The ghosts of 1920 come back to haunt the new millennium

Friday 5th October 2001

LOAD OF BULL: Some commentators take issue with the view that prime-pumping of the US economy is a ready fix

The September 11 terrorist attack on New York and Washington that demolished the World Trade Centre has an eerie parallel from the past. Eighty-one years ago, almost to the day, there was another terrorist assault aimed at a key financial building in New York.

The date was September 16, 1920, and the target was the JP Morgan Building opposite the New York Stock Exchange on Wall St.

Around noon, a horse-drawn wagon was parked outside the bank building. The driver slipped away in the crowd and seconds later a huge explosion occurred, killing and wounding hundreds, shattering windows for blocks around, wrecking offices and leaving scars in the marble facade of the Morgan edifice still visible today.

The bomber was never caught and his motive remains unknown, but his action triggered widespread outrage in the US and a sweeping witch-hunt for those thought responsible.

Attorney-general A Mitchell Palmer and J Edgar Hoover launched a round-up of Bolsheviks, communists, anarchists and "leftists" as they sought to strike out at any groups suspected of responsibility for the crime. The attack exacerbated a "Red scare" associated with terrorist bombings in the US both before and after the Morgan incident.

All rather akin to what we are seeing now, except that the Reds have mutated into Islamists. Oddly enough, the Bolsheviks probably had much the same beef against US capitalism as today's Muslim objectors.

Further similarities with last September's bombings are pointed out by the website www.markethistory.com in a story entitled "The 1920 Wall Street Terrorist Attack and the 'Red Scare'," by James Bianco of Bianco Research.

Both terrorist attacks took place at a time of falling stockmarkets. In 1920 the Dow Jones industrials average was down 22% year-to-date on the day of the blast. In 2001, the DJIA was off 22% year-to-date and the Standard & Poor's index 17.25% when the jets hit.

The DJIA kept falling in 1920 after September 16, plunging another 24% before it halted around Christmas. The average then recovered somewhat, faltered and finally bottomed out in August 1921.

It thereafter commenced the great upswing that topped out in the 1929 Wall Street crash. In the bombing's immediate aftermath, interest rate yields dropped as shares tumbled.

Are there lessons from 1920 applicable to today? History seems to be repeating itself according to Mr Bianco. There are similar market reactions evident in stock prices and interest rates.

It cannot be expected that markets have stabilised yet. Markethistory.com argues that the 1920 precedent is evidence that a quick sell-off and rebound may not be likely in 2001.

The "V-shaped" recovery heralded repeatedly by optimistic economists may be a long time a-coming.

Another markets-related website, www.breakingviews.com, has been running articles that also question speed of likely recovery. Edward Chancellor states in a piece called "Wishful Thinking" that the capital expenditure boom of the dot.com bubble economy has left total industry capacity utilisation in the US at 76%. The surplus capacity must be removed.

He also points out that private debt is a significant problem for the US economy. Between 1995 and 2000 US financial liabilities almost doubled from $US12 trillion to $US22 trillion.

As Mr Chancellor points out, this sort of debt mountain will take some time to work off. He notes affinities between the present state of the US economy and the two previous great depressions of the 1870s and 1930s, as well as those with the 1920 bombing, although he is a bit of an optimist over the 2001 bombings in that he believes they may accelerate capacity reduction and loosen monetary policy on rising government expenditure. Nonetheless, he is talking about a crunch yet to come.

Also from Breakingviews.com is the article "Crises and Keynesians," by Andrew Kashdan, which takes issue with the view that pump-priming of the US economy is a ready fix. He points to previously high US stock valuations, profit warnings, rising unemployment and slumping confidence as signs that things had turned sour before September 11.

He notes: "To think that government spending is a free lunch is a common fallacy. Whether the money is borrowed, taxed or printed, one need only stop to consider from whence those dollars originate to lay that misapprehension to rest. By the same token, believing that insurance claims can actually be an economic stimulus is quite an extraordinary leap of faith."

It seems the ghosts of 1920 have come back to haunt the new millennium. It is arguable that a war footing by the US may be bullish on rising government expenditure but that same expenditure will crowd out the indebted and over-capacitated private sector at a time of surplus capacity not necessarily convertible to military uses and tight bank credit despite low interest rates.

It is all very well for the US Federal Reserve to trend official interest rates toward zero but evidence from earlier in 2001 suggested that banks were using credit criteria as an excuse not to lend money to businesses. These same banks have no more reason now to loosen the purse strings.

The final quote to Mr Chancellor: "Of course, if economists continue to forecast a 'V-shaped' recovery indefinitely, one day they will be vindicated."

Comments from our readers

No comments yet