Still Riding the Wave or Crashing on a Rocky Shore?

The other day as I was aimlessly surfing the net in search of something interesting to read, I came across a fascinating op-ed column by James Saft of Reuters, UK. Saft referenced a book by historian David Hackett Fischer, The Great Wave: Price Revolutions and the Rhythm of History. in an effort to understand the current worldwide economic crisis.

Fischer’s book, published in 1996, looks at price data back to the time of the Babylonian king Hammurabi, and actual prices back to Europe in the 13th century.

As the title implies, Fischer finds in the data a succession of waves, often lasting more than 100 years, of first inflation that leads to violent crises and then very long periods in which prices are basically stable. The most recent “Great Wave” of inflation began in 1896 and may or may not have broken on the shore of the current debacle.

“It looks as if the long inflation has come to an end, but we can’t be sure,” Fischer said in an interview.

He makes no claims for the predictive value of his work, unlike those who study cycles, and warns that the wild swings characterizing the ends of waves make it impossible to judge until well after the fact.

In his book, Fischer details in four great waves since the 12th century when the most care price records began to be kept: (1) the Medieval price revolution, followed by the fourteenth century crisis, which led into the stable period of the Renaissance; (2) the sixteenth century price revolution, followed by the seventeenth century crisis and the Enlightenment; (3) the eighteenth century price revolution, the revolutionary crisis, and the stability of the Victorian era; (4) the price revolution of the twentieth century and recent history.

Fischer says that European historians have written extensively about these historical waves, but U.S. historians have not. Americans tend to focus on the present and future rather than long-term historical trends. Today there are many comparisons in the media of our current economic crisis with that of the stock market crash of 1929 and the Great Depression of the 1930s; but those crises were mere bumps in the road in the context of the “great waves” that Fischer studied.

Fischer’s research showed that periods of price equilibrium were characterized by “order, harmony, progress, and reason,” while inflationary periods (price-revolutions) led to “cultures of despair” as they drew to a close. During price-revolutions (inflationary periods), inequality, broken families, crime, and drug and alcohol abuse increase.

Clearly, American culture has been in turmoil at least since late 1963. In the spring of 1963, President John F. Kennedy was planning to pull American advisors out of Vietnam after the 1964 election, and he was determined to push for a nuclear disarmament treaty with the Soviet Union. But that was not to be. Instead Kennedy was assassinated in Dallas on November 22, the military-industrial complex got the war and the weapons they wanted, and a long, a series of smaller wars have followed. Looking back now, it’s easy to see that our current wave has been kept going by wars.

Still the 1960s were prosperous times for the U.S. World War II vets like my dad had, with the help of the GI Bill, had been able to get an advanced education, build a professional career, move up to the middle class, and buy a nice house with a low-interest mortgage. My dad supported a family of 7 on less than $20,000 per year. When I left home and came to Boston in 1967, life was relatively easy. For years, I supported myself by working only part time. I had plenty of leisure time to participate in anti-war demonstrations and other personal pursuits. Then, in 1973, under Nixon, we were hit with out-of-control inflation and times started to get a little bit harder. I had to work full-time again, and after Reagan, it became just about impossible for a familiy to be middle class without two incomes.

According to Fischer, right now, in the early years of the twenty-first century, we have been riding a wave that began more than a century ago, at the end of the Victorian era and right after the presidential election of 1896 which pitted Democratic and Populist party nominee William Jennings Bryan against Republican William McKinley. One of the primary issues in the campaign was deflation, because Commodity prices were at a nearly 100-year low point in the U.S. The biggest issues in the campaign revolved around deflation and “scarce money.” Populist Bryan proposed expanding the gold standard to a “bimetal” standard in which the value of the dollar would be tied to a set quantity of silver or gold, in order to encourage wage increases and higher prices for farm products. McKinley, who argued for maintaining the gold standard, won the election. Those in the monied classes were greatly relieved, unaware that inflation was already beginning in other Western countries. According to Fischer, prices have continued to rise from then until the present time, when prices for housing and oil have begun dropping precipitously. According to Wikipedia, the 1896 election

is often considered to be a realigning election. McKinley forged a coalition in which businessmen, professionals, skilled factory workers and prosperous farmers were heavily represented; he was strongest in the Northeast, Upper Midwest, and Pacific Coast states. Bryan….was strongest in the South, rural Midwest, and Rocky Mountain states….Republican campaign manager Mark Hanna invented many modern campaign techniques, facilitated by a $3.5 million budget. He outspent Bryan by a factor of five.

Following the 1896 election, Republicans controlled the White House for sixteen years, until their hold on presidental power was broken in 1912 by the election of Democrat Woodrow Wilson. From Wikipedia:

However, although Bryan lost the election, his coalition of “outsiders” would dominate the Democratic Party well into the twentieth century, and would play a crucial role in the liberal economic programs of Presidents Woodrow Wilson, Franklin D. Roosevelt, Harry Truman, and Lyndon Johnson.

Today, shortly after the presidential election of 2008, we see all around us signs of social disruption and turmoil typical of other times in history when great inflationary waves crashed to a close. This year, the candidate of the monied and professional classes was the nominee of the Democratic Party, Barack Obama, and the real battle for the White House happened during the Democratic primaries, with Obama representing the wealthy establishment and party insiders, and Hillary Clinton ending up as the more populist candidate who appealed to rural and working class voters. This year’s the “outsiders” were those who voted for Hillary in the primaries and refused to recognize Obama as a true Democrat–the pumas, the remains of the FDR/JFK/LBJ branch of the Democratic Party.

Have we reached the end of the twentieth century wave? According to Fischer’s historical model, the present crisis resembles the periodic crashes that in the past have come at the end of inflationary waves, with sudden and dramatic deflation in housing prices and commodities. In the past, economic crises such as the one we are experiencing now have led to violent social unrest and “toppling of old orthodoxies.” The devastaing “lending and spending spree” of the 14th Century came to an end with the epidemic of plague known as “the Black Death.” But the economic crashes that come at the end of inflationary waves can also be followed by periods of social and economic stability and low inflation, such as those that occurred during “the Renaissance, Enlightenment and the prosperity of the Victorian period.”

Will the “panic of ’08” ultimately lead to a time of economic stability, productivity, and human creativity? Are we headed for a period social unrest, government crackdowns on dissent, and violent resistance? Our government is certainly preparing for such emergencies, with Secretary Gates (warning: PDF file) plan to assimilate the Naitonal Guard and Reserves into the regular Army and have 20,000 combat troops on alert on U.S. soil by 2011. In fact that process as already begun. Or will government’s efforts to “bail out” (actually nationalize) banks and big industry lead to a continuation of the twentieth century wave, with even more dramatic, out-of-control inflation? We probably won’t know for some time.

All we really know right now is that incoming President Barack Obama plans to allow the Bush tax cuts to continue while maintaing the current level of spending in Iraq, increasing spending in Afghanistan, extending and increasing increasing Bush’s policy of vast deficit spending. I’m obviously no economic expert, so I’ll leave it to our resident economist Dakinikat to comment on how she thinks Obama’s proposed policies are likely turn out. Will we continue to surf the big wave or will we crash on a rocky shore?