a Depression like 1929? nope. More like 1873...

[Javaman]

(I have written on just this topic a few times. The depression that is coming/here will be nothing like 1929. So to all those who state that a depression is not coming, you are using the wrong example and model. 1873 is the panic you should be taking a very hard look at. With that said...)

http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

bThe Real Great Depression
The depression of 1929 is the wrong model for the current economic crisis

Article tools By SCOTT REYNOLDS NELSON

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.

[shrike]

1. Hey, thanks for bringing this up.

Most people don't even know there WAS a first Great Depression.

I hope you're wrong. Boy, do I hope you're wrong.

During the "First" Great Depression, people actually atsrted crowding ships in droves, seeking passage to somewhere, anywhere, where they could work, eat. Little did they know, there was really nowhere to run.

I've always said we need to make history more of a priority in our educational system.

[Recursion]

2. Good point. The central-europe consolidation...

...under the Hapsburgs and Bismark is a lot like the economic consolidation of Chindia right now.

[librechik]

3. my husband keeps saying this--thx for explaining n/t

[NJGeek]

4. Great history lesson, thank you.

[crazylikafox]

5. Very valuable information. Thanks. recommended.

Problem is, Bernake is a student of the 1930's Great Depression, and is following that playbook. Which means he doesn't have a clue about what he's doing.

[ThomWV]

6. I think the article misses a lot and that is important

In the 1870's more than 95% of the population were farmers in a time when great debt was rare in that economic segment, today less than 5% are farmers and debt is all important to them. That has a tremendous effect on the appropriateness of the model chosen as an analogy, and it was ignored in this article.

[truedelphi]

11. Thanks for pointing out those crucial differences.

We were an agrarian nation until aftr WWII. And that mitigated a great deal of the damage that both these Depressions might have caused to our nation. Farmers, especialy farmers in the MidWest, traded and co-oped their needs.

My mom was a little kid in MN during the 1930's. She never really believed that there was a Depression. Her dad was the local constable and shreriff, so he had a small dependable income. And their farm fed her and her ten siblings with food left over for others in their community.

[kickysnana]

7. Grasshopper plagues on the Great Plains at the same time.

Farmers families starved. People lost their land.

[Pab Sungenis]

8. There's another parallel to our current situation.

In 1873 we went off our bi-metallic standard and de-facto on the gold standard. Silver was all but demonetized. This led to deflation, which negatively impacted farmers and others who had borrowed money.

A parallel with today's credit crunch and the current deflationary pressures?

[leftchick]

9. good god I hope he is wrong

:scared:

<snip>

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-derivative 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-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.

[Laelth]

10. That's very, very interesting. k&r n/t

The United States is a LIBERAL Country.

:dem:

-Laelth

[Stellabella]

12. We never learn, do we.

That is, the crooks at the top never learn. Greed has no barriers to those jackasses.

[nadinbrzezinski]

13. There are two problems

history never, EVER repeats itself

And there are echoes of both

Why I dread the coming few years

[4 t 4]

14. Why does History never repeat itself ?

It that just one of those quotes. I feel I have been told that all my life and thought it was true but it's really not is it ? All history does is repeat itself, War, poverty, killing, hate, genocide, cruelty, class division, murder, suppression of the poor, weak, meak, disabled. You would hope and pray by now we would evolve. I can't believe we haven't evolved more. I have such loathing for my fellow man I think I just might cut off my ear and present it to the most worthy human at Christmas.

[nadinbrzezinski]

15. The patterns have echoes from the past... but patterns are not the same exact event

And patterns do repeat, but not the actual events

That is why.

Now if you are familiar with the PATTERNS, and the Longee Duree, that is really long patterns, then you can see what is coming before many do

And the patterns for this depression are way scary since it has echoes from both the 1873 scare and the 1929 depression, with a few, albeit very few, from 1901 and that has all to do with empire

THere are also echoes from the patterns of the fall of empires, going all the way back to Rome, and all the way forwards to the USSR

[Javaman]

16. history doesn't repeat itself, it rhymes. :) nt

[roamer65]

17. This depression will be very unique, unlike any others we've endured.

This is our first depression under the fiat "floating" currency system. It appears to be deflationary...FOR NOW.

As the money supply swells at an exponential rate, it will become a hyperinflationary depression.

World-wide competitive currency devaluations will just make matters worse.

Note: 1929 and 1873 were depressions under the gold standard, where money suplies were constricted.

[HamdenRice]

18. I wrote the same thing in September. 1873 and other 19th century panics are the model

Those depressions were about a loss in confidence in bank assets and currency, which at the time were "gentlemen's" "notes and drafts," the equivalent of asset backed securities.

It's a very apt comparison, and very scary.

[JNelson6563]

19. Off topic

Every time I see your sig-line pic it makes me smile. :toast:

Great post BTW.

Julie