For the past several weeks, ever since the major bank collapse in the USA, the BBC news website has been dominated by stories of more fallen banks, solid financial businesses that are on there way out, mergers and of course it is all labeled as ‘The Credit Crunch’, that label in itself is another way of saying “Yes were in the mother fucking shit”, but lately people have been comparing this to the great depression of 1929.
Now I was born a long time after this period but when I see footage and read newspaper clips about this time I seriously hope that the imbeciles that we vote in power can avoid this. We are some 70 years from those dark depressing days and surely we are now more worldly to avoid this. As I read the fact that the UK Prime Minister, Gordon Brown, is not followwng the Irish and German pattern of guranteeing savings from banks are we really heading for those dark days again?
Lets look at the Depression, unlike this time it was not deemed to be a surprise. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the northern summer of 1930.
Debt was the cause of the depression in 1929 and businesses were hit hard, unemployment went from 4.5 to 25% in 1933. Banks which had financed this debt began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets. Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.
This echos what is happening but the fact is that the world was a far different place back then. The USA was not a dominant superpower, Europe still held the mantle of being the financial leader of the world and the far east were nothing more than mere trading ports. Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have tuned a 1930 recession into a 1933 great depression. We are now at that point again. it must be avoided at all costs.
Shortly after President Roosevelt was inaugurated in 1933, drought and erosion combined to cause the Dust Bowl , shifting hundreds of thousands of people off their farms in the midwest. From his inauguration onward, Roosevelt argued that restructuring of the economy would be needed to prevent another depression or avoid prolonging the current one. New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending and institute financial reforms.
But these new deals did not just end here, another recession followed in 1937 so the effect was not overnight. Only the arrival of WWII really put an end to such dramatic endings financially.
he massive rearmament policies to counter the threat from Hitler helped stimulate the economies of Europe in 1937-39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war in 1939 finally ended unemployment.
In the United States, the massive war spending doubled the GNP, either masking the effects of the Depression or essentially ending the Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of large government contracts. Productivity soared: most people worked overtime and gave up leisure activities to make money after so many hard years. People accepted rationing and price controls for the first time as a way of expressing their support for the war. Cost Increases in munitions contracts guaranteed businesses a profit no matter how many mediocre workers they employed or how inefficient the techniques they used. The demand was for a vast quantity of war supplies as soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down city streets begging people to apply for jobs. New workers were needed to replace the 11 million working-age men serving in the military. These events magnified the role of the federal government in the national economy. In 1929, federal expenditures accounted for only 3% of GNP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt’s critics charged that he was turning America into a socialist state.
Surely we do not need another war to bail us out?!