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."
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