The real lessons to learn from the Great Depression
“The worst financial crisis since the Great Depression” became standard shorthand for the global financial crash and resulting severe recession early in this century. A decade ago, the international financial crisis was waning at last.
Extreme, pervasive financial speculation centered in the United States sparked the international meltdown. The 2008 bankruptcy of Lehman Brothers underscored the profound scale of the crisis. Government intervention in pumping out liquidity and supporting other banks was crucial to recovery.
This fall is also the 70th anniversary of the stock market crash that ushered in the Great Depression.
That was a true disaster, political as well as economic, which affected the entire industrialized world for a decade.
Along with vast human suffering, the Great Depression fueled the rise of Nazism in Germany. The fundamental lessons of that experience remain profound.
The 1929 stock market nosedive that led to the economic collapse was sudden and steep. From the 381.17 peak on Sept. 3, U.S. stocks lost 25% value over two days.
November brought recovery, but that proved fleeting. Stocks drifted to the historic low of 41.22 in July 1932. During the height of the selling frenzy, stocks traded in volumes that were not reached again until the late 1960s.
Stocks did not return to the 1929 peak until 1954, in great contrast to more recent declines. Great public suspicion as well as hostility toward bankers defined American political life for decades.
In the more recent crash, many banks failed and others remained solvent only by enormous emergency federal fund infusions. The Federal Deposit Insurance Corporation, established during the New Deal, has been up to the task of protecting individual depositors.
The U.S. central bank has led aggressive bond buying. Traditionally, the money supply and interest rates have been principal financial tools. The Fed today controls a relatively small share of total dollars. At the same time, the global reserve role of the currency has facilitated the radical bond purchase initiative.
Commercial banks became more regulated again, with capital requirements raised along with their rescue. In 2010, the comprehensive Dodd-Frank Act became law, including the important initiative of Paul Volcker to separate commercial from investment banking funds.
The Trump administration has led sustained efforts to weaken these regulations, with some success. Commercial banks have been bitterly opposed to DoddFrank and Volcker reforms. That provides persuasive evidence that these restrictions have been having positive effects.
Removing them sets the stage for the next crash. Large U.S. fiscal deficits and low interest rates have removed two primary tools of government to fight recession.
Yet finance remains only one part of our complex economy. During the Great Depression, humorist Will Rogers became enormously popular. He seemed the antithesis of bankers.
Inspired by Will Rogers, here are down-to-earth points. First, as a worker, take pride. The United States — you and me — has the most productive and largest economy in the world. Our gross domestic product doubles about every two decades.
Second, as a citizen, be active and be alert. Government reforms reflect public pressures. There must be serious, sustained public oversight of financial activities.
Third, as an investor, do homework. A good guide is “Security Analysis” by Benjamin Graham and David Dodd, first published in 1934 during the Great Depression, revised regularly since.
You can read the book while the TV, the Internet, your cell phone are on.
However, why don’t you turn them off.