1929 and 1982: THE SIMILARITIES
DYSON, LOWELL K.
1929 and 1982: THE SIMILARITIES BY LOWELL K. DYSON When the stock market went on its roller-coaster ride this fall, lots of people began referring to the Crash of 1929, but the consensus seems...
...It's impossible to know for sure where people put their money when they pay less in taxes, but the suggestive evidence is strong...
...The Reagan tax cut gave them nothing to improve their dwindling buying power, and unemployment in manufacturing now stands at 14.1 percent...
...WHERE THE MONEY DIDN'T GO...
...This isn't going to be another Great Depression, we're told...
...The tax cut gave them nothing to improve their dwindling buying power, and farm income dropped by half in the late 1920s and early 1930s...
...First, the stock prices that resulted bore no relation to the true value of the stock, nor did they reflect what was going on in the rest of the economy...
...I don't want to go out there and default on my debt.— WHERE OTHER DANGERS LIE...
...Today's decline began before the tax cut, but it hardly needs to be said that the money from tax cuts has not gone into productive investment...
...As of October of this year, only 45 to 50 percent of Americans without jobs were receiving unemployment benefits, and as more benefits expire, the percentage will drop further...
...WHY RECOVERY IS HARD...
...But, you say, the second cause of the Crash— buying on credit—no longer is a danger today because of margin requirements that 50 percent of a stock's price be paid up front...
...Lowell Dyson is a Washington-area historian...
...Commodities, the magazine gushed, are "the most emotional, exhilarating markets of them all...
...What's more, they may not be buying in the future, even if interest rates continue to fall...
...Under the Economic Recovery Act of 1981 pushed through by Ronald Reagan, the maximum capital gains was reduced to 20 percent, top taxes on unearned income to 50 percent, and estate taxes virtually eliminated...
...First, like all commodities, stock futures can be bought almost entirely on credit, which in itself could be a 1929-like margin problem if the business keeps growing...
...Am I going to have a job for three years...
...Mellon believed that "a decrease in taxes causes an inspiration to trade and commerce," and he achieved his goal with the Revenue Act of 1926, which trimmed both the surtax on income tax and the estate tax to 20 percent, and eliminated the gift tax...
...Stock futures are simply exploding...
...Increased margin-buying and more volatility, imported from the commodities market, should cast some doubt on the complacency of those who are so sure that conditions of 50 years ago cannot exist...
...Second, and more pressing, there is, as Ron Hobson of the Commodities Futures Trading Commission says, some concern that the arbitrageurs who play both markets (betting on stock movements) could "transmit the volatility from one market to another...
...That compares to 68 percent at the depths of the 1975 recession...
...Construction, employment, wages, and salaries all reached their peak that year, and then—at the same time the tax cuts were taking effect—began a steady decline...
...And not buying...
...1929 and 1982: THE SIMILARITIES BY LOWELL K. DYSON When the stock market went on its roller-coaster ride this fall, lots of people began referring to the Crash of 1929, but the consensus seems to be that it can't happen again...
...Whether the first of these conditions exists today is hard to figure, given that stocks have been undervalued in recent years...
...WHO SUFFERS ANYWAY...
...In other words, half the unemployed are suffering, really suffering...
...There are also a lot of similarities to the 1920s and 1930s, and the similarities are scary as hell...
...In the 1920s, a lot went into raccoon-skin coats and Duesenbergs, but a tremendous amount also went into the stock market...
...In the early 1980s, the billions in tax breaks received by the wealthy were channeled not only into mink coats and Mercedes but into money markets as well...
...Efforts to give them money—through relief—were paltry...
...In so uncertain a time, the consequences are alarming...
...Yet while this is true for the stock market, it's not true for the topsyturvy commodities market, and this year, for the first time, the two are directly connected...
...Since this kind of trading was legalized in February of this year, volume has climbed to more than 30,000 contracts a day, which is already higher than all but a few commodities...
...As Roger B. Smith, chairman of General Motors said recently to The Washington Post, "If a guy is going to go out there to buy a car, he's going to say, 'Boy, it's going to take me three years to pay for that...
...Today's employed not only suffer less, but have more to spend to keep the economy from stopping altogether...
...The threat of defaulting on debt lingers over the world economy, too...
...Just about any dismal economic indicator from this year will prove that...
...In both cases, an important group of customers capable of leading a retail-sales recovery (which most economists agree is the quickest and most effective kind) found themselves in a depression...
...The second problem, of course, was that some 600,000 of the investors were buying on the "margin" (that is, borrowing up to 90 percent from their brokers...
...The assumption now is that our system of unemployment insurance will prevent this from happening...
...In 1926, the major beneficiaries of the tax cuts were those in the upper 20 percent of all taxpayers...
...1926, the year of the tax cut, was also the last year of real economic growth before the Depression...
...The father of supply-side economics is not Arthur Laffer but Andrew Mellon, who served as secretary of the treasury under Harding, Coolidge, and Hoover...
...WHERE THE MONEY MAY HAVE GONE...
...The situation is different, very different indeed...
...In 1982, the National Journal reported that the top 20 percent of the nation's taxpayers reaped $36 billion in net tax benefits and that the rest of the population netted no tax savings at all...
...Consider the following: SUPPLY-SIDE ECONOMICS...
...It's gotten to be unbelievable," Jack Baker, chief stock trader of the First Boston Corporation, a big investment firm, recently told The Los Angeles Times...
...In I 929, there were two big problems with the investments people made in the stock market...
...The 1920s witnessed a precipitous decline in the fortunes of the people who had been the backbone of the American economy—farmers...
...These same words have repeatedly been used to describe the climate of 1928 and 1929...
...The connection is something called "stock futures," which are traded like commodities, but instead of being pork bellies whose future price the investor bets on, they're stocks...
...If you want some confirmation of where the rich are now looking for action, consider a recent article in a new magazine called Good Life, which says it is targeted "exclusively for readers with high incomes...
...The New York Times stock index climbed from 176 in 1927 to a high of 452 on Labor Day, 1929, just before the Crash...
...banks are carrying $500 billion in outstanding loans, many of them on the brink of default...
...Last August, with the decline of interest rates, much of this money made its way into the stock market, fueling the surge in the fall...
...A wave of international defaults forced banks to call in delinquent domestic loans, triggering bankruptcies and foreclosures at home...
...WHO BENEFITS FROM THE TAX CUTS...
...It's a real big gambling casino...
...The Jazz Age tax-cut recipients certainly didn't put their money into job creation and economic growth...
...When the market headed down in October 1929, the "margin calls" began, and panic set in...
...In 1982, U.S...
...Similarly, in the last decade there has been the same kind of decline among those who had been the most recent backbone of our consumer economy— industrial workers...
...In the 1920s, banks loaned heavily in international markets, particularly to Weimar Germany and Latin America...
...Well, the truth is that those differences might not be enough...
...But the roller-coaster ride of recent months is not encouraging...
...Fearful of that prospect, these banks are now lending even more money abroad, stretching the international monetary system to the breaking point...
...While a major improvement, this isn't as reassuring as some imagine...
...The problem after 1929 was, quite simply, that too many people had too little money—and thus couldn't help spend the country back to health...
...WHAT'S WRONG WITH THAT...
Vol. 14 • December 1982 • No. 10
