Thursday, January 19, 2012

So Depressing! 1893, 1929, and 2008

Most Americans have heard of the Great Depression of the 1930s, and many Americans today are suffering from the effects of the 2008 sub-prime mortgage crash.  But few are aware of the so-called "Panic of 1893," which sank the US and other industrialized countries into a depression that lasted for a decade.  Some aspects of the '93 Panic bear an uncanny resemblance to those of the current economic mess.

The economic motivations for the 1892 Homestead Strike are harbingers of the Panic.  In 1891 Carnegie and Frick, casting their eyes upon the great flood of unemployed Americans and immigrant labor entering the country, decided to slash workers' wages to take up the slack in their sagging bottom line.  Theirs was a conscious, orchestrated move to take out unions and their negative impact on Robber Baron income.  The Strike, after all, began with a lockout. Frick planned to keep control of the situation by enclosing the Homestead Works in a huge fence (aka "Fort Frick"), then bringing in Pinkerton guards, who would secure the mill for scab workers.

The flaw in this strategy proved to be the bringing in of Pinkertons.  Frick did not anticipate that his mercenaries would encounter a few thousand angry, armed townspeople on the river bank.  But this defeat did not deter Frick.  He convinced the Pennsylvania governor to send in the State militia to occupy the site to allow replacement workers to come inside the Works.  End of strike. What the strikers had not realized is that for every one of them, there were several hungry, unemployed workers desperate for any income.  A torrent of scabs flowed into the mill, and that was that.

During the previous decade, the US had enjoyed a tremendous period of economic expansion, driven by speculative building of railroads.  No one seemed to care that there were too many railroads, all being built with shaky financing.  Banks, investors, and railroad workers were all profiting from the building of this economic house of cards.  What, them worry?
A run on a bank in 1893.

But then, in February of 1893, the first cards came tumbling down with the bankruptcy of the Philadelphia and Reading Railroad, followed by three other major railroads, including the Great Northern. A series of bank failures followed, with thousands of small investors losing their life savings. The mining industry, heavily reliant on railroad building and the silver standard, went into a deep depression.

Bankrupt, many people couldn't pay their mortgages and were forced to abandon the homes they'd recently built.  Brand-new houses stood unoccupied and unsalable. The ranks of the bankrupt and unemployed swelled, driving wages on existing jobs even lower. Double-digit unemployment continued for nearly a decade, reaching a high of 18% in 1894. The US Treasury was in such bad shape that President Grover Cleveland took out a loan of $65 million in gold from banker J.P.Morgan (the future owner of U.S. Steel) to keep it afloat.
A soup line, with ironic billboard, 1930s.

While the government implemented some reforms during the next several decades to try to stabilize the economy, it took the horrors of  the Great Depression for things to change significantly for the average American worker.  Roosevelt's New Deal spurred the creation of government agencies that not only brought economic stability, but a social safety net for ordinary American workers and their families: the WPA, Social Security, the United States Housing Authority and the Farm Security Administration. Regulation was imposed not only on banking, but also on other commercial enterprises, like the sale of foods and pharmaceuticals.
A farm foreclosure auction in Iowa, 1933.

But then, in 2008 Americans found themselves facing the unimaginable: an international crisis of debt.  The cause: the bursting of the real estate speculation bubble.  Shaky lending practices (subprime mortages) had spurred an enormous housing boom, driving up real estate prices while creating enormous debt.  Worldwide, banks and  governments got suckered into helping build this house of cards.  Then the crash came, with painful consequences: banks failing, governments on the verge of bankruptcy, companies downsizing or folding, mass layoffs, huge numbers of unemployed.
Editorial cartoon: I thought we were just buying a house."

While the economic situation in 1893 is in many ways different from our current one, the parallels are nonetheless stunning: financial speculation driving overbuilding, resulting in bank failures and mass unemployment. In both cases, a tiny privileged minority acquired fabulous wealth, elections were partisan and fiercely contested, and ineffectual and/or corrupt elected representatives were reviled by the people who elected them.  Instead of Robber Barons and banks, we have international corporations and banks running the show.  Either way, it's still a very small, elite group in control of the wealth of nations.

A brand-new house, abandoned.
Amazing to me is the solution that some today are trying to implement to fix this mess: dismantle the regulations and social safety network put in place in the last century.  Let's get rid of safety and environmental regulations, the workers' right to bargain collectively, and expensive programs like Medicare and Social Security, and all will be well, they say.  Let capitalism work its magic on the economy, they say, staring dreamily into their Brave Newer World.  Emulating Frick, they would like to take advantage of American workers by eliminating their jobs and benefits and handing over the profits gained thereby to the Fortunate Fewer.  The workers with gainful employment will continue to shoulder the tax burden, while the rich sit by and build up their fortunes.

I say, you folks must be nuts to consider even for a second catapulting our country back into the ugly, filthy, brutal economic free-for-all of the 1890s. Yours is neither a practical nor ethical vision.

Take a lesson from history.  As George Santayana famously remarked, "Those who cannot remember the past are doomed to repeat it."
'Nuff said.

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