The author of the great book ‘Lords of Finance: The Bankers Who Broke the World’ Liaquat Ahamed has a comment on ft.com on the euro crisis and the parallels of the behavior of today’s European central bankers with that of the central bankers of the 1930s. I have been making the argument many times that we are in the process of making the same mistakes as we did in the 1930s – particularly in Europe. Ahamed agrees.
Here is Ahamed:
“The situation in Europe today bears an eerie similarity to that of Europe in the 1930s. Ironically, Germany was then in the position of the peripheral European countries today. It was weighed down with government debt because of reparations imposed at Versailles; its banking system was severely undercapitalised, the result of the hyperinflation of the early 1920s; and it had become dependent on foreign borrowing. It was locked into a rigid fixed exchange rate system, the gold standard, which it dared not tamper with for fear of provoking a gigantic crisis of confidence. And so when the Depression hit and international capital markets essentially closed down, Germany had no choice but to impose brutal austerity. Eventually, unemployment rose to 35 per cent.
Like today, in the 1930s there was one major economy in Europe doing well. It was France. While the rest of Europe was suffering, unemployment in France, as in Germany today, was in the low single figures. And France, again like Germany today, had large current-account surpluses and was in a financial position to act as the locomotive for the rest of Europe. But the French authorities of the 1930s, refusing to accept responsibility for what was happening elsewhere in Europe, would not adopt expansionary policies. Nor would they lend directly to Germany, fearing that they would be throwing good money after bad. The effect of French policy eventually brought down the whole financial system of western Europe”
I completely agree. The PIIGS are the Germany of the 1930s and Germany of today is France of the 1930s. In that regard it should be noted that despite France initially avoided being hard hit by the Great Depression, but the crisis eventually caught up with the French economy in 1931-32. Let that be a lesson for Merkel and Weidmann. Unfortunately today’s policy makers seem completely unaware of the parallels to the mistakes of the 1930s.
Maybe it is time for Liaquat Ahamed to write a book on today’s Lords of Finance – the central bankers who are in the process of killing the European economy.
For an overview of some of my posts on the 1930s see here.
Book recommendation of the week: I just received in the mail what seems to be a very interesting book on Exchange Rate Regimes of small states in twenties-century Europe. The book “Fixed Ideas of Money” by Tobias Straumann tells the story of why European small economies such as the Scandinavian countries, Belgium, the Netherlands and Switzerland have been so attracted to pegged exchange rate regimes. From what of the book I have read so far I must say it is very interesting and the book is full of interesting anecdotes from European monetary history. The book is extremely well-researched and it is clear that Straumann has had access to local sources for information about monetary policy in for example Denmark or Belgium in the 1930s.