Robert Samuelson asks whether we have avoided a second Great Depression:
The case that we have dodged a second Great Depression rests on a narrower notion: that the Depression was preventable; and that advances in economic knowledge allowed us to do so. If we knew then what we know now, governments could have averted the tragedy. Despite some disagreements, economic scholars subscribe to a broad consensus about what went wrong in the 1930s. Government central banks, like the Fed, were too passive. They didn’t halt bank panics. Intervention at decisive moments (perhaps the failure of the Bank of the United States in late 1930 or Austria’s Credit Anstalt in spring 1931) could have changed history. Instead, mounting unemployment and falling prices fed on each other. Debtors couldn’t repay loans, leading to more bank failures, a contraction of credit and deposit losses. But this time the mistakes were not repeated. Despite criticism, banks were “bailed out.” Money was pumped into credit markets to pre-empt a downward spiral.
By this reading, the world has bought itself time to deal with underlying problems. As the economic recovery strengthens and lengthens, the politics of confronting unstable export-led growth (for Asia) or unsustainable welfare spending (for developed countries) will grow easier. People will be more optimistic about the future; they will be more open to necessary, if not popular, adjustments. This could happen. The world may muddle through, making gradual and messy changes that ultimately defuse another large crisis.
But there is another more sobering reading of the Great Depression. It is that painful and once unthinkable changes are made only under the pressure of acute crisis. One reason that central banks were so passive is that they clung to the gold standard: Relaxing credit policies too dramatically to rescue banks might lead to a loss of gold; people would demand metal to replace paper money. Gold was abandoned in various countries only after it seemed untenable. Similarly, the post-World War I debt problem wasn’t “solved” until repayment was impossible. As for Britain’s place as global leader, the United States assumed that role only in World War II.
Against that backdrop, today’s unresolved problems — over the welfare state, leadership in the global economy — become more ominous. They suggest that major adjustments won’t be made until they’re compelled by some sort of crisis. This possibility defines the present economic drama. Will the recovery encourage conscious changes? Or is recovery providing a false sense of security? The stakes are, of course, enormous, because — as everyone knows — the economic suffering of the Great Depression transformed many countries’ politics for the worse and led to World War II.
I’m not optimistic at all.