Can the Great Depression help us fight the Great Recession?
Glen O'Hara |
Wobbly banks. Doubts about government credit. Chronic and rising unemployment, engendering a sense of hopelessness among the young. A second wave of economic crisis on the horizon.
This litany of woes would have been familiar in 1931. At that stage of what we now term the Great Depression, there were hopes that the worst was past. The Wall Street Crash of 1929 had to some extent been absorbed, and a sense of fragile confidence was returning. But then came the collapse of the Austrian Credit Anstalt Bank in May 1931, a run on other European banks, a catastrophic loss of confidence in any debts - anywhere - an American banking crash, and then the destruction of the sterling area and the gold standard. The world's economy, structurally weakened by debts and physical damage issuing from the First World War, deranged by a feverish boom, and having already struggled to breast a financial tsunami in 1929, just could not cope. The 'Devil's Decade' had begun.
We are not now faced with such a disaster - or, at least, not yet. But the Bank of England's Governor, Mervyn King, has recently termed our present economic travails 'the worst ever'. Bearing in mind just how alarming the situation became in the 1930s, and in the 1970s and early 1980s too for that matter, those words are an indicator of just how bad things might get if there is no co-ordinated action to meet the challenge.
The experience of 1929-32 contains clear lessons, which present policymakers would be foolish to ignore. The first: forget about inflation. There are vast reserves of unused labour and capital in Europe and America, let alone across the developing economies. The banks are in no position to inflate the money supply - quite the opposite. We need to follow the advice of John Maynard Keynes eighty years ago and print money. Ram it through the financial system, via dictations to nationalised banks if necessary. Take the chance to update our intellectual and physical infrastructure. Support jobs for men and women who would otherwise stand idle. Though long debates have raged about the effects of President Franklin Delano Roosevelt's 'New Deal', his closure and restructuring of the banks does seem to have refocused minds in just this manner.
The second lesson is the importance of acting in concert. There were fitful attempts at this during the early 1930s, before the Americans wrecked the World Economic Conference in 1933 by opposing any co-ordination of currency values to avoid competitive devaluations. Right now, we lack even the appearance of inter-governmental agreement and resolution. The London G20 summit of 2009 is the last time that governments signed up to any concerted reflationary action. World financial and economic authorities must now act together, shoring up the banking system with 'shock and awe' tactics and barrages of cash so vast that no amount of speculation could even hope to challenge them. If the markets expect a one trillion euro rescue fund, announce two trillion; if two, announce three. This is why Prime Minister David Cameron's belated call for the eurozone to employ a 'bazooka' of money is so welcome: it acknowledges both the scale of the crisis, and its likely resolution.
Some elements of the international response are welcome. The Bank of England's second round of Quantitative Easing fits Keynes' template perfectly: by buying government debt, it amounts to printing money. The measure may add one per cent or more to Gross Domestic Product over the next year. More rounds of QE are both likely and welcome: officials at the Bank, at least, seem to have learnt the lessons of the early 1930s. The European Central Bank is trying to at least hold interest rates at their present level, while attempting to persuade member states to build up a larger European Financial Stability Facility to fight off speculative challenges to eurozone governments' plans.
Elsewhere, though, elected governments are heading in precisely the wrong direction. The US Congress is presently attempting to assemble a kamikaze plan to slash spending. Greece and Italy are attempting cuts that almost certainly cannot be delivered, given the organisational capacity and history of central government in those countries. In the Greek case, the continuance of civil society, the Government and even governance itself are in question: middle class and public sector discontent seem likely to stall many of the reforms Athens has been forced to promise. In the UK, as growth slows and confidence drains away, each week seems to bring worse economic news. The prospect of the Coalition closing the whole structural deficit during this Parliament has receded rapidly.
It is highly likely that Europe and the United States will step away from the brink represented by the euro's collapse or, on the other side of the Atlantic, constant and chronic political battles over government debt. Berlin will probably take fright at the possible break-up of the euro and then move to secure its future, however tardily. A stronger European Treasury and Central Bank may forestall speculation and encourage greater international co-operation. A new Congressional and Presidential term in the US may refresh spirits and focus minds. American unemployment has begun to fall, however slow and uncertain that welcome turnaround seems.
But the deep-seated structural crises will remain. The euro will still strain to accommodate both strong northern and weaker southern economies. US politics may well remain frozen in a stand-off, perhaps between an increasingly Right-wing Senate and House and President Obama's enfeebled second term. Above all, governments may try competitively to deflate their way out of the impasse. Western elites remain wedded to a neo-liberal and anti-interventionist credo that is now outdated.
Whatever their faults, Keynes and FDR turned the intellectual and political tide and provided hope in the last crisis of this scale. Who will do so now?Please note: Views expressed are those of the author.