What lessons from the 1930s?

Alcidi, Cinzia and Gros, Daniel (2009): What lessons from the 1930s?

Abstract

This paper explores three areas in which the experience of the Great Depression might be relevant today: monetary policy, fiscal policy and the systemic stability of the banking system. We confirm the consensus on monetary policy: deflation must be avoided. With regard to fiscal policy, the picture is less clear. We cannot confirm a widespread opinion according to which fiscal policy did not work because it was not tried. We find that fiscal policy went to limit of what was possible under the conditions as they existed then. Our investigation of the US banking system shows a surprising resilience of the sector: commercial banking operations (deposit taking and lending) remained profitable even during the worst years. This suggests one policy conclusion: At present the authorities, in both the US and Europe, have little choice but to make up for the losses on ‘legacy’ assets and wait for banks to earn back their capital. But to prevent future crisis of this type one should make sure that losses from the investment banking arms cannot impair commercial banking operations. At least a partial separation of commercial and investment banking seems thus justified by the greater stability of commercial banking operations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Great depression; Monetary policy; Fiscal policy; Commercial banks
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

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