Borrowing from the 1930s to solve the financial crisis

June 17, 2009

Alan Beattie, FT Economics Leader Writer.- Alan Beattie is world trade editor at the Financial Times, and author of the recent book “False Economy: A Surprising Economic History of the World”. He studied history at Oxford and economics at Cambridge, and worked as a Bank of England economist before joining the FT. The opinions expressed are his own. -

Those who forget history are condemned to listen to historians going on and on about it, a fate almost as bad as listening to economists doing the same. (And I write as a double agent with a foot in both camps attempting the delicate task of bringing the two together in my new book)

As we are perpetually being told, the current global financial crisis and recession is the kind of event that comes along only once or twice in a century. So now the immediacy of the panic has subsided, perhaps this is a good time to ask if we been applying the correct lessons from the past, and particularly from the 1930s, in dealing with this one.

On monetary policy, the answer is largely yes. On fiscal policy, it’s partly yes, but not where it matters most. And on trade, the response hasn’t been perfect but it’s not been disastrous. Yet.

First, monetary policy. Subtle differences in the way that the major central banks have gone about pumping cash into the financial system – with some, like the Bank of England, slower off the mark than others – should not conceal the basic fact that they have largely learned from the mistakes of the Great Depression. They have acted fast, used extraordinary tools when necessary and all costs headed off the hreat of deflation. No-one has made serious headway arguing that the world’s central banks should have been following markedly tighter monetary policy – though Angela Merkel has (wrongly) been criticising the ECB.

On fiscal policy, I come down on the side of the activists wanting government spending to take up the slack in private demand – at least those that are able to. The problem here is that the countries in current account surplus, which ought to be doing the bulk of the work, are not convinced they should. Germany in particular seems to think the world economy is closer to the situation in the 1920s or 1970s, where loose money and too much spending fed inflation, than the deflationary 1930s. It’s all very well searching for the lessons of the past, but you have to pick the right comparator.

On trade, we appear to have entered a sort of happy paradox of constructive hysteria. There has been so much howling about the dangers of returning to the protectionism of the 1930s that not many truly boneheaded anti-trade actions are actually being taken. (The auto and financial bailouts need watching carefully, though.) And monitoring by a variety of watchdogs including the World Trade Organisation, the World Bank and independent researchers should at least keep any such mistakes in plain view. As long as the global economy endures merely a nasty recession rather than a protracted full-blown depression, naming and shaming should have at least some deterrent effect.

There’s a long way to go before we come out of the crisis, and prematurely declaring it over could be one of the worst missteps that we take. But while we might well find new mistakes to make, so far the world’s policymakers are making a reasonable fist of avoiding some of the very worst of the last ones.


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