Posted on 10/03/2008 8:58:05 PM PDT by HaplessToad
The national economy's current woes are less like the Great Depression than the Panic of 1873, according to a new article in the Chronicle of Higher Education.
"When commentators invoke 1929, I am dubious," writes Scott Reynolds Nelson, a professor of history at the College of William and Mary. "According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now."
Nelson continues: "In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls 'the real Great Depression.' She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years."
Quick version: Starting around 1870, European rulers "supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral."
But Midwestern U.S. farmers were busy undercutting exporters from Russia and Central Europe in markets like Britain, the biggest importer of wheat. That unraveled the basis for Europe's boom.
"As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis," Nelson writes. "The cost to borrow money from another bank -- the interbank lending rate -- reached impossibly high rates."
The crisis crossed the Atlantic in the fall of 1873, first hitting U.S. railroad companies, which had "crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing)."
The stock market crashed in September, and hundreds of banks closed over the next three years.
Tycoons such as Andrew Carnegie and John D. Rockefeller had enough capital reserves to finance continuing growth and gobbled up competitors at fire-sale prices. Unemployment hit 25 percent in New York City. In Central and Eastern Europe, many blamed the crisis on foreign banks and Jews.
"If there are lessons from 1873, they are different from those of 1929," Nelson says. "Most important, when banks fall on Wall Street, they stop all the traffic on Main Street -- for a very long time."
Those with cash reserves may be the winners. Scapegoating of immigrants may reignite protectionism.
"In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west -- from Central Europe toward the United States," Nelson writes. "The current panic suggests a further shift -- from the United States to China and India."
Bump!
Thanks, good read.
Although this is a pretty good article, this part is B.S.:
“Germany’s inability to pay back war debts”
Although Germany started the war, the debt that the allies ammassed during WWI was their own problem. Recessions usually follow wars, not Great Depressions. The Smoot-Hawley tariff has much more to do with international collapse than war debts.
I recommend you all read the linked complete essay. The parallels are striking.
When he mentioned “Germany’s war debt”, it was far more complicated than just that.
To start with, Germany owed France reparations for the War. The French were very resentful of the Germans, and had even proposed that Germany be reduced to an “agrarian state” after the war, because they did not want the industrial competition from what was an inherently more industrially powerful Germany.
Well, Germany had to pay France, not just in cash, but in goods as well.
In turn, France and England owed a major debt to the United States, for all the war materiel we had shipped them. They paid the US from the money paid to them by Germany.
The US, in turn, sent this money to the Austrian central bank, the Creditanstalt, to subsidize loans that were then given to Germany to pay its war debt. And thus the circle was complete.
Well, the French decided to throw a monkey wrench into the machine. One month, Germany was late with a payment, literally a ship full of wooden telephone poles. So France declared Germany in default, and sent the French army into the Ruhr Valley of Germany.
The Ruhr Valley was where most of Germany’s heavy industry was located, and it cause the German economy to come to a screeching halt.
In turn, the Germans not being able to pay interest on its debts to the Creditanstalt, the Austrian bank collapsed. This started a chain reaction that threw all of Europe into Depression.
So to a great extent, the international depression was caused by the French desire to humiliate and debase Germany.
Oh, and I forgot to add that the thesis is fundamentally flawed, because he forgets to mention the massive bank failures during the Great Depression. When he writes, “If there are lessons from 1873, they are different from those of 1929,” Nelson says. ‘Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time,’” I have to ask, what about all the banks that failed from 1929 to 1933?
Thanks for the post. What would be interesting to read is what, if any, actions our gov’t took, and how the economy pulled itself up by its own bootstraps.
Then you should realize, Mr. Nelson, that in 1929 and the year following, it wasn't hundreds of banks that fell, it was thousands. And it is main street that is under threat of being shut down again. A million jobs lost in a month should be more than enough of a hint of the rapid decline we are in. People just don't understand yet that this is not something that effects a very few, it will effect each and every one of us, every business, every supplier, every consumer, every bank. Maybe some people will realize this when they see their lines of credit being cut, credit card limits reduced, loans denied even though they qualify, etc. With Europe heading into full recession, (France has already declared itself in a full recession) we are looking at conditions similar to 1933, except there aren't any banks with enough capitol to carry the load.
BTW, the New Deal failed. Things were sorse for several years after FDR begn to socialize America than when he took office. World War II saved the economy.
"Although Germany started the war, the debt that the allies ammassed (sic) during WWI was their own problem."
I believe that the author is referring to the onerous war reparations Germany was obligated to pay after the war ended.
They did the exact same thing. Infused cash into the banks to get credit moving again. Ecept they waited 2 years first, which is what made 1929 last longer than it should have.
“So to a great extent, the international depression was caused by the French desire to humiliate and debase Germany.”
France absolutely destroyed the German economy, or rather Germany destroyed its own economy, after France occupied the Rurh. However, to suggest that Germany’s failure caused the depression is misleading. Europe’s war debt was the problem. Just because the Treaty of Versaille blamed it on Germany (rightly, in the narrow sense that the war was Germany’s fault) does not mean that Germany could realistically pay it off.
In my opinion, with or without crashing its own currency, Germany never would have paid off the debt. Besides, Germany stopped paying in 1923, long enough before the worldwide depression that it makes me doubt their causal relationship. I’d say it was monetary policy in general that caused the depression. The war debt was a big part of the inflationary problem, but only a part. Expanding the supply of credit available to industry, the policy of every central bank in history that I’ve ever heard of, was more directly the cause of the breakdown.
“I believe that the author is referring to the onerous war reparations Germany was obligated to pay after the war ended.”
Yes, I know. And why did the allies want Germany to pay reparations? Because they had amassed debt in financing the war.
That’s the depression that my G G grandfather lost his bank, The First National Bank of Pomona, and everything he had.
From the family they said that the “great Depression”, was a cake walk, everyone did quite well durring the 30s.
Maybe the lessons they learned from the 1870s taught them how to survive, and even thrive in the 30s.
Bingo.
And that’s what is happening now, or rather the result of it.
No, they didn't. The war started when Archduke Ferdinand of Austria was assassinated by a Serbian. Germany entered the war because it had an alliance with Austria-Hungary, just as the Western powers entered the war because they had an alliance with Serbia.
I meant Ruhr, not “Rurh.”
“People just don’t understand yet that this is not something that effects a very few, it will effect each and every one of us, every business, every supplier, every consumer, every bank. Maybe some people will realize this when they see their lines of credit being cut, credit card limits reduced, loans denied even though they qualify, etc.”
Not everyone!
Almost everyone I know,or at least associate with, don’t use credit except for a credit card and then only as a convienence card that is paid in full every month.
And many didn’t. Don’t forget, added to the depression was a severe drought, which wiped out farm crops for about 7 years. It effected the entire midwest. That’s where the term “dirty thirty’s” comes from. The entire midwest was a dust bowl.
“No, they didn’t. The war started when Archduke Ferdinand of Austria was assassinated by a Serbian. Germany entered the war because it had an alliance with Austria-Hungary, just as the Western powers entered the war because they had an alliance with Serbia.”
Don’t be so naive. The actions of one Serbian rebel would have been the problem of the Austro-Hungarians, not Germany. The situation hardly necessitated Germany’s invasion of Belgium, France, and Russia. None of the nations on the other side used the assassination as an opportunity to invade a foreign country. Clearly, in my mind at least, Germany wanted to conquer the continent, and this was its opportunity.
...wouldn’t that suggest the Chinese banks are holding good paper??
And had no money (Weimar, remember.) So they would borrow money from us, pay Britain and France reparations, then Britainand France would pay us for materiels we sold tehm during the war on credit. Then we'd make another loan to Germany. It was the same bag of money going round and round.
I did a lousy job of asking my question. I should have asked what the Gov't did in 1873, since this was the depression that the author said mimiced the current situation. I have done a case study on 1929 in college and agree with what you said.
“That’s where the term “dirty thirty’s” comes from. The entire midwest was a dust bowl.”
That’s when the raggedy ass Okies invaded Southern California!!!
That’s true, but the Treaty of Versailles placed punitive payment structures upon the Germans and their economy buckled and broke under the terms. This in turn caused their banks to fail, their currency to become worthless (as has been well documented), etc.
If you go back and read the Treaty, you see that the “war debts” were only one component of the payments demanded of Germany. The French took land, industrial capacity, patents, you name it.
One has to study the history of the Franco-Prussian war of the 1870’s and see what came out of that to set the stage for the Treaty of Versailles.
George Washington was clearly wisest among our presidents when he cautioned us to not become entangled in the affairs of Europe....
Estimates I’ve read (from German language sources prior to WWII) was that they estimated they would finish paying off the Versailles debt by the late 1980’s.
And don’t forget that 30%+ of the US population still lived or worked on farms, and ag was a huge component of the US economy at that time.
So the Dust Bowl was not just about a little dirt in the air...
Given that Smoot-Hawley was passed after the collapse, that's a non-starter.
They won’t even have that. No credit means no lines of credit. No lines of credit means businesses can’t function, the whole supply line shuts down.
Business lay off, then nobody has any money either.
“Given that Smoot-Hawley was passed after the collapse, that’s a non-starter.”
It was passed in 1930, after the stock market crash but before our economy tanked. When it was passed, unemployment was only about 8 percent. Needless to say, it got a little worse.
The big point I was trying to make was that Smoot-Hawley sparked a series of tariffs passed by other countries. The toguh times during its passage were nowhere near the pit they’d fall into in ‘32-’33. If international trade had been allowed to bolster our collective GDPs, perhaps there would have been enough wealth to prevent the depression from lagging on through the entire decade.
Absolutely not. They were “lean times”, and not just because of a lack of funds, lack of grain too.
You need to go back and re-examine the interlocking sets of alliances, treaties and royal family connections.
The chain of events went like this:
1. Ferdinand is killed.
2. Austria/Hungary issues ultimatum terms to Serbia.
3. Serbia replies, but brings in Russia.
4. Austrians bring in the Germans.
5. Russia’s involvement then causes Germans to think that unless they attack France (a Russian ally) first, that France will invade Germany from the west.
So, yes, Germany invaded France/Belgium in a pre-emptive move, but absent the treaties that locked France to Russia, and Germany to Austria, this might have just stayed a regional spat between the Austrians and Serbs.
Again, one has to go back to the Franco-Prussian war to see why the WWI was escalated so quickly. The French were just itching for a reason to open up a can of whoop-ass on the Germans - and this issue had been simmering for years when WWI came along. The Germans thought (with some justification) that as soon as Russia (who was brought in by the Serbs) prevailed upon France, that France would take the opportunity to invade Germany. The Germans had reason to think this — after all, the outcome of the Franco-Prussian war ended much as WWI did for the Germans - only on a smaller scale. The Treaty of Versailles did to Germany what Germany did to France in the 1870’s - only on a far larger scale. Versailles was a “Oh, yea?! Well, we’re going to multiply what you did to us by 10!”
The whole history of Europe in the 19th century is one of sordid incest and royal intrigue so perverted, it boggles the mind of Americans who try to understand it. Looking at that bunch of inbred retards who ruled whole countries, one comes away with a sense that they ruled for reasons (ie, who their mother slept with) as silly a basis of government as some water-logged tart lobbing a scimitar at some passer-by...
This is how I remember it:
- Archduke Ferdinand of Austria was assassinated by a Serbian
- Austria declared war on Serbia
- Russia, allied with Serbia, declared war on Austria
- Germany, allied with Austria, declared war on Russia
- France, allied with Russia, declared war on Germany
- Germany invaded France through Belgium
- England, by treaty, was obligated to go to war against Germany for invading Belgium
But I’dunno, it was a long time ago.
Our exports from manufacturing dropped to about 50% during that time if I recall, and Unemployment hit over 25%. I don’t think it was because of tariff wars however. Europe was in a depression as well, as was Canada and everywhere else.
Well, no, because Europe was also cash strapped as well, and the UK, our largest trading partner at the time, had also abandoned the gold standard in September, 1931. This caused the pound sterling to immediately fall 20 to 30% in value as well, adding to the UK's problems by reducing their buying power even further.
“...the Treaty of Versailles placed punitive payment structures upon the Germans and their economy buckled and broke under the terms.”
I respectfully agree. The part of your post that refers to France’s confiscation of Germany’s industrial capacity is on the money. Their occupation of the Ruhr was the problem, the reparations themselves not so much.
I’ve always had a problem with the Keynesian “Carthaginian Peace” argument concerning the collapse of the Weimar Republic. To begin, Germany was not razed, like Carthage was. The allies were kind enough not to set foot on their soil. Furthermore, Germany ended up paying very little of the debt, on net balance. How could the debt have crushed them if they didn’t even bother paying it?
My point above was that Germany would never have paid reparations in the sense that they started out paying them; that is, with their savings. Had they not gone bust, and had not the Great Depression whiped their debts clean, they would have ended up paying the debt with export goods.
France’s occupation of the Ruhr obviously hampered their ability to expand industry. More than that, the occupation led directly to Weimar’s decision to print money expeditiously, which led to the horror of horrors of modern monetary policy: hyperinflation.
The lesson? If you wanted to dissuade Germany from threatening you in the future, how about invading them during the war, instead of after the peace.
“...adding to the UK’s problems by reducing their buying power even further.”
You know a good way to help increase your nation’s buying power? Exporting goods. No matter how weak the several economies were at the time, passing laws restricting trade wasn’t going to help. Sealing your economy off certainly doesn’t give you any more money.
I don't disagree with that, Germany wanted complete European hegemony, but the intertwined treaties created the powder keg and excuses. Germany declared war on France and Russia after Russia, who had no contractual obligations with Serbia, began mobilization after Austria-Hungary issued ultimatums against Serbia and bombarded Belgrade.
Why Russia did this is not entirely clear. France began mobilization after Russia, in anticipation of honoring treaty obligations and to prepare for the retaking of the Alsace and Lorraine. Germany viewed both mobilizations as an act of war and declared against France and Russia on August 1st after setting in motion her own mobilization that became like an out of control freight train. This resulted in AH having to honor her treaty obligations with Germany.
Britain had obligations with France and readied her forces but was fully drawn into the war with Germany's violation of Belgium. Britain was hesitant to send troops to France but the German invasion of Belgium settled the matter.
And they all hoped to be home before the leaves fell.
I completely agree with you on Keynes’ “Carthaginian Peace” paper. It was a highly overwrought argument, or so I thought. (WTF do I know, I’m just an engineer, not an economist).
As you point out, the Ruhr was critically important to Germany’s economy at that time. Germany was a tad late to the industrial revolution economically speaking, because they were just uniting after the Franco-Prussian War, so economically speaking, they were a rather young country. The Ruhr region figured so heavily into their national economy at the time that stripping away even a piece of that production was crippling to their economy at that time.
On the hyperinflation: my memory might be flawed, but didn’t the UK have a hand in that too? I seem to remember that the Brits demanded hard currency (ie, gold) from the Germans, and the Germans handed it over, which left them with only inflation (and then hyperinflation) as the fiat currency response to a depleted treasury...
“Europe was in a depression as well, as was Canada and everywhere else.”
Like I said in the post above, trade amongst the nations could only have helped the situation. If Europe wass suffering from a depression the same as the U.S., that’s all the more reason for them to clamor for U.S. goods.
I always thought “overproduction” was a catchword of the depression era, and it seems to me that this does have an analogy today because of “outsourcing”.
Overproduction was caused by the rapidly emerging industrial technology which increased efficiency, but displaced workers, so the booming production had no consumer base, and faltered. It seems to me our situation is similar, with the American blue and white collar working class being displaced by cheap overseas labor. So we have a deluge of cheap and attractive goods, but our consumer buying power is eroding because of the devaluation of domestic labor.
Thankfully, with the exception of a fragment of Mortgage, I am there.
Still looking for ways to save more of what I earn. Easy credit is a rip-off, and can cost multiples of what it would have if someone had been willing or able to wait until they could pay cash.
And pay for it with what? They were already essentially bankrupt.
At the same time, between 1920- 29, about 1,200 mergers swallowed up more than 6,000 previously independent companies; By 1929, only 200 corporations will control over half of all American industry.
That didn't exactly build any confidence for American made goods either. What good is junk you can't get parts for because the company no longer exists.
Apparently you weren’t around durring the last depression.
Wherher you believe it or not, most businesses don’t operate on credit except for 30-60 day open accounts.
Personally, in my own business er never missed taking the 2% discount from suppliers for paying by the 10th which saved us between $500 and $1000 a month.
As part of Germany’s unofficial policy of passive agression against the occupying forces in the Ruhr, officials in the Ruhr area (with the backing of the central government) lobbied for a general strike. To the best of my knowledge, the hub of Germany’s inflation crisis was caused by the government’s decision to support the strikers by printing money, a monumentally stupid idea. Gold flowing out of German banks through reparation payments didn’t help, but there is no way they’d have had enough gold to cover the new marks anyway. I’ve read somewhere that prices were doubling every other day (!) at the height of hyperinflation.
Also, I seem to remember reading somewhere once that Britain was one of the few allied powers that recognized the debt would never be paid if Germany’s economy didn’t recover. Whether this means that they would have eventually accepted payment “in kind” instead of gold, I don’t know. But I do know that Britain opposed the decision to occupy the Ruhr occupation.
Russia viewed Serbia as a client state under the idea of “pan slavism” at that time — much the way Germany was allied with Austria because the Austrians speak German too.
The Austrians had already encroached on Serbian territories prior to 1914, which was what created the environment in which the Black Hand terrorist organization grew up. Ferdinand wanted to convert the “dual monarchy” (Austria and Hungary) into a “triple monarchy” by including Serbia into the Austrian-Hungarian emptire. But the ethnic slavs within Serbia didn’t want to be included into the A/H empire, they wanted their own country.
So the Serbs appealed to Russia as fellow Slavs. Russia knew that they would have zero, zippo, nada influence in Slavic lands to the west if they did not stand up to German/Austrian aggression and dominance over Serbia - because that’s what the terms of the Austrians to the Serbs was following the killing of Ferdinand.
Russia then got word from France that Russia should be firm and resolute with Germany and Austria, because France would back them from the west.
And so, the Russians went to war against Austria as the Serbs’ big brother.
“And pay for it with what?”
With the proceeds they’d get from selling goods to the U.S. That’s how international trade works: it’s mutually beneficial.
Whoops, I meant, “But I do know that Britain opposed the decision to occupy the Ruhr.”
That’s the way to be, especially now. Having credit doesn’t hurt, but it doesn’t mean you need to use it either. It’s there for when you want to buy something, then pay that credit back as soon as you can get to the bank. The basic rule is, don’t buy it unless you have the cash.
Having lines of credit and credit cards are better than carrying around a wad of cash, And a line of cresdit is good to have when you see something you can flip over and make a good dollar on.
As far as saving more of what you earn, that’s a personal decision, giving up some of the things you spend money on, like coffee at Starbucks every morning. That could be a 401k contribution instead. Even that little bit adds up over the year, and thats how rich people get rich. They save it and invest it, not spend it. (until you have a lot to spend)
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