The Benefit of Bad Memories

Story Highlights:

• Some folks are again drawing comparisons between today's financial panic and the 1929 stock market crash and Great Depression.
• Today, we have the benefit of hindsight and extensive fiscal and monetary stimulus working to lessen strain on the system—both domestically and globally.
• While things may well get worse economically from here, we'll likely avoid a repeat of the 1930s.

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Market turmoil has continued to intensify this week. While previously much of the focus was on US financial woes and legislation, we've been recently reminded the world is still globally interconnected—several European banks were taken over Monday amid unilateral government intervention to inject confidence into markets.

Amid the panic, not a few have begun to compare today to another infamous era in US history: the 1929 stock market crash, financial panic, and ensuing Great Depression. Financial panics and economic depressions were common throughout much of the 19th and early 20th century. But few folks living today have experienced one in the flesh.

It's no wonder that many are comparing the current crisis to the 1930s. Many suppose that because today's panic resembles the panics of the past, we must already be in a recession and irrevocably on our way to a depression. But while current financial worries may look like those of the past, it's important to remember today we've benefitted by learning from those bad times and targeting better policy prescriptions.

For example, to discourage runs on banks by depositors, the Federal Deposit Insurance Corporation (FDIC) insures accounts. The FDIC was a Depression-era improvement that could have helped prevent a rash of bank failures after 1929. Though today's Fed has made mistakes, it still understands supporting banks with looser money can prevent financial distress from spreading to the wider economy. The Fed in the beginning of the Depression did little to prevent a catastrophic 1/3 decline in the money supply, as did other global central banks. Nowadays, monetary policy is supported by open lines of communication and concerted action globally, not just domestically—something notably missing during the Great Depression.

In addition, fiscal policy was counterproductive then because too much focus was placed on balancing the budget, precisely the wrong policy prescription. Today, if you count the various Treasury spending programs, fiscal policy is at least not contractionary. And as for trade policy, protectionist rhetoric has been kept to a minimum so far. Most folks understand today that free trade helps support domestic markets, especially in hard times. Compare such sentiment to the beliefs behind 1930's Smoot-Hawley Tariff Act. Smoot-Hawley sparked a global trade war that, while not the only cause of the Depression, greatly exacerbated it.

These are just a few of the significant differences between then and now. Today we've got the benefit of hindsight and extensive fiscal and monetary stimulus working to lessen strain on the system—both domestically and globally. The key will be how well those tools are used going forward. By no means has every policy initiative been optimal so far, nor have all options been exercised. But net/net, they have been far preferable to the abysmal decisions made in the early 1930s. While things may well get worse economically from here, we'll likely avoid duplicating the Great Depression.