Long Depression (1873-1896) – Causes & Lessons for Today’s Portfolios

Written By

Dan Buckley

Updated

Jun 22, 2023

The Long Depression, which occurred between 1873 and 1896, was a period of economic stagnation and deflation that affected many industrialized nations.

This historical event offers insights for today’s traders/investors.

By examining the causes, the role of globalization, the impact of government policies, and the rise of technological innovation during this period, we can draw lessons for contemporary asset allocation strategies and better understand the evolution of financial markets.

Key Takeaways – Long Depression (1873-1896)

The Long Depression (1873-1896) was a prolonged period of economic stagnation and deflation that impacted multiple industrialized nations, highlighting the significance of understanding the causes and consequences of economic downturns.

Lessons from the Long Depression include the importance of diversification, risk management, and long-term perspective when constructing investment portfolios to navigate challenging economic environments effectively.

The Long Depression also demonstrates the role of government policies, such as adherence to monetary standards, in exacerbating or alleviating economic crises, emphasizing the need for an understanding of the potential policy impacts on investmentsand asset markets.

Key Statistics About the Long Depression (1873-1896)

The Long Depression, also known as the Great Depression of 1873-1896, was a period of severe economic contraction and financial malaise that lasted for over two decades.

Here are some key statistics related to this historical event:

Duration: The Long Depression lasted from 1873 to 1896, making it one of the longest economic downturns in modern history.
Global Impact: The depression had a worldwide impact, affecting many industrialized countries, including the United States, Europe, and Australia.
Economic Contraction: During the Long Depression, global economic output and trade experienced significant declines. Industrial production, agriculture, and mining sectors were severely affected.
Unemployment: Unemployment rates surged in many countries during this period. In the United States, for example, unemployment peaked at around 25% in 1878.
Stock Market Crash: The depression began with the Panic of 1873, a financial crisis triggered by the collapse of the Vienna Stock Exchange. This led to a domino effect on global financial markets, causing bank failures and a credit crunch.
Bankruptcies: Many businesses faced financial difficulties and bankruptcies during the Long Depression. Companies in industries such as railroads, mining, and construction were particularly affected.
Wage Deflation: Wages experienced significant deflationary pressures during this period. Workers faced declining real wages and increased income/wealth inequality.
Social Unrest: The Long Depression contributed to social and political unrest in many countries. Labor movements and strikes became more prevalent as workers demanded better conditions and higher wages.
Gold Standard: The depression highlighted flaws in the international gold standard system, leading to debates on monetary policies and the role of central banks. As we cover in other articles, monetary systems follow a cycle between “hard” and fiat throughout time.
Recovery: The Long Depression gradually came to an end in the late 1890s. Economic recovery was driven by factors such as technological advancements, new industries, and government policies.

An Introduction to the Long Depression: A Historical Overview

The Long Depression began with the Panic of 1873, a financial crisis triggered by the collapse of several major banks in Europe and the United States.

Over the next two decades, economic growth slowed, unemployment increased, and deflationary pressures persisted across much of the world.

The period was marked by a series of booms and busts, with numerous countries facing financial crises and recessions throughout the era.

The Causes of the Long Depression and Their Relevance Today

Various factors contributed to the Long Depression, including the overexpansion of railroads, excessive investment in speculative assets, and disruptions in international trade.

These factors are still relevant today, as we continue to see economic cycles fueled by credit booms, asset bubbles, currency devaluations, and global trade imbalances.

Recognizing the causes of past crises can help traders avoid similar pitfalls and make better-informed decisions in the future.

The Role of Globalization in the Long Depression

Globalization played a significant role in the Long Depression, as increased international trade and financial integration – while providing more benefits than drawbacks – facilitated the spread of economic problems between countries.

The interconnectedness of economies meant that a crisis in one country could have ripple effects across the globe.

In today’s globalized world, understanding the risks and benefits of international exposure is important for portfolio diversification and risk management.

Today, traders/investors wrestle with questions like:

Do I allocate anything to China?
In a world where there’s more geopolitical conflict, do I allocate to certain countries that have shown to be more aligned with countries that could be sanctioned or risk sanctions themselves (which clearly impacts capital flows)?

The Impact of Government Policies on the Long Depression

Government policies during the Long Depression, such as adherence to the gold standard, often exacerbated the economic downturn.

Monetary policy was constrained by the gold standard, limiting the ability of central banks to respond to crises effectively.

Modern-day investors can draw lessons from the impact of these policies, as they highlight the importance of understanding the economic environment and the potential consequences of government actions on investments.

The Long Depression and the Rise of Technological Innovation: Implications for Modern Portfolios

Despite the economic hardships of the Long Depression, the period saw significant technological advancements, such as the development of the telephone and the growth of the electrical power industry.

These innovations laid the foundation for future economic growth and created entirely new types of companies and investment opportunities.

Today’s investors can learn from this by recognizing the potential for technological innovation to drive economic progress, even during challenging times, and by seeking investment opportunities in emerging technologies.

It’s also important to be aware that not all new technologies are good investment opportunities.

Sometimes prices are too high to realistically give quality forward-looking benefits. Sometimes technologies aren’t economic at all.

Lessons from the Long Depression for Asset Allocation Strategies Today

The Long Depression offers valuable insights into the importance of diversification, risk management, and maintaining a long-term perspective when constructing investment portfolios.

By studying the historical context and identifying the factors that contributed to the economic downturn, modern investors/traders can develop more resilient asset allocation strategies that are better equipped to navigate the future in any environment.

The Long Depression and the Evolution of Financial Markets: Implications for Modern Investors

The Long Depression marked a significant shift in the structure and functioning of financial markets, as they became more complex and interconnected.

This evolution has continued into the present day, with increasingly sophisticated financial instruments and investment and trading strategies.

By understanding the historical development of financial markets, today’s investors can better navigate this complex landscape and make more informed investment decisions.