The Great E-pression?

Author Michael Bordo argues that parallels drawn between the 1930s and today are unfounded and should not trigger market panic. Do you agree?


October 29, 1929 is a date tattooed on the psyche of every economist and businessman worth his weight in T-bills. Today, Black Tuesday is making a comeback as pundits reference it alongside April 14, 2000 — the day the NASDAQ plunged 355 points and sent investors into a panicked e-frenzy.


But, does the Great Depression really resemble America’s current economic hangover? Should banks and businesses brace for the worst? Or should they dismiss our current economic travails as a “market correction” and place their faith in Alan Greenspan?

Clearly, more than a few economists and politicians have been playing Chicken Little lately. In the January/February 1999 issue of Foreign Affairs, MIT economist Paul Krugman wrote, “The problems of the 1990s have distinct similarities with the problems of the 1930s; so do the solutions. We had better all start relearning our Depression economics.” Likewise, political scientist Nicholas J. Brunick argued in his 1999 paper, “From the 1920s to 1990s: The Continuing Crises of Capitalism,” that the United States will fall victim to a Depression-sized crisis if it doesn’t reform major social and economic policies — fast.

Not true, says Michael Bordo, author of The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Bordo insists that we are not entering a “defining moment” of Depression-era magnitude. In fact, we’re not even close. “The depression from 1929 to 1933 was the worst economic downturn the modern world has experienced,” he says, “And the reason it was so bad was that the Federal Reserve failed to intervene, allowing money and credit to collapse. The Fed will never make that mistake again.”

Like many other modern-day political economists, Bordo hopes the hysteria will recede long enough for him to disprove the hype. The outspoken historian and Rutgers University economics professor argues for composure and perspective as the curtain rises on Act II of the new economy.

Déjà Vu All Over Again

The resemblance is uncanny … and unnerving.


For the United States, the 1920s were marked by unprecedented innovation and prosperity as entrepreneurs fired up new production engines that churned out automobiles, refined steel, and newfangled radios with speed and efficiency. Big business was rapt, and its wallet was growing fat as an unregulated stock market inflated.

Booming production and idea generation also dominated the mid- to late-1990s as high-tech sectors bolstered by the Internet’s popularity dictated the markets and produced tech startups, like eBay,, and Yahoo!, that experienced surging stock prices in 1998 and 1999.

Then came last April’s Black Friday, and the bubble burst. The media drew parallels to 1929’s Black Tuesday, investors withdrew money, and startup companies drew the curtains and left town.

The First to Fall

In the late 1920s and early 1930s, the automobile industry was hit first and hardest by the changing economic conditions. Though they are hardly the only victims, high-tech and Internet companies today are suffering the most humiliating downfalls with heavy layoffs, big sales drops, and overwhelming media criticism. Despite these equally painful falls from grace, comparing the two sectors is like comparing Pontiacs and Pentium chips.

“The automobile industry still employs more people and produces a larger percentage of output today than the high-tech industry does,” Bordo says. “Just because a few dotcoms go out of business doesn’t mean that consumers are going to stop using computers or that firms are going to stop making technological advances.”


In short, automobile manufacturers make more significant contributions to the U.S. economy than do Internet companies. When a plant foreman at a parts-supply company in Indianapolis, Indiana loses his job because of cutbacks at Chrysler, he can’t just post his résumé on and move onto the next gig. Layoffs are much more detrimental in geographic regions that rely on just a few industries or companies. And Silicon Valley is not one of those regions.

Consumer Conservatism

Last month, PC makers including Hewlett-Packard and Gateway Computers announced disappointing fourth-quarter computer sales — the first indication of declining consumer spending. The purse strings are drawing tighter, but U.S. buyers can afford to reduce their consumption while the government takes action to prevent worsening conditions — something it failed to do 60 years ago.

“If the Fed had acted on common sense rather than a bad theory of policy, the Great Depression could have been avoided,” Bordo says. “When the Fed stopped extending loans to its member banks, there was a series of banking panics from 1930 to 1933, which meant that people couldn’t borrow money from the bank — many couldn’t even get back their initial deposits.”

In contrast, Bordo says the Fed’s recent move to cut interest rates by half a percentage point will lead to more tax cuts designed to boost the lagging economy. If passed, President George W. Bush’s $1.6 trillion, 10-year tax-cut plan will also likely give more economic control to the private sector, encouraging consumer spending at all levels. All of this adds up to much rosier marketplace activity than the United States experienced in the early 1930s.

Whole New Ball Game

“A set of forces has been unleashed since the 1980s that will make it impossible to repeat the Great Depression,” Bordo says. “For one, free trade has expanded between diverse countries, which has allowed capital to flow freely around the world.”


Currently, the dollar is trading high, and U.S. goods are not selling well overseas. A forthcoming recession, however, would decrease the rate of the dollar, bolstering U.S. export sales and possibly offsetting conservative spending at home.

The prognosis? The worst-case scenario is a U.S. version of the long, drawn-out economic stagnation in Japan. This is a real threat, given the high price of oil and the energy crisis currently ravaging California. Still, even if these factors unite to create a collapse in spending, Bordo thinks the Fed has learned its lesson well enough to avoid economic disaster. As long as banks continue to lend money freely, consumer confidence will remain stable, and we will emerge from this market correction with only a few scrapes and bruises.

“This era has been one of unprecedented prosperity,” Bordo says of the 1990s. “We’ve made tremendous technological advances in saving time and reducing inventory, and we’ve freed ourselves from the shackles that prevented us from springing back after the market crash of 1929.”

What Do You Think?

Q: Will the Fed’s interest-rate cut provide long-term help for the American economy?
A: Yes || No