Is It 1931 Again?


Dan Drezner is feeling very gloomy tonight:

The start of the Great Depression is commonly assumed to be the October 1929 stock market crash in the United States. It didn’t really become the Great Depression, however, until 1931, when Austria’s Creditanstalt bank desperately needed injections of capital. Essentially, neither France nor England were willing to help unless Germany honored its reparations payments, and the United States refused to help unless France and the UK repaid it’s World War One debts. Neither of these demands was terribly reasonable, and the result was a wave of bank failures that spread across Europe and the United States.

The particulars of the current sovereign debt crisis are somewhat different from Creditanstalt, and yet it’s fascinating how smart people keep referring back to that ignoble moment. The big commonality is that while governments might recognize the virtues of a coordinated response to big crises, they are sufficiently constrained by domestic discontent to not do all that much.

So… is this 1931 all over again?

Read the rest to see why Dan thinks it might be. My own take is that it’s probably not, partly because 1931 already happened and we’ve learned at least a little something since then. As senseless as a lot of our recent political behavior has been, so far national governments have been willing to respond to prevent imminent catastrophes from getting out of hand. It might not happen until the last second, but in the end, they finally do the right thing — or at least enough of the right thing to keep things puttering along.

What national governments haven’t shown the will to do is address issues that are slightly less than catastrophic. As a result, our recovery is going to be much slower than it needs to be, and it might even tip into a second recession. More than likely we’ll avoid 1931, but I’m increasingly unsure we’ll avoid 1981.

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