Locklin on science

To learn about the future, study the past

Posted in finance, history by Scott Locklin on February 11, 2010

When I’m trying to get away from internet and the telephone to get some work done, I often end up in the University library. When I need a distraction, and there are no attractive coeds to wiggle my eyebrows at, I have a look at the old journals; an activity which beats the heck out of goofing off with garbage like Wikipedia. One of my favorites is The London Times Imperial Trade and Engineering Supplement. Considering recent events, the era between 1929 and 1941 are of particular interest.

Between the advertisements for valves, the new wonder metal of aluminum, Vickers airplanes, coal mine ventilators and diesel motors there is a great deal of history and food for thought. In olden times, one could write a report in a general interest economic publication on the health of the local plywood industry, or the national fruit canneries. While this sort of thing sounds like total rot today, it’s somehow a lot more satisfying than reading about the latest facebook swindle in Business Week. Personally, I would like to know how the local plywood industry is doing. The gouty old fussbudgets who could write a detailed (and interesting) report on the state of the British paraffin wax industry in 1928 were far more perceptive and less susceptible to “deferring to the expert syndrome” than modern financial writer nincompoops. These gentlemen knew a thing or two about a thing or two. Modern financial writers tend to be journalism school types who know more about padding their CV than they do about the subjects they write about.

If you start to think men who were actually alive in the 1930s may have had better insights into what was actually going on, well, that way lies heresy and madness, because they certainly said different things than the cartoon vision of the time we’re given today. There are modern historians of the era who are reasonably honest if carefully read, but even they are misleading, and the picture the vast majority of people keep in their heads is a complete fabrication. The Orwellian phrase “If all records told the same tale — then the lie passed into history and became truth.” is in full effect when it comes to the period of time known as the Great Depression. For example; the prevailing idea in most people’s heads is that 1929 was a big surprise. Lots of people knew there was a credit bubble well before it burst. Months before black Monday, the Fed (yes, they had a Federal Reserve Banking system then, though it was a new idea) was warning about it, and they raised interest rates to help it along. Weeks before the stock market crash, it was noticed that market conditions were actually a lot weaker than justified by the stock prices. In early October 1929, it was noted, for example, that manufacturing was down and automotive inventory was building up on lots (Oct 12 1929 p 81).

The other prevailing historical idea which appears to be complete fiction is that the Hoover Administration were Laissez Faire Republicans who sat on their hands and did nothing. Au contraire: Hoover was hardly a market fundamentalist. Hoover was in fact a standard issue early 20th century technocrat -a guy who made his bones running a spectacularly successful aid program for central Europe and Soviet Russia post WW-1. The fame which made Hoover president was fame for being a proto-socialist technocrat who managed Europe’s economy for a couple of years. As such, the idea of Hoover as failed libertarian is complete historical fiction. He enacted huge government spending projects, and even wanted to implement a ban on short selling. The London Times estimated that by 1929 the expenditures of the American government totaled 30% of the national GDP (April 23, 1932 p 117). They estimated this using a system doubtless obsolete now, but which makes perfect sense: they divided the national income by the national and local government budgets. The old London Times talks in great detail about enormous public works projects funded by the Hoover administration to reduce unemployment -pretty much the same stuff Hoover did in Europe in 1919. Finally, the Republican congress of the Hoover era passed all manner of legislation tinkering with the economy. FDR, touted in the history books as a miracle worker who brought us the wisdom of Lord Keynes accompanied by angelic harp music, by contrast, took an axe to the economy: his policies were compared unfavorably with those of Stalin and Hitler. In fact, the economy only seemed to begin to recover once the Supreme Court put limits on what FDR’s gang of imbeciles could do, such that business felt confident enough in future conditions to make investments. At least that’s how the London Times saw it. Brad Delong somehow sees it a little differently (though he is a lot closer to the LT than he is to the cartoon view of the Depression, which is why I recommend you read him). Who is more right? I don’t know: everyone else seems to believe something more like the cartoon view of the Great Depression. I figure the anonymous authors of London Times Imperial Trade and Engineering Supplement, being British, had no political or historical axe to grind, and they were there. Certainly they all agree that unemployment was still nearly 18% in 1939.

The other spooky thing about reading “primary source material” is you start to notice how much the past is like the present. I won’t bore you with all the interest rate and bond buyback maneuvers that look eerily like the last year or two. People who aren’t bond traders are generally only dimly aware of such things today. The main way in which the past doesn’t much resemble the present is the technological breakthroughs of 1929 make those of 2010 look like the joke they are, which isn’t very encouraging, as these technological innovations eventually fueled a real economic boom. Try looking for advertisements in modern financial rags which compare to aluminium, the diesel engine, radio or the airplane. It is fun to read some of the contemporary predictions of immanent recovery though. These provide cheap entertainment for ironists, and are useful reminders in gauging the veracity of our “green shoots” and the various declarations of recovery and economic victory in our modern era of troubles.

Oct 26 1929 p 130 (two days before the “Black Monday” crash):
‘Recently, as has been noted there was very heavy liquidation in the New York stock market, and money rates fell. Commenting upon this in Berlin on October 8, Mr. Charles E. Mitchen, chairman of the national city bank and a director of the Federal Reserve Bank of New York is reported to have said that he was not looking for lower money rates and that the break in the stock market would not have any lasting effect.’

March 8 1930 p 584
‘The Secretary of Commerce who cited these figures in the middle of February as proof that the country was getting on its feet again, emphasized the fact that the total of new construction was in excess of what his department had estimated four weeks previously, and he predicted that expenditures for the building and maintenance of public works and public utility properties this year would total or exceed $7b. But in other quarters there was a disposition to wonder where the money was coming from which were to put through, not the public utility enterprises which are financed with private capital, but the public works.’

Nov 22, 1930 p 226
‘Recovery, in a sense, has already begun, but the pace is slow. “The buying of goods by ultimate consumers has for several months past been running at a greater rate than production by factories.” Dr. Benjamin M. Anderson, Jun. recently told the Kansas City Chamber of Commerce “The year 1930 to date stands well above the first ten months of the year 1921, and the worst of 1930 is not as bad as the worst of (the depression of) 1921.”‘

March 19 1932 p 13
‘At the beginning of March the Administration in Washington was much cheered to hear from business men and bankers calling at the White House that there had been “a distinct improvement” in business conditions throughout the country “a 10 per cent improvement” as some of them said. Unhappily, however, actual figures of business activity did nothing to bear out these blithe observations. It is true that bank failures decreased until here were only one or two a day instead of 10 to 15, and that hoarding of currency seemed to have diminished somewhat; but sales of goods in stores and by wholesalers, production and sales of motor cars and steel, loadings of freight cars on railways, electric power production, new business operations, commodity prices, and a number of other common indices of business activity showed no change what ever for the better.’

May 28, 1932 p229
‘…Therefore only the most cautious use is being made of the credit which the Reserve banks have been pumping into the market, for many weeks past at the rate of $100 million or so a week. Where the credit is being used at all, it is mainly for the paying off by member banks of their indebtedness at the Reserve banks.’

July 23, 1932 p 399
business contraction less marked (headlines)’

October 15, 1932 p 90
‘Such expansion in business as has occurred since the beginning of September has been slightly less than is usual at this season. A year ago, however, there was no improvement at all in the autumn -excepting an insignificant upturn in mid-September which was followed by a precipitous decline a month later. On balance, therefore, a more cheerful feeling is justified. But unfortunately, political exigency has operated to exaggerate what improvement has occurred thus far, representing recovery as actually here, although it is still doubtful that the corner really has been turned….It has frequently been asserted that one of the difficulties in business today has been the refusal of banks to give credit freely.’

June 3 1933 p 263
The feeling appears to be growing among business men that the belated spring recovery now is no mere “flash in the pan” but a beginning of a genuine revival. “Whatever may be thought about inflation,” as one commentator put it, “deflation is at an end.” If this is not the fact, it is at least the feeling.’

June 30 1934 p 331
‘To be sure, it has long been evident that a broad movement of recovery is in progress and that in many material ways the country has strikingly improved, and is continuing to improve, its position of a year ago.’

December 1935 p 24
the reason for the prevailing business optimism is simply that the conditions are genuinely improved for the great majority of business men’

(unemployment remained in the double digits until the Second World War)

20 Responses

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  1. Daniel said, on February 11, 2010 at 9:37 am

    Thanks for writing insightful posts like this one, it’s appreciated! More quality, less quantity. If only every blog was like this.

    • Scott Locklin said, on February 11, 2010 at 7:18 pm

      Thank you sir.

  2. Siddharth Sharma said, on February 11, 2010 at 12:01 pm

    “In fact, the economy only seemed to begin to recover once the Supreme Court put limits on what FDR’s gang of imbeciles could do, such that business felt confident enough in future conditions to make investments”

    I think that its intuitively obvious that confidence would definitely get screwed up when there are waves of bank failures and private savings /wealth lost after a credit debacle like 1929.

    Minus FDIC and FED, something similar would’ve happened in 2008.

    What i truly find interesting is an estimation of how quickly a laissez faire system would bounce back psychologically minus government induced frictions.

    I think that private sector re-capitalization of the banking system would have been almost impossible i think in late 2008 had the banks been allowed to go into bankruptcy en masse.

    I have an anti gov intervention bias but i think the bailout is probably a saving grace unless there are strong arguments to suggest that private sector recapitalization could’ve stopped large scale disruptions and large scale psychological scarring of savers and borrowers alike.

    What do you think would have happened in the absence of government stabilization in a debt induced crash (not an equity crash where leverage is absent). How quick would the recovery be.

    • Scott Locklin said, on February 11, 2010 at 7:18 pm

      Well, there is no such thing as an absence of government stabilization -the government is always doing something -and it always says it’s trying to help. Printing a metric shit ton of money and handing it out to banks was the textbook “right thing to do” according to economists. Was it the right thing to do? Well, it depends if you think the outcome was any good. Upside: financial armageddon didn’t happen -it was very obviously starting to, and that would have been a complete disaster. Downside: we already have 18% unemployment in America (though really, it doesn’t seem as bad, since women are now expected to work, which makes this more like 9% unemployment in 1930 terms), which is about as bad as it ever got under Roosevelt -and that doesn’t even count the much higher ratio we have today of uselessly employed people (aka government bureaucrats, college professors and other people whose contribution to the national wealth is predominantly negative). We also have the same structural problems as before, and no way out of them, and no grown ups attempting to fix stuff.
      It’s really impossible to say what would have happened without TARP. Maybe Mad Max, maybe stuff would have worked out exactly the same, maybe things would have been better. All three of those outcomes are more appealing than debt slavery, though of course “Mad Max” was just a movie -the more likely outcome is I’d be herded on a reservation somewhere and made to eat gruel.

  3. Dan said, on February 11, 2010 at 8:42 pm

    This is a depression with I-phones and I-pads.

  4. Lloyd G. said, on February 12, 2010 at 1:12 pm

    One thing that the gov’t could do to ensure recovery here in the US would be to destroy the productive capacities of our economic competitors for at least a couple of decades, as happened with WW II. Of course there’s always the risk that things might not go as planned.

    • Scott Locklin said, on February 12, 2010 at 7:22 pm

      Don’t give them any ideas.

  5. William O. B'Livion said, on February 12, 2010 at 6:26 pm

    I used to read http://newsfrom1930.blogspot.com/ until it got too hard to tell whether it was a synopsis of the current WSJ, or the one from 79 years ago.

    Then it got too depressing.

    • Scott Locklin said, on February 12, 2010 at 7:26 pm

      Man, that’s a fantastic find: thanks for pointing it out!
      If you like this sort of old stuff, do check out the London Times Imperial Trade and Engineering Supplement. It is really a fantastic thing which has no modern parallel.

      • William O. B'Livion said, on February 12, 2010 at 11:32 pm

        Got a URL?

        Just kidding.

        I can only take that sort of stuff in small doses–it keeps reminding me that as dumb as I am, I’m still way too far right on the bell curve. I can and do try to learn from other people’s history (as opposed to only learning from my own). Large quantities of other people don’t seem to have any desire, and so they repeat the same arguments their grandfathers did.

        “We’ve been going back and forth for a century”
        “I want to steer markets”
        “I want them set free”

        The government can only “fix” the economy for values of “fix” that approximate what most people are supposed to their pets.

        • Scott Locklin said, on February 13, 2010 at 3:39 am

          I looked a bit for writing this up, but you’d have to go to the library. It’s much more fun than old WSJ’s (and certainly better than anything we have now) -I learned a ton about how many industries actually work.

  6. Ilya said, on February 16, 2010 at 5:31 pm

    Does this mean that the economy is going to continue to be in this lull for the next 3-5 years? Does that mean I should hop to a PhD or still try to find a job with this MS stats?

    (Though I certainly don’t want to become a college professor!)

    • William O. B'Livion said, on February 19, 2010 at 2:54 pm

      The economy is going to continue to be unstable for most, if not all of our lifetimes.

      People will continue to try to get rich. Some of these people will try to do it through hard work and savings. Others will try to get rich faster. A significant number will take shortcuts. This is widely regarded as “cheating”, and the people who bet wrong (those who try to get rich quickly and fail, losing money) and those who think that other people being rich is bad will insist that the government (federal level) Do Something To Prevent This. Which the peeps in Washington will use as an excuse for a further power grab. The discussion of What Will Be Done will scare the business community (because what they really don’t like is legal/regulatory uncertainty. Well, uncertainty of any kind, but ESPECIALLY regulatory uncertainty).

      I really am starting to expect a very unstable economy for the next generation or two.

  7. Robin said, on February 20, 2010 at 12:28 pm

    Fascinating stuff, well reasoned as usual.
    A pedantic question, slightly off topic from the general thrust of your argument, but I was wondering the basis of your assumption that “the anonymous authors of London Times Imperial Trade and Engineering Supplement, being British, had no political or historical axe to grind”.
    The London Times is acknowledged, and from my limited understanding has been for many years, as as the most closely aligned to the British political establishment. While it may seem unlikely any bias or agenda would creep into an Engineering supplement, I though I would highlight that “being British” seemed an odd justification to having no political or historical angle.
    The inclusion of the word “Imperial” in the title of the Journal has a certain political edge to it if nothing else!

    • Scott Locklin said, on February 20, 2010 at 9:17 pm

      Well, I’m sure the LTITS had a political bias, but they didn’t really have an American local political bias in the same way American publications do and did. Local politics is sort of like cheering for your favorite football team. Basically, the LTITS fellows had no dog in the race, so they could give something like an objective point of view on the subject. Now a days, it’s a lot more difficult to find publications with this degree of remove which are written in english. But back then, when crossing the ocean took a few weeks, they certainly seemed to have a point of view which differed from any offered in America; one which seemed trustworthy and not off in a corner somewhere huffing glue.

      • Olivier said, on August 27, 2010 at 4:12 am

        It’s late (6 months) later but I can’t resist pointing out that “when crossing the ocean took a few weeks” is a load of nonsense: the big ocean liners of the time did it in 4-5 days. For a guy who is so picky about everything and so dismissive of everyone that’s a pretty big blooper; it makes one wonder about the rest of your trenchant assertions…

        • Scott Locklin said, on August 27, 2010 at 4:40 am

          Well, that was an off the cuff comment, and anyway, it was a true one. Just because the world’s record between New York and London is a couple of days doesn’t mean all ocean liners took a couple of days. Most took, well, a week or two, which qualifies as “a couple of weeks.” After all, the ship might have left from San Francisco.

  8. Z. S. said, on March 4, 2010 at 4:25 am

    I’m glad someone other than my twisted brain does the same thing whilst spending hours at the library. I cannot recall how many publications I read from 29-32 toiling away on my undergrad.

  9. Jessica said, on April 30, 2010 at 2:18 pm

    Interesting read, thanks for that. If you are really into this kind of stuff (and maybe into economics as well), another site worth reading and which i can recommend is:


    – featuring news from the WSJ as of the same day 80 years ago.

    • Scott Locklin said, on April 30, 2010 at 2:47 pm

      That looks like a good website; thanks.

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