Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.
The expectations for the meeting of the world leaders where huge, but when they gathered no agreement was reached on currency wars, commodity prices or demand stimulus. As it should be clear, I am not making a prediction about the forthcoming G-20 meeting, but just recalling the failed London Economic Conference, held in the summer of 1933, at the peak of the Great Depression. Contrary to conventional wisdom, which argues that the conference failed because it was unable to reestablish a credible Gold Standard, the main mistake in London was the incapacity to provide a framework for global expansion, in part as a result of British incapacity, in part as a result of American unwillingness as noted by Charles Kindleberger.
In the absence of such framework, the countries that pursued Keynesian policies domestically were able to recover faster. Those countries tended to get rid of the Gold Standard’s austerity rules and had a more undervalued currency. But depreciation and foreign markets were not at the center of the recovery. Fiscal policy and employment programs, and, thus, the domestic market, were central.
The examples of domestic market successful policies abound. In Latin America the recovery was largely possible because of a shift towards domestic markets, and an increase in manufacturing production, the so-called Import Substitution Industrialization. The depreciation was more important as a tool to protect domestic production than as an instrument for the recovery of external markets, which were depressed anyway. In Germany, remilitarization was an important part of the path to recovery. In the US the employment programs, in particular the Public and Civil Works Administration (PWA and CWA) and the willingness to accept deficits reduced the unemployment level from 25% in 1933 to 9% in 1936. Not full employment, but no small achievement either.
But it is still true that the recovery only became global when, as noted by John Kenneth Galbraith, “Hitler, having ended unemployment in Germany, had gone to end it for its enemies.” The lesson seems to be that before trying to fix the international monetary system, the G-20 countries, in particular Western Europe and the US, should agree to pursue more expansionary fiscal policies at home. The reorganization of the world’s monetary system in Bretton Woods, and Cold War military spending among other things, allowed for sustainable expansion after the war, but domestic and global demand expansion did not wait for the new financial architecture, and there is no reason why we should do it now. If not we will have to wait for an external event to get the global economy going again.