No New Era

Posted February 15, 2000

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Stock Market "New Era"

"For five years, at least, American business has been in the grip of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the "new era," upon which we, or it, or somebody has entered. Discussions of economic conditions in the press, on the platform, and by public officials have carried us into a cloudland of fantasy where all appraisal of present and future accomplishment is suffused with the vague implication that a North American millenium is imminent. Clear, critical, realistic and rational recognition of current problems and perplexities is rare.
"Changes in the structure and processes of American industry and trade have been swift and sweeping, as the President's Committee on Recent Economic Changes has so well shown. Have these changes fundamentally altered the conditions of economic security and progress for either the individual business man or the nation? The simple truth is that we do not know. The Committee was honest and scientific enough to say so. American business should be sane and sensible enough to recognize it.

"There is not a single new and important development in our economic life in recent years of which we can confidently calculate the consequences or judge the soundness and permanence. We have seen an amazing increase in man-hour production in industry since the war, but we do not know why it took place then, or whether it was merely a resumption of a rise, quite as rapid, that had been going on for fifty years before the war. We certainly do not know how long or rapidly it can continue, or, if it does, whether and how the problems of adjusting employment and consumer purchasing power to it will be met.

"We have seen new industries rise like rockets, and old ones grow tired and die. We do not know how soon the new ones will fizzle out, or what others will take their place.

"We have seen the machinery of distribution formed and reformed into new patterns changing every day before our eyes, but no one can say precisely where they leave the consumer and the independent enterpriser, or whether they will fundamentally alter the costs of distribution or mitigate the rigors of commercial competition.

"We have seen security prices soar out of sight of earnings, brokers' loans swell till they absorb a third of the banking resources of the country, and the blind pools of ancient days return and multiply by endless crossing and pyramiding as the investment trusts of today. Banks merge and emerge in chains, trailing trusts and holding companies, while industrial corporations pay dividends not by producing goods but by buying each others' stocks and by borrowing and lending everybody's money in the market. But of all these things can anyone say with surety what they signify, whether they are safe and sound, or what they are leading to? We do not even know, or cannot agree, whether inflation exists, what it means, or how it shall be measured.

"In face of the ignorance, uncertainty, and irrationality that surround every aspect of the "new era," it were wisdom for business to keep its feet firmly on the ground and assume for the present that the principles that prevailed through the long business past still govern the stability and success of business today."

        Business Week - September 7, 1929


Credit Market "New Era"

"The thesis of this paper is that the existing depression was due essentially to the great wave of credit expansion in the past decade. There is a lamentable lack of comprehensive and accurate data concerning this process of debt creation. But highly suggestive information may be assembled regarding the growth of bank loans and investments; the increase in mortgage indebtedness, urban and rural; the increasing volume of securities outstanding; and the expansion of installment credit… [I]n the six years after 1922, loans and investments held by banks had increased over $18 billon. This is over 45 per cent…


"The great field of credit expansion in the last decade lies in the realm of urban real estate mortgages… We have undoubtedly expanded the credit structure, spending today and postponing the accounting until tomorrow. We have been guilty of the sin of inflation. And there will be no condoning the sin nor reduction of the penalty because the inflation is of credit rather than a monetary one.

"Thus the area covered by credit sales enlarges and the volume of credit expansion increases. As in monetary inflation the immediate results seem favorable. Credit expansion results in business activity, in full employment, in optimistic outlook and in a flood of gratulatory literature proclaiming us wiser than our predecessors. But the evidence is consistent and cumulative. The past decade has witnessed a great volume of credit inflation. Our period of prosperity in part was based on nothing more substantial than debt expansion.

"Several financial devices of recent invention have contributed to this process of debt inflation… The Federal and Joint Stock Land Banks refinanced a growing proportion…of rural land mortgages into long term paper. This gave the borrowers security… Of similar tendency but more obvious in its recent developments is the newly originated and rapidly introduced device of urban real estate bonds. As a method of credit inflation this plan could hardly have been bettered… The volume successfully sold rolled up with the speed of the proverbial snowball traveling down a steep hill. The fruits of such sales gave us building activity and contributed to the flush times of the decade…

"The fundamental question regarding installment sales is of this sort. The method per se is unexceptional. Granting that sound credit principles are applied such sales are safe. But it is highly probably that a considerable volume of the sales recently made were based on credit ratings only justifiable on the theory that flush times were to continue indefinitely… It so happened that this new credit method coincided in the time of its introduction with the origination of new consumption goods of the widest popular appeal… This process of debt inflation went on apace… Temporarily we have spent, enjoyed and stimulated business activity. When the process of expanding credit ceases and we return to a normal basis of spending each year no more than we earn that year, there must ensue a painful adjustment period…

"When the accounts are footed we shall have learned new lessons respecting the evils of credit inflation. This dear bought wisdom we may place beside our knowledge of the evils of monetary inflation purchased at an equally dear price. And we may venture a pious hope that the joint lessons will induce growth of the wisdom to foresee, caution to move less rapidly and more surely in the path of progress…

"The essential point here is that during the period of introduction of these new financial devices and while the newly opened reservoirs of credit are filing, we have a temporary increase in the nation’s purchasing power. A combination of circumstances has rendered this expansion of large dimensions in the decade just closed…

"The check to expansion is sharp and is intensified by the excesses inevitably associated with periods of over-rapid expansion. Such a course of events is clearly proven by the evidence as to credit expansion in the period 1920 to 1929. The depression into which the nation fell in the latter year was undoubtedly due in part at least to these developments in our complicated economic structure. Manifestly these events are too recent and our records too incomplete to attempt to measure their relative importance as compared with other factors of great weight. But there can be no doubt that their influence was large."

The Quarterly Journal of Economics - November 1930
Charles E. Persons, excerpt from “Credit Expansion, 1920 to 1929, and its Lessons”

(“The writer makes grateful acknowledgement of generous assistance given him in his research for information by Miss Aryness Joy and Mr. F.R. Garfield of the Federal Reserve Board staff.”)

1929 "New Era" Quotations
"Apparently there has been a fundamental change in criteria for judging security values. Widespread education of the public in the worth of equity securities has created a new demand."
The Outlook & Independant Magazine - May 15, 1929


"It has seemed to be taken for granted in speculative circles that this is a market of 'manifest destiny,' and that destiny is to go continuously forward.

New York Times - September 1929


1960s "New Era" Quotations

"There seems to be a consensus that the present is something of a 'new era'... a number of conservative economists and businessmen now accept the idea that expansion can go indefinitely."

"Backers of the 'new economics' think Government now can keep the boom going indefinitely."

"Plan just right, be prepared to act at the first sign of trouble, and recessions can be prevented."

U.S. News & World Report - November 15, 1965


"The United States has entered a new investment era to which the old guidelines no longer apply."

Barron's - February 3, 1969