PARALLELS IN A CHANGING WORLD

The parallels between the world now and that of the late 1920s are indeed frightening, and the possibilities that a 1930s-style depression occurs cannot be completely ruled out. These parallels include:

* The late 1920s and the 1930s were an era of worldwide surpluses following the revival of Europe after World War I. That conflict had caused shortages which led to excessive supply increases in this country and elsewhere. The era from World War II through the 1970s was also dominated by strong demand and shortages, but surpluses have become the rule - just as they were starting in the mid-1920s.* Because of the switch from shortages to surpluses in the 1920s, the soaring inflation after World War I price controls had been removed turned to steady deflation in industrial commodities by the mid-1920s, and agricultural prices collapsed in the early 1920s and again at the end of the decade. A similar switch from runaway inflation in the 1970s, following the Vietnam and Great Society spending binges, to deflation in industrial and agricultural commodities is taking place now.

* Huge debts were run up by the European and other countries during World War I, but deflation in commodity prices and very weak demand that followed the war made it impossible for them to repay. Many ultimately defaulted in the 1930s. A similar pattern is shaping up today, with financially weak less- developed countries replacing financially weak European countries.

* Also as a result of excess global supply, protectionism thrived in the late 1920s, culminating in the infamous Smoot-Hawley Tariff Act. We are following the same path today.

* Then, as now, there was no clear world leader to control protectionist

pressure. Great Britain lost that role as a result of World War I, and the United States, did not assume it until after World War II. In between, the world was essentially leaderless. Today, the United States no longer dominates the Western world as it did in the first two decades following World War II. Whether the United States revives and assumes leadership or whether the role of the dominant economic power eventually passes to the Japanese, or even some other nation, is uncertain, but it is clear that today no country is strong enough to stem the global rush to protectionism.

* U.S. agriculture was in terrible shape by the late 1920s, after overexpanding to feed Europe during and immediately after World War I. But Europe soon returned to agricultural production, and a drought hit the U.S. Midwest in the mid-1920s. Today, U.S. agriculture is again in trouble, with Europe replaced by less-developed countries who not only have stopped buying U.S. agricultural products, but are themselves exporting foodstuffs and even invading U.S. markets.

Of course, U.S. agriculture was an important economic sector in the 1920s, accounting for 25 percent of employment in that decade. Now it employs only 3.5 percent of the labor force, but today U.S. mining, including oil and other energy production, and manufacturing are also in trouble. Inter estingly, these sectors plus agriculture account for 26 percent of U.S. employment. The depression belts then and now are of an almost identical size.

* In the late 1920s, and again now, financial markets were booming, while substantial sectors of the economy suffered. Even the parallels between the two periods in the Dow Jones Industrial Average movements are marked. Moreover, in both cases Wall Street tycoons were not satisfied with huge legal incomes but engaged in insider trading as well. Moreover, speculative vehicles were readily available both then and now, with leveraged buy-outs today replacing the utility trusts and other schemes of the 1920s.

Nevertheless, speculation in the inflationary 1970s was in tangible assets, not in stocks as in the deflationary 1920s, so it is tangible assets which should be watched this time for big price collapses. In this sense, the economy may be well beyond the equivalent point in 1929, since the prices of farmland, oil and many other commodities have already collapsed. Furthermore, the correction of tangible asset speculation would be expected to be less spectacular than the 1929 stock market crash for several reasons.

First, tangible assets are much less homogenous. All may have been fundamentally driven by soaring inflation in the 1970s, but their owners do not necessarily all simultaneously conclude that inflation is over and that as a result their assets are vastly overpriced.

Second, the Federal Reserve bailed out Mexico in 1982 to prevent a wave of bankruptcies among tangible asset speculators and innocent bystanders. This has spread out, but not eliminated, the correction of excesses of the 1970s.

Finally, even if the continuing collapse in real estate and other tangible asset prices is part of a Kondratieff Wave depression, that collapse, and the overall business decline it could signal, would be expected to be less extreme than that of the 1930s. There have been three Kondratieff Wave depressions in the nation's history, and the first two in the 1830s-1840s and in the 1880s- 1890s were considerably less severe than the 1930s debacle. A simple

average of the three suggests that a rerun of the 1930s Depression's severity is unlikely.

* The flattening in real personal income per household since 1973 following more than two decades of growth is also similar to the pattern in the early part of this century. The lack of strong purchasing power growth for the average middle-income family - the mainstay of an industrial economy - contributed to the 1930s Depression. This may happen again given the prospects of continuing declines in middle-class purchasing power.

* In the late 1920s, as now, money velocity in the United States was declining rapidly and in both cases, the Fed seemed oblivious to the fact that its monetary policy was too tight, pursuing it until too late. Furthermore, the Fed is still fighting the last war - inflation. In the early 1930s, the Fed was still fighting the previous war as well - excessive stock speculation in the late 1920s. The monetarists who blame the Fed for creating the Depression by vastly overstaying tight credit would be principal culprits if another economic crisis erupted now, since it is they who have been urging the Fed to keep credit tight and go on fighting inflation.

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