Abstract

Friedman and Schwartz (1963, Chapter 3) argued that the stagnant money supply caused a long depression from 1869 to 1879. However, Friedman and Schwartz also stated that the real GNP average rose 6.5 percent per year, wage earners in manufacturing in 1879 rose 33 percent more than in 1869, and basic production nearly doubled from 1869 to 1880. The opposition between real GNP and nominal GNP raises a paradox in the business cycle theory: the prosperity of real GNP coexists with the depression of nominal GNP. As nominal GNP is overestimated relative to real GNP during hyperinflation, real GNP moves opposite to nominal GNP if the deflation rate is greater than the growth rate of real GNP. Since deflation is caused by the increase in productivity in the 1870s instead of insufficient demand, I examine monetary explanation for the long depression and conclude that the change in money stock explained neither GNP nor deflation from 1869 to 1879. Besides, I find cases that the increase in money stock makes velocity decline instead of the increase in GNP and price level, which implies the ineffectiveness of monetary policy. I use the increase in labor supply to explain another paradox: both the unemployment rate and the number of employees kept increasing in the 1870s. Thus, I conclude that the US economy in the 1870s was in prosperity and we should identify either depression or prosperity by the number of employees and real GNP, not unemployment rate and nominal GNP.

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