By Robert J. Samuelson

                  Wednesday, October 7, 1998; Page A21 

                  It is hard to watch the turmoil of the world economy without thinking of the
                  Great Depression. There are disturbing parallels between what's happening
                  now and what happened at the start of the 1930s. Some dramatic
                  similarities may not mean much -- they may be only intriguing coincidences.
                  But some parallels, obscure and subtle, are worrisome -- they may signify
                  unfamiliar economic forces that we don't understand and can't fully control.

                  As a rule, I object to depression analogies. These are often trotted out
                  when the economy weakens. They usually represent a reckless misuse of
                  language. The Great Depression was not just a slump. It was the worst
                  economic calamity of the industrial era, dating to the 19th century.
                  Between 1929 and 1933, the output of the U.S. economy plunged 30
                  percent. Unemployment rose from 3 percent to 25 percent; for the 1930s,
                  it averaged 18 percent.

                  Nothing like that has happened since. In the nine postwar recessions, the
                  biggest annual loss of output was about 2 percent in the 1981-82 slump.
                  The highest annual jobless rate was 9.7 percent, also in 1982. Downturns
                  have inflicted hardship and financial loss. But they have not involved the
                  mass suffering or widespread collapse of the 1930s. Comparisons of
                  postwar economic distress with the Depression are typically so misleading
                  as to be almost immoral.

                  So, why the comparison now?

                  The answer is not that some obvious parallels, starting with stock market
                  booms, are striking. In the 1920s, the Dow Jones Industrial Average rose
                  344 percent from Oct. 27, 1923, to Sept. 3, 1929. The 1990s' gain was
                  only slightly less: 295 percent from its low on Oct. 11, 1990 to the peak of
                  9337.97 on July 17. Nor is the answer that, then as now, many Americans
                  thought they had entered a new era of uninterrupted prosperity.

                  A better explanation would be that many countries face genuine
                  depressions. In 1998 Indonesia's economy will shrink 15 percent, South
                  Korea's 7 percent and Thailand's 8 percent, estimates the International
                  Monetary Fund. Russia has been in a downward spiral for most of the
                  1990s. The human tragedy represented by these dry statistics is often vast.
                  Middle classes in countries such as Korea are being impoverished; in
                  Indonesia, people are returning to the subsistence existences they only
                  recently left.

                  But these tragedies, by themselves, do not evoke the Great Depression.
                  What justifies the comparison is the fact that the economic declines are
                  feeding on each other. The same thing happened in the 1930s. Typically,
                  countries recover fairly quickly from slumps. Interest rates drop and excess
                  inventories are sold; production revives. In the 1930s, that did not happen.
                  The crisis spread. One country's problems deepened another's. World
                  trade dropped (in physical volume) by 25 percent between 1929 and
                  1932. There was global deflation. Wheat prices dropped almost 50
                  percent between mid-1929 and late 1930.

                  Our understanding of the Depression has recently improved, thanks to
                  economic historians Barry Eichengreen and Peter Temin. They argue that
                  the gold standard disarmed the normal mechanisms of recovery. To
                  protect gold reserves (which could be demanded for paper money),
                  countries kept interest rates too high. Governments were too stingy in
                  providing more paper currency to banks facing depositor runs. As a result,
                  banks failed; the money supply, purchasing power and credit shrank. Only
                  when countries left the gold standard did their economies slowly revive.
                  Britain did so in 193l; the United States effectively did in 1933.

                  What's unsettling now is that a similar process -- capital flight -- is
                  transmitting economic declines around the world. Poor countries are losing
                  the dollars, yen and marks they use to finance global trade. To stem capital
                  flight, countries raise interest rates. Or they concede defeat and let their
                  currencies depreciate. Either way, their economies suffer. (A currency
                  depreciation makes imports and interest payments on dollar debts more
                  expensive.) Capital flight has now spread from Asia to Latin America and
                  much of the former Soviet bloc. Japan and China now suffer because they
                  trade heavily with the rest of Asia.

                  Together, these countries account for almost half the world economy. All
                  have entered recessions or face slower growth. This might not be
                  disturbing if the United States and Europe, representing about 40 percent
                  of the world economy, could compensate by increasing their economic
                  growth. That would aid global recovery. But it's not clear that they can or
                  will.

                  Capital flight of dollars from abroad into the United States does not
                  automatically stimulate the U.S. economy. The reason is that (and this is
                  simplified) the Federal Reserve regulates the U.S. money supply and credit
                  conditions. If the United States receives dollars from abroad, the Fed may
                  pump out fewer dollars to keep interest rates steady. Then, capital flight's
                  effect here is muted. The Fed has to raise money growth and cut interest
                  rates for the full impact to occur. The same is true of inflows of marks to
                  Germany. But the Europeans have not cut interest rates, and the Fed has
                  made only one tiny cut. However, even deeper cuts might induce only a
                  little extra economic growth.

                  What we may have is a process (capital flight), not easily understood or
                  controlled, that subtracts economic demand from one part of the world
                  without adding it to the remainder. The danger is a negative sum game:
                  Everyone loses. This is the story of the Great Depression. Attacks on
                  countries' gold stocks spread the slump and caused deflation (declining
                  prices) that obliterated production and profits. A bad omen: Deflation has
                  already appeared in global raw material prices (oil, foodstuffs, metals).

                  Still, the United States is a long way from anything resembling a
                  depression. The comparison is utterly far-fetched. In September, the
                  unemployment rate was 4.6 percent. Few economists predict a recession
                  for 1999. If one occurred, the Fed could cut interest rates. And world
                  leaders, at meetings this week of the IMF and World Bank, are discussing
                  plans to stem capital flight. What started unexpectedly might stop
                  unexpectedly. All this seems reassuring; then again, Americans in the early
                  1930s reassured themselves that their slump was normal and would soon
                  pass.