A Rabble of Dead Money: The Great Crash and the Global Depression (1929-1939

Charles R. Morris, “A Rabble of Dead Money: The Great Crash and the Global Depression (1929-1939,” PublicAffairs, 2017, 332 pp.

The Great Depression has long been a kind of economic Rorschach test for scholars: each sees a different cause. Free marketers look at the economic disaster and blame the Smoot-Hawley tariff, which inaugurated a global trade war; monetarists attack the Federal Reserve for its tight-money policies; Keynesians berate Herbert Hoover for his attempts to balance the budget as the crisis worsened. Morris, in his Rorschach moment, sees all these as a cause, but not the main one.  For Morris, Europe, particularly Germany and France, hold that title.  Yet, this book is largely restricted to the United States Great Depression experience.  By the way, “A Rabble of Dead Money” —is a title borrowed from Federico Garcia Lorca’s description of the stock market crash.

I found it interesting that the one area where Morris avoids placing blame for the Great Depression is Wall Street.  He cites scholars who believe the crash of 1929 had almost nothing to do with the ensuing crisis. Morris concedes that the stock market was due for a correction, but he plays down the kind of financial manipulations that have occupied other writers, save for a detailed account of the mountains of leverage amassed by the public utility magnate Samuel Insull.

Morris instead turns his attention to the other side of the Atlantic. “All of the tangled threads that twisted together to create the catastrophe of the Depression originated in Europe,” Morris declares, though he concedes that the policy response of the United States (along with that of Britain, Germany, and France) didn’t help matters.  Most importantly, he declares, “It is hard to conceive of the Great Depression absent World War I."

Morris traces in considerable detail the economic effects of WWI, beginning with Europe’s abandonment of the gold standard and, even worse, the attempts to return to the gold standard at all costs (France gets particular blame for its “semi-messianic drive … to force a gold-based deflation on the rest of Europe”).

There is a growing literature within economics that examines the possibility that income inequality, household debt, and financial crises may be related, but Morris shows little interest in this kind of work, and he dismisses Thomas Piketty and Emmanuel Saez’s groundbreaking analysis of inequality as a “hoary theory,” a breezy rejection of some of the most widely discussed work in economics in recent years.

My Notes:

Pg. 13:  Ordinary Germans found it hard to believe they had lost WWI.  Unlike in WWII, when they saw their homeland reduced to rubble, the fighting in WWI took place almost entirely on French and Belgian soil.  And at the time of the armistice, except in a few fringe areas, there were no Allied troops in Germany.  Also, it was the German military that marched into Berlin after the armistice was signed, to be hailed by the chancellor, Friedrich Ebert, as troops returning ‘unconquered from the field of battle.’  These appearances set the stage for the ‘stab in the back’ legend that Germany had been sold out by ‘pacifists, Jews, and socialists.’ 

About 7.2 million were killed in WWI.  Civilian deaths from illness, starvation, and other causes have been estimated at an additional 6.5 million.  Total war spending in 2016 prices was about $5 trillion (or $220 billion in 1919 nominal dollars).

Pg. 16:  The forces that caused the Great Depression originated in the disordered aftermath of WWI.  Absent WWI, it is almost impossible to imagine a Great Depression.  (In fact, Churchill called the combination of WWI and WWII “The Thirty Years War).

Pg. 38:  When the Model T was first introduced in 1908, it sold a then-spectacular 11,000 cars its first year.  Sales roughly doubled each year, hitting the 500,000 mark in 1915-16.  The economies of scale were demonstrated in 1913 when Ford Motors accounted for nearly half of all automobile sales: Ford sold 261,000 cars against the rest of the industry’s 287,000.  But Ford did it with 13,000 employees, while the 299 other companies required 66,000 employees, or five times as many.

Pg. 50:  Muncie, Indiana, an industrial city of about 36,000 people in 1924, was subjected to an in-depth study by anthropologists, and again in 1933, late in the Great Depression, to discover key cultural norms and better understand social change.   Prior to 1924, Muncie had been a strong union town with half of all production workers in unionized skilled or semi-skilled trades and had completed apprenticeship programs.  It was the unions that had insisted on workplace safety rules, and the unions had also pushed through a state worker’s compensation program.  Much of the town’s social life had been organized around the unions.  But the unions lost their base when Ford deskilled manufacturing.  In a Ford plant, the machine embodied the required skills, while the human operator was its servant, working to the machine’s tempo.  By 1924, the median Muncie worker was a male factory machine operator.  He had not finished high school, did not belong to a union, and had no formal apprenticeship training.  There were almost no benefits.  When the study was repeated in 1933, very little had changed from 1924.

Pg. 73:  The average inflation rate between 1900 and 1914 was 1.4 percent a year.  Both major political parties had been officially opposed to entering WWI so there had been almost no military preparation for a war.  There were only nineteen months between the US 1917 war declaration and the November 1918 armistice.  In that time the US increased its military establishment from 174,000 men to 2.8 million.  Two million Americans were sent overseas, and 1.4 million saw combat.  Total US military casualties exceeded 250,000 of whom 50,000 were killed, along with another 67,000 fatalities from disease, most frequently from pneumonia.

Pg. 103:  The 1920s marked the point when agriculture ceased to be the most important American industry.  Factories were depopulating family farms, mechanization was forcing consolidation of smaller farms.  But the traditional meme that a rural collapse was a major cause of the Depression is an overstatement.  However, in 1935 the Federal government effectively socialized the biggest cash crops—a bailout not unlike the one provided to the banking sector in 2008.  (In 1900, some 40 percent of the labor force in Muncie worked in agriculture; by 1930 it was down to 22 percent, on its way to the almost invisible 2 percent that prevails today.)

Pg. 106:  In 1923 Miami’s population passed 47,000.  The state legislature abolished income and estate taxes.  Land values rose exponentially but cooled off after the 1926 hurricane flattened Miami.

Pg. 123:  In the 1929 crash, industrial stocks were hit harder than service and retail stocks.  But taking all New York Stock Exchange common shares together, the market was worth $82.1 billion in September 1929; by July 1932, values had collapsed to $12.7 billion, 15 percent of pre-Crash valuations.

Pg. 182:  The Industrial Revolution of the eighteenth and early nineteenth century was almost exclusively a British phenomenon.  As its trade sector grew apace, it naturally became the global leader in accountancy, law, shipping, finance, and other high-end commercial services. 

Pg. 184:  The ‘classic gold standard’ actually prevailed for barely a century between the Napoleonic Wars and WWI, with a period of admirably efficient operation of perhaps fifty years.  However, the dollar, which had been pegged to a specific gold parity since 1879 was gaining increasing acceptance in international commerce by the turn of the century.  During WWI, all of the belligerents except the US left the gold standard during the years of active hostilities, and even the US restricted the sale of gold.  The hoped-for seamless return to the gold standard after the war, didn’t happen.  (Note: the US dollar gold parity was $20.67 per ounce, unchanged since 1879.  That number had served until the start of WWI, in part because prices had been remarkably stable over most of that period.  (In 1931 virtually all the major countries departed the gold standard. P. 234).  (Roosevelt secured legislation forbidding most private ownership of monetary gold and embargoing its export to prevent a flight of monetary gold from the Treasury.  The practical effect was that the US was no longer on the gold standard. P. 249)

Pg. 203:  The German military ignored the Versailles disarmament mandates from the very start.  Soon after the war ended, apparently without the German government’s knowledge, they had reached agreements with the Soviets both to transfer weapons technology and to establish German factories in Russian territory producing arms for both nations. 

Pg. 204:  Altogether, a generous reckoning of German reparation payments in cash and in kind, is about $5.5 billion, paid over the dozen years 1919-1931.  It amounted to about 2.7 percent of German GNP over that span.  Except for the first cash payment, all the rest was financed by loans that were never repaid.  In stark contrast, the 5 billion gold franc reparations imposed by Germany on France at the conclusion of the Franco-Prussian War of 1870 was fully paid off in only three years, or two years ahead of time.

Pg. 209:  Virtually all the experts argued that Great Britain could not regain its status as a financial superpower after WWI until it stabilized the pound at the pre-war conversion ratio of £1=$4.86. 

Pg. 24:  By the 1930s, the advent of the tractor consigned ten million horses and mules to slaughter and freed up the twenty-three million acres of farmland devoted to their fodder.  But farm prices took a nosedive in 1930.  From midsummer of 1929 to the month that Roosevelt took office, the farm price index dropped by two-thirds—primarily the result of perversely favorable weather, but possibly also progress on mechanization. 

Pg. 260:  In 1928, the top 1 percent of taxpayers received about 24 percent of taxable income, or about the same share as they have absorbed through most of the 2000s.

Pg. 262:  The New Deal programs were a mixture of income transfers, price and market interventions, and permanent regulatory initiatives.  The first programs to get into operation were focused on creating jobs, like the Civilian Conservation Corps (CCC) and the Federal Emergency Relief Administration (FERA), which included welfare payments for the unemployable destitute.

A second thread encompassed programs to change market outcomes in pursuit of a specific price, wage, or other policy objectives.  Farmers got their price supports, and industrial workers got fair labor standards protection, a federal minimum wage, and greatly enhanced bargaining rights.  Finally, there were four new permanent regulatory bodies, following the model of the Interstate Commerce Commission, the most important of which was the new Securities Exchange Commission.

Pg. 276: By 1939 real economic growth had returned per capita GDP back to its 1929 level.  Companies were hiring, and unemployment was considerably lower.  This recovery occurred, despite the 1937 self-inflicted crash.  Roosevelt had campaigned in 1936 on a special point of returning to balanced budgets.  Few New Deal programs were slated for elimination, but sharp cuts were planned for virtually all.  The underlying message was that the New Deal had won.  Then everything fell apart.  What finally turned it around was a resumption of government stimulus.  (Note: the social security system had started out as a trust fund but in 1940 the system was put on a pay-as-you-go basis).

Pg. 298: The economist Alexander Field has recently made the claim that it was not principally the Second World War that laid the foundation for postwar prosperity.  It was technological progress across a broad frontier of the American economy during the 1930s.  Despite the crash in effective demand, the working economy was turning in one of the best records in total factor productivity (TFP) in the country’s history.  The concept of TFP arose from research in the 1950s.  Reconstructed economic databases for the nineteenth and early twentieth centuries revealed explanations for most nineteenth-century growth by summing the contributions of changes in the inputs of labor and capital (e.g., new plants and machinery).  However, growth was consistently higher than suggested by the identifiable inputs.  Economist Solow called the unexplained growth factors the residual.  TFP, then, was revised to include inputs of labor and capital plus the residual, which was assumed to capture the invisible technology-enabled improvements in the use of the inputs.  That residual began to shrink in the second half of the twentieth century and is now nearly undetectable.

The twenties was an extraordinarily productive decade, but its advances were almost entirely explained by the growth in manufacturing TFP—an amazing 5.12 percent a year from 1919-1929.  In the thirties, with much of the factory productivity revolution already in the bank, manufacturing TFK dropped to 2.76 percent—which is still a very strong number.  Capital investment played only a minor role in the thirties, and the TFP gains came from two broad categories of progress.  First, smaller, older plants were forced to close, raising the average productivity of them all, and second, manufacturers raised their scientific game and made a major investment in research and scientific manpower in the thirties. 

Pg. 306:  The Great Depression was the product of three different but related forces.  The first was the deflationary momentum created by the major country's push for gold-based currencies at pre-war parities.  The second was the global agricultural glut of the 1930s.  The Hoover administration’s farm programs were overwhelmed by splendid bumper crops at the time of global excess production.  And the third was the collapse in world trade, which was the product of, but additive to, the effects of the first two.

Pg. 310:  American farmland values fell 40 percent from 1928 to 1933, with the greater part of the fall before the stock market crash—suggesting that the industry was following an internal logic of its own.  Waves of farmer bankruptcies wreaked havoc on rural banks.  The thirties became a heyday of tariffs and quotas. 

Pg. 313:  The 1929 stock market crash was a loud announcement that the economy had overheated.  It did not cause the Depression.  Consumer debt was too high and the stock market crash perhaps drew consumer’s attention to their debt so they quit consuming.  But more ominous was the very large run-up in home mortgages.  The total mortgages outstanding was $27.5 billion in 1930 or 30 percent of the 1930s GDP.  Housing values dropped about a third.  Bank failures took as long as six years to unwind, shrinking the money supply.  Also, too much of the national income flowed to the richest.  The share of pre-tax income flowing to the top 1 percent was the highest ever recorded, although just a couple of decimal points ahead of that recorded in 2006. Yet, when all the above are added together they still do not account for the severity of the Great Depression.

Pg. 321:  The Great Moderation believed its success was derived from its faith that deregulation, rational expectations, and a mix of neoclassical and monetarist economics, was creating a new nirvana, called ‘complete markets.’  It is the kind of frictionless, perfectly clearing economy that neoclassical economists dream about.  Its special feature is that any asset or risk position can be seamlessly converted into a contingent claim—that is, a financial derivative.  Both Greenspan and Bernanke bought into this.  The Great Moderation was explained by the assumption that all financial players work for the best long-term outcomes of their institution, even if they could make pots of money by putting their own interests first.  Naïve hardly covers the case.   

The Spanish flu pandemic arrived in Europe some months before the armistice.  It was almost certainly carried by American soldiers.