Saturday, October 17, 2009

The view from the depression

Joe Nocera provides a fascinating glimpse of the Great Depression from someone in its midst.

It provides useful insight on our current situation and the battle over deficit spending.

Mr. Roth’s diaries have no narrative. But they are compelling reading nonetheless, because they force readers to reflect on both the similarities and the differences between then and now. What particularly struck me was watching Mr. Roth, in his diaries, grope from day to day, and year to year, searching for an answer that wouldn’t be clear until long afterward. He’s like the proverbial blind man who feels an elephant’s trunk and thinks elephants look like a rope. Not unlike the way we are today, as we grope our way through our own financial crisis.

Mr. Roth’s inflation fears are one good example. A rock-ribbed Republican, he can’t understand why Roosevelt’s New Deal programs — and the spending they require — don’t bring with them the kind of scary inflation that had occurred in Germany after World War I. He keeps waiting for it, predicting it, ever fearful that it will make an awful economic situation even worse. He is baffled that inflation remained subdued. He can’t get outside of his mental framework and see — as we can today — that Roosevelt’s programs are the only things keeping the economy alive.

But an even more wrenching example of his groping in the dark is his desperate wish for the Depression to end. His diaries are filled with tentative predictions, usually based on experts’ opinions, that the worst is over. Yet every time he thinks that, he turns out to be wrong. He begins studying the charts of previous Depressions to see how long they lasted. “I have done considerable reading about the depressions of 1837 and 1873 and I am struck by the similarity to the present crisis,” he writes in early 1933. “If history repeats itself then we still have 2 or 3 years of bad times ahead.”

At various points in the early 1930s, the stock market spikes — and he starts to think it’s a good time to buy stocks. Indeed, he writes, many experts are advising people to get into the market, and some of his wealthier friends do so. But six months later, the experts invariably turn out to be wrong, and his friends wind up losing their money. During the Depression, optimism was ruinous.

And yet — and this is something we tend to forget — between 1935 and 1937, business began to boom again, and a sense of growing prosperity took hold in the country. In Youngstown, the steel and rubber factories were operating at near capacity, just as they had in the 1920s. On Christmas Eve in 1936, Mr. Roth wrote: “Just came back thru the stores on my lunch hour. People are spending like drunken sailors.”

A week later, he added, “It seems to me that the time has come where we can formally and officially announce that the depression of 1929 has ended.”

This, of course, turned out to be completely wrong. That September, the market crashed, and the Depression took hold once again. Today, most economists believe that the downturn was caused by Roosevelt, who turned off the spigot too soon, trying to balance the budget instead of continuing to pump money into the economy. Not understanding the reason for the downturn, Mr. Roth was deeply discouraged by the reappearance of the Depression. “It is terrible to contemplate that we are in the 9th year of depression and still cannot see clearly ahead,” he wrote in March 1939.

A few months later, he wrote: “As I re-read some of the predictions made by outstanding economists in past few years, I must laugh. They were all wrong. None of them foresaw the 1937-1939 collapse and many predicted inflation before this.” Mr. Roth comes to the conclusion that relying on experts is a waste of time.
Nocera places the following quote at the start of his column this morning:

Dow at 10,000 as Crisis Ebbs

— Wall Street Journal headline on Thursday

It's beginning to feel a lot like 1937.

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