http://www.star-telegram.com/ed_wallace/v-print/story/1025629.html
Tuesday, Nov 18, 2008
Déjà Vu, All Over Again II by Ed Wallace
Special to the Star-Telegram
In a sign of faith in the economy, which for decades had seemed to have found some real if tentative traction, the powers that be all but decreed that loans be made easier to obtain, thereby flooding the capital market with inexpensive liquidity. With that came expansion of government and new mortgages that often had nothing for collateral but unfinished homes – and these moves encouraged an even more foolish optimism for the future. If anyone doubted the economy’s success, those proclaiming an endlessly expanding economic situation needed only point to the construction projects and asset appreciation going on all around as proof.
In the middle of this upswing in borrowing and economic factors, the working class experienced a fundamental shift in their wage structure. For in this period of globalization came low-cost foods and cheap goods from across the ocean, which started to drive down the average worker’s earnings – though the lower-priced goods were sold to the public as a great thing because they would stretch the workingman’s buying power. What they really did was announce to the world that there was a new economic superpower and that things would never be the same.
Suddenly, after years of growth enabled by the lax lending standards, foreclosures started taking place. And then banks that had too many non-performing loans started failing; with no way to tell which banks were truly in trouble and which weren’t, banks started refusing to lend to each other, which substantially raised the interbank lending rates.
Too Bad: Hegel Was Right
Of course, the financial damage would spread worldwide because the remaining solvent banks were lenders to the world. They were forced to raise their interest rates, and that caused the short-term commercial paper, so necessary to the proper performance of business, to freeze solid. Then one well-known and respected American financier admitted he could no longer pay his company’s debts, and the stock market crashed.
The President of the United States wrote in his diary, "In the midst of great national prosperity a financial crisis has occurred that has brought low fortunes of gigantic proportions; political partisanship has almost ceased to exist. The full effect of this financial disaster, if it should not prove to be a blessing in disguise, is yet to be demonstrated. In either event, it is our duty to heed the lesson and to provide by wise and well-considered legislation against its reoccurrence."
The 19th-century philosopher Hegel observed, "What experience and history teach is this – that nations and governments have never learned anything from history, or acted upon any lessons they might have drawn from it." Hegel was right; this story sounds exactly like today’s crisis – but it happened in 1873. And amazingly, we’ve repeated the blueprint for that financial disaster, copying it almost line for line.
America Invades Europe
Until the 1930s history called the 1873 crash the Great Depression, but since then it’s been referred to as the Long Depression.
Back in 1873 it was the banks in the Austro-Hungarian Empire, the new German Empire and France that were to blame. But the low-cost producer that started shipping cheaper goods into their economies and driving down wages was not China, it was the United States. To this day European economic historians refer to that period of globalization as the American Commercial Invasion. But what happened next would change the world.
In major cities in America, unemployment would skyrocket. It is estimated that fully 25 percent of New York City’s workers became jobless. The terms "tramp" and "bum" came into our vernacular to describe the many Civil War veterans who had lost their jobs and become homeless. Europeans, unable to keep low-cost American goods from undermining their economies, went back to colonizing other countries for their raw materials, in the process creating new markets for their own products. These colonization policies would lead England to seize greater control of Egypt and France of Algeria, while other European powers fought over the Dark Continent. Known as the Race for Africa, that period of world history falls between the 1880s and the start of the Great War.
Did Society Inspire Darwin’s Theory?
The Long Depression would also lead America directly into the infamous Gilded Age and the final excesses of the Robber Barons. As has happened today, many U.S. firms with a large industrial base or extreme liquidity could dictate financial terms for their companies that their smaller competitors couldn’t get. And, because they couldn’t obtain commercial loans cheaply, the smaller firms – often poorly capitalized to begin with – soon failed for lack of credit or were forced out of business by their larger competitors.
This age benefited the likes of Andrew Carnegie and his steel company, John D. Rockefeller and Standard Oil, and Jay Gould with the railroads; much like we’re seeing now, the strongest companies devoured their weaker competition. The only difference is that in the 1870s they used their own cash – they didn’t have it given to them by our Federal Reserve and Treasury Department. The end game looks remarkably the same, either way: Super corporations were built on the ashes of those injured when a worldwide financial bubble collapsed.
But for every action there is always an equal and opposite reaction. In this case the American blue-collar worker, never on a solid financial footing to begin with, found his prospects even direr. So, as the Depression led to the Gilded Age and fed the wealth and power of America’s Robber Barons, it also engendered militant unionism; the Molly Maguires in Pennsylvania were but one example.
In Europe, Communism became a bigger fear. Just two years before the start of the Long Depression the common workers had seized Paris, declaring it now a communal worker’s paradise. That takeover lasted only 73 days, but the fear it created in the wealthy is still with us. The coup led France to create a National Guard, which America would copy shortly thereafter "to ensure civil obedience in this country."
Let’s Hope The Upside Repeats, Too
Economic pundits still compare our current financial crisis to the Great Depression; they are partly correct in that massive, unchecked speculation primarily caused both. But in reality what has just transpired mirrors the events not of 1929 but of 1873: Massive bubbles created and collapsed by ridiculous lending practices, followed by a new producer of low-cost goods undermining nations’ wages and economies. But because so few people understand or even know about the Long Depression or its causes, few appreciate how the world went into shock in its aftermath.
We’re still trying to resolve issues in the Middle East, still trying to figure out what to do with Africa – and in many ways those current situations are what remains of everyone’s reaction to the depression that happened 135 years ago. Some say that the Long Depression didn’t end until after the Spanish American War in 1898, when we too became a colonial power. Others say the worst lasted only four years in America, longer in Europe.
But there was one bright side to this period of uncertainty in people’s lives. In Europe, because the average person had so few opportunities to improve his family’s finances, Karl Benz would work maniacally to perfect his internal combustion engine, then mate it to a three-wheeled carriage. It was during this depression that Henry Ford left home to find his way in the world at 16. And as proof of how the Long Depression affected real wages, Ford worked an 80-hour week and still made only enough to pay for his room and board. He fixed watches at night in his room for spending money.
History Teaches Only Students
It is fair to say that the desperation of the times, brought on by a real estate bubble collapsing in much of Europe, gave rise to the finest of mechanical visionaries, those who gave us the automobile. After all, if times had been good and Karl Benz had found permanent and satisfactory employment, he might never have been so obsessed with creating the automobile.
Because of the Robber Barons’ rapacious greed and the monopolization of industry, the Gilded Age would be challenged by the Progressive Age. In 1914 Henry Ford and his $5-a-day wage finally put the average worker on a path to prosperity. So it’s true: Out of the darkest times will come good to the wise man seeking the future.
Today we have governments actively trying to fix the damage, so this downturn is unlikely to match the crisis of that period. However, our government is actively promoting that the strongest survivors on Wall Street and in our banking system take over their lesser competitors, which makes one wonder whether we should prepare for another Gilded Age.
One thing is for sure; Fed Chairman Ben Bernanke studied the wrong depression. It was 1873 that looked just like today, far more so than the 1929 event. In any case, no one listened to President Ulysses G. Grant when he wrote, "It is our duty to heed the lesson and to provide by wise and well-considered legislation against its reoccurrence."
What good is history if we don’t learn from it?
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society.