Thursday, October 02, 2008


An article by Scott Reynolds Nelson suggests that 1929 is the wrong model for the current economic crisis. The real model is 1873, the worst depression the Western economy ever endured.

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 . . .

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 . . .


Blogger Ken Houghton said...

Sh*t. I've been trying not to talk about that one, mainly because it seems to have been eclipsed in a lot of William Jennings Bryan nostalgia.

But now that the cat is out of the bag, in more ways than one...

6:56 PM  
Blogger Ralf the Dog said...

I keep having dreams about 1637 Amsterdam and tulips.

9:46 PM  
Blogger halojones-fan said...

ken: Yes, stuff like that is why people proposed the bailout package in the first place. If there's no guarantee that credit will be repaid, then people will stop giving you credit--and that means ALL of you, not just the "bad risks" (which, to my mind, has invariably been a code phrase for "poor people and niggers".)

We all saw this coming last year, though, when there was a "sudden downturn" in the housing market. This wasn't because everyone suddenly stopped wanting to buy houses--it was because banks suddenly decided to stop lending money.

Back when it was just houses, everyone could tell each other that it's "just the housing market slowing down". Now it's propogating up the stream and it's gotten into the bond market, which is why it's A NATIONAL CRISIS.

1:47 AM  
Anonymous Anonymous said...

Actually, 1873 is right about the time of another crisis era in both the American and European timelines. People looking only at wars notice the Civil War (and some say the crisis lasted until the end of Reconstruction, just as the American Revolutionary crisis era ended only with the ratification of the Constitution) and wonder what was going on in Europe at the period. You just told us.

Have you noticed? There's a certain rhythm to these things. And right now, we're on the downbeat. Thanks enormously for posting this article!

Pat, amateur historian

8:08 AM  
Blogger Ralf the Dog said...

I don't like solutions that are more complex than their problems. The problem is a lack of liquid credit. We could pass this very complex legislation and save the world by giving a tax credit to makers of wooden arrows, unbleached coffee filters and spend 700 billion dollars on purchasing bad loans or we can focus on the problem.

If we find out what banks are solvent and insure new loans they make (If the borrower has good credit and collateral), we can add liquidity to the market for five cents on the dollar.

9:15 AM  
Anonymous Anonymous said...

"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" . . . Heh
Change the American to Chinese and the European to American and there you have it. Funny what happens when you ship all your jobs overseas. Do we make anything any more?

8:00 PM  
Blogger Ralf the Dog said...

Just getting a prediction down to make it official. Friday, 10-10-2008 will be a killer day on the stock market. I would expect it to be very bad near the closing bell.

Volitility was up on Wednesday. The market was going sideways so fast my computer is still spinning. I don't think many traders will want to keep their money in stocks. Not that any other place is that much safer.

I am a long term investor so I am not that worried. I am thinking about selling out on my few stocks that are doing well so I can have more cash to go on a buying spree later.

6:20 PM  

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