Category Archives: Great Depression

The 1930s were humanity’s darkest, bloodiest hour. Are you paying attention? – Jonathan Freedland. 

Even to mention the 1930s is to evoke the period when human civilisation entered its darkest, bloodiest chapter. No case needs to be argued; just to name the decade is enough. It is a byword for mass poverty, violent extremism and the gathering storm of world war. “The 1930s” is not so much a label for a period of time than it is rhetorical shorthand – a two-word warning from history.

Witness the impact of an otherwise boilerplate broadcast by the Prince of Wales last December that made headlines. “Prince Charles warns of return to the ‘dark days of the 1930s’ in Thought for the Day message.” Or consider the reflex response to reports that Donald Trump was to maintain his own private security force even once he had reached the White House. The Nobel prize-winning economist Paul Krugman’s tweet was typical: “That 1930s show returns.”

Because that decade was scarred by multiple evils, the phrase can be used to conjure up serial spectres. It has an international meaning, with a vocabulary that centres on Hitler and Nazism and the failure to resist them: from brownshirts and Goebbels to appeasement, Munich and Chamberlain. And it has a domestic meaning, with a lexicon and imagery that refers to the Great Depression: the dust bowl, soup kitchens, the dole queue and Jarrow. It was this second association that gave such power to a statement from the usually dry Office for Budget Responsibility, following then-chancellor George Osborne’s autumn statement in 2014. The OBR warned that public spending would be at its lowest level since the 1930s; the political damage was enormous and instant.

In recent months, the 1930s have been invoked more than ever, not to describe some faraway menace but to warn of shifts under way in both Europe and the United States. The surge of populist, nationalist movements in Europe, and their apparent counterpart in the US, has stirred unhappy memories and has, perhaps inevitably, had commentators and others reaching for the historical yardstick to see if today measures up to 80 years ago.

Why is it the 1930s to which we return, again and again? For some sceptics, the answer is obvious: it’s the only history anybody knows. According to this jaundiced view of the British school curriculum, Hitler and Nazis long ago displaced Tudors and Stuarts as the core, compulsory subjects of the past. When we fumble in the dark for a historical precedent, our hands keep reaching for the 30s because they at least come with a little light.

The more generous explanation centres on the fact that that period, taken together with the first half of the 1940s, represents a kind of nadir in human affairs. The Depression was, as Larry Elliott wrote last week, “the biggest setback to the global economy since the dawn of the modern industrial age”, leaving 34 million Americans with no income. The hyperinflation experienced in Germany – when a thief would steal a laundry-basket full of cash, chucking away the money in order to keep the more valuable basket – is the stuff of legend. And the Depression paved the way for history’s bloodiest conflict, the second world war which left, by some estimates, a mind-numbing 60 million people dead. At its centre was the Holocaust, the industrialised slaughter of 6 million Jews by the Nazis: an attempt at the annihilation of an entire people.

In these multiple ways, then, the 1930s function as a historical rock bottom, a demonstration of how low humanity can descend. The decade’s illustrative power as a moral ultimate accounts for why it is deployed so fervently and so often.

Less abstractly, if we keep returning to that period, it’s partly because it can justifiably claim to be the foundation stone of our modern world. The international and economic architecture that still stands today – even if it currently looks shaky and threatened – was built in reaction to the havoc wreaked in the 30s and immediately afterwards. The United Nations, the European Union, the International Monetary Fund, Bretton Woods: these were all born of a resolve not to repeat the mistakes of the 30s, whether those mistakes be rampant nationalism or beggar-my-neighbour protectionism. The world of 2017 is shaped by the trauma of the 1930s.

The international and economic architecture that still stands today was built in reaction to the havoc of the 1930s

One telling, human illustration came in recent global polling for the Journal of Democracy, which showed an alarming decline in the number of people who believed it was “essential” to live in a democracy. From Sweden to the US, from Britain to Australia, only one in four of those born in the 1980s regarded democracy as essential. Among those born in the 1930s, the figure was at or above 75%. Put another way, those who were born into the hurricane have no desire to feel its wrath again.

Most of these dynamics are long established, but now there is another element at work. As the 30s move from living memory into history, as the hurricane moves further away, so what had once seemed solid and fixed – specifically, the view that that was an era of great suffering and pain, whose enduring value is as an eternal warning – becomes contested, even upended.

Witness the remarks of Steve Bannon, chief strategist in Donald Trump’s White House and the former chairman of the far-right Breitbart website. In an interview with the Hollywood Reporter, Bannon promised that the Trump era would be “as exciting as the 1930s”. (In the same interview, he said “Darkness is good” – citing Satan, Darth Vader and Dick Cheney as examples.)

“Exciting” is not how the 1930s are usually remembered, but Bannon did not choose his words by accident. He is widely credited with the authorship of Trump’s inaugural address, which twice used the slogan “America first”. That phrase has long been off-limits in US discourse, because it was the name of the movement – packed with nativists and antisemites, and personified by the celebrity aviator Charles Lindbergh – that sought to keep the US out of the war against Nazi Germany and to make an accommodation with Hitler. Bannon, who considers himself a student of history, will be fully aware of that 1930s association – but embraced it anyway.

That makes him an outlier in the US, but one with powerful allies beyond America’s shores. Timothy Snyder, professor of history at Yale and the author of On Tyranny: Twenty Lessons from the Twentieth Century, notes that European nationalists are also keen to overturn the previously consensual view of the 30s as a period of shame, never to be repeated. Snyder mentions Hungary’s prime minister, Viktor Orban, who avowedly seeks the creation of an “illiberal” state, and who, says Snyder, “looks fondly on that period as one of healthy national consciousness”.

The more arresting example is, perhaps inevitably, Vladimir Putin. Snyder notes Putin’s energetic rehabilitation of Ivan Ilyin, a philosopher of Russian fascism influential eight decades ago. Putin has exhumed Ilyin both metaphorically and literally, digging up and moving his remains from Switzerland to Russia.

Among other things, Ilyin wrote that individuality was evil; that the “variety of human beings” represented a failure of God to complete creation; that what mattered was not individual people but the “living totality” of the nation; that Hitler and Mussolini were exemplary leaders who were saving Europe by dissolving democracy; and that fascist holy Russia ought to be governed by a “national dictator”. Ilyin spent the 30s exiled from the Soviet Union, but Putin has brought him back, quoting him in his speeches and laying flowers on his grave.

European nationalists are keen to overturn the view of the 1930s as a period of shame, never to be repeated.

Still, Putin, Orbán and Bannon apart, when most people compare the current situation to that of the 1930s, they don’t mean it as a compliment. And the parallel has felt irresistible, so that when Trump first imposed his travel ban, for example, the instant comparison was with the door being closed to refugees from Nazi Germany in the 30s. (Theresa May was on the receiving end of the same comparison when she quietly closed off the Dubs route to child refugees from Syria.)

When Trump attacked the media as purveyors of “fake news”, the ready parallel was Hitler’s slamming of the newspapers as the Lügenpresse, the lying press (a term used by today’s German far right). When the Daily Mail branded a panel of high court judges “enemies of the people”, for their ruling that parliament needed to be consulted on Brexit, those who were outraged by the phrase turned to their collected works of European history, looking for the chapters on the 1930s.

The Great Depression

So the reflex is well-honed. But is it sound? Does any comparison of today and the 1930s hold up?

The starting point is surely economic, not least because the one thing everyone knows about the 30s – and which is common to both the US and European experiences of that decade – is the Great Depression. The current convulsions can be traced back to the crash of 2008, but the impact of that event and the shock that defined the 30s are not an even match. When discussing our own time, Krugman speaks instead of the Great Recession: a huge and shaping event, but one whose impact – measured, for example, in terms of mass unemployment – is not on the same scale. US joblessness reached 25% in the 1930s; even in the depths of 2009 it never broke the 10% barrier.

The political sphere reveals another mismatch between then and now. The 30s were characterised by ultra-nationalist and fascist movements seizing power in leading nations: Germany, Italy and Spain most obviously. The world is waiting nervously for the result of France’s presidential election in May: victory for Marine Le Pen would be seized on as the clearest proof yet that the spirit of the 30s is resurgent.

There is similar apprehension that Geert Wilders, who speaks of ridding the country of ‘Moroccan scum”, has led the polls ahead of Holland’s general election on Wednesday. And plenty of liberals will be perfectly content for the Christian Democrat Angela Merkel to prevail over her Social Democratic rival, Martin Schulz, just so long as the far-right Alternative Fur Deutschland makes no ground. Still, so far and as things stand, in Europe only Hungary and Poland have governments that seem doctrinally akin to those that flourished in the 30s.

That leaves the US, which dodged the bullet of fascistic rule in the 30s – although at times the success of the America First movement which at its peak could count on more than 800,000 paid-up members, suggested such an outcome was far from impossible. (Hence the intended irony in the title of Sinclair Lewis’s 1935 novel, It Can’t Happen Here.)

Donald Trump has certainly had Americans reaching for their history textbooks, fearful that his admiration for strongmen, his contempt for restraints on executive authority, and his demonisation of minorities and foreigners means he marches in step with the demagogues of the 30s.

But even those most anxious about Trump still focus on the form the new presidency could take rather than the one it is already taking. David From, a speechwriter to George W. Bush, wrote a much-noticed essay for the Atlantic titled, “How to build an autocracy”. It was billed as setting out “the playbook Donald Trump could use to set the country down a path towards illiberalism”. He was not arguing that Trump had already embarked on that route, just that he could (so long as the media came to heel and the public grew weary and worn down, shrugging in the face of obvious lies and persuaded that greater security was worth the price of lost freedoms).

Similarly, Trump has unloaded rhetorically on the free press – castigating them, Mail-style, as “enemies of the people” – but he has not closed down any newspapers. He meted out the same treatment via Twitter to a court that blocked his travel ban, rounding on the “so-called judge” – but he did eventually succumb to the courts’ verdict and withdrew his original executive order. He did not have the dissenting judges sacked or imprisoned; he has not moved to register or intern every Muslim citizen in the US; he has not suggested they wear identifying symbols.

These are crumbs of comfort; they are not intended to minimise the real danger Trump represents to the fundamental norms that underpin liberal democracy. Rather, the point is that we have not reached the 1930s yet. Those sounding the alarm are suggesting only that we may be travelling in that direction – which is bad enough.

Two further contrasts between now and the 1930s, one from each end of the sociological spectrum, are instructive. First, and particularly relevant to the US, is to ask: who is on the streets? In the 30s, much of the conflict was played out at ground level, with marchers and quasi-military forces duelling for control. The clashes of the Brownshirts with communists and socialists played a crucial part in the rise of the Nazis. (A turning point in the defeat of Oswald Mosley, Britain’s own little Hitler, came with his humbling in London’s East End, at the 1936 battle of Cable Street.)

But those taking to the streets today – so far – have tended to be opponents of the lurch towards extreme nationalism. In the US, anti-Trump movements – styling themselves, in a conscious nod to the 1930s, as “the resistance” – have filled city squares and plazas. The Women’s March led the way on the first day of the Trump presidency; then those protesters and others flocked to airports in huge numbers a week later, to obstruct the refugee ban. Those demonstrations have continued, and they supply an important contrast with 80 years ago. Back then, it was the fascists who were out first – and in force.

Snyder notes another key difference. “In the 1930s, all the stylish people were fascists: the film critics, the poets and so on.” He is speaking chiefly about Germany and Italy, and doubtless exaggerates to make his point, but he is right that today “most cultural figures tend to be against”. There are exceptions – Le Pen has her celebrity admirers, but Snyder speaks accurately when he says that now, in contrast with the 30s, there are “few who see fascism as a creative cultural force”.

Fear and loathing

So much for where the lines between then and now diverge. Where do they run in parallel?

The exercise is made complicated by the fact that ultra-nationalists are, so far, largely out of power where they ruled in the 30s – namely, Europe – and in power in the place where they were shut out in that decade, namely the US. It means that Trump has to be compared either to US movements that were strong but ultimately defeated, such as the America First Committee, or to those US figures who never governed on the national stage.

In that category stands Huey Long, the Louisiana strongman, who ruled that state as a personal fiefdom (and who was widely seen as the inspiration for the White House dictator at the heart of the Lewis novel).

“He was immensely popular,” says Tony Badger, former professor of American history at the University of Cambridge. Long would engage in the personal abuse of his opponents, often deploying colourful language aimed at mocking their physical characteristics. The judges were a frequent Long target, to the extent that he hounded one out of office – with fateful consequences.

Long went over the heads of the hated press, communicating directly with the voters via a medium he could control completely. In Trump’s day, that is Twitter, but for Long it was the establishment of his own newspaper, the Louisiana Progress (later the American Progress) – which Long had delivered via the state’s highway patrol and which he commanded be printed on rough paper, so that, says Badger, “his constituents could use it in the toilet”.

All this was tolerated by Long’s devotees because they lapped up his message of economic populism, captured by the slogan: “Share Our Wealth”. Tellingly, that resonated not with the very poorest – who tended to vote for Roosevelt, just as those earning below $50,000 voted for Hillary Clinton in 2016 – but with “the men who had jobs or had just lost them, whose wages had eroded and who felt they had lost out and been left behind”. That description of Badger’s could apply just as well to the demographic that today sees Trump as its champion.

Long never made it to the White House. In 1935, one month after announcing his bid for the presidency, he was assassinated, shot by the son-in-law of the judge Long had sought to remove from the bench. It’s a useful reminder that, no matter how hate-filled and divided we consider US politics now, the 30s were full of their own fear and loathing.

“I welcome their hatred,” Roosevelt would say of his opponents on the right. Nativist xenophobia was intense, even if most immigration had come to a halt with legislation passed in the previous decade. Catholics from eastern Europe were the target of much of that suspicion, while Lindbergh and the America Firsters played on enduring antisemitism.

This, remember, was in the midst of the Great Depression, when one in four US workers was out of a job. And surely this is the crucial distinction between then and now, between the Long phenomenon and Trump. As Badger summarises: “There was a real crisis then, whereas Trump’s is manufactured.”

And yet, scholars of the period are still hearing the insistent beep of their early warning systems. An immediate point of connection is globalisation, which is less novel than we might think. For Snyder, the 30s marked the collapse of the first globalisation, defined as an era in which a nation’s wealth becomes ever more dependent on exports. That pattern had been growing steadily more entrenched since the 1870s (just as the second globalisation took wing in the 1970s). Then, as now, it had spawned a corresponding ideology – a faith in liberal free trade as a global panacea – with, perhaps, the English philosopher Herbert Spencer in the role of the End of History essayist Francis Fukuyama. By the 1930s, and thanks to the Depression, that faith in globalisation’s ability to spread the wealth evenly had shattered. This time around, disillusionment has come a decade or so ahead of schedule.

The second loud alarm is clearly heard in the hostility to those deemed outsiders. Of course, the designated alien changes from generation to generation, but the impulse is the same: to see the family next door not as neighbours but as agents of some heinous worldwide scheme, designed to deprive you of peace, prosperity or what is rightfully yours. In 30s Europe, that was Jews. In 30s America, it was eastern Europeans and Jews. In today’s Europe, it’s Muslims. In America, it’s Muslims and Mexicans (with a nod from the so-called alt-right towards Jews). Then and now, the pattern is the same: an attempt to refashion the pain inflicted by globalisation and its discontents as the wilful act of a hated group of individuals. No need to grasp difficult, abstract questions of economic policy. We just need to banish that lot, over there.

The third warning sign, and it’s a necessary companion of the second, is a growing impatience with the rule of law and with democracy. “In the 1930s, many, perhaps even most, educated people had reached the conclusion that democracy was a spent force,” says Snyder. There were plenty of socialist intellectuals ready to profess their admiration for the efficiency of Soviet industrialisation under Stalin, just as rightwing thinkers were impressed by Hitler’s capacity for state action. In our own time, that generational plunge in the numbers regarding democracy as “essential” suggests a troubling echo.

Today’s European nationalists exhibit a similar impatience, especially with the rule of law: think of the Brexiters’ insistence that nothing can be allowed to impede “the will of the people”. As for Trump, it’s striking how very rarely he mentions democracy, still less praises it. “I alone can fix it” is his doctrine – the creed of the autocrat.

The geopolitical equivalent is a departure from, or even contempt for, the international rules-based system that has held since 1945 – in which trade, borders and the seas are loosely and imperfectly policed by multilateral institutions such as the UN, the EU and the World Trade Organisation. Admittedly, the international system was weaker to start with in the 30s, but it lay in pieces by the decade’s end: both Hitler and Stalin decided that the global rules no longer applied to them, that they could break them with impunity and get on with the business of empire-building.

If there’s a common thread linking 21st-century European nationalists to each other and to Trump, it is a similar, shared contempt for the structures that have bound together, and restrained, the principal world powers since the last war. Naturally, Le Pen and Wilders want to follow the Brexit lead and leave, or else break up, the EU. And, no less naturally, Trump supports them – as well as regarding Nato as “obsolete” and the UN as an encumbrance to US power (even if his subordinates rush to foreign capitals to say the opposite).

For historians of the period, the 1930s are always worthy of study because the decade proves that systems – including democratic republics – which had seemed solid and robust can collapse. That fate is possible, even in advanced, sophisticated societies. The warning never gets old.

But when we contemplate our forebears from eight decades ago, we should recall one crucial advantage we have over them. We have what they lacked. We have the memory of the 1930s. We can learn the period’s lessons and avoid its mistakes. Of course, cheap comparisons coarsen our collective conversation. But having a keen ear tuned to the echoes of a past that brought such horror? That is not just our right. It is surely our duty.

The Guardian

What the 21st century can learn from the 1929 crash – Larry Elliott. 

As the summer of 1929 drew to a close, the celebrated Yale university economist Irving Fisher took to the pages of the New York Times to opine about Wall Street. Share prices had been rising all year; investors had been speculating with borrowed money on the assumption that the good times would continue. It was the bull market of all time, and those taking a punt wanted reassurance that their money was safe.

Fisher provided it for them, predicting confidently: “Stock markets have reached what looks like a permanently high plateau.” On that day, the Wall Street Crash of October 1929 was less than two months away. It was the worst share tip in history. Nothing else comes close.

The crisis broke on Thursday 24 October, when the market dropped by 11%. Black Thursday was followed by a 13% fall on Black Monday and a further 12% tumble on Black Tuesday. By early November, Fisher was ruined and the stock market was in a downward spiral that would only bottom out in June 1932, at which point companies quoted on the New York stock exchange had lost 90% of their value and the world had changed utterly.

The Great Crash was followed by the Great Depression, the biggest setback to the global economy since the dawn of the modern industrial age in the middle of the 18th century. Within three years of Fisher’s ill-judged prediction, a quarter of America’s working population was unemployed and desperate. As the economist JK Galbraith put it: “Some people were hungry in 1930, 31 and 32. Others were tortured by the fear that they might go hungry.”

Banks that weren’t failing were foreclosing on debtors. There was no welfare state to cushion the fall for those such as John Steinbeck’s Okies – farmers caught between rising debts and crashing commodity prices. One estimate suggests 34 million Americans had no income at all. By mid-1932, the do-nothing approach of Herbert Hoover was discredited and the Democrat Franklin Roosevelt was on course to become US president.

Across the Atlantic, Germany was suffering its second economic calamity in less than a decade. In 1923, the vindictive peace terms imposed by the Treaty of Versailles had helped to create the conditions for hyperinflation, when one dollar could be exchanged for 4.2 trillion marks, people carted wheelbarrows full of useless notes through the streets, and cigarettes were used as money. In 1932, a savage austerity programme left 6 million unemployed.

Germany suffered as the pound fell and rival British exports became cheaper. More than 40% of Germany’s industrial workers were idle and Nazi brownshirts were fighting communists for control of the streets. By 1932, the austerity policies of the German chancellor Heinrich Brüning were discredited and Adolf Hitler was on course to replace him.

Timeline of turmoil

It would be wrong to think nobody saw the crisis coming. Fisher’s prediction may well have been a riposte to a quite different (and remarkably accurate) prediction made by the investment adviser Roger Babson in early September 1929. Babson to the US National Business Conference that a crash was coming and that it would be a bad one. “Factories will shut down,” Babson predicted, “men will be thrown out of work.” Anticipating how the slump would feed on itself, he warned: “The vicious cycle will get in and the result will be a serious business depression.”

Cassandras are ignored until it is too late. And Babson, who had form as a pessimist, was duly ignored. The Dr Doom of the 2008 crisis, New York University Nouriel Roubini, suffered the same fate.

F Scott Fitzgerald described the Great Crash as the moment the jazz age dived to its death. It marked the passing of a first age of globalisation that had flourished in the decades before the first world war with free movements of capital, freedom and – to a lesser extent – goods. In the decade or so after the guns fell silent in 1918, policymakers had been trying to re-create what they saw as a golden period of liberalism. The Great Depression put paid to those plans, ushering in, instead, an era of isolationism, protectionism, aggressive nationalism and totalitarianism. There was no meaningful recovery until nations took up arms again in 1939.

In Britain, recovery was concentrated in the south of England and too weak to dent ingrained unemployment in the old industrial areas. The Jarrow march for jobs took place in 1936, seven years after the start of the crisis. It was a similar story in the US, where a recovery during Roosevelt’s first presidential term ended in a second mini-slump in 1937. Sir Winston Churchill, who lost a packet in the Crash, described the period 1914 to 1945 as the second 30 years’ war.

Only one other financial meltdown can compare to the Wall Street Crash for the length of its impact: the one that hit a climax with the bankruptcy of Lehman Brothers in September 2008. Without the Great Depression, there would have been no New Deal and no Keynesian revolution in economics. Roosevelt might never have progressed beyond the New York governor’s mansion in Albany. Hitler, whose political star was on the wane by the late 1920s, would have been a historical footnote .

Similarly, without the long-lingering effects of the 2008 crash, there would have been no Brexit, Donald Trump would still be a New York City builder and Europe would not be quaking at the possibility of Marine Le Pen replacing François Hollande as French president.

Not since the 1930s have there been such acute fears of a populist backlash against the prevailing orthodoxy. As then, a prolonged period of poor economic performance has led to a political reaction that looks like feeding back into a desire for a different economic approach. The early 30s share with the mid-2010s a sense that the political establishment has lost the confidence of large numbers of voters, who have rejected “business as usual” and backed politicians they see as challenging the status quo.

Trump is not the first president to urge an America-first policy: Roosevelt was of a similar mind after he replaced Herbert Hoover in 1933. Nor is this the first time there has been such a wide gulf between Wall Street and the rest of the country. The loathing of the bankers in the 20s hardened into a desire for retribution in the 30s.
According to Lord Robert Skidelsky, biographer of John Maynard Keynes: “We got into the Great Depression for the same reason as in 2008: there was a great pile of debt, there was gambling on margin on the stock market, there was over-inflation of assets, and interest rates were too high to support a full employment level of investment.”

There are other similarities. The 20s had been good for owners of assets but not for workers. There had been a sharp increase in unemployment at the start of the decade and labour markets had not fully recovered by the time an even bigger slump began in 1929. But while employees saw their slice of the economic cake get smaller, for the rich and powerful, the Roaring Twenties were the best of times. In the US, the halving of the top rate of income tax to 32% meant more money for speculation in the stock and property markets. Share prices rose sixfold on Wall Street in the decade leading up to the Wall Street Crash.

Inequality was high and rising, and demand only maintained through a credit bubble. Unemployment between 1921 and 1929 averaged 8% in the US, 9% in Germany and 12% in Britain. Labour markets had never really recovered from a severe recession at the start of the 20s designed to stamp out a post-war inflationary boom.

Above all, in both periods global politics were in flux. From around 1890, the balance of power between the great European nations that had kept the peace for three quarters of a century after the battle of Waterloo in 1815 started to break down. The Ottoman and Austro-Hungarian empires were in decline before the first world war; the US, Germany and Russia were on the rise.

More importantly, Britain, which had been the linchpin of late 19th-century globalisation had been weakened by the first world war and was no longer able to provide the leadership role. America was not yet ready to take up the mantle.

Stephen King, senior economic adviser to HSBC and author of a forthcoming book on the crisis of globalisation, Grave New World, says: “There are similarities between now and the 1920 and 1930s in the sense that you had a declining superpower. Britain was declining then and the US is potentially declining now.”

King says that in the 20s, the idea of a world ruled by empires was crumbling. Eventually, the US did take on Britain’s role as the defender of western values, but not until the 40s, when it was pivotal in both defeating totalitarianism and in creating the economic and political institutions – the United Nations, the International Monetary Fund, the World Bank – that were designed to ensure the calamitous events of the 30s never happened again.

“There are severe doubts about whether the US is able or willing to play the role it played in the second half of the 20th century, and that’s worrisome because if the US is not playing it, who does? If nobody is prepared to play that role, the question is whether we are moving towards a more chaotic era.”

Deflationary Disaster
There are, of course, differences as well as similarities between the two epochs. At this year’s meeting of the World Economic Forum in Davos, Switzerland, held in the week of Trump’s inauguration, members of the global business elite found reasons to be cheerful.

Some took comfort from technology: the idea that Facebook, Snapchat and Google have shrunk the world. Others said slapping tariffs on imported goods in an era of complex international supply chains would push up the cost of exports and make it unthinkable even for a country as big as the US to adopt a go-it-alone economic strategy. Roberto Azevêdo, managing director of the World Trade Organisation said: “The big difference between the financial crisis of 2008 and the early 1930s is that today we have multilateral trade rules, and in the 30s we didn’t.”

The biggest difference between the two crises, however, is that in the early 1930s blunders by central banks and finance ministries made matters a lot worse than they need have been. Not all stock market crashes morph into slumps, and one was avoided – just about – in the period after the collapse of Lehman Brothers.

Early signs from data for industrial production and world trade in late 2008 showed declines akin to those during the first months of the Great Depression. Policymakers have been rightly castigated for being asleep at the wheel while the sub-prime mortgage crisis was gestating, but knowing some economic history helped when Lehman Brothers went bust. In the early 30s, central banks waited too long to cut interest rates and allowed deflation to set in. There was a policy of malign neglect towards the banks, which were allowed to go bust in droves. Faced with higher budget deficits caused by higher unemployment and slower growth, finance ministers made matters worse by raising taxes and cutting spending.

The response to the Crash, according to Adam Tooze in his book The Deluge, was deflationary policies were pursued everywhere. “The question that critics have asked ever since is why the world was so eager to commit to this collective austerity. If Keynesian and monetarist economists can agree on one thing, it is the disastrous consequences of this deflationary consensus.”

At the heart of this consensus was the gold standard, the strongly held belief that it should be possible to exchange pounds, dollars, marks or francs for gold at a fixed exchange rate. The system had its own automatic regulatory process: if a country lived beyond its means and ran a current account surplus, gold would flow out and would only return once policy had been tightened to reduce imports.

After concerted efforts by the Bank of England and the Treasury, Britain returned to the gold standard in 1925 at its pre-war parity of $4.86. This involved a rise in the exchange rate that made life more difficult for exporters.

What the policymakers failed to realise was that the world had moved on since the pre-1914 era. Despite being on the winning side, Britain’s economy was much weaker. Germany’s economy had also suffered between 1914 and 1918, and was further hobbled by reparations. America, by contrast, was in a much stronger position.

This changing balance of power meant that restoring the pre-war regime was a long and painful process, and by the late 20s the strains of attempting to do so were starting to become unbearable in just the same way as the strains on the euro – the closest modern equivalent to the gold standard – have become evident since 2008.

Instead of easing off, policymakers in the early stages of the Great Depression thought the answer was to redouble their efforts. Peter Temin, an economic historian, compares central banks and finance ministries to the 18th-century doctors who treated Mozart with mercury: “Not only were they singularly ineffective in curing the economic disease; they also killed the patient.”

Skidelsky explains that in Britain, the so-called “automatic stabilisers” kicked in during the early stages of the crisis. Tax revenues fell because growth was weaker while spending on unemployment benefits rose. The public finances fell into the red.

Instead of welcoming the extra borrowing as a cushion against a deeper recession, the authorities took steps to balance the budget. Ramsay MacDonald’s government set up the May committee to see what could be done about the deficit. Given the membership, heavily weighted in favour of businessmen, the outcome was never in doubt: sterling was under pressure and in order to maintain Britain’s gold standard parity, the May committee recommended cuts of £97m from the state’s £885m budget. Unemployment pay was to be cut by 30% in order to balance the budget within a year.
The severity of the cuts split the Labour government and prompted the formation of a national government led by MacDonald. Philip Snowden, the chancellor, said the alternative to the status quo was “the Deluge”. Financial editors were invited to the Treasury to be briefed on measures being taken to protect the pound, and when one asked whether Britain should or could stay on the gold standard, the Treasury mandarin Sir Warren Hastings rose to his feet and thundered: “To suggest we should leave the gold standard is an affront not only to the national honour, but to the personal honour of every man or woman in the country.”

The show of fiscal masochism failed to prevent fresh selling of the pound, and eventually the pressure became unbearable. In September 1931, Britain provided as big a shock to the rest of the world as it did on 23 June 2016, by coming off the gold standard.

The pound fell and the boost to UK exports was reinforced six months later when the coalition government announced a policy of imperial preference, the erection of tariff barriers around colonies and former colonies such as Australia and New Zealand.

Britain was not the first country to resort to protectionism. The now infamous Smoot-Hawley tariff had been announced in the US in 1930. But America had a recent history of protectionism – it had built up its manufacturing strength behind a 40% tariff in the second half of the 19th century. Britain, as Tooze explains, had been in favour of free trade since the repeal of the corn laws in 1846. 

“Now it was responsible for initiating the death spiral of protectionism and beggar-thy-neighbour currency wars that would tear the global economy apart.”

Britain’s 1931 exit from the gold standard meant it secured first-mover advantage over its main rivals. For Germany, the pain was especially severe, since the country’s mountain of foreign debt ruled out devaluation and left Chancellor Brüning’s government with the choice between default and deflation. Brüning settled for another round of austerity, not realising that for voters there was a third choice: a party that insisted that national solutions were the answer to a broken international system.
The reason borrowing costs were slashed in 2008 is that central bankers knew their history. Ben Bernanke, then chairman of America’s Federal Reserve, was a student of the Great Depression and fully acknowledged that his institution could not afford to make the same mistake twice. Interest rates were cut to barely above zero; money was created through the process known as quantitative easing; the banks were bailed out; Barack Obama pushed a fiscal stimulus programme through Congress.

But the policy was only a partial success. Low interest rates and quantitative easing have averted Great Depression 2.0 by flooding economies with cheap money. This has driven up the prices of assets – shares, bonds and houses – to the benefit of those who are rich or comfortably off.

For those not doing so well, it has been a different story. Wage increases have been hard to come by, and the strong desire of governments to reduce budget deficits has resulted in unpopular austerity measures. Not all the lessons of the 1930s have been well learned , and the over-hasty tightening of fiscal policy has slowed growth and caused political alienation among those who feel they are being punished for a crisis they did not create, while the real villains get away scot-free . A familiar refrain in both the referendum on Brexit and the 2016 US presidential election was: there might be a recovery going on, but it’s not happening around here.

Authoritarian solutions

Internationalism died in the early 30s because it came to be associated with discredited policies: rampant speculation, mass unemployment, permanent austerity and falling living standards.

Totalitarian states promoted themselves as alternatives to failed and decrepit liberal democracies. Hitler’s Germany was one, Stalin’s Soviet Union another. While the first era of globalisation was breaking up, Moscow was pushing ahead with the collectivisation of agriculture and rapid industrialisation.

What’s more, the economic record of the totalitarian countries in the 30s was far superior to that of the liberal democracies. Growth averaged 0.3% a year in Britain, the US and France, compared with 3.1% a year in Germany, Italy, Japan and the Soviet Union.

Erik Britton, founder of the consultancy Fathom , says: “The 1920s saw the failure of liberal free-trade, free-market policies to deliver stability and growth. Alternative people came along with a populist stance that really worked, for a while.”

There is, Britton says, a reason mainstream parties are currently being rejected: “It is not safe to assume you can deliver unsatisfactory economic outcomes for a decade without a political reaction that feeds back into the economics.”

Economic devastation caused by the Great Depression did eventually force western democracies into rethinking policy. The key period was the 18 months between Britain coming off the gold standard in September 1931 and Roosevelt’s arrival in the White House in March 1933.

Under Hoover, US economic policy had been relentlessly deflationary. As in Germany – the other country to suffer most grievously from the Depression – there was a dogged insistence on protecting the currency and on balancing the budget.

The Great Depression ushered in isolationism, protectionism, aggressive nationalism and totalitarianism

That changed under FDR. Policy became both more interventionist and more isolationist. If London could adopt a Britain-first policy, then so could Washington. Roosevelt swiftly took the dollar off the gold standard and scuppered attempts to prevent currency wars. Wall Street was reined in; fiscal policy was loosened. But it was too late. By then, Hitler was chancellor and tightening his grip on power. Ultimately, the Depression was brought to an end not by the New Deal, but by war.

King says the world is already starting to become more protectionist in terms of movement of capital and labour. Trump has been naming and shaming US companies seeking to take advantage of cheaper labour in the emerging countries, while Brexit is an example of the idea that migration needs to be controlled.

The US supported the post-war global instutional framework: the UN, IMF and European Union, through the Marshall Plan. “It tried to create a framework in which individual countries could flourish,” King adds. “But I don’t see that [happening again] in the future, which creates difficulties for the rest of the world.”

So far, financial markets have taken a positive view of Trump. They have concentrated on the growth potential of his plans for tax cuts and higher infrastructure spending, rather than his threat to build a wall along the Rio Grande and to slap tariffs on Mexican and Chinese imports.

There is, though, a darker vision of the future, where every country tries to do what Trump is doing. In this scenario, a shrinking global economy leads to shrinking global trade, and deflation means personal debts become more onerous. “It becomes a vicious, self-fulfilling cycle,” Britton says. “People seek answers and find it in authoritarianism, populism and protectionism. If one country can show it works, there is a strong temptation for others to follow suit.”

This may prove too pessimistic. The global economy is growing by around 3% a year; Britain and the US (if not the eurozone) have seen unemployment halve since the 2008-09 crisis; low oil prices have kept inflation low and led to rising living standards.

Even so, it is not hard to see why support for the policy ideas that have driven the second era of globalisation – free movement of capital, goods and people – has started to fracture. The winners from the liberal economic system that emerged at the end of the cold war have, like their forebears in the 20s, failed to look out for the losers. A rising tide has not lifted all boats, and those who do not consider themselves the beneficiaries of globalisation have grown weary of hearing how marvellous it is.

The 30s are proof that nothing in economics is inevitable. There was eventually a backlash against the economic orthodoxies and Skidelsky can see why there is another backlash happening today. “Globalisation enables capital to escape national and union control. I am much more sympathetic since the start of the crisis to the Marxist way of analysing things.

“Trump will be impeached, assassinated or frustrated by Congress,” Skidelsky suggests. “Or he will remain popular enough to overcome the liberal consensus that he is a shit of the first order. After all, a lot of people agree with what he is doing.”

The Guardian

The Protectionist Who Nearly Wrecked America – Gil Troy. 

When Utah Senator Reed Smoot moved to Washington in 1903, he endured an even harsher welcome than Donald Trump’s.

This Mormon apostle, elevated in 1900, and first LDS senator had to battle anti-Mormon prejudice for four years until President Theodore Roosevelt bullied Republican senators into seating him formally. Smoot inspired what became a classic headline – “SMOOT SMITES SMUT” – with an anti-obscenity crusade that prompted the poet Ogden Nash to mock “Smoot of Ut.”

This priggish protectionist co-sponsored the 1930’s destructive, ultra-nationalist, anti-Free Trade, Smoot-Hawley Tariff. So, with apologies to Nash, because he wasn’t economically astute, “Smoot of Ut” made the Depression more acute.

In 1929, as the economy tanked, Smoot spearheaded the fight that would blacken his legacy—and cost him his Senate seat. Smoot pushed a puritanical, patriotic, protectionist tariff—with Sec. 305 banning the importation of obscene material. Smoot spent Christmas vacation reading “obscene” novels imported by foreigners, returning with a stack of “smutty” quotations. “In the classic manner of purity champions,” the historian Paul Boyer gibes, “he could not resist sharing the filth.” When Smoot proposed presenting his findings to a closed Senate session, reporters anticipated a “Senatorial stag party.”

Smoot and his co-sponsor Congressman Willis C. Hawley, the chairman of the House Ways and Means Committee, wanted to “throw their arms of protection” around American industry too. If the government made foreign goods more costly, they reasoned, Americans would buy American, boosting the economy. In words that sound familiar, Smoot said tariff opponents were spreading “propaganda from un-American and international sources.” He insisted: “No foreign country has the right to interfere.” Stirring America’s isolationist paranoia, he refused to “surrender our national prestige and power on the altar of internationalism.” Smoot did not “want to see any American industry swamped by foreign competition,” nor did he “wish to build a wall around this country so high as to practically shut off importation of foreign products… or unduly restrict the exportation of American products.”

The economic misery sharpened the tariff battle. One thousand and twenty eight economists signed a letter denouncing the bill. The banker Thomas Lamont, recalled “I almost went on my hands and knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff. That act intensified nationalism all over the world.”

General Motors’ Economic Director Graeme K. Howard telegrammed from Europe: “PASSAGE BILL WOULD SPELL ECONOMIC ISOLATION UNITED STATES AND MOST SEVERE DEPRESSION EVER EXPERIENCED.”

The Smoot-Hawley Tariff became law on June 17, 1930, raising taxes on 20,000 imported goods. Its obscenity provision defined “the moral sense of the average person” as the standard for determining exclusion, although there were exceptions for classics.

Thirty-three countries protested formally. France, Australia, India, even Canada, retaliated. European governments now struggled to get the gold they needed to pay off their World War I debts to America. In two years “U.S. imports dropped more than 40 percent,” the historian Amity Shlaes reports; unemployment jumped 16 percent. Beyond the specific damages, the bill rattled markets and confidence globally, suggesting, the MIT economist Charles Kindleberger noted, that “no one was in charge.” While some economists question whether the higher tariffs were that damaging, the economic and historic consensus is that the act proved that if you raise tariffs too high, retaliatory trade wars will choke American exports.

Franklin Roosevelt’s New Deal tidal wave of 1932 swept away Protectionist Republicans, sending Smoot back to Utah. Smoot died in 1941. By then, World War II had jumpstarted America’s recovery from this Great Depression exacerbated by the mainstreaming Mormon whose cultural Yahooism, narrow nationalism, and economic illiteracy upstaged his fight for religious freedom.

The Daily Beast