January 9, 2010
Why the Great Depression happened and why we are better off now
Lords of Finance got all kinds of praise last year, so I read it, and it's good. Why did the Great Depression happen? Because the West's collectively poor knowledge of economics around the time screwed up badly. There are these lovely profiles of the guys who ran the US, UK, French, and German central banks, and you get a sense for who these powermasters were (and how they are similar to today's) but also how they can come to be so wise yet dumb/wrong (again, today has these failings too).
What did we do wrong?
1. After WW1, we totally annihilated Germany economically and created insanely huge reparations bills that would keep Germany bankrupt and furious forever. But the US specifically kept the UK and France encumbered under insane war debts. And nobody thought about 'rebuilding Europe'.
2. Everyone desperately clung to the gold standard. Which made it hard to manage the local economies (Germany had inflation problems, UK had deflation, US had a runaway stock market). Folks didn't realize it was better to have a free interest rate policy than to have a straightjacket against inflation.
3. US & all mishandled the 1920s stock market boom and mishandled the European deflation
4. Then the US, UK, Germany all mishandled the post 1929 bank collapses
Who were the villains? Basically, it was the conventional economic wisdom of the era that was wrong.
But Woodrow Wilson was also a naif and bungled the post-WW1 peace. And the ultra-conservative and backwards French leader, Clemenceau, ensured the peace would be really unbalanced.
The heroes? Maynard Keynes basically saw it all first and best, and if only we had listened to him... After WW2, we basically built the system of his dreams
It certainly an unusual confluence of disasters -- currency crisis, bank runs, stock bubble, and economic downturn all at once.
Are we better off now? Well we learned all kinds of Keynesian lessons and the energetic leaders of the 1990s and 2000s actually confronted many of these one off: the East Asian/Russian panic of 1998, the Mexico currency crisis of 1994, the stock bubble burst of 2000, the bank crisis of 2009. Rubin, Summers, Greenspan, Bernanke, Geithner have basically saved the day over the last 2 decades.
Though then, as now, these leaders are part of the run up to the problems, and often the conventional wisdom is the biggest weakness.
If this topic is at all interesting, you really have to read Keynes himself (free on Kindle) and possibly the more political book about the 1919 peace, and even Galbraith's book about the 1929 crash and aftermath.
