Double-Dip Depression

By Ferguson, Niall | Newsweek, December 12, 2011 | Go to article overview

Double-Dip Depression


Ferguson, Niall, Newsweek


Byline: Niall Ferguson

The Fed is working to prevent an economic calamity. Why do its critics seem eager to repeat the mistakes of 1931?

What was the root cause of the financial crisis? Greed? Deregulation? No. It was ignorance of financial history.

Last week the world's central banks--including the American Federal Reserve--acted in concert to try to prevent history from repeating itself. Their critics on both sides of the Atlantic showed a dangerous ignorance, and not for the first time.

Republican presidential wannabe Ron Paul warned that the Fed was "flooding the world with money created out of thin air." Paul's remedy for our financial ills is to go back on the gold standard. More alarmingly, German Chancellor Angela Merkel reiterated her opposition to monetary easing as well as to the creation of common "euro bonds." Her latest proposal is that each European state should set up a national debt-reduction fund.

In normal times it would be legitimate to worry about the consequences of money printing and outsize debts. But history tells us these are anything but normal times.

We teetered on the edge of this same precipice 80 years ago, in 1931. A succession of major European banks went bust. Bailing them out was beyond the resources of fiscally overstretched governments. Failure to agree on orderly debt reductions led to disorderly defaults, tariff wars, and a further worldwide collapse of production and employment.

People often forget that the Great Depression was like a soccer match--there were two halves. The first half was dominated by the aftermath of the 1929 U.S. stock-market crash. The second half, which made the depression truly "great" in both its depth and its extent, began with the European banking crisis of 1931.

To understand what has been happening in our own borderline depression, you need to know this history. But hardly anyone does. Since the crisis began, I've regularly addressed conferences of bankers, investors, fund managers, regulators, policymakers, and economists. In the first half of the crisis, I used to ask who in the room had read Milton Friedman and Anna Schwartz's Monetary History of the United States, the single most important book about American financial history ever written. …

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