The world shouldn’t repeat the experience of the United States in 1930s. It’s hard to disagree. But while people love researching what happened 80 years ago, the analogies between the current financial crisis and the Great Depression are popular, they are misleading.
To start, Depression-school economists exaggerate their knowledge. Economic historians still can’t agree on what caused the American downturn, nor on which policies were effective in countering it. The focus on the United States is too narrow. The Depression there was just one of many economic declines around the world between the First World War and the Second World War, part of the death throes of an old world order.
Comparative analysis is also problematic. In the 1930s, governments were small by today’s standards, high tariffs were standard trade policy and the gold standard was widely considered, well, the gold standard of monetary policy. With so many differences, little can be learned from rehashing ancient policy debates.
Everyone in power now has learned the one genuine lesson taught by the Great Depression: Avoid debt deflation. Ben Bernanke, a Depression scholar before he became president of the U.S. Federal Reserve, put this knowledge into practice after the 2008 failure of Lehman Brothers. The Fed led a global monetary effort - central bank lending and printing, government borrowing - to keep that collapse from starting a spiral of bad loans, lower wages and bank failures.
It’s hardly likely that this will be forgotten soon. Indeed, central banks’ deflation fixation may even be slowing down recovery. If the authorities weren’t so afraid of a bad debt spiral, they wouldn’t shy away from bold credit restructuring. And without a systemic deleveraging, new credit crises will be hard to avoid.
If the Great Depression teaches anything else, it’s that intelligent and well-informed policy-makers can get it wrong. From 1918, two decades of effort did not produce sound economies. A reprise of that pattern might be under way. Lehman’s failure was almost four years ago now, and it is depressing to consider how little progress has been made by the current generation of leaders.