Governments around the globe should avoid major strategic and tactical errors like the ones they made during the early days of the Great Depression if they want to avoid repeating history, writes one of the U.K.'s leading pundits, William Rees-Mogg.
"As we enter a second year of slump, history has some key pointers to the best way forward," Rees-Mogg indicated.
The year 2009 can be compared quite accurately with 1931, Rees-Mogg asserts.
"Both are the second year after the start of a big recession: 1931 was, beyond question, a year of depression," Rees-Mogg wrote in the Times of London.
There were many major errors the governments made in the late 1920s and 1930s. These included cutting the pay of public employees; defending fixed exchange rates at all costs; letting major banks fail; and trusting central bankers too much.
The Federal Reserve Board kept records of the profits of 500 leading companies at the beginning of the depression. In 1929, the index had been 998, out of a 1000; in 1930 it had fallen to 760; in 1931 it was 370, and went as low as 267 in the final quarter.
Between 1929 and 1931, U.S. employment fell by a third as employers cut back dramatically to deal with declining revenues. The government also pulled back on employment, trimming the pay of many workers.
A number of state governments today are planning reductions of their workforces to contend with falling revenues.
That's a potentially big mistake that the incoming Obama administration is trying to avoid.
Former Treasury Secretary Lawrence Summers indicates that Obama wants to budget for the creation of 600,000 new federal government jobs during his first year in office and avoid the layoffs and pay cuts that marred the early 1930s.
This seems to be sound economic policy, Rees-Mogg contends.
"We can follow, and perhaps guard against, the acceleration of 'the vicious spiral' of depression in 1931 itself," he notes.
Another key lesson from the depression, according to Rees-Mogg, is not to rely on central bankers during a crisis. This lesson, however, has not been internalized by policymakers yet.
In May 1931, Credit Anstalt, the leading bank in Austria, became insolvent and had to close. The government there did not respond immediately.
This past fall, Lehman Brothers failed, in what The Wall Street Journal calls the "weekend that Wall Street died."
The U.S. government did not react in time. This failure, Rees-Mogg noted, "may be regarded as the Credit Anstalt of the Wall Street panic of 2008."
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