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The “Art of Central Banking” in yesterday and today’s crises

di - 27 Giugno 2013
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I’ll consider central banking in reference to two periods: the interwar banking crisis and Great Depression, and the recent financial crisis and Big Contraction. I’ll compare the depth of these crises in terms of output loss, and of central banks’ reaction: this will be done from a pretty unusual perspective, that is looking at their balance sheet. I’ll consider three specific central banks: US, UK and Italy’s. They are good examples of sometimes different approaches to financial crises.


Let’s start by giving some figures regarding the depth of the Great Depression, in terms of real output, in these major countries: the US, UK and Italy.

Table 1. GDP in the Great Depression


Sources: US: Bureau of Economic Analysis; UK: Bank of England; Italy: Mitchell (1981)

The Depression hit the US more severely, with a cumulative -29.5% in four years, than Britain or Italy: -5.9 and – 9.0%, respectively. After two years, their national product started recovering .
The recent Big Contraction, so far, has been less deep in the US, but the economies of the other two countries have been affected to an extent not far from the 1930s’. In addition, recovery has been so far tentative, sluggish, in the US, and almost non-existent in the other two countries.

Table 2. GDP in the recent Contraction

2013 (est)

Source: IMF(WEO)

It is now a well accepted view that, in an incoming recession, pro-reactive macroeconomic policies should stimulate aggregate demand by fiscal and monetary measures. To stay within our theme, we shall focus mainly on the second category of measures: on policies adopted by central banks in front of a deteriorating economic performance. But let me also briefly mention budget policies, which give an immediate idea of how differently governments have reacted to the crisis, in the interwar period and today.

Table 3. Government deficits, as % of national output[2], in the 1930s and in the recent turmoil

1930 +0.8
2008 -6.7
1930 +0.9
2008 -4.9
1930 -0.7
2008 -2.7
1931 -0.6
2009 -13.0
1931 +0.7
2009 -10.4
1931 -4.3
2009 -5.4
1932 -4.0
2010 -10.5
1932 -0.1
2010 -9.8
1933 -5.0
2010 -4.5
1933 -4.5
2011 -9.5
1933 +0.9
2011 -8.7
1933 -4.2
2011 -3.9
2012 -8.1
2012 -7.9
2012 -2.4

Sources: 1930s: US, Office of Management and Budget; UK and Italy, Mitchell (1981);   2000s:  IMF(WEO)

The US is a good example. In 1932, the worst year of the Great Depression, the US government deficit was a meager 4% of GDP (in the same year, the discount rate, in real terms, was at the prohibitive level of almost 14%[3]). By contrast, in 2009, the worst year of the recent contraction, the federal deficit was 13% of GDP (while the “federal funds” rate stood close to zero, and the Fed had started already in 2008 a policy of “quantitative easing”- QE, buying large quantities of securities and loans to stimulate the economy; this QE1 has been followed by QE2 in 2010 and more recently, in 2012, by QE3).
The UK kept in the 1930s an almost perfectly balanced budget.
The enormous expansion of government deficits in recent years, as compared to the different trend in the 1930s, is evidence of “Keynesian” activism, of faltering revenues due to recession, and of huge bail-outs of financial institutions.
Italy’s reaction in the recent crisis is remarkably different from US and UK’s, and shows a paradox: Italy has suffered the biggest yearly fall in output (among the three countries), even though the banking crisis has had a lesser relevance. The collapse of the Italian output has been due to structural, “real” weaknesses of its economy, not to financial distress. To address these long-dated structural problems the reduction of public debt – currently at more than 120% of GRP – is a priority. This explains the declining trend of the Italian government deficit in recent years and why, this year, the government aim is to stay below 3% of GDP.


1.  This text is based on two seminars recently held at the Buckingham University, UK and at LUISS-Guido Carli in Rome. I am grateful to Pierluigi Ciocca, Robert Pringle and Geoffrey Wood for their thoughtful comments.

2.  GDP, but GNP for UK and Italy in the 1930s.

3.  Historical Statistics of the United States.

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