1929 all over again?

As anyone reading this blog may realize, my eyes have turned on to this country's current economic crisis. I've been seeing a few news articles that suggest that this recent turmoil in the financial markets is dangerously similar to the crash that occurred in October 1929. When historians remember the Great Depression, they point at one moment as the turning point: Black Friday. Normally, the way it is read is that of some kind of cause; what most may not realize is that Black Friday was an effect. We would be wise to remember the lessons of 1929-1930. If we do, then we will see that today's problems are not that of the Great Depression, at least not yet.

A myth, propagated by the likes of J.K. Galbraith, blame the crash of 1929 on impetous investment and an immature margin system. Too many people bought too much stock with credit, and a chain reaction of margin calls sent the stock market into a downward spiral that caused the Great Depression. Though the stock market did in fact crash, this was a response to government legislation, not irrational investing. The legislation I refer to is the Smoot-Hawley Tariff of 1930 which sliced this country's imports in half, nearly overnight. An Act that spurred retaliation tariffs from other countries and ground international trade to a virtual halt. The crash of 1929 was in response to the likelihood that Herbert Hoover was going to sign the Tariff into law. Investors were not irrational as some would believe. They knew what was coming, and a massive sell-off was the result. This sell-off culminated on Black Friday. This sell-off was the result of a government's attempt to heal an economy by restricting international trade. It was the greatest backfire in this country's history.

There are similarities between today's markets and those of the late 1920's. The tariff was passed in response to a recession in 1929. A recession that occurred as countries were still healing from the First World War. Our government tried to "fix" our economy and ended up destroying it instead. What will we do now that our economy has faltered? Xenophobic rage is boiling up again, with hatred for China, India and other countries that have "stolen" our prosperity. Will we again try to block international trade in response to a recession? It could happen. Listen to today's rhetoric, especially from the Democrats. Free trade is the cure to this mess not the disease. The lessons from history are laid bare for all to see, do not ignore it; for a wise man once said those who ignore history are bound to repeat it.