THE NEW ERA OF THE 1920s AND THE NEW ECONOMY OF TODAY: BIRDS OF A FEATHER?

Doug Dowd

The New Era began poorly, as did our New Economy (dating its take-off as the 1990s). In 1919 there was a short recession, then a sharp inflation and unsteady good times and a very sharp recession, 1921-22; then began the so-called "prosperity decade," pulled up short only six years later. The 1990s also began with recession; bouyancy began in 1993, mounting toward 2000. As the two periods are now compared further, many similarities and contrasts with the present will jump off the page.

"The times they are a changin'" fit the Twenties as much as it did the Sixties. The hoopla taking us into World War I had sent emotions singing; war's realities produced economic stimuli, but just as much disillusionment and decadence: changes rocked thrugh science and tehnology and the economy, and on into haute and popular culture and social mores (including the first major cracks in the nuclear family); and politics, always wolfish, became more so, requiring and producing the new art of public relations.

Much of that was both facilitated and concealed because the Twenties were also the first hype decade -- hype about everything: entertainment, sports, fashion, politics, celebrities, free enterprise, and what would become consumerism: Hail the New Era!

As in our own time, the hype paid little attention to the underside of what was celebrated: 1) the modern U.S. drug culture had its beginnings in the Twenties, tightly intertwined with jazzing nightclubs and the boozing and gangsterism of the time, the latter an outgrowth chiefly of the illegalization of booze (1919; repealed in 1933); 2) the rat-a-tat-tat of exploding mergers and acquisitions; 3) political corruption, always well dug in, plumbed new depths in the 1920s, from the White House on down (or up, as H.L. Mencken then put it); 4) soaring real estate and stock markets were matched by rising and spreading urban and rural poverty, alongside 5-10 percent unemployment, 1921-29. Notwithstanding, the economy was seen in 1928 by the then leading economist (Irving Fisher) as "on a high and rising plateau." (That make you shiver a little?)

A serious look around the world would have shown that the U.S. economy was not on a plateau but an island in a stormy sea. The much-vaunted "integrated world economy" of the 19th century was in a shambles in the 1920s: the UK averaged 10 percent unemployment for the entire decade; Germany had raging inflation (prices rising 4 trillion times, 1914-1924) and associated political instability; the rest of Europe was also struggling with intractable economic problems, and with both revolution and counter-revolution; Latin American economies were sliding badly (as Wall St. called in loans, in favor of speculation at home); China's civil war had begun. Global chaos was king.

Meanwhile, as both cause and result, lurking over the horizon was the worst depression in history, followed closely by the worst war. Given the gifts of nature, location and its other accidents of birth, the USA was going to be Numero Uno soon, no matter what; that we became so just when we did was an inexorable outcome of World War II and its aftermath. Strength and power are relative: before 1914, the gap between the U.S. and European economies was growing; the war, as beneficial to our economy as it was destructive to theirs, widened the gap to a Grand Canyon.

The benefits of the war persisted well after 1918, due to substantial postwar pent-up demand for both consumer and investment goods and their new -- largely war-originating -- technologies, yielding the great expansion of the motor vehicle and other durable consumer goods industries. Though sustained for a while by the purchasing power enhanced by consumer debt and the roaring stock market -- sound familiar? --the key sectors (construction and autos) were already soft by 1926.  ................................... What about now? As with the World War I, War II was again a major boon for the USA, both during and after; indeed, it was more than a "boon." Of all the industrial nations, ours was politically the most stable, and our economy the healthiest, strongest and technologically most advanced as the war ended, poised to become considerably more so; all the others, friend or foe, had been flattened.

And then Providence, with a large boost from Uncle Sam, provided the Cold War, just in time to soften and end the recession of 1949. Cold War and hot war (first in Korea) combined to provide renewed expansion in the USA, creating or assisting the major bases for rising consumption and real investment. In addition, and at least as important, the Cold War was the foundation for the renewal of the European and Japanese economies, thus (given exploitation) bringing back to life and health the sine qua non of capitalism: an expanding global economy.

The most striking contrast between the Twenties and today is found in that global economy. It was crumbling in the Twenties; whatever its recent troubles, it continues to thrive, always more integrated and expansive. Even so, there is a hard core of disturbing similarity today: in the Twenties, the USA was the only "healthy" economy in an otherwise sick world; in recent years we have been the healthy base upon which all other economies have depended. But a closer look shows that such "health" as we have depends upon the economic equivalent of addictive drugs.

The USA sits at the center of a world in which the key factor for maintaining economic buoyancy for both major and minor economies is rising exports. The latter function in a complicated web whose strength or weakness is fully dependent upon the USA: "the consumer of last resort." U.S. consumption of the world's exports in the 1990s (and earlier) has been on an always rising trend; it must continue to be so, or the web will collapse for one and all. As this is written, consumption has begun to level off in the USA; even if that is the worst of what is on its way (which is unlikely), it must be remembered that continuous expansion in world trade is essential. Now some relevant data.

IN 1980, the USA was the world's (and history's) largest creditor nation; ten years later, wwe the world's and history's largest debtor nation: our foreign debt now exceeds $3 trillion, and it rises at annual rate of $350 billion. It must continue to do so; I know of no economists who think it can. That could signify nothing worse than a slowdown and moderate recession at some point. But it doesn't, for what has made the rise possible is not only foreign debt (which can be pulled back in a trice), but mountains of domestic debt.

Thus: It is acknowledged that not only U.S. imports, but our consumption, productive investment and financial markets depend upon always rising and already astronomical debt; and, to repeat, that rise must continue if collapse is to be averted. The situation was worrisome enough in 1999 to cause Business Week (11-20-99) to ask, in its feature essay, "Is the United States Building a Debt Bomb?" -- and to answer "Yes." In analyzing all the debt areas noted above, they found that 1) consumer debt (excluding mortgages) now runs at over 100 percent of disposable income (as compared with 62 percent about 20 years ago); 2) non-financial corporate debt as a share of corporate output rose from 60 to 80 percent in those same years; 3) corporate debt, rising to finance buybacks of shares more than to finance productive investment, now equals 46 percent of GDP, compared with 38 percent 6 years ago (NYT, 7-7-00); 4) financial debt as a share of GDP more than quadrupled, from under 20 to over 80 percent; financial companies are heavily into "repackaging" loans already made and selling them as bonds and notes (that is, borrowing on them), in amounts that rose from $2.4 to $7 trillion, 1989-99 -- an amount greater than household debt and twice that of nonfinancial debt

There are some nerve-wracking interdependencies whizzing around behind those numbers: the U.S. economy is now driven by consumption; consumption depends upon rising debt and the great Bull Market; an increasing percentage of stock purchases is done on margin; a significant percentage of those purchases depends upon credit cards and borrowing on home equities; the relative weakness of other economies and the atrractiveness of U.S. stocks and bonds has made it possible for our trade deficit to be fianced by an always rising inflow of foreign capital.

Any slowdown in the USA -- and one has already begun -- will soon cause slowdown in most or all other economies -- to the degree that they are dependent upon our purchases (and our investments there); in turn that cannot be lead to a withdrawal from the USA of foreign capital, and....; and then, hold on to your hats. ........................... It is a commonplace that we lefties nourish a secret hope for another Big One. That may feel good; however.... Although (as Gramsci once put it) an economic crisis creates "a more favorable terrain" for our kind of analyses and politics, the following must be kept in mind:

1) those hurt most by recessions/depressions are in the bottom 80 percent of incomes, the poorest most of all; the rich are hurt least, if at all;

2) the 1930s depression pushed no nation to the Left, except for a while. In the USA, FDR adopted center/right policies 1933- 1935 (the Nazis sent a delegation to study the NRA in 1934); the "Second" New Deal (1935-38) was pushed into place more from the bottom up than from the top down; and there were still 10 percent unemployed on Pearl Harbor Day;

3) were there to be a serious recession soon, and that is more likely than not, we could expect worse than nothing from the Bush Administration and the largely conservative Congress, whose position on such matters is one of the larger similarities between the Twenties and now; and Europe too has been moving from center/left to center/right. (And Japan, 2nd largest economy in the world, has been mired in recession now for 10 years, its government paralyzed by ignorance and fear.)

So, as always, the chances for a better rather than a worse society depend squarely on persistent hard and good work by all those left of center. It is not idle to suppose that there are many millions -- 5-10? -- in the USA who do or easily might think "left of center," and more than that if WE put in more of our time and effort to that end. 

So let's do it, already.