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October 16, 2008
The real great depression - what we should be comparing the current financial crisis with
This interesting article suggests that whereas many current politicians, finance-gurus and even historians are comparing the current financial situation to Depression in the 1920s and 1930s, the parallels between then and now really are not that strong. The crisis in the 1920s was caused in great part by
overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves.
Clearly, these are not factors in today's financial environment.
Instead, the author suggests that we look to the little-known financial crisis in Europe in the 1870s (was there a financial crisis in Europe in 1870 you might exclaim!!). There was. Europe was in a period of financial growth in which the newly united Austro-Hungarian and German Empires
supported a flowering of new lending institutions that issued mortgages for municipal and residential construction. Sound familiar? Just wait...
However, when cheap goods suddenly started flooding the Continent (thanks to the use of technology, the US was able to export large quantities of cheap grain, kerosene and manufactured food), the markets' shaky fundamentals couldn't stay stable.
The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. [...]As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates.
It took 4 years for the panic to subside and the long-term effects of the crisis included huge layoffs in the US, violent strikes, and - somewhat perversely - the rise to great economic heights of the largest names in manufacturing (Carnegie, Rockefeller, McCormick). These large companies had enough cash reserves to survive the collapse, and to buy our their competitors at
Will this be our fate? Who knows. But the catch-phrase "cash is king" is becoming quite popular nowadays, so I for one am going to re-read this article a few times and see if I can't glean any pearls of wisdom from the European financial crisis...
Posted by lara at 02:25 PM | Comments (0) | TrackBack
