Parallels With the Great Depression

From: New American

What began early last year as a “credit crunch” and an “economic downturn” is now being characterized as a “long, severe recession.” Once upon a time, such a crisis was known as a “depression” before Americans became squeamish about such stark language.

As with our reluctant semantic retreat from “credit crunch” to “recession,” the reality of another Great Depression will probably not be acknowledged until years after the fact. But America and the rest of the modern world, by doggedly pursuing the same mistaken policies of the 1920s and ’30s, have made a full-blown depression — lasting years, not months, and featuring catastrophic failures in entire economic sectors along with chronic double-digit unemployment and monetary malaise — all but inevitable. In fact, the parallels between the run-up to the Great Depression and today’s economic havoc are stunning.

The Roaring ’20s, ’80s, and ’90s

By 1929, the United States — and most of the rest of the industrial world — had been on a nine-year joy ride known as the “Roaring Twenties.” It was an age of unparalleled new technology — the heyday of the silent film era and the Model T Ford, and the beginning of radio and commercial air service, among many other modern marvels. The first American generation to consecrate itself to mass entertainment came of age in the Twenties. It was the first recognizably modern decade, and the future, to the flappers, barnstormers, and other bons vivants that characterized the age, looked very bright indeed. Accordingly, it was also an age of bold enterprises — of the beginning of mass production and of skyscraper construction. For the first time ever, Americans had enough extra money to turn sports into a lucrative industry. From the vantage point of the mid-Twenties, the party was never going to end.

Like the Roaring Twenties, the long boom from approximately 1982 to 2000 was characterized by boundless optimism and an explosion of new technology. New forms of mass entertainment — MTV, cable television, video games, and the Internet — proliferated, turning the United States of America into the world’s entertainment capital. Men with big ideas — the leveraged-buyout moguls of the ’80s and the high-tech wizards of the ’90s chief among them — had no trouble finding capital to leverage their grandiose ambitions. Like the Twenties, the last two decades of the 20th century were a time of larger-than-life colossi like Donald Trump, Warren Buffett, and numerous flamboyant entertainers, from rock stars and hectomillionaire athletes to the instant celebrities of reality TV and American Idol. Risk and chutzpah were everywhere rewarded and nowhere penalized, or so it seemed. Old-school caution and frugality were cast to the wind; the world belonged to the extravagant, the glitzy, and the fully leveraged.

But behind these two parallel utopias, separated by more than six decades, lay a common reality that none but a very few astute, well-connected, or economically well-schooled were able to perceive: an artificial economic expansion created by the issuance of vast amounts of paper money. The great episodes of monetary expansion of the ’20s, ’80s, and ’90s resulted from the magic of central banking — in America’s case, of the Federal Reserve’s ability to create new debt by lowering interest rates far below any rational market pricing. This resulted in years of easy credit, abundant borrowing, and an illusion of far greater prosperity and growth rates than actually existed. The result was cultural and societal no less than economic: because so few Americans, then or more recently, understood how the banking and Federal Reserve System works, the illusion of unnatural prosperity encouraged waste, leisure, and the notion of American invincibility.

In both cases, the party came to a calamitous end. But despite what we assume nowadays, few in the late fall of 1929 — even after the storied stock market meltdown — imagined that more than a decade of economic hardship lay ahead. Indeed, had the federal government, and the Federal Reserve in particular, allowed the crisis to run its course, the American economy during the 1930s would have been far different, probably recovering after a severe recession at the beginning of the decade helped restore sanity to the markets.

Disastrous Intervention

Unfortunately, the Hoover administration chose to intervene in the markets to an unprecedented degree.

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