Robert McElvaine: Parallels to 1937 "are very strong"

Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we’ve been living through this week. They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery — and eventual sharp stock market gains.

 The events of the last few weeks — gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor’s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market — bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then. The Dow Jones industrial average dropped 49 percent from its peak in 1937. Manufacturing output fell by 37 percent, a steeper decline than in 1929-33. Unemployment, which had been slowly declining, to 14 percent from 25 percent, surged to 19 percent. Price declines led to deflation.

 “The parallels to what is happening now are very strong,” Robert McElvaine, author of “The Great Depression: America, 1929-1941” and a professor of history at Millsaps College, said this week. Then as now, policy makers were struggling with how and when to turn off the fiscal stimulus and monetary easing that had been used to combat the initial crisis....

Historians can’t know if the 1938 recovery, strong as it was, would have been enough to finally end the Great Depression. World War II intervened. But nothing today seems nearly as dire as the problems facing the world in 1938. The 1937 aftershocks had the effect of galvanizing policy makers who had grown complacent about the recovery. The result was renewed economic growth, higher employment, higher wages and productivity — and higher stock prices. Investors who had the courage to buy stocks at their 1937 lows were looking at a 60 percent gain less than a year later.