Hall of Mirrors
The Depression and the euro crisis compared.
Summary
Eichengreen compares the Great Depression and the 2008 crisis directly, arguing that policymakers in 2008 acted on their understanding of the 1930s and that this both saved them from the worst outcome and led them into a distinct set of errors.
His argument has a specific structure. Because the 1930s lesson had been learned, central banks provided liquidity aggressively and governments prevented banking collapse, which is why 2008 did not become a depression. But the success of the immediate response removed the political urgency for structural reform, so the financial system was stabilised without being restructured, and the shift to austerity in 2010 repeated the fiscal error of the 1930s in a milder form. He calls this the paradox: the crisis was less severe because the history was known, and it was less thoroughly resolved for the same reason.
The historical work interleaves the two episodes chapter by chapter, covering the credit booms that preceded each, the banking failures, the policy responses and the political consequences. He documents the parallels in the preceding booms, in the role of new financial instruments, and in the international transmission.
Eichengreen is one of the two or three people best qualified to make this comparison and the scholarship is careful. The book is long and the interleaved structure makes it harder to follow than a sequential treatment would. His judgement that the 2010 turn to austerity was a serious error is a position within a live dispute rather than a settled conclusion.
Key takeaways 7
- Policymakers in 2008 acted on their understanding of the 1930s, which is why the immediate response prevented a depression.
- The success of the emergency response removed the political urgency for structural reform, so the financial system was stabilised without being restructured.
- The 2010 turn to fiscal austerity repeated the error of the 1930s in milder form, and it slowed the recovery in both Europe and the United States.
- Both crises were preceded by credit booms in which new financial instruments allowed leverage to build in places supervisors were not examining.
- Knowing the history of a previous crisis shapes the response to the current one, which means historical understanding is itself a determinant of outcomes.
- Banking systems in both episodes were internationally connected in ways that transmitted the shock faster than any national policy could contain it.
- Political reaction to a crisis is determined by its severity, so a well-managed crisis produces less reform than a badly managed one.
Who should read it
Macro investors and policy readers who want a rigorous comparison of the two crises and an argument about how historical knowledge shapes policy.
About Barry Eichengreen
Professor of economics and political science at the University of California, Berkeley, and economic historian of international monetary systems.
Golden Fetters established the standard account of the interwar gold standard: fixed exchange rates transmitted deflation across borders, and recovery began in each country only after it left the peg. The later books apply that monetary-history method to reserve-currency status, the euro, sovereign debt capacity and the 2008 policy response.
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