As the tepid economic recovery continues, there has been a fair amount of discussion about the uniqueness of the duration of above-normal unemployment following financial crises.  Reinhart and Rogoff were clear on this in This Time is Different and in this article, where they write:

“After the Fall,” a 2010 paper written by one of the authors of this article and Vincent Reinhart, a former Fed official who is now chief U.S. economist at Morgan Stanley, added evidence that in 10 of 15 severe post-WWII financial crises, unemployment didn’t return to pre-crisis levels even after a decade. It also showed that in seven of the 15 crises there were “double dips” in output.

John Taylor also recently posted on this topic, claiming that the 1890s recession was actually followed by a rapid recovery.  He based that conclusion on a comparison of real GDP  to potential GDP.  The problem, in my view, is that we don’t even have official actual GDP statistics before the 1930s, so I’m skeptical about drawing conclusions from potential GDP figures.  Taylor acknowledges this difficulty with measuring potential GDP, so he then suggested that  we look instead at growth rates in real GDP.  It’s true that real GDP grew strongly in 1895 and then fell again in 1896, but it’s important to explain the short-lived recovery in 1895.  There were a couple of unique factors that led to the one-year boom: (1) rapid expansion in the money supply – a 15 percent increase, in fact, from 1897 to 1898 followed by a 17 percent increase from 1898 to 1899  (2) good harvests at home and poor harvests abroad – U.S. wheat exports doubled, while a tariff in 1897 sharply restricted imports.  The balance of trade shifted dramatically as a result.

So, GDP figures – and GDP growth rates – give us a mixed picture.  On the one hand, those who argue the recovery was rapid can point to 1895 (although, as I pointed out, there are unique factors almost entirely behind the growth in that year).  On the other hand, it took five years for real per capita GDP to return to its pre-crisis level.  And the unemployment figures are even more suggestive of a slow recovery.  The average 3-year unemployment rate prior to the 1893 crisis was 4.1 percent, and unemployment peaked during the crisis at somewhere between 12.4 (Romer’s estimate) and 18.4 percent (Lebergott’s estimate).  But the recovery in labor markets was actually quite slow according to both Romer and Lebergott.  Using the Lebergott series, we didn’t get back to the 4 percent range until 1901, and not until 1902-03  in the Romer series (even those years saw slightly higher unemployment rates of 4.3 percent).  The data we have suggest that it took somewhere between 8 and 10 years for unemployment rates to return to pre-crisis levels following the 1893 panic.  The unemployment rate exceeded 10 percent for 5 to 6 years.

Here are the unemployment rate estimates (from Lebergott and Romer) from 1890 to 1915:

More generally, I’m quite happy to see renewed discussion about these historical financial crises.  While it does not garner that much attention these days, the 1893 panic was important in a number of respects.  Perhaps most importantly, it informs us about the consequences of debt buildup, the nature of financial crises and the speed (or lack thereof) of recovery post-financial  crisis.  Moreover, it was one of the crises studied by the the National Monetary Commission, whose work and recommendations led to the formation of the Federal Reserve System in 1914.  The Commission noted in its report on financial crises that, while the causes of crises were varied, the method of handling them was simple. There should be a reserve of lending power because the ability to increase loans from a central reserve to meet the demands of depositors “would have allayed every panic since the establishment of the national banking system [in 1864].”