EXPERT WITNESS: Sase This Time Is NOT Different: Part Two

By Dr. John F. Sase, Ph.D.

With Gerard J. Senick, Contributing Writer and Editor

"Refusal to believe until proof is given is a rational position; denial of all outside of our own limited experience is absurd."

-- Annie Besant, Prominent 19th Century Anglo-Irish Writer, Orator, and Women's-Rights Activist

In our three-part series, we explore the economic history of financial crises, events that continue to occur. Throughout history, both rich and poor countries have muddled their way through a vast range of crises. These have included sovereign-government defaults on both domestic and foreign national debts, banking and financial market panics, and collapses due to piracy on the high seas and subprime mortgage meltdowns. In addition, there has been monetary inflation, due to everything from species-currency debasement, which reduced the gold and silver content of coins in favor of more base metals in recent centuries, to the modern corollary of printing more paper money within a network of sovereign fractional-reserve central banks. In our column this month, we present the second part of "This Time Is NOT Different."

In our exploration of economic fluctuations, we draw upon the words of great minds in Economics and related fields. We thought, "What if we invited our own selection of personages to a soiree?" In Part One, we introduced polymath English economist Jeremy Bentham and a number of his colleagues. In Parts Two and Three of this series, we will bring them back together in a fantasy situation. With a bit of artistic license, we hope to have a meaningful discussion of the subject.

The style of this column was inspired by John Kendrick Bangs, an American author and satirist who was well known for creating a school of fantasy writing in which plots are set in the afterlife. In his short-story collection A House-Boat on the Styx: Being Some Account of the Divers Doings of the Associated Shades (Harper & Brothers, 1895), Bangs brings together deceased figures from history, all of whom are gathered on a houseboat that is moored along the banks of the River Styx. With Bangs as our inspiration, let us journey to the houseboat, which includes our own group invitees.

A Soiree

Charon, the ferryman on the River Styx, had busied himself all that morning and afternoon ferrying selected guests from the Land of the Dead on far side of the River Styx. He assisted English economist Jeremy Bentham and members of the Houseboat Committee to prepare the vessel to host a soiree. The houseboat, which resembles a Florentine barn set on top of a barge, was moored on the near side of the Styx in order to facilitate attendees who were coming from, and returning to, the Land of the Living.

All was prepared. The last of the attendees had arrived. Charon stepped onto the houseboat to greet and address the guests. With the exception of a few invitees, the gathering quieted when Charon entered the room and walked up to the podium. Without hesitation, he began to speak: "Ladies and gentlemen, on behalf of Dr. Sase and Mr. Senick, visitors from the other side of our river, Jeremy Bentham has ask his old associates to gather for a festive evening of lively discussion on the topic of economic cycles and the specific nature and causes of recurring financial crises. Now, ladies and gentlemen, madams et messieurs, damen und herren, I present your host for the evening, the Right Honorable Jeremy Bentham."

Bentham stands and addresses the gathering saying "We are most pleased and honored to have such a wonderful gathering of luminaries this evening. Thank you all for coming. Dr. Sase contacted me because he sought our insight about the topic for discussion. It seems that, basically, very little has changed in the world since the time that most of us wrote and lectured. In effect, Dr. Sase believes that what we wrote a a hundred years ago or more still has relevance in the 21st century. Therefore, without further ado, I would like to introduce our moderator for this evening's presentation and discussion, Dr. John Sase."

I rose and took the podium and said "Thank you so much for attending our soiree. I asked Mr. Bentham to host this event for educational purposes. Throughout history, both rich and poor countries have muddled their way through a vast range of crises. As many of us have in our respective lifetimes, I recognize the importance for everyone to have a basic understanding of financial crises, events that continue to occur. However, I come here tonight as a teacher of Economics in 21st century America, where teachers are under-valued and critical thinking has been impaired."

At this moment, the prominent 19th century English social thinker John Ruskin exclaimed, "Education is the leading of human souls to what is best, and making what is best out of them. What travesty is besetting the culture of your century?" In accord, his contemporary Harriet Martineau, the English social theorist, asked rhetorically, "What office is there which involves more responsibility, which requires more qualifications, and which ought, therefore, to be more honorable, than that of teaching?'"

I answered Martineau, "Unfortunately, many Americans have lost their belief in education and have relinquished knowledge and the freedom that it ensures. In its place, they have chosen the illusion of material security. However, I have asked Jeremy Bentham to invite all of you to this side of the River Styx in order to discuss and lend insight to the topic of financial economic crises. Let us begin.

The procession of history and economic fluctuations come in regular waves, some long and some short. Also, these waves of varying lengths appear to be harmonically related to one another and to cycles of nature. We witness such phenomena at sea during a storm, from within the earth when we feel quakes, through the air whenever the wind blows or we hear music, and in the sky. As we view the darkness of space through the light of day or the light of the setting sun through the gathering darkness, we see waves of color. Regardless of the nature or origin of the waves, they all behave similarly. Borrowing terminology from Acoustic-Wave Theory, the Attack occurs as the wave develops and rises to its peak. At its peak, it sustains briefly-a Transient. Then, as it has risen, so the wave Decays. The shapes of waves vary depending upon their nature in time and space. However, there remain universal constants among the many types of waves."

English economist, philosopher, and logician William Stanley Jevons responded, "I understand what you are saying and agree with it. Let me add this. When we know that there is a cause, the variation of the solar activity, which is just of the nature to affect the produce of agriculture, and which does vary in the same period, it becomes almost certain that the two series of phenomena--credit cycles and solar variations--are connected as effect and cause."

"Wonderful!" I responded. "With your permission, I would like to approach this subject from the meta-view of cultural ages. Then, I would like to narrow the focus by considering the long economic waves introduced by Nikolai Kondratiev in 1922 and the shorter fluctuations that we know as common business cycles. We have chosen to take an interdisciplinary, polymathian approach to the subject because the economic, social, political, and other spheres of human life are inseparable. Therefore, let us continue our discussion on this note.

As the available data collected by Dr. Sidney Homer and others only goes back to ancient Sumeria, let us confine our discussion to the more recent cultural ages, I have asked the Austrian philosopher, social reformer, architect, and esotericist Dr. Rudolf Steiner to summarize the nature of these ages for us.

Dr. Steiner addressed the group, saying, "Let us begin with the third age of our current great epoch. Egypto-Chaldean-Babylonian culture extended from 2907 to 747 BCE. In addition to the earlier science of the spirit, these nations also possessed a science of the physical world. An astrology and geometry arose in Egypt that taught the Egyptians how to treat and cultivate the earth. The Chaldean loved the physical World; to him it was a part of the Godhead into which he penetrated and immersed himself. This activity leading him from the divine into the physical world appears to us in the Babylonian-Assyrian culture. The next age for which we have qualitative and quantitative data is the Graeco-Latin (Roman) Age, which flourished from 747 BCE to 1413 CE. During this age, the human being is now included in the external perception, including the individual human essence. This essence only begins to unfold in Greek art. It shows us that man now takes hold of his own being as an immediate reality and seeks to create it as an image in space. The Greek created a world of realities and realized that he had to create it without the help of the Gods; more and more he united himself with the external reality. Out of his own strength, he permeated the external reality with a divine essence. If you study the Greek polis [city state] you do not find any trace of jurisprudence in it. Man had to establish this during the Roman epoch as Roman right which governed the private social intercourse of men as Roman citizens. Third, we regard the fifth cycle of culture as the one in which we now live, with our materialistic civilization. It is the time in which man has descended most profoundly into the external world. We know how to apply the forces of the spiritual world to our physical environment--we carry the spiritual world into it. A great amount of spiritual power is used to produce modern natural science with its technical appliances. How great is the difference between obtaining food by primitive means and obtaining it from America with the aid of telephone, engines, etc.! Yet these complicated technical means are used to satisfy the same needs, after all."

I nodded at Steiner approvingly and said, "Thank you, Dr. Steiner. We recognize that during each of these ages, culture developed with the pattern of a wave, evolving slowly for a millennium, reaching an apex, and then declining. For example, In the Graeco-Latin Age, the glorified prime of Pax Romana from 27 BC to 180 AD and the subsequent Golden Age of Rome marks the apex. Would anyone care to share observations or comments of the economic and other factors that we may consider as universal?"

John Ruskin began: "We consider that civilization is the making of civil persons. Isn't that correct, Mr. Disraeli?" British Prime Minister and statesman Benjamin Disraeli agreed, adding, "Increased means and increased leisure are the two civilizers of man. Furthermore, the health of the people is really the foundation upon which all their happiness and all their powers as a state depend. Finally, I hold the view that the best security for civilization is the dwelling. Upon properly appointed and becoming dwellings depends, more than anything else, the improvement of mankind." Ruskin added, "To summarize what Mr. Disraeli said and what Dr. Sidney Homer observed across the ages, in any civilization, large fortunes are all founded either on the occupation of land, on lending, or on the taxation of labor." Finally, English economist John Maynard Keynes interjected, "Ladies and gentlemen, before we become too immersed in the material realities of these ages, let us remember that it is ideas that shape the course of history and, furthermore, that it is ideas, not vested interests, which are dangerous for good or evil."

I rose from my seat and said, "Thank you, illustrious guests, for your insights. Your observations provide us with an excellent frame of reference for the next part of our discussion. Let us look at the nature of the waves discovered by Kondratiev in 1922 and studied by many economists since then. What we observe in the 21st century is that these waves each extend a length of fifty to sixty years on average. Given these estimates, each cultural age contains about forty average-length Kondratiev Waves.

The difference in opinion as to wave length rests with whether we are measuring industrial or agricultural data. Originally, Kondratiev measured his agricultural-based wave as 58 years. The industrial-based wave is approximately 50 years. Of course, all but the most recent occurrences are the result of projecting backward through recent centuries to eras of sparse quantitative data. We may speculate that the average cycle has shortened gradually over the past century in many countries due to rapid urbanization. Consider that, in the United States, 80% of the population grew its own food in 1900. However, after the First World War, farm failures, coupled with the growing demand for manufacturing labor, led to a massive migration to cities. Over the decades, agricultural production became mechanized. Now, less than 5% of the labor force grows the food for the entire population in 2012. Furthermore, economic and social changes have occurred concurrently with change and expansion of sovereign governments as they attempt to redefine their roles in the recent century. Any questions or insights?"

Jeremy Bentham turned to me and asked, "Have governments changed in their basic purpose? It has always been that the business of government is to promote the happiness of the society by punishing and rewarding." Ruskin interjected, "I agree. The first duty of government is to see that people have food, fuel, and clothes. The second, that they have means of moral and intellectual education. However, as we look at the 20th and 21st centuries, I would add that the role of government in respect to property rights must be emphasized again. Whereas, it has long been known and declared that the poor have no right to the property of the rich, I wish it also to be known and declared that the rich have no right to the property of the poor." Disraeli chimed in, "What you say is true. However, I would not limit the emphasis to the future. Even the governments of the past and present day have to deal not merely with other governments, with emperors, kings, and ministers, but also with the secret societies, which have everywhere their unscrupulous agents and can at the last moment upset all the governments' plans." Bentham nodded, adding "In respect to the jurisprudence of natural and civil law as well as the law of nations, secrecy, being an instrument of conspiracy, ought never to be the system of a regular government."

"You have made excellent points, gentlemen," I affirmed. "However, as this matter has re-emerged as a cause celebre in the early 21st century, let us hold off further discussion until we address the specifics of that era.

Given that the majority of my audience resides in America, and given that most of you at this gathering lived during the 19th and early 20th centuries, let us explore the five long waves that have occurred over the course of the history of the United States, onward from 1787. Returning to Kondratiev Waves, if we project measurements backward from the 20th century, we find that the industrial-based and agricultural-based calculations coincide fairly well until the mid-nineteenth century. During our pre-dinner session tonight, let us discuss the first three waves that occurred up to the time of the first great contraction, which is known as the Great Depression of the 1930s. We can summarize these three waves as follows:

The first wave began during the late 18th century at the time of the American Revolutionary War. It reached its peak during the early decades of the United States. We identify this wave by the economic prosperity of the time. This is due to maritime trade along with the development and proliferation of Eli Whitney's cotton gin. In addition, the development of the steam engine by James Watt and its application to water transportation by Robert Fulton furthered this prosperity.

The second wave began in the first third of the 19th century during the Era of Good Feeling, a period during the presidency of James Monroe in which Americans were united in purpose. The wave reached its peak about one decade before the War Between the States. We identify this wave by the prosperity that resulted from the acquisition of California from Mexico and the subsequent California Gold Rush from 1848 to 1859. In addition, the development of the steel industry, which enabled the rapid growth of railroads in the Eastern United States, helps to define this wave.

The third economic wave began around 1880, the time that the United States went to freer silver and gold standards. The wave ends at the time that President Franklin D. Roosevelt took the country off of the gold standard in 1933. We can identify the economic surge of this wave by a series of events. These include the period of Gold Resumption Prosperity; the completion of, and trade along, the First Transcontinental Railroad during the 1880s; the periods of Corporate Merger and Corporate Growth during the decade preceding the First World War; and the urban growth of the Roaring Twenties, which included the stock/bond market bubble that led to the Depression of the 1930s. During this wave, a focus on education and engineering led to massive developments in the fields of electric power and equipment as well as new chemical products.

In order to cast a light on the events that occurred during these waves, we use the science of economic measurement that developed contemporaneously with them. Would anyone like to jump on board this train of thought?" John Ruskin spoke up: "The work of science is to substitute facts for appearances and demonstrations for impressions. However, some of our colleagues, such as Huxley, have suggested that science has explained nothing." Hearing his name, English author and philosopher Aldous Huxley bolted upright. He exclaimed, "The more we know, the more fantastic the world becomes and the profounder the surrounding darkness."

The English economist John Stuart Mill spoke to the assembly: "John Maynard Keynes, David Ricardo, and I, all of whom are best known as English economists, have just finished a side conversation. We would like to contribute a brief summary for the benefit of moving along the discussion. Keynes has suggested, 'The importance of money flows from it being a link between the present and the future.' He also says, 'The social object of skilled investment should be to defeat the dark forces of time and ignorance that envelop our future. By continuing the process of inflation, a government can confiscate, secretly and unobserved, an important part of the wealth of its citizens.' Ricardo tells us, 'In the same manner, if any nation wasted part of its wealth or lost part of its trade, it could not retain the same quantity of circulating medium which it before possessed.' In reference to class divisions, Ricardo notes, 'It is not by the absolute quantity of produce obtained by either class that we can correctly judge the rate of profit, rent, and wages but by the quantity of labor required to obtain that produce.'

As for my own views on the subject, I humbly ask Dr. Sase and his contemporaries to remember that, in many eras, ignorance of the principle of population among the poor serves the interests of the rich by provoking cutthroat competition among laborers, bidding down wages, and extending working hours. Consequently, the poor are too exhausted to learn and are trapped in a cycle of ignorance and exhaustion. Education is not compatible with extreme poverty. It is impossible effectually to teach an indigent population. As a result, the poor are disqualified from any but a low grade of intelligent labor. In summary, with every boom and bust, with every crisis within history, tension and conflict between increasingly polarized classes heightens. In recent centuries, we have seen smaller firms being gobbled up by larger ones during every business cycle, as power concentrates in the hands of the few and away from the many."

My collaborator Mr. Senick was too busy shaking everyone's hands and learning the names of their spouses, significant others, and children to comment verbally on the matters being discussed. Therefore, I (Dr. Sase) took it upon myself to carry on. I stood, applauded our guests, and said, "We would like to extend our thanks to our noted economists for their profound comments that cast a stark light on the realities of our age. Personally, I must add that you gentlemen have given me a very tough act to follow. Nevertheless, I must proceed.

Let us begin by following the economic timeline from 1787 into the 1930s. In assessing this timeline, a few attributes become apparent in all three Kondratiev Waves. During each long wave, the number of prosperous years exceeds the not-so-prosperous ones. If we count the years of prosperity as those above the long-term trendline, we find that the ratio is two-thirds above trend to one-third below trend.

The second attribute that we notice is the sequence of the prosperity related to major wars and their subsequent recessions. Each of the first three waves had a major war, The War of 1812, The War Between the States, and the First World War, respectively. We observe that each period of prosperity, either during or immediately after a major war, is followed first by a Post-War Recession/Depression and, later, by a second one. Also, we notice that there are two to three more post-war below-trend years than there were years of war-related prosperity. This observation seems to challenge the old adage that war is good for the economy.

In addition, periods of extended prosperity tend to be more stable than sudden boom/busts. Two boom/busts occurred back to back during the expansionary phase of the second economic wave of the early 1800s. The Bank Credit Land Boom of 1835-37 preceded the banking Panic of 1837 with after-effects that lasted through 1838. Why did this happen? The answer is that President Andrew Jackson won office on the platform of eliminating the National Debt. During his second term as President, he took advantage of a huge real-estate bubble that raged in the Western Territories. The federal government owned vast tracts of Western land. Jackson, with previous experience in real-estate investment, sold public lands and used the proceeds in order to pay off the National Debt. Unfortunately, this venture resulted in a financial bubble that led to a banking panic when the real-estate bubble burst and the National Debt returned a year later.

Subsequently, the Cotton Boom of 1838-39 preceded the Debt Repudiation Depression that lasted until 1845. In the Antebellum South, cotton was king. As the railway system expanded in the South during the second economic long wave, construction of new textile mills along the rail lines drove an increased demand for raw cotton. In addition, demand for baled cotton continued to remain high in Britain due of its flourishing mill system in Greater Manchester and beyond. However, the Panic of 1837 in America wreaked havoc on the state-based banking system that had gone on a money-creation binge. In response, the states implored the U.S. Congress to bail them out as it had in 1789. Congress declined. In turn, many states repudiated their debts to the federal government: a six-year depression followed. This depression ended with the prosperity brought by the War with Mexico of 1846. Following the war, there was a transfer of territories in the West and Southwest from Mexico to the United States.

Of more than a dozen significant boom/bust cycles preceding the 1930s, the best known was the Bull Market Boom of 1928-29 that preceded the Crash of 1929. This resulted in a depression that lingered until the beginning of the Second World War in Europe. Taking office during the first recession that followed World War I, President Warren G. Harding and Vice-President Calvin Coolidge pushed Congress for the economic plan called "A Return to Normalcy." This plan outlined a call for a national budget program, reduction of taxes and the National Debt, emergency tariffs to protect American industry and farm commodities, legislation to relieve farm bankruptcy, and immigration restrictions to protect American jobs. After Harding's death, Coolidge built upon the plan. As a result, the Gross Domestic Product grew by an average of 7% per annum from 1924 to 1929. High wages and surplus savings created an investment vacuum. Wall Street responded with stock pools, margin buying, and other elements that fueled the bull-market mania that escalated until the bubble burst in October 1929.

The Crash of 1929 remains our best lesson of a manipulated financial bubble. Essentially, it reflects the old adage "What goes up must come down." During the 1920s, the United States and many of its major trading partners experienced unrivaled prosperity. It was the decade of the exaltation of the businessman. By March 1928, financial-market speculation had grown into a national pastime. Through September 1929, market gains exceeded those of the previous five years of Calvin Coolidge's put-together. However, as we know now from the Pecora Hearings of 1933, unscrupulous manipulation had slithered into the market.

Major brokers banded together to form trading pools for the expressed intent of manipulating specific stocks. Over a period of months, the pool managers inconspicuously accumulated shares of a target stock. Next, the pools enlisted the help of the specialist of that stock, a person who worked on the floor of the exchange and kept a private book of buy/sell orders.

Using insider information, the pool members traded with one another, allowing their trades to be recorded on the public stock-ticker. Repeating this action again and again produced the illusion of a "Hot Stock." The members traded the same shares back and forth among each another. By increasing the number of shares as well as the bid price throughout successive trades, the pools created the impression of speculative activity due to the increase in market volume and the price of the stock. As the pools heated up, they enlisted the support of loyal tip-sheet writers and commentators (the 1920s equivalent of the Web site CNN Money, the Bloomberg Channel, etc.) to fan the flames. Attracted by the ticker-tape activity and managed news, millions of non-savvy neophyte investors thronged to purchase shares of the stock.

As the market price reached its manipulated apex, the pools sold their inventory of shares to a willing and waiting, soon-to-be-wiser, public. As the market began to boil, pool members reaped enormous profits while the public found itself holding stocks that suddenly deflated. Furthermore, CFOs and other insiders were selling stock in their own companies "short." In other words, they were selling shares of their own stock that they did not currently own (usually borrowed) in the expectation of buying them back later at a lower price. In March 1929, Herbert Hoover took office as President. By the Labor Day weekend of 1929, the financial goose was cooked. The market peaked on 3 September and subsequently declined sharply on 9 September. The market faltered for the next month and a half, much like the bobbing stern of the HMS Titanic before it went under. By 21 October, gradual price declines wiped out the equity position (down-payment) of many investors. In turn, this led to margin calls in which investors would have had to contribute more equity to cover the fall as they went "below water" on their stock holdings. Most customers either sold low or lost their investment as they failed to meet margin call. These events led to further market-price declines.

Finally, on "Black Thursday" (24 October 1929), prices plummeted as thirteen million shares were traded. During the following weekend, attempts were made to stabilize the markets by the government and bankers. However, on "Black Tuesday" (29 October 1929), more than sixteen million shares were traded as the market began its long-term descent. Today, many people believe that the market headed straight to the bottom. However, this urban myth is false. At the end of the year, President Hoover tried to fight the ensuing Depression by instituting Public Works projects, tariffs on trade, and increased corporate taxes. In 1930, there was an economic recovery; however, it was short-lived. Afterwards, the market and economy ratcheted downward through six episodes of bleak, brief hope before bottoming out in July 1932.

The market seemed to recover through the election season of 1932. However, the economy backslid during the winter of 1933 as banks failed and closed. That year, the country reached what most economists consider to be the pits of the Great Depression. On 28 February, depositors ran on banks, which had to close their doors quickly. Four days later, Franklin Delano Roosevelt took office as President. Five days after that, his administration passed the Emergency Banking Act. Then, FDR convinced Congress to enact the "New Deal" program for economic recovery. The economy began to make gains until 1937 when it receded before resuming recovery. However, sustained recovery only occurred after the war in Europe commenced in September 1939 as Allied nations demanded armaments and food from U.S. producers. In effect, the series of events that we know as the Great Depression lasted for a full decade.

Ladies and gentlemen, let us take a break for some food and libation before commencing the second half of our lecture/discussion. Even though Mr. Bentham has been quoted as saying that the act of setting food before a person may be a pernicious one, he assures us that the pheasant, beef, wines, and liqueurs are splendid enough to lift the pennies from a dead man's eyes. When we return, we will discuss economic events from World War II to the first decade of the 21st century and take time to speculate about the future as we wind our way upward to the apex of the current cultural age."

Let us leave our party guests and step off of the houseboat to ask this question: What do Economic Cycles mean to attorneys? These cycles and the fluctuations of income that accompany them influence the number of clients who can afford to pay both plaintiff and defense counsels. The fluctuations also affect the availability of credit and rates of interest for the credit that is used to finance litigation. In addition, these cyclical changes influence the ability of defendants or their insurance carriers to pay awards determined by jurors. Finally, attorneys who understand Economic Cycles can prepare themselves and their practices to weather economic storms. In our next column, we will explore the nature and causes of the economic boom/busts and financial crises that have struck the United States since the Second World War and look forward to the future.


A PDF copy of this article as well as Part One is posted at We continue to post videos related to our monthly column on


Dr. John F. Sase of SASE Associates, Economic Consulting and Research, earned his MBA at the University of Detroit and his Ph.D. in Economics at Wayne State University. He is a graduated of the University of Detroit Jesuit High School. Dr. Sase can be reached at (248) 569-5228 and by e-mail at

Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a Supervisory Editor at Gale Research Company (now Cengage) for more than 20 years. Currently, he edits books for publication and gives seminars on writing. Mr. Senick can be reached at (313) 342-4048 and by e-mail at

Published: Wed, Jun 20, 2012