For many people, this is a time of great uncertainty – they don’t know what is going to happen next. For those of us who study history, what happens next isn’t the question, but rather how bad it will be – and what happens after that. This may sound like the same thing, and as far as most people are concerned it probably is. But there is a boundary to what might possibly go down and there are known likely effects of this situation. The more we understand what happened before, the more we can take confidence that we at least know where we are.
I’ve been slow to make predictions as to how the Depression will play out because there are a lot of people in positions of authority who understand the situation. How much influence they have is always a question, but they are there – and may influence what goes down. The conditions we see are indeed a Depression in the sense that it is a Kondratieff Winter, or a specific situation where the economy simply over-extended itself. To understand the waves of history we have to start by looking at the last three Depressions and what happened.
Naturally, some people will say that the economy has changed completely in the last 150 years. That’s true, but it’s only one reason why this is an art, not a science. A Depression, in the sense that I use the word, starts with a bank panic or large failure of credit markets – but not all bank panics trigger a Depression. Poorly run banks are historically pretty common, and many of you will say that what just went down is nothing more than one of those things.
1857: Britain, exhausted from the Crimean War and other adventures of “The Great Game”, entered a recession in 1856 and slowed its buying US exports. The long period of expansion after the Mexican War had created a lot of manufacturing capacity, and with the slowdown to our largest trading partner warehouses became full and manufacturers defaulted. When massive embezzlement was discovered at the Ohio Insurance and Trust office, a run on all banks resulted. The unemployment in the North hit as high as 15% by some estimates, but the South was relatively untouched. The resulting emboldening of Southerners, especially given the apparent superiority of their quiescent economic system that avoided boom and bust cycles, was one of the causes of the Civil War in 1861. Our politics was forever changed after the War. Around the world, strange military adventures included the French invasion of Mexico in 1863 and eventually the unification of Germany in 1871.
1893: A recession struck all of Europe in 1889, and by 1893 exports to Europe were negligible. The excess capacity lowered prices for everything and resulted in a massive default nearly simultaneously. There was no single scandal or event that triggered this collapse. The unemployment rate hit as high as 18%, and was above 10% for five years by most estimates. The excess of people was absorbed by the growing West, where at least some living and cheap land were still available in places like North and South Dakota. Progressive politics was born from the horrible working conditions that remained for those who still had jobs. The Spanish-American War of 1898, where we knocked off a relatively weak power and assumed our position in the world stage, was an immediate response to the Depression.
1929: Recession brought Europe to its knees long before the US, exacerbating the already obvious excess capacity – especially in the automotive industry. The Stock Market Crash of 1929 was the result of a series of bank failures and a creeping credit meltdown, and while the first big sign of trouble it is incorrectly viewed as the cause of the Depression. The unemployment rate hit 34% as the Depression lasted as long as 12 years, the worst in our history by far. There was significant improvement in the mid 30s, but officially it only ended as World War II flared up. Our current system of left-right politics, reflecting a response to the Cold War, was created in the aftermath.
Where are we today? I’ll let you decide. Nearly all Depressions started abroad, but this one may have started here first. All were caused by excess capacity in a key sector, this time the financial sector. There is a cast of villains in a key, symbolic event like the collapse of Lehman Brothers – except for 1893. Unemployment was often ran above 10%, but not by much – except in 1929. The ending comes when the entire social, political, and often geographic landscape changes, without exception. War can proceed a Depression, but after such an event it is very likely.
This may look chaotic, and it is. It is a bounded chaos, however, a fractal landscape of recursion or at least passing backward glances. We can’t say what will happen, but we know where it’s going in broad terms. Some paths through this territory are better than others, for sure. It’s also not necessarily as bad a ride as some people think, assuming you don’t mind a sense of danger on every curve.