March 13, 2008 11:15 am
John Kenneth Galbraith called the late Charles Kindleberger's book, The World in Depression, 1929-1939 `the best book on the subject.`` Kindleberger who taught for decades at MIT published a first edition of the book in 1973. A second enlarged edition appeared in 1986. In the current circumstances on Wall street and Main street it is instructive to return to this book for some potential guidance about what may or may not be happening.
For example, today's stock market news is dominated by stories of the impending collapse of a major bond fund that was highly leveraged and heavily exposed to the falling property market and sub prime mortgage mess. So far this morning stock prices are down substantially almost 200 points on the Dow -Jones because of the reaction to this news. Since a large proportion of traders are young men and women who have little or no experience of financial panics and probably know very little history and in any case are swept in one direction or the other by options and programmed trades they tend as a group to overreact to bad news.
On the other hand there is no shortage of bad news and it is always chastening to consult Kindleberger and note that in 1929 when stocks fell by 25 % at the crash they initially recovered by more than 10 % over the next 7-8 months. After that they plunged to close to one half their original pre crash value.Over the next year they plunged another 60 % until they bottomed out in 1932 at just over 1/6 of their original pre cash value.
From 1932 to 1937 they recovered but they only reached 75 % of their pre crash value before they fell again. It took until the 1950s before their value exceeded that of September 1929.
Now this does not mean that it is 1929 all over again. But one still has to be cautious.
In 1929 and the early 1930s the authorities in the the US, Canada, Great Britain and other leading capitalist countries were obsessed with budget balance as the solution to the problem. They were of course as Kindleberger points out terribly wrong.
The Federal Reserve did cut the discount rate eight times between the end of 1929 and the middle of 1931. It was lowered from 6 % to 1.5 %. The problem was that deflation, falling prices were greater and as a consequence the real discount rate rose despite the nominal cuts.Wholesale prices fell 12.2 % from August 1929 to September 1930 alone. In Canada they fell 16.0 % in the same period.(source Anna Schwartz , Understanding 1929-1933 in Karl Brunner, The Great Depression Revisited, table 12 in Kindleberger, p.114)
We shall see how events unfold. Fed chairman Ben Bernanke is doing the right thing in pumping liquidity into the system and the American federal Government has done the right thing in running a deliberate deficit.
The oil cartel in its price gouging behaviour is a different sort of force from what prevailed in the 1930s when deflation was the order of the day. But the negative shock waves that flow from its price shocks are still a destabilizing factor.
One other thing among many insights that Kindleberger establishes is that that there was an inability to co-ordinate a global recovery strategy and a failure to preserve international trade against the influence of excessively protectionist beggar thy neighbour national strategies which of course made the situation much worse for everyone. There is regrettably some sign of this again today.
More on this later.
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