The Real Great Depression – 1929 Wrong Model for Current Crisis

29 10 2008

Today’s global collapse more closely resembles Panic of 1873 than 1929

By Scott Reynolds Nelson

[Occasionally I will invite a Guest to publish at Scribal Thrum – and I’m proud to welcome Scott Nelson, Professor of History at William and Mary College.  Thanks for Contributing, Scott.)

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

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.

As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873.

WikiMedia Commons

Run on the Fourth National Bank, No. 20 Nassau Street New York City, 1873 : WikiMedia Commons

Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.

As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, “economic organization crumbled with some primeval upheaval.” Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms “tramp” and “bum,” both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York’s Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania’s coal fields in 1875, when masked workmen exchanged gunfire with the “Coal and Iron Police,” a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.

In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.

The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing.

Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-default swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007.

By then trillions of dollars were already invested in this credit default swap derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.)

As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.

If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment.

Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)

The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.

In the end, the Panic of 1873 demonstrated that the center of gravity for the world’s credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.

Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin’ Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).

Reprinted by Special Arrangement with the Author.  A slightly different version of this article appeared in The Chronicle of Higher Education, October 17, 2008 issue, Volume 55, Issue 8, Page B98, and in the Online Edition, here.


Carson and Webb – Copper Clapper Caper

27 10 2008

Sure do miss You, Johnny…

Bailout Cash Not Lent – Used By Banks for Mergers Instead, Despite Kashkari’s Testimony

27 10 2008

Joe Nocera at the New York Times writes that Banks are hoarding their new bailout cash for the onrushing downturn, instead of making loans to free up the credit markets.

He reports that on 17 October, only four days after taking a $25 billion bailout, a JPMorgan Chase executive admitted during an employee-only conference call that there was no intention on the part of management to use the money to make loans.

(emphasis added-dcm)


“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”


“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase … What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.

Yet, here is what Neil Kashkari said to Senator Chris Dodd and the Senate Banking Committee on Thursday, 23 October:

Full Hearing Video

Either somebody’s cribbing, or JPMorgan Chase has plans for the money that the Congress hasn’t.

The problem is the bailout was passed to buy up toxic mortgage debt in the form on credit default swaps of dubious and opaque valuability.  But the Fed’s direction changed after they got the money, and realised that the unfreezing of the credit markets through the recapitalisation of the banking system was the way our European Partners had determined to go about this, and we had better follow suit.

The Economist:

In America, where the authorities have helped to shovel failing banks into the hands of bigger ones, the retail-banking landscape now has three towering figures. On September 25th JPMorgan Chase overtook Bank of America as the country’s largest deposit-taking institution by snapping up the assets and deposits, but not the other liabilities, of Washington Mutual (WaMu), a Seattle-based savings-and-loan bank that had been suffocated by bad mortgage loans.

Four days later Citigroup, its risks capped by a loss-protection agreement with the Federal Deposit Insurance Corporation (FDIC), strengthened its domestic deposit base by acquiring the banking operations of Wachovia. Further consolidation is likely. Jim Eckenrode, an analyst at Tower Group, a consultancy, reckons that a top tier of five banks (Wells Fargo and US Bancorp are two other contenders) may end up holding as much as half of America’s deposits.

So now it looks like the credit markets will have to wait, and we must endure the resultant deep wave of medium and small business layoffs and bankruptcies due to a lack of available credit, while the Fed forces a round of bank consolidation with what bailout money they have at the moment.

As Joe Nocera put it:

“Nobody is saying it should make loans that people can’t repay. What I am saying is that [JP Morgan Chase CEO] Mr. Dimon took the $25 billion on the condition that his institution would start making loans. There are plenty of small and medium-size businesses that are choking because they have no access to capital — and are perfectly capable of repaying the money.”

Senator Dodd did press the urgency of lending to Kashkari in Thursday’s hearing:

While JP Morgan Chase may use their $25 Billion as a “backstop” against what’s coming,  Bloomberg reports that Goldman Sachs may raise capital to buy assets assuming it finds the right opportunities, according to company spokesman Lucas van Praag:  “If we see assets that are attractive, we might raise capital in order to be able to acquire them,” but Goldman has “no immediate plans to raise capital.”


Goldman, now the sixth-largest U.S. bank by market value,
is more interested in buying deposits than in buying entire
banks, according to a person familiar with the firm’s thinking.

– 30 –

It’s been a long day.  Looks like the Fed is letting the banks sit on the money for a rainy day, or to buy other banks.  Doesn’t look like they’re gonna lend out much, at any kind of decent rates, anytime soon.  I hope Senator Dodd can talk some sense into them.

I can’t fix that right now.  But I can rest, kick back, crack open a Foster’s, and enjoy Oscar Peterson and Joe Pass show me how a Nigerian Marketplace should work.

Thanks Oscar, Guys, Joe.


Sh*T-for-Brains Yellow Journalism: WFTV, Barbara West, Bob Jordan

26 10 2008

(Update I)


To the General Manager of WFTV

Your interview Thursday with Joe Biden was not a tough interview, as many have held.  It was an ambush interview. Perhaps Barbara West and Bob Jordan learned how to be Journalists from Bill O’Reilly‘s sprititual forefatherJoe Pyne.

Not simply an ambush, this interviewer’s questions were not simply woefully uninformed as the Obama camp would have it, but they were outright insulting to the intelligence of any reasonably educated and informed Viewer.

Ironically part of the title of the above video feed on YouTube says “Real Reporter Asks Real Questions.”  Neither characterisation is true, judging from the content.

First, the questions about ACORN.  Both candidates have a history with ACORN.  So?  Would not a balanced interview follow up with a question about GOP efforts to remove voters from the rolls in multiple states?

You seem to want to make something of the so called “redistribution” of wealth.

Excuse me, WFTV, what do You think the US Tax Code is?  Both Democrats and Republicans have had a hand in it’s design.

Little wonder Biden thought it might be a joke.  To a real Journalist it would have been.

Pre-2008 Collapse - Effect of Bush 2001 Tax Cuts on National Debt

Pre-2008 Collapse - Effect of Bush 2001 Tax Cuts on National Debt

What do You think the immense 1.8 Trillion dollar tax cut was, when Bush was forced to sue to get into the White House in the 2000 attempted election?  Does this Biden interviewer know who got most of that money?

Does this interviewer know anything about the corporate loophole filled US Tax Code?  Does this interviewer have any familiarity at all with Republican legislation for the past eight years in this regard?

Ask them who benefitted the most from Bush’s tax giveaway of our surplus.  If they don’t know, fire them for nonfeasance.  If they DO know, fire them for ignoring the facts and preparing a set of interview questions intentionally false to fact.  Karl Marx indeed.

According to Hal Boedeker’s blog on the Orlando Sentinel,  the Obama campaign cancelled a second interview with Biden’s wife.

WFTV news director Bob Jordan said, … “Mr. Biden didn’t like the questions,” Jordan said. “We choose not to ask softball questions.”

Jordan added, “I’m crying foul on this one.”

Cry whatever You want, Bob.  If You think these were “hardball” questions, You should probably should go back to whatever You were doing before You decided to try Your hand at the news business.  Because based on this interview, You don’t know what the hell You’re doing.  You are either disingenuous, or actually do know nothing about recent events with regard to tax legislation, corporate lobbying, or what has passed for social policy under republican governance.  And You need to know about such things to be a news director, Bob.  You really should.

Here is how the interviewer, alleged “veteran Journalist” Barbara West, responded to the reactions to her encounter with Biden:

I think I asked him some pointed questions. These are questions that are rolling about right now and questions that need to be asked. I don’t think I was rude or inconsiderate to him. I think I was probing and maybe tough.

So, let me get this straight, Barbara, veteran that You are:  You choose Your questions based on what is “rolling about right now?” What does this mean?  That You mindlessly parrot whatever questions other equally uninformed talking heads are mindlessly parroting about now?  Or that You choose Your questions based on what Your uninformed “news director” hands You without any actual research into the subjects of the interview on Your part?

I am a Journalist.  And I am insulted, appalled, and aghast at the prospect that Your station, WFTV, would have the temerity to represent this “interview” as anything remotely resembling responsible, researched, informative Journalism. As a thoughtful, reasonably intelligent Citizen trying to do due diligence in informing myself about the important issues facing our country, I’m insulted.  Looking at this interview, I couldn’t blame any Journalist or Journalistic Blogger who cares about the integrity of their information for wanting WFTV‘s hide for a doormat for such a breach.

It wasn’t decent Journalism.  As a thinking being, I can assure You that it was not.  It was an attempted hi-tech lynching (apologies to Clarence Thomas).  It was crap.

As much has been made of Joe Biden’s tendency to be verbose, or commit gaffes by shooting from the hip, his performance in this encounter belies that.  Biden handled himself beautifully, in the hands of an obviously non-thinking and ill infomed questioner.  I think he was much kinder than was deserved.

This bubble-headed interviewer needs to get some research practice.  Both Parties just gave away all of the tax revenue the US Government hopes to derive from the next 3 or more generations with this so called economic bailout, and these are the best questions You can come up with?

Shame on WFTV.  In the interest of honesty with Your Viewers and professional due diligence, perhaps You should either forgo doing news, outsource it to a professional staff, or hire some talent.

For what it’s worth,

David C. Manchester


My preliminary research suggests that WFTV‘s corporate parent, Cox Enterprises, is a good example of much that is wrong with the Fourth Estate today, in terms of media concentration of ownership, and a $1.5 million lobbying agenda.

Cox Enterprises 2008 Lobbist Expenses Reported at $1,500,000.00

Cox Enterprises 2008 Lobbist Expenses Reported at $1,500,000.00

If You would like to write to the owner of WFTV about this shameful and unprofessional episode, here is Alexa’s information about them:

Cox Holdings, Inc.

1400 Lake Hearn Dr. NE
Atlanta, GA
Phone: 404 843 5327 404 269 1437
Fax: +1 404 572 1801
CoxTVsURL [at]

(Update I)

I am not alone in this assessment. -dcm

Sphere It!

60’s Kids – Say You Want A Revolution – An Apt Summary

12 10 2008

Ted Mark - I Was A Teeny-Bopper for the CIA

While foraging for widgets and feeds I came across MediaStorm, who did this flash piece for MSNBC which is, I think, an apt summary of what many of us who lived through the sixties and our adolescences actually feel about the time and our memories.

U Can’t Hold No Groove – Victor Wooten

12 10 2008

If we reform the economy properly, then we’ll be able to actually Hold a Groove…  We’ll have pockets with something in them.

Thank You, Victor!


If You Ain’t Got No Pocket…

12 10 2008

Looking over the postings I’ve made so far, looks like some pretty grim stuff.  But one of the reasons for this blog is to highlight golden opportunities engendered by this current global economic collapse.

9 October 2008 Dow Jones Industrial Average

9 October 2008 Dow Jones Industrial Average

Opportunities to press for a more equitable structuring of the current economic infrastructure for the Individual Citizen.    Changes  that would give People some relief.

What sorts of changes?

  • Reinstitution of Usury Laws
  • Elimination of Credit Card / Credit companies current practice of data-mining the Customer’s financial data and increasing their interest rates if they are late on any other bill; such increases to rates in the 30, 40, 50, and 60 % range. (The highest I’ve seen is 62.3)
  • Give Citizens not just control, but ownership of their Credit (and Medical) Information. The current mercantile approach is too fraught with abuse, and enables abuse of debt by both Individuals and organisations.  This means Citizen-centric designed Privacy controls.  Equifax, TRW, and the like more properly would compete with each other to sell storage, security, and delivery services to the Individual, who would be considered to own the information.
  • Requiring mortgage issuers to maintain a minimum 50% stake in the note for the life of the loan.

… and a few other measures I’ll probably rant about later.

Merely recapitalising the banking system isn’t enough without an international capital market restructuring that includes utter transparency for derivative products.  Otherwise derivatives are worse than worthless as a liquidity device – but serve in that case merely as a dodge, as current efforts will, without the buy-in of an angry populace.  Without credible effective transparency and regulation of derivatives, bailouts and bank nationalisations serve only as a temporary, jury-rigged patch of confidence, bubblegum, spit, string.  Our trillions will only buy us a shoeshine,  a smile and a wink.

But the good news is that it can be done.  In all probability Barak Obama wil be the next President.  And he seems to be open to suggestions and innovative ideas.

My first suggestion is more an exhortation to keep on a course to rebuild the middle class.  And to start by instituting some or all of the reforms noted above.  After all, as virtuoso bassis Victor Wooten says, “You can’t hold no Groove if You ain’t got no pocket.

%d bloggers like this: