Two depressions revisited

Barry Eichengreen and I have posted an update to our column comparing the current global economic crisis with the Great Depression. The data are through the end of March (apart from the discount rate data, which are through the end of April). Further updates will be posted as the industrial output and trade data are processed by the international organisations which we are using as our source.

At the global level, March saw green shoots in the stock market, but not in the real economy — although world trade stabilised, and there was a clear deceleration in the rate of decline of world industrial output.

We are also, for the first time, posting data on individual countries. These emphasise the gravity of the current crisis. They also show green shoots in some countries, particularly in Eastern Europe and Japan. Hopefully subsequent numbers will confirm these encouraging signs.

Is this the end of the beginning, or a lull between storms? Hopefully the former, but how can one be certain, especially given the various unexploded landmines littering the economic landscape, and the steady increase in unemployment around the world with its potential to create new holes in the financial sector? The Great Depression also saw increases in output which turned out to be temporary, largely due to the policy mistakes of central bankers and politicians trapped by a gold standard mentality. As my column with Barry pointed out, the policy response has been much better this time around, and may be bearing fruit. Once the recovery is clearly under way, governments will need to start balancing the books. But a premature tightening of fiscal policy would be disastrous, which is why Europe needs to avoid artificial fiscal straitjackets.

19 replies on “Two depressions revisited”

Okay. This is 2009, not 1929. So any comparative analysis needs to be real cautious.

1. Fossil Fuels. We have burned through half. Not so in 1929.

2. World Population: Increased a bit since 1929.

3. Food supply and drinking water are real problems in some parts.

4. Everyone wants to ‘grow’. The biosphere is FINITE. It is FIXED. It cannot GROW. So where in God’s name are we going to get the ‘growth’ to undo the financial, economic political and social damage that has been inflicted by the past two decades of the FIRE Economy?

You guys are economists. You must put yourselves in the shoes of the scientists, geologists and energy engineers who are constantly urging us to heed the writings of Hubbard, Bartlett, Simons and Meadows. You might not like what they write, but to ignore them is madness. We need a new economic Model-in-Use – one that does not include annual, incremental growth. Do you have any ideas?

Brian P

I’m just putting this out there. It looks from the graphs that the policy response is not “very different”, but very much the same. The only difference is that governments and central banks are doing more of the same they did back in the 1930s. Have I got that right?

The big difference is interest rates. They are much lower than they were in the last depression. They have been dropped to historic lows and held there for longer.

Another BIG difference is that debt is greater now with optARMs to reset and we have the derivatives yet to pop!

Also Japan is anomalous. The second largest economic power has been declining for two decades. It should have been more widely taken as a warning. Or would Weimar Germany be a comparator?

And we have nuclear and bio weapons for the next war……

@ Brian Wood

There is little evidence to support the idea that oil is a fossil fuel. Uganda apparently now has reserves of oil as large as Saudi. Coal and gas have never been more plentiful…..

Growth of 300% is inevitable for China and India, but do not worry, there are only 2.2Bn of them.

Given the tremendous success of economists in predicting what has happened, don’t you feel that you would be better off posting on a site where the readers can affect something, anything?

Growth does not need to mean pollution and waste, but the commodity bubble will mean more economy, husbandry will be practised so the GFC is probably a good thing for this purpose? Lack of growth when a population is growing means that we must do with less. With a bit of graft and reorganization, we can do that!

But Ireland’s population is now declining. So sharing what we have will help a lot.

SHARING. Not a concept in economics……

Remember Iceland!

@Matt: Pat is right, interest rates have been cut much more aggressively this time around. And governments really didn’t do a lot of stimulus spending back then, if deficits rose this was largely a result of the contraction. But, you were reading the graphs correctly.

The real point is what happened approx 24 months in, i.e. 1931. There was a totally perverse increase in interest rates, largely in an attempt to defend countries’ fixed exchange rates (i.e. membership of the gold standard). That is one mistake we don’t want to repeat.

Here is a pessimistic reading of the current state of play, although there are also many optimists around these days:

@Pat; Thanks for the reply. Economics is a, or should that be, the Religion of the financial and commercial populus. It sure as hell ain’t science. Chindia may ‘grow’, but I presume this is internal, not external. No assistance to us.

Your reference to oil, coal and gas are interesting. Perhaps you are familiar with King Hubbard and Alfred Bartlett – if so, great. If not, Scroogle them (please do not use Google as your search engine)- use!

Interest rates: its the real interest rate that counts. Real = Nominal – Inflation or Nominal + Deflation. Take your pick. I would choose #2. So that puts it at approx +6% if data is to believed. Not so pretty.

Brian P

Thanks for the post; this is fascinating. I have a question; perhaps there is already some work on this out there on this. I was wondering if one should expect the transmission of the shock from the US to the rest of the world to be faster now then in 1929. Trade is relatively more important now — and it’s faster with just in time inventory management etc. Working capital cycles are much shorter now then even 20 years ago. Capital markets are more inter-linked etc Information gets transmitted faster with the Internet.

@Donal: International Trade is a major significant factor. Go over to He wrote several items on this and related matters. You may need to search through his archives for what you need.

Brian P

@ Pat

Are you really saying that oil is not a fossil fuel??!! Do you want to rephrase/completely change that assertion?


I don’t think you’ve disputed anything I’ve said. After all, the US Federal Reserve (for example), also continually slashed interest rates to then-record lows by 1931 [Graph].

The point I was making is that doing the same things more quicky and more aggressively hardly constitutes a “very different” policy response.


Well, between 1929-1932, US Federal spending increased over 40% under the Hoover Administration. [Another Graph]. Ironically, since spending got so out of hand, it was Roosevelt who campaigned on a platform of a 25% spending cut! Perhaps this wasn’t the situation in Europe.

Of course, there’s no disputing that the 30s policy response was shambolic.

It appears my previous post was mangled in cyberspace.

It was meant to read:

Well, between 1929-1932, US Federal spending increased over 40% under the Hoover Administration [Graph]. Spending was so out of hand that, ironically, Roosevelt campaigned on a promise of a 25% spending cut! I am unsure about European spending.

However there is no disputing that the policy response of the 30s was shambolic.

This is an excellent piece of work, which I’ve seen reference to over the weekend in the financial pages of a number of newspapers abroad (eg. Ambrose Evans-Pritchard in yesterday’s Sunday Telegraph).

Given that, its a shame the charts on industrial output don’t contain Ireland. Had they done so, they’d have counteracted the widespread belief across the world that Ireland is an economic disaster area. The charts show a massive plunge in industrial output in every country shown since the base month of April 2008. Had Ireland been included, its graph would have been essentially flat or moving up since April 2008, the only one to do so. Manufacturing output in March 2009 in Ireland, the latest month for which figures have been published, was almost 10 per cent higher than in the authors’ base month of April 2008, in contrast to 20 per cent falls in nearly all other countries.

@Brian, there is clearly a resource problem, which may put constraints on future growth, but as a matter of definition it is possible for growth to continue as resource consumption levels off or falls. There are at least three key mechanisms through which this can occur.

1. Efficiency can (and frequently does) increase, so that the same product or service is delivered using less inputs.
2. The mix of products and services produced and consumed can change, in favour of products and services that consume less resources. As services are typically much less resource intensive than manufacturing, a fall in production and consumption of manufactured products is consistent with growth if consumers consume more services.
3. Quality can (and generally does) improve, and the value of quality improvements is incorporated into measures of the real value of output.

“The primary energy intensity of the (Irish) economy fell by 42% between 1990 – 2007 (3.1% per annum). In 1990 it required 0.15 kilograms of oil equivalent (kgoe) to produce one euro of GDP (in constant 2006
values) whereas in 2007 just 0.09 kgoe was required.”


Any thoughts on why the UK’s output was a lot more volatile (possibly seasonal) than any of the other European big four in the Great Depression? Or is that just a function of the data source/quality?


PS. General reader tip re Brian’s search engine recommendation – don’t type in by mistake. Or at least, certainly don’t do it in an open-plan office!

Ronan, just a suggestion that the UK’s output could have been more volatile because it was more exposed to international markets, and as a result its manufacturers were feeding longer supply chains, with poorer information about stocks and end-user consumption. Long supply chains with limited information can be highly unstable in the face of shocks, and can oscillate between oversupply/overproduction and undersupply/underproduction. See, for example:

While not all supply chains would have behaved identically, enough of them might have behaved similarly to produce the national output volatility shown in Kevin’s chart for the UK, rather than smoothing the trend out over time.

@Con: good suggestion. However, the jagged nature of the UK interwar series is I suspect an artefact of the data: uniquely in this set of countries, the UK only produced quarterly data, which were then interpolated by subsequent scholars.

@con. Thanks for the reference. So far I have not been able to download it. Will keep trying.

My difficulty with ‘growth’ is that it invariably involves increases in inputs – though not always. The conventional wisdom on this matter is that you require a product/service that you sell to some consumer, who is able and willing to pay. You get your costs, plus a surplus (hopefully) which you use for whatever. If your income stream becomes impaired (for whatever reasons) you have to forego your surplus, perhaps even have to reduce costs. You can invoke efficiencies – but only to some limit. Now you have to make a choice about how much you are able to produce – or perhaps you may even question your reasons. There is also a significant difference between producing goods and providing a service.

My other concern is about the very large labour supply in East Asia. It is massive – hundreds of millions. In addition these potential workers have access to world-class manufacturing capabilities – allied to their ‘low-cost’ environment, they can make anything we need, or supply any service (except on-site- services) we, (western economies) need. Our workers are almost not needed. Service economies, are low wage economies, hence low demand economies, hence low ‘growth’ economies. (I am invoking the Permagrowth economic Model-in-Use). Essentially we are nett energy consumers. This is not sustainable. This has some bearing on our emerging financial problems.

Debt is acceptable if, and only if, you get a surplus to pay down the principal + interest. Money and debt are like matter and anti-matter – when they meet they mutually cancel each other – like now we have Deflation (decrease in money supply). “Money makes the world go round, without it, it stops”!! The Quantitative Easing is a scam to pay down debt in the vain hope this will re-stimulate consumer demand. Trouble is the consumers have decided to be more prudent, and worse, to start saving.

@Ronal L: Yeah!, was – interesting!!!

Brian P

@ Barry
Scarce resources are not the problem. Paul Zane Pilzer would argue that there is no such thing as scarce resources, they are only a function of the technology available at the time.
For example, a hundred years ago whale oil was used to light lamps and whales were being killed in large numbers creating a “scarce resource”. However light was subsequently produced by making gas from coal. Later oil was used to generate electricity and make light. In 1979 a number of leading economists ans experts predicted that, at the then current rate of increase in consumption of oil and the expected rate of finding new oil resources that oil would run out around 2009. This did not take into acount the changes in technology which within 10 years put a chip into American cars which would virtually double the mileage of a gallon of fuel. Neither did it take account that we would be able to drill to six miles rather than one mile and we would be able to recover oil from more difficult sites.
In 1978 we used 250W Par38 lamps as spotlights. In the late 80’s these were largely surpassed by the 12v 50W halogen lamps, now almost the same output can be provided with the new 3W led spots which are similar in size and shape to the 50W halogen lamps
Oil is a finite resource, however technology will provide other means and methods and suplant its use.

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