Thousands of members of the Greatest Generation die every week. With them die memories not only of World War II, but also of the Great Depression. Yet that worldwide experience hides in the closet of our collective memory and comes out to haunt us in times of uncertainty.
Could the world enter another Great Depression?
The most useful answer I can give is to contrast recent events with those of 1929, the year in which the roar of the Roaring ‘20s died.
The similarities between 1929 and 2001 are more than superficial. Both came at the end of long economic expansions. There had been a brief recession in the United States following World War I, but the urban economy quickly recovered and began a long period of growth.
Factories shifted from power provided by a central engine to individual electric motors driving each machine. Urban families spent freely on new electrical devices such as radios and refrigerators.
The automobile became an item of mass consumption. Agriculture was the exception. For farm families, the Depression lasted nearer to two decades than one.
The United States had a brief recession following the Persian Gulf War, but similarly began to grow, slowly at first and then more strongly.
Telecommunications were at the core of the 1990s boom. Cell phones changed from being pricey status symbols to inexpensive must-have accessories for suburban teenagers. Cellular companies erected towers throughout the country while streets across the nation were torn up so that fiber-optic cable could be laid to accommodate the needs of another communications revolution, the Internet.
Companies spend lavishly on servers and routers. They hired tends of thousands of Web designers and programmers. New businesses related to the Web sprouted daily.
In both decades, stock indexes rose strongly, particularly in the last years. In the 1920s, easy credit for buying on margin was a factor. In the 1990s, billions of dollars flowed into equity markets through 401(k) plans and mutual funds as baby boomers discovered that capitalism was not as immoral than they had thought while in college.
In both cases, irrational exuberance led to a bubble in stock prices, and in both, some correction or shakeout was inevitable. But there the comparison can end, at least if our economic officials and elected representatives are wise.
The stock market began to drop in October of 1929, not all at once. It had occasional recoveries and repeated periods of sideways moves. The stock price declines through March 1930 could have been absorbed if governmental policies had not been tragically misguided.
While the stock market dropped and banks failed, the Federal Reserve stood by and let the money supply collapse. The Fed had been set up 15 years earlier precisely to prevent a loss of liquidity. But without effective leadership, Fed officials reverted to thinking as commercial bankers rather than central bankers. The emphasized caution when they should have been bold.
Congress responded by passing the Smoot-Hawley bill that raised U.S. tariffs to their highest point ever. This set off a trade war that collapsed global trade.
I use the following analogy:
The U.S. economy in 1929 was like a man who tripped over a footstool and hit his head against the coffee table in falling. Lying dazed on the floor, he was approached by a sympathetic Fed.
But instead of checking for pulse and bandaging the victims cut, the Fed put both hands around the victim’s throat and choked him.
Congress approached from the other side and said “He’s unconscious, maybe a few slaps to the cheeks will bring him to.” Picking up a baseball bat labeled “Smoot-Hawley,” Congress smashed it down on the victim. Both the Fed and Congress were perplexed that their patient did not stand up and walk away.
A Dow Jones index over 11,000 clearly had to fall. It did. The attacks of September 11 were a serious shock to the economy that will force difficult adjustments
But neither a stock market retrenchment nor a violent act and subsequent military operations need plunge us into another Depression.
That will happen only if the Fed and Congress botch it badly.
I have great respect for the people on the Fed’s Open Market Committee and think that the likelihood of serious misjudgments in monetary policy is near zero.
Yes, Congress contains some members whose reactions trouble me. But on the whole there are many men and women of experience and sound judgment in both parties and in both houses. I don’t worry about another Depression, and you should not either.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.