But the problem with using historical examples is that there is rarely agreement on what history teaches. Indeed, there is rarely agreement on the facts. Even a simple statement such as "the Battle of Hastings took place in 1066" contains two inaccuracies and a piece of religious bias (the battle occurred a few miles from Hastings, 1066 is a date derived from the Christian calendar and is wrong, since Christ was not born in 1AD).
The "Hollywood" narrative of the Depression is that it started with the stockmarket crash of 1929, which provoked little response from the unfeeling incumbent president, Herbert Hoover, and was only solved by the dynamism and enthusiasm of Franklin D Roosevelt and his New Deal (not to mention little orphan Annie). The monetarist school, led by Milton Friedman, blamed the Federal Reserve for allowing the banking system to collapse and the money supply to shrink; the last Fed chairman Ben Bernanke, a student of the era, was very much a believer. Conservative revisionists, such as Amity Shlaes, argue that much of what FDR did was counterproductive since it penalised business and discouraging investment. There are a host of other factors worth mentioning; the Smoot-Hawley tariff and the rise of protectionism; the deadening effect of the reparations dispute on international co-operation; the role of rearmament in stimulating the economy; the rise of new industries such as chemicals and cars; and the great mistake of FDR and the Fed in tightening too early in 1937, which caused the US economy to slide back into recession.
In his book Golden Fetters, Mr Eichengreen highlighted the role played by the Gold Standard; countries that exited the standard saw their economies recover more quickly than those that did not. His new book (reviewed here) focuses on the 1930s lessons that were misapplied in the recent crisis. In his talk, he mentioned two or three. One was the focus on the failure of deposit-taking banks in the 1930s which led to the loss of confidence among depositors (the Jimmy Stewart/It's a Wonderful Life problem). Lehman Brothers was not a deposit-taker so the authorities were too relaxed about it going bust, he argues; they forgot the ability of wholesale lenders to organise a run and the complex derivative exposure that tied Lehmans to so many other counterparties.
A second mistake, in his view, is that both governments and central banks have been too keen to return to normal policy and thus have withdrawn support too early; this explains the sluggishness of the recovery. He also argues that changes to financial regulation have been pretty "weak soup" by the standards of the 1930s which saw the creation of the SEC.
Perhaps his most interesting conclusion, given his work, is about the parallels between the euro and the gold standard. He argues that too few people considered the parallels before 1999 and the potential weaknesses in the single currency that would result. But in the current circumstances, leaving the euro is not akin to abandoning the standard as Britain did in 1931. Trade finance collapsed in the 1930s, reducing the disruptive effect of exchange rate changes, but Greece's entire economy is closely bound with the EU trade and payment system. There was little international cooperation in the 1930s but there is (despite the headlines) today; Greece has already benefited from debt extensions, lower interest rates and ECB liquidity support). All that might be lost with euro exit.
A wide-ranging discussion ensued, which neatly illustrated one of the problems with economic history; as Mr Eichengreen quipped
"Societies tend to cherry pick their historical analogies"An obvious example is the German fear of hyperinflation that dates back to the 1920s (there was a post-1945 episode as well) and is perceived to affect the German attitude towards monetary stimulus. Some pointed to the austerity policies pursued by the German chancellor Bruning between 1930 and 1932 that caused unemployment to soar and led to the rise of Hitler; the irony, in this view, is that Germany is now imposing similar terms on Greece. The counter-argument is that the key to long-term growth is labour market reform, pursued by Britain in the 1980s and Germany in the early 2000s; Spain may be starting to see the benefits of its reforms now but Greece wants to go in the opposite direction. France and Italy have done very little.
To me, the monetary policy of the last few years is simply a continuation of a theme since the 1980s. When financial markets wobble, central banks step in to cut rates for fear of 1930s-style debt deflation (this was very explicit after Black Monday in October 1987). But each intervention leads to lower rates, a bigger financial sector and higher debt levels, making central banks even more fearful, and requiring even greater intervention. So we get to today's combination of zero rates and outright asset purchases. In turn, this leads to wider inequality, as the rich benefit most from higher asset prices, and this inequality causes political unrest, adding to the potential for crisis. This interpretation draws on the work of Charles Kindelberger's history of financial crises and Hyman Minsky's thoughts on how economic stability leads to financial excess. But I fully accept that I may be suffering from "confirmation bias" forcing every event into my peculiar interpretation.
A particular problem with analysis of economic history is the lack of counterfactuals; we cannot go back and re-run history without, say, quantitative easing. Nor can we be 100% confident in assigning differential US and euro zone economic outcomes to the impact of divergent monetary and fiscal policies, given the links between the two regions and the different institutional structures. (One speaker, for example, pointed out that countries with bond-financed corporate sectors, such as the US, recovered more quickly than those with bank-financed sectors, such as Europe. Bond markets have recovered more quickly.) If we go back to the Obama stimulus of 2009, some economists will argue it was useless, others that it helps explain the US relative out performance of Europe and still others that the stimulus was not big enough.
This is already a long post but it is worth reflecting briefly on how a rigid interpretation of history has been mistaken in other areas; for example, the belief that World War Two would resemble the defensive stalemate of World War One, allowing the Allies to be overwhelmed by blitzkrieg; the subsequent tendency to blame appeasement for Hitler's rise and thus for western governments to oppose all Third World nationalist movements on the domino theory, and so on.
In short, it is tempting and can be thought-provoking to use historical analogies (think of the Middle East in terms of the 30 years war of 1618-48, for example) as long as one does not take the parallels too literally. History does not repeat itself exactly even if we know exactly (which we don't) what did happen in the past.
Source: Economist.com
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