80 Years Later: Commentary on the Crash of 1929
This blog entry has been copied from Franklin County, Update 239: Solemn Anniversary
As you should know, we are now entering the ninth decade after the Stock Market Crash of 1929. 80 years has passed since those fateful two days -- October 28 and 29, 1929. The crash is often seen as representing the initial cause of the Great Depression, but it was more of a symptom of underlying problems rather than the cause of them.
Regardless of the cause of the crash, it heralded the greatest economic downturn the American economy would ever face, being comparable only to the Depression of 1837, which occured 92 years earlier. The political and economic leaders, with the notable exception of the Austrian school, thought the crisis was over after the crash, which had taken the stock market down by more than 40 percent by December, had stabilized. In the Spring of 1930 Hoover and his compatriots saw bettering data on the economy signaling a recovery, and a stock market which had undergone a monster rally of 50 percent from the lows.
Alas, it would only last 6 months. The rally peaked by June, and from there it was a nearly non-stop downward slide from 279 on the Dow, to 41 by the Spring of 1932. This was the deepest bear market in stock market history, taking stocks down by 89 percent.
The economy was not much better. Throughout the early 1930's, the economy continued a self-sustaining vicious circle leading to bankruptcy, unemployment, shuddering of production, and plummeting GDP. By 1933, the unemployment rate stood at a staggering 25 percent, with the rate of underemployment being above 40 percent.
The economy had contracted by over a quarter, marking the most severe depression on record. By 1932 the downturn has been dubbed "the Great Depression". All hope seemed lost, but the bottom was near. 1932 saw a lessening of the decline while the people loathed the current president, Herbert Hoover.
In November 1932 Franklin Roosevent was elected President, and promised a "New Deal" for the American people. The Hundred Days after his inauguration in March witnessed the enaction of a multitude of government programs, dubbed the "alphabet soup". The programs spanned the spectrum from fascist to socialist to capitalist, but they got the economy running a modest uptick in 1933.
By 1934, the unemployment began to ease as government payrolls, created by the new programs, swelled with new workers. Infrastructure construction was at an all-time high -- Americans were building the greatest infrastructure to have ever existed, laying the groundwork for the future, sustaining the recovery until 1937.
In 1937, with public works booming, and with deficit spending easing, the economy contracted, and unemployment shot up again, heralding what would be dubbed "the Recession of 1937", due to the fact that the governemnt did not want to frighten the populace with another depression call. The term has stuck to this day to describe downturns. By 1939, ten years after the Crash, recovery had begun to take hold once and for all.
This recovery was drastically accelerated as the Second World War reached the United States. Wartime production in factories propelled GDP to new heights. By 1945 production was so vigorous that one new naval vessel was being built every 10 hours. In September, the war ended, but it would take until 1947 for the effects on the world brought by the war to return to normalcy. When they did, it caused a stagnation in the economy, exacerbated by the Recession of 1949.
In 1952, a full 23 years after the Crash, the United States had reached full employment, and economic growth was over 15 percent. In 1954, 25 years after it happened, the Dow Jones Industrial Average had finally eclipsed the 1929 peak. This was the boom of the 1950's, but it took place in a nation and a planet which had been changed forever by the Depression.
Such a world-changing event was forecasted only by a few who were not heeded, and became apparent only on those two fateful days -- October 28 and 29, 1929.
Can such an event happen again? Evidence suggests that it has happened again, in our very own depression, the Depression of 2008, which we are now living through. 2008 involved the collapse of a credit boom greater than that of the 1920's, which became apparent only in a large crash, the Crash of 2008, which exacerbated the problem. In March of 2009, we started our own monster rally, which has so far taken the stock market 60 percent higher from the lows. Economic data is improving, feeding the beast of stocks. This crash also took place in a deflationary environment, with commodity prices collapsing.
There is only one crucial difference -- government intervention. The government since the crash has devoted 23.5 trillion dollars to prop up the markets, buying its own debt, buying mortgage-backed securities, lowering interest rates to zero, and giving bailout after bailout to failing companies.
This has averted our Depression from becoming a Great Depression. However, the 23.5 trillion was paid for by debt, most of it purchased by the Federal Reserve. The Federal Reserve has doubled the money supply to finance this 23 trillion, and excess reserves in banks are humongous. This money, once it has begun to be lent out when the recovery begins, will flood the economy with dollars, devaluing the currency, and causing rampant inflation.
The US could as a result of this endure a hyperinflationary collapse of the currency, economy, and markets which would be multiple times worse than in the 1930's. In this case, the cure may be worse than the disease. Such collapses have happened in the past, incredibly rapid from the original impetus, not more than 4 years. This gives a date of early 2013 at the latest for this collapse to occur.
In this case, the US will have to endure another, even worse Great Depression. Whether this will happen or not, what the effects will be, and what will come out of the crisis, only time will tell.
TweetBacks
There are no TweetBacks for this entry.
Subscribe
There are no comments for this entry.
[Add Comment] [Subscribe to Comments]Registration is not required