The Other Great Depression: New Hope from a Long-Forgotten Crisis

Article excerpt

There is a part of our brain which firmly believes that disaster begets disaster. This intuition probably comes from daily life--for example, we see gambling misadventures lead to a job loss, a painful divorce, and so on. It is also natural to apply this dogma on a macro-level, and the current economic crisis is no exception. A chorus of doomsayers loudly predict that today's economic ailments will usher in a dark "age of upheaval." Not surprisingly, these pessimists rush to embrace the 1930s as the empirical centerpiece of their argument. They argue that, as in the 1930s, we face a perfect storm of rising poverty, popular resentment, and a major power in withdrawal. Now, as then, such a combination will breed failed states and dangerous new autocracies. And so we must brace For the impact of these looming realities. It is the unavoidable outcome. Right?

Wrong. In drawing historical parallels to the current crisis, we should consider another fateful decade, the 40s--the 1840s. Across Europe, the lessons of that decade contradict the doomsayers. Between 1845 and 1848, a crippling recession struck the Continent. Yet it eventually fostered not dictatorships, but some of the world's more stable democracies. For powerful Austria, France, and Prussia, 1848 brought angry mobs that (rightfully) questioned their kings' ability to provide good living standards. The monarchs' response in those cases and other, smaller states was remarkable: democratic reforms that, while limited, were unprecedented in continental history. Austria, the bastion of monarchic conservatism, allowed a representative Diet to co-exist with its centralized government. And in neighboring France, change was even more dramatic--with the Second Republic coming into life after the Bourbon monarchy abdicated for the last time.

The crises of 1848 and 2008 share a similar storyline, in both economics and geopolitics. European households in the late 1840s saw their purchasing power disappear when bad harvests sparked a grain-price shock. This parallels the interest rate hikes during 2004-06, which hit millions of households with variable-rate mortgages. And like today, the agrarian crisis of 1845-47 curtailed savings and investment, which in turn struck the manufacturing sector. For example, France's industry shrank about 10 percent between 1847 and 1848. Others followed suit.

The geopolitics of the era also resemble ours. …