and treated with according reverence. That story is not really true.

I’ll make an attempt in taking the other side of that argument, both quantitatively and qualitatively. One of the most oft repeated things about the period in question (roughly the end of the Civil War to World War I) is the frequency of financial panics, crazy price fluctuations and depressions which have been eliminated in this new era of central banking, to the benefit of all. I’ll touch on that later in this post, but I mention it now to introduce this quote from A Monetary History of the United States, 1867-1960, by Friedman and Schwartz. From p 42-43:

Accustomed as we are to viewing economic affairs through a monetary veil, the steady decline in prices from 1873 to 1879 probably led contemporary observers and has certainly led later observers to overstate the severity of the contraction in terms of real output.

The period from 1873-1879, starting with the Financial Crisis of 1873, is referred to as the part of the ‘Long Depression.’ It is meant to be the most severe example of the depressions of the period, with Friedman and Schwartz describing the contraction as being ‘the longest experienced by the United States from at least the Civil War to the present.’ Because of that, I will focus on the  1873-1879 depression instead of going through each depression of the period, in the interest of time.

The quote above suggests that the view held by the vast majority of economic commentators (namely that falling prices = bad), has caused them to misinterpret the actual goings on of the period. A look at the data would suggest that the US economy mostly ended those recessions in a better position than when it entered, in terms of real incomes and national output. The one key exception to the era is the recession following the 1907 crisis. Returning to the period starting in 1873, a sample of the economic data presented by Friedman and Schwartz is as follows (click for large):

The starting point of 1869 is used due to the fact it catches the previous trough in economic conditions, in order to capture a complete cycle of boom to bust. There are a couple observations to be made here, apart from the obvious 6.8% real growth per year during the period. The first is that the velocity of money increased during the period despite the fact prices fell. We’re conditioned to believe today that falling prices mean that people will ‘hoard’ money, leading to a halt in economic activity. That’s not what happened here. More on that later.

Another thing to notice is that the money stock actually grew by 2.7% a year, meaning that the production during the period was large enough to increase the supply of goods to such an extent that prices still fell relatively sharply. This is the basis for the ‘reverence’ over the period generally, given that true economic growth leaves the economy with more goods and services, or a better quality of goods and services, and that increase in supply will ALWAYS drive prices down. It is that supply driven decline in prices that leads to the enrichment of society as a whole. The drop in prices enables an ever expanding group of people to consume the goods and services brought about by the increased productivity. The following passage from Freidman and Schwartz (p.35) applies these principles to the Long Depression period. They write:

There are many other signs of rapid economic growth. This was a period of great railroad expansion dramatized by the linking of the coasts by rail in 1869. The number of miles of track operated more than doubled from 1867 to 1879, a rate of expansion not matched subsequently. In New York State, for which figures are readily available, the number of ton miles of freight carried on railroads nearly quintupled and, for the first time since the figures began, exceeded the number of ton miles carried on canals and rivers…. The number of farms rose by over 50 per cent from 1870 to 1880 for the U.S. as a whole. The average value per acre apparently increased despite the sharp decline in the price of farm products—clear evidence of a rise in economic productivity. The output of coal, pig iron, and copper all more than doubled and that of lead multiplied sixfold.

Manufacturing shared in the expansion. The Census reported 33 per cent more wage earners engaged in manufacturing in 1879 than in 1869, though 1879 was a year containing a cyclical trough and one following an unusually long contraction, while 1869 was a year containing a cyclical peak. An index of basic production compiled by Warren and Pearson nearly doubled from 1867 to 1879.

The rapid progress of the United States in manufacturing was clearly reflected in international trade statistics. Despite a decline in prices, exports of finished manufactures were nearly 2.5 times as large in gold values and 1.75 times as large in greenback values in 1879 as in 1867.

The last point about exports rubbishes another popular view that a strengthening currency (which manifests itself in falling prices) is a detriment to exports. Yet the story of this period is quite the opposite (for a more modern example look at the Swiss).

An ‘oddity’ that Friedman and Schwartz discover in their analysis of the period may shed further light on the true consequences of the period in economic terms. They write (p40):

Consider the velocity series on that chart. Velocity declines from 1869 to 1871, rises to 1873, and declines to 1875. So far, so good. June 1869 marked a cyclical peak, December 1870, a cyclical trough, and October 1873, a cyclical peak, so these movements conform to the cycle in the same direction as later movements. But then comes a serious discrepancy. Velocity rose some 17 per cent from 1875 to 1879, bringing the terminal velocity to a level 4 per cent higher than in 1869 and 8 per cent higher than in 1873, both cyclical peak years.

The chart they refer to is below (click for large):

As I mentioned before, money velocity ended up higher at the end of the depression than at the peak before it. Here Friedman and Schwartz show that within the depression, money velocity bottomed in 1875 and turned around. This is consistent with the more Austrian view that falling prices are the cure to depressed periods, as lower input costs and increased purchasing power of money ultimately encourages activity. The rationale is that we as humans ultimately desire things, not money. Thus a certain level of ‘natural demand’ exists, which is discovered as prices fall, shifting preferences to preferring goods versus money. It is the falling price that persuades the change of preference. This is contrary to the prevailing view of ‘deflationary spirals,’ that supposedly destroy economies because people refrain from purchasing, instead waiting for prices to drop even further. This clearly didn’t happen here. More contemporary examples include the electronics sector, and the current Swiss economy. In both of those cases falling prices did not, and do not preclude spending from taking place.

The sense of peculiarity at the findings apparent in the prose of Friedman and Schwartz is borne from the preconceived notions about prices and economic output that caused them to come to the conclusions I quoted at the start of the piece. To further underline their interpretations of the findings, they write (emphasis mine):

…an unusually rapid rise in output converted an unusually slow rate of rise in the stock of money into a rapid decline in prices. We have dwelt on this result and sought to buttress it by a variety of evidence, because it runs directly counter both to qualitative comment on the period and to some of the most strongly held current views of economists about the relation between changes in prices and in economic activity. …In the greenback episode, a deflation of 50 per cent took place over the course of the decade and a half after 1865. Not only did it not produce stagnation; on the contrary, it was accompanied and produced by a rapid rate of rise in real income. The chain of influence ran from expansion of output to price decline.

The bold suggests a level of scrutiny was taken in analyzing the data of the period, and it was done so because the findings ran counter to the economic dogma that existed at the time (and still prevails today). I highlight that to address Stoltas’ concern over the possibility of data painting a rosy picture of the 19th century being ‘either imprecise, inaccurate, or worse, gamed according to their start- and end-points.’ The second bolded point once again reiterates the point that real growth ended up happening and living standards ultimately improved over the period thanks to the productivity based price declines that took place. The other recessions of the late 19th century were similar in nature to this one, in terms of that real increase in living standards.

But what about the problems that most definitely did occur? Specifically, the 1873-1879 recession was kicked off by a Financial Panic in 1873. Numerous business failures and increased unemployment followed. Indeed, the social strains that occurred came to a zenith in the Railroad Strikes of 1877. So if there was so much growth, why did all of this bad stuff happen? The issues that plagued 19th century America were essentially the same ones that plague us now. Specifically, overextensions of money and credit led to bubbles that ended up bursting. The Financial Panic of 1873 was preceded by railroad overbuilding and stock speculation, in turn driven by cheap credit by the banks. When the credit abated, the bad projects and unprofitable speculations needed liquidating, leading to crisis. The crisis was triggered by the failure of Jay Cookes banking house, which after the Civil War rose to prominence by being the monopoly underwriter of government bonds. Those connections to government also came with access to land grants which enabled widespread expansion into Western territories.

Long story short, Cookes house became one of the earliest ‘Too Big to Fail’ institutions in American history. Except back then things were allowed to fail (we were more capitalist then), so it did fail. That touched off the panic, which was particularly devastating for rail prices, as they were the concentration of the speculative efforts. A note here: the increased credit supply came about without the existence of a central bank, as Soltas points out in the opening quote above. This doesn’t invalidate the theory which holds that the business cycle is the result of increases in money and credit supply. It is simply that in modern times, the Central Banks are the ones ultimately responsible for facilitating these increases, which is the reason why modern critics aim their criticisms at central banking. These problems occurred under a gold standard as well, and the aim is not to suggest it is an infallible system. The suggestion rather is that is better than the paper standard of today due to the fact that it forces the liquidations of unprofitable entities and commensurate price declines that are inevitable when credit and money expands to unsustainable levels.

The rebuttal to this is often that the price fluctuations and volatility of the era were problematic, and the relative price stability of the post WWII central bank, economics-as-hard-science era has been superior. For a start, price stability as defined as 2% yearly inflation is not price stability. It is a stable increase of prices, which is a completely different thing. The constantly rising price level does nothing but promote increases of debt, as incomes fail to keep up with the inflation. Furthermore, the central bank era has done nothing to prevent the business cycle from occurring, as evidenced by the problems arising in the 1970s, the beginning of the Too Big to Fail era in 1982, the 1987 stock crash, the S&L crisis, the 90s busts in Japan, Latin America, and Russia, LTCM, the tech crash and the most recent housing bubble. The difference to the gold standard era is that the Central Banks prevented mass liquidations with injections of money and credit, stemming further declines but preserving the instabilities that led to the crisis in the first place. In other words, the symptoms of instability were dealt with, the underlying causes weren’t. Meaning conditions were always ripe for more trouble in the future. Those are the costs incurred by ‘stabilizing’ measures for mitigating the effects of recession.

So, when Soltas asks:


One can answer that in the affirmative, the ‘recessions’ were a necessary byproduct of Americas transition. It was the resultant liquidations of unsustainable railroad projects, for example, that enabled the restructuring that needed to take place. Clearly too much capital had been employed in the building of railroads; the depressing of prices served to move capital away from that sector and into more profitable ventures. This, of course was terrible for those who worked in the industry, as evidenced by the high unemployment, massive wage cuts and so on. However, the real mistake was not the liquidations, but the overbuilding in the first place. The correction of that mistake, however painful for one group, was necessary in order to establish conditions that could foster growth anew. And the data presented by Friedman and Schwartz suggest that overall, this happened relatively quickly.

As for the idea that growth was superior in the 20th century, in the central bank area, Soltas writes:

from 1800 to 1840, real GDP per capita grew at 0.4 percent annually; from 1840 to 1880, 1.44; from 1880 to 1920, 1.78; from 1920 to 1960, 1.68; from 1960 to 1978, 2.47.

I’m not sure where the data comes from, but I’ll accept it as legitimate for arguments sake. On this evidence, it’s clear that the ‘modern economy’ under Central Bank purview has had superior growth. Including a look at the public debt involved changes the picture a bit. In making this observation, I used the 1869-1879 period of Friedman and Schwartz as opposed to Soltas’ dates simply because the dates presented by Soltas include the Civil War and an explosion of debt that distorts the picture. Similarly, the 1920-1960 period includes two World Wars, with similar explosions of debt.

From the period of 1869-1879, the total public debt declined from $2.59 billion to $2.35 billion. From 1960-1978, the debt rose from $290 billion to $776 billion. The bottom line is that the latter period saw its debt load increase by 268% to achieve a 71% higher average rate of growth than a period in which the debt was actually paid down. That point cannot be overlooked, because aside from the ineffective return on the debt undertaken, the increased debt simply meant that a portion of future production would not be consumed, but repaid to someone else. It matters little whether this debt is repaid via increased taxation or inflation. In that light, the 1960-1978 period performs worse than the 19th century example I’ve discussed, even more so when using the Friedman and Schwartz growth figures as opposed to Soltas.’

And what about the poor working standards that were endured, child labor and so on? For a start, it seems to me that taking that line of argument, essentially diminishing the transformation America made on account of poor working conditions is a bit specious. It’s almost impossible to fathom the change from an agrarian society to an industrial one taking place in heavenly pristine conditions. It requires blood, sweat and tears, and someone ultimately had to shed them. The sacrifice was made with the goal of increased wealth and living standards in mind, and generations later, we are in a better place because of it. As for child labor, again it is true that during the 19th century there was a great deal of it. According to this, child labor participation rates went from 32.5% to 6.4% for boys and 12.2% to 2.9% for girls between the years 1880 and 1930. It should be noted that Federal legislation regulating child labor was first passed in 1938. The reason for the decline can be described by the fact that the living standards and wealth of average people were modest, such that children needed to work to help support the family. There was no deficiency in terms of morals or backwardness. Child labor was a function of lower living standards, as it is in places today where it still exists at a high rate. It follows that with the rise in productivity, increases in wealth and living standards of the period, the need for child labor declined massively, and the data showed it did in the 19th century.

Continuing (apologies for the long post), the conclusion Soltas reaches is as follows:

It’s a very different picture of America, when you think about it. Frequent recessions, slow growth, little improvement in living standards, profound inequality — all of this against what we have (had?) in the postwar era: fewer recessions, faster growth, faster improvement of living standards, less inequality.

Of course, I would disagree, and I believe that the evidence I have presented supports my view. Other observations of the period between Civil War and WWI also seem to back that stance. It was during this time period in which the US went from relative insignificance to power on a global stage. This is probably the most obvious point, and the one seemingly forgotten by those who hold that the golden age of America was really 1945-1973, as though Hiroshima and Nagasaki was what ushered the United States into prominence. It was precisely because the US was already a world power that it was even capable of playing such a large role in winning WWII, and that status was earned in the 50 years prior to WWI. On a more philosophical note – comparing the advances made in the 19th century period to the ones today pose an interesting question. Was a larger impact made by the invention of the telephone, for example, or by the advancement of that technology as we have done today, to include cell phones and the internet? One could make the argument that going from the Pony Express to telegram or telephone was a larger step forward than going from landline to cell phone. Were standards of living improved faster by the mass introduction of refrigeration, electrical engineering or plumbing of the 19th century, or by the improvements on those advancements today? Those are interesting thought experiments, that I’ll leave the reader to contemplate.


  1. Thank you for your detailed response. The data come from the Romer paper I linked to in my post. I wrote in my post that the 1800s were a period of “price volatility but not inflation,” which is what you discuss at length, and also frequent financial panics. Although interesting, ultimately I don’t find your rebuttal persuasive, because I think it presumes an Austrian / Andrew Mellon-esque “liquidationist” economic philosophy…which leads it to beg the question, in the proper sense of that phrase, whether liquidationism and full-on laissez-faire are efficient. The point of my post, ultimately, was to demonstrate that the costs of both are much higher than we might think if we had a rosy view of the late 19th century. But thank you for this; counterargument and debate is needed and important. – Evan Soltas

    1. So if the very idea of liquidation means my argument isn’t persuasive, is that to suggest that we are to always preserve bad debts, unsustainable/unprofitable projects into perpetuity? As an example, if you ran a horse and buggy business around the advent of the automobile, and you start to run into trouble as a result because your product is no longer necessary, is it not more efficient for your business to be liquidated so that the capital you are taking up can be used for something else? You are ultimately taking the position that the horse and buggy business should be propped up by all means for the sake of the ‘stability,’ and my point is that doing so is not without cost.

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