Happy Anniversary Wall Street

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If I was asked to nom­i­nate the wis­est apho­rism of all time, Mark Twain’s “His­to­ry doesn’t repeat, but it sure does rhyme” would def­i­nite­ly be one of my top two can­di­dates.

On song, today Wall Street is replay­ing the 1930s, but to a slight­ly dif­fer­ent meter. With the 80th anniver­sary of  the Great Crash of 1929 falling on Octo­ber 29th of this year, Wall Street is cel­e­brat­ing in char­ac­ter­is­tic style–with a eupho­ria-led bub­ble that now appears to be crash­ing up against eco­nom­ic real­i­ty.


Of course, our time is not a mir­ror image of that momen­tous peri­od 80 years ago. It’s clos­er to a mir­ror image of the days rough­ly a year lat­er, when the first two bear mar­ket ral­lies that fol­lowed the crash final­ly petered out, and the long slow grind of the Great Depres­sion grad­u­al­ly took hold on the econ­o­my and the minds of Amer­i­ca.

But in 1930, though on our reck­on­ing the Depres­sion had well and tru­ly begun, the mind­set that pre­vailed was very sim­i­lar to today’s—that the worst of the cri­sis is behind us, and eco­nom­ic recov­ery is under­way.


This mind­set is on show at the won­der­ful blog News from 1930, which in hon­our of this week’s anniver­sary is pub­lish­ing news sum­maries from the Wall Street Jour­nal of 1929 as well as from 1930. Read­ing news­pa­per sto­ries from 1930 is remark­able enough on a day by day basis, as com­ments made about the recov­ery that was then in place (and the return of the bull mar­ket) could eas­i­ly have been lift­ed from today’s—or last week’s—newspapers. But to see these jux­ta­posed with the actu­al cov­er­age of the Crash of 1929 is all the more star­tling.

The most obvi­ous chord in the his­tor­i­cal song is that very few peo­ple realise when they are par­tic­i­pants in an event of his­toric pro­por­tions. Even though the Dow had nev­er fall­en by any­thing like what it did in the five days of the Great Crash, the belief that  this would nonethe­less turn out to be a rather ordi­nary event was the dom­i­nant per­spec­tive, as this excerpt from the Wall Street Journal’s Edi­to­r­i­al for Sat­ur­day Octo­ber 26th 1929 indi­cates:

The mar­ket will find itself, for Wall Street does its own liq­ui­da­tion and always with a remark­able absence of any­thing like finan­cial cat­a­stro­phe. … Sug­ges­tions that the wip­ing out of paper prof­its will reduce the coun­try’s real pur­chas­ing pow­er seem rather far-fetched.”

It seems that only in ret­ro­spect was it realised that 1929 was a water­shed in world his­to­ry: few liv­ing at the time actu­al­ly under­stood that—and none of them had their prog­nos­ti­ca­tions pub­lished by the Wall Street Jour­nal.

One year lat­er, though the far-fetched had become some­what hard­er to dis­miss, the gen­er­al tenor of eco­nom­ic and busi­ness com­men­tary was that the worst of the cri­sis was over, and that 1931 would be a bumper year for the mar­ket and the wider econ­o­my. This obser­va­tion in a radio address by Gen­er­al Motors exec­u­tive and Demo­c­ra­t­ic Par­ty Nation­al Com­mit­tee Chair J. Raskob is indica­tive of busi­ness atti­tudes in 1930:

In clos­ing, let me say that no coun­try in the world, not even our own, was ever in as splen­did posi­tion to go for­ward and enjoy a peri­od of pros­per­i­ty as our own coun­try is today. Every­thing has been thor­ough­ly deflat­ed and busi­ness is now turn­ing upward. The momen­tum is nec­es­sar­i­ly slow at first, but with­in three months … we will quick­ly leave depres­sion behind.”. (WSJ Tues­day Octo­ber 1930)

The sec­ond chord is that the caus­es and effects of momen­tous events can be mis­un­der­stood both at the time and in retrospect—which leads human­i­ty to repeat its mis­takes all over again. Read­ing the com­men­tary in the 1930, it is clear that the gov­ern­ment of the time was doing all it thought pos­si­ble to pre­vent the Crash turn­ing into an eco­nom­ic cri­sis, and it appeared to believe that it had been suc­cess­ful.

The sta­tis­tics cer­tain­ly imply that Hoover wasn’t sit­ting on his hands doing noth­ing as Wall Street burned, which is the mod­ern mythol­o­gy. Gov­ern­ment debt was equiv­a­lent to 30 per­cent of GDP when the cri­sis began; just 3 years lat­er it was 70 per­cent of GDP—and that was when the so-called “auto­mat­ic sta­bilis­ers” were a lot small­er than they are today (because the gov­ern­ment sec­tor was much small­er back then).

Yet the view that dom­i­nates con­ven­tion­al eco­nom­ic think­ing today is that the Depres­sion was caused by a dis­en­gaged gov­ern­ment and bad mon­e­tary policy—if only the Fed hadn’t tight­ened in 1930, every­thing would have been fine. In fact, if the Fed did tighten—and the evi­dence on that is mixed—it was because they, like today’s Fed, believed they had already done enough to avert cat­a­stro­phe.

Bol­locks to that: the prob­lem in 1930 wasn’t the tight­en­ing of fiat mon­ey, but the pre­ced­ing fail­ure to con­strain the pri­vate debt bub­ble that financed Wall Street’s spec­u­la­tive excess of the 1920s. Yet armed with the mis­guid­ed belief that there wouldn’t have been a Great Depres­sion had the Fed not tight­ened in 1930, the Fed of the 1980s-2007 ignored an even big­ger bub­ble in pri­vate debt than its pre­de­ces­sor ignored in the 1920s.


By the time Ben Bernanke made his fawn­ing paean to Mil­ton Fried­man at his 90th birthday—“Let me end my talk by abus­ing slight­ly my sta­tus as an offi­cial rep­re­sen­ta­tive of the Fed­er­al Reserve. I would like to say to Mil­ton and Anna: Regard­ing the Great Depres­sion. You’re right, we did it. We’re very sor­ry. But thanks to you, we won’t do it again”—the Fed had already caused a far big­ger cri­sis by ignor­ing pri­vate debt and the asset bub­ble it financed.

I’ll fin­ish with my oth­er favourite apho­rism: Max Planck’s obser­va­tion that “sci­ence pro­gress­es one funer­al at a time”. It will take a lot of funer­als before the eco­nom­ics pro­fes­sion aban­dons the fol­lies that led it to describe the decade lead­ing up to today’s cri­sis as “The Great Mod­er­a­tion”.

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