Learning from the 1929 recession
October 7th, 2008 · 2 Comments
Barry K Gills
The British economist Alfred Marshall said (apparently to his followers) “Use the mathematics- then burn it!” Advice that has since too often tended to be forgotten by those who pretend to have a ’scientific’ mathematical economics that encompasses economic reality.
Another line of discussion reopened today in the Financial Times- as Tony Jackson commented on his recent reading of Kindleberger’s ‘The World in Depression: 1929-1939′ - where he follows Kindleberger’s ‘explanation’ that ‘the market collapse that began in 1929 was in response to a recession which had already started’. Whereas this time ‘the recession is following the collapse’.
While this begs a ‘chicken and egg’ debate- (and also rehearses Kindleberger’s thesis that the capitalist system requires a single stabiliser- ie a global hegemon- like the US- to set things right) it also goes directly contrary to the explanation given by John Kenneth Galbraith in ‘The Great Crash- 1929.’
He argued that the stock market crash was mainly the result of a previous long and excessive ’speculative orgy’ in the stock markets- which had become a general cultural mentality in America to perhaps an unprecedented degree- ( a super-bubble) and not due to a recession already in train- and that the stock market crash and the inaction by governemnts, treasuries and central banks to take effective remedial actions led to the crash becoming a prolonged and deep depression.
Galbraith also concludes in his chapter on ‘Cause and Consequence’ that the American economy in 1929 was however ‘fundamentally unsound’ and lists ‘five weaknesses’ that had an ‘especially intimate bearing on the ensuing disaster’.
These five weaknesses were:
1. The bad distribution of income (ie extreme polarisation of wealth in US, with a few ever richer rich and a mass of working poor)
2. The bad corporate structure (replete with swindlers frauds, promoters, and a ‘flood tide of corporate larceny’; holding companies and investment trusts
3. The bad banking structure (inherently weak, large number of small units (unlike today- small no of large units). Galbraith notes how falling income and employment fed falling values and this fed bank failures- in a domino effect where the weak brought down both the other weak as well as the strong banks
4. The dubious state of the foreign balance- in this case a US trade surplus and US banking loans to deficit trade partners to cover their payments to the US, and subsequent default on these loans
5. The poor state of economic intelligence- where the economists and ideas in late 20s and early 30s ‘were almost uniquely perverse’ and in the aftermath of the crash ‘the burden of reputable economic advice was invariably on the side of measures that would make things worse (partly out of a historical and misguided fear of inflation)
It seems to me quite apparent that comparisons between the great depression and the present crisis are instructive at miniumum and that there are parallels in several of the key patterns- where we ought to also look to analyse the ’solutions’ - since mere financial reregulation will surely NOT be the complete answer to such ‘fundamentally unsound’ economic foundations. Our research needs to focus on these matters with urgency and seriousness of purpose- as ‘lessons’ from the 30s are useful indeed.
