Borrowing from the 1930s to solve the financial crisis

June 17, 2009

Alan Beattie, FT Economics Leader Writer.– Alan Beattie is world trade editor at the Financial Times, and author of the recent book “False Economy: A Surprising Economic History of the World”. He studied history at Oxford and economics at Cambridge, and worked as a Bank of England economist before joining the FT. The opinions expressed are his own. –

Those who forget history are condemned to listen to historians going on and on about it, a fate almost as bad as listening to economists doing the same. (And I write as a double agent with a foot in both camps attempting the delicate task of bringing the two together in my new book)

As we are perpetually being told, the current global financial crisis and recession is the kind of event that comes along only once or twice in a century. So now the immediacy of the panic has subsided, perhaps this is a good time to ask if we been applying the correct lessons from the past, and particularly from the 1930s, in dealing with this one.

On monetary policy, the answer is largely yes. On fiscal policy, it’s partly yes, but not where it matters most. And on trade, the response hasn’t been perfect but it’s not been disastrous. Yet.

First, monetary policy. Subtle differences in the way that the major central banks have gone about pumping cash into the financial system – with some, like the Bank of England, slower off the mark than others – should not conceal the basic fact that they have largely learned from the mistakes of the Great Depression. They have acted fast, used extraordinary tools when necessary and all costs headed off the hreat of deflation. No-one has made serious headway arguing that the world’s central banks should have been following markedly tighter monetary policy – though Angela Merkel has (wrongly) been criticising the ECB.

On fiscal policy, I come down on the side of the activists wanting government spending to take up the slack in private demand – at least those that are able to. The problem here is that the countries in current account surplus, which ought to be doing the bulk of the work, are not convinced they should. Germany in particular seems to think the world economy is closer to the situation in the 1920s or 1970s, where loose money and too much spending fed inflation, than the deflationary 1930s. It’s all very well searching for the lessons of the past, but you have to pick the right comparator.

On trade, we appear to have entered a sort of happy paradox of constructive hysteria. There has been so much howling about the dangers of returning to the protectionism of the 1930s that not many truly boneheaded anti-trade actions are actually being taken. (The auto and financial bailouts need watching carefully, though.) And monitoring by a variety of watchdogs including the World Trade Organisation, the World Bank and independent researchers should at least keep any such mistakes in plain view. As long as the global economy endures merely a nasty recession rather than a protracted full-blown depression, naming and shaming should have at least some deterrent effect.

There’s a long way to go before we come out of the crisis, and prematurely declaring it over could be one of the worst missteps that we take. But while we might well find new mistakes to make, so far the world’s policymakers are making a reasonable fist of avoiding some of the very worst of the last ones.


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Victor Hugo stated “Those who fail to learn the mistakes of the past are doomed to repeat them in the future”. The repeal of Glass/Steagal will one day be looked upon as a monumental blunder. People will inevitably from time to tome make bad economic decisions. Absent regulation this phenomenon will amplify. Even though many may agree the repeal of Depression Era regulation may have greatly contributed to the economic collapse, that does not necessarily mean the dynamics or conditions that prevail socially or economically are the same as the 1930s.

Much must be heeded from the past. However a new century with new challenges will require charting a new path if civilization is to endure.

Posted by Anubis | Report as abusive

The quote is, “Those who do not remember the past are condemned to repeat it,” and it’s by George Santayana.

Posted by David | Report as abusive

we never learn from our history we are doomed

Posted by james | Report as abusive

Last time I checked (prior to recently becoming bank holding companies for some)…Lehman Bros, Bear Stearn’s, Goldman Sachs, Morgan Stanley, AIG, etc. etc., where not BANKS and therefor the repeal of the Glass/Steagal Act was for the most part irrelevant (maybe you could make the case with Citibank but that’s about it)!

Posted by Atra Man | Report as abusive

Instant gratification or the pursuit thereof, contributed to the current economic crisis. That same lack of impulse control is responsible for the blunders that our current fiscal policy makers are making. The knee jerk reaction of the Fed and Administration to form policy without assessing the long term ramifications is troubling … as are some of the views in this article. quote: “Germany in particular seems to think the world economy is closer to the situation in the 1920s or 1970s, where loose money and too much spending fed inflation,” The argument that the US will experience severe inflation caused by a devaluation of it’s currency is already playing out in the long term bond market. Germany’s historical perspective on currency devalued inflation is from lessons hard learned , many live in houses that were at one time heated by burning worthless fiat.

Posted by Rusticus Alarmist | Report as abusive

What does Shawn of the dead know about fiscal policy…

Posted by vin van go | Report as abusive

Victor Hugo may have been wrong…

Maybe its more like this:

When we learn from the mistakes of the past we just increase the magnitude of the mistake in the future.

Theres no gps to the future

Posted by Robert | Report as abusive

I’d like to go back even further in U.S. History. I advise all who are interested to read Jon Meacham’s marvelous study of Andrew Jackson in “American Lion.” Of particular interest should be a reading of Jackson’s veto of the Second National Bank and his worry about the National Bank under Nicholas Biddle owning the Senate and House of Representatives. Beware the power of the big banks. Learn from Jackson.

Posted by Dick Diamond | Report as abusive

cant we give the Chinese Yellowstone now.

Posted by Observer | Report as abusive

Good article but I think that the loose credit may have been a larger cause than is now known. A review of some of the causes of the great depression was the large groups of money that influenced the stock market. Today these large groups of money that has an effect on the market are the Hedge funds. When they can get credit they can have an out sized effect on the swings and trends of the market. They also tend to follow the old patteren of talking up their own book to the public. The current run up may be a window into their operation of starting a run up and then getting out and selling the market short. When the up move started there was it seemed an undue ammount of business press talk about how this was the start of something big and do not miss the boat, get on board now. Now there is a quite period and small talk about running out of steam. Would be noce to know if the hedge funds are in volication of anti-trust and collusion in the market.

Posted by Tom | Report as abusive

The article is a little spare on the details with all the “this one’s got it right, that one’s a bit off” stuff.

How about this: during the 1930’s depression the West was filled with young people and technologically so far ahead of the rest of the world that missteps and even the coming wars (which actually fed even more advantages in technology coming out the other side) couldn’t slow things down.

Now the west is old, marginally ahead of the competition in technology and, critically, shown to be not the world leader it espoused to be but as corrupt as every other region on the earth.

New ideas, new ways and new politics are emerging in the world, and perhaps they look a lot like iron fisted regimes of old but then novel uses for new technology are always as surprising as the fact electricity can be put through a lightbulb or an electric chair.

As for Santayana, he also said “History is a pack of lies about events that never happened told by people who weren’t there’ – Some people just have a way with words don’t they?

Posted by Corvus | Report as abusive

“…as the new deposits created by loans at each stage are added to those created at all earlier stages and those supplied by the initial reserve-creating action.”
-Modern Money Mechanics
(Federal Reserve Bank of Chicago)

Have a read of this document VERY carefully, recessions aren’t just a rare case, its programmed logic in out monetary system…the federal government put in place these formulas to maniuplate the sheep and herd them by the masses…

Posted by Kernel Klink | Report as abusive

To the Jackson fan, you should learn your history. Jackson was a Jeffersonian Democrat and the reason that ilk disliked National power , was that they were at odds with manufacturers and banks in general, being slave-owning plantation southerns. They didn’t want to pay the higher prices that the Hamiltonian industrial adn financial modernization policies would have dictated, as well as fearing strong central govt that could one-day take their slaves away which represented their only form of liquid assets. At least they were precient in their immoral hypocracy.

Posted by tom rossman | Report as abusive

Not my field, but the current global economic and political entities seem more diverse, with less bipolar ideologies, than the 1930s. This richer hybrid with less concentration in Western Europe and the USA may be more resilient and adaptive. The flexibility may also be significant change in relative fates and dependencies of various nations. So far, not too many militarist opportunists, racists, believers, but early days for a changing world order.

Posted by Survivor? | Report as abusive

I think Corvus has some very relevant points on this debate.
When I was at school I took (as opposed to studied!) history, and when revision time came our eminent Kiwi historian teacher, who went by the name of Knackers MacMillan, revealed to us that we were obliged to study the curriculum on our historical subject – which was the Boer War – in order to get the optimum results… although the information in the curriculum wasn’t what actually happened in the historical event! (We were studying the British version of history at a school in New Zealand.)
That is problem with history is it is very subjective and normally written by the victors, with as much an eye on making themselves look good rather than explaining the events, and it normally completely disregards the cause(s) and the focus is usually on the consequence(s).
History goes in circles because humans can’t help themselves repeating the same mistakes.
Greed is the lubricant which makes things so slippery.

Posted by Peter H | Report as abusive

So true Peter. We must question what we read and find other sources of information including the political positions of the authors that we do read.

Jackson’s concerns were correct. However without any reasonable oversight of the finance industry the U.S. entered a precipitous economic and baking collapse subsequent to the end of the National Bank Charter. Ninety-five percent of the factories in the U.S. closed up. While America was still largely rural, manufacturing did not provide as much economic output or employment as later periods in U.S. history. The suffering was still wide spread.

Jefferson’s position was one of ambivalence his whole life long. Thousands of court briefs remain as where he argued for the the rights of runaway slaves earlier in his public life. His time in the Presidency however, relegates Native American treatment to worse than that of vermin. At the same time he is awkwardly quiet on the issue of slavery and the three/fifths resolution regarding representation in Congress. This enabled the South to dominate the legislative process by virtue of all the seats they held as “Slavery Representation”.

As for Jackson, he was arguably a Sociopath. First they master charm and then devastation. Study the “Trail of Tears”.

Posted by anubis | Report as abusive

Atra Man, Glass Steagal initially set up the FDIC. Subsequent Legislation was passed by the same Authors a year later. The second Glass/Steagall prohibited commercial banks from brokering stocks and selling investment insurance. It was seen at the time to be riddled with conflict of interest and to great a potential for fraud. This allowed for the legal creation of complex investment insurance that were neither regulated or transparent. Such investment vehicles were prohibited even for investment banks until the 1990s. Take a good look at Graham/Leach/Bliley and other deregulation bills signed into law by President Clinton in his second term. In all fairness the deregulation of the banking industry began under Reagan’s watch.

Posted by Anubis | Report as abusive

David, Santayana stole it from Hugo who probably stole it from some else. Read the classics and you will get the same sense. Besides what matters more, the message or the messenger.

Posted by Anubis | Report as abusive

WHAT: was it that worked to see us out of the depression, W.W.II. It was not W.W.II per/say, but the industries that had an impedes because of W.W.II that broke depression hold over the world. So to solve this world malaise we need another war. This is the lesson that we find in past history, for example

Civil war brought the greater iron age to the world
W.W.I saw chemical and a industrial revolution that gave us the roaring 20’s (will not go into what caused the 20’s down fall)
Finally W.W.II gave the world the greatest technological age we have ever seen

So lets go start a war. Any ideal who we should go to war with. By the way a small conflict does not help as we see from Iraq an Afgan. So who can we go to war against

Maybe the question is not who maybe it should be what. WHAT enemy is effecting the globe and is threatening of destroying every creature on this planet

Posted by thomas | Report as abusive