“A prolonged upward movement … has been built up over a series of years on the amazing and unexampled prosperity of America. But some two years ago the speculative movement seemed to lose all touch with reality; and in spite of occasionally vigorous but more often half-hearted, measures by the banking authorities of the United States, speculative fever spread throughout the nation and carried prices, mainly with the aid of borrowed money, to fantastic heights. Writing of the efforts made to check the movement, a high authority observes:"The market fought its way upward against Reserve banks and member banks, and there was truth in the boast that it defeated them . . . bankers are not the owners of the funds in their custody, and the market defeated them by going round them and inducing depositors to place their funds at the disposal of 'the street.' Democracy triumphed over authority and leadership in the advance, and the orgy at the finish was all its own."
Highly coloured stories of devastating ruin and of paralysis of economic life must, as always in such cases, be heavily discounted; but it is natural that people should be asking themselves how widespread and of what character will be the economic reactions of this slump.”
The Economist Magazine (23 November 1929), reposted on The Economist Blog (30 September 2008)
http://www.economist.com/blogs/freeexchange/2008/09/crisis_roundtable_from_the_eco.cfm
The Economist is a weekly news and international affairs magazine edited in London. It is regarded by many as the greatest newspaper in the world. Its editorial view supports free trade and globalization and it is generally sympathetic toward the United States and its position in the world.
This comment by The Economist was made about a month following Black Tuesday, 29 October 1929, when the stock market crashed and one of the defining moments in world economic history began to radically alter the world economic landscape and the fate of hundreds of millions of people. Although originating in the United States, the events of that day set in motion an economic Tsunami that slowly over a period of time and step-by-step engulfed the world as it spread from country to country. Economic activity began to weaken here and abroad, but it took time for the crash to have its full effect on incomes, tax revenues, prices and profits. International trade would be deeply affected, but not until a year or more after Black Tuesday.
Indeed, for quite some time people did not see the disaster that would eventually befall them. It is a mistake to see a depression as coming quickly and with immediate devastating effects. Rather, there may be a period of normalcy when all appears to be well and the indicators turn up in a false expression of continuing good times. Financial markets regain stability, economic activity resumes its usual pace, international trade appears to resume its normal course, attention turns elsewhere.
Then the collapse comes all at once. Quickly and steadily borrowing shrinks, spending plummets, prices and wages start to fall, unemployment rises, protectionist attitudes form and strengthen, the economic suffering begins and it is magnified by social breakdown and weakening public order. The fixed rates of exchange that defined the international monetary order of the time ensured that the contraction underway in the United States would be transmitted to the rest of the world. Although worldwide in scope, The Great Depression was more severe and prolonged in the United States than in other countries. National income in nominal terms fell by one-half between 1929 and 1933; measured in constant prices, the real national income fell by more than one-third; prices dropped by more than one-quarter; and the unemployment rate almost reached one-quarter of the work force. Average money incomes fell by more than half and real incomes by more than a third.
In November of 1929 no one had any idea of what was to come. The world had the appearance of gaining stability and a sense of impending recovery. People “asked themselves how widespread and of what character will be the economic reactions of this slump”. When doing so, there was no appreciation of the power of monetary forces to shape, in fact to determine, the disastrous course the economy would take in the months and years to come. Soon, however, almost without warning, the banking system collapses and with it the economy.
We now wait and watch and wonder whether another financial crisis will deepen and spread here and abroad to engulf our lives and destroy our future or whether it will pass like a bad storm in the night, never to return. We simply do not know and cannot know.
What we do know is that the conceit of modern macroeconomics has been exposed. Despite what we thought (and what I taught), our understanding of how the economy can be managed by actions of governments affecting aggregate demand and aggregate supply through fiscal and monetary policy has proven useless in stabilizing financial conditions in a true emergency. While it is too much to say that modern macroeconomics is of no value, it is fair to say it is inadequate when the chips are down and fiscal decision-makers and monetary authorities need guidance when dealing with a mounting crisis. Economists, not a group noted for their modesty and humility, are now seen for what they are: Experts lacking expertise when expertise is really needed. Knowing them as I do, however, I doubt they will adopt a more reserved demeanor in response to their evident failings.
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