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.