Good history, but still different

ARTICLE: The Real Great Depression, By SCOTT REYNOLDS NELSON, Chronicle of Higher Education, October 17, 2008

A more apt historical comparison (panic of 1873) than the crash of 1929. A starting point for discussion, but no answers here. The further you go back in time, the worse the comparison becomes, because here we're talking Europe's version of globalization (increasingly colony-based) being threatened by a new and different version (the U.S. model of globalization that wouldn't find true expression until after WWII). In short, there was so much play in that system that competing systems were possible. Today, the room for alternative plays is far more narrow (basically, Fukuyama's "end of history" on the economic side): you need access to the dominant globalization system to make any wealth happen, and once in, the only way to protect and expand that wealth is further integration (e.g., production- and buyer-chains) or lose out in a flat-world competition.

In short, globalization back then didn't really integrate trade by disintegrating production. Networks were largely vertical, not horizontal, so interdependency came largely at the point of final transaction, not throughout the entire supply chain like today.

(Thanks: greg)

Comments

[Louis Heberlein]

There were multiple American market crashes and economic depressions in the 1800s in an ERA of globalization and transformation similar to the recent decades. The post Civil War RR and heavy industry effort transformed America from a local farm and merchant economy with some coastal cities to a continent wide mass agricultural and raw material economy with significant exports. The transcontinental RR was promoted as part of that process, but also as part of a timely business and tourist link between Europe and England's Asian colonial activities. Our NY centered stock and bond market was created to fuel those ventures. It created excess capacity and market price bubbles with the collapses that allowed more subtle plotters like Central Pacific to prosper and get public and later academic acclaim. The market crashes caused English investors to push their government to pressure our government to monitor and intervene in our commercial bond markets, especially the put and call rules. Meanwhile, conservative citizens who had remained on their small farms and focused on local services handled the crises better, but did not gain wealth. Today the news media is loaded with advice to common folks to think like they did before the earlier transformations. Fifty years ago, California K-12 students learned this stuff as part of their state's history. Then it became old fashioned and BORING to students and their academic advisors. WW I and the 1929 crash became the new border for old history.

[Joe Canepa]

This is 1930-1932 again. The government then mistakenly sought a balanced Federal budget, put lids on the money supply, and went protectionist. The problem then originated with an artificially inflated stock market fed by only a ten percent margin on stock purchases. Today, however, we have a credit crisis brought on by the government and the mega financial institutions. The policy of setting very low interest rates, created a situation where prevailing rates did not provide the lender with sufficient return to justify the loan. Attempts to boost rates of return via securitization became unstable as the underlying securities lack clarity. The institutions peddling them did not seek clarity as they took their fees from the volume rather than any underlying intrinsic value. So successful this selling effort, that the world soon became flooded with paper so confusing nobody could put a value on it. As on a day in October 1929, when there were no bids on the New York Stock Exchange, there was a day in August 2007 there were no bids anywhere for the opaque paper.

The government was slow to respond, failing to see the correct cause of the problem. Its remedy of creating a massive amount of new debt to keep interests below reasonable return levels is as doomed to failure as were the Hoover/Mellon policies of 1930-1932. Interest rates need to be set by the market. Once done, banks can lend and make money. Businesses can borrow and repay. Consumer can tighten their belts and buy what they can afford.

Otherwise: financial chaos.