Robert Tyerman looks back at the Great Depression and asks whether the government’s reactions to the financial crisis were the right ones

As parts of the economy emerge from recession and stock markets surge ahead on a tide of monetary easing, politicians and central bankers have been congratulating themselves for not repeating the mistakes their predecessors made after the Great Crash of 1929.

Following the Northern Rock crisis in Britain and the collapse of Lehman Brothers in the USA, the argument runs, quantitative monetary easing and massive bailouts of banks by governments on both sides of the Atlantic
have helped prevent the sharpest decline in world trade and production since the Second World War from turning into a rerun of the Great Depression of the 1930s.

Roller-coaster markets
Sceptics fearing that we are mired in a ‘double-dip’ recession rather than bounding out of a ‘v-shaped’ one may point to October’s significant uptick in consumer prices as a pointer to quantitative easing’s dangerous inflationary implications. They may warn that most of the money printed seems to have gone into frothy areas such as stock market speculation and house prices, while banks remain loath to lend and companies to invest, and 2.5 million
people, nearly 8 per cent of the workforce, remain unemployed.

The policymakers will have none of it – though paradoxically the Queen’s Speech promise of a law to halve the government’s £175 billion deficit by 2014 and balance the books by 2018 shows that they must share at least some of the sceptics’ fears. Instead, our masters prefer to contrast the ‘decisive’ action of the Bank of England under its governor, Mervyn King, to slash base rate to 0.5 per cent with his pre-war predecessor Montague Norman’s reluctance to act fast enough in 1929, despite prophetic warnings from the economist John Maynard Keynes.

Keynes condemned the ‘unwillingness of the central banks of the world to allow the market rate of interest to fall fast enough’ as ‘the greatest evil of the moment and the greatest danger to economic progress’. He urged the Bank of England and the US Federal Reserve to ‘put pressure on their member banks to reduce the rate of interest which they allow their depositors to a very low figure, say 0.5 per cent’. Laissez-faire failure

Then, however, according to the Keynesian view of history, politicians and bankers paid no heed, but clung instead to
orthodox precepts about balancing budgets and relying on the market’s self-correcting mechanisms to lift the economy out of slump.What followed, of course was the Great Depression.

In the USA, the early 1930s depression was followed by measures to separate the country’s retail banks serving the public from investment banks influencing the markets. More recent times saw this separation removed and the banks
were given a free reign – until they nearly wrecked the world’s economy and had to be rescued by the taxpayer.

Rejected at the time, Keynes’s ideas dominated economic policymaking for three decades after the war, until
monetarism began to gain sway. Ironically, he regarded balancing the budget unless the economy was powering ahead as dangerously deflationary. Now, both government and opposition are competing to show how they will cut
public spending. Having flirted with Keynes, they are donning the clothes of Montague Norman for a balancing act whose success is far from guaranteed.