April 26, 2018
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Lessons from history

By Edwin Dean

Is our Great Recession a close cousin of the Great Depression that hit the world in 1929? There are indeed similarities between the two, as some analysts point out; but the differences are far more important. The most striking difference is that the Great Depression was immensely more severe than this recession.

Here is another significant difference: The origins of the Great Depression, and its severity, were due partly to bitter rivalry between the great powers of the day, in striking contrast to the cooperation seen during this recession. Indeed, this cooperation partly explains why the recession has been much less severe than the Great Depression.

The intense struggles between the great powers in the 1920s and 1930s are convincingly set forth by Liaquat Ahamed in his book “Lords of Finance.” The “Lords” were the central bank chiefs of the U.S., Britain, France and Germany, the four big powers of the day. Ahamed forcefully argues that rivalries among these four governments, and especially their central banks, were among the key causes of the Great Depression, though there also were other very important causes.

The Great Depression originated partly because France and Britain, victors in the 1914-18 World War, bitterly insisted that Germany — the loser — must fork over massive reparations for the damage it inflicted during the war. France throughout the 1920s persisted relentlessly to demand huge payments. Ahamed shows that the German economy simply could not bear the gigantic burden of these reparation payments. For this reason and others, Germany was an economic basket case during most of the 1920s, quite vulnerable to the slightest tremors in the international economy.

By 1927, the French economy had rebounded from its wartime disasters and France’s monetary unit, the franc, was among the strongest in the world. Funds were shifted to France from other countries, especially Britain, and soon the French central bank found itself holding massive assets in British pounds. The bank’s chief, Emile Moreau, threatened to convert $100 million of these assets into gold, a step that would have drained Britain’s central bank of a big part of its gold reserves. After months of tense negotiations, France finally backed down.

In 1930, with the depression well under way, the U.S. delivered a blow to international trade and finance by passing the Smoot-Hawley Act, drastically increasing U.S. tariffs on imports. This damaged the many European countries desperately trying to revive their falling exports. And — no surprise here — the Europeans soon retaliated by raising their own import tariffs, further choking off world trade.

A final example of destructive rivalry: In 1931, the impending failure of Austria’s largest bank, the Credit Anstalt, threatened Austria’s and Germany’s financial systems. The central banks of the other big powers failed for two months to mount a rescue package for the two countries. The French government actually tried to intensify Austria’s crisis by secretly encouraging French banks to pull money out of Austria.

Since the 2007 onset of this recession, and in sharp contrast to this history of destructive rivalry, the world’s economic powers have cooperated closely. Early in 2008, Central Bank chiefs from the U.S., Britain and many other countries jointly started to study the best ways to combat the financial crisis and the accompanying drops in output and employment. At the November 2008 summit of the G-20 powers — a group that includes China, India and other big emerging countries — a consensus emerged about how best to fight the recession.

Most major countries, in accord with this consensus, have pursued massive programs of economic stimulus, with emphasis on raising government spending to boost consumer and business spending. And central banks have eased their monetary policies dramatically, lowering interest rates and even offering loans directly to businesses.

Though many countries have raised their tariffs somewhat during the recession, they have so far avoided increases as drastic as those of the early 1930s. This cooperation helps explain why, by early 2009, the spectacular drops in output and employment ended or diminished. And also why fragile recoveries — though still modest in most countries — began in the second half of the year.

Who says we can’t learn from history?

Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues.

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