 Thank you everyone for coming to this talk today. The title of my talk, as you can see, is Panics and Depressions in Early America. Before I begin, I just want to clarify something. A lot of people have been asking me this. No, it is not about any mental health issues of our founding fathers. Some people have been wondering, I'm not going to talk about Alexander Hamilton or any of that. We're going to talk about business cycles. So this is a topic that I've spent a great deal of my own research on. In fact, my dissertation was on monetary history in the United States, particularly the late 19th, early 20th century. I do a lot of work in American history as well. In general, both micro and macro. So I greatly enjoy talking about this subject. This is something that I was very interested in, what got me involved in the Austrian and libertarian movement. So what's the outline of my presentation? And basically, why should you care? This is the most difficult part, I guess. So since the financial crisis, really, we're coming up to its 10-year anniversary. There's been a lot more discussion about central banks. Central bankers are having, they were credited with saving the financial system of the world. They also have greater powers than ever before. And there's been a lot of debate not only about whether or not central bankers took the right decisions, they made the right decisions. I'm sure you know my opinion on this. But also whether or not we need a central bank. I'm sure you also know my opinion on this. And generally, an argument that's often been brought up when someone says, oh, we should end the Fed, or we don't need a central bank. The United States didn't need a central bank, et cetera. People say, well, look at our financial system. Look at our banking system. Look at our business cycles before the Federal Reserve. We suffered from the arguments we suffered from very severe business cycles, banking crises, et cetera. And only the Federal Reserve, or more broadly, a lender of last resort, was really able to end these problems. So this relates to can we survive without a central bank and sort of counter-psychical macroeconomic policy? You practice contractionary monetary policy during the booms. Of course, that rarely happens. And you practice expansionary monetary policy during the busts. And that also ties in with fiscal policy. So that's sort of the motivation. And really, the entire presentation will go through sort of a brief overview of business cycles and panics in the 19th century, basically before the Federal Reserve. Talk about some sort of some new research that's been done. And then we will be analyzing the panic of 1873 and the depression of 1873 to 1879 in depth. So this is something that I spent a great deal of my own research on. This is one of my favorite topics periods to discuss. In particular, the depression of 1873 to 1879 is officially the longest recession in American history, at least defined by the NBER. OK. So sort of some general myths that I've been alluding to. You frequently hear that America suffered from numerous sort of severe business cycles and banking crises before the Federal Reserve. So there are the major ones, the panic of 1819, the panic of 1837, 1857, it's kind of every 20 years, 1873, 1884, 1893, 1907. And then there's purportedly smaller crises, smaller recessions, sort of all mixed in. In contrast, since the Federal Reserve, we've really only had two major severe financial crises, at least according to General Convention. And that's the depression, the Great Depression, and the financial crisis. So the other myth, basically, is that during the 19th century, we had an unregulated financial sector, and we practiced laissez-faire macroeconomic policies. So the idea is that, well, our banking system, you had all these wildcat banks, fraud, over-credit expansion, banking panics, et cetera, this was all due to the free market, OK? As I'll argue, both of these are basically wrong. In reality, you actually look at the business cycles, new data shows they were not as severe as before, along with banking crises, as well as the financial sector and the banking sector, there actually were some many perverse regulations that really contributed to a lot of these problems. So we go to business cycles and panics in the 19th century. So one of the main things, especially with the NBER, is that it's really coming to light, is that older analysts basically relied on faulty economic data. Even new data from the 19th century is still imperfect compared to the 20th century, but we have more modern estimates. We have a clearer picture, especially sort of in the short term of what's going on. So they used faulty economic data, and this led them to basically exaggerate contractions. Another issue was that it correlated basically deflation with depressions. So falling prices, oh, prices were falling, that also must have meant output was falling. And this was a belief that was even shared by contemporaries. People got confused. They said, oh, my wages are going down, or prices are going down, profits are going down, but that's just a nominal illusion. If the cost of inputs is also going down, your real income can go up during this time period. In reality, as I mentioned, sort of cycles and crises were less frequent and less severe than traditionally assumed. So here are two recent articles that have come out that I've, especially the first one, and I'll be referencing this, I've heavily enjoyed. The first one is an improved annual chronology of U.S. business cycles since the 1790s. And this was in the Journal of Economic History. So Joseph Davis constructed a new Industrial Production Index annual and basically used it to try and redefine American business cycles in this paper. The second is called A New History of Banking Panics in the United States, 1825 to 1929, sort of revises some of our knowledge about banking panics. One of my favorite parts about this paper, so bear in mind, it came out in the Journal of Macroe Economics and Murray Rothbard's America's Great Depression is actually cited in it. It's included in a footnote about how some authors believe panics are due to credit expansion or sort of an over-investment, et cetera, the inflationary boom. And I said, even though he somewhat just sort of mentioned, I'm like, we'll take it. Certainly in the Journal of Macroe Economics to have an econ history book from 1963 still cited is actually pretty incredible. And the second is a great website. If you're interested in any of this, it's called measuringworth.com and has a lot of new annual series on prices, wages, stock prices, GDP, et cetera. In fact, they have annual measures of a GDP index. I'll be using that references the Davis Industrial Production Index. Okay, anyway, now that preamble over. So this is a great, a picture says a thousand words, in my opinion. So on the top, this is from the Davis paper. You have the annual NBER recessions. So the black bars are the periods of recession. Kind of hard to see the small font, but basically you have from 1790 all the way, roughly the country's founding, all the way to 2000. He wrote the paper in the mid-2000s. And that's the NBER. Now notice, if you compare sort of halfway is the 1800s versus the 1900s. Look at the 1800s, there are more black bars and they're also thicker. What that meant is that recessions occurred more often and they were more severe. On the other hand, look at his alternative recessions with his Industrial Production Index. So look at just the difference now. On the right, it's relatively the same. He's not changing much. But look at the difference on the left. It's tremendous with this new Industrial Production Index. You know, there are whole recessions that are basically removed and the recession severity greatly shrinks. Okay, this is something that's highly illuminating. And so each recessions whenever there's a decline in annual industrial production. Now, if you notice in the middle there's sort of those teal blue bars in both those charts. That's where the 1870s are and that's what we'll sort of be talking about. As I'll sort of argue, and this is what Joseph Davis has argued elsewhere in his paper, the recession or the depression of 1873 to 1879 really only lasted until about 1875. There was no six year period of malaise. In fact, an older sort of myth referred to the fact that there was a long depression from 1873 to about 1896. So you had this 20 year depression of these grinding, impoverishment, et cetera. You know, that's completely a myth and that's sort of been revised. Okay, so we look at basically business cycles in panics in the 19th century, sort of the general theoretical framework that I'll be using, and this is something that I think is, won't be too controversial, is that basically they're due to government intervention. And the general framework, sort of from an Austrian perspective, is you have various policies and regulations. This might be a central bank or this might be some other policy the government is undertaking. This will lead to, this will incentivize credit expansion. Beyond what will occur in a, well you could consider a free banking system of competitive banks where sort of this adverse clearing mechanism, if one bank overexpands, it's notes and deposits, they're gonna be called in by another bank and they're gonna lose species reserves, gold and silver, okay. So in a free banking system, this is something that Mises and Rothbard have emphasized, credit expansion is relatively contained. In order for banks to expand credit, they have to generally rely on the government to do so. So you have some sort of policy or regulation, we'll go through some of these, some of them are below. This will lead to credit expansion. This, as you all know and love and you learn more this week, this will lead to sort of an Austrian business cycle theory. The credit expansion will artificially lower interest rates, it will cause an unsustainable boom in the higher orders, it will cause various malinvestments, et cetera. And then this will lead to a bust, okay. Eventually the credit expansion will stop or if the credit expansion continues, you'll get a hyperinflation. In this bust, many malinvestments become, they're revealed to be unprofitable. This will put pressure on the banking system. Why? Because many businesses can't pay their loans back, okay. And then or many banks have invested in bonds of businesses that have to, they're failing. And consequently banks will have to write off those loans. So losses in the real sector will inevitably translate into losses in the financial sector. So that already will put pressure on the banking system. In particular, and to make matters worse, the banking system, at least in America, was historically and even worldwide unusually weak, okay, compared to other systems. And this was due to a whole host of regulations that basically made it, the banking system, very poorly able to handle shocks. One of the most important restrictions was known as branch banking restrictions. The United States operated really until the late 1980s, 1990s, it's not a typo on my part. What's known as a unit banking system, which basically meant each bank was restricted in opening up additional branches. So a branch correspondent bank, sometimes so interstate branch banking, they couldn't operate a branch in another state. And sometimes there was even interstate branch banking. So they could prohibition. So they couldn't even operate another bank inside the state. This made banks extremely failure prone. They didn't diversify their loans. You had a bunch of small and efficient, imagine if there was no Walmart. You'd have a bunch of small and efficient mom and pop stores instead of the more efficient, large retail stores that can benefit from economies of scale. For example, in 1900, there was over 12,000 commercial banks in the United States, but only 87, there were only 87 branches. So think about that. There was 12,000 small, tiny little banks and only 87 branches. And this really only started to change in the late 80s in the early 1990s. I think Bank of America was actually the first bank to actually have a branch on both sides of both the East and the West Coast. And this was in the late 1990s. Another issue was there were many policies that encouraged credit pyramiding where banks could hold part of their reserves in other banks. So this encouraged greater credit expansion and weakened the adverse clearing mechanism. Banks would be less reluctant to call on other banks' notes and deposits if they could just hold their reserves in interest-bearing accounts. And this also did is this spread banking difficulty because suppose if some banks in the country or in the boonies are experiencing difficulty, people are wanting to redeem their notes in deposits for a species. In those banks, they don't have enough species, but they have some reserves in banks, say in New York City. What they're gonna do is they're gonna pull reserves from those banks. So problems that started in the country are now going to spread to other cities and to New York City. As we'll see really until the Federal Reserve, the United States operated basically on a multi-tiered level where banks, small banks would hold reserves in banks in minor cities and those banks would hold reserves in the most important city of the country and it still is New York City, where I'm kind of near, I used to live. So another important restriction is you had note restrictions. Banks were restricted in how well they could issue bank notes, so sort of handheld currency. There were many bond backing requirements, okay? So banks, you had to purchase a certain amount of federal or state bonds to purportedly ensure your bank notes. So if the bank failed, you'd have these great investments. It turns out most state bonds and federal bonds could kind of be somewhat crummy, but that's another story entirely. This made note issuance very inelastic, okay? So instead banks, they couldn't pay out notes because if people wanted to redeem deposits for notes, banks couldn't pay out notes, they didn't have enough bonds, they would instead pay out species. This made the banks more illiquid and more failure prone, okay? Many of these regulations, branch banking, credit pyramid, note restrictions, this led to a very fragile banking system. So all it took is sort of a failure of a large bank or a large firm, say from an Austrian business cycle theory, to create a full-bomb banking crisis. So a bank run is when there's basically a run, so to speak, on one bank. So people are redeeming their deposits and notes at one bank. A bank panic or a bank crisis is when this spreads everywhere. All right. This is something that I always describe, this is how I describe it to my students, so I was actually surprised that the GIF works. So I always love this Simpsons episode where he, you know, Mr. Burns goes for a doctor's visit and the doctor says, well, actually, you have every known illness known to man, they're all just getting jammed in this door. So all it would take is one little thing and Mr. Burns is sort of oblivious and he goes, I'm indestructible. So he says, so what you're saying is I'm indestructible and the doctor says, oh no, no, no, in fact, even a slight breeze couldn't, he goes, indestructible. He just sort of leaves like oblivious. This is how I tell this to my students and it's basically the way with the banking system. All it would take is, you know, you think this mighty country would be so strong, but all it would take is, you know, some little thing and you could have a very severe crisis. And a lot of these restrictions were not in other countries, Canada, England, et cetera. And while their banking systems were by no means perfect, they fared better than the United States. Okay, so this is sort of a general outline of the major sort of, you know, overview of panics and recessions. Now we can go sort of onto the panic of 1873 in more depth, at least sort of my research on early American business cycles and banking regulations. You have the Depression of 1873, 1879. Then I also did a sort of a similar study on the Depression of 1920 to 21, as well as sort of a study on the origins of the national banking system. I'll be referring primarily to the first and to the third. So you can find all of these papers online, either free copies online or on SSRN. And in fact, I was also on the Tom Wood Show and I give a podcast about the first two so you can listen to those. I think they're enjoyable. Some people, you know, they might listen to them, you know, the Tom, you know, my episodes, my dad would say if he wants to fall asleep, he has insomnia. I'll leave that up to you to decide. I think they're enjoyable. So, you know, you can listen to those. So we'll be primarily referring to the first and the third. Okay, so brief outline of the panic of 1873 in the Depression of 1873 to 1879. So the outline was that basically in the early 1870s, you had a boom, an enormous credit expansion, and this was particularly the malinvestment was in railroads. Okay, so railroads were sort of the long-term investment that was very big in the American economy at this time. There were also many railroad land grants, particularly given in the Civil War, where basically the government literally just gave land to the railroads, three major transcontinentals. Railroads were long-term investments. They required a significant degree of financing with borrowed money. So railroads was really for the 19th century a major malinvestment, the particular industry. So I sort of argue that this boom in the early 1870s was due to credit expansion following the creation of sort of this quasi-central bank or quasi-central banking national banking system, which was instituted in two laws in 1863 and 1864. Okay, and there's also, we'll talk a later tax that was instituted, but this was the system that we had before the Federal Reserve. And something I'll also mention is that this system, much like the Federal Reserve, was due to sort of special interest in private bankers, a classic example of rent seeking. So for those of you that have read Murray Rothbard's essays on the origin of the Federal Reserve, he goes through the special interest behind that. Rothbard also in other essays touched on the special interest behind the national banking system and I'll sort of go through those in more depth. So after this boom, the panic of 1873 was sort of due to a slowdown in credit expansion coupled with an already fragile banking system. Then there was sort of this mild recession until 1875, this necessary reallocation process we learned about. So you have the misallocation during the boom and you need the reallocation during the bust. And then a recovery, there was no long depression, for the rest of the 19th century or even for the remainder of the 1870s. Okay, so sort of jumping in. From 1861 to 1865, there was a civil war. So in order to sort of explain the panic of 1873, we have to go back, you know, back a couple of years. In late 1861, the United States suspended species payments. Okay, so when you hear suspended species payments, that means banks are no longer redeeming their bank notes, their bank deposits for gold and silver. In 1862, they start to print greenbacks. So you can imagine they promised to sort of redeem them in gold in the future, but it was very hazy, they were very far off. This is actually where our money sort of gets its green tint. You know, the greenbacks, that's what it refers to. The notes were actually bigger, the modern bank note didn't come out until the late 1920s, at least the size we have in our wallets. But you know, that's at least to sort of get the greenish color. In 1863 and 1864, it was two very important acts, the National Banking Acts, they're actually called the National Currency Acts, but those didn't really stick. And here are sort of the major provisions. It created a federally charted system of national banks, chartered system of national banks, excuse me, before state banks would charter. And so for a charter, it's basically a license. It's like a fancy way of saying a license. You had to apply for a charter. Back in the day, there used to be enormous special interests. You used to have to bribe people. One of the most ingenious things bankers used to do is if they wanted to bribe a politician to give them a charter for their bank, they wouldn't give them money, they'd give them bank stock. Why? Because if the bank was never chartered, the bank stock would be worthless. It was a bribe that only counted if they actually got what they wanted, which is, these are bankers, they're smart people. They know what they're doing. These banknotes, the banknotes they issued, these national banks, they were backed by federal bonds. So if you wanted to issue banknotes, you had to purchase from the Treasury for someone else a certain amount of U.S. government bonds. The second feature was this led to, there's also a credit pyramid where banks were allowed to hold reserves in other banks. And really most reserves were held in New York City. New York City was the dominant financial center around this time. And you actually had a small group of almost quasi-central banks. These were banks in New York City, commercial banks, that really their main business was actually holding bankers balances. All they held was deposits, not for us regular schmucks, but for actual, for prestigious banks. You had newly instituted position, the comptroller of the currency. That's something that's still with us. This instituted capital and reserve requirements. Capital requirements, you had to have a certain amount of equity. You hear about this a lot after Dodd-Frank. This actually acts as a restrictive barrier to entry, because if you have to have $50,000 to start a bank, back then that was a lot of money, if you didn't have that money, well, then tough kind of. You could operate a bank in a particular city, as well as reserve requirements. And most importantly, they continued sort of the, or all these are very important, but one that significantly, they continued the unit banking system due to sort of like one to two words in the legislation, the unit banking system from before was continued. So basically you had a bunch of things, new laws, this is gonna be very surprising. They don't really correct any prior problems caused by government intervention, but they caused their own problems. So I know this might sound very novel to you, but there's also occurred in the monetary realm. So one thing I always like pointing out, this is a great sort of special interest, you have the investment banker Jay Cook of the Philadelphia based banking system, investment bank Cook & Co. and secretary of the treasury, Salman P. Chase. So Jay Cook and his brother Henry, Henry ran a bunch of newspapers and they have supported Salman P. Chase in a lot of his political endeavors. He used to be governor of Ohio before for a long period of time. When Abraham Lincoln takes office, they successfully lobby to make their friend treasury secretary, which is an important position. And then coincidentally, I guess maybe like a year after Chase grants Cook & Co. He was very impressed also by how they could sell bonds, the monopoly on selling federal bonds to the public. Cook & Co had this great idea. He was really Jay Cook and Cook & Co. They're really the first people to realize that, hey, we can mass market their whole bunch of patriotic appeals, market them to the regular people instead of the rich people, these bonds. So Cook & Co. got this monopoly on selling federal bonds, which was obviously you could say quite nice for him. And then also coincidentally, I guess after, Cook then supports Chase's plan for a national banking system. Why? Because you have a bunch of new banks, they want to issue notes, they have to buy bonds. Who are they gonna buy bonds from? No, that guy, Jay Cook, Cook & Co. And they propagandize, they schmooze with a lot of senators, they have this whole newspaper blitz, et cetera. And then the first act in 1863 basically barely squeaks by, it gets passed. And then Cook sets up his own national banks, including those in New York City. Just to give you an example, in 1870, aside from his investment bank, he had a lot of commercial banks. So you sort of had a house of Cook, sometimes you hear about a house of Morgan. You know, particularly the fourth national bank of New York City was a Cook-owned bank. And it had the, it was the first largest bank in terms of total assets, and the second largest bank in terms of total banker balances. So this guy who was pretty big in sponsoring this legislation later had some of the most successful banks, at least starting off. And you go like, oh wow, the bunch of coincidences that, you know, fall from each other, you know, you know, I don't know what's going on here. And here's a great letter from Henry to his brother. And this is after, you know, sort of the bank bill sort of passes. Henry says, it'll be a great triumph, Jay, in one to which we have contributed more than any other living man. The bank bill had been reputed by the house. It was out of the sponsor and the Senate. And then, and there was this virtually dead and buried when I induced Senator John Sherman to take hold of it. And we went to work with the newspapers. Okay, so he's like, well, when I convinced the Senator and then we had a bunch of great stuff in the newspapers, you know, then it was successful. Okay. You know, I am very sure that Chase appreciates our efforts and knows that we can ever know fully the value and efficiency of our services. And this isn't just the Cook Brothers actually talking high and mighty about themselves. In an undated letter, Senator Sherman basically confessed the exact same thing to his wife. He wrote, oh yeah, the Cooks were very influential in this. And I've always taken this as pretty much a slam dunk case because I've never heard of a scenario where a politician has lied to his wife. So, you know, it seems, especially how monetary matters, it seems as though, you know, this is very, you know, pretty much open and shut case. So, you know, we move on to the boom and surely after, there was sort of some contractionary monetary policy, I tried to return to a species payments wasn't very successful. So from 1865 to 1867, the money supply was roughly constant. Then from about 1867 to 1870, there was sort of some limited credit expansion, the money supply, and this is M3 actually, only increased by less than 3% a year, not very significant. But then all of a sudden, money supply starts jumping up by about 10% a year from 1870 to 1873. So you have a period of basically roughly constant money supply after the Civil War and then it just jolts up. And why was this? Well, this was because the national banking system had matured and banks by that time had sort of been fully loaned up. They had spread all of the reserves or they counted the reserves as deposits in other banks and the bank reserves could spread out to other national banks or to more importantly state banks. So those banks that were still chartered by the state. And so this basically allowed for greater system-wide credit expansion. And then this led to, you know, of course these, you know, the loans that got to be lent somewhere, this was, you know, sort of the higher orders. Okay, so you had a lot of investments in the higher orders at this time. So sort of touch on. So sort of the major malinvestments were in railroads and related higher order goods, such as metals, fuels, machinery, et cetera. So the Davis Industrial Production Index, it breaks down the aggregate production into various sectors. And the one I concentrate on here, in the paper I go through more along with relative prices, I concentrate on machinery. Why? Because one of the major figures in the machinery index is locomotives, which you gotta have for trains, you know, at least a good train, I would think, good railroad, you have to have locomotives. So that's sort of, you know, one index we'll be sort of tracking here. And the price indices and the production indices show the relative movements in sort of consonant with Austrian business cycle theory. Greater increase in the higher orders and sort of this tug of war that develops later on between the lower orders and the higher orders. Just to go through them figures, so we've been to the money supply before in this four year period, the enormous jolt in the money supply, GDP, increased from about 3% a year. These are all per annum or yearly figures to now about over 7% a year. The CPI, just an index, the consumer prices, those were falling by about 4% a year in the late 1860s. And now it's only falling by about less than 3% a year. A lot of people would say that, oh, there's no inflationary impetus. You know, you actually, you know, prices weren't rising, they were falling. But of course, from an Austrian business cycle theory, we know that inflation isn't really the rise in prices, it's the rise in the money supply. And the credit expansion causes prices though to fall by less than what they would have in absence of the credit expansion. So you can still see, you know, there's sort of a malinvestment credit expansion, et cetera, brewing. And this would have eventually translated into higher prices. You can't keep ramping up 10% per year monetary expansion. Just look at the machinery index. It jumps from about 6% a year growth, which is sizable growth to 11%, over 11%. You know, it's an enormous increase. I guess they were making a lot of locomotives during this time period. So, you know, the good times can't last forever. You know, problems will surface up. And this is what happened really beginning in sort of late 1862, 1863. So you have the panic and the recession. So there's sort of the end of the boom around this time period. A lot of investor uncertainty, railroads, they're not looking as profitable as a lot of people thought they were, the initial promoters. So again, sort of explaining the transmission mechanism from Austrian business cycle theory. You have a slowdown in credit expansion. That leads to a decrease in railroad profitability. Businesses can't borrow sort of that the stress borrowing to continue their projects and the higher interest rates reduce the present value of projects, okay? Especially long-term investments. This leads to a decrease in the value of railroad bonds and of loans made to railroad companies. Banks have to write these off. This increases bank losses, pushes them closer to insolvency, okay? When their equity is less than zero. So what have you know? It's sort of like this, sometimes people get what's coming to them. So who do you know, just who failed? He's actually invested in Bank J. Cook and Co. After the Civil War, the United States government actually had this very rare problem, this issue we'll never have again. It was paying off its debt and its deficits. It was actually running surpluses. So it's not like the best thing, the market bonds, the federal bonds during this time. So as he do, he switches the next best thing, railroads. He bought a lot of Northern Pacific securities. And in 1873, he found it very hard to sell them. The railroads weren't doing so good. And so what does he have to do? He fails. They closed their doors. And this was like a thunder clap, because no one expected it. This was the most prestigious investment bank. Oh my God, J. Cook and Co. failed. It caused a huge panic, okay? So it fails in about mid-September, 1873 and the panic begins. An already fragile banking system, people start to redeem deposits and notes. They try and get either, they try and get greenbacks or redeem them for more secure banks. You have a run on the banking system. Just to give you an idea of this, after J. Cook and Co. failed, a much more prominent investment bank took over during this time, one that's much more familiar I think to all of you, and it's J.P. Morgan and Chase. Or excuse me, J.P. Morgan and Co. At that time, they didn't merge the Chase bank yet. So J.P. Morgan and Co. became the most prominent investment bank, investment banker after this. So you have this panic that begins and this sort of the severe part is in September in October of 1873. The stock market closes for 10 days in September. Banks actually suspend cash payment until October, 1873. And some people think that, oh, actually suspending cash payment, it helps the banks, it's good. Actually, during this time period it caused difficulties because banks suspended payments, cash payments, it was harder for businesses to pay their workers. So it led to a very dry up, the contagion spread very quickly. During the sort of the reallocation process over the past two years, excuse me, over the next two years, railroads and sort of related higher order goods were hit the hardest. The lower order is not so much. Just look at that, 11% growth each year and then you go to negative 17, negative 18%. If you invest in a company and they go from, well, you know, before you invested or less, we were doing great. The past two years we're getting about negative 18%. I would recommend switching to a different financial advisor or someone else because that's clearly not gonna work out. And I'm of the opinion that credit contraction can actually be beneficial during a bust that helps sort of correct the price spread in the economy. During this time period, the money supply still increased slightly. The government actually tried to print more money, green backs into the banking system. That was one of the interventions. Most of it occurred primarily in 1874. As we'll see, actual credit contraction sort of happened later. But notice, look at the GDP. It goes up from about 7% a year and there's definitely a noticeable change but it's actually increasing each year. So it's increasing by about roughly less than 1% each year. So about, you know, 0.8%. It's not nearly, you know, this atrocious. You look at the years during the Great Depression. The Great Depression actually had real negative numbers for GDP, not just sort of mild numbers. The CPI was falling by more. Generally during panics, you have a large increase in money demand. So people don't wanna spend their money. You have a period of uncertainty. That's the calm down. Then we went through the machinery figure again. So this is sort of the panic and the recession. And then we get to the good stuff, sort of the recovery. So there's a noticeable turnaround in 1875. So about, you know, roughly a year and a half, two years after, you think the recession kind of began in September of 1873. And what's noticeable about this is that there's a recovery, although prices continued to fall and there's actually monetary contraction. There's a lot of bank failures, particularly among non-national banks and mutual savings banks. And there was sort of laissez-faire, counter-circuitable policy. There's no fiscal stimulus. In fact, there was actually some mild contractionary monetary policy to try and help the country return to the gold standard, which it did in 1879. And there was enormous nominal allusion sort of from deflation. As we'll sort of look at the figures, prices were falling, stock prices were falling, wages were falling, incomes were falling, profits were falling, interest rates were falling, et cetera. And this fooled contemporaries because they mistook it sort of a nominal allusion for real allusion. People didn't realize, oh, my income's going down, but hey, the prices at the grocery store, they didn't really have grocery stores back then, at the general store, everyone's played Oregon Trail, right? So like the general store, you know, they're also falling along with businesses, oh, my output prices are falling, but guess what? My input prices are also falling. Here's an old historian who's had actually a very negative opinion of the depression, but this is a great quote, it says, contemporary appraisals of the intensity of depression tended to be the more alarming by their very vagueness to get tribute to the prevailing pessimism. Basically no one knew what was going on, everyone's just kind of negative. And that naturally sort of reinforces itself. Because if you think our faulty statistics, you know, in the 1950s, I had a misleading picture of this depression. The statistics back then had a very misleading picture. New York unemployment was estimated by a charity organization in 1873 at 25%. Would you think, oh, this is enormous, this is atrocious, but here's what they did. Basically they counted all the people who went to their charity over the year and they divided it by the total labor force. So that mistakes, okay, they're feeding children, they're also feeding women who wouldn't be considered in the labor force, and they're also not considering that the same poor guy who's going to them in January might also be the same poor guy who's going to them in June. So it's not like a separate person. So like this 25%, again, unemployment statistics back then, you know, sort of, you know, you kind of make stuff up. But again, you just think about, you hear about in your news, you're like a poor farmer or poor mechanic or artist, and you go, oh, 25%, things must be terrible. The Chronicle newspaper also had unemployment figures of job losses in particular industries, like construction, et cetera. That was actually greater than the total amount of workers in construction or like in certain industries. So it's like, I guess you have, you know, people negative, you know, clearly it doesn't make sense. There's no doubt that people during this time period were mad. There was a railroad strike in the late 1870s, but sort of mad at what? And what some new historians have been arguing is that, well, this was the beginning of the Second Industrial Revolution. You had enormous change, the movement to large scale farms, the movement to sort of these large trusts. I'll be talking about them tomorrow, these new businesses swallowing up the mom and pops stores. You had to grow the department stores. You also had inequality, where now you can, oh, I'm just some poor farmer, but you can see this robber baron who becomes very rich. You know, I don't think there's a problem with that, et cetera, just more visible. So the people get mad, you know, whether they get mad at it, they get mad at the economy, just to get mad at stuff, I guess. So, I mean, if you look actually, what's incredible is from about, that should be about the one on the right, 1875 to 1878 or nine, depending on the figure. So you look at the money supply from 1875 to 1878, the money supply, M3, actually declined by roughly about 3% each year, which is pretty incredible. It's one of the most prolonged monetary contractions. It's one of the sharpest monetary contractions outside of the Great Depression. But look at GDP. GDP goes from less than 1% growth each year, to now 4% growth. So you hear about in the news, like, oh, can we get 4%, can we get 3%? Well, you know, they got 4% here, and you know, they're doing pretty good. It's not as high as 7% during the boom, but it is higher than the 3% in the late 1860s, and no one was considering that a depression. Prices were still falling. Railroads were still hardly, you know, hard hit. You only had about 1% growth, but that's just sort of a malinvestment. Again, you know, these were tough times. The, you know, at least, you know, for the railroads, there's still a malinvestment industry. You still had some liquidation going on, et cetera. There was no economy-wide depression, though. Okay, interestingly enough, nominal wages during this period also fell by about 16%, about 1873 to 1878. I have the numbers there slightly changed because 1879 had enormous growth, and I don't include that in there, because I know I'd be cherry picking if I went from 1875 to 1879. So in fact, I'm actually being conservative here. So sort of a sequel is that about 1879, you finally resume species payments. So we return to the gold standard, and there's a large gold inflow. This sort of led to credit expansion, built in the national banking system, et cetera, led to a, you know, then the Panic of 1884. But that's sort of a story for another time, okay? So this is sort of the end of sort of this 1870s, quote unquote, malaise. So really the NBER, and this is something Davis argued as well as me, you know, it has to adjust some of these figures, at least these recession dates. So we look in conclusion, the severity and frequency of business cycles and banking panics in the 19th century, they've been exaggerated due to fault to economic statistics. The recessions, or at least the depressions back then were not as harsh as what we've considered before. Banking panics were not as severe. In fact, many quote unquote banking panics and recessions actually get whisked away. When you look at sort of comparing them, sort of doing objective analysis, they don't really count. So remember just the picture with the recessions, you know, it's really drastic change. And what problems that did occur, they were not sort of due to laissez-faire, but instead these misguided government regulations, particularly the national banking system, branch banking restrictions, et cetera, and perhaps more importantly, the panic of 1873 and the depression of 1873 to 1879 is a classic example of this, and you should tell all of your friends about this episode if they ever ask about this stuff. So thank you very much for listening and I appreciate your time.