Are the tragedies of the 1920s repeating themselves in the twenty-first century? In the 1920s, an irrational attachment to the gold standard helped cause the Great Depression, as European fears of inflation acted as a deadweight on growth. By the 1930s, economic collapse facilitated the rise of fascism, Nazism and World War II. While the Great Depression eventually broke the gold standard, enabling economic recovery, this would come too late for central Europe.
In the current day, a similar attachment to the euro – again as a bulwark against inflation – risks a similar tragedy. Once again, respectable opinion stresses the need for monetary discipline. Support for a strong euro has led the European Central Bank – and German policymakers in particular – to insist on austerity across the continent, despite the consequences for growth and social welfare. The result has been double-digit unemployment across the Eurozone, and truly frightening levels of unemployment among those under the age of 25 – from 21.8% in France to 51.2% in Greece. It is no small wonder that the far right and neo-Nazi groups did well in the recent French and Greek elections, as respectable opinion seems to offer little other than the policies that have so respectably failed.
Ironically, just as in the 1920s, there is a technically easy way out of this predicament: put broadly, the European Central Bank should print more euros, lower interest rates, and so ease the burdens of debtor states. Indeed, nothing requires that the euro as a common currency also be a strong currency.
Ironically, a weaker euro in the short term would ease the burden on debtor states relative to creditor states – and so strengthen the currency in the long run. By making euros cheaper and more plentiful, Greeks, Italians, Irish, Portuguese, and Spanish debtors could more easily pay off their creditors in Germany, London, and New York. In the short term, this might seem unfair. However, in the long term, it would be better for everyone – and paradoxically lead to a stronger euro. By reviving global growth, and so European demand, real economic growth would increase, and European debtors could buy more from their varied American and European creditors, in ways that might spark a self-reinforcing recovery.
History bears this out. Over the 1920s, the economic conventional wisdom was overwhelming: the gold standard was essential to growth. In the absence of a metallic anchor, inflation and reckless government spending would brew collapse. Even as the Great Crash and Global Financial Crisis of 1931-1933 deepened, and as fascist movements across Europe gained support, support for the gold standard remained entrenched.
Over the Hoover administration, the US stressed the importance of the gold standard – and the global economy suffered for it, leading to a global banking crisis. In 1933, with Hoover turned out of office, Franklin Roosevelt famously reversed course. In his first week in office, Roosevelt passed an executive order prohibiting banks from paying out gold for dollars. By April 1933, the US was off the gold standard itself, freeing the Treasury and Federal Reserve to pursue an inflationary policy, printing dollars. The result was to not simply raise wages and prices – and so demand – but also to ease the burden of interest payments on debtors. In an important paper, one of Barack Obama’s chief economic advisers, Christina Romer, has argued that Roosevelt’s inflationary policies were the key antidote to the Great Depression.
Did inflation result? The answer is a definite no. Inflation would not revive as a major policy problem until the 1970s. In this light, just as Paul Krugman has argued that contemporary arguments for austerity have been premised on the misguided notion that a “confidence fairy” rewards economic discipline, one might argue that inflationary fears are similarly based on misguided policy beliefs. Inflation is not, Milton Freidman’s claims aside, a monetary phenomenon; it is a macroeconomic and institutional problem rooted in low levels of unemployment and the assertiveness of militant unions. Neither low employment nor labour militancy seems likely to reemerge in the short on middle-term.
As Keynes put it, the threat to prosperity comes from nothing material. Instead, Keynes argued in the 1930s that “our predicament is notoriously of another kind. It comes from some failure in the immaterial devices of the mind … It is as though two motor-drivers, meeting in the middle of a highway, were unable to pass one another because neither knows the rule of the road. Their own muscles are no use; a motor engineer cannot help them; a better road would not serve.” From this vantage, he concluded: “Nothing is required and nothing will avail, except a little, a very little, clear thinking.”
In the current context, this requires setting aside the theological attachment to a strong euro and an Old Testament-styled desire to punish undisciplined debtors. Instead, it requires recognising that the best means to a strong euro is, paradoxically, in expanding the supply of euros themselves – and so restoring economic growth and the legitimacy of the European project itself.