Today's Economy Echoes An 1800's Depression—And That's Good

History may not repeat itself, as the old saw goes, but it does rhyme. Which historical times best "rhymes" with our current economic predicament? And what can we take away from such an analogy?

Parallels to the Great Depression of the 1930s and to Japan's recent lost decade are frequently made. Perhaps the best analogy of our current predicament, one gaining ground in recent blog entries and journals, is the Long Depression that began in the United States with the Panic of 1873 and saw an alternation between recovery and collapse that lasted to the threshold of the 20th century.

Much of the economic history of that time sounds as if it could have been taken straight from today's cable financial news shows. Yet the underlying realities of the Long Depression reveal a silver-lining parallel for our future.

In the 1870s, as today, loose lending standards led to a credit, housing, and construction bubble—only this one was in Europe. When cheap American goods began to flood European markets, Europeans began to feel their overextension. The result was that their bubble burst. As with U.S. banks today, the world's leading banks in London locked up, which in turn collapsed the arcane financial arrangements of U.S. railroads, which forced financier Jay Cooke to suspend the building of the Northern Pacific Railroad, which led to a U.S. stock market collapse, followed by widespread bank failure and a depression that lasted almost five years in the United States.

A period of boom and bust followed, with the consolidation of vast business empires by tycoons, along with a Bernie Madoff-like scandal in which a character named Ferdinand Ward exploited his friendships with prominent people (including former President Ulysses S. Grant) to fleece the trusting.

A new collapse in 1893 inflicted double-digit unemployment on the United States for half a decade. The cause, then as now, was overextension (in this case, mortgages to farmers), lower prices as railroads commoditized goods (as the Internet and cheap Asian manufacturing do today), and overconstruction. Mass foreclosures set off a wave of financial and industrial bankruptcies that forced massive government intervention to shore up national reserves.

What are our takeaways from this historical experience? Several useful parallels present themselves.

First, we can see the boom and busts of the last quarter-century—from the S&L collapse, to the dot-com bubble, to the Enron-WorldCom scandals, to our current financial crisis sparked by easy credit and defaults—as symptoms of an overarching period of overextension and consolidation. There is a lot of talk about glimmers of recovery. History suggests another possibility—that we instead face a "W"-shaped recession, in which we are now riding up the middle peak.

Second, the social legacy of that time is not appealing, from labor-business wars (see coal companies and the Molly Maguires), to rising protectionism, to the search for scapegoats that led to anti-Semitism in Europe and intensified racism in America. The period also saw the rise of explicit socialism and radical populism as mass movements in American politics.

Third, there is a more heartening parallel from those times. It was during the years of the Long Depression that American engineers began to create transformative technologies that would bring amazing improvements to the average person's quality of life.

During the Long Depression, we saw the first practical internal combustion engines, Rockefeller launching the oil age, and Edison inventing his light bulb and phonograph. The telephone went from curiosity to business utility. During these years, electrical and gas utilities lit cities and brought light and reading to the home. The technological evolution that would produce the automobile, the airplane, and the motion picture of the early 20th century were already well underway.

Today, we can also see in this slow economic time the technological seeds of future growth and progress.

Now that the human genome is mapped, biologists are set to better delineate the functions and expressions of our basic genetic structure. Genetic-based therapies are sure to create a medical revolution in the treatment of diseases, including the explicit curing of diseases long believed unconquerable.

The coming convergence of high-definition television with virtual reality technologies and the Internet is going to create rich new media that will enable new value from social networks we cannot yet fully imagine.