The First Great Moderation
By Scott Sumner
I just read a fascinating NBER paper by Joseph Davis and Marc Weidenmier, on the first Great Moderation; from 1841 through 1856:
First, both moderations experienced a change in the structure of the economy. The First Great Moderation witnessed the widespread adoption of important general purpose technologies–clipper and steam ships, railroads, and the telegraph–that helped contribute to significantly larger markets for goods, labor and exports. The modern Great Moderation saw structural change in terms of the movement of production from goods to services, the IT revolution that led to better inventory management, and financial innovations that allowed households and firms to better smooth consumption and investment. Second, the first and second moderations have been characterized by improved economic policymaking. Many states during the first Great Moderation wrote new constitutions that redefined the rules of the game for business and the government, while tariff rates during this time were generally significantly lower and less volatile, especially in the 1850s. As for the modern period, many scholars have argued that good monetary policy was an important factor in the Great Moderation from 1984-2007. Finally, both periods seem to have benefitted to some extent from good luck. While we do not observe significant changes in weather shocks or commodity prices during this period, the first Great Moderation did benefit from the discovery of gold in California. It also occurred during the era of Pax Brittanica–a period of global peace (Brown et al, 2005) and no major armed conflict in the United States. The second Great Moderation, on the other hand, appears to have been a period of generally low and stable oil prices coupled with few negative productivity shocks, at least up until 2007.
In summary, our analysis suggests that the First Great Moderation is an unparalleled period in the history of U.S. business cycles characterized by high economic growth rates and low business cycle volatility. Like the modern-day Great Moderation, the end of America’s First Great Moderation was abrupt, pronounced, and notable for its magnitude following years of relative stability. Unlike the modern-day Great Moderation, however, America’s First Great Moderation occurred despite a low level of government spending, the absence of a central bank, and no marked improvement in price stability.
That last sentence is particularly interesting. I’d guess that wage stickiness was less of a problem in the 1840s than it is today. In addition, commodity price shocks may have been relatively more important.
I occasionally see economic historians argue that America’s industrial revolution was aided by high tariff rates during the 19th century. Here one needs to be careful as there are many factors that influence any large economy. For instance, I often see people talking about the giant Chinese economy, and obsessing way too much over one particular aspect of their development model. However it’s worth noting that the unusually rapid economic growth of 1841-56 occurred during a period where trade was less restricted than usual:
Another factor that may have contributed to stable economic growth during the First Great Moderation was the sustained downward trend in U.S. import tariffs beginning during the early 1830s and running until 1860. According to Irwin (2008), import tariffs were steadily and consistently reduced over time due to the shifting political coalitions between the various regions of the country.