Today’s Economic World Compared to The Great Depression
by The Ticker
I’ve been a student of the Great Depression for more than forty years. I’m not as much interested in determining what its cause was, I’m interested in comparing events of the ‘here and now’ against what transpired more than ninety years ago. I have written seven or eight similar articles like this one over time. None rose to the level of concern that the chance of another Great Depression could occur existed until now. Not even twelve to thirteen years ago during the ‘last great’ financial crisis, brought to you by Lehman Brothers and their brokerage associates, although similarities with the Great Depression were obvious at that time as well.
Scholars of the Great Depression cite many reasons for its happening including, but not limited to, and in no particular order, the following:
- The Stock Market Crash of 1929
- Moving Away from the Gold Standard
- Significant Reduction in GNP
- Bank Failures & Monetary Contraction
- Effects of the Smoot-Harley Tariff
- The Dust Bowl
- Liquidationism
No one entity, governmental, corporate or individually situated, was responsible for the Stock Market Crash of 1929. To paraphrase Galbraith, “no one engineered the speculation that preceded it.” It was the product of the free choice and decision making of thousands of individuals, those led to slaughter by the notion that they could become very rich with little to no effort. No singular entity caused the Great Depression; it was a “team” effort.
In 1929, “investment trusts”, similar to what we called “derivatives” in the late 2000’s, was the fancily coined moniker concocted to disguise the less than adequate securities entombed in an investment vehicle that were then sold to the unsuspecting public. The New York Stock Exchange only began permitting investment trusts to be listed in 1929. The NYSE required an investment trust to post with the Exchange the book and market value of the securities held at the time of listing, then updated annually to provide an inventory of its holdings. Because of these rules, most of the investment trusts did not list on the NYSE choosing lesser restrictive regional and rogue exchanges like Boston or Chicago so as to avoid this requirement. The reason given was that if these “premier” trust managers revealed the investments they selected a “dangerous boom in the securities they favored” would occur. As we now know, the securities that comprised these trusts comprised the danger. More often than not they were worthless.
While this concealment and lack of transparency was apparent in the late 2000’s, no such similar evidence is apparent over recent times, although some have sought to include Bitcoin and highly leveraged ETFs into the fold, especially those who invested in the “volatility” ETFs related to the VIX indicator.
In 1929, the economy was fundamentally unsound. Many things were wrong, but five weaknesses had a large impact on the ensuing disaster. They are as follows:
- Unbalanced Distribution of Income
- Inadequate Corporate Structure
- Non-Existent Banking Structure
- Foreign Trade Unbalance
- Lack of Economic Intelligence
As paraphrased by Galbraith and his many followers, “had the economy been fundamentally sound in 1929 the effect of the great stock market crash might soon have worn off but business in 1929 was not sound. Business was exceedingly fragile. It was vulnerable to the kind of blow it received from Wall Street”. Such is not the case today.
Now, as throughout much of history, financial capacity and political intelligence are inversely correlated. Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. That’s been the case for as long as I’ve studied our economic systems until Trump surfaced. He was able to illustrate that equality, as associated with communism, is the true threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound. This, if Georgia elects two Democratic senators in the upcoming election, is something to really worry about.
Similar to the Great Depression not only did the United States face an economic crisis due to the Great Depression; there was a global economic crisis taking place. If anything, COVID-19 can be directly compared to the agricultural Dust Bowl; an outside event that further exacerbates an unsuspecting economy. Unlike actions taken with the Smoot-Hawley Tariff Act, the world acted in unison developing viable vaccines and did not compete directly for a source to the solution. Unless the international communities act in a confrontational manner by raising tariffs further than economically reasonable, trade should not create a problem. If tariffs between international constituents rise to levels that reduce “free” trade the reduction in the flow of capital is also something to worry about.
Today’s banking system seems to be in good working order, the Federal Reserve along with other international monetary institutions, different from actions to raise rates in the late 1920’s, have kept rates low. Governments and credit issuing agencies are flooding the markets with money. Let’s hope they realize another $5.0 to $7.5 trillion is necessary to inflate economies worldwide where demand, backed by buying power, is far less than supply. In other words, ‘too few dollars chasing too many goods.’
In the United States, continuing to assist those effected by COVID-19 is a must as is passage of a large infrastructure spending plan, one that is indeed ‘shovel ready’ versus what the Democrats put on the table during the first Obama term. In this, what is essentially the ‘third’ Obama term, raising any taxes or increasing regulatory oversight should be avoided at all cost. If not, you’ve got ‘trouble’ and not just in ‘river city’; any action that withdraws capital from any economy could spell disaster.
It appears that we’ve once again skirted another major depression, but we’re not totally out of the woods yet. I’ll conclude this article defining a term “Liquidationism” one that was effectively the cause of and unnecessary lengthening of the Great Depression. Central banks should pour liquidity into their banking systems during a depression. The governments should cut taxes and accelerate spending in order to keep nominal money supply and total nominal demand from collapsing.
The Federal Reserve did not act this way during the initial years (1929 – 1932) of the Great Depression. Unfortunately, Hoover kept the federal budget balanced through 1932. Once he removed Andrew Mellon as Secretary of the Treasury, Hoover adopted more aggressive measures to inflate the flailing economy. The liquidationists, often called ‘leave-it-alone’ economists felt that government must keep its hands off and let the slump liquidate itself. Mellon had one formula; “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate thinking that in the end this strategy will purge the rottenness out of the system. High costs of living and high living will come down and people will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” It didn’t work. My fear today is that ‘liquidationists’ have once again emerged in the Democratically controlled states with the same objective, liquidate private enterprises, such as restaurants and the like, and let the chips fall where they may.
Liquidationists believed that the economic function of a depression is to liquidate failed investments and businesses that have been made obsolete by new technological development. They believed this lack of action releases factors of production, capital and labor, from unproductive uses. These factors could then be redeployed in other sectors of the technologically dynamic economy. Liquidationists argued that even if the self-adjustment of the economy caused mass bankruptcies; postponing the liquidation process would only magnify future social costs.
Not providing immediate financial relief for several segments of today’s economy, those establishments harmed the most by COVID-19, coupled with the mismanagement of “lockdowns” in primarily Democratic run states and cities, could light the fuse of the next Great Depression. Liquidationism didn’t work then, and it will not work now.
