World Economy Falling Faster Than in 1929-1930

Barry Eichengreen, an expert on the Great Depression, and Kevin O’Rourke, take issue with the notion that the current downturn is less severe than the Great Depression. While the slump in the US is not as bad, that mis-states the global picture.

Note that many economists expect the US to suffer less than the big exporters, namely China, Germany, Japan. The reason is that the economic adjustment required of surplus nations is greater than that of debtors. Similarly, in the Great Depression, the US, then a major exporter, was harder hit than the overconsuming importers such as Britain, who defaulted on their debts.

The one bit of cheer is that this time around, government action is more aggressive, but it remains to be seen whether it is sufficient.

From VoxEU:

Often cited comparisons – which look only at the US – find that today’s crisis is milder than the Great Depression. In this column, two leading economic historians show that the world economy is now plummeting as it did in the Great Depression; indeed, world industrial production, trade and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then

Source: Eichengreen and O’Rourke (2009).

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then

Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then

Sources: League of Nations Monthly Bulletin of Statistics,

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.

To summarize: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

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  1. Anonymous

    We should all revert to local currencies and screw the Geithner Dollar! Detroit Dollars, NY Dollars…LA Dollars. Mount the presses and damn the torpedoes!

    I find it amusing that people keep making parallels to the 1930s. Not sure why stone age culture is being used as a reference point. Because things were bad? I’m sure things were pretty bad in 1200 AD!!!

  2. Anonymous

    The disconnect between what you are saying and what the Obama team is saying is huge and getting bigger. Unfortunately, your view is being hidden from the public.

    When does the reality bubble burst upon us? We can only hope that it precipitates strong rebalancing of our economic model toward public rather than private support.


  3. a

    “The one bit of cheer is that this time around, government action is more aggressive, but it remains to be seen whether it is sufficient. “

    I’d say: it remains to be seen whether it is beneficial. Aggressive pursuit of harmful policies is no virtue. While doing nothing may be bad, doing something bad is usually even worse.

  4. steven

    “Fortunately, the policy response to date is much better.”

    Assuming that all those reckless and crazy policy measures will improve the economy. I do not agree.

  5. Anonymous

    Regarding the comparison of “World Stock Markets, Now vs Then”, is is possible to also rescale the graphs by the amount of implied leveraging in the market between 1929 and 2008?

  6. tentman

    [1.]to take a look at the numbers of the past and compare them with current numbers makes sense, but does it offer solutions for the future?

    [2.] will those who only look back shape the future?

  7. VK

    I agree with the blog posts main premise that the depression is even worse than the great depression. More like the panic of 1873 in it’s characteristics.

    I don’t however believe that Govt stimulus will do anything but prevent the pain temporarily. The patient has cancer, temporary adrenaline shots won’t do. The cancer tumor must be removed – meaning the Banks (Yes Banks, not their toxic assets but the Banks must be taken into chapter 11)

    Too much bad debt in the system, there are only three ways to clean up an excessive debt problem

    1) Pay up
    2) Default
    3) Take the creditor out

    Govt stimulus to encourage borrowing and keeping rates low is a sign of desperation.

    Why would anyone want to borrow in a time like this? Why not wait for a few years and buy when everything will be ‘dirt cheap’? Govt’s carrying out stimuli and running deficits only contribute to one thing – stealing from future generations to pay for the mistakes of the current ones. A ponzi.

  8. russell1200

    The real good news is that if it is the suppliers who are going to get whacked than China is the one who is going to feel the most pain (by a lot) not us.

    The big debtors of the time: Germany followed by our WW1 allies mostly came out of the Great Depression in less than 5 years. Hitler was popular in 1933 because the German economy was getting better. We of course came out of it when WW2 started.

  9. Timo

    “The real good news is that if it is the suppliers who are going to get whacked than China is the one who is going to feel the most pain (by a lot) not us.”

    You mean the sales office aka USA will not feel the pain? US economy is basically giant Las Vegas, based on shopping malls SELLING stuff made abroad and shuffling money forth and back (Wall Street).
    What the hell those service sector workers are going to do now?

    American manufacturing sectors are also contracting as badly or even worse than all around the world. US economy will collapse soon.

  10. Anonymous

    Comparing this to the 1930’s may or may not be the right thing to do and there are arguments that it has more in common with the long depression of the preceding century or the credit problems in 1907. Numbers like exports from Taiwan to china are down 59 percent show that some places are really suffering and to suggest that the response by central banks has been quick when compared to the great depression is still being blinkered. While the major economies responses may have been quick there are some that have made very little headway.

    Right now unemployment has not grown to the levels or accelerated in quite the way it did during the great depression, however we might just be in the early days of this depression. There is still the hope that the economy will pull out of this, that things will return to normal with very little effort and until that hope is extinguished I would not like to call a bottom.

    The US does have the dollar as a mill stone around its neck such that its value as a reserve currency will enable others to devalue their currencies and ship their unemployment across to the US. So before we are finished I expect the US will be one of the hardest hit countries.

  11. travelbug6

    Why do people keep insisting Europe came out better than the US back in the 30’s? Does anyone believe that WW2 had no economic causes? That the Nazis would have come to power regardless? Or these folks are just too scared to admit the inevitable, that the US is screwed this time around?

  12. Anonymous

    “The one bit of cheer is that this time around, government action is more aggressive”

    Aggressive? That means nothing. Aggressively wrong or aggressively right? You can argue some parts of their policy each way, but there have some huge aggressive mistakes made already. Clearly the only single thing the have done to date is substitute government credit guarantees for private, thus making it impossible to know what the underlying situation might be. Other than that: no growth, no stimulus, no halt to the slide. NOTHING.

  13. Anonymous

    It is hard to imagine that chart 5 (money supply) means much, since about 4 trillion of debt is being destroyed but not accounted in that chart. We are in a period of strong net money destruction, not creation.

  14. Anonymous

    I am curious as to why we pay homage to the shibboleth that maintaining open markets is the correct policy response when, e.g., the British escaped the worst of the Great Depression by doing just the opposite.

    As the center of a global empire at the time, the British system of Imperial preference seemed to have been the most effective policy response of any of the major nations in terms of mitigating unemployment and falling GDP.

    Today the US is perhaps the only economy with the size and depth to duplicate the British Empire’s policy response to a global economic collapse.

  15. Timo

    “US is perhaps the only economy with the size and depth to duplicate the British Empire’s policy response to a global economic collapse”

    After 30 year spending spree, empire building with debt and de facto plutocracy as political system? And NOW USA somehow magically is going to duplicate proper policy response?!

  16. rd

    The world had somewhere to fall from in 2007 whereas most of the world did not in 1929.It makes sense that the global impact would be larger today.

    It is about 20 years since the fall of the Soviet Union which occurred relatively peacefully. China has opened up substantially. Japan, India, Korea, etc. are all relatively successful democracies.

    The world in general was a much better place to live in 2007 than in 1929. In 1929, much of the world was still recovering from the ravages of WW I which effectively bankrupted Europe and wiped out its young men, was still in the throes of the post-Russian Revolution struggles for internal power, or had not yet emerged from 19th century feudalism and occupation.

  17. Waldo

    It is important to continue this line of thinking concerning our “financial” mess. But we all must dig deeper (moral and intellectual courage) to find the true root of the malaise.

    As I have said before on this blog site this quasi-catastrophe was brought on by the ruiness pricing of the fuel market for the past 8 years. These painful realities we see today are the consequence of this vicious, parasitic, and tyrannical behavior put on us all by the past Administration and the very powerful oil industry.

    We must truly understand the nature of this reality today and do proper mitigation measures to eviscerate the cancer and to provide additional preventive measures to stop it from occurring again in our grandchildren’s future.

    Sonnet #35

    No more be grieved at that which thou hast done:
    Roses have thorns, and silver fountains mud,
    Clouds and eclipses stain both moon and sun,
    And loathsome canker lives in sweeter bud.
    All men make faults, and even I in this,
    Authorizing thy trespass with compare,
    Myself corrupting, salving thy amiss,
    Excusing thy sins more than thy sins are;
    For to thy sensual fault I bring in sense-
    Thy adverse party is thy advocate-
    And ‘gainst myself a lawful plea commence.
    Such civil war is in my love and hate
    That I an accessory needs must be
    To that sweet thief which sourly robs from me.

    William Shakespeare

  18. Ike

    Isn’t it a little presumptuous to lay the data flat like that, and assume the curves will be the same?

    The global economy is hyperconnected now from front to back, linking suppliers all the way through distribution chains.

    How much of the “grade” of the decline (the steepness) can be attributed to less slack in supply chains, and faster determinations about laying off employees? How much of the severity of the drop is from more rapid sharing of information, and faster reactions from all economic players?

  19. Anonymous

    So just like the article says trade is dropping faster and markets are dropping faster while at the same time money supply is raising faster all when compare to 1929.. Could it be a cause and effect? Is it perhaps that we are doing the wrong thing? I mean the current evidence suggest so.. My thinking is that just doing the opposite that was done during the great depression is in no way a “prove” that it is the correct solution. I may even make the case that doing the opposite has actually exacerbated the results…

  20. Anonymous

    This is the guy with the dumb idea again after a hiatus of several months.

    We really are going to need to reduce hours of work. Nothing else is going to work.

  21. Anonymous

    There can be no effective “policy response” to this Great Recession because the recession is an inevitable and necessary consequence of the inflationary bubble that was created by loose Fed credit policies 1998-2007.

    There is no way out of this until the bad debt (i.e. much of the debt created over those 10 years)is entirely liquidated. That means bankruptcy for firms, banks, and ordinary people.

    Sad, but the Fed should have thought about that before it created a decade’s worth of inflation/cheap credit.

  22. Anonymous

    “I find it amusing that people keep making parallels to the 1930s. Not sure why stone age culture is being used as a reference point. Because things were bad? I’m sure things were pretty bad in 1200 AD!!!”

    Clearly, you’re an idiot. Plain and simple.

    There was no USA in 1200 AD, moron. Perhaps if we were in that time period, I’d ship you to a private meeting with Genghis Khan.

    Let’s see….7 million people starved to death during the Great Depression. Do you understand that and are you saying that is also amusing to you? It is also a very poignant period in recent history that one can compare this current economic situation to. You sound as one that knows very little of that time period or of history.

    The 1930’s was hardly “stone age” either. Many great things came out of that period, as tragic as it was, from the first trans-tlantic flight 3 years earlier by Charles A, Lindbergh to the music and arts of that period. There are many Billie Holiday fans to this day!

    As well, the people of that time were more advanced in the use of what was available to them, and HAD manufacturing, other than heading to today’s throw-away mecca known as Walmart.

    I also bet you didn’t know that during the Great Depression of the 1930s, IBM managed to grow while the rest of the U.S. economy floundered. Thomas J. Watson, Sr., took care of his employees. IBM was among the first corporations to provide group life insurance (1934), survivor benefits (1935) and paid vacations (1937).

    Judge yourself on your own merits and learn and think of what it was like back then. Study and research it, then come back here and share with us an educated opinion.

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