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October 2008
Vol. 22, No. 9
More Ways to Burst a Bubble
Bruce Ramsey is a journalist in Seattle.
For anyone who believes the principal cause of the Great Depression was stock speculation on Wall Street, Garet Garrett’s “A Bubble That Broke the World” (1932) should be an eye-opener. There was, of course, a bubble that broke on Wall Street in October 1929. This book, reprinted by the Mises Institute, which has also reprinted Garrett's novels, is about a second disaster, the foreign payments crisis of 1931, which complicated the situation considerably.
The 1920s had begun with Britain and France owing billions to America in debts from World War I, and Germany owing billions to Britain and France in war reparations. After trying to inflate their way out, the Germans borrowed their way out. They borrowed from the U.S. Treasury and by selling bonds in New York, whose bond houses resold them to small-town banks across America. The money went in a great circle: from American savers to Germany, then to Britain and France as reparations, and back to the Treasury as British and French debt repayments. Around and around — until it froze, and everyone was relieved of an obligation except the United States, which was stuck with bad loans.
Billions were also lent to South American borrowers who did not repay. And that was a disastrous. Wrote Garrett:
If we lend our credit for skyscrapers and railroads and power plants to be built in foreign countries and they turn out badly we cannot send the sheriff to seize them. Where is the State of Minas Geraes? You would not be expected to know. We loaned sixteen millions of American credit to the State of Minas Geraes, and all we know about it is that the bonds of Minas Geraes are in default. If Amarillo, Texas, had lost sixteen millions of American credit we should at least know where to go to look for it.
In “A Bubble” (which the new publisher mistakenly calls “The Bubble” on its book cover) Garrett tells the story of how these things could happen. Garrett was a financial reporter and editor during the first 15 years of the century. He was also a superb writer. In the book’s first two essays, “The Cosmology of the Bubble” and “The Anatomy of the Bubble,” he is at his best, showing how depressions come about through mass lending of money on projects that don’t pay. Investors expect a return and get none. So they pull back. Asset values fall. Ventures that were in the black slide into the red. Horizons shrink. People adjust.
In all this there is a reversal of the streams of money. In the boom phase, money flows outward from the savers and investors. In the crash, they demand it back. Garrett shows what that does to the banks, particularly to those that used their depositors’ money to buy 8% Argentine bonds.
The latter half of the book has four essays on the particulars: “On Saving Europe,” which ran in the Saturday Evening Post (Oct. 17, 1931); “The Rescue of Germany” (Sept. 26, 1931); “Operating the Golden Goose” (Dec. 12, 1931); and “Book of the Debts” (March 19, 1932). The first is about the Hoover debt moratorium; the second, about the crisis that knocked Britain off the gold standard; the third, about the problem created by having a moratorium on what A can collect from B but not what B can collect from A — a problem Hoover had not taken seriously enough.
The last is an extended rebuttal to the “internationalist” claim that Britain and France had never been expected to pay their war debts back. Oh yes, they were, Garrett says. Well, it was an important point in 1932, America’s last full year on the gold standard, but it is the least interesting part of the book now. Besides, the essay is too long on quotations and short on Garrett.
The general reader will get the most out of the first 56 pages — the first two essays — and these are Garrett at his best. They contain a strong strain of nationalism, the nationalism of a man who is not about to be talked into sacrificing his country’s interests, in war or peace, to a gaggle of whining foreigners:
It had long been the darling theme of a few world minds among us that as a people we should learn to ‘think internationally.’ We never had. Then suddenly we found ourselves in the leading international part, cast there by circumstances, with no experience, no policy rationally evolved, no way of thinking about it. To ‘think internationally,’ if it had ever been defined, was a way of thinking not of ourselves alone, but of others too, as all belonging to one world. In our anxiety to overtake this idea we overran it . . .”
“A Bubble That Broke the World” is quite a different explanation of the Great Depression from the one that Americans learn in high school. I recommend it highly. — Bruce Ramsey
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