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Will the Great Depression Be Repeated?

Global trade fell 30 percent three years after the crash. The US gross domestic product shriveled 40 percent. In 1932, every fourth American was without a job. In Germany, industry only produced half of what was produced three years before. Keynes recommended state economic programs and called into question the theory of self-regulating markets.

In 1929, 80 years ago, prices crashed on Wall Street. The course of the financial crisis since 2008 dramatically resembles the course from 1929. WELT ONLINE asks how the 1929 crisis arose and whether a return of the Great Depression is possible today.

By D. Eckert and H. Zschapitz

[This article published on: WELT ONLINE, October 20, 2009 is translated from the German on the Internet,  http://welt.de.]

"In 1929 the volume of outstanding credits amounted to 160 percent of US economic output and climbed to 260 percent within the next three years. Before the crash of 2008, the share was already at 365 percent and now has soared to at least 500 percent. We could hearken back today to the experiences of the 1930s and the findings of Keynes."

Barry Eichengreen is always ready with good news. Since the eruption of the financial crisis, the Berkeley professor meticulously recorded the fall of the world economy. Up to the summer months, its curves pointed downwards in a similar dramatic way as after the stock market crash of 1929. Industrial production, world trade and stock prices - everything fell with the same or even greater speed as 80 years ago.

For the first time since the collapse of the Lehman Brothers investment bank in September 2008, the markets have broken through the 1929 catastrophe pattern. The recovery in industry gives reason for hope. The stock prices persistently tending upwards are a good sign. A new Great Depression is not occurring. So it appeared in the spring.

The greatest tragedy in the history of the world economy, the "Great Depression," began with a stock exchange tremor that resembled the 2008 tremor in a fatal way. On the morning of October 24, 1929, a Thursday, the quotations on Wall Street began to fall abruptly. Within minutes, big names like General Motors and US Steel, lost millions of dollars in stocks. The Dow fell from 305.85 to 272.32 points. The situation was precarious because many investors bought on credit. When the fall was not curbed, they had to get rid of their securities to obtain credits. A domino effect threatened.

The most powerful bankers of Wall Street quickly came together in an emergency meeting. While Thomas Lamont from the JP Morgan banking house trivialized the situation before reporters, that there were only "a few emergency sales." The vice-president of the New York stock exchange Richard Whitney placed massive money orders. He ordered standard securities for around $30 billion. Through his intervention, the double-digit loss of the Dow Jones index on that "Black Thursday" was limited to 2.1 percent. Still the alarm and uncertainty could not be repressed. The news of the stock market tremor on Friday - "Black Friday" - reached the old world.

On the following Monday, the prices went into a tailspin. The "margin calls" of the brokers had a stronger effect than President Herbert Hoover's calming. On Tuesday, a storm flood developed out of the selling-wave. More than 16 million shares were thrown on the market on that darkest day of Wall Street. The Dow skidded 12.1 percent. The flight from stocks continued in the next weeks - despite all the attempts at calming.

Fear now wields the scepter where greed previously ruled. The Great Crash ended one of the most spectacular speculation bubbles of history. Everything began ten years before. All of a sudden after the end of the First World War in 1918, America was again the leading economic nation of the world. The British Empire like the other victor-powers became heavily indebted to the US. The pound's global hegemony as a reserve currency6 was ceded to the dollar. Three-quarters of worldwide gold reserves are stored in the vaults of the Federal Reserve.

The United States had a leadership position in the new boom branches of automobiles and electricity. In the middle of the 1920s, there were as many cars on New York streets as in all Germany. From 1920 to 1929, electricity production doubled in the US. Most amazingly a great recession did not occur after the postwar recession. Thanks to modern management methods, the ideal of a perpetual growth without setbacks seemed to become reality.

Economists and politicians spoke of a "New Era." Industrialists like John Raskop preached that stocks could make everyone rich. Big speculators like William Crapo Durant who controlled an investment pool of four billion dollars were fired. The trends in prices seem to confirm the prophets of the "New Era." Since the beginning of the 1920s, the Dow Jones has multiplied almost forty-fold. Every correction was a chance to climb to a more sustainable level- until October 1929 when the dreams of fast riches shattered.

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What made the Great Crash so insidious is that there was a counter-movement from the middle of November 1929. In the next six months, the Dow climbed around 50 percent. In the spring of 1930, many observers believed the worst had past. However the stock market crash started a process that drew the global economy and not only the US economy into unprecedented misery. Global trade fell 30 percent three years after the crash, the low-point of the crisis. The US gross domestic product shriveled 40 percent. In 1932, every fourth American was without a job. Until then unemployment rarely rose above three percent.

The crisis struck Germany with full rage, the Germany weakened by war, hyperinflation and reparations. Here a third of the population was without a source of income in 1932. Industry only produced half of what was produced three years before. The misery of the Great Depression prepared the way for Adolf Hitler. Still a splinter group in the 1928 Reichstag election, the NSDAP gained more than 37 percent of the votes in the election in the middle of 1932.

Could that happen this time? Could what began with the bursting of the American real estate bubble at the end of 2006 and developed to a financial collapse trigger a new Great Depression regardless of the latest recovery? Prominent economists, historians and investment bankers give the all-clear signal. Still they do not share the wild optimism that now drives stock prices. "Political errors 80 years ago made a correction on the stock market into a depression. Fortunately, we have learned from the debacle at that time and completely changed crisis management," Harvard historian Neil Ferguson says. Political-economic lapses like holding to the gold standard and the austerity policy of the world economy were sent to hell.

Higher prime interests in the US caused the money supply to shrivel by a quarter after 1920. As a result, a dying of banks occurred. On the other hand, the monetary custodians - above all Fed chief Ben Bernanke - bravely lowered the interests this time and flooded the markets with liquidity. Simultaneously the governments different than at that time presented economic programs amounting to billions.

Nevertheless Ferguson refers to glaring parallels particularly in the banking sector: "Citi-group is the credit institute of our days." In the 1931 bank crisis, the largest Austrian bank was in decline and had to be rescued with taxpayer money. Some institutes have reached a system-relevant size today, which is why the state guarantees them. "No one thinks any more that these giant banks could ever be insolvent. This is not a healthy state and is actually not capitalism any more." He says the current crisis is not overcome by state debts.

Hedge fund pioneer George Soros also emphasizes the indebtedness problem. "The volume of outstanding credits amounted to 160 percent of US economic output in 1929 and climbed to 260 percent within the next three years. Before the crash of 2008, the share was 365 percent and has now soared to at least 500 percent," the master speculator says.

David Rockefeller, the last grandson of the oil baron, regards further turbulences as possible. "In 2008 like 1929, people were granted credits who were not creditworthy." In both cases, there was a breakdown of monitoring. "We now have the choice: either we rely on international regulation or we must live with intense fluctuations, uncertainty, growing mistrust and increasingly frequent financial crises."

The crucial actors in overcoming the crisis hearken back today to the experiences of the 1930s and the findings of the economist John Maynard Keynes, all economic historians stress. As an answer, Keynes recommended governmental economic programs and called into question the theory of self-regulating markets. With coordinated bailout packages and relief programs in the billions, the economic decision-makers in this crisis hold to Keynes' script.

In the past the tormenting remembrance had served as a reliable compass for crisis policy, the economic historian Werner Abelshauser says. "But be on guard, fighting the battlers of the past is not enough," the Bielefeld professor underlines. Thus consumers, investors and citizens would do well to heed the crisis-protocols of Berkeley professor Barry Eichengreen.


Capitalism Hits the Fan - Richard Wolff

Great Depression in the US - Wikipedia:

Franklin D. Roosevelt - First Inaugural Address - March 4, 1933

Presidents and Job Growth - New York Times

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