William Jennings Bryan had a point.

Source: Hulton Archive/Getty Image

Those Victorians Really Knew How to Bounce Back

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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The financial crisis of 2008 was the worst in three-quarters of a century, but thanks to timely interventions from Washington, the U.S. avoided an economic crisis on the scale of the Great Depression. That's the standard line, and I think it's mostly right (although the story's different in Europe).

But what about the Panic of 1893? How has the U.S. economy done this time around compared with the other of what Credit Suisse Asset Management economist Jonathan Wilmot calls "the three great crises of capitalism"?

Not all that well, it turns out:

Source: Credit Suisse Global Investment Returns Yearbook 2016

That chart is from an essay Wilmot wrote for the new Credit Suisse Global Investment Returns Yearbook, which came out this week. It's the annual update to finance scholars Elroy Dimson, Paul Marsh and Mike Staunton's 2002 book "Triumph of the Optimists: 101 Years of Global Investment Returns," and it's full of the usual fun facts (last year I wrote about the yearbook's examination of the long-run stock performance of different industries, which showed booze and tobacco leading the way).

Wilmot's look at the three great crises is an attempt to find commonalities and contrasts, and maybe some lessons for how to go forward. He acknowledges that if you examine declines in gross domestic product or the price level, the immediate aftermath of the 2008 near-meltdown was less extreme than the fallout from the two earlier crises. But by various other measures -- not just industrial production (the metric in the chart above) but also unemployment, corporate earnings, bond returns, equity returns -- the trajectory of the past eight years bears comparison with that of the 1890s in particular.

The 1890s crisis is only called the Panic of 1893 in the U.S. In London, then by far the world's most important financial center, it began in November 1890 when Barings Bank almost went under due to bad investments in Argentina. The Bank of England organized a rescue effort a bit like the one in the U.S. in the fall of 2008, but the crises continued in Latin America and eventually spread to the U.S., where hundreds of banks failed and thousands of businesses closed. Unemployment spiked into the double digits.

The hard times sparked a fierce political reaction, with the rise of the populist People's Party and then the presidential candidacy of populist Democrat William Jennings Bryan. It was at the end of his speech to the Democratic National Convention in 1896 that Bryan uttered his famous line:

You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.

For all its religious overtones, this was chiefly an argument for easier monetary policy. Bryan was saying that linking the dollar to gold was causing deflation, which was depressing the economy by making it harder for debtors to repay their loans and thus impossible for many farmers and other working people to get by. This is actually not all that different from what Wilmot observes. He writes that the biggest threat to recovery in the years after a major financial crisis is "a tendency to underestimate the power of the deflationary dynamic unleashed by a large debt buildup and subsequent systemic shock."

Bryan lost that election, to pro-gold-standard Republican William McKinley. And there was no Federal Reserve in the 1890s to fight deflation with quantitative easing. Yet as economists Milton Friedman and Anna Schwartz documented in their "Monetary History of the United States," deflation turned to inflation in 1897, and prices kept rising through the beginning of World War I -- the biggest peacetime inflation in U.S. history up to then. The economy recovered.

What had happened? Quantitative easing by gold miners, effectively. Take it away, Milton and Anna:

The proximate cause of the world price rise was clearly the tremendous outpouring of gold after 1890 that resulted from discoveries in South Africa, Alaska, and Colorado and from the development of improved methods of mining and refining.

In the 1930s, economies began to recover after governments dropped the gold standard. What followed after World War II in the U.S. was a decades-long inflationary run that far surpassed that of 1897-1914. It eventually got so out of hand in the 1970s that the Federal Reserve cracked down, beginning the long disinflation (if not quite deflation) that has brought us to today. So what's next? Well, it seems like a little inflation might be nice.

  1. And yes, Barings Bank finally did go under in 1995 after rogue trader Nick Leeson lost more than $1 billion of the bank's money. But by then it was a less central part of the global financial system, and life went on.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net