Tuesday, August 14, 2007
Are we heading for a repeat of 1929?
This article of mine appears in today's Daily Express.
October 29th 1929- the day of the Wall Street Crash, was the day The American Dream turned to dust. Share prices crashed, over 16m shares were sold on a single day alone. Prices and incomes across America fell by as much as 50%. Very soon the entire capitalist world, was in meltdown- the start of what historians call 'The Great Depression'-10 years of slump with catastrophic levels of unemployment. The economic crisis also had profound political consequences; it was the Great Depression which enabled Adolf Hitler to come to power in Germany in 1933 and set the world on course for war.
Could we be heading for a new Great Depression today? That's the question many economists are asking after last week's dramatic stock market falls in the US and Britain, where the FTSE suffered its worst drop in 40 years. To answer it we need to look at the four main causes of the Wall Street Crash in 1929 and then compare them with the situation today.
Firstly, there was over-speculation on the US stock market. The average value of a share rose from $9 in 1924 to $26 in 1929. Share prices of individual companies rose spectacularly: Radio Corporation of America stock stood at $85 a share in early 1928 and had risen to $505 in September 1929. Share-buying became a mania for Americans: many poor people took out bank loans to buy shares, while stockbrokers sold shares on credit. But the share-price of US companies did not match with their actual performance; by the end of the Twenties sales of goods were slowing down.
Secondly, there was the hugely unequal distribution of income. The enormous profits made by the big American corporations were not shared evenly enough among workers: between 1923 and 1929 industrial profits increased by 72%, but industrial wages only rose 8%. The automobile manufacturer Henry Ford understood the economic argument for higher wages, famously arguing he gave higher wages so his workers could buy his cars- but his greedy fellow industrialists didn't follow suit. As a result there was glut of consumer goods, as the ordinary person couldn't afford to buy the products that American companies were producing.
Another factor was growing restrictions on international trade, started when America introduced tariffs in an attempt to protect its industries from foreign competition. With falling profits from their exports to the US, European nations were themselves unable to buy US products and to pay in full their war debts to the US.
Finally, there was the fact that industry was monopolised by large super corporations. By 1929, the wealthiest 5% of corporations took 84% of the total corporation income. The power of these big corporations kept wages lower and prices higher than they should have been, had there been more of a genuinely competitive economy.
The causes of the Great Depression are uncannily similar to the situation in both the US and Britain today.
Our economies are dominated by big corporations controlled by the same groups of powerful short-term investors and the distribution of wealth has become very unequal. Now, as then, we have been living through an age of speculative frenzy, with share prices, house prices and financial institutions' profits rising year after year. But how secure are the economic foundations of our prosperity in the US and Britain?
America, as in 1929, is living beyond its means: the US national debt now stands at nearly $9 trillion and it has only $66bn left in its reserves. Compare that with China's reserves of $1.3 trillion, Japan's of $900billion and Russia's of $330 billion. US and British citizens are the most personally indebted in the world: total UK personal debt, including mortgages, has been estimated at £1.2 trillion, with the average credit card debt of Consumer Debt Counselling Services' clients standing at around £33,000. Debt has played a key role in the so-called 'dynamic economy' New Labour likes to boast of.
One of the big features of the economy in the last few years has been the increased role of speculative financial institutions such as private equity and hedge funds, described by critics as "swarms of locusts that fall on companies, stripping them bare before moving on.". Because both use ridiculously excessive debt in their operations, the positions they can take in the financial markets are much larger than their assets under management. But despite the enormous profits both have recorded up to now,it is debatable how much either adds to the long-term national wealth.
Now it seems, the gravy train for private equity and hedge funds is coming to an end. Last week's events hit the speculators hard as the banks started to call in loans. But the big question is, how will recent events affect the rest of us? The US Housing market crash, which led to the collapse of the US mortgage company Home Banc, will have repercussions the world over. As banks call in the money and interest rates rise, it's not hard to see a major recession looming. We've had plenty of false alarms before, not least when the 9/11 attacks threatened to cause major economic meltdown, but this time the danger signs are unmistakable. While the world is not yet engaged in a tariff war, as it was in the Twenties and the US and UK stock markets recovered some ground yesterday, the other three causes of the Great Depression are all present.
To paraphrase Bette Davis in the classic film All About Eve, buckle your seat-belts-this one could be a bumpy ride. Finger's crossed it isn't.