As Depression looms, we must shun errors of the 'Hungry Thirties'

Frankly Speaking

Picture of Giles Merritt
Giles Merritt

Founder

Giles Merritt looks back at the Great Depression of the 1930s and warns against trade barriers to protect jobs. Instead, the EU must accept sky-high indebtedness.


It’s time for us all to be very afraid; not just of the coronavirus but of its consequences. A ‘Great Depression’ like that of the 1930s is looking increasingly inevitable, and if mishandled could trigger a disastrous train of events.

We should now be reaching for the history books because the parallels with almost a century ago are uncanny. Contrary to popular belief, it wasn’t the Wall Street Crash of October 1929 that caused America’s depression and the worldwide slump. It was the wave of protectionism that followed ‘Black Tuesday’ in New York’s financial district.

Most historians now agree that the 1914-18 Great War was the fundamental cause, and that hyperinflation in defeated Germany and uncontrollable financial speculation in America were contributory factors. But it was governments’ response that did the real damage. The US Congress passed the Smoot-Hawley Act whose punitive tariff walls prompted Britain’s equally restrictive Imperial Preferences. International trade soon ground almost to a halt, throwing tens of millions out of work.

The lesson of history – and sheer common sense – tells us that protecting employment is all that really matters

This time the root shock is very different, but similar policy responses risk being equally disastrous. Unless EU governments shape up, there will be mass unemployment leading to civil unrest and dangerous levels of political turmoil. And that’s just in Europe.

The UN’s International Labour Organisation suggests that 1.4 billion informally employed people are on track to lose their work, which is roughly a third of the global workforce. With fears of some 50 million jobless in wealthier countries, the shantytown encampments, marches, violent strikes and political battles of the ‘Hungry Thirties’ could look like a walk in the park.

Economists are abandoning talk of a V-shaped recovery once the lockdowns are lifted, and the consensus now is that we are in for a long haul of economic shrinkage. But the EU’s member governments remain locked in old-style squabbles about debt sharing and the ‘moral hazard’ of bailing out bankrupted enterprises and countries. Instead, they should envisage massive public works projects akin to Franklin Roosevelt’s New Deal.

The lesson of history – and sheer common sense – tells us that protecting employment is all that really matters. This crisis is unlike the financial crisis a decade ago, and this time around we need more debt, not less. National governments’ central banks and the eurozone’s ECB in Frankfurt must let the printing presses run red hot.

Governments are becoming the employers of last resort and must subsidise employees’ wages

Recovering debt has been the leitmotif of successive disputes in the eurozone and elsewhere, but it’s a notion that should immediately be torn up. Unwilling though they may be, governments are becoming the employers of last resort and must subsidise employees’ wages for as long as it takes. Paying salaries costs the state much the same as paying unemployment benefit, and has the great advantage of maintaining economic activity and thus tax income.

Rather than the ‘helicopter money’ that has attracted much controversy, governments should be thinking in terms of heavy airlift. They would be spending their national currency within their own economy – including eurozone countries once they see that theirs is a collective problem – so in practice they would be creating debt that is owed to themselves.

It is when borrowed money is owed in another currency to another country that debt becomes toxic. That’s where the EU and other rich countries need to hurriedly re-think their policies on less privileged countries. The corona crisis will probably last longer and be more debilitating in the poorer parts of the world. But so far there’s been little sign other than a half-hearted G-20 debt delay scheme for emerging markets.

The looming depression that’s going to engulf the global economy is hard to imagine, and impossible to gauge in depth and length. But the IMF, World Bank, OECD, UN and a host of national and sectoral analysts are forecasting catastrophic figures. The rich will be hit less hard than the poor, but as with the coronavirus itself, their wealth will be scant protection.

Next week’s Frankly Speaking column will be entitled ‘Jointly Speaking’ and will be written by Shada Islam and myself to focus on the performance of the European Commission. Our joint column will look at those areas where it must redouble its efforts and those where it should change course.

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