Those of us who were alive at the time, or who have seen the film, have vivid memories of the sinking of HMS Hood in 1941, and of the pursuit and subsequent sinking of the German battleship Bismarck. Ten years earlier the Hood had been involved in another episode of naval history, which had a significant influence on British economic history.

On September 19, 1931, Captain J.F.C. Patterson, the acting Senior Officer, Atlantic Fleet, sent a signal to the Admiralty: “For two days, the ships at Invergordon of the Atlantic Fleet were in a state of open mutiny... large numbers of men were massed on the forecastles of Hood, Rodney and Dorsetshire. Men on the forecastle of Hood had refused to allow any work to be done to commence on unmooring, and it became evident that neither Hood nor Rodney could go to sea.”

Patterson had some sympathy with the underlying grievance. He informed the Admiralty: “The use of force was in my opinion quite out of the question,” and that “with regard to the causes of the outbreak, there is no doubt that first and foremost was the disproportionate reduction (in pay) of the lower ratings who entered before 1925”.

On the same day that Patterson sent his report of the Invergordon mutiny, a small conference was held at 10 Downing Street; the Prime Minister, Ramsay MacDonald, reported that he had had a discussion with Stanley Baldwin, the leader of the Conservative Party, and Sir Herbert Samuel, the leader of the Coalition Liberals.

The result had been an agreement that it was essential to get legislation that would release the Bank of England from the obligation to pay out gold. E.R. Peacock, a director of the Bank of England, commented: “A sudden blizzard has struck the world. People have got anxious about their bank, that is to say, Great Britain, and they are gravely anxious about themselves.” The Downing Street meeting agreed to take Britain out of the gold standard.

The sailors at Invergordon were loyal and patriotic - many were to die for their country in the Second World War. But they were not prepared to have their pay docked - unfairly as they thought - to defend the convertibility into gold. In this, they were good Keynesians. In September 1931 the gold pound lost the confidence of British sailors, Cambridge economists and French bankers. That combination was irresistible.

September 19, 1931, was approximately the second anniversary of the start of the Great Depression in 1929. The mutiny and the decision to leave the gold standard proved to be the recovery point for Great Britain. From that point on, recovery became possible.

Two lessons were taught by Invergordon and the withdrawal from the gold commitment: governments should not try to balance the budget by cutting the pay of essential public servants; and they should not defend at all costs an overvalued fixed exchange rate. Britain does not now have a fixed exchange rate, although some people still want to join the euro. If we were in the euro, we would probably be arguing about when to leave.

The year 2009 can be paired with 1931. Both are the second year after the start of a big recession: 1931 was, beyond question, a year of depression. In the US the Federal Reserve Board kept statistics of the profits of 500 companies. In 1929 the index had been 998; in 1930 it had fallen to 760; in 1931 it was 370, and went as low as 267 in the final quarter.

Between 1929 and 1931 US employment fell by a third. If we based a forecast for 2009 on 1931 we would produce ghastly figures. The American recovery really began only in March 1933, after the inauguration of President Roosevelt. Britain had a lighter and shorter recession.

However, we can follow, and perhaps guard against, the acceleration of “the vicious spiral” of depression in 1931 itself. The turning of the screw actually began in June 1930, with the disastrous Hawley-Smoot tariff. Intended to protect US industry from excessive imports, it aroused international resentment and retaliation against US exports. If British experience offers the first two lessons, this would be the third: do not raise tariffs in a recession.

In May 1931, the Credit Anstalt, the leading bank in Austria, became insolvent and had to close. As the American economist, Irving Fisher, observed: “It was a great bank, and its collapse embarrassed both Germany and England.” Lesson four: do not allow systemic banks to fail. This was not applied to Lehmann Brothers, which may be regarded as the Credit Anstalt of the Wall Street panic of 2008. In June 1931 after runs on other Austrian banks, its Government belatedly guaranteed the liabilities of the Credit Anstalt.

In July 1931, the Bank of England rescued the German Reichsbank, which had been embarrassed by the failure of the Credit Anstalt. The French withdrew gold from Germany and the Bank of England for having taken the risk of supporting Germany. Lesson five: do not depend on central bankers in a panic.

On September 21 Britain left the gold standard, followed by 23 other nations. The US and France maintained gold convertibility.

In October 1931 President Hoover proposed the creation of the Home Mortgage Corporation, the ancestor of Fannie Mae and Freddie Mac, the mortgage banks that did not become insolvent until 77 years later.

In December Hoover announced his relief programme. Fisher commented: “To meet the rapidly developing emergency, each step was too small and by the time it was enacted into law, it was too late.”

Lesson six: in a depression, too much and too early is safer than too little and too late.

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