The Great Depression: 'Only Yesterday'

Elaine Meinel Supkis

If anyone doubts the gravity of today's news, all they have to do is read this great seminal work from over 50 years ago, 'Only Yesterday.' My grandfather told me to memorize this book.

Frederick Lewis Allen's 'It Happened Only Yesterday':

XIII: CRASH!

Early in September the stock market broke. It quickly recovered however, indeed, on September 19th the averages as compiled by the New York Times reached an even higher level than that of September 3rd. Once more it slipped, farther and faster, until by October 4th the prices of a good many stocks had coasted to what seemed first-class bargain levels. Steel, for example, after having touched 261 3/4 a few weeks earlier, had dropped as low as 204; American Can, at the closing on October 4th, was nearly twenty Points below its high for the year; General Electric was over fifty points below -its high; Radio had gone down from 114 3/4 to 82 1/2.

A bad break, to be sure, but there had been other bad breaks, and the speculators who escaped unscathed proceeded to take advantage of the lessons they had learned in June and December of 1928 and March and May of 1929: when there was a break it was a good time to buy. In the face of all this tremendous liquidation, brokers' loans as compiled by the Federal Reserve Bank of New York mounted to a new high record on October 2nd, reaching $6,804,000,000 -- a sure sign that margin buyers were not deserting the market but coming into it in numbers at least undiminished. (part of the increase in the loan figure was probably due to the piling up of unsold securities in dealers, hands, as the spawning of investment trusts and the issue of new common stock by every manner of business concern continued unabated.) History, it seemed, was about to repeat itself, and those who picked up Anaconda at 109 3/4 or American Telephone at 281 would count themselves wise investors. And sure enough, prices once more began to climb. They had already turned upward before that Sunday in early October when Ramsay MacDonald sat on a log with Herbert Hoover at the Rapidan camp and talked over the prospects for naval limitation and peace.

Something was wrong, however. The decline began once more. The wiseacres of Wall Street, looking about for causes, fixed upon the collapse of the Hatry financial group in England (which had led to much forced telling among foreign investors and speculators), and upon the bold refusal of the Massachusetts Department of Public Utilities to allow the Edison Company of Boston to split up its stock. They pointed, too, to the fact that the steel industry was undoubtedly slipping, and to the accumulation of "undigested" securities. But there was little real alarm until the week of October 21st. The consensus of opinion, in the meantime, was merely that the equinoctial storm of September had not quite blown over. The market was readjusting itself into a "more secure technical position."

This entire book is free and online. I strongly urge people to read the entire book, it is worth the effort and time. I am no economic professor or genius. My grandfather wanted me to know this book because he was very worried about this ever happening again. My former father-in-law's first post-college job was in the worst part of the depression and it was working for the City of NY, calculating the first 'temporary emergency' sales tax.

'No emergency is ever temporary, they are permanent,' he used to joke. Like all major train-wrecks, one thing led to another. The one major flaw in this book is its focus on the USA. The vicious storm that destroyed our economy brewed far away, in Asia. The decimation of China was accelerating, warlords rampaged about the countryside and England couldn't control things there anymore and Germany was gone from Beijing. The USA demanded open trade with China and India and England couldn't afford this, literally.

England was bankrupted by WWI. They tried to solve this by expanding their huge empire further. So they went ever deeper into China, they took over Germany's African and Asian holdings, the invaded....IRAQ. And were defeated there. The Japanese saw how weak the British really were and sharpened their swords, invading more and more Asian lands near Korea. Russia was in the throes of a revolution and the international balance of power was in full collapse.

France marched into the Ruhr and Germany's fragile economy collapsed. Germany couldn't pay anyone reparations and a general strike meant the French couldn't get money out of the Ruhr the hard way and this made the victors of WWI very much hated by the Germans who began to vote for the Nazis. WWII was already inevitable before the Great Depression. The empty vaults in London were opened to view when France and England had to tell the USA, there was no more money to pay off the loans we gave them.

So the whole world's banking systems went into paralysis.

The USA, a much more insular, self-sufficient nation, was barely affected by all this. More: money from Asia and Europe fled to the much more stable USA. Stocks roared full speed ahead as England languished more and more. Money fled Europe and took root here and happy days were here, indeed.

But finally it all fell apart. A depression already was ravaging the farmers and land speculators drove up property values in the Northeast, California and Florida. The great Mississippi flood bankrupted many banks and farmers and ravaged all the cities from New Orleans to Chicago. We see an obvious connection here!

The excuses made by investors and the Treasury when the collapse began are nearly identical to the rhetoric and whining we see today. Back then, the very wealthy investors and politicians all assured everyone that America was too rich, too big and too strong to collapse.

But it did collapse! A helpless paralysis set in. The gang running this joint were monetarists just like today. Monetarists imagine all you have to do is manipulate the printing presses and interest rates and voila! Like magic, the economy runs smoothly.

This bizarre and utterly stupid notion dies every 50 years or so. Usually after a terrible disaster. The post-Great Depression sanity collapsed during the Vietnam war when America voted to fight and party at the same time. The Bretton Woods reforms were supposed to make us pay on time and not run up any more debts.

This collapsed in 1982 when Reagan cut taxes and said, 'Let's party anyway!' This irresponsible urge would have been squelched by bankers, and believe me, they tried. But the Japanese stepped in with a great deal: they could invade our markets while closing us out of Japan's markets but in return, they will loan us all the excess FOREX funds garnered by this unbalanced trade and thus, we could run up budget deficits with no penalties.

So spending went wild and the rest is history. We made the same deal with China and this seals our fate.

All over the world, pundits are struggling to minimize the reality of this evolving market crash.

By David Callaway, MarketWatch
Last Update: 12:01 AM ET Mar 1, 2007

As of this writing, the Dow's plunge on Tuesday, which wiped out as much as $600 billion in market value at its worst, is being dissected by bulls, bears, even Chinese Year of the Pig enthusiasts, for its relevance to the overall direction of the market. Might as well add Cubs.

There are plenty of good arguments why this was a one-off, and why the market can go higher. Corporate earnings have been on a record run. Interest rates are low and likely headed lower. Inflation is still just a word only Fed Chief Ben Bernanke whispers regularly. But the fact is that the swiftness of the declines in the Dow average that day -- computer glitch or not -- and the willingness of investors worldwide to turn tail and run on something as meaningless as a drop in the fledgling Chinese equity market, indicates that big investors have their fingers on the sell button. That doesn't happen in a bull market.

You can't have a market run up as far, and so fast, as this one did over the last eight months, no matter how many people say it's still undervalued, and not expect a hair-trigger response to the slightest provocation. Now that we've had the drop, it's certainly healthier for the market. But is it really time to step in and buy stocks now that you know the gunslingers and heartless program-trading computers are ready to draw at the first sign of trouble?

Tsunamis are like this: one can be lifted up and carried forwards for a while by the sudden surge of waters but what kills people is when the water hits buildings, rocks and trees. The wave we are riding right now is heading towards some really big World Trade Centers: Berlin, NYC, Shanghai, Tokyo, Paris, Hong Kong and Singapore. Normally, the USA uses this thingie called 'FOREX' money to stop panics.

What is this today? Last I looked, it was less than one FIFTH China's funds. And offsetting this is a gigantic mountain of outstanding debts: $9 Trillion. AAARGH. Can we take on $5 Trillion in debt to protect the dollar and quiet nervous markets?

THIS IS EXACTLY WHAT THEY FEAR! We cannot run up another $9 Trillion in debt: our GNP is too small! We cannot go 100% into debt! Not even third world countries can do this! And China, Japan and Saudi Arabia do NOT have an extra $9 Trillion sitting around, either! They can't stop this.

Here is some really stupid commentary:

By Mark Hulbert, MarketWatch
Last Update: 12:25 PM ET Feb 28, 2007

ANNANDALE, Va. (MarketWatch) -- What if Tuesday's drop in the stock market happened for no reason other than that it was overdue?

Our minds recoil from such a possibility, since it strips Tuesday's 416-point drop in the Dow Jones I

12,268.63, +0.88, +0.0% ) of any particular meaning. In fact, it is our psychological need for ascribing meaning to momentous events that accounts for how much ink has been spilled trying to explain what happened.

But, according to a mathematical theory developed by an MIT economist and several physicists at Boston University, drops of Tuesday's magnitude are entirely regular and periodic.

Their study, published several years ago in the prestigious scientific journal Nature, reports that large daily fluctuations in the stock market occur, on average, at very predictable frequencies. Instead of seeing these fluctuations as abnormal, the academics' theory suggests we see them as inherent features of the stock market's volatility.

When one doesn't pay one's bills then yes, something is 'overdue.' The difference between ordinary shakedowns due to random chance and historic moments when all things come together in a tsunami of red ink is of course, the difference between life and death. Namely, yes, markets over time have ups and downs but the Great Depression went down. And down. And then down. And then stayed down. Day after day, weeks, years.

Frustrated Germans put Hitler in power and he marched into the Ruhr and evicted the French and then confiscated all the money and businesses of the Jews and thus, restored the treasury via violent, looting, vicious criminal actions. Japan marched on China and occupied the industrial north and then used it to build their war machine for further looting and conquests.

The USA, in thrall to capitalistic fantasies, crawled along on its economic belly, no home building, no jobs, the value of everything falling like rocks, money disappearing, banks collapsing. Federal programs launched to give people food and jobs got things going to the point where economic activity was half of the 1920's. WWII saved us from our own stupidity.

It also destroyed 90% of all competition! All those bombed factories meant we ruled the earth in all ways, militarily, financially and industrially.

Red ink kills currencies and bad loans kills economies.

By Ruth Simon and James R. Hagerty

The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.

At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication.

Already, the bad bad loans are falling. Now the better than bad ones are collapsing. I remember 9/11. The World Trade Center had lots of cement on each floor, more than any building on earth. They were stacked up higher than any building on earth, per square foot. The Sears Tower which bankrupted the Sears company, is slightly taller but it gets thinner and thinner as all other contestants for 'tallest buildings' do. But the WTC had huge square footage per floor all the way to the very top.

When they collapsed, the sheer weight of each floor literally disinetgrated the floors below. These buildings fell as fast as the speed of a dropping ball. So it is with our massive 'economy': unlike even England post WWI, ours dwarfs theirs. And this economy is fake.

The red ink in trade is astonishing and accelerating even as the world goes into a recession.

China's trade surplus jumped 67% in January, a development that is likely to increase pressure on Beijing to allow its currency to float freely.

Last month China exported $15.9bn (£8.2bn) more goods and services than it imported, compared with $9.5bn for the same month a year earlier.

Hiding all that inflation, to keep profits roaring along, to control money, our nation is allowing businessmen to flood our country with imports! And as things get worse, the need to import rises, it doesn't fall. The Chinese worry about this but then they see they will be the last to feel the effects of this depression. They are the source of the cheap labor all businessmen need to make profits in a collapsing economy!

And here it is: the need for profits fuels the mess that is causing the collapse:

World shares have dropped for a third day on concerns about economic growth and the outlook for corporate profits.

A large slide in Europe and Asia was compounded by a drop on US markets. The key US Dow Jones index fell 0.4%, the S&P fell 0.4% and the Nasdaq lost 0.6%.

London's FTSE 100 index closed 0.9% lower. It has shed 5% in three days, wiping more than £80bn of its value.

I don't need a crystal ball. I just need to take the statistics of the Great Depression and set them up against today's stats. And one has to be aware of how all the nations were in concert with the previous major collapse.

And this is all about rebalancing the world's economies:

Even if this line of argument is right - a correction, not a crash - you still have to deal with the real concerns about the world economy that have been bobbing around for some weeks but have surfaced fully in the past few days. The sensible thing to say here surely is that there is some sort of slowdown taking place, but actually a slowdown is rather needed to rebalance the world economy. ING bank has just put out a paper arguing that, just as last year the second half was weaker for growth than the first, this year things may be the other way round. Thus the weakness we are seeing now, particularly in the US, will run on a bit further but there are a number of reasons, not least the possibility of a cut in US interest rates, to expect a stronger performance later in the year.

Here is the insanity! Cut interest rates? How on earth can we? Deflation may be destroying the value of most investments but there is no money to loan. If the government which is bankrupt, prints money to loan, we will have hyper-inflation in no time flat. If we can't ship this extra money to China, it stays here and causes inflation. And the only way the Chinese will accept our money is if we buy stuff from them and this means we go deeper into debt. And debt isn't infinite.

And what 'growth' are we talking about here? America isn't producing much that is trade-able. So are we going to return to the status quo of just buying stuff? Again, with what? More loans from China?

Congress is debating wasting more money in Iraq. $135 billion this time around! And the Democrats are fighting this madness by suggesting they cut...$20 billion. Arf. This level of irresponsibility is astonishing. All the fools on the Hill have joined the Tin Man and the Cowardly Lion in a scheme to ignore the red ink in Oz.

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Comments

[CK]

And now the USA is going back into cambodia for Oil, and spy bases. Good times good times.

[Elaine Meinel Supkis]

Don't forget the child prostitutes. We need all those things, don't we?

[CK]

"What this we? white person." Famous Tonto quote removed from Lone Ranger taping many years ago.

[JSmith]

So you absorbed the wisdom of the Depression-scarred elder, and it's affected your thinking ever since.

I think the worst effect of the Depression was that too many people ran scared for too long - decades, in many cases. "Take that gold and bury it under the shed - that's the only safe money!"

But there have been market ups and downs since then - October 87, the Y2K dotcom bubble, etc. - which didn't wreck the entire world economy. Stuff goes up, goes down, and goes up again.

[Katy]

BTW, the title is Only Yesterday

[Elaine Meinel Supkis]

OOPs. Sorry.

[JSmith]

"BTW, the title is Only Yesterday"

That's so. nd according to U. Virginia's website, the original was published in 1931 - so for Allen, the events he writes of really were "only yesterday".

There are some grins in this chapter:

http://xroads.virginia.edu/~HYPER/ALLEN/ch5.html

[JSmith]

It occurs to me that may have been the chapter Elaine's grandfather had in mind when he told her to memorize it.