The crucial point is that even though historians argue over the complex causes of the Great Depression, they generally agree that it wasn't the Wall Street crash itself. Dramatic as that was, the panic in which corporate shares collapsed and financiers leapt from skyscraper windows was a fairly short-lived affair. By the early 1930s American capitalism was back in business and forging ahead once more. Wall Street had, after all, suffered similar shakeouts every 20 years or so since the 1840s.

Here, Merritt is taking sides in the debate on what caused the Depression, without letting on. There are generally three schools of thought on what caused the Great Depression. One, advanced by Milton Friedman (and subscribed to by Ben Bernanke, great student of the Depression), held that it wasn't the crash which caused the depression, but an inadequate response to that crash on the part of the US Central bank in the following period. The markets required greater liquidity, in order to offset the deflationary pressure put on assets and, eventually, goods and services, and to prop up banks in whom the public had lost trust, prefering to withdraw their funds (with good reason) and stash them in the mattress. A credit freeze ensued, and the economy collapsed. If all of this is sounding familiar, it's no wonder - this is the dominant interpretation of the Great Depression as seen through the eyes of Anglo-American financial elites.

But, it is not the only interpretation; in fact, there were two alternative explanations at the time on the continent, one from the conservative "Austrian School" led by Freidrich Hayek, which explicitly blamed easy credit and inflationary policies led in particular by the United States in the 1920's, as directly causing both the crash and the ensuing downturn. The credit boom was allowed to go on for far too long in the 1920's; the Depression (as well as the Crash) were inevitable. Another school, equally critical of the credit boom of the 1920's, came from the left and was typified by a German Socialist, Rosa Luxemburg, who argued that not only was credit used to build capital stock and accumulate ever more capital on the part of economic elites, but it was also used to give workers a false sense of well being, increase the burden of risk on their and their children's shoulders, and accentuate their poverty in the event their fortunes, ever more wedded to those of their Masters, took a turn for the worse. An additional criticism was the contribution of great income inequalities to the resolution of the crisis, via lack of confidence, on the part of those on the receiving end of inequality, in the institutions benefiting those on the upper rungs, starting with banks.

I think most of us see more than a few grains of truth in both what Hayek and what Luxemburg were saying in the last great global credit crisis. And even a little Friedman. But most of us will agree that we see precious little analysis, on the part of our press elites, which reflects either of these two schools. So, as usual, we will be treated to more Friedmanite prose to the exclusion of everything else.

(And it's not true that American capitalism was in the ealry 30's back to it's normal self. It took a few years for the deflationary spiral to take root, but people generally acknowledge 1932-1933, the heart of the "early thirties," to be the bottom, starting to grow only in 1934. Merritt is just plain wrong here.)

One of the major reasons that America's 1929 financial crisis turned into a global economic slowdown was shortsighted policymaking, first by the U.S. Congress and then by America's main trading partners. The Smoot-Hawley tariff introduced in 1930 by a Republican senator from Utah and a fellow-Republican congressman from Oregon to protect the United States from both farm and industrial imports triggered a global trade war. Britain retaliated with its system of imperial preferences. The protectionism that spread rapidly made scores of millions jobless, homeless and hungry across the planet.

Ah....that's right. The problems that "reforms" (deregulation and liberalisation) brought us via the credit crisis can only be solved by more "reforms". It had to come, eventually.

The law of unintended consequences quickly made itself felt, with the United States arguably hit hardest by its own misguided policy. American banks had lent generously to European industries after World War I, and when the latter were denied their U.S. export earnings they could no longer service their debts. By 1933 almost 9,000 U.S. banks had failed.

Ah, 9,000 banks failed because of protectionism? Imagine that. Talk about magical thinking.

Well, it's a good thing we have free trade today, because otherwise another 9,000 banks would fail. What's that? They're failing anyway? Trade has little to do with it? Well, don't let that spoil an Englishman's argument for free trade.They've been at it since the Opium Wars...

Now even more than then, thanks to globalization, international trade is the key to economic health everywhere... if the world's great trading nations begin to erect barriers to one anothers' goods and services, then they'll be doing far more damage to the global economy than any financial crisis ever could, however enormous the banks' and investment houses' recent losses.

Maybe we should just leave trade rules as they are, to demonstrate once and for all that liberalisation impacts little in a global crisis of confidence, one that was predicted long ago by many of us here, much like Luxemburg, Hayek and their contemporaries almost a century ago. What matter import when workers can afford to buy what is imported? What matter export when workers abroad can't afford to buy what is exported?  The Depression is often used as a bugbear by advocates of Trade liberalisation. It's time to put that fear-mongering to bed.

If there is to be a resumption of tit-for-tat protectionism, then the signs are that it will start in the United States. The perception among many American voters is that "unfair" competition from low wage countries in Asia is robbing the U.S. of jobs. Similar resentments in Europe have of late seen the European Union resorting to anti-dumping actions against allegedly underhand practices in China...

Allegedly?

Melamine anyone?

The seeds of a fresh round of protectionism may already be sown, yet no economies benefit more from booming international trade than those of the rich countries. American labor unions complain about the 7 million jobs lost every year to foreign competition, but in fact the last 12 years have seen a net jobs gain in the United States with an extra 23 million people employed.

Hmmmm...any thoughts on income growth over those magical twelve years there? Oh yeah, that's right...median income for those Americans has barely budged since 1994, year after Nafta passed. All the benefits of liberlisation go to the elites, all the risks to workers, and yet another limey neo-liberal wonders why there is political pressure for fairer trade.

The reason isn't hard to find. America and Europe have the know-how and the retail markets that are the main drivers of new industrial bonanzas like that of China. On average, only 15 cents in every dollar of Chinese exports' added-value stays in China, and for goods like laptop computers and other electronic gizmos that share can drop as low as 3 to 4 percent. Experts talk of the "smiley curve," in which the upward parts of the smile are a product's design cost, brand value and retail profit and the lowest portion of the curve the actual manufacturing process.

Look no further than the long ongoing current account deficit in the United States to see the bankruptcy of this position. The world's largest economy borrowed cash, goods and services from everybod else for three decades to fuel domestic consumption bankrolled by easy credit, and the painful unwinding has begun and is scaring everyone. Yet Merritt still wants to talk about Smiley curves.

Talk about being out of touch...

As a counter point, continental Europe, which maintained far more of its industrial base, relatively speaking, than the US, has no current account deficit to speak of. And the impaired assets its banks have their respective books which are now unwinding? Mostly Anglo-american.

With luck, the weeks and months ahead will see containment of the panic that is making global financial markets so dangerous and unpredictable. Still more luck as well as good judgement will be needed to stop the crisis spreading to world trade. Let's hope the policymakers have learned the lessons of the "hungry thirties."

Luck...your side is going to need a lot of it in the future if you hope to stay relevant.