1929 Revisited

Most of us, at some time in our teenage years, were obligated to take a course in modern history. Assuming we received our schooling somewhere in the First World, this education almost certainly included a chapter on the Great Depression.

We were taught that people borrowed quite a bit of money and speculated in the stock market. The market crashed and the Great Depression followed, affecting most every First World country heavily.

If we studied a history book that included photos, there was often a picture of Wall Street looking empty, and another photo, showing a bread line that went around the block. There might also have been a picture of the Dust Bowl, or possibly one of Okies driving to California to hopefully work in the orange groves.

On the final page of the chapter dealing with the Depression would be a firm message, stating that under President Roosevelt, the economy was saved by government intervention into the market and the creation of government jobs.

And that, according to the history book, was pretty much it.

Some years ago, this explanation began to seem a bit too simplistic to me and I attempted to learn more about the actual events and their causes. Back then, it was a bit difficult, as very few people were interested in the topic, and, as the internet did not exist, information was harder to find than it is today. However, over time, I was able to piece together a general picture that seemed a bit more plausible that what I had learned in school.

Here it is (in very abridged form, for the sake of brevity):

The expansion of the money supply, by the Federal Reserve, virtually guaranteed the Great Depression. Under the Fractional Reserve banking system, for every dollar that a bank holds, it can loan out up to nine dollars more. This effectively creates nine dollars for every one that exists. Under this system, the US money supply grew by 61.8% between 1921 and 1929. Much of this went to the growth, in the 1920’s, of the stock market. Speculators, buying on margin (the speculator puts up 10% of the cost of the stock and the broker borrows the rest from the bank), were able to buy far more stock than they could truly afford. To further exacerbate the situation, the speculators often borrowed the 10% deposit, which meant that, in some cases, all the money to buy the stock came from the bank.

Since this was all easy money, many speculators bought all that their bankers would allow. Of course, at some point, some speculators would get stiffed with the final bill, but, as long as a given speculator was smart enough to get out at the right time (and, of course, he believed he was), he stood to get rich quick.

The banks quite happily fuelled the fire, offering money at low interest. However, in  1929, bankers from both sides of the Atlantic met and agreed that the bubble was due to pop. They then advised their peers (bank stockholders, well-connected industrialists and senior people in government) that it was time to quietly sell.

Then, on 9th August, 1929, the Federal Reserve suddenly raised the interest rate to 6%, effectively ending the easy credit. At the same time, the banks began selling securities on the open market, contracting the money supply.

The market continued to climb, but only briefly. Its fate was sealed. On 24th October, the market dropped substantially, then on 29th October selling began in earnest. Within a single day, literally millions of investors were wiped out.

Beginning in 1931, the government created monetary transfusions to revive the ailing economy (is this beginning to sound familiar?) but they failed to revive it.

The crash itself did not create the rampant unemployment that characterised the Great Depression. That was caused in the following years by the market restraints created by the government. Legislators called for a variety of greater controls to limit further bad investment. This had the effect of killing off many businesses that were already on the ropes. As businesses downsized or disappeared, unemployment rose steadily.

At this point, the legislators, had they been mostly businesspeople, should have recognised their folly and reversed the new restrictions, but they were not and they did not. They continued the same failed policies and, until 1939, the same state of depression continued unabated, with no end in sight.

However, 1939 brought war to Europe and the US geared up for war production – a giant shot in the arm for business and, within a few years, the Great Depression eased. (It is important to note that supplying bullets to another country for profit when they are at war has a decidedly different effect from starting your own war and having to pay for the bullets yourself. The latter situation is guaranteed to drive a country deeper into depression. America’s late entry into World War II and its continued sale of armaments to the Allies resulted in a boom for America, instead of a bust.)

The above description is very brief and can certainly be added to. In addition, readers may wish to challenge some of the points. They are encouraged to do so. The more debate, the better.

In my belief, we are in another Great Depression. But, not surprisingly, no one in Government, nor in the media, wishes to use the dreaded “D” word. The reader should therefore consider the following definition and draw his own conclusion:

Depression: a sustained, long-term downturn in economic activity in one or more economies. A depression is characterized by its length; by abnormally large increases in unemployment; falls in the availability of credit, often due to some kind of banking or financial crisis; shrinking output as buyers dry up and suppliers cut back on production and investment; large number of bankruptcies including sovereign debt defaults; significantly reduced amounts of trade and commerce, especially international; as well as highly volatile relative currency value fluctuations, most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.

(It should also be pointed out that, whilst, in America, the government statistic for unemployment is presently 7.9%, this figure does not include those who have part-time jobs, have ceased to collect unemployment or have stopped looking for work. If these people were included, the statistic would presently be 22.9%)

So, if we have a brief look back at the Great Depression – what essentially led up to it, then triggered it, we may see some similarities to our present situation. If we then observe how the world’s governments dealt with the situation, we may possibly gain some insight as to what they will do this time and, more importantly, what the outcome may be this time.

In contrast to what the reader may have read in his history book as a teenager, the collapse did not all occur at once. In fact, it took several years for the Great Depression to hit bottom. Then, oppressive restrictions by misguided governments kept it there, until a major market opportunity created a recovery.

But, this time, there is an added danger. Instead of the leading economy of the world beginning a recovery by supplying other nations with bullets for their war, this time around, it is America that is spoiling for war, a prospect that, for a country that is already up to its eyes in debt, will require a massive increase in debt, from a world that may already have run out of patience with continued lending.

This would leave only one option: Massive creation of money out of nothing by the Federal Reserve, to finance both the stated unlimited QE3, plus a major war, at the same time.

It is left to the reader consider what effect such a move would have on his own  economic and personal life, should he be dependant in a significant way upon the American economy. Depending upon his conclusion, he may wish to consider taking steps to diminish that dependency.

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