Stumbled across an interesting article - a reprint from the Chronicle of Higher Education
The Real Great Depression
The depression of 1929 is the wrong model for the current economic crisis
By SCOTT REYNOLDS NELSON 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).
Not being particularly well educated in history - especially our own, we tend to forget how volatile our economy was during the 19th century - and how devastating the various recurring 'Panics' could be.
while I recommend that you follow the link and read the whole article, the conclusions to be drawn are not too positive. We may be in for a long period of real pain as financial markets rebuild.
From the article - emphasis added
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. .....................
When commentators invoke 1929, I am dubious. ....................
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." ...................
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..................... 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. ...............
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.
Summary - large strong companies bought out weak ones that lacked the capital to survive. This was he REAL beginning of the Gilded Age with industries increasingly concentrated in fewer and fewer firms.
The ordinary worker was hardest hit with many small employers going out of business. Tens of thousands became 'transients'... relief rolls exploded with double digit unemployment rates..... demonstrations by workers demanding jobs were often met by violence..... strikes by workers resisting cutbacks became violent
Europe suffered even more with people looking to place blame - anti-Semitism increased.... Jews became scapegoats - convenient for some political leaders
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 adjustablerate 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 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.
I found this an interesting read.... especially the shifts in economic centers, the use of questionable financial instruments serving as a trigger, and the prolonged recovery period needed.......