I’m going to move on from the Great Depression next week, but for our final chat on the topic (for now), I wanted to ask the most pertinent question: what, if any, are the lessons for today?
Is this really the 1930s all over again?
None other than Ray Dalio of Bridgewater, the world’s biggest hedge fund group, has argued that our current situation resembles the late 1930s (1937 specifically), with populism on the rise, our economies still in recovery from a major banking crisis, and central banks looking to tighten monetary policy at a time of low but rising inflation.
When you put it that way, the parallels seem pretty impressive. And when you look back at how the Depression unfolded and compare it to the financial crisis, there are many similarities.
They were similar types of crises. They were both preceded by unsustainable credit booms, and they were both very deflationary due to the precarious state of the banking sector (in the US during the Depression, and globally during 2008/09). The big difference of course, is that the impact of the Great Depression was far greater in economic terms.
When you look at how the 2008 recession unfolded, it’s clear (to me at least), that there were a few key factors involved that made the recent crisis less severe than the Depression. And looking at the British experience of the Depression in particular is helpful in figuring out what made the difference.
Last time, we looked at how Britain had managed to avoid much of the worst of the Depression. This happened via three main mechanisms.
One was the simple fact that we didn’t have much of a boom in the 1920s to come down from, whereas the US by comparison had enjoyed a rampant bubble.
The second was that we loosened monetary policy dramatically by dumping the gold standard in 1931 and letting sterling take the strain, whereas the US maintained relatively tight monetary policy throughout.
And the third, which I didn’t really touch on last time, was that the big British banks were actually pretty solid – they were well capitalised and didn’t need to be bailed out, unlike in the 2008 recession. The US banks on the other hand, were hit hard by the 1929 stockmarket crash.
If you fast forward to the 2008 crisis, then central banks around the world tried to alleviate the pain in two main ways. One: they printed money to loosen monetary policy (and frequently push their own currencies lower), the modern-day version of leaving the gold standard. Two: where their banking systems were bust, they stepped in to recapitalise, nationalise, or both.
It took Europe a lot longer than the US or the UK to do these things, and you need only look at Greece – one of the few countries that actually has endured a Depression-scale slump over the past five years – to see what happens when your banks are bust and your currency is unable to bear any of the weight in helping prices and your economy to adjust.
All of this comes at a cost, of course. There’s been an erosion of trust in the system, and a widening of wealth inequality. But that happened in the 1930s too.
In all honesty, I think the only viable way to avoid a terrible crash is to avoid getting too excited in the boom phase – and that is almost impossible, given human nature.
If the Depression phase is over, then what happens now?
So what’s next? Clearly, the big worry when we look back at the Great Depression is what it culminated in. It goes without saying that the last thing any of us wants is another world war.
On that front, I like to think that there are sufficient differences between now and the 1930s to avoid that sort of outcome, despite the worries about populism. I’ve recently been reading The Dark Valley by Piers Brendon, which gives a great panoramic sweep of the 1930s and how the great powers ended up at war.
Clearly, there are some very specific differences – I don’t think economics alone can explain the rise of something as abhorrent as the Nazi regime under Hitler, for example.
But on a more general note, one thing that stands out is just how badly off vast chunks of the population were. In many countries there was no safety net at all, and where there was any such net, it was rudimentary. Agricultural workers in particular were hit very hard by the general slump in commodity prices and there’s no doubt that this level of poverty was a breeding ground for all sorts of discontent.
These days, in developed economies at least, there simply isn’t that degree of poverty. That’s not to say for a minute that people don’t feel disenfranchised, or that there is no deprivation – there plainly is. But it’s simply not on the scale seen in the 1930s. The proportion of the population that has almost literally no stake in society is far smaller.
Meanwhile, the idea of democracy is also more entrenched than it was in many countries in the 1930s. After the 2008 crash, there was the occasional article in the FT admiring the success of China’s “state capitalism” but no one was calling for a dictator to be appointed.
Indeed, while our political picture may feel precarious by the standards of the 1990s and early 2000s (and even those had their moments). But you only have to go back to the 1970s and 80s, let alone the 30s, to find far more political and civil turmoil in the UK, certainly, than we are experiencing today.
Not so much the 30s as the 60s
So while there were certainly economic parallels between the Great Depression and the great financial crisis, I’m rather hoping that the resemblance, politics-wise, is rather more superficial.
Indeed, as I’ve mentioned before, the parallel I’m more interested in right now is with the mid-1960s. Back then, we had very low inflation and a complacent bond market, which rather quickly gave way to rising inflation, and then of course, to the disaster of the 1970s.
We’ll be keeping a close eye out for signs of inflation properly taking off this year. A reluctance to unwind quantitative easing might well be a trigger for prices rising a lot more quickly than anyone expects right now.
And there’s still that issue of trust – the Great Depression and the post-World War II era marked a transition to a new monetary regime of fixed exchange rates (Bretton Woods, which survived until the mid-1970s). I suspect the 2008 crisis will also eventually mark the point at which our current monetary regime began to break down.
But as to what will replace it – we’ll have to wait and see.