Are we witnessing the birth pangs of another Great Depression? Karl Marx once observed that history repeats itself, "first as tragedy, second as farce." But the record of the past emphatically suggests that we are not suffering through a play-by-play recapitulation of the catastrophe of the 1930s. To be sure, we may be brewing our very own 21st century economic calamity. But if so, it will be altogether different in its sources, scale, severity and duration from the last century's ghastly, decade-long, globe-girdling ordeal. It is only the consequences that may be similar.
Several chronic infirmities afflicted the international economic order in the 1920s: the massive destruction World War I inflicted on key economies like those of Britain, France and Germany, and the lingering distortions in trade, capital flows and exchange rates occasioned by the punitive Treaty of Versailles. Memories of the war's bitter fighting and vengeful conclusion had rendered the international atmosphere toxic, making a mockery out of the one transnational institution to have emerged from the conflict, the League of Nations. Adding to those abundant ills was the near religious faith in the sacred orthodoxies of laissez-faire and the gold standard--the economic equivalents of the Nicene Creed.
The U.S. was not immune to those ailments as the decade of the '20s reached its operatic climax, and it suffered from some others that were peculiarly its own. A stubborn agricultural depression had blighted the American countryside since the conclusion of World War I, crimping the incomes of the 20% of the workforce who were farm laborers and significantly limiting domestic purchasing power. Meanwhile, a notoriously ramshackle, poorly regulated banking system had managed to wobble its dysfunctional way into the modern era. Some 25,000 banks--most of them highly fragile "unitary" institutions with tiny service areas, little or no diversification of clients or assets, and microscopic capitalization--composed the astonishingly vulnerable foundation of the national credit.
Government spending at all levels, though fairly stable even as the Depression set in, constituted only about 15% of GDP in the 1920s. Less than one-fifth of that was federal expenditures. "If the Federal Government should go out of existence, the common run of people would not detect the difference in the affairs of their daily life for a considerable length of time," said famously taciturn President Calvin Coolidge in one of his more long-winded (and accurate) assessments of the national scene. The Federal Government, in other words, was a kind of 90-lb. weakling in the fight against the Depression monster.