By William Rees-Mogg (THE TIMES, 14/07/08):
Today I am celebrating my 80th birthday, an age that seems less formidable when one has reached it than when one can see it only from afar.
I was born on July 14, 1928, about 15 months before the American boom of the 1920s came to its rather abrupt end. Like everyone else, I am naturally curious to see whether the global credit crunch is going to be a brief interruption in global prosperity, or the prelude to a longer and deeper depression.
I cannot claim to have clear memories of the 1929 Wall Street Crash, which occured when I was 1year old, or of Britain leaving the gold standard in 1931, when I was 3 years old.
I do however, remember newspaper articles about the later stages of the Depression. In the 1930s, my parents read The Times, the Financial Times and the Daily Mail.
I can remember the news stories of the Jarrow march of the unemployed. I also remember discussing with my mother a lead story which reported that farm workers’ pay was to be raised 6d (2p) to what would now be £1.50 a week. The depression was a fact of existence in the North Somerset coalfield up to the outbreak of war in 1939.
Fortunately, there has only been one Great Depression in my lifetime, but there has also been a Great Inflation. In 2006 Pickering and Chatto, which I refounded in the 1980s, had the good timing to publish a three-volume History of Financial Disasters, under the general editorship of Mark Duckenfield.
His introduction to the 1929 crash on the New York Stock Exchange makes an important point: “Most of the stock market’s loss in value took place in later years as the Depression deepened. Three years after its initial crash and shortly before the 1932 election, the Dow Jones Industrial Average had fallen to 34, a loss of more than 90 per cent in less than three years. The Dow did not return to its 1929 peak of 381 until a quarter of a century later at the end of 1954.”
On that basis, stock markets would get back to their 2007 levels in 2032.
There are various ways of measuring a recession. These are reasonably useful when applied to minor fluctuations of the stock market, or to minor adjustments of the world economy. But the big booms and slumps need to be measured by their broader impact over time.
The Great Depression can be regarded as lasting for ten years from 1929 to 1939; the Great Inflation ran for a similar period, from 1973 to 1982. Even these dates could be challenged, since both events were preceded by a build-up of debt and other warnings of trouble. Both were followed by aftershocks.
One can even argue about the correct date to take as the starting point of the present recession. It was certainly preceded by two great American bubbles, the dot-com bubble of the late 1990s and the US housing bubble of this century. On one view, the present recession began on August 7, 2007 – only a year ago – when the sub-prime mortgage crisis came to the surface. That date could also be used to mark the bursting of the US housing bubble, which is still having so damaging an impact on mortgage banking.
Alternatively, one could reasonably start the present recession from the bursting of the dot-com bubble itself, which was the beginning of a bear market on Wall Street. That happened in the early months of 2000, already eight years ago. If this is a depression, it is a matter of choice whether one regards it as one or eight years old.
A big inflation has many of the same consequences as a big depression. That is why many people made a dangerous mistake in the early 1970s. They saw that inflation was the immediate threat and assumed that it would raise the value of capital assets while liquidating debts. In fact, it raised interest rates on debt and actually reduced the value of many capital assets.
The inflation of the price of oil after 1973 was accompanied by a collapse of the British property market and the insolvency of the secondary banking sector in London. It is obvious that a big depression is bad for investors; a big inflation is bad for them as well.
The present recession has some characteristics which make me think that it will be a relatively long one. The recession is centred on banking and property. In an ordinary recession, one has to wait for consumers to regain their confidence, which, in turn restores the confidence of business. Now one has to wait for the bankers as well. At present, banks are too anxious even to lend to each other, let alone to expand consumer credit or business loans.
This recession has produced a succession of nasty surprises. Things are always proving to be worse than anyone had expected. Last week the crisis spread to the American mortgage giants Fannie Mae and Freddie Mac, created by President Roosevelt in 1938.
These are far bigger than the investment bank Bear Stearns and Northern Rock put together. They have brought the crisis from the level of billions of dollars, to the level of trillions. No doubt they will be saved because the US would be bust if they went down. But you cannot save six- trillion-dollar institutions without suffering on a large scale.
The debt crisis, the banking crisis, the property crisis, the oil crisis, the shift to Asia, the bear market in stocks, are huge global adjustments that have all come together at the same time.
If my birthday does not prove to be another Black Monday on Wall Street, I shall think myself rather lucky. There is now a momentum of negative events sweeping away financial flood defences; in the 1930s that force overturned democratic governments as easily as it overturned banks.
Before we get back to balance, we may see dramatic changes in politics, as well as in business and finance.