While it is quite correct to draw parallels between the Crashes of 1929 and 2008, it is important to distinguish not only between the two eras but also between the different experiences of different nations within the same era. The simple, but not insubstantial, point of this post is that Europe’s Periphery is not in the same boat as the United States, or Britain, today; just like Britain found itself in a different kind of pickle, after 1929, compared to that of the United States. Moreover, keeping in mind these differences is important in order to devise strategies for dealing with the Crisis.
Take Britain in the post-Great War period, that eventually led to 1929 and the Great Depression. From the Great War’s end, Britain was experiencing diminishing investment and profitability. Having returned soon after the War to the Gold Standard, and at an exchange rate that was too high, Britain spent the 1920s trying to defend that high exchange rate by means of high real interest rates. So, on the one hand investment was bleeding away while, on the other hand, interest rates were being kept artificially high, in the context of maintaining the folly also known as the Gold Standard. The result was that Britain was riding a recessionary tide well before 1929 hit.
In sharp contrast, the United States was experiencing a boom, courtesy of the creation of the first web-like vertically integrated conglomerates (Edison, Ford etc.) whose financing required the first spate of large scale financialisation. The resulting cycle of high monopoly profits, low interest rates and high growth gave rise to the speculative bubble that burst so catastrophically in 1929. When that happened, the US and the British economies were hit just as hard. Nevertheless, the difference between the two experiences of the same Crisis was that, unlike the US, which never saw the recession-cum-depression coming, Britain was already tasting the bitter grapes of a slowdown in advance of the banking sector’s implosion.
Cut to the two decades preceding 2008: On the back of the tsunami of capital that was flowing into Wall Street daily, in order to finance the US deficits, which were in turn keeping the world exporters’ in business (thus closing the recycling cycle that I have described as the Global Minotaur), interest rates in the US were extremely low and financialisation proceeded more or less as it had done in the 1920s. The bubbles were, this time around, larger and more menacing (as Wall Street and the City of London were aided in their credit creation spree by massive computing power and exorbitantly complex derivative contracts) and, so, when these burst, the black holes that the taxpayer had to fill were bottomless. However, this time, Britain was more or less on the same page as the United States: unencumbered by a common currency (i.e. the Gold Standard in 1929 or the euro in 2008), Britain followed a similar trajectory to that of the United States: Massive bank bailouts that doubled public debt, partial nationalisation of banks, infinite support for the banks’ bondholders, and next to no relief for the ‘little’ people caught up in the cogs of negative equity, unemployment, poverty. Burnt by all their other investments, investors flocked to buy Treasuries and Gilts, keeping American and British interest rates at all time lows.
Meanwhile, Europe’s Periphery ended up in a situation not dissimilar to that Britain had found itself in in 1929. Just like Britain in the 1920s, Europe’s Periphery had entered into a currency union at a daft exchange rate. Moreover, to secure entry into that eurozone in the first place, each and every one of these nations had to impose upon itself a hidden, slow-burning recession: reductions in real wages and a substitution of investment away from manufacturing toward import-heavy services and real estate development (especially in countries like Ireland and Spain, or public works in places like Greece) were the price of admission that they paid.
Once inside the common currency, investment (excluding real estate development) began to fall rapidly, labour unit costs to rise, and the only thing that stood between them and a run on the countries’ bonds (the equivalent to a run on their currency once they had given up their currencies) was the ‘exorbitant exuberance’ of the large foreign banks which kept flooding the Periphery with the loans that masked the underlying recessionary process.
In short, just like Britain before 1929, Europe’s Periphery was being secretly buffeted by a slow-burning recession (which did not show up in their national statistics, courtesy of real estate, white elephant developments and unlimited credit) well before 2008. Labouring under an overvalued currency, their industries were being depleted in exchange for phoney growth in real estate and finance. And when the Crash of 2008 burst these bubbles, Europe’s Periphery, unlike Britain and the US, found itself in a situation very close to that which Keynes was trying to study in Britain in the 1930s.
As we all know, Britain responded quite swiftly, after 1929, by being the first to abandon the common currency (i.e. the Gold Standard) that was dragging it down years before the Crash. Today, the Periphery cannot do this. We no longer have currencies that we can de-link from Gold, from the dollar, from a foreign means of exchange and stock of value. Recreating currencies from scratch will be the equivalent of tearing down the European Union and all it symbolises , both economically and politically.
So, how should the Periphery respond to its existential crisis? Continuing with more loans and deeper austerity is, obviously, just as clever as it would have been for Britain to remain in the Gold Standard after 1929, and to try to ‘cut’ itself out of the Depression by putting the full magnitude of the adjustment’s burden on already impoverished working people. [This is precisely why the current debate on the size of the toxic EFSF-ESM is besides the point.] If the Periphery’s social economy is to survive, and not to turn into a desolate desert, deep structural changes are necessary within the eurozone. To those that suggest the ‘federal move’ as the ‘solution’, my reply is: Dream on! Even if the political will for more federation was in situ (which it is not), the process that would take us there is bound to be outpaced by the Crisis’ onslaught.
So? What should we do? It is my considered opinion that the only option that Periphery has that is today’s equivalent to Britain’s early exit from the Gold Standard is not an exit from the euro but a few decisive steps that will utilise existing EU and Eurozone institutions to unify the eurozone’s banking sectors, a large portion of eurozone public debt and, last but not least, aggregate and disaggregated investment strategies. In short, we need something like our Modest Proposal – click here and here.