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The 1890s are another time that the Keynesian economists like to point to as
an example of "gold rising in value." What they mean by that is,
that commodity prices were falling. For several years leading up to the 1896
presidential election, the Democratic party made various threats to
effectively devalue the dollar by allowing "free coinage of
silver." This alone caused quite a lot of financial turmoil and
distress, as you might expect when a government starts to tell people that
they will devalue the currency. However, on top of that, the decline in
commodity prices itself was crushing many farmers, who were often in debt.
February
12, 2012: The Warren Pearson Index
Here's what it looks like:
![](http://www.24hgold.com/24hpmdata/articles/img/Nathan%20LewisThe%201890s-2013-05-02-001.gif)
What do we see here?
There is a big peak in commodities prices in 1864, related of course to the
Civil War. The dollar was devalued during this time, which of course had the
corresponding effect on commodities prices. On top of that, you have the
usual supply/demand characteristics of war, which is increased demand (for
war materials), combined with decreased supply, because the farmers are in
the battlefield shooting each other instead of growing crops.
The decline in commodity prices from 1864 to 1879 corresponds to the
re-valuation of the dollar, the return of its value to the prewar gold
parity, which was accomplished in 1879. From there comes a little more of a
decline into 1897, and then a modest rebound in prices in the 1900-1913
period.
The 1870s and 1880s were the great decades of railway expansion in the United
States. This allowed farmers who had really served just their local area --
because you can't really carry a bulk crop like corn for more than about
twenty miles in a horse-drawn cart -- to grow crops for long-distance trade.
People bought land, borrowing money in the process, expecting to be able to
put their crops on the train and sell it in New York or Charleston, and
thenceforth to Europe or wherever. A flood of agricultural products hit the
market, driving down prices, and thus bankrupting the farmers. This bad
experience suppressed the expansion of farmland acreage beginning around
1900. A simple supply and demand story.
![](http://www.24hgold.com/24hpmdata/articles/img/Nathan%20LewisThe%201890s-2013-05-02-002.gif)
This shows the new miles of
railway added each year in those decades. This time series is very spikey. I
think it shows completed systems, so that a project that takes five years
might be registered when it is ready for commercial use. I added a five-year
moving average in red.
This is really incredible. The U.S. was adding 6000-8000 miles a year of
railway track. This was all done with hand tools! The population of the U.S.
in 1880 was 49 million people.
Imagine! Forty-nine million people, using hand tools, without electricity or
petroleum, could lay six to eight thousand miles of rail track a year. China
today is aiming for about 7,000 miles of rail track a year for the next ten
years. This is with twenty-four times the population, using power tools and
heavy equipment.
![](http://www.24hgold.com/24hpmdata/articles/img/Nathan%20LewisThe%201890s-2013-05-02-003.gif)
This shows the acreage under cultivation for the top ten commercial crops.
See how it grows from 92.7 to 259.6, a 180% increase, in the 34 years from
1866 to 1900. However, from 1900 to 1940, forty years, it grows from 259.6 to
280.2, an increase of only 7.9%.
Here are YoY % Change figures, and a five-year moving average. We see that
the growth rate in the 1870s and 1880s was in the realm of 3%-5% per year.
This falls to about 1.5% per year in the 1890s and less than that after 1900.
This index of production for the top 12 crops has a lot of variability due to
the weather and so forth. The period 1910-1914=100 on this index. It goes
from 25.5 in 1866 to 86.5 in 1900, an increase of 239% in 34 years. Then,
from 1900 to 1940, it rises 26% in forty years.
![](http://www.24hgold.com/24hpmdata/articles/img/Nathan%20LewisThe%201890s-2013-05-02-006.gif)
Here I am applying quite a lot of smoothing to the yearly growth rates. This
is the compound annual growth rate for a ten year period centering on the
indicated year. We can see that the average was around 5% in the 1870s, 3% in
the 1880s and 1890s, and then it falls below 2% after 1900. Less supply =
better prices.
In the 1890s, and then in the 1930s, people argued that you needed to devalue
the currency to maintain "stable prices." What they really meant
was: declining commodity prices were hurting farmers, and causing them to
default on their loans. Of course a devaluation would tend to support nominal
commodity prices, and allow farmers to pay back their loans in a devalued
currency. Note how much commodity prices rose in the 1940s. Did any of these "stable
prices" advocates suggest that the dollar be returned to its
$20.67/ounce pre-1933 parity? Of course not. Their "stable prices"
arguments only go one way.
The market served its function in the 1890s. By removing any incentive to
increase acreage under cultivation and farm output, the supply glut was
resolved, and prices rebounded in the 1900-1910 decade. In the 1896
presidential election, the voters chose William McKinley, who promised to
stay with the gold standard. Despite the difficulties of the 1890s, it worked
out fine: the 1900-1914 period was a wonderful time of economic expansion in
the U.S. and indeed throughout the world, the last hurrah of 19th Century
Capitalism before the turmoil of the two world wars.
The information for these graphs comes from the NBER Macro History Database,
a free online resource.
http://www.nber.org/data/
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