Thursday 26 January 2012

The Great Depression

If you put five economists in a room and ask a question, you'll get seven definitive answers. The IMF seems to have covered all its bases by suggesting ever more stimulus for America, a little stimulus for the UK and austerity for PIGS.

Three economists on Newsnight debated the merits of Keynesian economics. The New Deal got its usual airing. What surprised was that they never seemed to point out that all the major combatants of world war two had a different approach to resolving the great depression. And all were cut short before the effects of whether they were a success or a failure could be realistically measured.

The Fascist Germans pursued arms production with a vengeance, but needed to have an export market to obtain the hard currency to buy the missing rubber, steel, copper and oil to feed the factories. So Germany's pre war boom was accompanied by frequent busts as it struggled to balance its economy. Germany funded its boom with a mixture of taxation, confiscation, restriction and promises. The Mefo bills his 12 billion RM of debt. Unemployment was tackled by removing women, by benefits for staying at home having children, and Jews and undesirables, by imprisonment and death, from the workforce. What would have happened to Germany if they hadn't embarked on war? The opinions at the time were that it was running such unsustainable spending that it would eventually be unable to continue funding its war machine and the cost of all the arms and armaments that it had created, and just implode. But at the same time Germany's 1930's recovery was seen as a miracle, similar to West Germany's.

The Japanese devalued. Abandoning the gold standard that had trapped them, the Japanese devalued the Yen by about 40% and Japanese exports, especially textiles, soared. Large Japanese stimulus spending was used for large drainage, irrigation, land reclamation. Arms spending was also great of course. The worlds third biggest navy had to come from somewhere. All this was funded by government issued bonds. The government issued bonds to the banks and the banks sold them to private investors. Japan was on a Keynesian road to recovery by 1933. Unfortunately in attempting to control inflation and an overheating economy, the finance minister , Takahashi Korekiyo, cut military spending and so was assassinated by militarist radicals that destroyed the Japanese during the 1930s/40s. It is not known if the Japanese economy could have been deflated successfully without setting off a second recession. It wasn't tried. Military spending followed Germany and went ever upwards. And as all countries found rearmament forced up the price of raw materials, so forced up the costs of rearmaments, so increased inflation..

The British Empire tried austerity. Austerity first was the UK solution. The decision to rejoin the gold standard in 1926 had caused harm to the only slowly recovering export trade. Wages and jobs were cut to make factories more competitive and led to unemployment and the general strike. And from then it just got worse. the Wall Street crash was followed up with government tax rises and wage cuts which just removed purchasing power from the economy and unemployment soared to 3 million at a time when the population was just 50 million and women were not working in many workplaces at all. Coming off the gold standard and trade tariffs with the empire helped, but did not end, the damage done, and the recovery was a very long time in coming. Chancellor Neville Chamberlin was a firm believer in controlling overspending and defending the value of the pound. His limited rearmanent policies had not created the booms experienced in Japan and Germany, but hadn't created the debts either. Great Britain could have not have fought long if it had gone into WW2 with an empty treasury.
Even so, with the stimulus in arms spending from 1938 unemployment still failed to fall significantly in the UK, probably as much of the money went on air defences. The aircraft industry, unlike the navy, requiring fewer, higher skilled, workers.

France tried everything in the late 1930's and failed at all of them. It reversed policies so many times it ended up with debt, austerity, unemployment, giant stimulus spending, frightful unproductivity, devaluation and shortages. France was in a terrible position to try and resist the German arms race, partly from having fallen into the depression last and pursued policies that meant it didn't emerge until last either. In 1936, in France, the Keynesian stimulus was spent on increased wages and social benefits rather than increased output and so caused ever increasing inflation that ate up all of those 1936 wage gains by 1938, without the necessary investment to lead to increased productivity. A reminder of how government spending in the 1970's didn't raise living standards, but actually decreased them through stagflation.

And the USA. The New Deal. Well, we know it worked. Sort of. The slowing of the stimulus spending in 1937 led to a big rise in unemployment. up by around 5% to 20%. The US economy stalled that led the right to complain that all the government spending had done was to push up wages, cause thousands of strikes at a time when workers were desperate for jobs, and lead to too high taxes on business. It all got very acrimonious. But what can't be denied is that stimulus had not ended the great depression of 1929. Even the orders for arms from Britain and France that poured in from 1938 didn't sort the economy. What would have happened if the war had not broken out? Could Roosevelt have just continued priming the pump indefinitely? If any country could, the USA could. But would it have worked? Or would each time government spending was reduced, economic measures fall?

World War Two turned all democracies into totalitarian, centralised, bureaucratic economies. Debt and consequences weren't an issue and so the answers to which countries were the most right in ending the depression can't be known.


BlackRaven said...

There is a good paper by Bernanke that shows that when a country came off the gold standard was the best predictor for when it started recovering, and I imagine informs his monetary policy.

The thing that isn't really discussed often is how anti-business FDR was, and how much of a negative effect that had. The rhetoric is not dissimilar to that from Obama's 'millionaires and billionaires' grandstanding.

Budgie said...

An intriguing notion - that "austerity" means spending what you earn.

Anonymous said...

I am now depressing....

I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.

Albert Einstein
US (German-born) physicist (1879 - 1955)

electro-kevin said...

A very interesting post.

Written as though world war was incidental to the ravages of economic depression around the globe. "We don't know how these methods would have panned out because war intervened."

War was an innevitability.

We're going the same way now.

This is a re-ordering of old world powers with new. Increased competition for limited global resources.

A factor which might limit things is the USA's overwhelming military might and technological advantage.

This is probably their last chance to re-assert themselves.

electro-kevin said...
This comment has been removed by the author.
Bill Quango MP said...

BlackRaven: Totally agree about the gold standard. His theory is virtually proved by Britain booming when coming off and collapsing when going back on.
Roosevelt needed a lot of votes for his second election and he wanted the isolationist ones. So he set up a commission to investigate whether big business had manipulated the USA into WW1. He didn't believe it for a moment, but he wanted to show business that if they kept opposing his new deal and labour reforms, they could be punished.
It all came back to bite him hard when he needed the help of business in gearing up the economy.
The Liberal view of the New Deal that you read in the Guardian from time to time is a very rose tinted one.

Budgie.I use modern terms.
In his own day Neville Chamberlain was fanatical about 'a balanced budget.' Something that I can recall being talked about on the nightly news along with 'balance of payments'
that are now no longer deemed important.
By contrast Churchill was considered a dangerous spending maniac who would destroy the nation's long term stability with his maverick spend and spend policies.
History has not been kind to Chamberlain who was really only following a policy similar to the current coalition's of spend only where you must, cut where you can.

electro-kevin said...

WW2 resulted in shifted borders, dismantled empires and new economic opportunities and markets for the victors.

The UK was occupied during WW2 by a foreign army and stripped of her empire - not to forget the virtue of many of her women too ! Our culture was to be changed forever to that of Rock and Roll, fast food, lack of deference, bling and laterly Gangsta culture.

The war didn't end. Though it stopped in 'Caucasia' it continued vicariously among brown and yellow people in Indo China, South America and in a stand off on the cold borders of western Europe.

After the war in Caucasia had ended the result was a vast wealth generating (and consuming) machine called America in the west.

That is what the war (another word for economic-sort-out-by procurement-of-other-people's-wealth) brought us.

Nick Drew said...

the USA's overwhelming military might and technological advantage. This is probably their last chance to re-assert themselves

agree with the last part, Kev but as to the first ...

there has indeed been a period of complete US dominance. I have written here before about the 1st Gulf War, which left the Russians absolutely gobsmacked: they hadn't believed the NATO air-land doctrine would actually work; but it did, on a very large scale

even we & the French have shown we can intervene at will in places like Libya, which still leaves the Chinese baffled

and the Russians' pathetic showing in Georgia 2008 was distinctly underwhelming

however ... a lot of folk have been watching and learning

if Iran - Iran ! - can divert a US stealth drone (ultra-secret) to land intact on one of its own airfields, I think we may safely infer that the USA could be in for a bit of a surprise if it ran up against, say, China (to name a country at random) when everyone was playing their A-game for real

(I rather imagine t'internet would cease to exist within the first 5 seconds, along with an awful lot else of what we rely upon for day-to-day existence)

of course the Chinese might not enjoy the experience much either: but I can't see a happy outcome for anyone (and this is without even resorting to the old bogey a of global thermo-nuke ruck, which is probably a thing of the past)

Bill Quango MP said...

Anon: A lot of words are being written about how the current situation is similar to 1939. It isn't though. But there are some ongoing lessons.

EK: WW2 was not inevitable. A great many people tried hard to prevent it.
It certainly sprang from the depression but its outbreak was just empire grabbing. Germany and Japan were not chasing scarce resources. Oil wasn't scarce. It was just not in their control. Both feared being cut off from supplies. But if neither country had been totalitarian militaristic warmongering countries those fears would not have materialised.

But glad you mentioned it as it is worth returning to the current Iran/Iraq/Nigeria/ Arab Spring/ Recession/China a bit later.

Incidentally, on any measure that you pick. Be it general health, lifespan, wealth, leisure time, freedom, consumer goods, transport, education, retirement, travel,holidays, hours of work, housing provisional, social care ... the west has been on an upwards trajectory that is unbroken since WW2. China, by contrast, goes backwards from WW1, sinks during the civil war of the 1940/50's. Collapses again during the cultural revolution, stagnates under communism and only slowly emerges from its 1890's level of wealth per/person when Mao dies and a limited free market is introduced.

Timbo614 said...

BQ, You are much better at your recent history and analysis of same than I. I can only view the developing situation from "New Eyes" naive and simplistic as that may be.

But (as could possibly be gleaned from my previous postings) I believe the game is up for modern economics and the current capitalist model. I really believe its that simple!

"The number are too big" is not just an arithmetic thing, it getting obvious surely to everyone with half a brain that the money-numbers being tossed around are just getting silly.

Now I know that macro numbers have always been big, but the current crop of numbers quoting multiple trillions nay, we are starting to look at 100s of trillions, are simply letting that cat out of the bag or at least putting it among the pigeons! At some point the whole shebang including banks, FED, governments, financiers of all ilk are going to have to admit that they just make it up(the money-numbers that is) as they go along, and that all debts are simply a mirage designed to benefit their system and class by diverting resources their way (not specifically money).

Forecasting the outcome of this if the entire populace of the world or countries started to see through the mirage, ala Occupy anything, is at best, err, difficult. But won't be good initially.

Global Jubilee is starting to look like the only way out and if anyone in the EU/ECB/IMF/IIF/FED etc had any sense at all or more importantly any regard for the progress of humanity, they would make a start now, probably with the PIIGS. The rest would follow automatically.

A Short lived apocalypse is surely better that 20-50? years of long term agony as the system fails and crumbles more and more, not just at the edges but eventually at the centre.

The process needs to be controlled not allowed to just spark off one day when a country has a fit of temper!

In addition the planet is being exhausted of easy to mine/pump/harvest energy and resources. This will bring war eventually if planet-wide human equality is not addressed. There is enough food we know from figures that we can "feed the world" we have the technology already.

Everyone on the planet needs heave a big sigh and accept that they are not going to have an American dream type lifestyle, it doesn't exist (it possibly never did) because the resources to create it don't exist, there is not enough stuff on the planet to make the goodies for all 7 billion of us, while at the same time engineering enough food and water. Unless of course half of us wipe out the other half, and that brings us back to war.

Sorry, it got to long but sometimes two sentences are not enough!

electro-kevin said...

"WW2 was not inevitable. A great many people tried hard to prevent it."

And yet it happened.

As for the golden era which followed in the west ? I agree. However, the same could not be said for those stuck in the east nor - for a long while - those countries vacated by the bankrupted colonialists.

The Americans went on to colonise without aparently colonising - Mickey Mouse and Coca Cola being their equivalent of our East India Trading Company and doing so without any obligation or pretence of trying to lift those countries.

Nick Drew is right about the morphing of modern warfare. I'd better get all of my photos on disc or printed in hard copy.

I could not live without Lady Sonia nor Nylon MILFs.

electro-kevin said...

PS - resources are always scarce. That's why such ingenious methods of production and extraction are created.

And why there are navies and air forces.

andrew said...

to me it is all about money
if you borrow money now you have to pay it back in the future.
if the money you spent was used wisely, you will be better off, otherwise worse off.

in a grim sense, it remains to be seen whether building lots of schools and hospitals and paying public sector employees more was a wise use of money. many here will say not, but the obvious is not always right.

Demetrius said...

Good and interesting post. But today is so radically different from then. Given the inbuilt assumptions from experience and how things were then embodied in a lot of economic theory one of our major failures of understanding is just how different the world is now. How goods are carried, how communications work, how marketing is done, how firms are managed (or not), how finance has become critical, how so much money leaks out of all economics and how no government is now "independent" but subject to external events and decision makers.

CityUnslicker said...

Its a great post BQ. History rhymes but rarely repeats.

diogenes said...

CU - it repeats the first time as history, the second time as farce....Marx?

We are getting the farce!

any views on AEP in the Bellygraph?

As a forecaster, he is a bit of a stopped clock, right every 12 hours or so.....but this is kinda eerie

Anonymous said...

Re Britain, it did a lot better (relatively) than the US - because it still had an Empire - Imperial Preference was the order of the day.

We haven't got an Empire, and vast new industries were arising in the 20s and 30s UK - automobiles, chemicals, electricals, aircraft.

Vast new industries have arisen in the last 30 years - computers, LCDs, mobiles - but none of them here.


Anonymous said...

Seems like you are supporting Keynesian stimulus ideas...

If you have a boom and bust, eventually given enough time with new technology etc the economy will recovery to the level it was before and more..

Nothing I have seen about the history of these attempts at smoke and mirrors has suggested a recovery any quicker than would have happened anyway.

During the 20's 30's and 40's was the begining of the motor vehicle era, by the 40's most people who needed them had them and had cheap fuel to run them, and as a result the economy was more efficient.
That had nothing what so ever to do with government and central bankers playing paper games.