We are puzzled by the length and severity of the financial crisis and its effects on the real economy. We are also mesmerised by the possibility of parallels to the Great Depression. But at the same time we are sure that we have learnt the lessons of the Great Depression. We assume that we can avoid a repetition of the disasters of the deglobalisation that occurred in the 1930s.

The problem is that there are several different lessons from the Great Depression. They are confusing when we conflate them. Especially in the US, the Great Depression is usually identified with the stock market crash of 1929. Economists have two simple macro-economic policy answers to that kind of collapse. The first is the lesson that John Maynard Keynes already taught in the 1930s – in the face of a collapse in private demand, there is a need for new public sector demand, or for fiscal activism.

The second is the lesson above all drawn by Milton Friedman and Anna Schwartz in the 1960s. In their view, the Depression was the result of the Fed's policy failure in the aftermath of 1929. There was a massive monetary contraction, which was responsible for the severity of the downturn. In the future, central banks should commit themselves to providing extra liquidity in such cases.