Meltdown: A Case Study

What America a century ago can teach us about the moral consequences of economic decline
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Would it really be so bad if living standards in the United States stagnated—or even declined somewhat—for a decade or two? It might well be worse than most people imagine. History suggests that the quality of our democracy—more fundamentally, the moral character of American society—would be at risk if we experienced a many-year downturn. As the distinguished economic historian Alexander Gerschenkron once observed, even a country with a long democratic history can become a "democracy without democrats." Merely being rich is no bar to a society's retreat into rigidity and intolerance once enough of its citizens sense that they are no longer getting ahead.

American history includes several episodes in which stagnating or declining incomes over an extended period have undermined the nation's tolerance and threatened citizens' freedoms. One that is especially vivid, and that touched many aspects of American life that remain contentious today, occurred during the Populist era, toward the end of the nineteenth century—roughly from 1880 through the middle of the 1890s.

For a decade and a half after the Civil War, economic growth was largely exuberant, society optimistic, and social progress undeniable. But all that changed over the next fifteen years, beginning with a faltering economy. From 1880 to 1890 Americans' real per capita income grew on average by just 0.4 percent a year (versus almost four percent in the 1870s). Then, after a few strong years at the start of the 1890s, the economy collapsed altogether. A severe banking panic set off a steep downturn, widely known at the time as the Great Depression. By the end of 1893, 500 banks and 15,000 other businesses, including several major railroads, were bankrupt. Prices, especially farm prices, had been falling even when the economy was growing strongly. Now the declines became ruinous. Wheat dropped from an average price of $1.12 a bushel in the early 1870s to fifty cents or less in the mid-1890s, and corn went from forty-eight cents a bushel to twenty-one. By the early 1890s farmers in some western states were burning their nearly worthless corn for fuel. By 1895 per capita income had fallen below the level it had reached fifteen years earlier.

Popular discontent followed economic distress. In 1892 labor action against the Carnegie Steel plant in Homestead, Pennsylvania, sparked an armed battle between striking workers and company-hired Pinkerton forces, leaving sixteen dead and more than 150 wounded. Two years later a strike against the Pullman Sleeping Car Company led President Grover Cleveland to call in the Army to protect the railroads. At the same time, hundreds of unemployed men, led by Ohio businessman Jacob Coxey (the group was known as "Coxey's Army"), marched on Washington to demand federal assistance. Altogether, during the course of 1894 seventeen such "industrial armies" marched on the capital.

But economic concerns did not manifest themselves only, or even primarily, in labor marches and job riots; they soured many aspects of American society. As wages fell and unemployment rose, fearful citizens sought to close the country to newcomers—particularly from areas other than northwestern Europe. The new Statue of Liberty (completed in 1886) may have proclaimed America's welcome to the world's "huddled masses" and "wretched refuse," but such popular magazines of the day as Harper's and The Atlantic Monthly were full of ethnic jokes and slurs. Beginning in the 1880s hard times catalyzed a movement to tighten immigration standards. In 1882, after riots protesting the use of Chinese labor for railroad construction, Congress barred Chinese immigrants entirely. All other immigrants were subject to a head tax. Some states adopted legislation prohibiting certain noncitizens from acquiring land.

Race relations also deteriorated. In a spectacularly unfortunate coincidence that would affect American history for decades, this period of economic stagnation—the worst up to that time—set in just as Reconstruction ended and the federal government finally withdrew its troops from the defeated southern states. No one will ever know whether the country's race relations, both in the South and elsewhere, would have taken a different course had America enjoyed robust economic growth during this period. In the event, the result was segregation by race in practically every aspect of daily life, together with appalling racial violence.

One reason for believing that economic frustrations contributed to the sad history that followed is that although the former Confederate states regained full political independence with the end of Reconstruction, in 1879, most of them did not begin to adopt what in time became pervasive "Jim Crow" laws until the 1890s. By the end of that decade most southern states had made it illegal for blacks to ride with whites in railroad cars, and some had also segregated city streetcars and railroad-station waiting rooms. The devices used to deny most black citizens their voting rights—property and literacy requirements, poll taxes, and white-only primaries—were likewise adopted mostly in the 1890s or after.

But the legal changes enacted during this period barely capture the racist and anti-immigrant (and anti-Catholic, anti-Semitic, anti-ethnic) sentiment of the time. The 1880s saw a rise in vigilante violence in rural areas—not only lynchings in the former Confederacy but also beatings, murders, and arson by such groups as the Bald Knobbers, in the Ozarks, and the White Caps, in Kentucky and elsewhere. Such colorful populist figures as "Pitchfork" Ben Tillman, who served as governor of South Carolina from 1890 to 1894 and then as a U.S. senator, and Tom Watson, a widely read newspaperman who ran for vice president on the Populist ticket in 1896, were outspoken white supremacists. Tillman publicly defended lynching, called for the repeal of the Fifteenth Amendment (which had given the vote to blacks), and advocated the use of force to disenfranchise blacks in the meantime. Watson's speeches and editorials were regularly devoted to sensational attacks on blacks, Catholics, Jews, and foreigners. The American Protective Association, an anti-Catholic organization founded in Iowa in 1887, spread rapidly once the 1893 depression began, and claimed to have 2.5 million members nationwide by the mid-1890s. Anti-Semitic propaganda was so common among Populists by 1896 that William Jennings Bryan felt obliged to disavow it during his campaign for the presidency.

Steps that would have made America more democratic were not without advocates during this period. Many Populists favored such measures as direct primaries and the popular election of U.S. senators. Some also favored women's suffrage. Bryan was a tireless advocate for all these causes. Yet none of them advanced in the face of prolonged economic stagnation. Meanwhile, the Supreme Court only made matters worse. In two key decisions it effectively gutted the Civil Rights Act passed in 1875 (when economic growth was strong), declaring private racial segregation and then segregation legislated by the states to be constitutionally protected. Throughout the Populist era America's media, politics, and legislation all lent support to cultural exclusion, societal rigidity, and efforts to turn back the clock. These ultimately proved futile, but for a while they poisoned both politics and society. Openness toward the future, faith in a better society for all, and support for the rights of minorities were simply not the order of the day.

Economic weakness does not always produce social regress, of course; history is not so deterministic. The depression of the 1930s led, for the most part, to a reaffirmation of America's openness and generosity. But that was atypical; the Populist era was more the norm.

When slow growth together with widening inequality halted improvements in living standards for many Americans in the 1920s, the upshot was the revival of the Ku Klux Klan (not just in the South—at the Klan's peak perhaps one in ten white Protestant U.S. men was a member), the tightest and most discriminatory immigration restrictions in the nation's history, and the elimination of both federal and state laws designed to protect women and children. Similar economic conditions in the 1970s and 1980s provided the backdrop for another round of anti-immigrant agitation, the rise of the right-wing militia movement, and incidents of politically motivated domestic terrorism.

Not just in America but in the other Western democracies, too, history is replete with instances in which a turn away from openness and tolerance, often accompanied by a weakening of democratic institutions, has followed economic stagnation. The most familiar example is the rise of Nazism in Germany, following that country's economic chaos in the 1920s and then the onset of worldwide depression in the early 1930s. But in Britain such nasty episodes as the repression of the suffragette movement under Asquith, the breaking of Lloyd George's promises to the returning World War I veterans, and the bloody Fascist riots in London's East End all occurred under severe economic distress. So did the ascension of the extremist Boulangist movement in late-nineteenth-century France, and the Action Française movement after World War I. Conversely, in both America and Europe fairness and tolerance have increased, and democratic institutions have strengthened, mostly when the average citizen's standard of living has been rising.

The reason is not hard to understand. When their living standards are rising, people do not view themselves, their fellow citizens, and their society as a whole the way they do when those standards are stagnant or falling. They are more trusting, more inclusive, and more open to change when they view their future prospects and their children's with confidence rather than anxiety or fear. Economic growth is not merely the enabler of higher consumption; it is in many ways the wellspring from which democracy and civil society flow. We should be fully cognizant of the risks to our values and liberties if that nourishing source runs dry.

Benjamin M. Friedman is a professor of economics at Harvard. This article is drawn from his forthcoming book, The Moral Consequences of Economic Growth, to be published by Knopf in October.
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