Posted on 12/24/2008 8:14:30 AM PST by Welcome2thejungle
All of us have witnessed market bubbles in our lives. Not all of us have experienced the horrors of the protracted Great Depression of the 1930s. This is because market bubbles are a normal expression of free market capitalism.
During the Clinton Administration we witnessed the bubble of insanely overpriced internet stocks. During the Bush Administration we witnessed both a real estate and an oil price bubble. Most Californians such as myself have been through many real estate booms and busts. It is quite normal in this state.
Common mythology alleges that the October 1929 stock market crash triggered the Great Depression. Truth is that stock market crash was not fundamentally different than any other binge of wild speculation and could not have all by itself triggered the Great Depression. As columnist Thomas Sowell notes in his column this morning, the unemployment rate hit 9% in December of 1929 but was back down to 6.3% in June 1930. As Sowell notes, "Five months after the Smoot-Hawley tariffs, the jobless rate hit double digits for the first time since the 1930s." Investor's Business Daily 12/24/08.
The mythology perpetrated by the Democrats was that free market capital caused the Great Depression and that FDR's New Deal programs ended it. Both are false. The Depression was worse than ever on the eve of World War II. The economy rebounded in the aftermath of bursted stock market bubble. It was Herbert Hoover who signed the misguided Smoot-Hawley tariffs which caused the entire global economy to collapse and made things even worse by raising taxes. Had Hoover done nothing the economy would have recovered on its own, and he would have probably been re-elected. The country would have been spared the ravages of the Great Depression and the New Deal.
Bottom line: Markets always fluctuate, but only seriously misguided government policies can cause severe depressions. Which brings me to the Deity-elect. If BHO governs a lot like WJC, I think we'll weather the storm. If BHO rules like FDR, get ready to pull out your tin cup.
Ahhh!!!! But auto makers must have bonuses.
The 1929 crash was not merely a "fluctuation."
Misguided policies will exacerbate a problem, but a market crash is a social shock that knocks the confidence (often misguided confidence) from an overheated economy. Deleveraging is a natural a consequence as...a hangover after a drinking binge.
1929? Isn’t THAT the crash after which President Roosevelt went on T.V. and was honest with the American people about what happened?
I think I heard something about this during the recent vice-presidential campaign.
;^)
B-I-N-G-O!
This is old news here at FR. But thanks for the information.
Well, if it didn’t, it certaily didn’t help.
I question blaming Smoot-Hawley tariffs as well, because it assumes that the US slamming the door on trade was a unilateral action. In fact, other countries were doing the same. Trade has to be a two-way street.
I can also point out that right now, with no great tariffs or new trade barriers, international trade is likewise coming to a screeching halt, as seen with the Baltic Dry Index of cargo ship rental prices. Ships that just a few months ago were renting for half a million dollars can now be rented for just a few thousand—barely the price of its lubricating oil, much less its fuel.
Even more important is to *not* become hypnotized by the Great Depression as a model to our current economic crisis. Much better partial examples can be found in “The Panic of 1893”, and also in “The Panic of 1837”, which was the only depression to near equal the Great Depression in severity.
Two years after The Panic of 1893, the US government was close to bankruptcy, much as it is today. But back then, J.P. Morgan, the man, stepped in to insure solvency of the government. Today, no one comes close to having enough money to do this.
In The Panic of 1837, two things happened of note. First, on the success of the bond issue for the Erie canal, several other states issued canal bonds, and much of the money backing these came from banks that issued their own money.
But then all the canal projects failed because of poor foresight, and then President Jackson decreed that all private bank notes had to be backed with gold. This caused an enormous number of bank failures, overnight, and wiped out the savings of millions of people.
This resulted in those states defaulting on their bonds. And this is critical, because the US might be forced to do the same with its Treasury bills.
(There are reasonably good Wikis on the two panics.)
Well.. one source says:
Sometime after the panic of 1929 a reporter asked JP Morgan what caused all this to happen. He said " someone asked for a dollar".
(His point being that the banks were so leveraged that one too many people withdrew one too many dollars. Then that first domino fell. And the rest is history.)
Maybe years from now it will be said that the domino that caused the crash of 2008 was some idiot Senator from New York and his devious scheme to crash a large bank before the elections?
Can a knowledgeable person recommend a good book that explains what happened to cause the great depression?
Yeah, and imagine if Gov. Palin had expressed such rank ignorance out on the campaign trail. The MSM would have been all over it like flies on excrement.
There are many. One of my favorites is The Way the World Works by Jude Wanniski.
I would also strongly suggest you clap on eye on Thomas Sowell’s column in today’s Investors Business Daily entitled “Gov’t Solutions Only Deepend the ‘30s Downturn”.
IMHO, the crash on its own would have caused a recession or a mini-depression. It took bad government policy (Smoot-Hawley, etc.) to turn it into the Great Depression. In fact, anticipation of Smoot-Hawley might have helped cause the crash, then made the economy worse after being enacted.
J. P. (John Pierpont) Morgan died in1913.
Perhaps the quote originated in the book, The Moneychangers, by Upton Sinclair
"'Somebody asked for a dollar,' was the way one banker phrased it. Wall Street had been doing business with pieces of paper; and now someone asked for a dollar, and it was discovered that the dollar had been mislaid."
Given that, the catalyst is merely the catalyst. Perhaps it takes really bad policy to drive a market to the point where it's vulnerable to a crash. But anything could tip it off: bad policy, shouting "fire," maybe even a killer-bee attack.
This book blows away the conventional interpretations of the crash of 1929, not only in its contents but that this book exists at all. It was written in 1931. He ascribes the crash to the pile of up debt, which in turn was made possible by the Fed printing machine. This created distortions in the production structure that cried out for correction. So what is the answer? Let the correction happen and learn from our mistakes.
Such is the thesis of the great Garet Garrett. But take note: this book was a big seller in 1931. In other words, two years before FDR arrived with his destructive New Deal, ascribing the depression to capitalism and speculation, Garrett had already explained what was really behind the correction.
It took Murray Rothbard to resurrect these truths decades later, and when he wrote this in 1963, it was a shock and we are still fighting an uphill battle to explain the true causes of the crash and following depression. But here in this wonderful book is an actual contemporary account that spelled it out plainly for the world to see.
No more can we say that people back then could not have understood. Garrett told them. And thanks to this new edition of this classic and important work, he is telling us again today.
http://www.mises.org/store/Bubble-That-Broke-the-World-The-P437.aspx
“The mythology perpetrated by the Democrats was that free market capital caused the Great Depression and that FDR’s New Deal programs ended it”
In the late 30s and early 40s I was taught just the opposite.
I was taught to hate FDR and his communist wife and everything about him from the time I could sit up in a high chair.
Thanks for the book recommendations!
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