This is an event summary of a speech given by Barry Eichengreen, Professor of Economics and Political Science at the University of California-Berkeley, on 20 January 2015. It reflects the views expressed by the speaker, not those of The Henry Jackson Society or its staff.
On 20 January 2015, Professor Barry Eichengreen presented his book Hall of Mirrors: The Great Depression, The Great Recession, and the Uses – and Misuses – of History to an audience at the House of Commons. Professor Eichengreen explained how knowledge of the Great Depression of 1929-1933 shaped responses to the 2008 global recession, and conversely, how the recent crisis will likely re-shape writing of the Great Depression. The book finds that while the Great Depression has has, on the one hand, allowed policy-makers to better respond to the recent recession, it has, on the other hand, allowed the failure to adopt more systematic and far-reaching post-crisis economic and financial reforms.
Lessons learned from the Great Depression
History is a lens through which leaders and policy-makers view current problems and the past provides lessons that inform decisions in present-day crises:
- Perceived mistakes made during the Great Depression (1929-1933) shaped the response to the financial crisis of 2008. In the 1930s, for example, policy-makers adopted protectionist policies that resulted in the collapse of the economy, prompting global leaders in 2008 to vow to avoid implementing the same disastrous policies;
- Most countries fared better in the aftermath of the 2008 recession compared to the 1930s: in the United States, for example, unemployment peaked at 10% in 2008 compared to 25% in 1933, while failed banks numbered in the hundreds, not in the thousands, and the collapse of the financial system was averted.
Lessons not learned from the Great Depression
The experience of the 2008 recession has prompted many to question conventional wisdom claiming that the Great Depression was a result of avoidable policy failures that had since been corrected:
- Economic historians were better able to explain the course of the Great Depression than either its causes or onset. As a result, contemporary policy-makers failed to recognise that the same contributory factors of the Great Depression also existed during the last decade. Most notable was the regulatory focus on commercial banking to the detriment of investment banking, which after the collapse of the US investment bank Lehman Brothers arguably arguably became the single most disastrous decision in the course of the recent financial crisis;
In response, policy-makers rushed to prevent the failure of other financial institutions: governments provided capital and liquidity to distressed financial institutions, central banks flooded financial markets with liquidity and global leaders congratulated themselves on avoiding another Great Depression. The results of those policy initiatives, however, have been less than fully successful: post-crisis recovery in the US has been lethargic, proceeding at half the rate of a normal recovery; Europe has experienced a double-dip recession; and, partly as a result of a historical fear of inflation, austerity has become the norm.
Lessons for the Eurozone Crisis
Policy-makers’ success in preventing another Great Depression also arguably led to a widespread failure to do more to support a more vigorous recovery and, as such, there is a strong argument for unconventional policies to promote recovery in the Eurozone:
- Policies of monetary shock and awe similar to those implemented in the US by Roosevelt in 1933, i.e. depreciating the dollar and driving up prices to 1929 levels, are needed to fight deflation in Europe, but the European Central Bank is not constitutionally capable of implementing them. In addition, irresponsible lending by the German state-owned Landesbanken and the big German banks as well as unhealthy borrowing from the southern European countries was a significant part of the crisis;
- Looking forward, Europe needs quantitative easing in the form of an infrastructure initiative from the European Commission. In response to debt, policy-makers must choose from mutualisation, nominal income growth, or debt restructuring. Negative interest rates are also a possibility. In addition, the disconnection of French and German banks from Greek debt would not immunise the Eurozone from the contagion and confidence effect were Greece to withdraw from the Euro. If Greece and Germany cannot come to an agreement, it could lead to disaster in the Eurozone, and eventually impact the US.