[R-G] [BillTottenWeblog] The Real Great Depression

[Suzanne de Kuyper]

Dear Bill Totten:
Proffessor Nelson make a serious factual mistake at the end of his fine
"Wrong model" article that the cultural scapegoating of the Jewish community
was not done in the U.S..  This is a complete and serious historical
falsehood!

Suzanne   suzannedk at gmail.com

On Fri, Feb 27, 2009 at 2:15 AM, Bill Totten <shimogamo at ashisuto.co.jp>wrote:

>
> The depression of 1929 is the wrong model for the current economic crisis
>
> by Scott Reynolds Nelson
>
> The Chronicle Review (October 17 2008)
>
>
> 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.
>
> The long-term effects of the Panic of 1873 were perverse. For the
> largest manufacturing companies in the United States - those with
> guaranteed contracts and the ability to make rebate deals with the
> railroads - the Panic years were golden. Andrew Carnegie, Cyrus
> McCormick, and John D Rockefeller had enough capital reserves to finance
> their own continuing growth. For smaller industrial firms that relied on
> seasonal demand and outside capital, the situation was dire. As capital
> reserves dried up, so did their industries. Carnegie and Rockefeller
> bought out their competitors at fire-sale prices. The Gilded Age in the
> United States, as far as industrial concentration was concerned, had begun.
>
> As the panic deepened, ordinary Americans suffered terribly. A cigar
> maker named Samuel Gompers who was young in 1873 later recalled that
> with the panic, "economic organization crumbled with some primeval
> upheaval". Between 1873 and 1877, as many smaller factories and
> workshops shuttered their doors, tens of thousands of workers - many
> former Civil War soldiers - became transients. The terms "tramp" and
> "bum", both indirect references to former soldiers, became commonplace
> American terms. Relief rolls exploded in major cities, with 25-percent
> unemployment (100,000 workers) in New York City alone. Unemployed
> workers demonstrated in Boston, Chicago, and New York in the winter of
> 1873-74 demanding public work. In New York's Tompkins Square in 1874,
> police entered the crowd with clubs and beat up thousands of men and
> women. The most violent strikes in American history followed the panic,
> including by the secret labor group known as the Molly Maguires in
> Pennsylvania's coal fields in 1875, when masked workmen exchanged
> gunfire with the "Coal and Iron Police", a private force commissioned by
> the state. A nationwide railroad strike followed in 1877, in which mobs
> destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Maryland
>
> In Central and Eastern Europe, times were even harder. Many political
> analysts blamed the crisis on a combination of foreign banks and Jews.
> Nationalistic political leaders (or agents of the Russian czar) embraced
> a new, sophisticated brand of anti-Semitism that proved appealing to
> thousands who had lost their livelihoods in the panic. Anti-Jewish
> pogroms followed in the 1880s, particularly in Russia and Ukraine.
> Heartland communities large and small had found a scapegoat: aliens in
> their own midst.
>
> The echoes of the past in the current problems with residential
> mortgages trouble me. Loans after about 2001 were issued to first-time
> homebuyers who signed up for adjustable rate mortgages they could likely
> never pay off, even in the best of times. Real-estate speculators,
> hoping to flip properties, overextended themselves, assuming that home
> prices would keep climbing. Those debts were wrapped in complex
> securities that mortgage companies and other entrepreneurial banks then
> sold to other banks; concerned about the stability of those securities,
> banks then bought a kind of insurance policy called a credit-derivative
> swap, which risk managers imagined would protect their investments. More
> than two million foreclosure filings - default notices, auction-sale
> notices, and bank repossessions - were reported in 2007. By then
> trillions of dollars were already invested in this credit-derivative
> market. Were those new financial instruments resilient enough to cover
> all the risk? (Answer: no.) As in 1873, a complex financial pyramid
> rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do
> not make short-term loans. Businesses large and small now face a
> potential dearth of short-term credit to buy raw materials, ship their
> products, and keep goods on shelves.
>
> If there are lessons from 1873, they are different from those of 1929.
> Most important, when banks fall on Wall Street, they stop all the
> traffic on Main Street - for a very long time. The protracted
> reconstruction of banks in the United States and Europe created
> widespread unemployment. Unions (previously illegal in much of the
> world) flourished but were then destroyed by corporate institutions that
> learned to operate on the edge of the law. In Europe, politicians found
> their scapegoats in Jews, on the fringes of the economy. (Americans, on
> the other hand, mostly blamed themselves; many began to embrace what
> would later be called fundamentalist religion.)
>
> The post-panic winners, even after the bailout, might be those firms -
> financial and otherwise - that have substantial cash reserves. A
> widespread consolidation of industries may be on the horizon, along with
> a nationalistic response of high tariff barriers, a decline in
> international trade, and scapegoating of immigrant competitors for
> scarce jobs. The failure in July of the World Trade Organization talks
> begun in Doha seven years ago suggests a new wave of protectionism may
> be on the way.
>
> In the end, the Panic of 1873 demonstrated that the center of gravity
> for the world's credit had shifted west - from Central Europe toward the
> United States. The current panic suggests a further shift - from the
> United States to China and India. Beyond that I would not hazard a
> guess. I still have microfilm to read.
>
> _____
>
> 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).
>
> The Chronicle Review - Volume 55, Issue 8, Page B98
>
> Copyright (c) 2008 by The Chronicle of Higher Education
>
> http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18
>
>
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>
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