Lessons from the Great Depression

How can we better integrate history into economic analysis?

From the collection: America's Dual Economy: Why the Middle Class Is Vanishing


From the collection America's Dual Economy: Why the Middle Class Is Vanishing

George Santayana once wrote that those who could not remember the past were condemned to repeat it. And looking at today’s policy makers at work seeking to combat the huge challenge of unemployment in the aftermath of the Great Financial Crisis of 2008, it appears that there is a lot of collective amnesia evident amongst this crowd.

The parallels with the mistakes of the 1930s echo. Peter Temin, currently Gray Professor Emeritus of Economics, MIT, and former head of their Economics Department, has written extensively about the Great Depression. He argued persuasively in that book that the cause, spread and recovery from the Depression must be found in the monetary and fiscal policy regimes amongst the authorities of Great Britain, the US, France and Germany. The Great Depression, according to Temin, was the result of a shock to the system produced by World War I, coupled with an ideologically constrained response that exacerbated a bad situation and turned it into a crisis.

Does this sound familiar?

In the 1930s, governments practiced austerity to try and preserve the gold standard. And what they did was turn a recession into the Great Depression. And that seems to be what everybody is doing now with austerity. The Eurozone is still struggling with deflationary pressures because of an intensely austerian philosophy promoted by the Germans. In the US, the GOP also appears wedded to cutting government spending (except, it seems, when it applies to the military). The United Kingdom, which has no particular debt problems, is doing austerity because the Conservatives are in power.

In other words, governments which have other choices are making the choice for austerity. In the 1930s, they were doing austerity because they were adhering to the ideology of the gold standard. In their minds, austerity was the only way to preserve the gold standard, which would eventually restore prosperity. Today the justification for it is debt. But debt for the United States is de minimus; our debt service is a minor part of our government spending. So you have to believe that there’s another motive, and that appears to be attack on the very foundations of the modern day social welfare state via class warfare.

Temin outlines this thesis in the course of the interview, whilst illustrating the importance of integrating history into some rational and cogent form of economic analysis, a view which is sorely lacking in today’s economics profession.

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