It is impossible to find parallels for the extent of this week's banking crisis since the Great Depression. But the implosions of the weekend do not even look like the American experience of depression, in which the country was swept by wave after wave of panic that wreaked widespread havoc by hitting small institutions exposed to local market conditions. Today's crisis, by contrast, is right at the heart of the financial system, and threatens a complex pattern of credit guarantees and insurance backstops that were touted as making the financial system failsafe.

Bankers, like everyone else, like to suck on a comfort blanket. In the middle of any episode of banking weakness or financial turmoil their oft-repeated claim is that they have learnt the right lessons from the Great Depression. It became an article of faith that a catastrophe of that magnitude could not occur again.

In particular, in the 1930s, monetary policymaking was paralysed. Out of that story came a simple lesson that all policymakers have absorbed from Milton Friedman and Anna Schwartz's monumental Monetary History of the United States, and from its central chapter on the Great Contraction. The policy recommendation is simple: central banks have a responsibility to not allow a bank collapse to be followed by a deflationary monetary contraction.