Their Party Crashed. Ours May Too.

Instead, 1920s financiers gave consumers an injection of the economic steroid known as credit. And the economy temporarily became extremely robust. Sales of automobiles, radios and other new products to people who couldn't actually afford them soared. The ratio of private credit to GDP nearly doubled between 1913 and 1929. During the '20s, short-term personal loans from personal finance companies ballooned by more than 1,200 percent.

But a steroid-induced burst of great strength is always likely to be followed by impotence. Sooner or later the limits of consumer credit are reached -- consumers find themselves with more debt than they can repay, sales decline and banks, left holding bad loans, begin to fail.

"Sooner or later" arrived in October 1929, as it has again in September 2008.

Today isn't an exact replay of the 1920s, but it's a pretty good rhyme. Over the last three decades, top-end tax rates have been slashed; unions' power has become diluted; top corporate pay has skyrocketed; the minimum wage has been allowed to fall in real terms and the average wage has flatlined. And the credit bubble on which the economy has been riding in recent years is vastly larger than the one in which Americans danced the Charleston and drank bathtub gin 80 years ago.

After a long period of less income inequality from the 1940s through the 1970s, inequality began to increase again in the 1980s and has continued to rise almost continually ever since. By 2005, income concentration slightly exceeded the levels of just before the Great Depression: The richest 1 percent of Americans were receiving nearly 22 percent of the nation's income, and the top 10 percent took in more than 48 percent.

Yet there are some significant differences between the 1920s and today. Some make our current situation more dangerous. These include today's huge federal budget deficits (compared with the more or less balanced budgets of the late 1920s) and the war in Iraq, which has undermined confidence in the administration and, along with other policies and the flood of federal red ink, makes a stimulus through a massive deficit difficult, if not impossible. There's also the trade imbalance: In the 15 years preceding the 1929 collapse, U.S. exports exceeded imports by $25 billion. Now the trade imbalance is decidedly in the other direction.

On the other hand, we learned a good deal from what happened in the Great Depression, so the consequences of a major collapse may be less severe. We came to understand that we live in an economy far removed from a state of nature and that the market can't be allowed to rule over us without any restraints. And although they've been weakened in recent years, we have in place many regulations and countercyclical programs from the New Deal, including unemployment insurance and Social Security.

Here's the main lesson the Great Depression taught us: Capitalism is the best economic system just as democracy is the best political system, but both contain inherent dangers that require checks and balances to ensure that they work properly. One of the most prominent dangers of capitalism is that income will become too concentrated at the top, undermining the functioning of a consumer-based economy. The fruits of this lesson were put into effect during the New Deal through higher taxes on the rich, support for unions to help working people get a larger share of the national income, social programs to aid the poor, and such regulatory agencies as the Securities and Exchange Commission. A system of regulated capitalism was in place and worked very well from World War II to 1980.

Then economic fundamentalism staged a revival -- and once again got us into a mess. The only thing that can begin to get us out of it is replacing it with the sort of reasonable, balanced policies that produced a long period of widespread prosperity through the middle of the 20th century.

Bottom line: The fundamentalists of the economy are wrong.

rmcelvaine@hotmail.com

Robert S. McElvaine, a professor of history at Millsaps College, is the author of "The Great Depression" and, most recently, "Grand Theft Jesus: The Highjacking of Religion in America."