Don’t Get Depressed, It’s Not 1929

It's difficult to avoid the ubiquitous comparisons between the current sad state of financial affairs and the Great Depression. "This is not like 1987 or 1998 or 2001," Merrill Lynch CEO John Thain said at a conference on Nov. 11. "We will in fact look back to the 1929 period to see the kind of slowdown we are seeing now." A newsweekly that is a loathed rival worthy competitor depicted President-elect Barack Obama on its cover as the second coming of Franklin Delano Roosevelt. And in Washington, the buzz is all about what the new team will do in its first 100 days. What's next? Show trials in Moscow?

All this historically inaccurate nostalgia can occasionally make you want to clock somebody with one of the three volumes of Arthur M. Schlesinger Jr.'s New Deal history. The Credit Debacle of 2008 and the Great Depression may have similar origins: both got going when financial crisis led to a reduction in consumer demand. But the two phenomena differ substantially. Instead of workers with 5 o'clock shadows asking, "Brother, can you spare a dime?" we have clean-shaven financial-services executives asking congressmen if they can spare $100 billion. More substantively, the economic trauma the nation suffered in the 1930s makes today's woes look like flesh wounds.

"By the afternoon of March 3, scarcely a bank in the country was open to do business," FDR said in his March 12, 1933, fireside chat (now available on a very cool podcast at the Federal Deposit Insurance Corporation's Web site). In 1933 some 4,000 commercial banks failed, causing depositors to take huge losses. (There was no FDIC back then.) The recession that started in August 1929 lasted for a grinding 43 months, during which unemployment soared to 25 percent and national income was cut in half. By contrast, through mid-November of this year, only 19 banks had failed. The Federal Reserve last week said it expects unemployment to top out at 7.6 percent in 2009. Economists surveyed by the Philadelphia Federal Reserve Bank believe the recession, which started in April 2008, will be over by next summer. (Of course, the same guys back in January forecast that the economy would grow nicely in 2008 and 2009.) But don't take it from me. Take it from this year's Nobel laureate in economics. "The world economy is not in depression," Paul Krugman writes in his just-reissued book "The Return of Depression Economics." "It probably won't fall into depression, despite the magnitude of the current crisis (although I wish I was completely sure about that)."

So what's with all the speakeasy-era speak? Financial executives invoke distant history in part to make up for their own recent shortcomings. If a force as powerful as the Great Depression has been unleashed on the global economy, how can a mere mortal like Merrill's John Thain be held responsible? The specter of the 1930s has also been deployed by political leaders to create a sense of urgency. "We saw a lot of overblown analogies in the run-up to the passage of the bailout bill," notes Dean Baker, codirector of the Center for Economic and Policy Research in Washington, D.C.President Bush's Sept. 24 address to the nation warned that "the entire economy is in danger," and that "without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold."

It's understandable that we make comparisons to the Great Depression. Analogies help us place things in context. But very few of us actually lived through the Depression. Studs Terkel, the great chronicler of the voices of the Depression, died in October at 96. The historical distance from today to 1929 is as vast as the chasm separating 1929 from 1850. Dan Ariely, a behavioral economist at Duke University and author of "Predictably Irrational," says, "The closer we are to something— an event, a person, an object—the more nuances we see." By contrast, the farther away we are, the greater (and less accurate) the generalizations we make. And so when comparisons to the Great Depression are flashed on cable-news crawls, "it's all about the desire to fit everything into a snapshot," Ariely says.

Ironically, the differences between the two eras can be summed up in a few sound bites. The world of 1929–33 was one that lacked shock absorbers, like Social Security and deposit insurance, to insulate people from economic disaster. In the 1930s, some of the world's largest economies—Germany, the Soviet Union, Japan and Italy—were run by leaders hostile to the very notion of market capitalism. Today, U.S.-style market capitalism is under assault from self-inflicted wounds, and Germany, Italy and Japan (Russia, not so much) are working with the United States to cope with a common problem. Back then, we were cursed with a feckless Federal Reserve, and a wealthy Treasury secretary, Paul Mellon, saw the downturn as a force for good. "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," he said. "People will work harder, live more moral lives." By contrast, today's Federal Reserve chairman, Ben Bernanke, is a student of the Great Depression, and the wealthy Treasury secretary, Henry Paulson, wants to provide liquidity to stocks, farmers and real estate. (To labor, not so much.) A final difference: after the 1929 crash, the nation had to wait more than three years for a president who simply wasn't up to the job to leave the scene. This time, we've got to wait only a few more months.

© 2008