Economic landmarks since the Crash of 1929

October 6, 2008

, PARIS, October 6 – There is widespread agreement that the financial crisis which has shaken the world in the last 18 months, and brought down top names in the United States and Europe is the most severe since the stock market crash of 1929.

There is also widespread agreement that the lessons learned from the trauma of 1929 and the ensuing Great Depression, should contain the crisis of 2007-2008 and prevent an economic slowdown turning into prolonged recession.

Economists interviewed by AFP about the reforms likely to result from the current crisis spoke in the broad context of some of the great economic events in the 80 years since the crash of 1929.

The main lesson from policy responses in the 1930s was that central banks and governments should respond by easing, rather than tightening, the availability of funds; that central banks should provide emergency liquidity as the "lender of last resort", but should drain this back when activity picks up.

Other lessons were that protecting the home economy from imports and devaluing the currency to gain export advantage, depressed activity, especially when other countries did likewise.

The main economist associated with the theories behind these lessons was John Maynard Keynes of Britain whose work was behind the post-war Bretton Woods agreements, creation of the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade, now the World Trade Organization.

Another lesson now firmly established in the policy of central banks, which control the mass of money in circulation and oversee the integrity of the banking system, is that of "moral hazard". This expresses the principle of deterring lenders from taking imprudent risks in the belief they will be bailed out, by ensuring that the imprudent eventually pay a heavy price.

Some of the landmarks of the last 80 years are:

The Crash of 1929 and Great Depression of the 1930s, followed by the "New Deal" to kick-start the US economy;

The post-war Bretton Woods agreements, creation of the IMF and an international exchange-rate framework based on a link between the dollar and gold; creation of the GATT;
The post-war growth of state management of economies, and extensive use of budget-deficit financing, loosely known as "Keynesianism" although there are many interpretations of how Keynes’ policies should be applied;

The end of the dollar-gold standard from 1970 to 1976, resulting in the birth of the modern foreign exchange market;

The oil shocks of the 1970s, and inflation that followed;

A progressive rolling back of state interventionism from the 1980s, a controversial process set in motion by US and British leaders Ronald Reagan and Margaret Thatcher, accompanied by widespread deregulation of financial markets;

A US stock market collapse in 1987;

The collapse of Soviet Communism in the early 1990s and talk of a new world economic order;
The Asian financial crisis at the end of the 1990s;

Creation of the eurozone in a process which began at the end of the 1980s, took form in the 1990s and came into effect in 1999;

The US subprime home-loan crisis which began to have internal repercussions in August 2007.
Talk of a new world financial order in 2008.


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