Reading news and articles on Euro zone debt crisis like e.g. this one, reminds me of a very good book I read couple of years ago: Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed. It talks about how the world came to the great economical crisis of 1928-1934.
This is quite interesting book in itself, but I would not write this post if it doesn’t resonate so well with the current events.
Mr Ahamed makes a point that the crisis was “… the direct result of a series of misjudgments by economic policy makers, some made back in the 1920s, others after the first crises in – by any measure the most dramatic sequence of collective blunders ever made by financial officials” (p.501).
While listing the mistakes, the author says “… the second fundamental error of economic policy in the 1920s: the decision to take the world back onto the gold standard” (p.502).
Clinging to the gold standard deprived world economies of flexibility necessary to deal with consequences of huge debts accumulated by European countries as a result of WW I.
Getting out of the gold standard was a critical pre-requisite for resolving the crisis: “Breaking with the dead hand of the gold standard was the key to economic revival. Britain did so in 1930 and began to recover that year. The United States followed in March 1933 and that proved to be the low point in its depression. France hung to its link with gold for the longest. In 1935 Clement Moret was fired as governor of the Banque de France for resisting government measures to utilize its gold reserves to expand credit. Only in the following year did France finally abandon the gold standard. It was thus the last of the major economies to emerge from depression” (p.477).
Well, I should stop here, otherwise I could cite a good deal of Mr Ahamed book which I highly recommend for reading.
Why I think it is relevant to the current events? Euro is in effect a sort of the same gold standard for countries that use it. They are all bound to the same exchange rate which prevents some of them (e.g. Greece, Ireland, Portugal, Italy) from using devaluation of their currencies as a way to adjust their debt and their economies.
The story teaches us lessons, but unfortunately we rarely learn them. If the folks who created euro read Mr Ahamed book, they might have understood that it is impossible to jump over a ravine in two steps. They either should have went far further and established along with a single common currency strict use of the same single common economic and budget policies across all euro zone or they should have not introduced the common currency at all.
Unfortunately they didn’t. And as current events show they still believe that Europe must stick to euro (a sort of modern gold standard). Without the euro removed, the European debt crisis is not going to be resolved any time soon, it is likely going to get much worse before the crisis is going to be resolved.
If Mr Ahamed is right in his analysis of the crisis of 1928-1934, the things do not look nice at the moment. Given the size of European economies, the crisis may achieve a cataclysmic scale. All current efforts to stop the crisis are similar to trying to stop a tectonic rift from widening by pouring concrete into it. Very expensive and utterly futile attempt.
Are we heading to a new Great Depression?
I do hope I’m absolutely wrong…
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