Wednesday, March 11, 2015

Fear of Cheap Foreign Labor in the Long Depression: 1873-1879

The US economy was in a continuous recession for 65 months from October 1873 to March 1879. Historians call is the "Long Depression," because the Great Depression from 1929 to 1933 saw "only" 42 consecutive months of economic decline. For comparison, the more recent Great Recession lasted 18 months.

Samuel Bernstein offered one of the classic descriptions of the Long Depression in his 1956 article, "American Labor in the Long Depression, 1873-1878" (Science & Society, Winter 1956, 20:1, pp. 59-83, available through JSTOR). Precise government statistics are not available for this time period, of course, but estimates of the unemployment rate for the later part of this period often exceeded 20%, and some exceeded 30%. For those with a job, real wages fell by half. Even those real wages were often paid in the form of company scrip, which could only be used at the company store, and was worth substantially less than cash.

Bernstein quotes from a Bulletin of the American Iron and Steel Association in the first quarter of 1874, when the Long Depression had barely begun. The report stated "that the manufacturing industries of the country are rapidly sinking; and the conclusion is equally inevitable that all branches of business will soon collapse under the dead weight of the paralysisw hich has seized manufacturers and driven the labor classes into idleness, unless means are devised to stimulate and encourage productive enterprises." Output fell sharply. Here's Bernstein:
"From 1873 to 1878 production fell precipitously. Mills either closed or ran part time. At the end of the first year of the crisis the Bureau of Statistics in Pennsylvania reported:" Probably never in the history of the country has there been a time, when so many of the working classes, skilled and unskilled, have been moving from place to place seeking employment that was not to be had--never certainly for so long a time." Estimates on the production of pig-iron, coal, on cotton consumption, railroad revenues, imports of merchandise and bank clearing showed a reduction of 32 percent between 1873 and 1878. Its magnitude was second only to that between 1929 and 1932, namely 55 percent."
And what was the cause of this collapse? At least one writer back in October 1879, writing for the Atlantic Monthly, believed that globalization and competition from China, India, and Brazil were to blame. An author identified as W.G.M. wrote an essay called "Foreign Trade No Cure for Hard Times," which through the magic of the web can be read online here. W.G.M. argued: 

"We read in a London paper that the Chinese government have purchased machinery,and engaged experienced engineers and spinners in Germany to establish cotton mills in China, so as to free that country from dependence upon English and Russian imports. Though China is somewhat tardy in her action, we may be certain that she is thorough. ... More than this, the time is  not far distant when the textiles from the Chinese machine looms, iron and steel and cutlery from the Chinese furnaces, forges and workshops, with everything that machinery and cheap labor can produce, will crowd every market. The four hundred millions of China, with the two hundred and fifty millions of India,--the crowded and pauperized populations of Asia,--will offer the cup of cheap machine labor, filled to the brim, to our lips, and force us to drink it to the dregs, if we do not learn wisdom. It is in Asia, if anywhere, that the world is to find its workshop. There are the masses, and the conditions, necessary to develop the power of cheapness to perfection, and they will be used. For years we have been doing our utmost to teach the Chinese shoemaking, spinning and weving, engine driving, machine building, and other arts, in California, Massachusetts, and other States; and we may be sure they will make good use of their knowledge; for there is no people on earth with more  patient skill and better adpated to the use of machinery than the Chinese. When the Chinese goernment is doing for China, Dom Pedro is doing for Brazil [this would be Dom Pedro II, the last ruler of the Empire of Brazil], though in a different form."

It gives me a smile to think that that dangers of global competition from China, India, and Brazil were being stated so eloquently back in 1879! 

From a modern point of view, W.G.M. wasn't quite thinking clearly. The essay argues that increased exports won't be nearly enough to help the US economy recover, which seems clearly correct if a bit of a straw man argument. The argument also implies that the causes of the Long Depression could be found in an effort to cut costs for the purpose of raising exports, which recognizes at least that the 1870s were a time of enormous structural change in the US economy. 

A readable overview of the 1873-1878 period is available here.  If you had to describe the causes of the Long Depression in modern terms, you might call it a combination of a tech boom-and-bust cycle, an industrial transformation, a banking crisis, and a a euro-style problem of currency arrangements that were not serving the economy well.

The tech boom of that time was the railroad mania, which lead to a cycle of overbuilding and then bust, which in turn dragged down other manufacturing industries. By the later 1870s, about half of all the railroad track in the country was owned by those who had received in after bankruptcy proceedings. At the same time, the transportation network established by rail was feeding into a growth of much larger companies that were finding cost savings by investing in equipment and economies of scale. At least some of the unemployment was what we would today call "technological unemployment," which is labor that is displaced by rapid technological change and cannot soon find alternative places of employment. International trade and big business was often conducted on a gold standard, but the government continued to circulate large numbers of "greenback" paper currency that had been introduced during the Civil War. As firms and consumers went broke, and currency values fluctuated against gold, there were were banking crises and times when financial payments could not be made.

Thus, W.G.M. was correct in that 1879 essay to perceive a transformation of American production. I wonder how the 1879 argument would have differed if the writer had been able to see how little progress the economies of China and India had made even 100 years after the writing of the article in 1979! For me, an ongoing lesson is that when economic times are rough, blaming other countries is always an easy temptation.

Homage: I ran across a mention of the 1879 Atlantic Monthly article in the overview written by Prakash Lougani for the March 2015 issue of Finance & Development, and tracked down the original.