History of crises: cracking fears (2/2)

As the 21st century has left the belligerent 20th century behind, the economic system has become increasingly complex. Along the way, some crises have been terribly violent and devastating in their consequences; others have been anecdotal. With the help of the 11Onze agent and historian, Oriol Garcia Farré, we conclude this radiography of the great crises in the history of humanity. 

 

Although the 20th century is a short century, its consequences still affect our daily lives. Historiography considers that its chronological arc goes from the end of the First World War (1918) to the fall of the Berlin Wall (1989), although it could be extended to the attack on the twin towers in New York (2001). The intensity of events is such that it forces us to reflect on where we are going. For this reason, we have entered the 21st century with a host of transcendental questions to answer: the climate crisis, the production model, consumption, housing, the relationship with money, technology, freedom… Will we be able to find answers that benefit societies as a whole?

 

1929: The mega-crack

There are historical facts… and then there is THE historical FACT. And, for the contemporary world, this is it. It is the hinge that marks a before and an after. A concatenation of political, economic and social decisions that would end up leading the world to the abyss. Its causes and consequences have been studied by all the disciplines of the social sciences. And, even today, it is still taken as a reference to define whether an economic crisis will have a greater or lesser impact. We are talking about the American stock market crash of October 1929.

The American economy at the beginning of the 1920s was based on a purely speculative model, which led to a significant gap between the real economy and stock market activity, which became increasingly worse.

Faced with the closure of European markets and falling agricultural prices, the American government and banks tried to respond by offering a considerable volume of credit. These measures led to an abundance of short-term capital and speculation, especially from 1926 onwards. Unfortunately, the monetary authorities did not act in time to curb this unhealthy profiteering.

So it was that, at the beginning of October 1929, there were upward trends in investment. But when the sell-off in shares soared, panic broke out on 24 October, and the same thing happened on Tuesday 29 October. The stock market crash was inevitable because of the zero demand for shares and a global crisis of biblical proportions was triggered. Apocalyptic. Much worse than the English crisis of 1720, since it affected the whole world.

By 1932, some 5,096 banks went into receivership. Their collapse led to the bankruptcy of many companies, which saw stocks of goods accumulate, resulting in a significant drop in prices, especially in the agricultural sector. Finally, the decline in economic activity led to a runaway rise in unemployment. 

To stem the haemorrhaging of the financial system, from 1931 onwards, the massive repatriation of American capital from Europe – which had helped finance the post-war period of the First World War – led to the bankruptcies of European banks, mainly Austrian and German. From this point on, the story is well known. The whole world was plunged into a long apocalyptic night.

“The American stock market crash of October 1929 is the hinge that marks a before and after. Even today, it is still taken as a reference to define whether an economic crisis will have a greater or lesser impact.”

1945: After the Apocalypse

60 million deaths. This is the total cost in lives that humanity had to pay for the Second World War. The destruction of cities, villages, infrastructure, landscapes, material goods, industry… was gigantic. Disproportionate. The economic cost has been put at $200 billion in 1947 dollars, which would be equivalent to about three trillion dollars today. The devastation of Europe and parts of Far Asia, such as Japan, was such that the whole world experienced a profound and painful post-war period. History urgently needed to begin to be rewritten. But what were the options?

As had happened in the past in the resolution of war conflicts, for example at the Congress of Vienna to redraw the map of Europe after the Napoleonic defeat or at the Treaty of Versailles after the First World War, the meeting of the victors was an imminent event. The future had to be planned, and so the Allies met in the German city of Potsdam in the summer of 1945.

The agreements had a relative resolution, for they took shape over the following decades. Even so, the victors acted more as notaries of the new geopolitical situation than as the brains behind the new world order. The Potsdam Conference thus clearly visualised the division of the world into two blocs. Two political, social and economic models that would provoke several low-intensity armed conflicts over the next four decades.

The technological breakthrough of World War II would take mankind into outer space, to the moon and beyond, but it also led to the development of the atomic bomb as a weapon of mass destruction. This threat has been used ever since as an instrument of political pressure.

 

1973: If you play with fire, you can get burned

After the Second World War, the growth model adopted by the Western world, including Japan, was based on massive oil consumption. Since then, the Western economy has been heavily dependent on this limited resource. And it is well known that, if you want your economy to function properly, you have to know your friends and be consistent in your actions.

On 6 October 1973, the day of Yom Kippur or the Day of Atonement for Sin, the most important Jewish holiday, Egyptian and Syrian troops launched a major offensive against Israel to recapture the Sinai and Golan Heights lost in 1967. After three weeks of fighting, the Israelis, with US support, managed to re-establish their hegemony in the area.

Then, the Arab OPEC countries, i.e. those that controlled the oil, unhappy with the situation, decided to embargo the oil of all Western countries in retaliation against those who had supported the conflict. The measure led to an exorbitant increase in the price of oil —from $2.90 to $11.90— which caused a sharp rise in inflation worldwide.

For the US economy, the main economic engine of the West, the embargo meant a drastic slowdown in the economy, with a consequent rise in unemployment. In fact, the market had already been showing worrying signs of a slowdown for months, compounded by President Nixon’s decision to unpeg the dollar from the gold standard. Thus, with the end of the Bretton Woods system, the economy was plunged into the abyss.

The embargo lasted six months and led to major energy supply problems, as well as a period of generally low economic growth worldwide. Some countries, such as France, turned to other energy sources, such as nuclear energy, while the United States and Canada opted for waste wood cream. 

Our present situation forces us to ask ourselves whether this model of unbridled energy consumption, which has been the main source of growth for the Western world for decades, can continue to be sustained. The climate crisis is a very palpable reality and we must work to find real solutions that promote a change of production and consumption model that is much more sustainable.

“Our present forces us to ask ourselves whether this model of unbridled energy consumption, which has been the main source of growth for the Western world for decades, can continue to be maintained. The climate crisis is a very palpable reality.”

1988: The system collapsed

If they wanted to survive, they had to step forward. In order not to collapse, they had to carry out a very important, and millimetrically calculated, reform of the system implemented in 1917. The man charged with this gigantic challenge was a young lawyer, chosen as the first secretary of the Communist Party three years earlier, and on whom the old guard had pinned all its hopes. At the beginning of the 1980s, the USSR was facing a major historical crossroads: how was it possible that, as the world’s second industrial power, it was unable to produce enough consumer goods and foodstuffs to satisfy the needs of its population? 

The situation had become more than evident since the 1970s, when the Soviet system had been shown to be ineffective by the centrally planned system. Added to this was the enormous burden of military spending, a brutal technological backwardness and a poor quality of work due to an unmotivated workforce. Moreover, all this was managed by a single party made up of old glories!

The economic and political reforms promoted from 1988 onwards by the first secretary of the Russian Communist Party, Mikhail Gorbachev, were aimed at readjusting the system without destroying it. This readjustment involved liberalising the market and opening up foreign trade. Sooner or later, however, it was known that both options would lead to a democratisation of society. The explicit acceptance of the transition from a centralised, planned economy to a market economy put an end to more than 70 years of the Soviet experiment, which began in the distant October Revolution of 1917.

Despite all the measures implemented, Perestroika failed. The weakening of central power, the revival of nationalism and the emergence of major internal conflicts hastened the end of the Union of Soviet Socialist Republics in less than three years. This was followed by a period of severe crises in the former territories of the USSR, many of which still persist today, as evidenced by the situation in Ukraine, where historical motives and geopolitical interests stemming from the Cold War are intertwined. 

 

2001: ‘Corralito’, when the money went up in smoke

And they wanted to touch the sky. In the early 1990s, Argentina had implemented the Convertibility Plan, which consisted of maintaining a fixed exchange rate of one peso to one dollar (1:1). This measure was intended to end hyperinflation and stabilise prices through economic growth. In this way, it sought to reduce the fiscal deficit after a period of recession and the consequent indebtedness of the state.

In the early 2000s, Argentina’s external debt caused by convertibility began to grow increasingly large, which led to an exponential increase in the fiscal deficit. All this began to generate distrust among investors, both internal and external, who, moved by the rumour of a possible suspension of payments by the state, began a massive flight of capital.

The drama of it all began on the fateful 3 December 2001, when Argentina was faced with a restriction on the freedom of account holders to dispose of cash deposited with banks. This corralito was decreed by the President of the Republic in order to stabilise the economy, which had the opposite effect.

What had the state done in an extreme situation? It borrowed $40 billion from the International Monetary Fund (IMF) in 2000. And when it ran out, what did it do? It asked for another loan of 30 billion dollars from the IMF in 2001. Thus, in November 2001, Argentina’s public debt stood at nearly $145 billion. That is, 150% of its GDP. To give an equivalence and to be aware of the magnitude of the tragedy, the Western economies of that period were close to 50% indebtedness of their GDP. A year later, Argentina abandoned convertibility [1:1.45], devalued its currency and declared bankruptcy

Unemployment stood at around 35%, the risk premium rose to over 5,000 points, inflation stood at 52% and 60% of the population would fall into poverty in the following years. Faced with this dramatic situation, major riots broke out in Argentina’s main cities. And what was the state’s reaction? A forceful and indiscriminate repression. The aftermath of that crisis still lingers in Argentine society and the fear of another ‘corralito’ continues to exist in its memory. It is estimated that in 11 months, almost 25,000 million euros were lost. In 2010, Greece experienced a situation similar to the corralito in Argentina.

“From 2008 onwards, the reality was different: a real disaster. The financial system had developed and marketed products such as subprime mortgages, preference shares and futures, and would end up being swallowed up by its greed.”

2008: Is a mortgage worth that much?

I’m sure this story rings a bell: “I had a small flat that my parents left me as an inheritance. I sold it. With the proceeds, I bought a plot of land which I mortgaged to build my dream house, because I had always wanted to live outside the city. This financial operation left me with some savings.

One fine day, I received a call from my advisor, the one from my old bank, who offered me to invest my savings in the development of a luxury development of single-family houses near the sea. It seemed like a safe investment. As it was guaranteed by the same bank, I trusted it. Then, my advisor told me, without being signed anywhere, that with this operation I could live without worrying about the money for the rest of my life.

That’s when I took the plunge. Because of the confidence that the operation generated in me, because of the personalised management of so many years of folding and, to put it clearly and in Catalan, to earn more money, I added to the savings an extension of the mortgage on the house. I also asked for more money to build a swimming pool, renovate my car and even went on holiday to the Fiji Islands.

But one fateful Monday, the advisor called me to tell me that the promotion had been a failure and that I had therefore lost everything. From then on, my monthly mortgage payment increased by 800%.”

This was the illusion with which the financial system, led mainly by the banks, made many people believe that it was possible to live in a happy world. However, from 2008 onwards, the reality was different: a real disaster that, added to other products that the financial system developed and marketed, such as subprime mortgages, preferential mortgages or futures, would end up engulfing the greed of that same system.

Countless studies, articles, interviews, interviews, reports, documentaries and films have explained ad nauseam the global financial crisis of 2008, which originated in the marketing of a set of housing bonds placed on the market by major banks in the United States. Initially, these housing bonds offered investors a high return with low risk. This soon led to these products becoming the fashionable instrument of choice for banks.

The bonds were underpinned by a pool of mortgaged homes, with regular current payments by the owners. In this phase, the interest rate was kept low. So far, a normal 2000s product offered by the banks. But things started to change from 2006 onwards, when some clever person found a way to maintain the constant flow of capital that these bonds generated.

So the trick was to expand the market and start offering mortgage loans left, right and centre, without checking either the regular income or the credit history of the buyer. Surely, the smart guy from before already knew that there was a limit to this, because houses are finite and so are regular payers. Because what happens when you don’t pay? The system can handle it, and what happens when two do not pay? The system can still assume it. And what happens when many don’t pay? This is when the problem appears. Everything collapses. The rest is common knowledge. 

In the mid-1980s, the Japanese economy had already gone through a similar process of revaluation of financial and real estate assets, which experts had considered one of the biggest speculative bubbles in modern history. In 2006 nobody looked back. Only a few people noticed. If you are interested in knowing how they did it, don’t miss the film ‘The Big Short’ (2015).

“It will be vitally important to prepare ourselves, to build a solid financial culture, in community and with freedom, so that we do not fall back into the abyss, because of what is to come.”

2022: Towards a friendly symbiosis

Perhaps he was too bold, and time has proved him wrong. It was in the context of the fall of the Berlin Wall in 1989 that the American political scientist Francis Fukuyama published his famous and controversial article on “the end of history.”

The thesis was that, with the end of the Cold War, history had come to an end because global ideological uniformity had been achieved. This assertion was based on the idea that it was liberal democracy, represented by Western capitalism, that had been able to bring down communism in the Soviet bloc and would therefore be able to stop other wars and revolutions in the future. But has history really come to an end?

The reality of our present forces us to look to the past to understand what is happening to us. And the current debate pivots on the confrontation of two models, a priori antagonistic, which seek an amicable symbiosis, and which find their hyperbole in two dystopian novels written precisely in the 20th century.

On the one hand, we have the model described so well by the writer Aldous Huxley in the dystopia ‘Brave New World’ (1932), in which he describes a world where people are controlled by means of entertainment, drugs and deformed affective relationships. On the other hand, the model described by George Orwell in the dystopian novel ‘1984’ (1949), in which he describes a world run by an elite that, through language and manipulation of the mind, watches over us and punishes us with violence.

Will the fourth industrial revolution, with all this hyper-connectivity, make it possible for ‘Brave New World’ and ‘1984’ to coexist in the same matrix? Are Russia and China the realisation of this symbiosis? What will happen to the West, which is moving towards a Don’t look up! (as in the film of the same name?

We come to the end of this economic radiography, where we have analysed the crises of the last few centuries on the basis of specific moments. And, as we have moved closer to the present, we have abandoned the historical analysis with which the social sciences interpret the evolution of generations to become opinionators of the present. The closer we get to what is happening to us, the more we lose the perspective necessary to understand what is happening with a critical eye. We are not yet able to perceive the multidimensionality of the historical present, because we lack the time frame. 

Many of the current events are still in progress and many others have not even begun. What does the future hold for us? We do not know. We do know what happened in the past, we do know that there are questions that history helps us to answer. And, above all, we do know that it will be vitally important to prepare ourselves, to build a solid financial culture, in community and with freedom, so that we do not fall back into the abyss, because of what is to come.

 

11Onze is the community fintech of Catalonia. Open an account by downloading the super app El Canut for Android or iOS and join the revolution!

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  1. Mercè ComasMercè Comas says:
    Mercè

    Història de les crisis =història de la vida. Hem
    d’intentar sempre buscar el màxim benestar econòmic i emocional pel conjunt de la societat, però també hem d’aprendre a viure amb problemes, perquè tal s’ ha dit per aquí, les crisis, d’ una mena o altra són cícliques.

    • Oriol Garcia FarréOriol Garcia Farré says:
      Oriol

      Cert, Mercè és llei de vida i necessàries per evolucionar, però d’intentar que aquestes no s’ho emportin tot per endavant. Gràcies pel comentari i seguim a La Plaça!

      8 months ago
    • Jordi CollJordi Coll says:
      Jordi

      Doncs sí, sempre ha sigut així… Moltes gràcies pel teu comentari, Mercè!!!

      8 months ago
  2. Joan Santacruz CarlúsJoan Santacruz Carlús says:
  3. Joan Santacruz CarlúsJoan Santacruz Carlús says:
    • Oriol Garcia FarréOriol Garcia Farré says:
      Oriol

      Moltes gràcies, Joan per llegir aquest dens article! Desitjo que t’hagi agradat i hagis après una mica més! Ens veiem per La Plaça!

      8 months ago
  4. Josep RuaixJosep Ruaix says:
  5. Pere SorianoPere Soriano says:
    Pere

    Gran recull històric. Bona feina. Però avui altre cop estem parlant de dèficit, atur, rescats, embargaments … Tal com apunta, Quin futur ens espera?.

    • Oriol Garcia FarréOriol Garcia Farré says:
      Oriol

      Gràcies, Pere per la teva reflexió. Tot plegat és inherent del sistema econòmic al qual estem adscrits. Els reajustaments constants fan pensar que estem davant d’un nou període convuls. El futur ningú el sap encara que el podem predir coses que succeiran. Seguim a La Plaça.

      8 months ago
    • Jordi CollJordi Coll says:
      Jordi

      Tot és cíclic, però malauradament, és molt cert que ara mateix tenim una etapa força complicada pel davant… Moltes gràcies pel teu comentari, Pere!!!

      8 months ago
  6. Daniela SimónDaniela Simón says:

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