History

[Working backward from the year 2000 toward America’s beginnings.]

The crash

The stories of people throwing themselves out skyscraper windows are apocryphal, and the full effects of the crash didn’t manifest all at once. At first, most people read of the crash as something of interest that had happened to other people. People who had had a lot of money now had less. Some, a lot less. Some, none at all. But the man in the street probably didn’t worry too much, not at first. How many people worry because somebody else lost money gambling?

(I remember in 1987 when the stock market underwent a similar, but, because of computers, much faster, crash. Stocks fell 20% in a day. I was working for the Norfolk newspaper at the time, and I was in the newsroom watching TV with the others, listening to reporters cracking jokes about the market crash because they thought that it didn’t affect them. They had no idea how thin the ice was that they were standing on.)

But events have consequences. People with less money to spend, spend less. They default on loans. They stiff their creditors. Cumulatively, a lot of people doing this begin to depress the economy. Businesses start to fail. Banks close. Credit tightens, which makes it harder for healthy businesses to function normally. They start to fail too. in America’s past, business contractions (often caused by sudden restriction of credit, for one reason or another) were called panics. The word sounded to – well, panicky – so this time President Hoover and his economic advisors called it a depression in the business cycle. It was depressing, all right, and for three years it kept getting worse.

By the time Hoover went out of office, the stock market was down 75 percent from 1929, exports were at  their lowest level since 1904, the unemployment rate was 25%, an estimated 20% of the people were barely surviving on charity, and sharply falling crop prices led to farmers losing their land (having defaulted on bank loans,), tenant farmers being evicted, and farm laborers facing sharply reduced wages.

For decades, Democrats blamed Hoover for inactivity in the fact of an unprecedented crisis, but the charge isn’t fair. He did what he thought prudent. The trouble was, the world economy was in crisis, the domestic economy did not react the way it always had, and nothing that he tried did much good. Nor did he know how to connect with the people. Thinking that one main cause of the continuing depression was lack of confidence in America’s future, he took to proclaiming that the economy was “basically sound,” and that “prosperity is just around the corner.” When nothing improved, this jawboning naturally began to backfire. At one point he angrily claimed that Wall Street was in a conspiracy against him, because every time he announced that “the economy is basically sound,” stocks dropped some more. It evidently didn’t occur to him that announcing that the economy wasn’t broken amounted to announcing that he didn’t have any ideas about fixing it.

[Working backward from the year 2000 toward America’s beginnings.]

The Market

And there was the stock market! A wonderfully entertaining and accurate history of the 1920s, Only Yesterday, was full of anecdotes about the post-World War I stock market and its fabulous, almost unbelievable history. As with most group contagions, it started small, and bred got-rich-quick anecdotes that lured in others, some of whom generated similar stories, only in the 1920s it kept on going, and the music kept playing faster. It was all pretty wonderful, as long as stocks kept going up.  (Will Rogers told his readers it was simple to make money on the stock market. “Buy a stock, and when it goes up, sell it. If it don’t go up, don’t buy it.”)

You could buy stocks on credit, or on margin, and could use the value of the stock to buy more stock on margin, and use the value of the new stock …. You get the idea. And of course, because it was so pleasant and profitable, people persuaded themselves that it was going to go on forever. True, it never had in the past, but “this time is different.” It always is. And it always works out more or less the same way.

Herbert Hoover, “the great engineer,” was expected to preside over continued prosperity. Inaugurated in March, 1929, he got about half a year before the roof fell in. In late October, the market crashed. At first it seemed to recover, then on Black Tuesday it went into free fall. The mechanism for the free-fall was the same as the one that had boosted stocks in the first place: margin.

Few people understand it, but it’s simple enough in concept.

Say a stock sells for $100 a share and you buy ten shares on 10% margin. You have bought ten shares, worth $1,000, by putting up $100 and borrowing, from your broker, $900 against the value of the stock. If the price goes up to, say, $120, the stock you have pledged against your loan is now worth $1,200 and you look like a genius. You could sell your shares, pay off the $900 loan from the broker, repay yourself your initial $100, and walk away with an additional $200. This, of course, is what people were counting on. Stock prices were going up, and would continue to go up, right? They never had in the past, but this time it was different, right?

So what happens if for some reason the stock price falls to $80. If your only problem was that your original $100 had shrunk to $80, you could live with that. But you still owe the broker that $900, and now you’re securing that $900 loan with stock that is only worth $800. At some point (and pretty damn quick!) your broker issues a margin call, and you have to deposit more money in the account. If you can’t meet the margin call, the broker can sell enough of your stock to bring your account back up to the maintenance margin. They can (and will) do this without consulting you, and they can sell anything they control. Still sound like a fun game?

(Joseph P. Kennedy, the father of the future president, added to the fortune he had already made by extensive stock-market speculation in the 1920s, but – in a spectacular display of good judgment and good timing – he got out of the market entirely in the spring of 1929. A bellboy had given him a tip on the stock, and the stock had in fact gone up, and Kennedy said later, any market in which a bellboy could pick stock was no place for him. One wonders, what would it have done to the history of our country if Joe Kennedy had lost his fortune, or a good part of it, like so many others at all income levels? Fortunately, he didn’t.)

Okay, the stock market crashed, for many reasons but most simply because too many people were buying too many stocks by borrowing too much money. As one economist explained later, when asked what had caused the crash, “Somebody asked for a dollar.” In other words, someone was asked to put up actual money in place of borrowed money, and couldn’t, and therefore sold some stock. This in turn caused someone else (working on margin) to have to sell stock, which in turn ….

The result was dreadful.

[Working backward from the year 2000 toward America’s beginnings.]

After World War I

America emerged from World War I a very different country economically — not to mention socially and politically! The war production effort caused massive dislocations and readjustments in the way things were done. Before the war, for instance, there were dozens of sizes of auto tires. During the war those dozen sizes were standardized to maybe a dozen. (Making up numbers here, but the general idea is right.) And as with tires, so with hundreds or maybe thousands of other industrial items. The emphasis was on streamlining the process for maximum production, and part of the streamlining process involved standardization.

No one would have given the government such power in peacetime. War, as usual, served as the universal solvent, feeding power to government in all sorts of ways, in areas that had always been private property. (It would be the same in World War II, only more so. The net result of a century’s scarcely interrupted warfare was hypertrophy of the state and atrophy of the rights and autonomy of the private citizen. The result was the military-industrial complex that Eisenhower warned against on his next-to-last day in office, and the imperial superstructure that appeared so overwhelming at century’s end.)

In World War I as in World War II, the United States undertook two major assignments besides providing soldiers and sailors.

One was shipping enormous quantities of food to allies whose food supplies were running short because of lack of manpower to farm the fields (France) and/or insufficient land to grow crops in the first place (Great Britain). To provide this enormous surplus, the government mandated civilian food rationing, and encouraged civilians to grow as much of their own food as possible. At the same time, it encouraged farmers to grow as much as they could. Huge amounts of meats were canned ( “tinned,” the British would say) and civilians were encouraged to have “meatless Tuesdays” (or whatever the day was) as well.

The other major assignment was providing mountains of war materials. Again, just as in World War II, America functioned as the arsenal of democracy, whipping up and shipping out weapons, ammunition, and materials. Even an enormous amount of lumber was shipped to France in order build new railroads for the troops that were coming, and to build barracks, and to help replace so much previously destroyed infrastructure.

Both of these assignments were fulfilled. Both led to serious economic consequences after the war.

The farmers who had produced to the limit during the war found that the new, higher levels of production led merely to a collapse of farm prices after the war, when they were no longer feeding their own armies and those of other nations. This led to a prolonged depression in rural America that lasted for decades. As one old farmer said to his representative in the 1930s, “this depression wouldn’t be near so bad if it hadn’t come along right in the middle of hard times.”

The industries that had also produced to the limit now had to retool and find customers, either the ones they had had or new ones to replace the old ones. When you have been producing like mad on government contracts that are canceled essentially without notice, you are likely to get into a fix. The short postwar depression of 1920-21 was caused as much by retooling, probably, as by anything else. But then, when they got back to producing for civilians, the sky was the limit!

As would happen again 25 years later, people had money in their pockets and they were itching to spend some of it on new products. And someone had invented selling things “on time” – meaning, on the installment plan. Meaning (in plain words, long before the credit card was invented) debt. You could buy something on time for a fraction of the final cost, and pay it off as you went, which worked fine as long as you kept your job and as long as you didn’t go buying more than you could afford.

Do we need to spell out how well that worked out? But it was some ride for a while.

There were new kinds of gramophones, and now there was something entirely new: radio. There were automobiles. Not only the dependable, affordable Model T, but sports cars, and all manner of family cars. There were silent movies, and after a while there were talkies, and night clubs. And after 1920, when the Volstead Act became law, there was prohibition, which did more to promote drink than anything before it. Humorist Will Rogers said he thought that “Americans don’t want a drink so much as they want the right to have a drink if they happened to want one,” and in this is was probably right, as he was so often.

An appreciation of Ernest Hemingway’s momentous eighteenth year.

http://www.thedailybeast.com/the-year-that-ernest-hemingway-got-his-act-together

[Working backward from the year 2000 toward America’s beginnings.]

The long boom

The oil shocks of the 1970s marked the end of the long economic boom that had followed the end of World War II. Or really, it would be more accurate to say “the long economic boom that had followed the coming of World War II,” for the boom began with the massive rearmament campaign that began with the war in Europe, combined with the equally massive production of ships, arms and other goods for the British and French until mid-1940, and for the British thereafter.

The Great Depression of the 1930s began to end when the allies, and our own federal government, began to order so many things, and in such quantities. Guns, mortars, torpedoes, bombs, rifles, machine guns, and the shells and ammunition they needed. Aircraft carriers, battleships, battle cruisers, cruisers, destroyers, PT boats, submarines, LSTs, amphibious assault craft, oilers, supply ships, repair ships. Bombers, fighters, reconnaissance planes for both land and sea operations. Uniforms, boots, hats, and all the thousands of kinds of items warfare requires. Merchant ships, petroleum carriers, colliers. Coal from the ground and coal transported in trains and coal loaded onto ships and sent to England.

That’s a lot of demand, and calls for a lot of manufacturing and transport, which calls for a lot of hiring of personnel, all of whom have to eat and have a place to sleep, all of whom have money reliably in pocket, some for the first time in years. Supplying their needs causes other enterprises to hire more workers, each of whom adds to demand. And suddenly the economy was functioning in high gear again, for the first time in more than a decade.

When the rearmament boom was followed by our entrance into the war, that demand became vastly greater, because everyone was working, and everyone working had money to spend. But with so much of the nation’s economic effort going toward war materials, there was no way that pent-up civilian demand could be met. Hence, rationing. You couldn’t get the things you and your family needed just by having money (if you could have done so legally, price inflation would have gone wild); you had to have ration coupons, issued by the government. So many tickets for meat, so many for dairy, so many for gasoline, for clothes, etc. It must have been galling, to have money again after so long and be unable to spend it freely. But people by and large accepted the situation as part of the cost of war. (Many heeded the government’s pleas and bought war bonds, in effect lending it their new paychecks that they couldn’t spend, earning interest in return for helping to finance the war.) When the war ended, there was all that pent-up demand, and money to satisfy it with. Under heavy political pressure, rationing was ended in 1946, and, big surprise, inflation immediately followed, as excess money drove up the price of what goods were available.

But that immediate postwar boom left people nervous. Those with longer memories recalled that a boom had followed the first world war, too, but had collapsed. Would this regained prosperity go the same way?

Well, we know that in fact it didn’t. One reason why may have been the Marshall Plan:

In the winter of 1947, there was real fear that Europe would never be able to recover, for lack of economic resources to prime the pump. First would come collapse, and on its heels – people feared – would come the Red army. But what could be done? Harry Truman called in his friend Sam Rayburn, the Speaker of the House and one of a few key power players in Congress, and told him he wanted to give the Europeans $5 billion to revitalize their economies. This was back when $5 billion was real money, being worth probably 20 times that in today’s dollars. Rayburn, it is said, turned white and said, “Harry, you’ll bust the country.” Truman said he told him, “Sam, you know I saved the country at least that much during the war,” (as head of the Truman Commission, that ferreted out corruption among war contractors) “and now I want it back.”

Truman knew full well how unpopular he was, and by now he had the well-respected George Marshall as Secretary of State, so he called him and explained the plan and asked Marshall to propose it in public, which he did in a commencement speech at Harvard in June, 1947. The European Recovery Plan – the Marshall Plan – not only saved Europe, it kept domestic demand high, a economic consequence that Sam Rayburn evidently didn’t factor into his considerations of the effects of the plan. (It also began the economic integration of Western Europe, because it forced the Europeans to cooperate – they had to present an agreed-upon list of requests, rather than each of them lobbying separately.)

The following year came the Cold War, with the fall of Czechoslovakia to the communists, followed by such factors as the unification of the three western sectors of Germany, the triumph of Mao tse-tung in China, the formation of Nato and the Warsaw bloc, etc. etc. With the Cold War came the need to be ready to fight it. More armament orders; more soldiers to feed and equip; more paychecks indirectly funded by the taxpayers. And with the advent of the intercontinental ballistic missile and atomic warheads, the need for yet more weapons, as the age of terror put the earth into greater and greater jeopardy. Jeopardy, but there was money to be made, and made patriotically.

Eisenhower (though we recognized this only inadequately at the time) as an old Army man knew all the tricks the military would use to inflate budgets, and he did as much as he could to prevent the arms race from getting out of control. But in the end the real enemy was not only the Soviet Union, or, as it was known, the Sino-Soviet bloc, but fear itself. And fear, being an intangible, could never be defeated. At best, it could be held to an uneasy draw. But in the atomic age, the risks of being caught off guard had gone way, way up.

I think that’s one of the things that got John F. Kennedy killed. He tried to bring the cold war to a lower level; ideally, to end it. (He tried, I think, via the Space Race, to redirect the economic interests that were making money on war to make money on space technology.) It scared too many people in high places, in the military, in the secret agencies, and in the “defense” industries. It isn’t the only reason he was killed, but it was probably number one, or at most number two.

After Kennedy was killed, the war boom went into higher gear than ever before, with the Vietnam war that dropped more tonnage of bombs on the jungles that the total dropped in World War II. Didn’t matter whether the bombs were dropped on legitimate targets or at random: Each bomb had been ordered and paid for, and some people were getting rich.

The oil shocks

However, as I said, the boom came to a sudden crashing halt with the oil embargo of 1973, and nothing was ever the same thereafter. For one thing, the effect on the American economy was immediate and obvious, and every country sharing the planet and resenting American preeminence took notice, and some took hope: The giant wasn’t invulnerable.

Another effect was less immediate but cut deeper, at least in the short term (by which I mean anything from 50 to 100 years after 1973) and was potentially more dangerous. This crisis was a challenge to the assumption that America would always have plenty of whatever it needed, with no need to conserve, and no innate limits to growth. This was going to be the cause of a very deep divide in the American social scene, all the more bitter because the cause was mostly unsuspected by those it divided.

Those who retained their optimism about America’s future – by brute force, if need be, rather than give up this source of their idealism – saw those who argued for limitation as needlessly crippling America by their lack of faith. These optimists, whom the other side called cowboys, saw Jimmy Carter’s energy policy as defeatism; saw attempts to curb oil consumption as subversive; saw rules such as emissions standards, fuel efficiency standards, highway safety limits, as bad-faith efforts to impose needless restrictions on the American way of life using a non-existent energy crisis as an excuse. Foreigners holding us up because we used more than we produced? The obvious answer was to drill! Drill offshore, drill in Alaska, drill anywhere and everywhere that oil might be. Restricting drilling was a betrayal of the traditional American way of life.

Opposing them were those who saw the limits to growth. Accepting the argument that on a finite planet no resource could last forever, these realist, whom the other side called many things, few of them printable, saw attempts to continue the traditional American habits of high production, high consumption as attempts to live in a past that had vanished forever. They saw dependence on foreign oil as a guarantee that we would be embroiled in foreign wars over oil, and they saw the connection between burning oil and polluting air and water. The obvious answer was to develop new sources of energy, and in the meantime control our use of limited resources.

When we talk about the social history of the 20^th century, this will be one thread in the tapestry. But all this was un-dreamed of by the America that emerged from World War II as an economic colossus in a ruined world. (In 1950, half the world’s steel was being produced in the United States!) We’ve seen how the war transformed American consumption patterns; let’s jump back to the end of the previous world war to see the boom, bust, and recovery cycle that the nation endured in the two decades before World War II brought it out of its slump.