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14 | Economy
Lessons from
history
Mark Stephens, chief executive, Base Commercial
Mortgages, compares The Great Depression with
what is happening today, in his quarterly review of
the economic climate
D
uring a recent prime When stock prices eventually reached their house prices rose by 70 per cent and oil prices
minister's questions, Gordon record low in July 1932, they had lost 89 per cent jumped by 380 per cent in just 5 years. Sounds
Brown inadvertently let slip the of their value and did not recover to their 1929 familiar, doesn't it? Spurred on by the growing
'D' word: Depression. levels until 1954. mood of confidence, increasing numbers of con-
So what happened? No one really knows pre- sumers decided to buy stocks and shares in order
cisely what acted as the trigger for the sudden to get rich quick. Individuals were able to buy
selling spree of stocks on the 28th and 29th of stocks 'on margin', which meant they borrowed
His spokespeople were quick to clarify that it October 1929, but history has clearly identified the money against their other shareholdings; a
was an unfortunate slip of the tongue, but the why the bubble in the equity and commodities potential disaster in the making.
damage had already been done. TV, radio and markets grew and then eventually burst. Interest rates in the US had also been held
news reporters all pounced on this Freudian slip Unlike most European economies, the US unusually low for several years and Congress had
and started comparing today's economic prob- economy had not been hit hard by the first world passed a highly protectionist tariff bill which,
lems with the great depression of the 1930s. war. In the early 20s the economy started to ironically, was one of the factors which started to
Such comparisons make engaging news stories boom, as new industries such as motor manufac- spook the markets. And the final ingredient in
but are they really valid and, perhaps more turing and telecommunications started to grow. the recipe for impending disaster was a very lax
importantly, do they teach us anything useful to In the eight years prior to 1929, the US economy regulatory regime, which allowed insider trading
help lessen the impact of today's economic slow- grew by 40 per cent, with consumer spending to run rife and dealers to artificially inflate share
down? growing at an average annual rate of just under 3 prices.
per cent. The unemployment rate between 1921
Wall Street crash and 1926 fell from 12 per cent to 2 per cent and House of cards
Many historians regard the Wall Street crash, by 1929 the government budget ended in sur- When the house of cards did eventually tumble
which happened on 'Black' Tuesday the 29th plus. This was the era of the roaring 20s in which down, the effects on the US economy were dev-
October 1929, as the start of what was eventually consumers believed the only way the economy astating. The economy shrank by a third, unem-
to become The Great Depression. During the could go was up. ployment levels reached 25 per cent (and at that
first fateful couple of days of the crash, the Dow time there was no state aid to help unemployed
Jones industrial average fell by 25 per cent, with Spend, spend, spend workers) and, as a result, consumer spending col-
the volume of stocks being traded setting a Consumers were not afraid to spend, spend, lapsed. Thousands of factories were forced to
record which would not be broken for 40 years. spend. From the turn of the century to 1925 close due to a lack of demand, which meant
March 2009 Commercial Finance Introducer
www.mortgageintroducer.com
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