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Can the Global Crisis of the Nineties Lead to Another Great Depression?

by Robert Brent Toplin on Oct 21, 1998

Robert Brent Toplin

Since the summer of 1997, economies around the world have been falling as if stricken by an international disease.

Some business leaders are now expressing fear that an international meltdown could create a Great Depression like the one that wrecked national economies in the 1930s. They observe that the United States has remained impressively stable in the first year of global crisis but wonder about the country’s economic future in view of the recent evidence of declining corporate profits and sagging consumer confidence.

What are the similarities and differences between conditions in the Thirties and the Nineties, and does history offer “lessons” from a comparison?

Some of the similarities are certainly worrisome:

The climb in stock prices during the last year before Wall Street’s crash in October 1929 was phenomenal. Prices soared, much as they did in the recent bull market that stretched until the summer of 1998. After the stock market’s sudden downturn in 1929, President Herbert Hoover assured the public that the American economy was fundamentally sound. President Clinton offered similar assurances recently.

In the Thirties, business activity in the United States and other countries slowed down dramatically, despite Hoover’s expressions of confidence. Financial strains then had a domino effect. Individual and institutional speculators had leveraged their capital greatly, making investors vulnerable to huge losses and bankruptcies when values began to fall sharply.

The recent crisis over hedge funds and the Federal Reserve Board’s efforts to encourage banks and brokerage houses to rescue Long-Term Capital Management suggest related dangers in the late 1990s. Dominoes may fall again.

The crisis of the 1930s took time to materialize. America’s hardest days — the dark period of soup lines and jobless hoboes — came in the winter and spring of 1933, three and a half years after Wall Street’s crash. If the world is heading for another bout with Depression, today’s troubles may represent just an early sign of economic illness.

These parallels are disturbing but, fortunately, the present is not the same as the past. History cannot simply “repeat itself.”

One important distinction is that the United States, the scene of many speculative excesses in the 1920s and the place where the thrust toward a global depression began, is the last of the great nations to feel the economic impact in the 1990s. Today’s U.S. economy is much more solid than the one that folded like a house of cards in the 1930s.

Financial reforms and regulations put in place during the 1930s and in later decades have helped to make American business practices more stable and open to investor scrutiny. For instance, the U.S. stock market is less susceptible today to the wild investment schemes that were common in 1929. Furthermore, the Fed has played an effective role in steering the country on a responsible course. Many economists blame the Fed for mistaken decisions in the late 1920s and early 1930s that exacerbated economic problems.

Evidence of global action demonstrates an improved situation, too. Representatives of the International Monetary Fund and the G-7 nations have been meeting frequently and trying to conduct rescue operations for nations in a state of crisis. Their actions have not satisfied the world’s nervous investors, but at least they are displaying much greater international cooperation than leaders in the 1930s exhibited.

There is also less evidence today of isolationist reactions. So far, only Malaysia has demonstrated a fortress mentality, closing its participation in global markets to prevent capital flight. In the 1930s leaders in many countries (including the United States) responded to economic woes by erecting high tariff barriers. Those short-sighted efforts stymied trade and made the international situation worse.

The most disturbing evidence from this historical comparison relates to the United States’ vulnerability to global contagion in the 1990s. If the world’s economies are much more interconnected today than they were in the Thirties, an economic sneeze in Thailand or Brazil can cause a cold in the United States. America is not immune to the forces of recession and, possibly, depression, that are now sweeping across the world.

Yet history also offers a model for dealing with the dangerous swings in free-market capitalism that are the source of many of today’s difficulties.

Through much of U.S. history, Americans suffered from radical cycles of boom and bust. Eventually, Americans learned to control severe economic swings through intelligent regulation and cautious investment and monetary policies. Institutions such as the Federal Reserve System, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation helped to promote sound economic management in the United States.

The crisis of the 1990s began with the collapse of risky investments in Asia that resembled the crash of speculative shenanigans in the United States in the late Twenties and early Thirties. Evidently the world today needs stronger international cooperation, reporting and regulation, the very reforms that Americans effectively forced upon their business community a long time ago.


Robert Brent Toplin, professor of history at the University of North Carolina, Wilmington, has published books on popular culture and politics, and is a writer for the History News Service.