Thursday, October 20, 2016

Four Score and Seven Years Ago: The Great Crash

As almost everyone knows, President Abraham Lincoln began his famous Gettysburg Address, “Four score and seven years ago.” Eighty-seven years before that 1863 speech, of course, was 1776, the (literal) birth of the nation.
What about four score and seven years ago from now? That was 1929—and, as is widely known, “the great crash” of the stock market in the U.S. began that year on October 24, Black Thursday, and more or less ended with Black Tuesday, October 29. 

The Great Crash
John Kenneth Galbraith, the eminent economist, authored a book titled The Great Crash: 1929. Originally published in 1955, his book became an instant bestseller. That rather brief (about 200 pages) book by Galbraith (1908-2006) is invaluable for seeking to understand American financial history.
In what is no doubt an exaggeration, Galbraith states that “1928 was the last year in which Americans were buoyant, uninhabited, and utterly happy” (p. 22). There was, admittedly, great satisfaction with the way things were going in the country—and that had implications for the election of 1928.
Roger W. Babson, a leading entrepreneur of the day, proclaimed that “if Smith should be elected with a Democratic Congress we are almost certain to have a resulting business depression in 1929” (cited on p. 15). Partly because of ideas like that, Hoover was elected in a landslide.
It is sometimes said that Al Smith was defeated because he was a Catholic, but that may have been less of a factor than the voters not wanting to jeopardize the economic boom of 1928.
So, Hoover was elected—and the rest, as they say, is history. 

Are things bad now?
It is not surprising that now one of the most common campaign themes of candidate Trump is how bad things are in this country. His appeal to “make America great again” is based on the claim that it is necessary to elect a Republican President to reverse that damage done by President Obama during the last 7½ years.
Republican politicians and their talk radio surrogates exclaim about how small the growth in the GDP is—and it has not been good in the last year or so. They also say that the country has seen the weakest financial recovery since the Great Depression.
Of course, the 2008 crash was the greatest since 1929. Ben Bernanke, the former head of the Federal Reserve, even said the 2008 financial crisis was the worst in global history, surpassing even the Great Depression.
On September 1929 the Dow Jones Industrial Average peaked at just over 380. It did not reach that level again until November 1954, more than 25 years later. The peak before the collapse in 2008 was about 14,165, in October 2007. It was back up above that record by the first week of March 2013, less than 5 ½ years later—and the highest of all time was reached in August of this year.
Maybe things are not so bad now, financially.
What about the gap?
It has rightfully been pointed out, though, that the economic growth in this recovery period after the Great Recession has primarily benefited the wealthy. It is true that the gap between the rich and the poor is greater now than at any time since 1928.

In 1928 the top 1% in the U.S. had 23.9% of all pretax income. Last year that percentage was 22%. After this election we certainly don’t want a repeat of the great crash in the year following the 1928 election. Thus, reducing the income gap between the 1% and the 90% is one of the great challenges facing the new President.


  1. The last seven years of uninterrupted economic growth is the longest since 1949 (when quarterly economic data begins). Critics point out that the 2.1% annual rate since 2009 is the lowest on record. In my opinion the reason we haven't had a recession in the past seven years is because of the low rate. If the growth rate had exceeded 3% we probably would have had a retraction by now.

    1. Thanks for commenting, Clif--and I agree with what you wrote.

      In the debate Wed. evening, Trump said, “We’re bringing GDP from really 1%, which is what it is now. We’re bringing it from 1% to 4%. And I actually think we can go higher than 4%. I think you can go to 5% or 6%.”

      Such a projection is completely unrealistic, and, as you suggest, would probably have dire consequences in the long run.

    2. Trump plans to achieve those fantastic growth rates by removing restrictive rules and regulations. (I don't think so)

  2. I have not read Galbraith's book. I have added to my list of books to read. Fortunately, the Republicans swept the 1928 elections, so Galbraith had a clear window into the past and what it meant. Think how different that history might read of somehow Democrats had won the election, and then had the economy collapse shortly thereafter, anyway. Income inequality would not have been fixed that quickly, and just the right jostle might have opened the floodgates. Then Babson would have been there ready to trumpet his election prediction. As it is, it looks like he may have suspected a collapse was quite possible, and was looking for a way to blame the Democrats.

    Most recessions are caused by mismatches in supply and demand. When the source is a financial meltdown instead, the recessions tend to deeper and longer. I believe we had the Great Recession instead of World Depression II was simply because Obama took office months after the crash, while FDR did not do so until three years after the crash of 1929. In both cases the Presidents lead robust Keynesian stimulus recoveries. Obama had the advantage of strong help from the Federal Reserve, while FDR had the advantage of less successful interference by austerity Republicans. (For a hint of what a successful interference might have looked like, check out the "Business Plot.") See link:

    Republicans have been running for decades on variations of what is called "supply side economics" which most famously was in the "Laffer Curve." Everything from cutting taxes for the rich to abolishing the estate tax and cutting spending has been peddled based on it. Supply side is an incoherent attempt to avoid what is called the "Law of Supply and Demand." They pretend demand has nothing to do with economics, and justify all sorts of nonsense based on that willful omission. What the law says is that when supply exceeds demand, then supply tends to diminish as prices tend to fall. Look at what has happened recently to the oil industry for an example. When demand exceeds supply, prices rise and demand thereby falls until equilibrium is restored (or sometimes extra supply arrives at the higher prices). All the idle capital in the world cannot stimulate commerce if there are no unsatisfied but solvent customers available. This is where financial crises are so terrible, they destroy the ability of businesses and consumers alike to spend, and without customers, all business contract. Look how the financial crisis of 2008 bankrupted two of our three auto companies, and probably would have destroyed the entire industry had Washington not promptly passed the auto bailout. In the end, the industry began making more cars as more cars were being sold. Supply side economics had something to do with it, but not as Republicans imagined. The government bailout maintained the capability of auto manufactures to provide supply, even as the Cash for Clunkers program and eventual recovery lead to increasing sales. GM actually proved the fallacy of supply side economics, as it earlier used available capital to substantially increase plant capacity without regard to demand, and when the crisis hit, there was massive overcapacity that hastened the bankruptcy.

    I have had to learn a lot more than I wanted to about economics the last few years, and some of that has come from my father, who used to be a product manager for a large manufacturing company that used to be in Kansas City. He dusted off his old economic degree from the University of Iowa, and started trying to get an understandable explanation onto DVD. Being 94 years old has not stopped him from being furious with the Republicans!

    1. Thanks for once again posting significant comments, Craig.

      What you wrote goes right along with what Clif wrote and what I just now write in reply to him. Because of the law of supply and demand that you referred to, the kind of growth rate Trump is touting would likely soon lead to very bad consequences.

      The Republicans' "supply side economics" emphasis is highly questionable from several different angles. I am thankful that it seems quite certain now that Trump will not be elected to start the nation down that road again.

  3. In a brief response to this article, an esteemed Thinking Friend in Kentucky wrote,

    "Yes. Right on target, Leroy. I pray we don’t elect another Republican and have another Hoover moment!"

  4. I really enjoyed this blog posting Leroy! I quite agree that by most quantitative measures we are not that bad off financially as a nation and have largely recovered from the great recession. Having read Dr. Galbraith's book while writing my undergraduate thesis on this very subject, I think that his work is a must read for anyone who wants to gain a greater understanding of the Great Depression.

    -Ryan Hlousek