Lessons of the 1930s

There could be trouble ahead

In 2008 the world dodged a second Depression by avoiding the mistakes that led to the first. But there are further lessons to be learned for both Europe and America

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Readers' comments



History does often repeat itself for several reasons. First, while many organizations claim to identify lessons learned, how many actually do? How many document the conditions and circumstances within which they were learned? Second, people learn lessons, not organizations. People come and go and so does the knowledge they acquire of the lessons of the past. How is this knowledge retained by organizations? While one may say that the world dodged a second Depression by avoiding the mistakes that led to the first, is this really accurate? Has there been a full analysis of the conditions and circumstances that led to the first and those that led to the 2008 financial crisis? Lessons are easily identified but they are less easily learned and applied. Would differing ideologies, beliefs and opinions have anything to do with this? One only has to look at the current financial challenges faced by the US economy as an example. Do the Democrats and Republicans share views on the problem and the solution?
Brett Cairns


I for one do not want this impending crisis averted, the longer we continue on a path of “economics of growth” the more disastrous the outcome. When will we realise that we are playing with a finite amount of resources and that the idea of growing in population and economic output will inevitably push us over the precipice? We should accept to live and be happy with less, to redistribute wealth more equitably and have an Economic output meeting our needs instead of our artificially inflated wants. I’m not advocating communism but a sustainable approach to economics where it is not acceptable for 50% of the world population to own less than 1% of global assets. It might be a naïve and utopian view but if we all learnt to live on more modest means and educated people on sustainability instead of promoting greed we might just be all better off.

gdpbull in reply to insubstainity

A change in the financial system could result in a more sustainable economy. If the system was based less on debt and more on savings there would be fewer booms and busts. The system would be more resilient to shocks. Economies would probably not get "red hot", but would be sustainable. A lot of Keynesian economists would say such an economy is moribund and is not achieving its potential. They would encourage more, cheaper money, and more leveraged investment, but that's what feeds the boom and bust cycles.

Mcamelyne in reply to insubstainity

We run into a population versus total global growth problem if we slow down. As much as I hate the wealthy accumulating wealth, it's a pyramidal thing and we need to keep raising the peak until population growth levels off. At that point we can flatten out consumption and spread the wealth. There has to be enough wealth to spread around or we end up with everybody living on $5/day.


The Economist is playing its bizarrely poisonous role in getting us to the next Depression. While essentially agreeing with all of Obama's economic policies, and disagreeing with the ruinous prescriptions of the Right Wing, it resists no opportunity to attack Obama in order to save its Republican readership. This is exactly the narrowmindedness that destroys economies.


This is one of the best "comparison with the Great Depression" type articles I've ever read. Great job casting current events in historical perspective, TE!

As for the conclusion that printing money is the way out, unfortunately that's true as well. To the dismay of fiscal hawks, there is no good precedent for economic recovery through fiscal retrenchment. Expansionary austerity is myth.

Lao Tzu Bodhi

I am impressed at with article and the comments. When ever I see comments at a site like MarketWatch I wonder if any of the readers know anything.
At least The Economist is printing an article that should be required reading by all that shape our world.
The only thing not addressed was how corruption is making a bad problem much worse.
With Corporations sitting on so much cash they are buying back there own stocks rather than invest in the local economy putting local Americans to work.
The 'Don't Gore My Ox' mentality is an unpatriotic response to many of the problems the World faces today.
I find it ironic that American Companies are investing over seas in emerging markets rather than doing the patriotic duty of putting money to work here in America.
When an American company moves most of it's operations overseas to cut cost and increase the bottom line; it's not American anymore.
How can anyone expect the economy to grow if there are no buyers because jobs don't pay much.
I see almost everyone pointing fingers and blaming whoever is in there line of sight.
Who is out there that will stand up and do there part to help?


Query>: Just as the 1930's depression was due to a gross equality in incomes, which led to under consumption, are we overlooking the fact that the great inequalities in income in recent years may be the chief causal factor in our current economic woes? Yes, the Wall St. financial artists contributed to our economic woes, but a stagnation in wages and an enormous increase in wealth to the "1%" does seem to be the chief cause of our economic downturn to me. It has reduced greatly mass demand for goods and services. Will someone much more knowledgeable about these matters than I am please respond to my comment. Is there any merit to it?

Richard La Brecque, Bradenton, Florida


What about the mistake which led to the second?
Who got rid off Glass Steagal Act? The US central bank, US president Clinton plus support by all large US banks.
In other words no lesson was learned - what a poor article!

diagonally in reply to Lucrecius

Yes and all of that, bank deregulation, tax breaks for the rich, end up in over-investment, which was a hallmark of the roaring 20's.

There was a very interesting academic article I read once. It stated that they overbuilt so much in the 20's, that in downtown Chicago they did not build one office building or large hotel up until the 1950's.

If that is any guide to our real estate crisis today, we are still in for 25 more years of a down real estate market.


Yes another thing to remember as another commenter said, that the 1930's had very high temperatures and droughts. In fact, contrary to global warming believers, the 1930's had the hottest years on records. Remember all the Dust Bowl stories? That was another factor in the Great Depression as the farming revenue took a hit and spread to other industries.


"Economists have not yet recognized a major contributor to the Great Depression and the great recession. Low marginal tax rates have unintended consequences. While a low average tax rate benefits growth, a low marginal rate does the opposite. "

I agree. Just like in the 30s, this recession was caused by a bubble. What causes a bubble? TOO much investment. Too much building.

Now that might seem like an anathema to some Repubs, but, I believe yes, there is a thing as too much investment. The investment has to be only as much as can be absorbed by the economy, otherwise you get a short term party with a following crash.

What causes this overinvestment? Tinkering with the top tax rate. If you make the top tax rate too low, the rich and the banks with the extra money they keep, end up going gambling with it on Wall Street. Eventually you have finacial scandals and crashes.

If you keep the top tax rates a little higher, that goes more towards government spending which creates middle class bureaucrat jobs and benefits, and stimulates the economy that way. Of course, it is all a balance. You don't want too little investment either.

So the Bush tax cuts I believe were one main factor in this bubble and recession.


Any one who has read any of Harry S Dent's material would appreciate that aside from excessive growth in the money supply and very cheap and readily available loans that helped fuel multiple bubbles across many sectors, the roots of this 'great recession' as it has been dubbed, lie in demographics. Dent highlights this is true of past depressions too.

Governments across the developed world are keeping official unemployment statistics artificially low misrepresenting the scale of the current disaster. We are not even half-way through this crises and claims of victory are extremely premature at this stage.

The rise and rise of gold leads me to believe that many are hedging against the hyper-inflation that will come due to unrestrained printing of money that developed world banks have been engaged in since the unfolding of the credit crises. The people involved in authorizing this must know better and that history does not favor this as a strategy for saving national economies. Germany under Hitler and more recently Moldova bear testament to this.

The weakening of the US dollar as a result of this reckless printing of money will have hugely destructive consequences for the US and world economy. Already many countries are refusing to convert the US dollar and many tourist destinations in the US are accepting foreign currency as payment instead of US dollars.

Of course the devaluation of the US dollar which is and will continue to accelerate also means further asset devaluations...

All round deflation.

We have not averted a 1930's style depression and must be vigilant against needless crowing about victory over such a phenomenon.

The Baby Boomers are leaving the workforce in record numbers having reached and gone past their peak productivity and spending. As Harry S Dent highlights this is where the last and all preceding depressions have had their origins.


By the history of the GREAT DEPRESSION it presented scenaios for history that make DEPESSION scary. The 2008 Depression in hindsight ocnjured up the same scarinest on "possiblity." Then that, in hindsight, the brunt was averted, these symthoms that remains and how they are handled by what appears anybody's guess on any given day has a scariness that remains, though a level down from the height of the 2008 depression. Comparing does not do much if history did not provide a clear "LESSON." THE WORLD TRULY IS NOT TODAY WHAT IT WAS THEN.


Really interesting, effectively-written article.

As for the Brits, who declined to enter "the agreement" (whatever that will ultimately entail). I say "Yes! Good move!". The British Commonwealth is a huge entity that can stand by itself. The Brits don't need the nanny-state Euro model. Its moto: If it isn't regulated it shall be; AMEN [why do they have to use the word 'shall'?]: for example: "Every home shall have a window box beneath each window. Construction of said box shall meet IEC-ISO 80-blah-blah-blah. Each box shall be at a height of 2.0732 m above the road surface, +/- 0.562 cm. And it shall contain 3.00 tulips of shade X-Y-Z on the chromatography chart per EN60blah-blah-blah. No other flower or other plant, or other decoration, shall be allowed." Yuk. Why would anyone want to be part of this nonsense?


Why should we rethink "liberal capitalism"? Why not rethink clientilism, benefit addiction, suffocating bureaucracy and political correctness? In short: the suffocating "developed socialism" that we are forced to live in in Europe and that caused the crisis?

Let's forget the idea that "Europe" was made by technocrats. If only it was..."Europe" is socialist bigots and Maoists like Barosso forcing us to live in their socialist "Brave New World", were echoing their empty slogans is the substitute for "free experession of interest". Everyone with an inquisitive mind, any real opposition is labeled "ugly nationalists". I am not a nationalist, but I am as fed up with European bigotry, 360 degrees socialism and political correctness as the Russian intelligentsia is with Putin. If it costs 20% of GDP to get the whole edifice crashing down, so be it!


"When you borrow from the future, you are essentially forgoing future consumption." I am pleased to find this stated so succinctly.

Someone has pointed out that all that will be consumed in the future will be produced in the future. We cannot occupy a future house. We cannot eat future food. I am sorry I can't find the source.

There is something missing in our model. Or the way our monetary system is constructed is not fully functional.

It would be a shame to think that the monetary system should take precedence over the biological and physical reality. And, I suspect that is neither can nor will. I do have every reason to believe that our standard of living will suffer tremendously if we don't get a handle on this point of error.

It is rather unfortunate that there should be people without homes while there are homes that remain vacant. It is unfortunate that there are people willing to consume goods while there are unemployed individuals willing to produce.

And it is even more unfortunate that our system of accounting for production and consumption is an artificial mechanism that is failing to allow this to occur.

If push comes to shove, people will beg, barter or steal. Even worse, we get an overthrow of the gov't, some radical change, perhaps a war. We can eliminate unemployment by simply killing everyone that is unemployed. But, at some basic level, future consumption will continue regardless of the monetary system. It is a shame if this is not balanced by future production simply because the monetary system isn't functioning.

I like the way it was put, "essentially forgoing future consumption." I am not sure if you phrased it this way intentionally or inadvertently.

Surely we recognize the physical reality of future consumption and future production. They occur in the future. The only mechanism that will cause a forgoing of future consumption is that our monetary system carries forward constraints on our behavior that restricts future production and future consumption.

The phrase, "essentially forgoing future consumption" points a proverbial finger right at the heart of the issue, the crack in the wall.

The question is, what is wrong with the way we do our accounting such that we are forced into "essentially forgoing future consumption" when, in reality, this is entirely unnecessary?

Still, this idea of "borrowing from the future" is so fundamental in conflicting with "all that will be consumed in the future will be produced in the future" that I have to wonder if it doesn't speak to something fundamentally wrong with either the model or the system. And that no manner of attempts to employ macro solutions are going to "fix" a system when all we are attempting to do is put it back into the initial already broken state that it was in the first place.

We may not realize it but the "economic stimulus" didn't start in '08, it may have started as early as Reagan.

And, as someone pointed out, there is as much reason to believe that the last time it got "fixed", the Great Depression, it was fixed the same way society has always fixed it, by going to war. That will certainly put a whole bunch of useless eaters to work, at least long enough for us to simply kill enough of them to account for all the unemployed.

If I may, I would like to suggest some more philosophical points.

We already have,essentially forgone future consumption. Yesterday's future is now. Whatever effect the debt has, it has already had it and it has it now or it has none at all.

Tomorrow is just as much the future as a decade hence is the future.

Some less than 100% of the working age population can produce to supply 100% of the consumption.

Unfortunately, if your not working, in general, you don't get to consume. (Unless it can be shown that you have a good excuse.) So, in an effort to keep all than can be employed and as few on welfare as possible, because it's just so unseemly, we have been rolling through a series of economic over stimulation for a good four decades.

We've just reached the point where the rules on the game don't "allow" us to do the same stuff we've been doing to keep it all "stimulated".

Just a thought.

Fiscal power


Along with a low average tax rate robust, sustained growth requires a high enough marginal tax rate that those with potentially high income seek to avoid taxation with deductions that grow the value of a business.

When the top tax rate or capital gains rate is too low business owners and executive pull equity out of businesses as personal income. So cutting marginal rates leads to higher income for the wealthy and less money within businesses for paying wages and investing in productive capacity.

The biggest downturns come with low marginal rates. The Great Depression began in the US with a 12.5% capital gains tax rate and a 25% top rate. The great recession began with a capital gains rate of 15% and a top rate of 35%. These average to 25% which is the lowest average since the depression. Japan's lost two decades came with a 10% capital gains tax rate. The hyper inflation of the German Weimar Republic came with very low tax rates.

Those promoting low marginal tax rates never say when it is supposed to lead to faster growth. Getting specific would make the falsehood obvious. History suggests the top rate one year influences growth two years later and the capital gains tax rate leads growth five years. If these lead times are correct Bush's 2003 tax cut began influencing growth in 2005 since which every year has grown below average. The full effect started in 2008 since which GDP has annualized about zero percent and 6.3 million jobs have been lost.

England in now the place to watch; their top rate rose to 50% in 2010. The positive growth effect should start in 2012.


I applaud your article. It's about time that someone defended the central bank. We could have been in for harsh times. The same that is precsribed by Germany and France for other countries. No good will come in the end, a slow, persistant melt down.

cynical_prophet in reply to guest-iiaonoi

We are in for harsh times. What do you think happens when we have to pay back all that debt? What do you think happens when central banks increase the monetary base of their country's currency 300%? Get ready for a period of hyperinflation due that, which will lead to a deflationary depression. Austerity measures will make that worse when countries have to pay back their creditors. No one opposes the central banks for the sake of being mean. They may make things better for the here and now but their stalling will exacerbate the problem by debasing the value of the currency.

guest-iiaonoi in reply to cynical_prophet

History being the guide, we know that even President Hoover wanted to eventually help the business community out - clearly three years into the depression. He had always been "hands off". The Fed was hands off because of the loss of their leader and a internal fight between Washington and New York. It's obvious that without some confidence restored, the situation degrades quickly and takes much longer to correct. It affects people in the worst way.
With the Fed getting involved in the way they did, it bought some time to resolve some of the most serious problems at the time. They were paid back in most cases with interest. I do admit there is a risk of moral hazard but at least someone in the government sounded the alarm and actually did something to help. It's a contrast to nobody helping in 1929.


Earlier this year a comment in response an article read:

“How very funny! A long time published magazine named The Economist does not understand economics! What a silly article.”

The Government Bail-out Bubble as a response to the 2007-2008 crisis only guarantees the coming great depression will be even worse.

European governments needs to go into more debt so that when the ‘real’ crisis begins there will be the maximum amount of suffering possible - that’s the way the ‘bear’ works.

Floyd Norris of the NY Times summed it up well when he said:

“In sum, the Fed thought it had learned the lessons of the 1930s, but it had not learned the lesson of the 1920s, that allowing asset prices to soar to absurdly leveraged heights could lead to a financial collapse as the need to repay loans forced sales that drove prices lower, resulting in the need to repay more loans, and so on and so on” (Failing Upward at the Fed, nytimes.com, February 27, 2009).

If Irving Fisher was alive to day he would define the problem as overindebtedness.

This overindebtedness is obvious from the latest Fed “Flow of Funds”: total credit market debt is at a record high of $53.825 TN, representing 355% of GDP.

The only way to bring this debt down, or least get it started, is through a great depression. This will occur when the Government bailout bubble bursts.

The comparison of today’s government and central banks response to financial crisis should be compared with 1927 and 1997-1998.

The comparison with the 1930s should begin after the end of the cyclical stockmarket rally which may top in 2013, a little earlier or a little latter - the comparable event with 1929.

It took until January 1953 for total credit market debt to bottom - starting a new cycle.

The coming economic, technological and hegemonic restructuring will be a long drawn out affair, including world war.

For a magazine that was started in 1843 that has endured through the Great Depressions of the Nineteenth and Twentieth Centuries not to have learnt that there is a need for a financial system that regularly pays down short and long term debt is amazing.

Moses would have understood the problem, and the solution:

"At the end of every seven years you shall grant a release of debts And this is the form of the release: Every creditor who has lent anything to his neighbour shall release it..." (Deuteronomy 15:1-2, NKJV).

"And you shall count...seven times seven years...forty-nine years. Then you shall cause the trumpet of the Jubilee to sound on the tenth day of the seventh month; on the day of Atonement [Yom Kippur] you shall make the trumpet to sound throughout all your land. For the fiftieth year shall be holy, a time to proclaim liberty throughout the land to all enslaved debtors, and a time for cancelling of all public and private debts. It shall be a year when all the family estates sold to others shall be returned to the original owners or their heirs" (Leviticus 25:8-10, NKJV/Living Bible).

It wouldn’t work you say.

"The United States' economy has been in recession only nine times in the last 60 years, or roughly once every seven years. Before the last recession in 2001, the economy even expanded for a full ten years. And the average recession has only lasted for about four quarters" (Joachim Fels, Recession 2007, morganstanley.com, November 18, 2005).

These fundamental financial law works whether we like it not - implementing a plan to deal with these ‘laws’ is the less painless option; by not implementing a plan the ‘markets’ make sure it is the most painful option.

The Future Watch rough guide for the Dow Jones high is between 13,669 and 13,796. If history is a guide the Great Depression will begin in Mitt Romney’s Republican Administration.


"As in 1931 and 2008, a grave financial crisis may cause a large drop in output."

This short sentence in this article reflects what appears to be convention economic wisdom and needs to be challenged because it could be that a drop in output causes financial crises. Or it could be that one feeds the other.

During the 1930s America experienced its most severe ever drought and there may have been other problems in the physical side of the economy. Most of us are too old to remember.

Today there are people who claim we are using resources at a rate that is 150 percent of the sustainable rate. If that is so, or even partly so, it is not surprising we are in an economic crisis.

If it is true that current problems are because our use of resources is unsustainable, then quite different policies are required.



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