One for the economists among us

Thought this article made for interesting reading:

When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany’s inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; 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.” She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.

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. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America’s heartland, undermining rapeseed, flour, and beef prices. 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. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

I don’t think he fleshes out his case very well — it’s a short article — but hmm.

This entry was posted in A Fistful Of Euros, History by Douglas Muir. Bookmark the permalink.

About Douglas Muir

American with an Irish passport. Does development work for a big international donor. Has been living in Eastern Europe for the last six years -- first Serbia, then Romania, and now Armenia. Calls himself a Burkean conservative, which would be a liberal in Germany but an unhappy ex-Republican turned Democrat in the US. Husband of Claudia. Parent of Alan, David, Jacob and Leah. Likes birds. Writes Halfway Down The Danube. Writes Halfway Down The Danube.

10 thoughts on “One for the economists among us

  1. I found a google-book about the Commercial Invasion.

    Funnily enough it starts by emphasizing that the Americans are able to ‘invade’ because they do not carry the heavy military burden the European countries have…

  2. Heh.

    — But I’m not sure that’s true. Remember, 1870s America was still cleaning up after the Civil War. Over $2 billion in debt — back when that was real money; in an 1870s context, it was around 25% of GDP — and a pension system that would eventually absorb nearly half of all government revenue.

    Not as bad as keeping a million-man standing army, but nontrivial.

    Doug M.

  3. Like in 1929 the level of debt is very high.
    For instance for USA the total debt ratio (private ,public, companies, banks) is something 350% , 100% more than in 1929.
    And saving rate is 0% , the lowest in western world (with Australia may be).
    Many country have too much private debt (USA, Ireland, UK, Spain , Asutralia) or public debt (Germany, Italy, France, US, Japan).
    saing rate low in many country.
    So there is a need for correction : spend less, save more (like after 1945).

    More investment, more production less consumption.
    I bet a standard of living 30 % lower for USA in the next ten years. Something like Soviet Union.

  4. For a day I feared the CCrisis had reached FFoE 😉

    Doug: The book is over a hondred years old, you can only see a few chapters and I haven’t been doing macro economics for years so I’m not going to debate the issue 😉

    But I thought the burden of the American Civil War was rather unevenly spread (much more hardship for the South, much more industrial expansion in the North). And hey, I’m Dutch… our tulipmania took place in the middle of our 80 year independence war with Spain 😉

  5. As an economist who studies in somewhat detail the Great Depression I think that the posted articles is fundamentally flawed.

    There is indeed a very important similarity with the current economic crisis and the one in 1929. Whatever was the original source of the economic problems back than, what deepened the crisis and made it the worst in the global economy until than was the failure of the ‘financial intermediary system’.

    To put it very simply: whatever saved money was left in the economy or in the banks, due to the heavy losses in both the producing sector and the banks it was not credited to companies. Firms that were in the loss but would have needed only short-term credit to maintain their activities suddenly for short of cash and got not pay investment on long-term credit. The general mistrust among banks made the allocation of the few money available slow or impossible.

    This is very similar to the present crisis. Altough the losses on the misunderstood risks of the subprime mortgages should make only a few banks fail, the real economy is hit by a shortage of cash and short-term credit. The efforts of governments to maintain liquidity on the market and to save major credit institutions is essential to save the real economy.

  6. Actually, we in the U.S. had many problems in 1873 and thereafter. First, the “powering down” from the U.S. Civil War, the world’s first “modern war” in many ways, was starting to become deflationary.

    Second, I had learnd that part of the problems here were from British creditors recalling money invested in things like railroads as the European situation tighened.

    Third, the financier Jay Gould’s “run” on the U.S. gold market was exposed in 1873, triggering waht was known as a “panic” here; that, combined with the deflationary aspects of return to a “civilian” economy, tightened credit here.

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