http://www.spiked-online.com/index.php?/site/article/6622/
The âcredit crunchâ: another Great Depression?
To understand the current economic crisis, we need to look beyond the obsession with finance to the deeper structural problems of capitalism.
Friday 1 May 2009
Sean Collins
Last month Christina Romer, chair of the Obama administrationâs Council of Economic Advisers, began a speech by saying: âIn the last few months, I have found myself uttering the words âworst since the Great Depressionâ far too oftenâ (1). Romer is clearly not the only one: in almost any discussion of the current economic crisis, it does not take long before someone mentions the 1930s. Such references to the Great Depression are not just useful compare-and-contrast points for policymakers. The 1930s have re-entered the popular imagination: the period has become part of our mental furniture as we try to make sense of what is going on today.
At worst, the fascination with the Great Depression is a crystallisation of our deepest fears about a collapse of the economy and society. Apparently, many now indulge in âpessimism pornâ on the internet, spending hours reading about doomsday scenarios put forward by pundits like Gerald Celente, who predicts âBreadlines, protests, tax revolts⦠civil unrest. Crime like weâve never seen before.â Celente has bought a German shepherd to protect himself (2).
At best, the discussion about the 1930s is an opportunity for more serious reflection on how best to address meeting peopleâs material needs. However, if we are to draw lessons from the past, we need to be careful. Too often there is an attempt to find exact parallels, or to project todayâs preoccupations on to the past. The lessons are hardly likely to be âitâs a repeat of the Great Depression, weâre doomedâ, or âitâs totally different from the 1930s, everything is fine, stop worryingâ.
A survey of literature on the Great Depression â both old and new â finds that there are plenty of myths and misunderstandings that still exist about this period that need to be cleared up as we try to tackle todayâs problems. In this essay, we look at the origins of the economic crisis of the 1930s, the common explanations given for it, and how this experience might inform our approach to understanding the current downturn. In next monthâs spiked review of books, a second essay will examine to what extent the New Deal and other state responses solved the Great Depression, and the prospects for government intervention to address todayâs crisis.
1) From the Great Crash to the Great Depression
The Great Depression was a worldwide phenomenon, and it is important that any account does not exclusively look at the US experience. But the eye of the storm was clearly in America, whose economy was among the first to decline, and saw the steepest drop.
On 24 October 1929, in what became known as âBlack Thursdayâ, the New York Stock Exchange went into free-fall. In his classic The Great Crash 1929, John Kenneth Galbraith tells of the panic unleashed: âOutside the Exchange in Broad Street a weird roar could be heard. A crowd gathered⦠More people came and waited, though apparently no one knew for what. A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump⦠Crowds also formed around the branch offices of brokerage firms throughout the city and, indeed, throughout the country⦠An observer thought that peopleâs expressions showed ânot so much suffering as a sort of horrified incredulityâ.â (3)
Galbraith also noted that Winston Churchill was in the visitorsâ gallery of the New York exchange that day, âshowing his remarkable ability to be on hand with historyâ. Indeed, some Americans blamed Churchill, the former UK chancellor of the exchequer, and other British officials for demanding that the US ease credit conditions in the 1920s, which arguably led to a booming stock market.
Share prices would continue to drop over the next days, the worst day being âBlack Tuesdayâ, 29 October. In fact, prices would not start to stabilise until mid-November, by which time about a third of the marketâs value had disappeared and many investors went bankrupt. Galbraith writes: âIn the week or so following Black Thursday, the London penny press told delightedly of the scenes in downtown New York. Speculators were hurling themselves from windows; pedestrians picked their way delicately between the bodies of fallen financiers.â But such lurid stories of mass suicide (which were not limited to the London media) were simply imaginary, according to Galbraith; the number of suicides in October and November was actually lower than before.
This would not be the only myth to emerge from the Great Crash; indeed, one of the biggest is that the crash itself was the primary or sole cause of the Depression. But it is true that the stock market collapse triggered a severe downturn in economic activity. Over the year that followed, all sectors were affected: factories shut, farms went under, and banks failed. By 1930 output had declined by 10 per cent and unemployment rose from three per cent to nine per cent.
The crash and downturn shocked most Americans, mainly because the 1920s was an era of prosperity in the US. After recovering from a wrenching recession in 1921, productivity and profits increased, industries built on innovations â especially automobiles, but also domestic appliances like radios and refrigerators â took off, and living standards rose. Another new industry to emerge was Hollywood, and the movies and other forms of popular culture celebrated growing wealth. Such conditions led many observers to believe that high stock prices simply reflected a healthy economy. On 15 October 1929 â just before the crash â the economist Irving Fisher predicted: âI expect to see the stock market a good deal higher than it is today within a few months.â (4) (When the crash did arrive, Fisher would blame irrational mob psychology.)
That Americans generally were caught by surprise is understandable, but also somewhat myopic and parochial, given that many parts of the world faced economic difficulties during the 1920s. As Eric Rauchway notes in his useful âvery short introductionâ to the Great Depression published last year, the problems of the 1920s could be traced back to the First World War, which âmade it harder for people, goods and money to move around the globeâ and âchanged America, rendering the once-peripheral New World nationâs peculiarities central to the planetâs concernsâ (5). Europe was slow to recover, hindered by war debts (in particular Britain and France) and war reparations (in particular Germany), which the US refused to cancel. In the late 1920s, the flow of American capital to Europe was reversed, as investors were attracted by the stock market boom and rising interest rates in the US, further damaging the regionâs prospects.
Even in the US, where the economy made real gains in the 1920s, there were unhealthy signs. While consumer goods were taking off, capital goods were less dynamic; and consumer goods were increasingly being bought on credit. Economic performance was inconsistent, with minor recessions in 1924 and 1927. The policy of the Federal Reserve (the US central bank) was expansionary, just as the stock market boom was getting underway, and banks were channelling funds into the stock market. And investors were buying stocks on âmarginâ; that is, borrowing up to 90 per cent of the stock price, a sure sign of frothiness.
The crash happened less than a year into Republican President Herbert Hooverâs term in office. Hoover is remembered as a free-market proponent who stood by while the economy slid into the abyss. His initial response on Black Thursday was to pronounce that the âfundamental business of the countryâ was on a âsound and prosperous basisâ. Andrew Mellon, Hooverâs treasury secretary, took an infamously hard line, calling to leave the economy to restructure itself: âLiquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate.â (6) For periods of time after 1929 there were upticks in activity, and Hoover would pronounce that the recovery was starting (although he was not alone in seeing false dawns; for example, in January 1930, the Harvard Economic Society would state âthere are indications that the severest phase of the recession is overâ) (7).
Hooverâs reaction was no doubt informed by a laissez-faire perspective, but that was the consensus outlook among both major parties at the time. But it is not true that Hoover was totally hands-off; as Rauchway writes, âHoover did not âdo nothingââ, as Democrats then (and now) charged, âbut he did not do enough eitherâ (8). Hoover cut top income tax rates; encouraged business to maintain wages and avoid job losses; and worked with state and local governments to increase spending on roads and other public works. But his initiatives did little to stop the downward spiral, as a wave of bank panics and bankruptcies raged from 1930 onwards. His Reconstruction Finance Corporation, set up in 1932 to provide credit to banks, could not stop the rot. Under his regime â and contrary to subsequent lore â government spending increased (although slightly compared to the New Deal), and the federal budget went into deficit (mainly due to declining revenues). But by 1932, his last year in office, Hoover was more concerned with balancing the budget, and he raised taxes, which only added to the decline in spending and growth.
CONTINUED BELOW
The âcredit crunchâ: another Great Depression?
To understand the current economic crisis, we need to look beyond the obsession with finance to the deeper structural problems of capitalism.
Friday 1 May 2009
Sean Collins
Last month Christina Romer, chair of the Obama administrationâs Council of Economic Advisers, began a speech by saying: âIn the last few months, I have found myself uttering the words âworst since the Great Depressionâ far too oftenâ (1). Romer is clearly not the only one: in almost any discussion of the current economic crisis, it does not take long before someone mentions the 1930s. Such references to the Great Depression are not just useful compare-and-contrast points for policymakers. The 1930s have re-entered the popular imagination: the period has become part of our mental furniture as we try to make sense of what is going on today.
At worst, the fascination with the Great Depression is a crystallisation of our deepest fears about a collapse of the economy and society. Apparently, many now indulge in âpessimism pornâ on the internet, spending hours reading about doomsday scenarios put forward by pundits like Gerald Celente, who predicts âBreadlines, protests, tax revolts⦠civil unrest. Crime like weâve never seen before.â Celente has bought a German shepherd to protect himself (2).
At best, the discussion about the 1930s is an opportunity for more serious reflection on how best to address meeting peopleâs material needs. However, if we are to draw lessons from the past, we need to be careful. Too often there is an attempt to find exact parallels, or to project todayâs preoccupations on to the past. The lessons are hardly likely to be âitâs a repeat of the Great Depression, weâre doomedâ, or âitâs totally different from the 1930s, everything is fine, stop worryingâ.
A survey of literature on the Great Depression â both old and new â finds that there are plenty of myths and misunderstandings that still exist about this period that need to be cleared up as we try to tackle todayâs problems. In this essay, we look at the origins of the economic crisis of the 1930s, the common explanations given for it, and how this experience might inform our approach to understanding the current downturn. In next monthâs spiked review of books, a second essay will examine to what extent the New Deal and other state responses solved the Great Depression, and the prospects for government intervention to address todayâs crisis.
1) From the Great Crash to the Great Depression
The Great Depression was a worldwide phenomenon, and it is important that any account does not exclusively look at the US experience. But the eye of the storm was clearly in America, whose economy was among the first to decline, and saw the steepest drop.
On 24 October 1929, in what became known as âBlack Thursdayâ, the New York Stock Exchange went into free-fall. In his classic The Great Crash 1929, John Kenneth Galbraith tells of the panic unleashed: âOutside the Exchange in Broad Street a weird roar could be heard. A crowd gathered⦠More people came and waited, though apparently no one knew for what. A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump⦠Crowds also formed around the branch offices of brokerage firms throughout the city and, indeed, throughout the country⦠An observer thought that peopleâs expressions showed ânot so much suffering as a sort of horrified incredulityâ.â (3)
Galbraith also noted that Winston Churchill was in the visitorsâ gallery of the New York exchange that day, âshowing his remarkable ability to be on hand with historyâ. Indeed, some Americans blamed Churchill, the former UK chancellor of the exchequer, and other British officials for demanding that the US ease credit conditions in the 1920s, which arguably led to a booming stock market.
Share prices would continue to drop over the next days, the worst day being âBlack Tuesdayâ, 29 October. In fact, prices would not start to stabilise until mid-November, by which time about a third of the marketâs value had disappeared and many investors went bankrupt. Galbraith writes: âIn the week or so following Black Thursday, the London penny press told delightedly of the scenes in downtown New York. Speculators were hurling themselves from windows; pedestrians picked their way delicately between the bodies of fallen financiers.â But such lurid stories of mass suicide (which were not limited to the London media) were simply imaginary, according to Galbraith; the number of suicides in October and November was actually lower than before.
This would not be the only myth to emerge from the Great Crash; indeed, one of the biggest is that the crash itself was the primary or sole cause of the Depression. But it is true that the stock market collapse triggered a severe downturn in economic activity. Over the year that followed, all sectors were affected: factories shut, farms went under, and banks failed. By 1930 output had declined by 10 per cent and unemployment rose from three per cent to nine per cent.
The crash and downturn shocked most Americans, mainly because the 1920s was an era of prosperity in the US. After recovering from a wrenching recession in 1921, productivity and profits increased, industries built on innovations â especially automobiles, but also domestic appliances like radios and refrigerators â took off, and living standards rose. Another new industry to emerge was Hollywood, and the movies and other forms of popular culture celebrated growing wealth. Such conditions led many observers to believe that high stock prices simply reflected a healthy economy. On 15 October 1929 â just before the crash â the economist Irving Fisher predicted: âI expect to see the stock market a good deal higher than it is today within a few months.â (4) (When the crash did arrive, Fisher would blame irrational mob psychology.)
That Americans generally were caught by surprise is understandable, but also somewhat myopic and parochial, given that many parts of the world faced economic difficulties during the 1920s. As Eric Rauchway notes in his useful âvery short introductionâ to the Great Depression published last year, the problems of the 1920s could be traced back to the First World War, which âmade it harder for people, goods and money to move around the globeâ and âchanged America, rendering the once-peripheral New World nationâs peculiarities central to the planetâs concernsâ (5). Europe was slow to recover, hindered by war debts (in particular Britain and France) and war reparations (in particular Germany), which the US refused to cancel. In the late 1920s, the flow of American capital to Europe was reversed, as investors were attracted by the stock market boom and rising interest rates in the US, further damaging the regionâs prospects.
Even in the US, where the economy made real gains in the 1920s, there were unhealthy signs. While consumer goods were taking off, capital goods were less dynamic; and consumer goods were increasingly being bought on credit. Economic performance was inconsistent, with minor recessions in 1924 and 1927. The policy of the Federal Reserve (the US central bank) was expansionary, just as the stock market boom was getting underway, and banks were channelling funds into the stock market. And investors were buying stocks on âmarginâ; that is, borrowing up to 90 per cent of the stock price, a sure sign of frothiness.
The crash happened less than a year into Republican President Herbert Hooverâs term in office. Hoover is remembered as a free-market proponent who stood by while the economy slid into the abyss. His initial response on Black Thursday was to pronounce that the âfundamental business of the countryâ was on a âsound and prosperous basisâ. Andrew Mellon, Hooverâs treasury secretary, took an infamously hard line, calling to leave the economy to restructure itself: âLiquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate.â (6) For periods of time after 1929 there were upticks in activity, and Hoover would pronounce that the recovery was starting (although he was not alone in seeing false dawns; for example, in January 1930, the Harvard Economic Society would state âthere are indications that the severest phase of the recession is overâ) (7).
Hooverâs reaction was no doubt informed by a laissez-faire perspective, but that was the consensus outlook among both major parties at the time. But it is not true that Hoover was totally hands-off; as Rauchway writes, âHoover did not âdo nothingââ, as Democrats then (and now) charged, âbut he did not do enough eitherâ (8). Hoover cut top income tax rates; encouraged business to maintain wages and avoid job losses; and worked with state and local governments to increase spending on roads and other public works. But his initiatives did little to stop the downward spiral, as a wave of bank panics and bankruptcies raged from 1930 onwards. His Reconstruction Finance Corporation, set up in 1932 to provide credit to banks, could not stop the rot. Under his regime â and contrary to subsequent lore â government spending increased (although slightly compared to the New Deal), and the federal budget went into deficit (mainly due to declining revenues). But by 1932, his last year in office, Hoover was more concerned with balancing the budget, and he raised taxes, which only added to the decline in spending and growth.
CONTINUED BELOW
