I’ve been bothered for some time by the eerie similarity between events leading to the stock market crash of 1929 and the present eccentric state of North America’s stock markets. Problem is, I’m not sure how much faith I should put in this similarity, since history never repeats itself in exactly the same way.

An overly romantic or mystical frame of mind could lead me to overlook significant differences between 1929 and 2000 and imagine that history is repeating itself when in fact it isn’t. On the other hand, the illusion of progress created by linear time could lead me to depreciate the past and miss valuable insights. Each model has merit, yet each is deficient. Somewhere between these two extremes must lie the proper mindset.

I propose that history be seen as a screw—events unfold in an endless forward spiral along an axis of linear time—like the thread on a screw. When events in two or more thread segments appear to be similar, they can be recognized as the same, yet different. This seems to be the best way to approach the subject.

Let’s begin with this excerpt from Prof. Robert Sobel’s book Panic on Wall Street—A History of Financial Disasters: “In 1928, the demand for call money reached new highs… Customers appeared willing to pay any interest asked for loans. It seemed to make sense. If a stock rose 100 per cent in a year, why quibble about the difference between an eight per cent loan and one for 20 per cent.

“The corporations, realizing that 20 per cent could be had in the call money market, began to look at their cash surpluses and expansion programs in a new light. Why buy bonds at five per cent or invest in a new plant which might return 10 per cent, when it would be much easier to lend money to margin buyers at 20 per cent. By October 1929, some $6.6 billion had been loaned by corporations in this manner. Much of this could be lost in market declines; the managers knew this, but they, like most Americans, did not expect prices to fall severely.”

Now compare this scenario to last week’s newspaper headlines. Canada’s major banks and the Investment Dealers’ Association—the brokerage industry’s oversight body—are openly concerned about the amount of call money issued on speculative stocks. As the Globe and Mail reported, members of the New York Stock Exchange increased their client debt from October to January by US$60 billion to a total of US$243 billion, a level not seen since 1987, the year the market crashed.

In Canada, the largest discount brokerage, TD Waterhouse, has $2.2 billion in outstanding margin loans. John Palmer, the country’s top financial regulator, warns that a collapse of investor confidence could lead to huge losses for banks and brokerage houses, though he says our financial institutions are fundamentally sound.

Despite the similarity of overextended lending institutions, different attitudes prevailed 71 years ago. In the months and years leading up to 1929, repeated calls to reform stock trading and lending practices went unheeded. On the very day the market crashed—Tuesday, Oct. 29—the New York Times stated: “The investor who purchases securities at this time with the discrimination that as always is a condition of prudent investing may do so with utmost confidence.”

Of course, the crash was only the fuse. The powder keg that caused the Great Depression was the overextended U.S. banking system. In 1930, 1,359 banks failed, more than double the number in 1929.

Today, at least, attempts are being made to head off a repeat. Banks and investment companies are raising clients’ margin rates on Internet stocks from 30 percent to 50 percent, so another depression seems unlikely. Moreover, Palmer says brokerage houses are monitoring portfolios more closely.

This is all certainly good news, but I wonder if it comes too late. Internet stock prices are so grossly inflated by borrowed money, that you’d expect the least perturbation of the status quo to spark a selling frenzy. Much like the building in a Monty Python sketch, these Internet stocks will stay up only so long as people believe in them. When hype and hope give way to doubt, a crash is inevitable.

Last month I compared the bloated stock markets to a dying star and led with a quote from William K. Klingaman’s book 1929—The Year of the Great Crash. It bears repeating: “Mob psychology had borne the bull market to irrational heights, and mob psychology would drag it down far below any theoretical barriers erected by experts.”

One way we can combat this mob psychology is to end this inane, delusional “old economy/new economy” dichotomy, as if to imply that new is better than old. “Old” economy industries produce goods and services; “new” economy Internet and other high-tech firms produce little of tangible worth. Do we really want to embrace nothingness? A more honest comparison would be “real economy/ fantasy economy.”

By the way, Klingaman wrote his book in 1989, before the age of Internet intoxication. After the crash of October 1989, he wondered if the Crash of ’29 could happen again. He couldn’t come to a definite conclusion, but his research told him not to be swayed by experts who blithely assure us that everything will be all right.