No one can yet know when the world economy will reach its low point and begin what may be a long climb to recovery. In the past week we have seen a couple of political events that have already proved not to be turning points: the summit meeting in Paris and the passage of the Paulson plan through Congress. These were no more than village halts on the railroad to depression.
However, we do know when the last global banking crisis was turned round, when confidence started to recover. Indeed, the Great Depression has precise dates for its beginning, which was the Wall Street panic on October 24, 1929, and for its recovery point, which came with Franklin Roosevelt's inaugural address on March 4, 1933.
In his 1,000-page biography of Roosevelt, which has become one of my most valued works of reference, Conrad Black observes that there are only two other inaugural addresses that are as well known to Americans, John F.Kennedy's in 1961, and Abraham Lincoln's second inaugural on March 4, 1865. American schoolchildren are still taught Lincoln's great pledge: “With malice towards none; with charity for all; with firmness in the right as God gives us to see the right.” That was Lincoln's commitment to reconciliation after the Civil War. Only assassination prevented him from fulfilling it.
Roosevelt's inaugural address has been quoted repeatedly in the past few weeks. “This great nation will endure as it has endured, will revive and will prosper. So first of all let me assert my firm belief that the only thing we have to fear is fear itself - nameless, unreasoning, unjustified terror which paralyses efforts to convert retreat into advance.”
There have already been many comparisons drawn between the Great Depression of 1929-1933 and the current credit crisis. Most of these comparisons have concentrated on economic similarities, or the long standing academic debate on the causes of the Great Depression itself.
Both Ben Bernanke, the Chairman of the US Federal Reserve Board, and Mervyn King, the Governor of the Bank of England, have been serious scholarly students of the Depression, so one may reasonably hope that central bankers will avoid a repetition of the mistakes of the early 1930s. They will not tighten the money supply at the very moment when it ought to be loosened.
There has been less discussion of the similarities of the US political situation in the election years of 1932 and 2008. It cannot be said that the presidential debate has so far shown much intellectual rigour. Of the four candidates in these elections, the incumbent Republican president in 1932, Herbert Hoover, probably had the best grasp of economic theory, though it could be said that the existing theories were inadequate for the crisis.
The Democratic candidates were Franklin Roosevelt in 1932 and Barack Obama in 2008. Neither man had qualified as an economist, both had trained as lawyers, both went to Harvard. In 1904 Roosevelt stayed on an extra year to edit the Harvard Crimson; Obama became the editor of The Harvard Law Review. Both were, or are, gifted orators, relying as politicians on an ability to communicate to the public, and move them.
Of the four candidates in the two elections John McCain has been the unlucky one - the Republican who has to fight a campaign for the incumbent party in the middle of an economic crisis. “The boy stood on the burning deck, when all but he had fled.”
In the debate on the Paulson plan, arguments from the early 1930s resurfaced in Congress. Republicans wanted, and in the end achieved, large scale funding for banks with bad debts. Their justification was to protect the banking system, on the reasonable ground that the whole economy would suffer if the banking system collapsed. The Democrats wanted the money to go to middle- class families in financial difficulty, to homeowners who had been sold mortgages, not to bankers who had provided them. In the early 1930s, Roosevelt believed in “workfare” and Hoover made loans to bankers.
Probably the most effective action taken by the US Government in the early 1930s was the Reconstruction Finance Corporation, which distributed some $10 billion of funds to business in the 1930s. It was so successful that it came, mistakenly, to be thought of as part of Roosevelt's New Deal. In fact, the RFC was one of Hoover's initiatives; he insisted on the principle that it should not finance individuals. Roosevelt had created, as Governor of New York, the Temporary Emergency Relief Administration (1931), which provided the unemployed with food, clothing and, sometimes, jobs.
Hoover was blamed for the Depression; Roosevelt won the 1932 election by 472 electoral votes to 59. McCain has the advantage over Hoover in that he is not the incumbent president. Indeed, he has been a critic of the policies of the Bush administration. Yet he, like Hoover, is the candidate of the incumbent party. There is no absolute rule that the incumbent is bound to lose in a recession election, but the bigger the panic the worse the prospect for the party in power.
Roosevelt did not achieve an immediate recovery. In fact, Britain in the early 1930s outperformed the US, under the more orthodox policies of the Chancellor, Neville Chamberlain. But the optimism of Roosevelt was infectious; gradually confidence began to return after he took office. The Democrats did not have all the answers, but they seem to have fewer wrong answers than the Hoover Republicans. Roosevelt believed in reflation rather than further deflation. In the 1930s Roosevelt was the prophet of hope for the United States, just as he was for the free world in the 1940s. He was a very, very great President.
This is again an opportunity for the Democrats. The world is facing another crisis of financial confidence, for which the Republican administration is widely blamed. Can Barack Obama, if he is elected, restore confidence in 2008 in the way Franklin Roosevelt did after his victory in 1932?
