The spectre of 1929 hangs over the present financial crisis. Indeed, the City of London's exposure to America's toxic debts makes reference to the Wall Street Crash inevitable. It is assumed that what happened then had comparable results on both sides of the Atlantic.

But in the short term, damage to British banks is more apparent now than then. The eye of the financial storm hit Britain in 1931, two years later, and was as much a consequence of exposure to failing banks in Central Europe as to the panic in New York.

Historians usually focus on three immediate consequences of the 1931 crisis: cuts in state spending, the fall of the Labour Government and sterling's departure from the gold standard. At least the third of these will not be repeated this time.

There were bailouts in 1931. Anglo-South American, the biggest British bank engaged in Latin America, had to be rescued with a Treasury guarantee covering its forecast losses.

But this was only a stopgap and the bank ended up being sold on the cheap. Eschewing “moral hazard”, the Bank of England also co-ordinated a rescue package for several other established City institutions that survived to thrive another day.

Even so, these scrapes hardly compare with recent casualties. Seven months ago, the Government had to nationalise Northern Rock to prevent its collapse. Ten days ago HBOS, appeared on the brink until it was bought by Lloyds TSB. A quarter of Britain's mortgage payers were tied up in these institutions. In scale, the 1931 crisis offers no British equivalent.

In contrast to the myriad undercapitalised Wall Street banks that faced Armageddon in 1929, the British banking sector had already gone through a period of intense consolidation between the 1880s and 1919. This ensured the dominance of the “Big Five” clearing banks of Lloyds, Barclays, the Midland, National Provincial and Westminster. They were strong enough to weather the storm.

So last week's emergency merger puts in perspective the seismic nature of the present debt exposure. Longer term though, there could be ground for optimism. The 1931 crisis may not have claimed a scalp comparable to HBOS, but its effects, and the accompanying world depression, were long-drawn-out.

The City of London did not recover its dominance until the 1950s. We are not short of financial Cassandras, but few forecast that we will have to wait that long for a decent dividend.

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