WHILE IT'S NOT a disaster and it's not irreparable, the long fall of the stock market last week changes the atmosphere in which people deal with money. There is now a sense of vulnerability and fragility that did not exist before last Wednesday. It happened for reasons related to the twin deficits -- the federal budget deficit and the foreign trade deficit -- and the fear that, because of them, interest rates are going to go higher. Nothing dramatic had incited that fear. It was a slow accumulation of small warnings over many months until, as often happens in speculative markets, one final fragment of bad news, the figures for one month's trade deficit, suddenly reversed a consensus.
Comparisons with 1929 are inevitable. But keep it in mind that the market, from the high point last August until now, has dropped less than half as far as it did from September to November 58 years ago. Much more important, keep in mind the fundamental differences in circumstances. A severe recession had started in August 1929. Although the crash undoubtedly aggravated the recession, industrial production and incomes had been falling rapidly for two months before the stock market responded.
But the biggest difference is that since then the American financial system has been pretty well panic-proofed. The wildfire panics that were a regular part of economic life in this country from the Civil War to the Depression have not recurred since then. Government policy can't stop a slide in stock prices. But it can prevent the slide from generating other kinds of damage such as sudden droughts of credit and bank failures. The country has absorbed the lessons of the Depression, and whatever happens next, it won't be the kind of contagious fear and misconceived public policy that led to the misery of the 1930s.
While this country has now got itself into real economic trouble, it's a very different case from 1929. There's no recession. To the contrary, prosperity's running a bit too high, and Americans are running up ominously large debts. The creditors -- mainly European and Japanese -- are becoming reluctant to keep lending more. That's why interest rates are rising. The stock market is serving as an early warning system, picking up signs of stress that most of Washington hasn't felt yet.
In response, there is one thing that the White House and Congress need to do -- and quickly. They need to settle the long quarrel over this year's budget, and demonstrate to this country's skeptical creditors abroad that they are going to keep shrinking the deficit. There won't be another crash a` la 1929. But if interest rates keep rising because foreigners have decided to stop lending, the United States is in for a harsh process of learning suddenly to live within its means. A drop in the stock market would be only the beginning. The question isn't whether Americans are smart enough to avoid the dangers of 1929, but whether they can foresee the very different dangers of 1989