Sunday, October 12, 2008 7 comments ++[ CLICK TO COMMENT ]++

Are We Facing 1929 Or 1873?

One of the popular activity these days is to figure out how the present financial crisis compares to past ones. History doesn't repeat, but it does rhyme as Mark Twain is famous for saying. I ran across two articles from The Globe & Mail mentioning the similarities, and the not-so-similar relationships, between two past crises: 1929 and 1873.

The biggest impact of a crisis is not necessarily the losses and suffering. I don't mean to downplay that but that's generally short-term and humans always battle through adversity. Rather, the biggest results generally include a shift in politics and societal attitudes. Just like how the malaise of the 70's with excessive government intervention and price controls led to de-regulation and less intervention in the 80's and 90's, the current crisis will likely lead to a shift towards the left with greater government oversight of financial institutions and capital markets. For investors this likely means that returns on capital will be lower in the future.


Are We Facing The Great Depression Again?

One of the worst cases--one which a lot of people seem to pick as their pick whenver things look bad--is the Great Depression in 1929. A long piece by Derek DeCloet goes over the Great Depression in detail. If anyone is interested in that crisis, it's well worth reading the article.

Perhaps the biggest outcome from the Great Depression is a shift towards the left and modern liberalism, with increased government intervention. From an economic point of view, it is basically what led to the popularity of Keynesian economics. The thinking before and during the early stages of the Great Depression was to let businesses fail, and for the central bank to sit on the sidelines. Ever since then, central banks and governments have generally intervened to various degrees whenever there was a crisis. One can also argue that the start of the decline of the gold standard and hard currencies started with the Great Depression.


Are We Facing The Long Depression Again?

Another article (skip to the 3rd section or read the sidebars) speculates that the current problems are closer to 1873 Long Depression:

What conditions led to the panic [1873]?

In Europe, mortgages became easy to obtain even with little or no money down, causing a building boom that drove up housing prices. In the United States, railroads raised capital through complex financial instruments no one understood, but as long as those bonds could be sold for a profit, a delusional confidence in them thrived. Stock markets shot up as exuberance grew in the certainty the good times would never end.

What caused the crash?

The good times stopped – hard. Cheap grain from America undercut Europe’s farmers, which meant they couldn’t pay off their creditors. Mortgage-laden banks failed, especially on the continent, taking their depositors down with them. The relatively healthier London banks, looking across the Channel in shock, stopped lending, at least for low interest rates. This credit crunch spread back to the United States, killing thousands of businesses suddenly unable to finance their operations. Eventually, speculators started looking more closely at those railroad bonds. And then they panicked.

What were the effects?

Stock markets around the world crashed. The New York exchange closed for 10 days. Unemployment skyrocketed, hitting 25 per cent in New York.


The Panic of 1873 and the crisis around that time period was considered to be the Great Depression, until an even-worse situation unfolded in the 1930's. Presently, the 1873 crisis is called the Long Depression.

I should note that the picture being described doesn't align with what is described on wikipedia so I'm not sure which one captures the causes better. For instance, the wikipedia entry says little about the hard-to-understand railroad bonds.

The wikipedia entry also points out how the gold-backed currency (with silver backing being removed) was one of the major causes, with the money supply contracting at precisely the worst time. Recall that many economists say that the Great Depression in the 1930's was made worse with the tight money supply. Well, a hard currency (back in the 1800's) is even worse with governments unable to expand the money supply (unless they find more gold or something.) This is one of the reasons I am totally against a hard currency. A lot of hard currency advocates--American Libertarians, traditional conservatives, etc--seem to blame central bank money printing for present-era problems, but they seem to conveniently ignore how things were almost even worse back in the 1800's with hard currencies.

The 1873 crisis also led to a shift in politics with religion seeming to gain strength. Sadly there was also a rise in anti-Semitism with Jews being blamed for the crisis.


I Say This is 1907 + S&L Collapse

I personally don't think there is much similarity between the present and the early stages of the Great Depression. The current crisis is a financial crisis, whereas the Great Depression involved serious economic problems. The financial crisis may lead to economic problems, but that is likely to be completey different from the 1930's. If there were to be a Great Depression, the most likely region to experience it is some place like China. I feel that they have massive overcapacity in manufacturing, not to mention a property bubble, that a bust can be painful.

Similarly, I don't think it resembles the 1873 crisis from what I can gather. Apart from global imbalances on trade, the economic picture doesn't seem as poor as in 1873 or 1929.

I am of the opinion that the current crisis is a mix of the Panic of 1907 and the late 80's/early 90's S&L crisis. Panic of 1907 was largely a financial crisis due to a loss of confidence in financial institutions. The S&L crisis was a real estate bust that brought down a lot of banks.

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7 Response to Are We Facing 1929 Or 1873?

October 12, 2008 at 10:28 PM

good commentary.

1 comment though: with a hard currency, there are ways in which a government is able to inject liquidity into the money supply-all they do is devalue the currency by printing more bills.

October 12, 2008 at 10:42 PM

JEFF: "with a hard currency, there are ways in which a government is able to inject liquidity into the money supply-all they do is devalue the currency by printing more bills."

Is that correct? I don't think the government is able to print money under a hard currency regime because they would need more gold. Unless they have "excess" gold or find more of it, I don't think they can print money.

Isn't that one of the arguments in favour of fiat currencies? Namely, that the government can print at will under a fiat regime because there is nothing backing it...

October 12, 2008 at 11:10 PM

While hard currencies do tend to combat inflation, the government would still posses the power to devalue their currency... If they would do it, it would be obvious really quickly to the people in the market place.

If you have seen an old silver certificate, they simply say that there is a dollars worth of silver on deposit in the treasury that the bill can be redeemed for. If Uncle Sam wanted to have a budget deficit, then, the dollar would simply get a smaller portion of the pie.

Granted, this could create the potential for a run on the currency being devalued... but at least the market has more of a determination in what happens, rather than a hand full of people determining the fate of the world.

no?

October 13, 2008 at 4:56 AM

This is a link to a Scott Nelson article on the "Real Great Depression" about the panic of 1873.

October 14, 2008 at 10:36 AM

Jeff,

Unless I'm mistaken, I don't think you can devalue your currency if it was backed by gold (or silver or whatever else.) That's the whole reason for the gold backing in the first place i.e. the currency users can be certain that there is something backing it.

How would you devalue it? By saying that what is printed on the currency is wrong? I'm not even sure that it would be legal for the government to say $1 is worth x amount of gold but is now only worth 0.5x of gold.

contrariandutch
October 15, 2008 at 5:01 PM

The traditional method for devaluing gold (or silver) currency is debasing. Coins are never pure gold and by increasing the amount of other metal in the mix a little gold can become a lot of coins.

With a merely gold-backed currency you just keep on printing so every "paper" dollar is eventually only a fraction of a gold dollar.

I wonder if any of the hard currency fans and goldbugs ever bother to read up on he nineteenth century. It had a major market crash every decade or more, always followed by severe economic slumps resulting in social unrest. And that despite truly impressive technological progress. Brilliant currency regime, if you are a revolutionary.

October 16, 2008 at 10:16 AM

Oh yeah, forgot about diluting the coin content. Thanks for that pointing that out ContrarianDutch.

I'm with you when it comes to hard currencies. Some people literally imply that the current crises are the result of fiat currencies. Yet, we had a huge number of deflationary busts in the 1800's--nearly all of them worse than anything in the last 100 years (except the Great Depression.)

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