Crawling from the wreckage

Pepijn Bergsen and Hans Kundnani compare reactions to the economic crashes of 1929 and 2008.

The World Today Updated 10 November 2020 Published 1 April 2020 3 minute READ

Pepijn Bergsen

Former Research Fellow, Europe Programme and UK in the World Programme

Hans Kundnani

Former Associate Fellow, Europe Programme

‘I think the probability is, if we survive, that the majority of us will be starving.’ This was the stark warning given by Professor Theodore Gregory of the London School of Economics in a talk at Chatham House in October 1931. Following the onset of the Great Depression, and with the Soviet Union under Stalin on the rise, he was speculating about the consequences of a possible collapse of western democracies.

This year, as Chatham House celebrates its centenary, we have been looking through our archives to see what people were talking about and thinking at the institute during the early years of its existence – and at what this period can teach us about the state of the world today.

The Great Depression that followed the 1929 Wall Street Crash and the Great Recession that followed the global financial crisis in 2008 both left deep political and economic scars across the western world, which makes it particularly interesting to compare the two moments.

Not only did the economic crisis at the start of the institute’s second decade lead to warnings about the threat from communism, it also led some to see the Second World War coming. In December 1930, shortly after an election in which the Nazis won 18 per cent of the vote to become the second-largest party in the Reichstag, the Austrian economist Felix Somary gave a talk at Chatham House. He said that unless ways could be found to prevent tensions between France and Germany worsening, ‘the present crisis will be but a prelude to a dark period to which the historian of the future will give the name Between Two Wars’.

Discussions at Chatham House in the 1930s on how to respond to the Great Depression reflected the economic thinking of the time. Speakers focused mainly on the supply side of the economy and generally proposed cutting the prices of manufactured goods and wages. The economic misery created by these deflationary policies and the collapse of the financial systems in Europe and the United States played a large role in the subsequent political upheavals in Europe – particularly in Germany.

In the years after the Great Depression, however, a revolution took place in economic thinking. In the mid-1930s British economist John Maynard Keynes demonstrated the importance of government spending to ensure sufficient demand in an economy. This was followed in the 1960s by American economists Milton Friedman and Anna Schwartz putting the blame for the severity of the depression on the US central bank, the Federal Reserve, and its unwillingness to save the banking system.

Because they had learnt these lessons, policymakers responded differently to the financial crisis in 2008 than they had done in the 1930s.

In particular, they used fiscal stimulus measures to prop up demand. Whereas the Federal Reserve was blamed for exacerbating the Great Depression through deflationary policy and allowing banks to fail, it and other global central banks responded to the 2008 recession by rapidly lowering interest rates to stimulate demand, by providing ample liquidity to the financial system and by bailing out banks. This policy response goes a long way to explaining why the economic and political impact of the Great Recession was considerably smaller than that of the Great Depression.

By the end of the 1930s, only 11 European countries were still democracies, all in the northwest of the continent. As the historian Ian Kershaw puts it, about three-fifths of Europeans ‘lived in 16 states under some form of repressive, authoritarian rule where civil rights were strongly curtailed and minorities faced discrimination and persecution’. Of the states that became democracies following the collapse of the Austro-Hungarian empire after the First World War, only Czechoslovakia remained one by the end of the decade. Since the financial crisis, by contrast, democracy has survived across Europe.

However, the crash of 2008 did lead to deep political dissatisfaction in both Europe and the US. Voters baulked at seeing the banks, which caused the crisis but were ‘too big to fail’, being bailed out while they were suffering the consequences of the banks’ actions. In the US this produced both the left-wing Occupy Wall Street movement and the right-wing Tea Party.

Moreover, after the initial fiscal stimulus, policymakers in Europe and the US seemed to forget the lessons of the 1930s again. The imposition of austerity – especially in southern Europe – led to protest movements and parties like the Indignados and Podemos in Spain.

A decade after the global financial crisis, there is a perception of a crisis of liberal democracy in Europe and the US. In particular, during the past five years or so, there has been much discussion of a surge in ‘populism’. Many explicitly equate this new ‘populism’ with fascism. The shadow of the 1930s hangs over our politics.

Although few democracies in Europe have so far completely collapsed as they did in the 1930s, there has been what is often called ‘democratic backsliding’. This time it is the central and eastern European countries that became democracies after the end of the Cold War, such as Hungary, that seem to be ‘deconsolidating’ – and then as now, there is anxiety that more established democracies in Western Europe could also collapse.

However, as we show in a new Chatham House research paper on the future of democracy in Europe, there is no consensus on how to understand the current crisis of liberal democracy – or how bad it is. Some see what is happening now not so much as a threat to democracy but as a corrective – at least in some cases.

In particular, they point out that ‘populist’ parties have brought many non-voters back into the democratic process and argue that they have forced issues on to the agenda that established and mainstream parties had ignored.

There is also little agreement about the causes of the current crisis – and in particular about the extent to which it really is driven by economics. This is in part a debate between the left and right: the left tends to see economic factors – wage stagnation, the loss of manufacturing jobs, growing inequality, and economic insecurity or ‘precariousness’ – as the drivers of the current crisis and in particular the rise of ‘populist’ figures, movements and parties; whereas the right tends to see ‘cultural factors’ – that is, a backlash against changes in values since the 1960s, a feeling of a loss of identity, and anger about immigration – as being decisive.

It is also, in part, an interdisciplinary debate. Economists tend to emphasize economic factors and political scientists tend to emphasize ‘cultural’ factors. But even many political scientists who focus on cultural factors, particularly in explaining right-wing populism, admit that economic conditions have at least created the conditions that political entrepreneurs have exploited.

Despite the warnings about the rise of communism given at Chatham House in the early 1930s, it would turn out to be the far right, not the far left, that profited from the economic crisis.

With the partial exception of southern Europe, much the same thing has happened during the past decade. Indeed, research has shown that right-wing populist parties generally perform well in the wake of financial crises. In particular, voters seem to be attracted to far-right rhetoric blaming minorities and foreigners.

Nevertheless, we are still a long way away from the complete collapse of the system in so many countries in the 1930s. This time around, the political crisis seems to have been delayed and limited by the initial Keynesian response to the 2008 financial crisis.

But democracy may also have proved more resistant because it is more deeply entrenched than it was in the 1930s. After all, even as some of today’s populist leaders undermine media freedom and the rule of law, they remain rhetorically committed to the concept of democracy in a way that their counterparts in the 1930s were not.

This does not mean that economic crises no longer lead to political upheavals. But it does mean that they take a different form than they did in the first decades of Chatham House.


This article is part of a Europe programme series to celebrate the centenary of Chatham House