Tuesday, May 11, 2010
The Second Leg of the Great Depression Was Caused by European Defaults
Many Americans know that the Great Depression was started by the bursting of the giant Wall Street bubble of the 1920's (fueled by the use of bank deposits on speculative gambling, which is why Glass-Steagall was passed) , which in turn caused a run on American banks.
But most Americans don't know that the second leg of the Depression was caused by European defaults.
As Yves Smith reminds us:
Recall that the Great Depression nadir was the sovereign debt default phase.The second leg down of the Depression was larger than the first, as shown by this chart of the Dow:
[Click here for full chart]
The second leg down was primarily initiated by the failure of the Creditanstalt bank in Austria. Creditanstalt (also spelled Kreditanstalt) declared bankruptcy in May 1931.
As Time Magazine noted on November 2, 1931:
May 14 [1931]: First thunderclap of the present crisis: collapse in Vienna of Kreditanstalt, colossal Rothschild bank, which is taken over by the Austrian Government, shaking confidence in related German banks.
Austria played a prominent role in the worldwide events of 1931 as the largest bank in Central and Eastern Europe, the Viennese Credit-Anstalt, collapsed and led Europe into a financial panic that spread to other parts of the world. The events in Austria were pivotal to the economic developments of the 1930s ....
As Megan McArdle points out:
The Great Depression was composed of two separate panics. As you can see from contemporary accounts ... in 1930 people thought they'd seen the worst of things.Way to go, guys ... you're re-creating history.
Unfortunately, the economic conditions created by the first panic were now eating away at the foundations of financial institutions and governments, notably the failure of Creditanstalt in Austria. The Austrian government, mired in its own problems, couldn't forestall bankruptcy; though the bank was ultimately bought by a Norwegian bank, the contagion had already spread. To Germany. Which was one of the reasons that the Nazis came to power. It's also, ultimately, one of the reasons that we had our second banking crisis, which pushed America to the bottom of the Great Depression, and brought FDR to power here.
Not that I think we're going to get another Third Reich out of this, or even another Great Depression. But it means we should be wary of the infamous "double dip" that a lot of economists have been expecting.
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to get out of this mess do what JFK wanted to do close the federal reserve bank and cansel all dept with executive order 11110 but the killed him for it
ReplyDeleteSo, the second leg of the Great Depression wasn't in 1937 anymore?
ReplyDeleteI disagree with a part of this. I do think we're headed toward a Great(er) Depression.
ReplyDeleteWith the unemployment at its current rate, we are either very close to a depression or in a depression right now. You have to keep in mind that the official unemployment "numbers" don't represent the people who are no longer eligible for unemployment "benefits" but still have no job.
Add to that the people who are underemployed, then the declining value of the dollar, it seems as if a Great(er) Depression will be on us soon.
My $0.02
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Europe is about to erupt
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Merkel in trouble
Official unemployment nos also do not account at all for self-employed people - of which there are a lot - who do not even qualify for government handouts at all when the economy takes such a dive. These people are completely not counted at all and that would include me - I have been deeply affected by this crisis, as well as every single small client I have, had, used to have - my personal little business is aware of 100 (at least) related to me personally that are in the same boat.
ReplyDeleteWhile it is true that European banking failures were part of the cause of the second leg down, the big reaction came on June 17, 1930, when the Smoot-Hawley Tariff protectionist act was passed. There were other contributors, in other words.
ReplyDeleteThe whole monetary system is nothing more than a nod and a wink. It's long overdue to go belly up. Too bad for all you/us working stiffs. Better stock ammo and provisions. Become self sufficient now before the caca hits the proverbial fan
ReplyDelete