The New Era of the 1920s and the New Economy of Today:
Birds of a Feather?

by Doug Dowd

The following was written for Z Magazine and ZNet. Commentaries such as this one are a premium sent to Sustainer Donors of Z/ZNet. To learn more about the project, please consult http://www.zmag.org

[FLASHBACK]

The New Era began poorly, as did our New Economy (if we date its take-off as the 1990s). In 1919 there was a short recession, then a sharp inflation and unsteady good times and a very sharp recession, 1921-22; then began the so-called “prosperity decade,” pulled up short six years later. The 1990s also began with recession; buoyancy began only in 1993, holding and mounting to the present. As the two periods are now compared further, many similarities and contrasts with the present will jump off the page.

“The times they are a changin'” fit the Twenties as much as it did the Sixties. The hoopla taking us into World War had sent emotions singing; war's realities produced economic stimuli, but just as much disillusionment and decadence: changes rocked through science and technology and the economy and on into haute and popular culture and social mores (including the first major cracks in the nuclear family); and politics, always wolfish, became more so, requiring and refining the new art of public relations).

Much of that was both facilitated and concealed because the Twenties were also the hype decade—hype about everything: entertainment, sports, fashion, politics, celebrities, free enterprise and what would become consumerism: Hail The New Era!

As in our own time, the hype paid little attention to the underside of what was celebrated:

1) The modern U.S. drug culture had its beginnings in the Twenties, tightly entwined with the jazz, the (illegal) boozing, and the gangsterism of the time, the latter an outgrowth chiefly of the illegalization of booze in 1919 (repealed in 1933).

2) A rat-a-tat of mergers and acquisitions (that exploded in the Sixties and ran amok from the Eighties on).

3) Political corruption, always well dug in, plumbed new depths in the 1920s, from the White House on down (or up, as H.L. Mencken put it).

4) Soaring real estate and stock markets were matched by rising and spreading urban and rural poverty, alongside 5–10 percent unemployment from 1921–29. Notwithstanding, the economy was seen in 1928 by the then leading economist as “on a high and rising plateau.” (That make shiver a little?)

A serious look around would have revealed that the U.S. economy was not so much on a plateau as an island in a stormy sea: the “integrated world economy” of the nineteenth century was in a shambles; the UK averaged 10 percent unemployed for the entire decade; Germany had raging inflation (its prices rising 4 trillion times 1914–1924) and associated political instability; the rest of Europe was struggling with intractable economic problems, and with both revolution and counter-revolution; Latin American economies were sliding (as Wall Street called in loans in favor of the U.S. bull market), China's civil war was already exploding: global chaos was king.

Meanwhile, as both cause and result, lurking over the horizon was the worst depression in history, followed closely behind by history's worst war. Given the gifts of nature, location and its other accidents of birth, the USA was going to be Numero Uno someday pretty much no matter what; that we became so when and how and as soon as we did was an organic outcome of the war and its aftermath. Strength and power are relative; the pre-1914 growing gap between the U.S. and European economies was widened into a Grand Canyon by a war that was as destructive of their economies as it was beneficial to ours—as signified by the fact that before 1916 we were hugely in debt to others; after 1916 we moved toward becoming the main creditor nation.

War's benefits to the USA persisted well after 1918, due to substantial postwar pent-up demand for both consumer and investment goods and their new—and largely war-originating—technologies, yielding the great expansion of the motor vehicle and other durable consumer goods industries. Though sustained for a while by the purchasing power enhanced by the roaring stock market and by consumer debt, the key sectors (construction and autos) were already soft by 1926.

[DISSOLVE TO THE PRESENT]

What about now? As with the Twenties, war was again a major boon for the USA both during and after; indeed, more than a “boon.” Of all the industrial nations, ours was the healthiest, strongest and technologically most advanced as the war ended, and poised to become considerably more so; as war ended, all the other major powers, friend or foe, had been flattened: the Grand Canyon “squared.”

And then Providence (with more than a little help from its Yankee friends) provided the Cold War; bless it, for recession arrived in 1949. Cold War and hot war (first in Korea) combined to provide renewed expansion in the USA, creating or assisting the major bases for rising consumption and real investment, spiraling upward to the present; at least as important, the Cold War was the guiding and stimulating source for the renewal of the European and Japanese economies, enabling the rebirth of capitalism's sine qua non (along with exploitation): an expanding global economy.

The most striking contrast between the Twenties and today is to be found in that global economy: it was crumbling in the Twenties; whatever its recent troubles, it continues to move along, always more integrated and expansive. Even so, there is a hard core of disturbing similarity again today: in the Twenties, the USA was the only “healthy” economy in a sick world; now we are the healthy base on which the health of all other economies depend. A closer look shows that our health depends upon addictive drugs.

The USA sits at the center of a world in which the key factor in maintaining economic well-being for both major and minor economies is their rising exports. The exports function in a complicated web whose strength or weakness is fully dependent upon the USA: “the consumer of last resort.” U.S. consumption of the world's exports must continue to rise, or the web will collapse, for one and all.

In 1980, the USA was the world's largest creditor nation; ten years later, we were not only a debtor nation, but well on our way to becoming the world's largest debtor nation: our foreign debt now approximates $2.5 TRILLION, rising in excess of $300 billion annually. It must continue to do so indefinitely; it cannot.

It is hardly a secret that the U.S. economy, in its consumption, its productive investment, in its financial markets, and in its foreign trade, depends upon always rising and already astronomical debt; and, to repeat, that process must continue.

Late last year (20 November 1999), Business Week's feature essay—“Is the United States Building a Debt Bomb?”—in analyzing all the segments just noted found:

1) Consumer debt (excluding mortgages) now runs at over 100 percent of disposable income (from 62 percent 23 years ago).

2) Non-financial corporate debt as a share of corporate output rose from 60 to 80 percent in those same years.

3) Corporate debt, rising to finance buybacks of shares more than to finance productive investment, now equals 46 percent of GDP, compared with 38 percent 5 years ago (New York Times, 7 July 2000).

4) Financial debt as a share of GDP more than quadrupled, from under 20 percent to over 80 percent; financial companies are heavily into “repackaging” loans already made and selling them as bonds and notes (that is, borrowing on them), in amounts that rose from $2.4 to $7 trillion, 1989–1999—an amount greater than household debt and twice that of nonfinancial debt.

There are some nerve-wracking interdependencies whizzing around behind those numbers. The U.S. economy is now driven by consumption; consumption depends on rising debt and the great Bull Market on Wall Street; an increasing percentage of stock purchases is done on margin; a significant percentage of those purchases depend upon credit cards and borrowing on home equities; the relative weakness of other economies and the attractiveness of U.S. stocks and bonds has made it possible for our trade deficit to be financed by an always rising inflow of foreign capital, for both stocks and bonds.

Any slowdown here cannot but lead to a slowdown in foreign economies—most of them critically dependent on our purchases; in turn that is likely to lead to a withdrawal of foreign capital, and...and then, hold on to your hats (and your jobs).

[FAST FORWARD TO THE FUTURE?]

It is a commonplace that we lefties nourish a secret hope for another Big One. That may feel good; however…Although (as Gramsci once put it) an economic crisis creates “a more favorable terrain” for our kind of analyses and programs, the following must be noted about such crises:

1) Those hurt most by them are in the bottom 80 percent of incomes, the poorest worst of; the rich are hurt least, if at all.

2) The 1930s depression pushed no nation to the Left, except for a while; in the USA, FDR adopted center-right policies until 1935 (the Nazis sent a delegation to study the NRA in 1934); the second New Deal (1935–1938) was pushed into place more from the bottom up than the top down; but on Pearl Harbor Day, there were still 10 percent unemployed.

3) Were there to be a serious recession soon (which is clearly possible), the present political balance in this country (if not also those in Europe) favors a further shift to the Right.

The chances for a better rather than a worse society, now as ever, depend squarely on persistent hard and good work by all those left of center. It is not idle to suppose that there are many millions (5? 10?) in the USA who do or easily might think “left of center,” and many more who would if WE put in more of our time and our money to that end. Let's do it. Now.

August 8, 2000