Great Depression Remix

The lyrics are different in 2009 than 1929—but it’s still the same song.
From the November-December 2009 Trumpet Print Edition

The 1929 financial crash unfolded in just such a way as to inflict punishment. Every time stock investors thought it was safe to get back in the dance, they just lost more money. Every time consumers thought it was safe to start spending again, the job scene hit another low note. Businesses couldn’t hold a tune—they went bankrupt by the thousands.

Eight decades later, the question facing the world is this: Is the worst really over, or is it just the opening note of a very familiar hymn?

History repeats itself. Even if the lyrics are not exactly the same, this verse certainly rhymes with the first. Unfortunately, most people don’t know history.

Whistle a Happy Tune

Ask the average guy on the street. He is almost sure to tell you he has heard or read that the crisis is over.

The New York Times trumpeted: “Fed Chief Says Recession Is Very Likely Over” (September 15). Newsweek’s Daniel Gross confirmed: “I’m prepared to declare that the recession is really, most probably over” (July 14). Bloomberg and Forbes are whistling their own happy tunes proclaiming the end of the recession too.

The good times are back. Stocks will keep going up until 2010, said money manager John Dorfman. “On balance … I think the evidence favors continued gains.”

Sadly, it is all too familiar.

In 1930, the average person was singing that the worst was over too, as were many of the so-called experts.

“Green Lights Ahead,” cheered National Bank of the Republic (Chicago) Chairman G. Woodruff. “The red lights, through which our people last year drove, have changed” (Aug. 5, 1930).

Actually, the worst was only beginning.

Sucker Rallies

From 1921 to 1929, the Dow Jones hummed from 60 to a high note of almost 400! The Great Crash of 1929 changed that. It swallowed 48 percent of stock market value in just a few days. But over the ensuing months, the market bounced back, reclaiming around half of its losses. Investors breathed a collective sigh of relief, and money managers loaded up the stocks again.

Then the stock market abruptly crashed again, sending both share prices and bankers into funeral dirges.

Over the next three years, the market would “sucker rally” a total of five times—only to plunge to new lows on each occasion. Yet with each new rally, the professionals invariably belted out that the crisis was over.

On Aug. 23, 1930, Moody’s Investors Service wrote regarding its prosperity index: “We are, therefore, inclined to regard the present level of business activity as the approximate level from which recovery will begin” (emphasis mine).

And the market plunged.

On Nov. 15, 1930, the Harvard Economic Review predicted: “We are now near the end of the declining phase of the Depression.”

And the market plunged again.

It would take more than three years of ups followed by dramatic downs before the Dow Jones would hit a real bottom—all the way back to around 50.

For the general economy, it took a decade of hopeful high notes and octave-dropping lows and finally a literal worldwide bloodbath to end the Depression.

Here is the point. Whether you look at the stock market, world industrial output or trade, the tune matches 1930. By some measures, things are even more discordant.

The Next Stanza

By March of this year, the Dow Jones Industrial Average had crashed by 53 percent from its highs. The corresponding fall in 1929 was 48 percent. The Dow has now subsequently rallied by 50 percent—just as it did 79 years ago. Where to next?

The stock market’s lengthy slump has ended at last, says popular Goldman Sachs soothsayer Abby Joseph Cohen. “We do think that the new bull market has begun.”

“There is little evidence to be cautious,” composed Citigroup strategist Tobias Levkovich.

Can you hear the pickup note to the next stanza? And the market plunged again.

Yet the stock market is not the only indicator that is in hurtful harmony with 1930.

According to the most recent data presented by, an economic policy research center, world industrial production is also in uneasy unison with the 1930s fall. A look at the charts reveals a déjà vu nightmare chorus. Both the United States and Canada have seen their industrial production fall parallel to the 1929 crisis, as have Germany and Britain. Italy and France and Japan are doing much worse.

In the area of trade, our world is also worse off than that of our predecessors. Trade levels have fallen off a cliff. There are, however, some major differences between now and the first Great Depression.

In 1930 America was a producer. During that year, the U.S. produced 70 percent of the world’s oil, 60 percent of its wheat and cotton, 50 percent of copper, 40 percent of coal. Additionally, America held half of the world’s monetary gold reserves. Today, America is a net consumer, relying on other nations for energy supplies and strategic minerals such as oil and copper to meet demand.

America also used to be a creditor nation. But it has gone from being the world’s greatest lender nation to its greatest debtor—a situation that is getting worse by the day. America is spending money like it is going out of style. It has paid out more money combating the current recession than it has on any other event in history, including World War ii.

All the money might buy a little time—it might make the faux recovery last a bit longer—but it doesn’t really change anything. A problem caused by too much spending and debt cannot be fixed by more of the same.

Unfortunately, America looks like it is getting set up for a refrain. The excesses of the past two-plus decades have not been rectified during the past few short months. More punishment is on the way.

History is repeating; you can feel the rhythm. The crescendo awaits.