The New Economy - Part II (Continued -3)

I keep getting sidetracked from my thoughts on our economic development from the late eighties to the present.

Basically, my theory is that various pressures took the economy from one similar to a bowling ball to a balloon and much recent "growth" has been little more than that which causes a balloon to expand and rise...a lot of hot air.

But, in this post, I want to borrow a lengthy quote from Marriner Eccles, Chairman of the Federal Reserve from 1934 to 1948, and the principal architect of the post-Depression safe guards built into the banking system to avoid another Depression.

In his memoirs, "Beckoning New Frontiers," Eccles gives his own explanation of the Great Depression:

"As mass production has to be accomplished by mass consumption, mass consumption, in turn, implies a distribution of wealth - not of existing wealth, but of wealth as it is currently produced - to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of the currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

This is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product - in other words, had there been less savings by business and the higher income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but in reality was under consumption when judged in terms of the real world instead of the money world. This, in turn, brought a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the cycle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And, thus again the vicious circle of deflation until one third of the entire working population was unemployed, with our national income reduced by fifty percent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression."

Eccles, of course, lived in a different era. The late twenties and early thirties of the 20th century were in a totally different time frame, with apparent differences in economic fundamentals. Eccles' pre-WWII economy was essentially a national economy, not a globalized economy. American imports comprised less than 5% of the GNP. And, of course, the Depression occurred prior to an overhaul of the U.S. banking system, in which Eccles played a major role; an overhaul that created numerous safeguards to avoid another Depression.

However, in my next post - delaying the return to "stockholder value" a bit longer - I hope to show how similar our situation is today with the situation Eccles described above...albeit with new terms and on a much larger playing field, namely "a globalized economy."