At one time I used to believe the Santayana’s saying that those who didn’t study history were doomed to repeat it. But eventually I realized that’s not quite true – rather when the people who have lived history die, the way is open for history to repeat itself.
Back in the early 70’s a proposal was made to repeal the securities regulation that required that short sales on stock (selling a stock now, but delivering it a later date, in the hope that the price has gone down by the time you have to deliver) only be done on an up-tick in price of the stock.
Leave aside the merit of that regulation for the time being, it came into existence as part of the New Deal, after the Great Crash.
In the 70’s a proposal to repeal it got nowhere. There was a huge public outcry, and it was shelved.
No one outside the securities industry cared and it barely made the news.
Likewise the primary securities law which came out of the Great Depression, the Glass-Steagall Act, was repealed in 1999.
Wisdom, I believe, is learning from other people’s mistakes. And wisdom is always rare. Most of us have to learn by suffering the consequences of our own foolishness and stupidity.
And when the people who have learned those lessons are no longer around in sufficient numbers (because they’re dead), society repeats the mistakes that those fools suffered from and tried to prevent happening again.
It’s for this reason that the great age of repeal of the New Deal began in the mid 70’s and took full steam during the 80’s and 90’s. The people who had been adults during the Great Depression were mostly not in power any more. Those from the “Greatest” generation who were in power had generally been children in the Great Depression, and even if adults, did not remember what came before the Great Depression with any clarity – the Roaring 20’s. So, step by step, they repealed almost all of the New Deal – leaving only a few great spars left such as Medicare and Social Security, which had strong popular support.
And it’s really the twenties that are of interest right now – not the Great Depression, but the era that caused it. The period we’re living though today is very similar to that time especially in terms of attitude (business was king in the 20’s, for example). There are also some significant differences between America’s position and policies then and now, and they’re very revealing as well.
So, without further ado, let’s examine how the Roaring 20’s led to the Great Depression.
Unequal Distribution of Productivity Gains
The vast majority of productivity gains during the 20’s went to the rich and corporations. Wages for ordinary workers did not keep up with profits and neither did the money paid to farmers (at that time still the largest part of the population). As a result money rushed into speculation, and while consumer driven buying rose at a merry clip for some time (for example, rising at an annual rate of 7.4% in 1927-28) it eventually collapsed.
Tax Policies Which Favored the Rich and Corporations
The twenties saw a significant reduction in taxation on the rich, including the amount of the estate tax and on capital gains. The result was to fuel speculation in the stock market since marginal new money to the rich goes largely not into consumption (in modern day terms, if you make a million a year, what are you going to do with an extra 100K? Odds are you already own everything material you want. So you “invest” it.)
High Savings Rates
US economic policy heavily favored saving, and Americans saved heavily. The result of this was that the money saved was not used to purchase goods, and thus did not prop up demand. It was used for loans, however those loans were usually for speculation, either in real-estate or in securities and not in primary investment in new business. The result, combined with tax policies and the uneven distribution of productivity gains, was to further depress demand.
Regulatory Laissez Faire
Coolidge and Hoover both believed that industry could regulate itself and as a rule they made sure that regulatory agencies did not interfere with business. As just one example, in 1930 he appointed James Good as head of the Federal Power Commission and in the words of Schlesinger in The Crisis of the Old Order (pg 156):
When the Commission was reorganized in 1930, staff members whose zeal had irritated the utilities were discharged; one of them, the former solicitor of the Commission, told the press that Hoover had personally intervened to prevent the rigorous application of the Federal Water Power Act to the private companies.
Sound familiar? In Coolidge’s famous maxim, “the business of America, is business” and the Republican administrations of the 20s believed that business operated best when left alone to work its miracle largely undisturbed by regulation. Certainly there was much less regulation then than there is now (in large part because of the Great Depression) but what regulation there was was often not enforced with any rigor, and even when told of significant problems (as Hoover was, on more than one occasion, about stock market excesses) the response was always that the government should not intervene and often that it could not intervene.
High Tariffs and Loans for Export
The US of the 20’s believed in building up industry behind tariff barriers, a policy followed by the US for decades. In the past the US had been a net debtor nation, but in the 20’s it became a massive creditor nation, with other nations owing it fantastic amounts of money. Because tariffs made other nations exports to the US non price competitive, for them to buy US goods required the US to lend them the money. This US banks did, in massive amounts, and by some accounts the trigger for Black Thursday (the great stock market crash of 1929) was loan defaults. More to the point, to maintain US exports and thus production required these loans, which had to over time come to seem to those receiving them as being a bad idea; or simply unsupportable. Many recognized at the time that if the US wanted to sell to other nations letting them sell to the US, so they could get dollars to buy US goods with, made sense, but protectionism had built up US industry so successfully over such a long period that the US failed to realize that the situation had changed and the most industries no longer required protection for their survival and growth. Again, these policies depressed demand for US production – both for industrial goods and for farm produce especially (indeed the market for US agricultural exports crashed during the 20’s.)
A General Overbuilding of Capacity
The US wound up, because of high investment and low returns to consumers, with manufacturing and agricultural capacity that could produce more than than consumers, or foreigners, could afford to buy. With money flooding into secondary securities (ie. not creating new work, but bidding up the price of already existing companies); with the workers not receiving most of the productivity gains, and with technology clocking in huge gains in production efficiency, the economy wound up with overcapacity. The gains flooded into security markets, bidding them up and when the stock market crashed, most of the profits of the 20’s went with it. Consumers had already slowed down their purchases, and they proceeded to reduce them even further, even as business retrenched. The result was a very nasty demand crunch, where there just wasn’t enough buying power to keep the economy going at full speed. End result: decession.
The Modern Day
There’s a lot we can recognize in the 20’s today, but it isn’t all in America. The same laissez-faire “business knows best attitude” reigns; the same regulatory capture has occurred, where government simply refuses, at the behest of the executive branch, to oversee industry in any meaningful fashion. There are significant asset bubbles (the stock market in the 90’s, the real estate bubble, carry trade, derivatives market and private equity in the 00’s) as there were in the 20’s. The vast majority of the gains of productivity (over 80%) of the last expansion have gone to the rich and to corporations, with almost none going to workers.
Like in the twenties, consumer spending has kept going despite the fact that consumers aren’t getting their fair share. Unlike in the 20’s the American consumer, and America as a whole, is a net debtor – Americans have kept consuming by borrowing. Estimates of how much money the US borrows range from 80% of the world’s lendable money, to over 100%. (Yeah, over. In other words, all the legal money, plus a lot of the illegal money.) The American public has been running a literally negative savings rate, and so has the US government.
In the 20’s the US was the new great industrial power behind tariff walls and with substantial trade surpluses Today it is in deficit. This parallels not the US in the 20’s, but Britain in the 20’s. At that time Britain had negative trade balances and Europe in general was in negative trade balance with the US. In order to buy cheap US goods they had to borrow the money, and the US was all too willing to lend.
Today that role is played by China and Japan. While China and Japan don’t use classic tariffs as their primary economic subsidy for their internal industries the way the US did in the 20’s, their strong intervention to keep their own currencies artificially low against the dollar (an intervention that is costing China about 10% of its entirely yearly GDP) functions the same way – a cheap Yuan or Yen makes their imports very competitive against made in America goods, and makes American manufactured goods (and American services) much less competitive in China. The massive gutting of manufacturing jobs over the last seven years is probably at least two thirds the result of these subsidies, and the massive trade and balance-of-payment deficits are also exacerbated by this policy.
The US’s consumption is fueled by what amount to Chinese and Japanese loans, and the Chinese internal economy is not sufficient to absorb the products of thier own manufacturing capacity.
Meanwhile, in China, by the end of January, there were 80 million retail brokerage accounts (when you consider the size of the Chinese middle class, this is astonishing). The Shanghai stock exchange is on a tear, real estate in much of China’s coastal areas is rising at double digit rates every year and savings accounts are paying 3% or less. Like the US in the 20’s, and unlike America today, the Chinese have a huge savings rate (around 50%). And in another, eerie presage of the Great Depression, soil erosion in China’s interior, where the majority are still farmers, is out of control and leading to dust storms. (The Great Depression was made much worse by huge dust storms as the prairie top soil blew away after years of being abused combined with a few years of drought.)
History, they say, doesn’t repeat, but it does rhyme. If there is to be a new Great Depression, something I believe is probable, it won’t occur exactly as it did in the 20’s. But the outlines of how it happened last time tell us a lot about how it could happen this time. And what we see – with a rising mercantile power using protectionist policies while the old power engages in laissez-faire business policies; in the way that productivity gains are being concentrated in the hands of the few; in the refusal to use regulatory power; in excessive and repeated asset bubbles; in irrational exuberance and inflation in China; along with the absolutely sickeningly frightening American savings rates and multiple deficits leads one to believe that it’s very likely that history is about to rhyme again. When the Napoleonic wars ended it was predicted that there would be no great general European war again for as long as the memory of the memory existed. And indeed, it was almost exactly a century after Waterloo that World War I, that splendid brief war, got underway. I don’t think it’s going to take us a century from 1929 to finish repeating the mistakes that led to the Great Depression, perhaps because the human lust for blood is only exceeded by the human capacity for greed.
And it was greed that ultimately caused the Great Depression. It is, likewise, untrammeled unrepentant greed, celebrated as a civic virtue, rather than as the vice it is, that will cause the next Depression.