Co-operation is crucial to overcoming this Covid-19 economic crisis
“Not even during the Great Depression and World War II did the bulk of economic activity literally shut down, as it has in China, the US and Europe today,” he wrote.
Wall Street crash
The Great Depression was triggered by the Wall Street crash of October 1929, the implosion of a massive bubble in share prices, after a frenzy of speculation. Americans from all walks of life had been drawn to the stock market in anticipation of instant riches, many borrowing money to buy shares.
The Dow Jones Industrial Average plummeted from about 350 points (off its peak of 381, reached in August 1929) to about 200 points (a drop of 43%) within four weeks. It climbed to almost 300 by April 1930 but then declined steadily over the next two years to reach a low of 41 points in July 1932. From peak to trough, the index dropped by 89%. It was not to reach its pre-crash level until 1954, 25 years after the crash.
There was some intervention in 1930 by the Hoover administration to shore up the financial system, but this was largely ineffective. Highly damaging were the protectionist policies instituted in that year, imposing tariffs on imported goods. Other countries responded with similar measures, and world trade collapsed - to a third of the pre-crash level.
The era was marked in the US by a deflation spiral and the failure of thousands of banks. Dr Ben Bernanke, who chaired the US Federal Reserve through the 2008 global financial crisis, had made a study of the Great Depression, and applied the lessons learned. He pushed for massive state interventions to prevent runs on banks and ease tightened credit. These took the form of bailouts, cutting interest rates, and quantitative easing, which injected liquidity into the economy.
While the Covid-19 crisis is worse than the Great Depression in its “overnight” severity, there are important differences, which may be enough to stave off the despair and poverty that epitomise those unhappy times.
* Its cause was not an overheated market. Stock markets have been relatively stable.
* Governments have thrown money at the problem, even more so than in 2008.
* The financial system is better regulated and more robust - a far cry from the 1920s, when you could buy $100 worth of shares with $10 and a 90% loan from the broker.
* Technology is a game-changer. Today’s technology enables interconnectedness, the sharing of information and co-operation.
It’s co-operation, experts agree, the world needs most. If nations retreat into protectionist cocoons, that should trigger alarm bells. While countries may need to relook certain supply chains, global trade should not suffer unduly.
This is a time for collaboration, not competition, says Klaus Schwab, executive chairperson of the World Economic Forum, who writes: “The crucial principle, that everyone will need to subscribe to, is that we’re all in this together, for the long haul, and we must all come out of it together ... We’ll overcome this crisis, but only if we work together and dig in.”