CAMBRIDGE: With the remarkable financial turbulence of recent months, many people are asking whether the world could somehow blunder into global recession or even global depression. Could the world-wide financial crisis of 1929-33 happen again? A year ago, the question itself would have seemed preposterous. Now that financial crisis has spread from East Asia to much of Latin America, parts of Africa, and Russia, and it has rattled the stock markets of the advanced economies. The question now deserves a very considered response.
The right starting point is to understand the Great Depression itself, since the 1929-1933 economic crash was a once-in-a-century event. Looking back with the benefit of nearly 70 years, we can see the financial roots of the worldwide crisis. World War I, during 1914-1918, had destroyed the pre-war Gold Standard. Wartime finance had led to high inflation in much of Europe, the U.S., and Asia. After the war, the world spent 10 years attempting to get back on to the gold standard. This attempt, ironically, set the stage for the ensuing collapse.