Historical Comparisons to the Great Depression and the Classical Gold Standard

MAJOR CRISES: HISTORICAL COMPARISONS TO THE GREAT DEPRESSION AND THE CLASSICAL GOLD STANDARD

Ronald Albers * and Lars Jonung ‡

6th Eurostat Colloquium on

"Modern Tools for Business Cycle Analysis: the lessons from global economic crisis" Luxembourg, 26th – 29th September 2010

Session Globalisation Effects on Business Cycle Analysis and Forecasting 3

* European Commission, ‡ Lund University, Directorate General for Economic and Financial Affairs Institute of Economic Research [email protected] [email protected]

comparisons should be treated with caution. There INTRODUCTION (1) are fundamental differences with earlier epochs A perfect storm. This is one metaphor used to concerning the structure of the economy, degree of describe the present global crisis. No other globalisation, nature of financial innovation, state economic downturn after World War II has been of technology, institutions, economic thinking and as severe as today's recession. Although a large policies. Paying due attention to them is important number of crises have occurred in recent decades when drawing lessons. around the globe, almost all of them have remained national or regional events – without a global impact. GREAT CRISES IN THE PAST

So the crisis of today has no recent match. (2) To The current crisis is the deepest, most synchronous find a downturn of similar depth and extent, the across countries and most global one since the record of the 1930s has to be evoked. Actually, a Great Depression of the 1930s. It marks the return new interest in the depression of the 1930s, of macroeconomic fluctuations of an amplitude commonly classified as the Great Depression, has not seen since the interwar period and has sparked emerged as a result of today’s crisis. By now, it is renewed interest in the experience of the commonly used as a benchmark for assessing the Great Depression. (4) While the remainder of this current global downturn. contribution is mainly based on comparisons with the 1930s, it is also instructive to note that in some The purpose of this chapter is to give a historical ways the current crisis also resembles the financial perspective to the present crisis. The first section crises of the classical pre-World War I gold discusses the similarities and differences between standard, in 1873, 1893 and in particular the 1907 the 1930s depression (with some reference to the financial panic. pre-World War I period) and the present crisis concerning the geographical origins, causes, There are clear similarities between the 1907-08, duration and impact, As both depressions were 1929-35 and 2007-2009 crises in terms of initial global, the transmission mechanism and the conditions and geographical origin. They all channels propagating the crisis across countries are occurred after a sustained boom, characterised by analysed. Next, the similarities and differences in money and credit expansion, rising asset prices and the policy responses then and now are mapped. high-running investor confidence, and over- Finally, a set of policy lessons for today are optimistic risk-taking. All were triggered in first extracted from the past. instance by events in the United States, although the underlying causes and imbalances were more A word a warning should be issued before making complex and more global, and all spread comparisons across time. Although the statistical internationally to deeply affect the world economy. data from previous epochs are far from complete and comparability is an issue, historical national In all three episodes, distress in the financial accounts research and the statistics compiled by sectors with worldwide repercussions was a key the League of Nations offer useful evidence for transmission channel to the real economy, this chapter. (3) Of course, any historical alongside sharp contractions in world trade. And in each of the cases examined, the financial distress at the root of the crisis was followed by a (1) This paper has benefitted from contributions by Lauri deep recession in the real economy. Kajanoja, Michal Narozny and Alessandra Tucci. Adam Kowalski and Christopher Smyth have provided statistical assistance.We thank Joost Jonker and participants of the CES workshop at the Katholieke Universiteit Leuven for (4) See for example Eichengreen and O’Rourke (2009), helpful comments and suggestions. The views expressed in Helbling (2009) and Romer (2009). The literature on the this paper constitute the personal views of the authors and Great Depression is immense. For the US record see for not the position of the European Commission or Lund example Bernanke (2000), Bordo, Goldin and White University. All errors and omissions are ours. (1998) and chapter 7 in Friedman and Schwartz (1963). A (2) The present crisis has not yet got a commonly accepted global view is painted in Eichengreen (1992) and James name. The Great Recession has been proposed. It remains (2001). A recent short survey is Garside (2007). For an to be seen if this term will catch on. overview of financial crises see Reinhart and Rogofff (3) See for example Smits, Woltjer and Ma (2009). (2009).

The 1907 financial panic bears some resemblance structural transformations and a strong boost to to the recent crisis although some countries in productivity. (5) Europe managed to largely avoid financial distress. This concerns the build-up of credit and the rise in The degree of global economic integration and the asset prices in the run-up to the crisis. This pattern size of international capital flows had fallen back is similar to the expansion of the 'shadow' banking significantly. The incomplete return to a gold- system in recent years (building on fast-rising exchange standard (but without the stabilising role information asymmetries on the back of financial of a financial centre equivalent to London) after innovations), and the important role of liquidity the First World War had been insufficient to scarcity at the peak of the panic. restore the credibility and the functioning of the international financial order to pre-1914 conditions In 1907, in the heyday of the classical gold (see Box I.2.1). The malfunctioning of the standard and during the first period of exchange system and controversies surrounding globalisation, countries were closely connected the German reparations as set out in the Versailles through international trade and finance. Hence, Treaty and modified in the 1920s were sources of events in US financial markets were transmitted international and financial tensions among many. rapidly to other economies. World trade and capital flows were affected negatively, and the The recession of the early 1930s deepened world economy entered a sharp but relatively dramatically due to massive failures of banks in short-lived recession, followed by a strong the US and Europe and inadequate policy recovery. See Graph I.2.1 comparing real GDP responses. A rise in the extent of protectionism during the crisis of 1907-08, the Great Depression (Graph I.2.2) and asymmetric exchange rate of the 1930s and the present crisis. adjustments wreaked havoc on world trade (Graphs I.2.4 and I.2.5) and international capital

Graph I.2.1: GDP levels during three global crises flows (Box I.2.1). Through such multiple 125 2007-2014 transmission mechanisms, the crisis, which first 120 1907-1913 emerged in the United States in 1929-30, turned 115 1929-1939 into a global depression, with several consecutive 110 years of sharp losses in GDP and industrial 105 production before stabilisation and fragile recovery 100 set in around 1933 (Graphs I.2.1 and I.2.3). 95 1907=100 90 1929=100 Graph I.2.2: World average of own tariffs for 35 85 2007=100 countries, 1865-1996, un-weighted average, per 80 cent of GDP

1234567891011 30 I Source: Smits, Woltjer and Ma (2009), Maddison (2007), World 25 Economic Outlook Database, Interim forecast of September 2009 and 20 own calculations. World War I World War I 15 In the run up to the crisis and depression in the 10 1930s, several of these characteristics were shared. 5

However, there were also key differences, notably 0 as regards the lesser degree of financial and trade 1865 1885 1905 1925 1945 1965 1985 integration at the outset. Source: Clemens and Williamson (2001). Comment: As a rule average tariff rates are calculated as the total revenue from import duties divided by the value of total imports in the same year. By the late 1920s, the world economy had not See the data appendix to Clemens and Williamson (2001). overcome the enormous disruptions and destruction of trade and financial linkages resulting High frequency statistics suggest that the recession from the First World War, even though the in the 1930s lasted longer and that it spread at a maturing of technologies such as electricity and slower speed across major economies than the the internal combustion engine had led to

(5) Albers and De Jong (1994).

Graph I.2.3: World industrial output during the Great Depression and the current crisis 100 April 2008 - December 2009 June 1929=100 90 April 2008=100

80 June 1929 - August 1933 70

60 1 3 5 7 9 111315171921232527293133353739414345474951

Months into the crisis Source: League of Nations Monthly Bulletin of Statistics from Eichengreen and O'Rourke (2009) and ECFIN database.

current crisis. Today's collapse in trade, fall in some regions of the world (parts of Asia, the asset prices and downturn in the real economy are Soviet Union, and South America to a degree) was faster and more synchronous than during any larger in the 1930s, as it had been in 1907-8. (6) previous global crisis. The high speed of Whereas in the 1930s, core and peripheral information via new communication technologies countries in the world economy tended to be and the unprecedented degree of real and financial affected in roughly equal proportions, in the global integration partly account for this. Also, the current crisis, the most negative impacts on the speed of financial innovation and the extent of real economy did not necessarily occur in the leverage made for sharp adjustments when countries at the origin of the crisis, but in some financial markets turned down. emerging economies where growth was highly dependent on inflows of foreign capital, emerging Graph I.2.4: The decline in world trade during the crisis of 1929-1933 Jun (1929 = 100) 110 Graph I.2.5: The decline in world trade during the May Jul crisis of 2008-2009 100 Apr (2008 = 100) 110 90 Mar May Apr Aug 100 80 90 70 Feb Jun 80 Mar 60 Sep 70

Jan 60 Jul

Feb Oct

Dec Aug Jan Nov

Dec Notes: Light blue from Jun-1929 to Jul-1932 (minimum Jun-1929); dark blue from Aug-1932. Nov Sep Source: League of Nations Monthly Bulletin of Statistics from Eichengreen and O'Rourke (2009). Oct Notes: Light blue from Jun-1929 to Jul-1932 (minimum Jun-1929); dark blue from Aug-1932. Based on the latest indicators and forecasts, the Source: League of Nations Monthly Bulletin of Statistics from Eichengreen and O'Rourke (2009). negative impact of the Great Depression appears more severe and longer lasting than the impact of Europe today being the best example (see the present crisis (Graphs I.2.1). Moreover, recent Chapter II.1). trade and economic activity data show a quite fast rebound in the current crisis, more reminiscent of the 1907 episode than of the protracted slide during the Great Depression. Also, partly due to the political context, the degree of decoupling in (6) Presently, only some mostly emerging economies, notably China, have managed to partly decouple.

Box I.2.1: Capital flows and the crisis of 1929-1933 and 2008-2009

Capital mobility was high and rising during the As a result the international capital market classical gold standard prior to 1914. An collapsed during the Great Depression. This was international capital market with its centre in one channel through which the depression spread London flourished during this first period of across the world. globalisation. See Graph 1 which presents a stylized view of the modern history of capital During the present crisis there has hardly been any mobility as full data on capital flows are difficult to government intervention to arrest the flow of find. capital across borders. However, the contraction of demand and output has brought about a sharp

Graph 1: A stylized view of capital mobility, 1860-2000 decline in international capital flows. A very similar picture appears concerning net capital flows to emerging and developing countries in Graph 2. Private portfolio investment capital is actually projected to flow out of emerging and developing countries already in 2009.

Graph 2:Net capital flows to emerging and developing economies, 1998-2014, percent of GDP 3.5 3.0 2.5 2.0 1.5 Source: Obstfeld and Taylor (2003, p. 127). 1.0 0.5 World War I interrupted international capital flows 0.0 severely. By 1929 the international capital market -0.5 -1.0 had not returned to the pre-war levels. The Great 1998 2000 2002 2004 2006 2008 2010* 2012* 2014* Depression in the 1930s contributed to a decline in cross-border capital flows as countries took S ou rce : IMF W EO Apr il 20 09 DB ( * ar e es tim ates ) measures to reduce capital outflows to protect their Once the recovery from the present crisis sets in, foreign reserves. Following the 1931 currency cross-border capital flows are likely to expand crisis, Germany and Hungary for example banned again. However, it remains to be seen if the present capital outflows and imposed controls on payments crisis will have any long-term effects on for imports (Eichengreen and Irwin, 2009). international financial integration.

Another crucial difference is that the 1930s were rate of unemployment (see Chapter II.3), an characterised by strong and persistent decreases in increase in unemployment and a fall in resource money and credit and in the overall price level, utilisation similar to that of the 1930s can be causing a sharp deflationary impulse predicated by avoided today due to the workings of automatic the restrictive policies pursued. Despite rapid stabilisers and the stronger counter-cyclical deleveraging and a strong fall in inflationary policies pursued on a world wide scale (see Graph pressures, a deflationary shock of similar global I.2.6). magnitude has not emerged in the current crisis, despite severe monetary contractions in several The current downturn is clearly the most severe countries. since the 1930s, but still less severe and shorter measured in terms of decline of production. Finally, the 1930s witnessed mass unemployment Regarding the degree of sudden financial stress, at an unprecedented scale, both in the US where and the sharpness of the fall in world trade, asset the unemployment rate approached 38% in 1933 prices and economic activity, the current crisis has and in Europe where it reached as much as 43% developed faster than during the Great Depression in Germany and more than 30% in some other of the 1930s. countries. Despite expected further increases in the

As seen from Graphs I.2.4 and I.2.5, the initial Before 1914 the world monetary system was based decline in world trade was larger in the current on gold. The classical gold standard of the early crisis than in the 1930s. (7) On the other hand, 20th century was a period of fairly high growth, stabilisation and recovery appear to be quicker in stable and low inflation, large movements of the current crisis than in the 1930s. If the latest capital and labour across borders and exchange Commission forecasts (European Commission rate stability. The system was prone to instability, 2009a and 2009b) are broadly confirmed, this will but its rules-based characteristics and the be a crucial difference between the present crisis increasing depth of globalisation both helped and that of the 1930s. transmit negative shocks and helped support the upturn.

Graph I.2.6: Unemployment rates during the Great Depression and the present crisis in the US and After World War I, there were only partly 40 Europe 35 successful attempts to restore the gold standard, % following the devastating experience of high 30 inflation and in some countries hyperinflation 25 across European countries during and immediately 20 1929-1939* after the first World War. 15 USA 10 2008-2011 USA - forecast By 1929, more than 40 countries were notionally 5 Europe** Euro area - forecast back on gold. However, the interwar gold-exchange 0 1234567891011 standard never performed as smoothly as the Years into the crisis classical gold standard due to imbalances in the Note: * 1929-1939 unemployment rates in industry. ** BEL, DEU, DNK, FRA, GBR, NLD, SWE. Source: Mitchell (1992), Garside (2007) and AMECO. world economy in the aftermath of the First World War, problems with the German reparations, unrealistic parities and a lack of policy consensus Still, substantial negative risks surround the on the rules to follow. Political tensions hindered outlook. They relate to the risks from the larger international cooperation and solutions. degree of financial leverage than in the 1930s, the workout of debt overhangs, not least on the fiscal In the first years of the downturn after 1929 there side, which are higher than witnessed in the was a broad consensus on the policies to follow. previous crises studied, and the resolution of Initially, the defence of the fixed rate to gold was a global imbalances that were among the underlying fundamental tenet of central bankers who focused factors shaping the transmission and depth of the on external stability. Governments were pursuing current crisis (see Chapter II.4). balanced budgets, partly for fear of loosing gold reserves. In this way, the policy consensus implied pursuing deflationary policies which became a 2.1. THE POLICY RESPONSE THEN AND NOW mechanism to spread and deepen the depression across the world. There is a broad agreement among economists and economic historians that a procyclical An important reason why the downturn in macroeconomic policy response was the major economic activity in the US in 1929 turned into a factor contributing to the gravity and duration of deep global recession was that the authorities the global depression in the 1930s. The procyclical allowed the development of a prolonged crisis in policy measures taken by US and European the banking and financial system by not taking governments in the early 1930s can only be sufficient supportive measures in due time. The understood by reference to the prevailing policy crisis in the financial system spread eventually to thinking based on the workings of the the real economy, contributing to falling gold-exchange standard system of the late 1920s. production and employment and to deflation, making the crisis in the financial sector deeper via adverse feedback loops. The workings of the

incomplete gold-exchange standard worsened the (7) See Francois and Woerz (2009) for a brief analysis of the situation through a replication of deflationary present decline in trade. policies elsewhere in the world. The decline in

economic activity and a protectionist backlash economies via raised tariffs, the creation of induced a fall in capital flows. economic blocks, the use of import quotas, exchange controls and bilateral agreements By the summer of 1931, the European economy (Graph I.2.2). In June 1930, the US Senate passed was under severe stress from falling prices, lack of the Hawley-Smoot Tariff Act, which raised US demand and accelerating unemployment and import duties to record high levels. This step events in the US. This had a substantial negative triggered retaliatory moves in other countries. impact on the banking system, in particular in Even Great Britain – after 85 years of promoting Austria and Germany, where banks had close free trade – retreated into protectionism in the relations with industry. Deflationary pressure, autumn of 1931, forming a trade block with its rising indebtedness and uncertain prospects of traditional trade partners. manufacturing industry led to debt deflation and threatened the solvency of many European banks. The unweighted world average own tariff for The fall of the Creditanstalt in May 1931 – the 35 countries rose from about 8% in the beginning biggest bank in Austria – became symbolic of the of 1920s to almost 25% in 1934. Graph I.2.2 situation in the banking sector at that time. demonstrates that the interwar years were quite Germany's commercial banks were soon facing a different from the pre-World War I classical gold confidence crisis. The critical situation of the standard and the post-World War II years. banking sector in Germany spilled over to other countries. Turning to the recession of today, the scale and speed of the present expansionary policy response In September 1931, Great Britain was the first (see Part III) is conceivably the most striking country deciding to abandon the gold standard. feature distinguishing the current crisis from the The value of sterling fell immediately by 30%. Great Depression. The size of automatic stabilisers Some 15 other countries left the gold standard and of fiscal stimulus is much greater now than in soon afterwards, mostly the ones with close links the 1930s. Moreover, apart from massive liquidity with the British economy like Portugal, the Nordic injections into the financial system, several major countries and British colonies. Other European financial institutions have not been allowed to fail countries – Belgium, the Netherlands and France – by means of direct recapitalisation or partial remained on their exchange parity until late 1936. nationalisation. All these measures have helped Subsequently, it took much longer for them to get avoid a financial meltdown. out of the recession than for countries that left gold earlier. (8) Monetary policy during the recent crisis has been extremely expansionary due to swift policy rate In April 1933, President Roosevelt took the US off cuts across the world and with policy rates now the gold standard, paving way for a recovery. This close to zero. This is a major difference to the marked a departure from the orthodox policies still 1930s when central bank policy responded in a pursued in the early years of his presidency. The procyclical way. years 1934-36 witnessed remarkable growth of the US economy. However, when fiscal stimulus In sharp contrast to the 1930s, fiscal polices in the introduced in 1936 was withdrawn in 1937 and current crisis have been expansionary to an monetary policy was tightened for fear of looming unprecedented degree in the US, in Europe and in inflation, the economic situation worsened again, other countries. Budget deficits as a share of GDP and these policies were soon reversed. and government debt ratios have soared at an extent unmatched in peacetime. Another procyclical policy response was the sharp rise in the degree of protection of domestic World War II served as the final exit strategy out of the Great Depression - sadly to say. The mobilisation effort brought about full employment (8) Countries that left the gold standard early were better not only in the US but throughout the world. protected against the deflationary impact of the global Today proper exit strategies have yet to be economy. Thus, their recovery came at an earlier stage. See for example the comparison between the US and the formulated and implemented (see Chapter III.4). Swedish record in Jonung (1981). These exit strategies are crucial to preclude a

double-dip growth scenario if the stimuli are involved in the design of policy measures to withdrawn too early on the one hand, and to evade reduce the impact of the present crisis. The IMF public debt escalation and the return of high and the GATT (predecessor of the WTO) were inflation if expansionary policies are in place too actually formed after the Second World War as a long on the other. result of the devastating experience of the interwar period. The weak and often counterproductive policy response during the Great Depression reflected the Admittedly, in the current crisis, the framework of fragile and malfunctioning international monetary multilateral institutions has clearly not been able to and trade regimes. There was a lack of prevent protectionist measures altogether or to international cooperation and coordination on bring about the best coordination regarding economic matters. The ability and willingness of macroeconomic stimulus and financial system governments to act jointly on a multilateral basis support measures. Still, the contrast with the Great on monetary and financial issues was significantly Depression is striking. lower than prior to the First World War. (9) Today’s international institutions facilitate In addition, the rules-based classical gold standard coordination by monitoring and reporting helped underpin recovery from crises, especially developments and policies across the world in a for the core economies. This stability derived from comparable way, aided by the gathering and the disciplining and confidence enhancing system publishing of economic data. Now policy-makers centered on London. Although the classical gold meet regularly to discuss and to form consensus standard was prone to destabilising shocks, it had views about appropriate measures, at the same an ability to recover from disturbances. By time learning to understand economic contrast, in the early 1930s a similarly robust and interdependence and to reach coordination. well-functioning international economic Moreover, in response to the crisis, the framework was lacking. Moreover, no consensus international community is also undertaking an existed among the major countries and within the overhaul of the global economic and financial economics profession on the appropriate financial, governance in order to minimize the risk of new monetary and fiscal responses to the rapidly crises in the future. Of course, a new governance spreading depression in the early 1930s. (10) structure is unlikely to fully prevent major crisis in future. In the interwar period, multilateral institutions for economic cooperation were weak and unsuccessful A main difference in the economic and political compared to today. The League of Nations, landscape of Europe between the 1930s and founded in 1919, and the Bank for International the present crisis is the emergence of close Settlements (BIS), founded in 1930, played no role cooperation among countries in Europe as in dealing with the economic crisis. The lack of institutionalised in the European Union with a international cooperation and international common market and a single European currency, institutions in the 1930s stands in stark contrast to the euro. From a historical perspective, the euro is present conditions. Institutions such as the World a unique contribution to the integration process of Trade Organisation (WTO), the International Europe. There was no organisation resembling this Monetary Fund (IMF), the Organisation for in the 1930s. Instead the European continent was Economic Co-operation and Development split up in a large number of countries with failed (OECD), the G20 and the European Union are attempts of policy coordination and with rising nationalistic tensions among them. As the depression in the 1930s deepened, the economic balkanisation of Europe increased, leading to 9 ( ) See Eichengreen (1992, p. 8-12) and Eichengreen (1996, p. devastating economic and political outcomes. 34-35). (10) The subject of economics had not yet developed theories of economic policies to manage depressions. The Great Depression became the source of inspiration for a new branch of economics, macroeconomics, initially based on the work by John Maynard Keynes, later know as the Keynesian revolution in economics.

LESSONS FROM THE PAST stemming from a more closely integrated global trade and financial system. By now, based on the historical record, a set of policy lessons have emerged that are fairly well Lesson 1. Maintain the financial system – avoid supported by an emerging consensus within the financial meltdown. In case of a financial crisis, economics profession. (11) These lessons are the financial system should be supported by highlighted below. Before summarising them, two government actions in order to prevent a collapse important qualifications should be made. of the credit allocation mechanism and to maintain public confidence in the banking system. At the First, today the events during the 1920s and 1930s, same time, burden sharing remains an issue and covering the depression from its start to its end, are limits to liquidity and solvency support are needed the subject of a considerable research effort. to mitigate the fiscal costs and avoid moral hazard. Although researchers do not agree on all aspects, they can look back on the whole process. In Lesson 2. Maintain aggregate demand - avoid contrast, the world today is still in the midst of a deflation. It is crucial to support aggregate demand global crisis. In spite of evidence that the world and avoid price and debt deflation by means of economy has bottomed out and is well on the way expansionary monetary and fiscal policies. The to recovery, the future path is unknown. For this role of monetary policy is to provide ample reason any comparison between the two crises liquidity to the system by lowering interest rates must remain incomplete. Still, there is much and use, if needed, unconventional methods. Fiscal insight to gain by comparing the crisis of today policies should aim at supporting aggregate with the evidence from earlier crises. demand. (12) A timely exit is crucial: a too early exit before the underlying recovery sets in would A second caveat concerns the lessons taken from create a risk of extending the crisis, causing a the Great Depression experience as they were double-dip scenario. applied after the Second World War. These ran into major failure in the 1970s as stimulus failed to Lesson 3. Maintain international trade – avoid produce the desired result and advanced economies protectionism. The Great Depression set off a entered into stagflation. This disillusionment series of protectionist measures on a global scale. triggered the monetarist 'counter-revolution' to The degree of protectionism was higher than Keynesianism. The experience of the 1970s gave during any other period of modern history, with important lessons about the limitations of counter- devastating consequences for production and trade. cyclical policies and the importance of credibility, The policy lesson is straightforward: expectations, and fiscal sustainability. These protectionism should be avoided. insights should also be part of our historical legacy. Lesson 4. Maintain international finance – avoid capital account restrictions. The Great Depression A comparison between today's global crisis and contributed to a breakdown of the flow of capital that of the Great Depression of the 1930s (but across borders, driven by the problems facing the clearly also bearing in mind the policy experience US and European financial systems and the lack of from other crises) reveals a number of key policy international cooperation. Capital exports declined. lessons. The evidence from the classical gold Several countries introduced controls of cross- standard period seems less relevant due to the great border capital flows. These events made the differences in economic structure and governance. depression deeper, a chain of events that had Yet, it reminds us of the importance of credibility and rules-based policies and of the resilience

(12) The evidence about the impact of fiscal policies in the 1930s is scant as few countries deliberately tried such measures. Sweden is one exception where the government openly carried out an expansionary fiscal policy in 1933-34 (11) There is still a substantial academic debate about the based on an explicit theory of countercyclical stabilization causes, consequences and cures of the Great Depression. policy. This fiscal program, although a theoretical However, this debate should not prevent us from presenting breakthrough, had a minor effect as it was small and was of the main areas of agreement as summarized here. short duration. See Jonung (1979).

largely been avoided in the pre-World War I era. scale of the 1930s; the international flow of capital The policy lesson here is that the free flow of is not hindered by government actions, although capital should be maintained during the present criticism has been aimed at the role of global crisis. finance in the present crisis; and international cooperation has been strengthened. The present Lesson 5. Maintain internationalism – avoid crisis has – in contrast to the 1930s – fostered nationalism. It is proper to view the Great closer international cooperation. The G-20 is such Depression as the end of the first period of an example. China- and Japan-bashing has been globalisation. It is true that the outbreak of war in kept at bay in the US, at least so far. The world 1914 closed borders and destroyed the order that remains more inter-connected today than during had been established during the classical gold the Great Depression. standard. When peace returned, the 1920s saw the return to an international order that was a half- Important lessons from the past seem to have been hearted attempt to go back to the classical gold learnt, judging from the world-wide policy standard. response to the present crisis – at least up until now. Looking ahead, it cannot be ruled out that The depression of the 1930s signalled the end of policy-makers are pushing these lessons too far. In this liberal regime based on openness and particular, present expansionary monetary and internationalism. The crisis set off a wave of fiscal policies may turn out to be a case of "over- polices aimed at closing societies and inducing a shooting" by creating huge debt overhangs, both in nationalist bias in the design of economic policies. the public and the private sector. Large (public) The international movements of goods, services, debt build-up may spark destabilising debt crises capital and labour (migration) declined severely in the future, if left unchecked. The sharp rise of when countries concentrated first of all on solving public debt, unknown to the same extent in their domestic problems with domestic policy previous episodes, poses novel challenges and measures. Germany and the Soviet Union were history can only give limited insight in the extreme examples of countries carrying out consequences or appropriate response. unilateral policies. The policy lesson is straightforward: the international system of Most important for Europe, the EU is providing a economic cooperation should be maintained and shelter against the forces of depression in Europe. made stronger. Institutions for global cooperation The EU, through its internal market, its single should be strengthened. currency (which stood firm) and its institutionalised system of economic, social and Have the lessons mentioned above been absorbed political cooperation, should be viewed as a into the policy response to the current crisis? construction that incorporates the lessons from the While the jury is still out on some of the lessons, 1930s. Within the EU, the flow of goods and the initial answer should be a cautiously positive services, of capital and labour remains free – with one. The financial sectors in most countries have no discernable interruptions created by the present been given strong government support; aggregate crisis. Of course the ultimate effects of massive demand is maintained through supportive government intervention in the financial sector on monetary and fiscal policies; protectionism has so financial integration and the level playing field far been kept at bay, there has been very little of will have to be assessed. Still, the degree of protectionist revival (13) – far from anything of the continued economic integration within Europe is a remarkable difference with the interwar years which strongly suggests that Europe will be able to (13) Although there has been little open protectionist revival manage the present crisis in a much better way during the present crisis, anti-dumping procedures, export than in the 1930s. subsidies have been resorted to in some countries and "buy-national" clauses have been introduced in stimulus packages. These measures are all permitted within the WTO framework: discriminatory but also transparent. Nonetheless, learning from the past, the safeguarding of the such as international financial sector regulation, multilateral discipline, monitoring closely any government procurement and services trade is a vital policy discriminatory policy and possibly complementing the concern. See various contributions in Baldwin and Evenett existing set of rules especially in areas not fully covered (2009).

All this is an apparent source of comfort during the present crisis. At the same time, risks still abound and some of the longer-term pitfalls and drawbacks of policy interventions to counter the crisis cannot be assessed yet. Of course, today's crisis will eventually give rise to its own lessons, informed by evolving history and policy thinking of the economics profession. Yet, some fundamental mechanisms causing and transmitting crises appears to remain similar, allowing confidence in the policy lessons learnt from the past.

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