1929: “President Hoover said that ‘the fundamental business of the country, that its production and distribution of commodities, is on a sound and prosperous basis’” (John Kenneth Galbraith, The Great Crash 1929, London: Penguin Books, 1992, p.128).
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2001 : “The American economy is fundamentally strong,” Bush said in his weekly radio address. The “skills and hard work and entrepreneurship” of Americans are “as strong today as they were two weeks ago,” the American workforce is the “most productive in the world,” and U.S. factories produce more, and a wider variety, of goods than any other country, he said” (Holly Rosenkrantz, Bush Sees Business Climate Improving After Attacks, bloomberg.com, September 22, 2001).
1929: “Professor Irving Fisher ... added, ‘I expect to see the stock market a good deal higher than it is today within a few months.’” (Galbraith, p.116).
2001: “Treasury Secretary Paul O/Neill predicted on CNN that stock indexes would rebound to record levels “in the not-so-distant future.”” (Vince Golle & Monee Fields, Fed cuts benchmark rate to 3%, ECB reduction follows, bloomberg.com, September 17, 2001).
1929: “In New York [on Thursday October 24] the panic was over by noon. The organised support appeared... Word had reached the floor of the Exchange that the bankers were meeting, and the news ticker had spread the magic word afield. Prices firmed at once and started to rise. Then at one-thirty Richard Witney [acting president of the Exchange].... perhaps the best know figure on the floor ... made his way through the teeming crowd... At the Steel post he bid 205 for 10,000 shares... he continued on his way, placing similar orders for fifteen or twenty other stocks. That was it. The bankers, obviously had moved in. The effect was electric Fear vanished and gave way to concern lest the new advance be missed. Prices boomed upward” (Galbraith, pp. 122-124).
2001: “Leading the Washington/Wall Street coalition that tried to prevent the market from crashing, Treasury Secretary Paul O’Neill joined NYSE Chairman Richard Grasso in working the floor of the exchange during the day” (Jerry Knight, Dow, Nasdaq Tumble After Four-Day Halt, washingtonpost.com, September 17, 2001).
1929: “Yet by 1929 popular faith in laissez-faire had been greatly weakened. No responsible political leader could safely proclaim a policy of keeping hands off” (Galbraith, p.160).
“The conventional explanation is that Herbert Hoover, President when Wall Street collapsed and during the period when the crisis turned into the Great Depression, was a laissez-faire ideologue who refused to use public money and government power to refloat the economy... There is no truth in this mythology... From the very start ... Hoover agreed to take on the business cycle and stamp it flat with all the resources of government” (Paul Johnson, A History of the American People, pp.614, 617).
“The new element of the New Deal was the acceleration of the decline in laissez faire” (Harold Underwood Faulkner, American Economic History, 8th edition, New York: Harper & Brothers, 1960, p.683).
2001: “Even before the September 11 attacks, the administration had shown flexibility in its policies, breaking with the purist free-market supporters when it believed such action was necessary” (Paul Blustein, White House Willing to Nudge Markets, washingtonpost.com, September 19, 2001).
“White House economic advisor Lawrence B. Linsey ... a fervent believer in free markets and market-driven solutions ... and other members of President Bush’s economic team chose government intervention instead of a laissez-faire approach” (Glenn Kessler, Riding to the economy’s rescue, washingtonpost.com, September 25, 2001).
1929: “Mr Hoover’s first step was out of the later works of John Maynard Keynes. Precisely as Keynes and Keynesians would have advised, he announced a cut in taxes. The rate on both individuals and corporations was cut by one full percentage point..” (Galbraith, p.156).
“...on Thursday, 31 October [effective November 1]...the Federal Reserve Banks lowered the rediscount rate from six to five per cent. The Reserve Banks also launched vigorous open-market purchases of bonds to ease money rates and liberalize the supply of credit..” (Galbraith, p.141).
“...The Federal Reserve Bank lowered its discount rate so as to make an easy money policy. The rate went to 4.5 percent on November 15, and to 4 percent on February 7, 1930; by mid-March it reached 3.5 percent. The easy monetary policy was instrumental in restoring a measure of confidence and helped lead to the correction of December 1929-April 1930” (Robert Sobel, Panic on Wall Street, p.387). [Sobel’s dates have been corrected to the effective dates - see Federal Reserve Bulletins].
“Mr Hoover also called a series of meetings on the state of the economy... the meeting of the industrial leaders on 21 November ... was attended by, among others, Henry Ford, Walter Teagle, Owen D. Young, Alfred P. Sloan, Jr, Perre du Pont, Walter Gilfford, and Andre Mellon [the Treasury Secretary]...” (Galbraith, p.157).
“Mr Ford ascribed the stock market crash to a business slump. He proposed that prices be not lowered and that wages be raised. Mr Hoover proposed that construction be pushed, both public and private... Cities, states, and the Federal government took Mr Hoover’s advice; Mr Ford took his own advice" (Irving Fisher, pp.98-100).
2001: “Federal Reserve Board Chairman Alan Greenspan will meet tomorrow with congressional leaders to discuss how to help the economy rebound from last week's terrorist attacks.
“On the table are new tax and interest rate cuts, financial bailouts for airlines and larger tax write-offs for capital losses, according to lawmakers and administration officials.
““This is an economy that’s going to get a dose of both supply-side and Keynesian economics” White House spokesman Ari Fleischer said, referring to competing theories that tax cuts and government intervention stimulate the economy” (Ryan J. Donmoyer, Greenspan, Congressional Leaders to Discuss Economy, bloomberg.com, September 18, 2001).
On October 3 at a round-table discussion President Bush met with top U.S. executives. “Most of the business leaders he met with at Federal Hall this morning were chief executives of large publicly traded companies. They included Kenneth Chernault, chief executive of American Express, Sanford I. Weil, chairman of Citigroup, and Betsy D, Holden, head of Kraft Foods” (Michael Brick, Bush calls for billions more to give the economy a boost, nytimes.com, October 3, 2001).
“There, he said he was proposing $60 billion to $75 billion in additional personal and corporate tax cuts to provide a boost, saying the economy needed a “kick-start,” and he was working with Congress to get it” (Ashad Mohammed, Bush Talks Up Economy on 2nd Visit to New York, reuters.com, October 3, 2001).
“General Motors, scared that consumers would stop spending after September’s terrorist attacks, launched deep discounts to “Keep America Rolling”. Ford and DaimlerChrysler were forced to follow suit...” (Economist, America’s car makers, January 12, 2002, p.62).
1929: “Forgetting that depressions had frequently occurred in previous years, leaders in all walks of life, including economists, were dumfounded at the speed with which the glittering structure of prosperity had collapsed like a house of cards... It might be supposed that experienced leaders of business and finance, to say nothing of economists, might have predicted the inevitable result. Most of them did not. Optimism was widely prevalent that the country had entered a new era of never-ending prosperity and permanent high level of stock prices. By the time the government began to worry, it was too late” (Faulkner, pp.651, 644).
2001: “The speed of the downturn was remarkable, given America’s economic performance in the preceding decade. It took many people by surprise - Mr Greenspan included to judge by the speed of the Fed’s policy reversal in early January” (Economist, Taking no chances, economist.com, October 2, 2001).
1929: “The contraction shattered the long-held belief, which had been strengthened during the 1920s, that monetary forces were important elements in the cyclical process and that monetary policy was a potent instrument for promoting economic stability. Opinion shifted almost to the opposite extreme, that “money does not matter”; that it is a passive force which chiefly reflects the effects of other forces; and that monetary policy is of extremely limited value in promoting stability” (Milton Friedman & Anna Jacobson Schwartz, A Monetary History of the United States, (Princeton: Princeton University press, 1963), p.300).
2001: “These are times of shattered illusions. The attacks of September 11 destroyed our sense of invulnerability, and now the mythology of the “New Economy” is receding before the reality of declining jobs and profits. To this list may soon be added the Federal Reserve’s presumed power, which - during the reign of Alan Greenspan - has grown to immense proportions in the popular imagination. People began thinking that the Fed had achieved what “fine tuning” (a concept discredited in the 1970s) had promised. By well-timed changes in interest rates, the Fed could steer the economy along a path of low inflation, high employment and rapid growth.
“ It is doubtful Chairman Greenspan ever bought into this line. He has seen too many business cycles to harbor a false sense of control. But the success of his stewardship has inspired unrealistic expectations, even among economists, about the power of monetary policy - changes in interest rates and money supply orchestrated by the Fed and other government central banks. We may soon be disabused of this pleasing faith” (Robert J. Samuelson, An End to the Greenspan Illusion, washingtonpost.com, October 17, 2001).
History suggest that the recession following the bursting of the American dot.com bubble will, after one or more suckers' rallies, turn into a "great" recession or depression when events from overseas wash-back on the American economy pushing it over the brink. But before looking at what happened after the crash of 1929 we will look at the background to the booms in America in the1920s, Japan in the 1980s and America in the 1990s setting the precedent for the future. |
