The 'Great Depression' of 1873-1896: The Popular Linking of Deflation with Depression Was Contradicted by All Sorts of Evidence

The period from 1873 to 1896 bothered economic historians for decades. Both people living at the time, and many later academics, branded it a time of unprecedented economic stagnation throughout the gold-standard nations. In Britain (supposedly the hardest hit), 'there was an overwhelming mass of opinion -- in reports of parliamentary committees and royal commissions, in parliamentary debates, newspapers, books, pamphlets, and speeches -- that conditions were bad'.

The popular impression was supported by a single, indisputable fact: Britain and most of the West had witnessed a 'uniquely persistent deflation' with the British wholesale price index losing close to one-third of its value in less than a quarter-century. For many this 'most drastic deflation in the memory of man' was both evidence and cause of what Josiah Stamp called 'a chronic depression in trade'.

The decades-long decline in prices has been termed 'the essential problem of the Great Depression'. In what sense was it a problem? Basically, because the popular linking of deflation with depression was contradicted by all sorts of other evidence. As early as 1877 Robert Giffen found himself countering the 'common impression' that a depression of unprecedented severity was in progress. 'The common impression', Giffen insisted, 'is wrong, and the facts are entirely the other way.'

--George A. Selgin, Less Than Zero: The Case for a Falling Price Level in a Growing Economy, Hobart Paper 132 (London: The Institute of Economic Affairs, 1997), 49-50.