A Tale of Two Financial Crises: the 1930s and Now

As the seventh anniversary of the start of the economic crisis approaches, it is an appropriate moment to take stock. At the time, the recession was simply not recognised by conventional economic forecasts. These continued to foresee positive growth until the collapse of Lehman Brothers in the autumn of 2008. But the latest national accounts data now show that output began to fall in most Western countries during the winter of 2007/08.

The initial falls in GDP were sharp, but the overall outcome was in general better than that of 1930, the first full year of the Great Depression of the 1930s. The most dramatic contrast is America. Output was less than 1 per cent lower in 2008 than in 2007, in contrast to the 9 per cent fall in 1930. The financial crisis was a severe shock, but by the end of 2009, the worst seemed over. The standard definition of a recession is a fall in GDP over two successive quarters, and it ends when output grows again. As early as the autumn of 2009, this was the case in almost every Western country. Looking back to 1931, the second year of the crisis of the 1930s, output had continued to drop virtually everywhere, often at an accelerated rate. In Germany, for example, GDP was reduced by 6 per cent in 1930, followed by a further 10 percent collapse in 1931.

Optimism rose markedly in 2010 as a result. The nightmare of a potential repeat of the 1930s looked to be well and truly squashed. But as we move into 2015, the similarities between now and the 1930s become closer and closer. Across the West as a whole, the number of countries in which GDP is still below its 2007 peak level is almost the same as it was in 1936, seven years into the Great Depression. In Spain, output is 6.5 per cent below its previous peak, in Italy 9.5 per cent and in Greece a massive 26 per cent.

The total losses in output during the crisis in some economies are terrifying. To obtain this, every year we calculate the amount by which GDP falls short of its previous peak level, and sum these up to get the cumulative total. In Italy, the overall shortfall in output is 43 per cent of the value of GDP in 2007, and in Ireland it is 53 per cent. The Greek loss of 106 per cent may by 2016 exceed the highest previously recorded, which is the 132 per cent loss experienced by the United States 1929-1939.

The big difference between the 1930s and the late 2000s in North America and the UK is that the authorities followed expansionary monetary policies such as quantitative easing, which they did not do in the earlier period. It is hard not to conclude that the policies of the European Commission and the Central Bank have been catastrophic. The size and duration of this recession is set to break all records in several Euro zone economies.

Paul Ormerod

As published in City AM on 16th December 2014

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