Scott Reynolds Nelson: The depression of 1929 is the wrong model for the current economic crisis

[Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).]

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. 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. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

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. It looks much more like our current crisis.

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors 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. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They 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 bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe....

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Donald Wolberg - 10/5/2008

Oops is Ok; sometimes it is good to make the point again. In actuality "alternative" fuels are mostly not very good. Hydrogen fuel cells hold some interest, but there are many, many difficulties, economic, technological, and environmental. Alcohol fuels are well studied and have a history almost as long as gasoline. Alcohols are not very good for the environment, are remarkably inefficient, and have profound economic consequences. Liquified natural gas has excellent potential, is abundant and technologically feasible but an enormous amount of infrastructure remains. Petroleum is abundant and supprisingly environmentally sound to get: new drilling technology has reduced the footprint of terrestrial drilling and platform efficiencies are such that more is done safer than ever before. In truth, there is more natural seepage of petroleum than from any drilling operations on land or sea. Pipeline technology is such that they pose no hazard. Coal is different, but is abundant, reasonably priced and transportable. New technologies can liquifiy coal, scrubbers can clean it and power plants use it efficiently. Nuclear is the cleanest, safe with new technology and waste is resoveable if new reprocessing technologies are used. France is 80% nuclear and will increase to 90% and most countries are shifting to nuclear. The U.S. has 106 nuclear stations generating power, but noi new construction since 1985 or so. We need another 100 plants and they can just about reduce coal use by 70%. We also have more than 100 nuclear reactors on naval ships. The record for all 200-plus is not a single loss of life in 30 years.

The energy picture is complex but there are solutions.

Lorraine Paul - 10/5/2008


Lorraine Paul - 10/5/2008

Well, let us just rape the little bit of "natural" environment that we have left.

Alternative fuels have been around for decades, however, they were bought out by the oil companies and shelved.

Development is definitely not the answer. It is a short-sighted and greedy solution to a problem which is going to haunt us when this oil runs out.

Lorraine Paul - 10/5/2008

Well, let us just rape the little bit of "natural" environment that we have left.

Alternative fuels have been around for decades, however, they were bought out by the oil companies and shelved.

Development is definitely not the answer. It is a short-sighted and greedy solution to a problem which is going to haunt us when this oil runs out.

Donald Wolberg - 10/4/2008

Very interesting and I suspect right on in terms of the need for inexpensive energy. But there is a built in false estimate. There is sufficient domestic energy available but undeveloped by virtue of less than astute political action. For example, there is about 1.8-2 trillion barrels of oil just in western oils shale deposits (that's 2,000 billion), available or development at a reasonable cost. There is oil shale elsewhere in the U.S. and Canada. There are deposits of heavy oils available in the U.S. in some quantity and undeveloped. There are undeveloped tar sands in the U.S. and Canada. Finally, there are undeveloped oil fields off either coast, and the western interior and the American and Canadian Arctic. The Cubans are providing drilling permits to the Chinese and others for oil off the coast of Florida. The irony is that American companies are not permitted to drill there. In all, there is more undeveloped oil in the U.S. than there is oil in the entire Middle East. Additionally, there are enormous natural gas reserves available and that can be processed as vehicle fuels; more than 1 trillion tons of coal; enough nuclear material available essentially forever.
There is an energy shortage in the U.S. However, it is a shortage by design, not reality, and the product of non-development or an antagonism by political interests.

Per Fagereng - 10/4/2008

Here's my take. Today's global economy is based on cheap oil. The US used to export oil, but we depleted it. It allowed us to become #1 after World War 2. Our dollars were accepted everywhere, even after they began losing value. Oil was sold in dollars. Our military protected the oil producing countries, and they recycled their petrodollars back here.

Now things are changing. Our domestic oil is mostly gone. Our military has shown its weakness in Iraq and other wars. Our creditors are beginning to dump their dollars. Word has it that our creditors forced us to bail out Fannie and Freddie. Maybe they have already told us not to make war on Iran.

Americans are deeply in debt at every level. We won't grow our way out. The Wall Street boys grew rich on imaginary money, which they are now trying to transform into real wealth, leaving the rest of us behind.

The richest country in history wasted its wealth on junk and war.

Donald Wolberg - 10/3/2008

Dr, Nelson's commentary and analysis are fascinating and one can look forward to his lengthier exposition when it is completed and published. That remarkable cranky old man, Clarence Darrow, said, "history repeats itself; that's the damn trouble with history," although as a non-determinist, I prefer Mark Twains, "History doesn't repeat itself, it rhymes." It is clear that the present parallel of inflated housing prices, frequently to absurd dimensions, miserable mortages for people who could never repay them, and the stress of the new cheaper than cheap 900 pound economic gorilla, China, offer remarkable parallels. But I am not sure if they are more the symptoms of the present economic woes, rather than the cause. I wonder if there really is a cause other than loss of confidence in the American economic powerhouse, replaced by a flutuating and fire of hysteria, fanned by a generally ignorant media in a political season.

The American economy, with a GDP of $13.5 trillion is unlike any economy ever seen, not only within a single nation, but a single nation compared to the entire world. As I recall, the states of California and New York, if countries (and some would argue that they are almost such since they are really different from the rest of "us"), would be in the top 10 nations economically. Every day, almost 95% of the work force goes to work, drives cars, makes purchases of $200 sports of concert tickets and buys shoes for another $200 a pair. I believe the average unemployment rate for the last 25 years has been 5.6%. The number of people employed has increased substantially--our present population is about 330 million, more than double the popularion when President Eisenhower was in office, 50 years ago. 96% of all mortages are paid on time, and event half of the reamining 4% are not in default or are being renegotiated.

I suspect that the current loss of confidence, panic, hysteria, "proto-recession," began when that great needed resource of the American economy and "sense of entitlement," cheap gasoline, began its upward spiral. The cascade of effects sliced through the American purse of disposable income; $120 refills meant no new Nike shoes or one less night out. The follow-on of food price spikes next struck as refills for big trucks with 300 gallons on board and $5 diesel meant $1500/refill, not the previous $400 or $500.

The unfortunate collaps of the worthless paper in Fannie and freddie, clearly a case of felonious neglect or willfull manipulate by its former administrators and U.S. Senators, added the next panic button. Almost at economic light speed, the last redoubt of personal wealth, increasing home values fled. The financial and investor world grabbed at the last brass ring of the economic carousel, tightened credit, sell real assets, and hold cash. Withouth the flow of cash, there is no economy. With the outpouring of remaining dollars to foreign oil, the vise tightens all the more when a less than gifted group, the American Congress, felt it is better to export dollars than drill wells or build nuclear plants at home.

Such is my take on the situation; the symptoms are the disease. The underlying essentials for the patient's health remain but are clouded by hysteria. Unfortunately, there is no Freud to bring in a stream of reason to dispel the hysteria, at least not yet.

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