Economic history goes back further than 1929

Unemployed men on a hunger march pass through a British town, circa 1935.
Image caption It is easy to understand economists' obsession with the Great Depression

I have made a startling discovery. Apparently, the world did not begin in 1929.

I think I once knew that. I remember reading about Greeks and Romans and an important revolution or two.

But for the last four years, every financial journalist and political pundit has started every story with 1929 and the Great Depression. The hundreds of repetitions of that story had dimmed my memory.

I was reminded of the pre-Depression world when I read Are We Looking at the Wrong Depression? by Stephen Davies of the Institute of Economic Affairs in London.

This short paper compares the current crisis and the Great Depression with the so-called Long Depression which gripped the US from 1873 to 1879 and lingered even longer in the UK and Europe.

Davies argues that today's crisis is much more like the Long Depression than the Great one. He warns that policymakers who are schooled only in the Great Depression risk applying the wrong lessons to their response and doing more harm than good.


Economists' obsession with the Great Depression is understandable. The biggest of anything has a natural fascination. Plus, much of modern macroeconomics was developed trying to understand what caused and prolonged the Great Depression.

But focusing on only one economic downturn has dangers of its own. The most obvious pitfall is that the interventions of the late 1920s and 1930s were ineffective.

Governments around the world tried raising tariffs and taxes, and employing people on huge public works projects. They tried deficit-financed stimulus spending and currency manipulation. They tried increased regulation of banks and industry.

Despite all this, the Great Depression dragged on for more than a decade.

Today's leaders would do better to study earlier downturns, like the Long Depression or the sharp recession of 1920.

The US response to the 1920 crisis was almost the opposite of the Great Depression response. The US cut federal spending, raised interest rates to stabilise the money supply and engaged in only modest relief efforts.

The result? US GDP completely recovered in two years. Unemployment, which reached almost 12% at the height of the crisis, fell quickly to less than 3% by early 1923. An extended crisis was avoided.

History repeating itself

This new historical view has made my job as an economics writer a lot easier. There is no fiscal mistake so novel, no policy blunder so fresh or political gambit so innovative that it has not already been debunked dozens of times.

If I read about threats of a trade war, I see that this is the same protectionist nonsense that Adam Smith, the world's first economist, attacked in 1776.

If I hear someone calling for a national industrial policy, I remember Frederic Bastiat, the great 19th Century French economist, and his warnings about the unintended consequences of government picking winners and losers in the economy.

Then I just "borrow" these giants' work, update the examples, add a bit of cheek for the modern ear and call it a day. Which is what I'm going to do right now.

Steve Fritzinger is a business consultant based in Washington DC.

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