The following is a post by Steven Bryan, author of The Gold Standard at the Turn of the Twentieth Century: Rising Powers, Global Money, and the Age of Empire. Read Bryan’s earlier post, How Unusual Is China’s Currency Policy?
On its surface, one the oddest responses to the current economic crisis has been the reemergence of the argument that austerity is a good idea in a depression. The idea that, in effect, making a downturn worse is the way to recovery is superficially so nonsensical as to be incomprehensible.
But, in the current crisis, as in the interwar depression, calls for austerity have reflected mixed motives. In Germany to date austerity has been more rhetorical than actual and offset by a social safety net, export and manufacturing bases and a currency made to support them all. In Spain and Ireland it has been a response to perceived, if politically questionable, concerns about bond rates and ratings. This does not mean austerity is a smart policy; it just means it is not incomprehensible. In Greece austerity has been the result of IMF and EU demands to protect banks outside of Greece rather than a path freely chosen by Greeks themselves. In the UK, if anything, austerity has been less a response to the current economic crisis than the preference of a new government to re-shape the role of the state for philosophical reasons and to favor its electoral base – in other words, an excuse to do what it would like to do anyway.
There is nothing necessarily unreasonable about any of this where the means of austerity match the goals in terms of either favoring banks, bondholders or wealthier citizens (Spain, Ireland, Greece, the UK) or supporting a socio-economic model in which U.S.-style, ad hoc stimulus is less important if not superfluous (Germany). These countries have elections and their citizens can vote to favor the interests they prefer. Where governments see no electoral or national advantage in austerity they can place other interests ahead of it, as Argentina did in the 2000s and Hungary appears prepared to do at present. In the words of Milton Friedman, they are “free to choose” what interests they favor and what they think is in their national interest.
All societies make these choices, whether they admit it or not. Depressions and recessions have their own winners and losers, as do inflation and deflation. It is perfectly logical for bondholders to take whatever moves they view as likely to cause repayment of those bonds – even if this means the economy in general is weaker or someone else goes without a job. It is equally logical for autoworkers, firefighters and public school teachers to organize and demand pensions and salary increases. Similarly, there is nothing surprising about non-millionaires preferring to receive social security benefits rather than having the government use those funds to decrease taxes paid by the wealthy.
Where things become confused is when governments and societies pretend – or, worse, believe – that the means of austerity match an end that they do not, or that there are not social and political consequences to these decisions. The resort to “confidence” as an all-purpose rationale is rarely a good sign.
During the 1920s and 1930s it was precisely the refusal to acknowledge the social and political consequences of austerity that helped bring about not only the depression, but also the authoritarian governments of the 1930s. But, even then, there were any number of people who considered the governments of Hitler, Mussolini, Franco, and Vichy infinitely preferable to a left-leaning or even democratic government such as Weimar in Germany or the Spanish Republic. In the words of a slogan popular with France’s wealthiest families of 1930s, better Hitler than Léon Blum.
Austerity was the dominant response of governments during the early years of the Great Depression. In Britain austerity dated back to the 1920s when the issue was deflating the economy in order to return to the gold standard at the prewar exchange rate. English advocates believed austerity offered a way to reassert the supremacy of the City of London over Wall Street. This practical desire to regain English financial preeminence coexisted with a general fixation on World War I, the future of the British Empire, and fears of the end of a supposedly uniquely English era. Governments and the major media deemed finance more important than industry and employment and government policy reflected that choice.
In France, it was not just Hitler or – as in England, even among those who would later turn against the Axis powers such as Winston Churchill – Mussolini who was viewed by many more favorably than a government promising a tax on capital gains, paid vacations, and a 40-hour work week. The preference for austerity until the mid-1930s rested on the social tensions of the interwar years in which the Bank of France was a private entity largely controlled by, and in perfect harmony with, France’s wealthiest families – the infamous “200 families” – and center-left governments were chosen increasingly by industrial laborers demanding more rights and a better standard of living. The vitriol between France’s leading families and the nominally left governments of the 1920s and 1930s left no one eager in the 1930s to disturb the “franc Poincaré” and thus follow Britain and the United States in devaluing and re-inflating the economy.
In Japan, austerity and the depression were as homegrown as they were a reflection of worldwide disaster. The anglophile Prime Minister and Finance Minister Inoue Junnosuke was a product of Japan’s central bank and more comfortable with the views of the City of London than those of his own increasingly impoverished country. Inoue insisted on austerity in order to return to the gold standard essentially because Britain had returned to the gold standard. This, of course, did little to endear him to a population who, in many parts of the country, was literally starving to death in order to support a handful of international banks and Inoue’s own anglophilia. Not surprisingly, Inoue was the victim of one of the first of many 1930s assassinations in Japan by right wing groups targeting finance ministers and bankers deemed guilty, in their view, of having sold out the country.
In practice, austerity did not work as a remedy for the depression – not even for its strongest proponents who found that the new regimes of the 1930s brought problems considerably more serious than devaluation or giving factory workers two weeks of paid vacation per year. Austerity simply worsened the depression and led to the emergence of governments willing to spend massive amounts of funds on not only infrastructure and public works, but also armaments. And, as is so often the case with societies that develop a vested interest in military spending, they very quickly found ways to put those weapons to use.