This Day in Economic History (‘Black Tuesday’ Kicks Off Great Depression)

Oct. 29, 1929—Only five days after Wall Street trembled before righting itself, the New York Stock Exchange collapsed. The 16 million shares sold at declining prices not only made this “Black Tuesday” but also, for all intents and purposes, the start of the Great Depression. 

In contrast to prior economic contractions, which lasted only a year or two, the Great Depression was far more protracted—not really ending until the arms ramp-up just before Pearl Harbor—and far more devastating, putting one-quarter of the American workforce on the unemployment line simultaneously. 

It is well-known that, in effect, it thrust the federal government into a more interventionist position in relation to the economy. But not as many Americans realize that the Depression opened the country up to dangerous forces in a way never seen before. More Americans than ever before were willing to at least flirt with the idea of Communism, and in Louisiana, Huey Long made the entire state dance to his will.

Perhaps somewhat less surprising, my predominantly U.S. readership may not realize the impact of the Depression on other nations, starting with north of the border in Canada, a downturn chronicled by historian Pierre Berton in The Great Depression: 1929-1939. New Zealand, Australia and the United Kingdom also felt the blow. Worst of all was Germany, where voters in the already weak Weimar Republic looked increasingly toward, then embraced, the Nazi Party.

Critic Edmund Wilson called his account of the early stage of the downtown The American Earthquake. But if the noun in that title applies domestically, the case of Germany suggests that yet a stronger term might be required to depict the political damage in that country, where people sought simplistic solutions, then moved to wipe out the most vulnerable in their society. 

I will not rehash what happened on Black Tuesday. If you want a vivid narrative of what happened that fateful day, you can turn to economist John Kenneth Galbraith’s The Great Crash: 1929.  What I really want to do is consider: could it happen again?

In one sense, it already has—in the 2007-2009 Global Financial Crisis (GFC). Much ink has been spilled about how Fed Chair Ben Bernanke and Treasury Secretary Hank Paulson, mindful of what happened in 1929, prevented a complete economic meltdown.

But what happened was bad enough. Consider some of the consequences of the crisis in the decade since, here and abroad:

*largely anemic economic growth;

*a whole cadre of the unemployed who, toward the start of the recession, became jobless for so long that they ended up out of the workforce for good;

*the hollowing out of the middle class; 

*a resentment of government bank bailouts that, in part, sparked the Tea Party movement;

*scapegoating of immigrants.

In the July/August issue of Foreign Affairs, Gillian Tett, an editor at The Financial Times, laid out the results of the “Faith-Based Finance” of a dozen years ago—how a mystical conviction about new technology, for instance, not only led to a round of Wall Street delusion, but could be repeaed:

“It would be foolish to imagine that the lessons of the crisis have been fully learned. Today, as before, there is still a tendency for investors to place too much faith in practices they do not understand. The only solution is to constantly question the basis of the credit that underpins credit markets. Just as there was in 2007, there is still a temptation to assume that culture does not matter in the era of sophisticated, digitally enabled finance.”

In a sense, Galbraith had anticipated this in 1954, when his highly acclaimed history of the Great Crash appeared. Although much of the book brimmed with ironic reflections on the comeuppance of Wall Street a quarter-century before, he became considerably more sober in the introduction to his 1961 edition:

"Someday, no one can tell when, there will be another speculative climax and crash. There is no chance that, as the market moves to the brink, those involved will see the nature of their illusion and so protect themselves. The mad can communicate their madness; they cannot perceive it and resolve to be sane. There is some protection so long as there are people who know, when they hear it said that history is being made in this market or that a new era has been opened, that the same history has been made and the same new eras have been opened many, many times before. This acts to arrest the spread of illusion. A better sense of history is what protects Europeans if not perfectly at least more adequately from speculative excrescence."

This Day in Economic History (Birth of Robert Morris, Revolutionary Financier)

January 31, 1734—Robert Morris, commonly regarded as the “financier of the American Revolution” for keeping George Washington’s army intact through crucial financial transactions in the American Revolution, was born in Liverpool, England.

Reputedly the richest man in Philadelphia at the height of his influence, Morris was one of the most reluctant signers of the Declaration of Independence, but once he joined his colleagues at the Second Continental Congress in committing to separation from England, he threw his weight into the effort in a way that few others could match, with all his financial resources. He went on to sign the other two principal documents of the young republic, the Articles of Confederation and Constitution—one of only two people (Connecticut’s Roger Sherman being the other) to do so. He turned down Washington’s offer of the position of Secretary of the Treasury in the first Cabinet in favor of being one of the first two U.S. Senators from Pennsylvania.

Washington’s offer was not only an acknowledgement of Morris’ acumen, but the general’s appreciation for the merchant’s friendship and constant support during and after the revolution. Morris, along with other conservatives in the Continental Congress, had stood behind Washington when the “Conway Cabal” formed to supplant him as commander of the Continental Army with Horatio Gates. Throughout the war, whenever Washington put out an SOS, Morris had somehow found enough money to make sure that American soldiers were at least minimally fed and clothed—and that the small cadre of intelligence operatives who reported on enemy activities was funded. 

From 1780 on, when the republic's currency was, for all intents and purposes, worthless, it was Morris' personal credit, gained from three decades as a shipper and early global capitalist, on which the Continental Army's depended. When Washington needed to make his final move toward Yorktown to trap Lord Cornwallis' army, Morris managed to secure cattle from Connecticut and flour from Pennsylvania and Virginia--all while continuing to supply the Continental soldiers with gunpowder that he had managed to shp past British authorities in Europe and the Caribbean.

In the spring of 1787, as preparations for the Constitutional Convention got underway, Washington stayed as a guest at the moneyman’s home, which an awed French visitor observed was not exceeded “by any commercial voluptuary of London.” When Washington came to Philadelphia as the first President of the republic, Morris put at the disposal of his friend this home—one formerly occupied by occupying British General Sir William Howe in the war, then, after its burning, rebuilt and enlarged by the financier—as the first executive mansion.

In a prior post, I discussed one of Morris’ other significant post-Yorktown services: his advocacy of a national mint as Superintendent of Finance. In the same post, he established the Bank of North America with a combination of his own private funds and a loan from France.

Perhaps even more than his friend Alexander Hamilton (whom he recommended to Washington as the first Treasury Secretary), however, Morris brought controversy on himself. During the war, he barely survived charges of war profiteering because he so freely mixed his official duties with his private transactions. This self-made man—large and florid, with a taste for conviviality—set about furnishing a mansion where he could entertain on the lavish scale he desired, a project that became known as “Morris’ Folly.”

Worst of all, he became caught in a perfect storm of forces—not just the punitive laws toward debt in the federal republic, but also his involvement in the first financial “bubble” of the nation. Specifically, he became the biggest land speculator in the country (including in the District of Columbia, once that was designated as the new capital). He counted on a population explosion (principally emigrants such as himself) to drive up land prices. It was a good theory, but decades ahead of time.

Morris, disregarding the advice of his mercantile partner not to overextend himself, had left the firm to concentrate on these investments.  Thus, he had nothing to count on when he began to be pressed hard by creditors. He sold off his properties piecemeal until he could stave off ruin no longer, serving three years for debt beginning in 1798. His plight led his supporters to pass a bankruptcy reform act that secured his release. He died in 1806, his affairs still a wreck.

(The image accompanying this post comes from a 1785 oil-on-canvas painting by Robert Edge Pine.)

This Day in Economic History (Euro Debuts, to Premature Hoopla)

January 4, 1999—The euro, backed by 11 European countries, debuted, fueling the dream not merely of a common continental currency but even of a common continental economy that could compete against the United States.

There hadn’t been a common currency in Europe since the days of the Holy Roman Emperor Charlemagne, back at the start of the ninth century. We all know how that ended. Now, even with 17 nations using the currency, the euro has had its own struggles, as can be seen by turning to almost any newspaper with any kind of international coverage. (If you really want the major milestones for the euro crisis, this dandy timeline will do nicely.)

“Europe unified its monetary policy through the euro before it unified politically, therefore sustaining member countries' abilities to pursue the kind of independent fiscal policies that can strain a joint currency,” wrote Amity Shlaes in a Bloomberg News article from 2010.

What Ms. Schlaes is talking about can be seen even in the deliberations that brought about the pact. Germany, still fearful of the hyperinflation that doomed the Weimar Republic and helped bring on Nazism, wanted to call the treaty a “Stability Pact.” The leaders of France, balefully eyeing the prospects of putting that before their voters, pushed to have it called a “Growth Pact.” In one of those compromises that make political economy what it is (i.e., essentially meaningless), the agreement hammered out at a quarrelsome summit meeting in 1996 ended up calling it “the Stability and Growth Pact.”

(That meeting, by the way, took place in Dublin Castle. Ireland has had reason to question its relationship to the International Monetary Fund following the extreme austerity imposed as part of a bailout program designed to remedy their pell-mell struggle for—take a bow, France!—“growth.”)

It just goes to show that reality—or, at least, reality in the form of the traditional nation-state—is bound to rear its head against any economic theory.

This Day in Economic History (Marshall Plan Maps European Postwar Recovery)

June 5, 1947—Two years after the end of a war that had devastated Europe, George C. Marshall, the American “organizer of victory” over fascism, announced a plan to rescue the region from economic collapse, setting the stage for an alliance that eventually defeated another totalitarian power.

The Marshall Plan, proposed in a commencement address at Harvard by the Secretary of State, pumped nearly $13 billion in aid into the European economy. While initially it comprised mostly desperately needed shipments of food, staples, fuel and machinery from the United States, the focus turned to investment in industrial capacity that paved the way for long-term recovery.

A couple of aspects of this plan were extraordinary:

  

I    1) Its size. “Almost $13 billion” doesn’t sound like much, but that was in 1947 dollars. That translates to $107.1 billion in 2011 currency.  It was an amazing amount of money committed by a nation that itself had recently endured a decade-long depression. 

        2) Unprecedented generosity of victors. Living in a world recreated by the Marshall Plan, it’s easy to lose sight of the break with the past that this represented. But going back to the Romans—and even beyond—it was a far different story, writes David Fromkin, in his history In the Time of the Americans: FDR, Truman, Eisenhower, Marshall, MacArthur: The Generation That Changed America’s Role in the World (1995): “Prior to twentieth century America, the rule had been: losers pay. Now one of the victors chose to pay. A country that had been so isolationist that it regarded nothing that happened abroad as of vital concern took upon itself responsibility for the whole of the European continent: so far had it traveled in so short a time.”

Marshall, notes Fromkin, was one of a quintet of Americans (also including Franklin Roosevelt, Harry Truman, Dwight Eisenhower, and Douglas MacArthur) who came to adulthood when Theodore Roosevelt helped thrust the nation onto the world stage, then played roles a decade later when the United States entered WWI under Woodrow Wilson. In essence, they brought to fruition the Wilsonian concept that, in Fromkin’s words, “those who had won the world should serve the interests of all of its peoples, everywhere.”

The Army Chief of Staff during the war, Marshall had been tapped by President Harry Truman to become Secretary of State at a time of administration unrest and European fear. The prior head of the State Department, James F. Byrnes, had seen his relationship with his former friend and Senate colleague deteriorate because of Byrnes’ failure to keep the President informed and his disagreement with the domestic Fair Deal program, which he regarded as socialistic.

Once Truman appointed Marshall to the office, the President confided to his diary, “We'll have a real State Department now.” And so it was, particularly in the formation of the Marshall Plan.

Several people had a hand in the drafting of the proposal (more formally known as the European Recovery Program. A number of State Department officials, including the author of the famous containment “long telegram,” George F. Kennan, along with the President’s counsel, Clark Clifford, and Truman's later Secretary of State, Dean Acheson, contributed bits and pieces. The initial draft was created by Soviet expert Charles Bohlen, then revised by Marshall.

(The one person who preferred not to have his name on the program was the President. At that point, his popularity was plummeting, and more and more pundits and Democratic Party regulars were discounting his reelection chances. Truman, wanting the program to have a chance of success, believed that its best chance for passage was through association with Marshall. Anyway, the President reasoned, his Secretary of State was as responsible as anyone else for it, so why not attach his name to it?)

In a sign of Marshall’s prismatic style, there are no glittering phrases in the Harvard commencement address, just a solid summary of the facts and options—the kind of convincing presentation that he had made while Army Chief of Staff to President Roosevelt. As it was, the situation in Europe was so dire that it required no rhetorical amplification.

The German economy had been on the equivalent of a war footing once Hitler began his massive rearmament program shortly after coming to power, and we know now that he looked to Eastern Europe—and the dispossessed properties of the nation’s own Jews—as a means of disguising the utter failure of the Nazi-planned economy. Losses in Eastern Europe deprived Germans of their prior safety valve, and Allied air raids damaged the country’s infrastructure. And matters weren’t much better throughout the rest of Europe, even among the victors (who, after all, had to endure their own privation and sacrifice).

Besides its offer of massive aid, the Marshall Plan appealed to Europeans for another critical reason: they would participate in the plan’s execution. The Truman Administration recognized that, though the physical infrastructure of the continent might be close to a state of collapse, its intellectual infrastructure—in this case, its business culture and acumen—remained intact. Leaders in these countries would know best where their most urgent needs were. By securing their buy-in to the program, Truman and Marshall were also gaining their political good will and trust.

The latter would be sorely needed, because Joseph Stalin was intent on frustrating the aims of the program. It wasn't simply, as historian Walter LaFeber observed in an interview for a PBS American Experience documentary on Truman, because Germany “was the nation that had invaded the Soviet Union twice in 30 years and this was the nation that Stalin had essentially fought World War II for to keep down forever.” Stalin’s paranoia and thirst for absolute power not only played no small role in the Soviet dictator having his Foreign Minister, Vyacheslav M. Molotov, reject the plan out of hand as “totally unsatisfactory," but also compelled the nations of Eastern Europe—by this time, behind the Iron Curtain—to turn down the much-needed aid, too.

In the end, Soviet intransigence and saber-rattling tipped the balance toward Congressional approval of the plan. Both sides of the aisle had qualms about the massive aid, with both Arthur Vanderberg (R-Mich.), chairman of the Senator Foreign Relations Committee, and Sam Rayburn (D-Texas), the once-and-future Speaker of the House, initially incredulous about the amounts requested. A Soviet-backed coup in Czechoslavakia in February 1948 finally woke Americans and their representatives to the susceptibility of starving masses to totalitarian appeals, \and in April—10 months after Marshall first made the proposal—the European Recovery Program was passed by Congress.

Outright fear, then, accomplished what both altruism and enlightened self-interest could not. Even without the Red Army, however, as Acheson told Congress, the situation had to be dealt with. Such economic uncertainty reigned in Germany that Lucky Strike cigarettes were the only valuable, common currency.

Truman, Marshall, Acheson, and the other great minds behind the plan recognized what has become glaringly obvious in recent years: the globalization of finance and commerce. The Great Depression in America, they knew, had been exacerbated by the simultaneous downturn in Europe, which deprived the United States of markets for its foodstuffs and materials. Europe could go “down the drain” without the program, Truman told Rayburn: “And you and I have both lived through one depression, and we don’t want to live through another one, do we, Sam?”

In this regard, it is instructive to regard the predicament now confronting Barack Obama. The President, The New York Times reported the other day, is “at the mercy of actors in Europe, China and Congress whose political interests often conflict with his own.”

The situation faced by the Truman Administration, however, was arguably worse. Yet, led by Marshall, the State Department faced up to their issues soberly and with faith. “Avoid trivia,” Kennan recalled Marshall’s one piece of advice on preparing recommendations on how to save Europe. It’s not a bad strategy to be employed in the current—and any future—complicated, international financial situation, either.

This Day in Economic History (The Stock Market and the Panic of 1893)

May 5, 1893—Almost two months to the day after returning to the White House, Grover Cleveland experienced the second-worst (the worst being a catastrophic attack on the nation’s citizens) nightmare of an American President: an economy that goes south on his watch. In this case, the major signal of precipitous economic decline was a panic on the New York Stock Exchange, the first tremor of a far worse convulsion some months later that produced the Panic of 1893, a downtown surpassed in severity only by the Great Depression that began in October 1929.

A President exerts much less influence over the economy than over foreign affairs. That relative impotence was even greater in the nineteenth century, before a consensus formed during the New Deal that the executive branch of the federal government, if only as a last resort, must staunch the worst bleeding in the economy. Without a national bank or other central financial authority that could control markets (the charter of the Second Bank of the United States had not been renewed during the Jackson Administration, and the Federal Reserve would not be created until 1913), mostly all a President could do was wring his hands and pray.

While in office, Bill Clinton looked backward to the turn of the century to see how Americans had managed the convulsions of a new economy. If he read closely about the plight of his Democratic predecessor Cleveland, he must have felt as if he were reading a horror novel rather than an academic history. A kind of perfect storm produced the May 1893 frenzy:

* Then, as now, foreign investors bought heavily into U.S. companies. The 1891 failure of British banking house Baring Brothers made them especially timorous, with call rates on loans in New York rising to over 180 percent.
* While the subprime mess precipitated much of our current economic distress, the wild ride given investors by the American railroad industry lay behind the 1893 disruption. The February 1893 collapse of the Philadelphia and Reading, with debts up to $125 million, underscored the risks. By year’s end, 74 American railroads would collapse. (A fascinating phenomenon developed as railroads hit the financial wall; they needed well-connected attorneys at the helm of their companies to steer them through their legal morasses, including Frederick Billings of the Northern Pacific and Robert Todd Lincoln – yes, the President’s son – of the Pullman Palace Car Co.
* A Republican Congress frittered away a $100 million Treasury surplus.
* The Sherman Silver Purchase Act of 1890 pushed gold reserves below the $100 million mark and sent inflation through the roof.
* The National Cordage Co., a major rope trust and employer as well as big stock-market favorite, went belly up on May 4, immediately precipitating the stock market plunge.

Cleveland felt strongly that the Silver Purchase Act needed to be repealed, but Congress was oddly dilatory about the matter. Then, as now, the Constitution’s system of checks and balances ensured that the government wouldn’t move until a crisis came. It did so on June 27, when the stock market really crashed—the start of a four-year depression in which as much as a fifth of the nation’s factory workers lost their jobs.

By the time Congress could be persuaded to move, Cleveland couldn’t, for medical reasons. Also in May, it became apparent that a cancerous lesion in his mouth required surgery. The trouble was this: If anything should happen to the President, the next in line would be Vice-President Adlai Stevenson (grandfather of the later Illinois governor and Presidential candidate), whose pro-silver stance made him anathema to Wall Street.

Not a word could get out, then, about his medical condition, and to ensure that it didn’t the President had to have the surgery performed on a yacht in New York’s East River. Only after he was recovered, over a month later, was he prepared to call Congress into special session on August 7. Finally, they agreed to rescind the Silver Purchase Act. While investors were reassured, the damage continued to be long-lasting, ensuring that a Democrat would not hold onto the White House during the election of 1896.