When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.Here he is doing what historians do best -- correcting erroneous perceptions of the past and he should be listened to. He then develops an argument that the economic contraction of 1873-77 is a far better point of reference. His analysis is again excellent and I cannot fault him. But then he falls into the classic trap for historians -- he assumes that understanding the past provides a reliable guide to the future. He writes:
Read the whole thing here.
If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India.
Some of his predictions are self-evident -- even to anyone who has never heard of the Panic of 1873. Cash reserves will come in handy in the coming months and there will be a consolidation of capital in the financial industry as large, well-managed firms take over their weaker competitors. That is already happening. Agitation for protectionism has been going on for several years, and immigration has been an important political issue for some time now. The importance of China and India in the global marketplace has long been apparent. In short, reference to the Panic of 1873 adds nothing to our understanding of what we are experiencing today that we did not already know. And as for the future, he draws a false analogy between the shift of credit away from Eastern Europe toward the United States and popular predictions of American decline. In 1873 the center of world capital was in Western, not Eastern Europe and remained there for some time. New York did not displace London as the financial center of the world until the First World War, more than four decades after 1873, and there is no reason to believe that the recent rise of China and India, both of which face immense structural and social problems, portends American decline.
We have heard this all before time and again. Pessimistic commentators have been predicting the decline of America and of the West for at least two centuries. Each time the pessimists have been wrong, yet they have rooted their predictions in closely argued analogies from history. From the Federalists who looked back to the collapse of the Roman Republic and argued that the American experiment in republicanism could not long survive to the present historians have sought in vain for valid "lessons" that could be drawn from the past. It is not that there are no lessons to learn from the study of history -- it is that there are too many lessons, all of them contradictory. Historical experience can be invoked to support literally any conceivable argument. Professor Nelson has provided good reasons to reject the facile comparisons now being made to 1929, and he reminds us that bust cycles have occurred frequently in our nation's history, but substituting the 1873 Panic for the Great Depression will provide us little guidance as we try to cope with the problems of today.