Should we be looking at the 1870’s rather than 1929 for answers.
Steve Fritzinger, on the BBC Business Daily programme, gave an interesting insight into how just about every financial journalist has made some comparison of the present day crisis to that of the Great Depression in 1929. He referred to a short paper by Stephen Davies of the Insitute of Economic Affairs entitled “Are we Looking at the Wrong Depression?” It compares the current crisis with that of the “Long Depression” that gripped the US and Europe from 1873 to 1879 and suggests that policymakers are applying the wrong policies and making things worse.
Dangers of comparing current crisis to just 1929 onwards
He stated that focusing on one economic downturn – 1929 – which has its limitations in that:
- Interventions didn’t stimulate aggregate demand
- Governments tried raising taxes and tariffs and employing people on huge public works projects to no avail
- Deficit-financed spending didn’t work
- Currency manipulation had little affect
- Regulation of banks and industry – ineffective
Despite all of the above the Great Depression continued for over a decade.
The “Long Depression” – is this more comparable?
This happened between 1873 to 1879 and was triggered by a global financial panic which caused speculative markets like the railroads and real estate to burst. What followed was 30 years of deflation in most parts of the world. With agricultural prices collapsing there was a large movement of labour from the poorer parts of the world to those more affluent like UK, Europe, and the US. Although there was a sigificant slowdown in growth between 1873 and 1896 there wasn’t the exceptional reduction in GDP after 1930.
What Stephen Davies did allude to was the fact that profitable inventions in the late 18th century and the early 19th century has used up their capacity to raise productivity and growth by the 1860’s. This led to poor investment and a large build up of debt by the early 1870’s in both Europe and the United States. What followed was the reality that a lot of investments were not going to be profitable and as a consequence a process of deleveraging followed. However around this time there was an increase in technological and organisational innovation. This increased productivity and and created many new products but also led to large adjustments as older industries and forms of employment shrank, prompting a movement of labour. What is also noteworthy is that there was a shift away from the established economies – UK and France – towards those that were developing namely Germany, US, Japan. Stephen Davies asks are we going through this same transformation with the decline of the US and many EU countries and the rise of the BRIC countries. It seems that an exhaustion of profitable investment opportunity in countries leading to an artifiically stimulated bubble the bursting of which has triggered sustained deleveraging and a decline in GDP in many parts of the world.