Economic Crashes: Only One Great Depression?

Did you know that the Great Depression was not the worst economic depression in American history?

There was a depression that lasted far longer than the Great Depression. In fact, it lasted so long that economists named it the Long Depression. It began with the Financial Panic of 1873 and extended until 1896.

That was a 23 year downturn, far longer than the 1929 to 1941 depression. Of course, some of us might feel encouraged by the news that our economy was once able to recover from a catastrophe as severe as that one. But some of us might blanche at the thought that economic downturns can last such a long, long, long time.

Most of us don’t spend much time thinking about economic cycles that occurred over a century ago. But if we study the ebbs and flows of our capitalist system over very long periods of time, we start to notice some recurring trends.

Crashing Like Clockwork

To put it simply, periods of economic prosperity seem to crash to a close every thirty years or so. Three decades after the Long Depression ended in 1896, for instance, the Great Depression began in 1929.  And three decades after the Great Depression ended in 1941, the next great economic malaise and stock market collapse began during the 1970s.

Yes, our economy suffered brief recessions in 1990 and 2001. But how much time elapsed between the great 1970s crisis and what is now being called the Great Recession of 2008-09? That’s right: roughly three decades. It seems as if our capitalist economy is only capable of sustaining thirty consecutive years of prosperity before collapsing in exhaustion for a relatively long period of time.

Some economists may protest that our capitalist system has evolved too dramatically during the 20th century to make such comparisons meaningful. And yet, although it would be foolish to get carried away with ancient history, the similarities between the economic crashes of yesteryear and the one that we are experiencing today are quite striking.

For instance, the Long Depression of 1873 was triggered by the collapse of the banking system, the bursting of a speculative stock market bubble, and a massive number of bankruptcies that swept through the high growth railroad and real estate industries. And what happened to trigger the Great Depression of 1929? Again, it was a banking collapse, a stock market crash, and a massive number of bankruptcies that swept through high growth industries. In fact, one of those industries was again real estate; its crash brought the careers of entrepreneurs like Florida swampland promoter Charles Ponzi to a close.

The 1970s witnessed its own stock market collapse and the mammoth bankruptcies of railroad systems like Penn Central. And those of us who are witnessing today’s Great Recession are experiencing more of the same: a collapsing banking system, a bursting stock market bubble, a bankrupt real estate industry, and the emergence of a new generation of Ponzi Scheme operators like Bernard Madoff and Allen Stanford.

Don’t Trust …

There’s a certain consistency to this pattern, isn’t there? New high growth industries emerge over time, but banks fail to adjust their risk management practices accordingly. Government regulators become complacent, and investors grow accustomed to unnaturally high investment returns. As the economy starts to slow, charlatans gain attention and briefly become successful by promising returns that cannot possibly be maintained indefinitely. And then, when the high growth industries begin to overheat, the economic house of cards falls to the ground with a mighty crash.

So what can we learn from this pattern? Here are a few things to keep in mind as you develop your own long range financial plan:

Don’t trust real estate. The conventional wisdom is that real estate is always a good investment because people will always need a place for living and working. But investors who bought Florida swampland from Charles Ponzi might disagree with that recommendation. Those who recently bought homes with subprime mortgages might as well.

Don’t trust new technologies. It must have been exciting to invest in the new railroad industry of the 1870s, the new automobile industry of the early 1900s, and the new internet industry of the late 1990s. For a while, new companies in high growth industries often take their investors for a fun ride. But when the inevitable industry shakeout ends the party, most of the fledgling firms are driven into bankruptcy.

Don’t trust banks. They have a distressing tendency of collapsing whenever great recessions and depressions occur, don’t they? And when they do, they drag down our entire economy with them. And speaking of our entire economy …

Don’t trust entire economies. Huh? Hasn’t the American economy always bounced back from depressions and deep recessions? Well, yes, but it took 23 years for Americans to get rid of the Long Depression, and an even longer time until they could enjoy the emergence of an extended period of prosperity. And some regions never, ever recover. Did you know that Argentina was one of the world’s ten wealthiest nations during the 1920s? And that among American cities, Charleston was the fifth largest in 1800, Baltimore was second largest in 1850, St. Louis was fourth largest in 1900, and Detroit was fifth largest in 1950?

To put it succinctly, don’t trust any of the conventional wisdom that you may have learned over the years. But that’s not to say that old lessons no longer apply; in fact, in a sense, we actually need to heed the lessons of history.