The 1931 central European banking crisis revisited

The 1931 banking crisis was the pivotal event of the Great Depression and thus also of the political crisis of the Weimar Republic. But it was for a long time very difficult to understand. Chancellor Brüning composed his memoirs in the 1930s but was unable to complete the part about the banking crisis because he felt he could not grasp what was going on. (The other event that could not be written at that stage was the history of the 1933 concordat, in other words, the story of the Zentrum party's vote for the Nazi Enabling Act.) In the end, he was able to complete the memoirs only after long discussions in New York with Jakob Goldschmidt, the head of the bank whose collapse set off the crisis. The early historians of the crisis could deal with one aspect of the highly complex problem but could not fit the different pieces together. Thus, Karl Erich Born wrote an excellent history of the banking crisis in which the external side of the story appears as a rather shadowy background, while Edward Bennett wrote an account of the financial crisis without going into the mechanisms of the bank problems. We often derive additional understanding from some contemporary event that seems to throw up analogies. For a long time, during the long postwar boom in which national financial systems were relatively self-contained and isolated from each other, such analysis conducted in the light of present knowledge caused us to have a false sense of security, that we knew the answers that had eluded the deluded contemporaries. Knut Borchardt once memorably spoke of “retrospective optimism about the solubility of problems,” or rückwärtsgewandter Problem-lösungsoptimismus. Indeed, financial crises were commonly held to have disappeared, at least as far as advanced industrial economies were concerned. Some quotations from prominent Harvard University economists are revealing. Benjamin Friedman wrote that “panics and other sharp discontinuities in financial markets” had “all but vanished since the establishment of the Federal Reserve System in 1914 and especially the Federal Deposit Insurance Corporation in 1934.” Lawrence Summers and Bradford DeLong concluded that “financial and monetary shocks are less important sources of depression than we had suspected.” The experience of the last ten years of financial globalization may have induced some more historical humility, however. Crisis, and especially financial crisis, has returned as a major theme of economic history.