Depression of ’29 unlikely today, experts conclude

Most financial experts dismiss the worst-case scenario — that the market crash of Oct 19 will propel the world into a depression, as did the market crash of 1929. Although many of the imbalances of today are considered similar to those of 1929, other key factors are different, which suggest that a similar collapse in the financial system is unlikely. The most important, which precludes the coming of another depression, is that of financial flexibility and latitude which enables the system to react quickly to massive shocks such as that experienced on Black Monday.

Francis A. Scotland, senior editor of The Bank Credit Analyst, has examined the similarities and differences between 1929 and today.

* In 1929, British sterling was the reserve currency whereas today the U.S. dollar is the world’s reserve currency.

* Before the first crash, France and the U.S. were the world’s largest creditors. Today, Germany and Japan enjoy this position. The U.S. has become the world’s largest net debtor — unlike England of the 1920s.

* In the 1920s, England felt pressure from international monetary standards to deflate. This came primarily from the gold exchange standard, which meted out restrictive monetary discipline. The U.S. today is experiencing such pressure from a need to reduce its massive deficit — not from any international monetary standards. External U.S. debt exceeds $400 billion.

* As the U.S. in the 1920s, Japan has emerged as the new global power, Mr Scotland says. Also, “Japan is increasingly less receptive to calls from the reserve currency country (the U.S.) to lower rates in order to stabilize the dollar,” Mr Scotland concludes. In 1929, the U.S. was in a similar situation.

* Unlike the 1920s, when rigid monetary policy and a lack of flexibility in the financial system triggered the market collapse which marked the start of the Great Depression, government policy today is geared to stabilizing the economy and avoiding a recession, Mr Scotland says.

John Klinkard, senior economist with the Canadian Imperial Bank of Commerce, believes that the major difference between 1929 and today is the greater latitude available to governments with which to act quickly — a latitude which was not available in 1929. “Our economy today has a much larger service sector than in 1929.” Combined with responsive governments and a strong service sector, both can absorb financial shocks better, Mr Klinkard concludes. “Both (government and the service sector) can provide the system with liquidity. This acts as the shock absorber for the economy.”

Black Monday, which rocked the world financial community to its core, will be the real test of the system’s ability to absorb shock. Just how much damage to the economy the panic and hysteria of the past few days will have caused will only be known in the coming months.