Happy Anniversary Wall Street
If I was asked to nominate the wisest aphorism of all time, Mark Twain’s “History doesn’t repeat, but it sure does rhyme” would definitely be one of my top two candidates.
On song, today Wall Street is replaying the 1930s, but to a slightly different meter. With the 80th anniversary of the Great Crash of 1929 falling on October 29th of this year, Wall Street is celebrating in characteristic style–with a euphoria-led bubble that now appears to be crashing up against economic reality.
Of course, our time is not a mirror image of that momentous period 80 years ago. It’s closer to a mirror image of the days roughly a year later, when the first two bear market rallies that followed the crash finally petered out, and the long slow grind of the Great Depression gradually took hold on the economy and the minds of America.
But in 1930, though on our reckoning the Depression had well and truly begun, the mindset that prevailed was very similar to today’s—that the worst of the crisis is behind us, and economic recovery is underway.
This mindset is on show at the wonderful blog News from 1930, which in honour of this week’s anniversary is publishing news summaries from the Wall Street Journal of 1929 as well as from 1930. Reading newspaper stories from 1930 is remarkable enough on a day by day basis, as comments made about the recovery that was then in place (and the return of the bull market) could easily have been lifted from today’s—or last week’s—newspapers. But to see these juxtaposed with the actual coverage of the Crash of 1929 is all the more startling.
The most obvious chord in the historical song is that very few people realise when they are participants in an event of historic proportions. Even though the Dow had never fallen by anything like what it did in the five days of the Great Crash, the belief that this would nonetheless turn out to be a rather ordinary event was the dominant perspective, as this excerpt from the Wall Street Journal’s Editorial for Saturday October 26th 1929 indicates:
The market will find itself, for Wall Street does its own liquidation and always with a remarkable absence of anything like financial catastrophe. … Suggestions that the wiping out of paper profits will reduce the country’s real purchasing power seem rather far-fetched.
It seems that only in retrospect was it realised that 1929 was a watershed in world history: few living at the time actually understood that—and none of them had their prognostications published by the Wall Street Journal.
One year later, though the far-fetched had become somewhat harder to dismiss, the general tenor of economic and business commentary was that the worst of the crisis was over, and that 1931 would be a bumper year for the market and the wider economy. This observation in a radio address by General Motors executive and Democratic Party National Committee Chair J. Raskob is indicative of business attitudes in 1930:
In closing, let me say that no country in the world, not even our own, was ever in as splendid position to go forward and enjoy a period of prosperity as our own country is today. Everything has been thoroughly deflated and business is now turning upward. The momentum is necessarily slow at first, but within three months … we will quickly leave depression behind. (WSJ Tuesday October 1930)
The second chord is that the causes and effects of momentous events can be misunderstood both at the time and in retrospect—which leads humanity to repeat its mistakes all over again. Reading the commentary in the 1930, it is clear that the government of the time was doing all it thought possible to prevent the Crash turning into an economic crisis, and it appeared to believe that it had been successful.
The statistics certainly imply that Hoover wasn’t sitting on his hands doing nothing as Wall Street burned, which is the modern mythology. Government debt was equivalent to 30 percent of GDP when the crisis began; just 3 years later it was 70 percent of GDP—and that was when the so-called “automatic stabilisers” were a lot smaller than they are today (because the government sector was much smaller back then).
Yet the view that dominates conventional economic thinking today is that the Depression was caused by a disengaged government and bad monetary policy—if only the Fed hadn’t tightened in 1930, everything would have been fine. In fact, if the Fed did tighten—and the evidence on that is mixed—it was because they, like today’s Fed, believed they had already done enough to avert catastrophe.
Bollocks to that: the problem in 1930 wasn’t the tightening of fiat money, but the preceding failure to constrain the private debt bubble that financed Wall Street’s speculative excess of the 1920s. Yet armed with the misguided belief that there wouldn’t have been a Great Depression had the Fed not tightened in 1930, the Fed of the 1980s-2007 ignored an even bigger bubble in private debt than its predecessor ignored in the 1920s.
By the time Ben Bernanke made his fawning paean to Milton Friedman at his 90thbirthday—“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”—the Fed had already caused a far bigger crisis by ignoring private debt and the asset bubble it financed.
I’ll finish with my other favourite aphorism: Max Planck’s observation that “science progresses one funeral at a time”. It will take a lot of funerals before the economics profession abandons the follies that led it to describe the decade leading up to today’s crisis as “The Great Moderation”.