This Is Not Great Depression 2.0

Before comparisons are drawn, important historical distinctions must be made

“The worst economic crisis since the Great Depression”. If you’re reading this statement, this is probably not the first time which you’ve come across these words. Interestingly enough, imputing this on Google search will yield a total of 94,100 hits, showing how pervasive such sentiments have become among people.

The picture is in black-and-white for a reason

My concern is not with the statement itself, which is correct. Since 1929, there has been no economic crisis that has matched the scale of the current one. My concern is when people take this to mean that the new Great Depression has come, bringing to mind images of the past: scores of unemployed workers milling around, families queuing in front of soup kitchens, runs on banks as people scramble for money. Any predictions that are made on this scale must immediately be denounced as false prophecies.

The main similarity between the current crisis and the 1929 crisis is the extent to which financial markets have been ravaged. In 1929, excessive speculation in the stock market created a bubble that burst and damaged confidence everywhere. In 2007, poorly monitored sub-prime loans created a housing bubble that likewise burst and damaged markets.

Beyond this point though, the narrative changes. In 1930, in response to the crisis, the US administration enacted the the Smoot-Hawley Tariff, believing that protectionism would solve their woes. As history would later demonstrate, this was a grave error, setting into motion a beggar-thy-neighbour policy that only threw the world into further depression.

In contrast, notice how little protectionist reflex countries have shown in recent events. On the contrary, acknowledging their mutual dependence, world leaders were quick to rally together in a number of summits to discuss solutions to the crisis: the G20 summit, the gathering of notable trade officials in London, and most recently, APEC’s meeting in Peru. Not only was international cooperation witnessed between political leaders; leaders in other fields also demonstrated a similar unity, such as when heads of central banks gathered to mutually back credit. This change in worldview, from unilateralism to multilateralism, is an important historical contrast that merits our attention.

Cynics will be quick to point that such summits are mere talk shops, yielding little tangible solutions. However, while this is true, it does reveal a more important fact: that world leaders are at least on the same level in principle, understanding each other’s need to survive. Even the US has shown an unusual willingness to cede its hegemony, acknowledging the shift of power to emerging economies. The climate in the early 30’s was the opposite, a climate of fear, suspicion and growing resentment, eventually giving way to extremist regimes like Nazi Germany and a belligerent Japan. Where the financial crisis in 1929 left a world beaten and divided, the financial crisis now has left a world similarly beaten, but united.

This is not to say that times ahead will not be bad. The effects of the crisis so far have only shown itself in the financial sector; only time will show how badly the real economy will be affected. No one is doubting that the crisis will prove to be a deep one; but as long as favourable relations are maintained between key countries and protectionist instincts aren’t acted upon, we should not witness history repeating itself.

Therefore, there is still hope in the midst of the crisis. Expect stormy weather ahead, but don’t look to your history textbooks for any help.

-A.S.