The absolute craziest convention on Wall Street, at the Federal Reserve, and among academic economists is simply to ignore economic history before the Great Depression. It’s particularly wacky to do so as the Federal Reserve, which was billed as a means of avoiding economic dislocation after the Panic of 1907, was established in 1913. In other words, the Great Depression happened on the Fed’s watch.
What’s happening now to the economy: the bankruptcy of overly leveraged institutions, falling prices, a general sense of uncertainty, and calls for high levels of government spending and control are hardly unprecedented. We heard such rhetoric throughout the 70s. And this shift took place once before, in Europe, in the late 19th Century in response to the “Long Depression” of the 1870s and the associated anemic recovery.
For Christmas, I received among other books Norman Rich’s The Age of Nationalism and Reform, 1850-1890. This book might seem obscure and irrelevant to all but the most die-hard history buffs. But consider the following passage, and ask yourself if you think anyone at Lehman Brothers or on Bernanke’s staff like has had much familiarity with this episode and whether it might have been useful:
The 1873 crash set off an economic depression which was to continue for another two decades in the form of a slower rate of growth, rising unemployment, and a general feeling of economic insecurity. This depression appears to have been caused primarily by overspeculation and overproduction. There was a decline in the rate of railway building, and a consequent drying up of this immense market for goods and materials. At the same time European agriculture was depressed by the competition of cheap agricultural products from the interior regions of Russia, America, and Australia, to which the railroad had given access.
During the depression years there was an actually an increase in the real wages and a rise in the standard of living of many Europeans as a result of a steady fall in the prices of agricultural and manufactured products. The fall in prices, however, which brought hardship or outright ruin to many economic enterprises, together with the increase in unemployment and the overall sense of economic insecurity, aroused a widespread feeling of dissatisfaction with existing government economic policies and anger at the threat of foreign competition. The liberal doctrine of laissez faire was discredited as industry, agriculture, and labor alike clamored for protective tariffs and state aid. And everywhere in Europe, with the notable exception of England, the state responded to these pressures. The 1873 depression thus inaugurated a new period of state intervention in economic affairs which was to increase steadily to he present day. It also contributed to the growth of an economic nationalism which was to strengthen the burgeoning forces of political and ideological nationalism.
I used to feel somewhat sorry for Obama for the crises he must now manage, a good many of which were not of his making. But then I realized: he likes this situation and this is good for his personal goals, even though obviously quite bad for the country. Crises, real and imagined, allow someone like Obama to aggrandize power, push through the most radical and spendy proposals, and–like FDR–will make a great many people worship him even more without regard to results, so long as he manages his own image carefully. Far from feeling sorry for Obama, I feel sorry for my future children and grandchildren. It’s a scary time, and we have an immature and untested demagogue at the helm, whose historical loyalties are tribal, whose background is in the cesspool of Chicago politics, and whose outlook is replete with various artifacts of 1970s cracker-barrel liberalism.