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In a recent letter to shareholders of Berkshire Hathaway Inc., CEO Warren Buffett – a hyper successful investor – attempted to allay fears over the current financial meltdown, urging them to “never forget that our country has faced far worse travails.” It is a lesson that can be easy to forget – and hard to believe – as the news from Wall Street continues to reflect our ongoing economic troubles.

The credit crisis, and the recent controversy over the AIG executive bonuses – paid for by taxpayer bailout money – has led to distrust in our government and the financial institutions we rely on. And while we all struggle with the ramifications of the recession, many of us are fearful that what we are actually witnessing are the early days of a depression. But is there a legitimate basis for this fear?

While the micro- and macro-causes of the Great Depression have been studied – and debated – for decades, most historians point to two crucial factors. The first being the manufacturing boom following World War I. Lulled into a sense of peacetime security, companies overextended – producing inventory in anticipation of a worldwide demand for American goods. However, with many countries facing post-war high taxes and staggering debt, the demand never showed. The inventory languished on the shelves, as did the companies and the employees who relied on them.

In addition, easily available credit allowed investors to start trading on margin, using borrowed funds which flooded the marketplace and sent stock prices soaring high above the fundamental value, hoping to sell the stocks at the higher rate. When the bottom dropped out on ‘Black Tuesday’ - October 29, 1929, as investors rushed to sell stocks whose values were plummeting, the ripples were felt in every major financial market across the world. In America, every sector of the economy was affected including manufacturing, big industry, banking institutions, and even spreading to rural farming communities.



1929 Wall Street Stock Market Crash

As the Gross National Product shrank by over 50%, unemployment rates skyrocketed, from 7 million in 1930 to over 15 million in 1932 – or roughly a quarter of the working population. With the election of Franklin D. Roosevelt, the country finally began to see the first signs of recovery, but the repercussions of the Depression would linger for decades.

So what does this mean for us today? And how worried should we be?

As in the Great Depression, our love affair with credit has created false market value – the housing bubble of the past several years, combined with the dubious lending strategies of large financial institutions, helped to siphon actual worth from the market, leaving billions of dollars of debt and a surplus of assets. Assets that are now falling in value, and leaving homeowners without the ability to pay their mortgages.

While America is seeing the highest unemployment rate since 1983, at 8.1% – or 5 million unemployed with more jobs expecting to be cut during the next few months, we are still a long way from the 25% rate seen during the peak of the Depression.

The credit crisis, and the rising unemployment rates, seem to mirror the dilemmas of the 1930′s, but it is crucial to note that this situation is not a repeat of past events. Most economists believe that only one piece of the financial market has to fail to have widespread consequences – such as we are seeing today – but note that in the years leading up to the Great Depression, it was not only one sector that failed, but two – the manufacturers’ hope for rising demand, and the inflation of the stock market. Individually, these factors would have the strength to create a recession, but it was the two factors together that spun the country – and the world – into financial ruin.\

There are no easy answers or fixes to this current financial debacle – but it might very well be our fears that are contributing to its staying power – fear of further economic collapse, or losing our homes and our jobs. This has a basis – this unexpected meltdown has caused all of us to reconsider just what is most valuable in our lives, and to be afraid of losing it.

In the midst of all this turmoil, it would serve all of us well to remember Warren Buffett’s words, that we have seen the worst, and we have recovered and prospered. Or, if you prefer the words of another famous businessman and philanthropist, John D. Rockefeller, “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.”

And he was right.