Similarities between the1920s' economy and today's are "remarkable," suggests journalist Andrew Ross Sorkin in 1929 – Inside the Greatest Crash in Wall Street History and How it Shattered a Nation. The prologue lists examples – the flurry of innovations and products that captured the public imagination; consumer reliance on credit, speculation and gambling in the stock market, and increased concentration of wealth. Otherwise, Sorkin applies laser focus to the period between February 1929 and June 1933.
A few differences may be more troubling.
National debt
To stem crises, the US government tends to borrow freely. National debt spiked during the Great Depression, World War II, the Great Recession that began in 2008 and the Covid pandemic.
In 1929, the national debt was 16 percent of GDP, increasing to 35 percent by 1933 due to a decline in revenues with business closures and massive unemployment and then 50 percent by the end of the decade.
Today, the federal debt stands at about $39 trillion, more than 120 percent of GDP, giving policymakers less room to maneuver with more debt issuance that might cushion the blows.
Also, foreigners held virtually no US debt in 1929. Today, more than 30 percent of the national debt is foreign-held, led by Japan, the United Kingdom, China, Belgium and Canada.
Interest rates
Widespread demand for such debt, backed by the US government, has contributed to low interest rates in recent years. There are two camps on interest rates: One side argues that ongoing low rates can prevent crises by stimulating the economy in advance. The other maintains that low rates can encourage bubbles and inflation.
In August 1929 the Federal Reserve acted to contain a swelling stock-market bubble by hiking the primary credit rate, the amount banks were charged for short-term overnight loans, to 6 percent. After the crash, the Federal Reserve swiftly enacted a series of rate cuts, reaching 1.5 percent by June 1931.
In response to the Covid pandemic and sudden downturn, the Federal Reserve abruptly slashed the primary credit rate in March 2020 from 2.25 percent to a range between zero and 0.25 percent. The country has since struggled with inflation, brought under control through interest rate hikes imposed by the Federal Reserve.
Inequality
Stock ownership is more entrenched today than it was in 1929. More than 60 percent of Americans now participate in the market compared to less than 5 percent in 1929.
Fortunately, government reforms launched in the aftermath of the 1929 crash remain in place today including separation of commercial and banking functions, the Federal Deposit Insurance Corporation and guarantees of bank deposits to stop panicked runs on banks, as well as increased transparency for publicly traded companies. Also, more Americans are prepared for crisis: About half hold emergency savings accounts today compared with about 20 percent in 1929.
Still, the two decades run neck in neck in terms of inequality. “The gulf between the richest 1 percent and the rest of America is the widest it’s been since the Roaring ’20s,” reports the Associated Press. “The very wealthiest Americans earned more than 19 percent of the country’s household income last year – their biggest share since 1928, the year before the stock market crash. And the top 10 percent captured a record 48.2 percent of total earnings last year.”
Tax brackets and rates were different. The top rate in 1929 was about 25 percent for those earning $100,000 or more – worth $1.9 million in today's dollars. By 1932, the Hoover administration hiked the top bracket to 63 percent for any earning $1 million or more. Afterward, Senate hearings exposed that 20 of J.P. Morgan's wealthy partners wrote off losses, with none paying income taxes for 1931 and 1932.
Today's top bracket is 37 percent for those earning more than $768,7000, filing jointly.
Uncertainty
An uneven economy and volatile markets unnerve Americans with 70 percent anticipating a recession during the next year, as suggested by the Economic Uncertainty Index.
Sorkin’s book offers a riveting narrative on how the crash unfolded from the point of view of bankers, investors, speculators, presidents and other policymakers, explaining how many failed to anticipate the crash and then scrambled to contain the damage.
“To the nation, experiencing the implosion of the stock market felt like watching a heavyweight champion getting knocked out by an untested, unheralded amateur,” Sorkin writes. "A state of shock set in, accompanied by a paralysis of spirt and loss of confidence. People started questioning all the things they had taken for granted.”
He concludes, “The antidote to irrational exuberance is not regulation by itself, not skepticism, but humility – the humility to know that no system is foolproof, no market fully rational, and no generation exempt.”
Those of us with grandparents and great-grandparents who endured the hardship may benefit from their lessons of frugality.
