Paul Krugman's latest article
was surprisingly frank and honest.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
Most people focused on the first sentence of this paragraph, and for good reason. "Depression" is not a word that mainstream economists use very often. However, I'm a little weird, because I focused on the second sentence.
“coal-black steed named Panic” quickly “thundered riderless down Wall Street,” where “a monstrous yell went up and seemed to literally shake the building in which all these mad brokers were for the moment confined.”
- Robert Sobel, September 1873
Very few people know about, or are interested, in the history behind the Long Depression
of the 1870's. Those that do know something about the era tend to focus on the Panic of 1873
, which caused the closure of Wall Street for 10 days. The Long Depression was 65 months of economic contraction (even longer than during the Great Depression) and led to a 14.5% unemployment rate
One element leading to the Long Depression was the extreme amounts of debt created by the easy credit of the Greenbacks
. But the ultimate cause of the Long Depression was the Coinage Act of 1873, or as it was known in the western states, the Crime of 1873
The Crime of 1873
From 1792 until 1873, except for during the Civil War, America had been under the bimetallic standard, meaning that both gold and silver was money. The dollar was defined as consisting of either 22.5 grains of gold or 270 grains of silver. The country grew and prospered under a monetary standard specified in the U.S. Constitution.
Then in 1859 the Comstock Lode was discovered. Within a few years an enormous amount of silver was pouring out of Nevada, increasing the money supply. This was great news for debtors, the working class, and new entrepreneurs. What it wasn't good news for was Eastern Banks, who mostly held gold.
In February 1873, silver was demonetized. Now only gold would be money. The immediate effect of the law was the bankrutpcy of many western silver miners. But the long term effects were far more destructive
The result was that the dollar (and so the American monetary mass and ultimately output and employment) was linked to a metal that was getting scarcer and scarcer, because between 1879 and 1897 the rate of increase in gold output slowed, and the demand increased at the same time. The monetary mass could not keep pace with the strongly expanding economy, and price measured in gold declined strongly.
We see between 1875 and 1896 a deflation of about 1% a year in the general CPI....On the monetary side, this deflation made many bank loans turn sour, as the debtors struggled to honor their obligations with rising real value of their debts.
The deflation that hindered general prosperity for working Americans for 23 years didn't end until the Witwatersrand Gold Rush in South Africa and the 1898-99 Klondike Gold Rush when the monetary supply began expanding again. On the other hand, those same 23 years saw the upper class in America expand both power and riches until they dominated every sector of society.
The lesson to be learned here is that deflation is a good thing if you already have lots of money. It's a bad thing if you work for a living.
Which brings us to present-day Toronto.