b25e690446f86f380efcc928_jk869.jpg Jon Krause

The Great Depression Analogy

Whenever today’s economic crisis is discussed, analogies to the Great Depression are never far away, with the year 1929 almost always taken as a reference point. But two completely different pathologies were manifest in the Great Depression; each called for different diagnoses – and different cures.

PRINCETON – Whenever today’s economic crisis is discussed, analogies to the Great Depression are never far away. In its latest “World Economic Outlook,” the IMF examines the analogy explicitly, in terms not only of the collapse of financial confidence, but also of the rapid decline in global trade and industrial activity. In general, history, rather than economic theory, seems to offer a guide to interpreting wildly surprising and inherently unpredictable events.

Almost every contemporary use of the depression analogy takes the year 1929 as a reference point. But two completely different pathologies were manifest in the Great Depression; each called for different diagnoses – and different cures.

The first, and most famous, pathology was the stock market crash of October 1929 in the United States. No other country had a stock market panic of similar magnitude, in large part because no other country had experienced the euphoric run-up of stock prices that sucked large numbers of Americans, from very different backgrounds, into financial speculation.

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