Democratic revolution in Berlin, March 1848. After a prolonged economic recession, the year saw similar events across Western and Central Europe.

Historical parallels capture the collective imagination, and for good reason. They offer an intelligible way to understand present events and avoid past mistakes. The Vietnam War, for instance, continues to inform American decisions in Iraq and Afghanistan; it warns us of the perils of lengthy occupations, of public sensitivity to mounting casualties, and of the importance of exit strategies. But there is always the hidden danger of taking such parallels at face value. This is happening now, with the widespread comparison of the current economic crisis to the Great Depression. An ever-larger crop of pessimists warn that, like the 1930s, the coming years will see the arrival of three factors: widespread poverty, extreme popular discontent, and a reluctant Great Power — a perfect storm that previously resulted in failed states and hostile autocracies. These observers arrive at the conclusion that today’s crisis will be no different.

Yet the 1930s holds a historical appeal that, paradoxically, hinges on our limited scope of history. Most people, including the bulk of political scientists, know substantially less about the world before the 20th century. The Great Depression thus monopolizes attention simply because it is the one economic cataclysm in our short collective memory. But proximity in time does not mean proximity in facts. It pays to analyze other recessions to glean insights about future prospects.

A Crisis Brings Freedom

An interesting case is the 1848 recession, which unlike the 1930s, did not produce staunch dictatorships. Instead, this severe crisis heralded democratic reforms in the major powers of Austria, France, and Prussia, as well as smaller kingdoms like Bavaria, Saxony, Denmark, and Sardinia. To be sure, the degree of democratization varied across these countries, which were mired in absolute monarchies. For instance, barricading Berliners prompted King Frederick William IV to transition Prussia from an absolute monarchy to a constitutional one. By 1850, the new constitution guaranteed a two-house parliament and recognized basic individual rights, but the king still retained many powers - such as the right to veto with impunity.

Other countries underwent more dramatic changes. France put a permanent end to monarchic rule by installing the Second Republic, as King Louis-Philippe fled to England. In Italian lands, Venice also declared itself a republic, and, with Milan, expelled Austria – if only temporarily. And other states avoided unrest by “going preemptive,” instituting constitutional reforms well before the mobs gathered. Belgium, Denmark, and the Netherlands fall in this category, as well as some smaller German kingdoms.

These various paths to democratization formed under a sharp recession that was not completely unlike ours. Of course, the 1840s never had the proliferation of subprime mortgages and toxic assets that fed our present troubles. But both crises share the same chain of processes as many other recessions in history: all involve a trigger event or external shock that capitalizes on an unstable set of surrounding conditions. In 1848, the trigger was a poor harvest that led to a spike in grain prices from 1845 to 1847. This price shock, however, did not start a recession all by itself. The socioeconomic landscape of Europe was the combustible mix.

Across the Continent, monarchic rule had produced unequal societies in which lower-class households spent at least two-thirds of their incomes on food. Thus, when grain prices rose, the poorest members of society found themselves economically crippled. Added to this, the remarkably open European agrarian markets yielded unintended consequences. Wherever food shortages struck the hardest, traders imported grain from across Europe and the United States. Yet this market convergence meant that the grain-price shock only spread further. Even in regions with good harvests, households found that the Continent’s aggregate demand had propagated and made their foodstuffs expensive as well. As a result, the price shock hit nearly all of Europe: from France to Prussia, and from Norway to the Italian peninsula.

What happened next is the classic recession story, which economists Helge Berger and Mark Spoerer point out. Higher grain prices contracted Europeans’ discretionary income, crimpling their savings and investment. This curtailed the credit available to manufacturers, who then faced higher interest rates and a reduced ability to expand. The effects of this were quick and sharp. Prussian textile production declined 24 percent for 1847-1848, while French and Austrian industrial output shrunk 10 and 8 percent, respectively. As is the norm in modern recessions, businesses dealt with the downturn by firing workers, which further impacted aggregate discretionary income, and allowed the crisis to feed upon itself.

A similar tale unfolded in 2008. This time, the unstable conditions came from years of cheap credit, during which subprime borrowers indulged in variable-rate mortgages. Just like their 1800s counterparts were susceptible to changes in the food supply, risky financing exposed modern households to swings in the money supply. Such a tinderbox then needed the proper spark, which came in the form of interest-rate hikes during 2004-06. Despite their relative mildness, the hikes were enough to cripple the subprime borrowers, and trigger an onslaught of foreclosures. The problems that followed, of course, replicated those from 160 years ago: impaired investment, production drops, and massive layoffs.

The crises of 1848 and 2008 thus share more in common than it first seems. In particular, they share the distinction of being “household-driven,” especially during the early stages. Their initial shocks struck economically-vulnerable families first, and only then spread to other parts of the economy. Not all recessions follow this sequence. Consider the Great Depression, so frequently compared to our crisis. As historian Scott R. Nelson reminds us, its onset bears questionable resemblance to the present. In 1929, the stock market crash preceded the recessionary activity that later hurt households. In 2008, it was the other way around. First households suffered a spike in home foreclosures, and roughly a year later, capital markets imploded. The Great Depression also owed much to two other causes: bloated business inventories, and Germany’s unpaid war debts, which put pressure on British gold reserves. Today these conditions are obviously absent. Businesses are fairly adept at preventing surpluses, and the gold standard has been thoroughly abandoned. Despite the superficial similarities, we are hardly reliving the chain of events behind the Great Depression.