The Other Great Depression


In 1937 the American economy, which had been slowly rising from the depths it had reached in 1933, suddenly reversed course and sank once more. While this new economic trend enlarged the misery of the American people, it also gave the economists a new problem: what to call it.

Since the start of the nineteenth century, an economic downturn had been called a depression, but in 1937 the country was already in a depression. So the economists, probably delighted to have a problem they could actually do something about, pressed the word recession into service. Because of the iron law of euphemism (weak terms drive out strong ones), recession took hold, and we have not had a depression since. Today that word effectively belongs to the 1930s and, indeed, is often capitalized to indicate its now unique meaning.

But the Great Depression was hardly the first major downturn in the American economy. In fact, a severe economic contraction followed hard on the heels of the Revolution itself. And in 1837, after several years of economic expansion that was reflected in Wall Street’s first big bull market, Wall Street was hit with its first big crash.

The depression that followed lasted well into the 1840s. However, while it deeply affected Wall Street bankers and merchants, it did not greatly alter the daily lives of a majority of Americans. Most citizens lived on farms, largely outside of what economists call the cash economy.

By the end of the century, however, millions of Americans had become dependent on weekly wages. In 1860, for every worker toiling in a factory there had been nearly four working on farms; by 1890 the ratio had dropped to two to one. In 1860 there had not been a single industrial concern listed on the New York Stock Exchange; by the mid-nineties there were twenty, each employing tens of thousands.

Therefore, the depression that struck the country in 1893 has a very good claim to being called the Other Great Depression, for it directly affected the livelihoods not just of the bankers and merchants but of millions. The GNP fell almost 12 percent. Unemployment, which had stood at only 3 percent of the work force in 1892, soared to 18.4 percent two years later. Hunger stalked the streets of the now vast slum districts in American cities, while only private charity was available to alleviate the misery.

The causes of the depression were partly the usual ones of overexpansion. In early 1893 the Philadelphia and Reading Railway Company and the National Cordage Company collapsed and touched off panic on Wall Street. By the end of the year another 15,242 companies (and 642 banks) had failed. Before the great depression of the 1890s was over, nearly one-third of the country’s railroad mileage would pass through receivership.

But an equally important cause of the depression was that the government had been ignoring another iron law, this time economic, not linguistic.

It is hard to imagine today, but in the last two decades of the nineteenth century, the gold standard was the subject of numerous cracker-barrel colloquies, street-corner harangues, and bar-room brawls, reflecting a deep divide in American politics.

Being on a gold standard simply means that a country fixes the value of its currency in gold and stands ready to exchange any amount of it for gold at that value. The gold standard was extremely popular with the “moneyed classes,” the bankers, brokers, and established businessmen epitomized by Wall Street and J. P. Morgan. The Northeast strongly supported a gold standard.

The rest of the country, however, was still largely agrarian, and farmers are chronic debtors. Many people in the South and West thought that the gold standard was nothing more than a Wall Street plot to drive them into bankruptcy. A gold standard, you see, makes inflation nearly impossible. And inflation is always popular with people who owe money because it allows them to pay up in cheaper dollars. William Jennings Bryan would nearly reach the White House thanks to the inflationary schemes he advocated.

Faced with a strong demand for a gold standard by one powerful group, and an inflationary monetary policy by another, the United States government, as so often happens in a democracy, tried to have it both ways. In February 1873 the government began to move slowly back to the gold standard it had abandoned in the Civil War and stopped minting silver coins. The West, where vast new silver deposits were discovered in the mid-seventies, promptly labeled this the “Crime of 73.” In 1878, however, Congress, while still moving toward a return to the gold standard, also passed the Bland-Allison Act, which required the Treasury to purchase between two and four million dollars’ worth of silver every month at the market rate and turn it into coins at the ratio of sixteen to one. (In other words, sixteen ounces of silver were declared by congressional fiat to be equal in value to one ounce of gold.) This had the effect of arbitrarily increasing the country’s money supply, the classic means of generating inflation.