Platt Perspective on Business and Technology

Reconsidering the varying faces of infrastructure and their sometimes competing imperatives 7: the New Deal and infrastructure development as recovery 1

Posted in business and convergent technologies, strategy and planning, UN-GAID by Timothy Platt on May 27, 2019

This is my 8th installment to a series on infrastructure as work on it, and as possible work on it are variously prioritized and carried through upon or set aside for future consideration (see United Nations Global Alliance for ICT and Development (UN-GAID), postings 46 and following for Parts 1-6 with its supplemental posting Part 4.5.)

I have already briefly discussed four infrastructure development case study examples in this narrative. And my goal for here is to at least begin a similarly brief and selective discussion of a fifth such case study, large scale infrastructure development (or redevelopment) initiative, as drawn from at least relatively recent history:

• US president Franklin Delano Roosevelt’s New Deal and related efforts to help bring his country out of a then actively unfolding Great Depression.

Then after discussing that, I will turn to consider a sixth such example, with an at least brief and selective accounting of how:

• A newly formed Soviet Union sought to move from being a backward agrarian society, or rather a disparate ethnically diverse collection of them that had all existed under a single monarchical rule, to become a single more monolithic modern industrial state.

And I will of necessity find myself referring back to two other infrastructure development examples that I have already cited and explicitly discussed here, continuing them for purposes of comparison to these two: the Marshall and Molotov Plans as can be found in Part 4 and Part 5 of this series respectively.

My overall goal for this series as a whole has been to successively explore a progression of such current and historic large scale infrastructure initiatives, with a goal of distilling out of them, a set of guiding principles that might offer planning and execution value when moving forward on other such programs. I continue developing this narrative as a foundation building outline, as based upon real world experience at infrastructure development, with that goal in mind. This type of more organized consideration, I add, will prove to be of crucial importance as we all face and societally so, an imperative to more effectively address large-scale and even globally spanning challenges that only begin with global warming and its already visible impact: challenges that history will all but certainly come to see as defining a large part of this 21st century experience and the legacy that we will leave moving forward from that. Ad hoc and one-off cannot offer lasting sustaining value for that, so regardless of where a more organized understanding of large scale infrastructure development comes from, such an understanding is needed.

I write a lot in this blog about the new and unexpected and about the disruptively new as that would call for entirely new understandings of challenges and opportunities faced, and of best ways to address them. There were a variety of issues that led to the Great Depression that people in elected office and that people with training in economics and related fields thought they understood, from their apparent similarity to at least seemingly parallel events from their past. And they were correct on some of those points, even as they were hopelessly wrong about others and with great consequence for how they sought to correct for them.

I begin this posting’s main line of discussion here by citing two such factors: one effectively more understood at least in principle if not in practice, and the other much less so and certainly when effective action could have had a positive impact:

• Pre-Great Depression bank holding companies and their acceptance of their own stock shares as preferred collateral when making loans, creating vast liquidity and reserves gaps in their systems in times of stress (and also see Banking Panics of 1930-31.)
• And tariff barriers with their effect of killing overseas markets that American industry depended upon for its very survival, and particularly at a time when local and national markets were drying up for lack of available liquidity. See in particular the Hawley–Smoot Tariff Act of 1930 for an orienting discussion as to how these business challenging and economy breaking barriers were erected.

Both of these developments happened: the first as a leading cause for what became the Great Depression for its bad banking practices consequences, and the second as an ill-considered response to a deepening recession, that made it the Great Depression for its duration and for its depths of severity.

I just identified the first of those two contributing factors: bad banking practices, as having been understood in principle if not in practice, and the second of them: tariff barrier protectionism as being less fully understood of the two. But in all fairness, faulty assumptions and fundamental misunderstandings contributed to both, and both for their occurring and for contributing to their consequences. And as I will briefly note in what follows here, these and other related failures in understanding and action fed upon each other and over a course of overlapping timeframes. And those toxic synergies made the Great Depression into the systemic collapse that it turned into. But let’s start with the banking system and its challenges.

Even the leadership of the bank holding companies that failed during the Great Depression knew and understood that they should not make unsecured loans and certainly not as a matter of routine practice. They required collateral on the part of businesses and other entities that would take out loans from them, as assurance that if those loans were in danger of defaulting, they could recover at least significant amounts of their invested capital. Their mistake, or at least the fundamental one that I would cite here: the point where their understanding of this type of due diligence as a matter of principle, broke with their understanding of it in practice, came from what in retrospect can only be called their hubris. They saw themselves as absolutely secure and stable, and as a result saw themselves as organizations as being immune from market-based stress or volatility. So when their customers saw the economy that they had invested in begin to collapse and when those customers started going to their banks that they had put their savings in, and in increasing numbers, those banks were unprepared. And as their customers started lining up at their doors to take their money out, more and more of them panicked and joined the lines until their banks’ cash holdings were so depleted that they could no longer function.

I cited in my above bullet point how these holding companies had accepted shares in their own business as even preferred collateral for the loans they made. As their own systems began to fail, one member bank at a time, they found themselves as having in effect made vast numbers of loans without requiring any real collateral at all – or at least any that could still hold outside-validated value. So a bank in such a holding company might fail with others in that system finding themselves in distress but still remaining recoverable, at least in principle. But the house of cards nature of how they had all managed their businesses, in-house, as their own collateral valuation standard meant that those banks folded too. Their customers knew they had nothing real backing the loans they had entered into and they knew that the banks they had entrusted their savings in were now unreliable for that. And there was no Federal Deposit Insurance Corporation (FDIC) or similar outside supportive agency in place, at least yet, that might have quelled the panic and stopped the cascades of failures that quickly brought down entire bank holding companies and all of their member banks.

The dynamics that led to these banking system collapses were understood in principle and in the abstract, even if no one in those bank holding companies seemed capable of turning that abstract understanding into prudent due diligence and risk management practice. The second of the pair of examples that I cite here was, and I have to add still is a lot less well understood and certainly as the current presidential administration in the United States is playing with the fire of trade wars and tariff barriers even as I write this.

Ultimately, there is no such thing as a national economy. Nations operate in larger contexts and they have financially for as long as there has been international trade, and with the roots to that going back to before the dawn of recorded history. And ultimately, economies are liquid reserve and cash flow determined, and with trade shaping and driving all of that. Stop trade and you stop the flow of money and you challenge and even kill the economies involved. And that holds when considering the overall and even global economy as a whole, or when considering the portions thereof that are based in some particular country or region, but that depend for their existence on the ongoing functioning health of the larger economy that they are part of.

As just noted, even today there are people in positions of real power and authority who do not understand this. And a lot fewer seem to have understood this in 1930 when the Hawley–Smoot Tariff Act was put into law and into practice, and the American economy and other national and regional components of the overall global economy began to really collapse.

I at least alluded to timing overlap and toxic synergies in these systematic challenges in the above text, and explicitly make note of that point of detail here. The stock market of the Roaring 20’s was impulse driven for the most part and with seemingly everyone investing in it looking for quick riches. And investing in it was comparable to walking a tightrope without a safety net. But the structural instabilities and the lack of anything like regulatory oversight to limit if not prevent bad business and investment practices that characterized this early stock market, only constituted one of several systematic sources of failure, that all came to collapse together, with a pattern-setting start to that developing over a period of about one year starting in October, 1929 and continuing on to the Fall of 1930.

• To explicitly connect two points of detail just touched upon here, stocks and other investment instruments that might be counted as representing saved and invested wealth, were not necessarily considered to be reliable sources of collateral to individual banks or to their parent holding companies, for their volatility and their potential for it. But these banking institutions thought that they at least knew and could trust their own paper: their own traded stock shares as reliable collateral when making loans. So many if not most came to preferentially keep this “in-house” and asked for proof of ownership in their stock and with it used to back loans signed for through them.
• My point here is that all of the factors and considerations that I make note of here, and a lot more that also contributed to the Great Depression, interacted and reinforced each other for their toxic potential and for their eventual consequences.

The American economy and other national and regional economies in general, all took a real beating in late 1929, and with the US stock market collapse only serving as one measure of that. But these markets were actually beginning what would have seemed a long slow path back to stability and recovery. Recessions end and more recent ones of note in particular, had generally begun to significantly turn towards recovery within about 15 months from their visibly impactful starts. As one admittedly limited and skewed measure in support of that claim for what might have happened here too, consider the collapse of the New York City based stock market itself as tracked by an already relied upon and trusted Dow Jones Industrial Average as a measure of stock market performance and of public confidence in that. The stock market crash began on Thursday, October 24, 1929 with nervous investors trading a single day record 12.9 million shares and with many more trying to sell than to buy. The overall market valuation at measured by the Dow Jones average began falling precipitously.

The weekend that followed did not have a positive impact, in giving investors time to reconsider and settle their nerves. Tuesday, October 29: Black Tuesday came and by the end of that trading day, the overall Dow Jones average had fallen nearly 13%. And the stock market was effectively in freefall as investors panicked, losing their faith in the value of their investments, and any sense of safety in the security of their life savings insofar as they were invested in stock shares. (For further background information on this see for example, this piece on the Wall Street Crash of 1929.) But even the stock market was beginning to recover by March 13, 1930 as the Hawley–Smoot Tariff Act was first put into effect, as investors began buying stock shares again, looking for undervalued ones and real bargains to be gained from them. Then international trade effectively died as nation after nation began raising their own retaliatory and presumed self-protective trade barriers in response to what was going on around them and from their erstwhile trading partners. And that, to my thinking is when the actual Great Depression itself actually began. That is when what might have been just another significant recession became The Great Depression.

That overall systemic economic collapse did not take place all at once; it took a number of months for the real impact of this decision and action on the part of the US Congress to be realized. So for example, US based banks began to be stressed from panicked customer withdrawals and from larger numbers of their customers no longer being able to pay back loans, in late 1929. But many of the larger bank holding companies that failed from this onslaught of challenges, did so in the Fall of 1930 and over the next two years as the strangling of international trade really took hold with so many of their business customers – so many employers facing bankruptcy from loss of business and incoming revenue. And they continued to fail for years to come and at an incredibly impactful rate.

My goal for this posting has been to outline something of the challenge that Franklin Delano Roosevelt faced when first taking office as the 32nd president of the United States. I will continue its narrative thread in a next installment to this series where I will among other things, quantify the bank failures and their timeline to put what I am writing here into clearer perspective. And I will then discuss Roosevelt’s New Deal as a massive recovery effort, and one that had within it a massive infrastructure redevelopment effort too. Then after completing that narrative thread, I will continue in this series as a whole, as briefly noted above. But in anticipation of the next installment to this to come, I step back from the details to reframe this discussion in a second, and here-crucially important way. What Roosevelt faced, underlying and infusing all of the toxic details of policy and practice and on so many fronts, was a complete failure of an underlying world view as to how businesses and economies run, and of how and why they fail when they do that too. Roosevelt faced the problem of a broken puzzle with its pieces having to be reconnected. But at least as importantly he faced a problem of a broken and failed puzzle where its business as usual assumptions and understandings could no longer be made to apply. He had to find a way to fundamentally reshape and redefine the overall image in that puzzle too. And that is the challenge that I will write of in my next installment to this series.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 5, and also at Page 1, Page 2, Page 3 and Page 4 of that directory. I also include this in Ubiquitous Computing and Communications – everywhere all the time 3, and also see Page 1 and Page 2 of that directory. And I include this in my United Nations Global Alliance for ICT and Development (UN-GAID) directory too for its relevance there.

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