Good Old Days

There are still any number of analysts promoting the idea that the recent improvements in the economy are not real and problems with unemployment, real estate valuations, excessive money supply, and the fact that the Government has interfered in free market economics by bailing out a number of firms will come back to haunt us and lead to new lows in the stock market and I guess a return to the good old days of the mid 1930s.

Now, these are all real problems, and some of them do bear some similarities to issues in the 1930s. Of course there are a significant number of major differences, the primary one being our safety net, created since that time.

In the 1930s as financial distress spread and banks failed, there was no fall back system. When your bank closed, you lost whatever you had in deposit. As banks failed, panic ensued leading to more and more runs on banks causing more and more failures.

We do still have bank failures, but since deposits are insured, the depositors are protected. This has resulted in orderly bank closings with the FDIC making sure deposits are safe. While many of those nostalgic for the depression point to the number of bank failures, there is no panic and very little loss of wealth because of them.

The next biggest factor is our unemployment safety net. In the 1930s, if you lost your job, you were on your own primarily. There were some private and state charities, but as the unemployment rate soared, they were unable to help the great numbers of needy people and large numbers of people were forced to live in tent cities, emigrate to other states or take up the hobo life. This is not comparable to our current situation. While not a complete replacement for lost income, unemployment insurance followed by other forms of public assistance provide a bottom level to the pain of losing one's job. Yes, mortgages and credit card payments may be defaulted on, but the reduction in demand is simply not as great. We have not seen a repeat of the tent cities, or of the economic migrations of those days. In fact, the number of Americans relocating is down significantly during this period.

Finally, while we have had significant losses in the wealth of retirement accounts, there are many older Americans with guaranteed incomes from Social Security and conservative retirements investments or annuities. In this respect the larger number of older Americans is a mitigating factor in maintaining some economic demand. Yes, it has declined due to the loss of wealth, but this area was almost non-existent in the 1930s. Further, we have the Pension Benefit Guaranty Corporation that makes sure that pensions have at least some protection.

Of course, there are many other factors including the post war problems that existed in Europe, the fairly disastrous actions we took related to trade that don't exist today, the gold standard, the disastrous droughts of the 1930s that destroyed millions of farms, and the rise of fascism and communism that added a special something to that period.

The economy is certainly still in trouble and far too many people are unemployed, however, I don't see a return to Americans huddled around radios listening to fireside chats anytime soon.