Even today, people rhapsodise about the ‘Golden’ Twenties. But how glittering were those years, really? And how strong are the parallels to the current ’20s?
Andrea Weidemann is the director of the Swiss Finance Museum.
Productivity growth thanks to technological progress, new economic models, smoother business cycles by central banks… Economic headlines after the coronavirus pandemic? No! These sentences and ambitions are 100 years old. They date from the 1920s. In those days, people and the economy were suffering from the devastating effects of World War I. In a podcast produced by the Schweizer Finanzmuseum, historian Tobias Straumann highlights what a turning point that war was for people at the time. Prior to that, the world was already globalised and things were going well economically – one need only think of the belle époque – but that all came crashing down when the war came along. As well as millions of human lives, the war also swallowed up immense amounts of capital. Major national economies such as Germany were on the floor financially.
In addition, the Spanish flu claimed up to 50 million lives, according to estimates. But in the early 1920s, the economies of the United States and Western Europe slowly began to recover, even though hyperinflation was still rampant in Germany in 1923, with the Papiermark devaluing continuously. This also affected Switzerland, as Germany was our main export market in those days.This brief period of prosperity was referred to as the ‘Roaring Twenties’ in the USA, the ‘années folles’ (the Crazy Years) in France and the ‘Goldene Zwanziger Jahre’ (the Golden Twenties) in Germany. In the metropolises of the West, people celebrated exuberantly once again. Demand increased because of the desire to make up for everything that people had missed out on during and immediately after the war. Thanks to assembly line production, industry churned out manufactured goods for the masses. Real per capita income in the United States rose by more than 4% annually in the 1920s. Even at that early stage, Switzerland was already number 1 for asset management in Europe. And that was even before the introduction of banking secrecy. A practice known as ‘leveraging’ in stock market transactions, in which a lot of risk is taken on with a relatively low level of commitment through a deal with leveraging effect, fuelled a hitherto unprecedented stock market boom which, however, ended abruptly in October 1929. The party was over. The hangover lasted 25 years. It wasn’t until 1954 that the Dow Jones Industrial Average again reached its highest level from before the crash.
Is history now repeating itself? Not necessarily. In the west, for example, the welfare state is much better equipped today. This has proven to be beneficial in the COVID-19 crisis. So despite high levels of national debt, it should be possible to cushion potential negative effects. In addition, the world’s central bankers learned the lesson from 1929 and applied it during the earlier 2008/09 financial crisis: they lowered interest rates, or kept them low, and didn’t increase them at precisely the wrong moment, as was the case in 1929. After all, the crucial financial sector is more highly regulated today and bank balance sheets are much more resilient than after World War I. And yet there are parallels – or as Mark Twain said: ‘History doesn’t repeat itself, but it often rhymes.’But what rhyme is it now? The growing imbalances in the distribution of income and wealth within the western industrialised nations, and in comparison to developing countries, deserve a prominent mention here. Sustained negative interest rates are resulting in a steady erosion of the middle classes, the backbone of any society, because of the financial repression. A comparable situation emerged during the Roaring Twenties, which were only really roaring for a minority. Back then, too, there were many more losers than winners.
Today the digital economy is creating many exciting jobs, but these are outnumbered many times over by the newly created, poorly paid jobs (in the logistics sector of online trading, for example). A new underclass could emerge – this time in the service sector rather than on the assembly line. In addition, the composition of global value chains is increasingly coming under fire. A potential deglobalisation process would intensify the global economic disparities even further. And finally, it is uncertain whether the ‘coronavirus generation’ – that is, young people who are currently in education – will have a decent set of cards to play in the future job market.
Letting agents, vehicle suppliers, financial services providers: over the past few decades, a colourful profusion of products and services has assembled under the banner of the ‘shareconomy’. Its history runs deep, and has some murky secrets.