Is it the 30s - or the 70s?

"Whatever happens, we don't want to repeat the 30s." That has been the mantra of policy-makers since the financial crisis began. The last time the world had seen a banking crisis on this scale, the result had indeed been the Great Depression. But the reference point in thinking about the 1930s is always the horrendous experience of the US. We forget that in the UK, the Depression was not nearly as Great.

Nicolas Crafts and Peter Fearon remind us in the latest edition of the Oxford Review of Economic Policy that Britain's national output rose by 18% between 1929 and 1938. That's feeble. But in the US, output barely managed to grow at all (and the economy actually shrank, by more than 25%, between 1929 and 1933). The 1930s were also a much worse time to hold US stocks: the value of the US stock market fell by nearly 40% over the decade. In the UK, share prices in 1938 were "only" 12% lower than in 1929.

Why this trip down Memory Lane? Because the most important reason the UK avoided a US-style fall in output in the early 1930s was that it avoided lasting deflation. In 1938, the UK price level was almost exactly where it had been in 1929; in the US, prices were more than 25% lower. And the main reason we prevented prices from falling is that we left the gold standard in September 1931, which caused a 25% fall in the value of the pound against the dollar.

In that crucial sense, Britain has indeed repeated the experience of the 1930s - and that is good news. The question now facing the Bank's monetary policy committee is whether they have done too good a job of avoiding America's fate in the 1930s, to the point where we risk a repeat of the 1970s instead.

The minutes of the last Monetary Policy Committee meeting, released yesterday, show that the Bank thinks the target measure of inflation, CPI, could well reach 4% in the next few months, and is likely to remain above 3% for the rest of 2011. If so, the governor would end the year having written a total of 13 letters to the chancellor.

As I've written many times in the past, the Bank has some decent explanations for the consistent overshoot. It's become known as the "Lemony Snicket" defence: a series of unfortunate events, like rising import prices and the switches in VAT.

Interestingly, we tend to talk in similar terms about the stagflation of the 1970s, which we always blame on an "external shock" in the form of the Opec oil price rise. In fact, as Spyros Andreopoulos points out in a recent paper for Morgan Stanley, the downturn in the global economy happened before the big oil price hike, not afterwards. And subsequent oil price rises, in the 1990s and after, didn't produce stagflation at all.

He thinks that stagflation in the 1970s was only partly due to Opec and other "unusual events". More important was a long period of loose US monetary policy, which the rest of the economy was forced to follow, at least until the 1971 collapse of the Bretton Woods system, which indirectly linked other countries to the dollar. On this view, it was loose US and global monetary policy that generated the conditions that allowed Opec to raise prices as high as it did. The Fed then loosened policy even further, in response to the oil price rise, thereby laying the ground for the Great Inflation.

There are important differences between now and then - not least, the fact that, outside of the UK, prices are flat and even falling in many of the largest economies. But you have to say the similarities are interesting. (I will have more to say about today's rise in commodity prices, and what it means for the advanced economies, in a future post.)

In the past two years the UK has applied the lessons it learned in the 1930s, and once again shown its capacity to devalue its way out of deflation. But we should probably also get clear what the lessons of the 1970s are - in case we start to repeat them as well.