Abridged by Brad de Long.
(Politicians) talk about the need to restore “confidence in the markets”. The argument here is that deficits do positive harm by destroying business confidence… fear of higher taxes, fear of default, fear of inflation…. The parallel with what happened in 1931 is irresistible. In February of that year, Philip Snowden, the Labour government’s chancellor of the exchequer, set up the May Committee to recommend cuts in public spending. The committee projected a budget deficit of £120m, later raised to £170m, the latter figure amounting to about 5 per cent of gross domestic product, and proposed raising taxes and reducing spending to “balance the budget”…. Keynes was one of the very few who stood out against the herd…. When the Conservative-Liberal coalition that had succeeded the Labour government introduced an emergency budget in September 1931, Keynes again stood out against the chorus of approval. The budget was, he wrote, “replete with folly and injustice”. He explained to an American correspondent that “every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every form of economic activity, we can all become prosperous again.”
Scott here. Just to re-cap the international monetary parallels, explained in greater depth elsewhere in this blog:
- In 1931, governments were urged (typically by financial elites / creditors generally / the governments’ creditors specifically) to stick to the current monetary arrangements at all costs. The need to do so was framed sometimes in morals and frequently in histrionics.
- A parallel today is the EU’s approach to weaker eurozone members like Greece; it wants them to stay within the euro and to honour all debts and somehow to manage this through a feat of growth-via-austerity.
- The parallel is even closer now that the eurozone’s biggest creditor (Germany) has kicked off an austerity campaign of its own, just as the rest of the continent needs it to start becoming a net importer. (France was the biggest European creditor in 1931 and it too embarked on an austerity drive.)
- Scared by the travails of Greece (and soon Spain), governments beyond the eurozone are jumping on the austerity bandwagon — just as their neighbours need them to do the opposite.
- To anticipate some counter-points: I can understand the importance of repaying the creditor, but the situation is now beyond that possibility. Once that fact is recognized, the key is to ask what approach will be best. (My suggestions are all over this blog.)
- The tragedy of 1931 is that forcing debtors into a straitjacket only makes them adopt illiberal means. This is precisely the way to understand the resort of central European debtor economies to exchange controls and ultimately to the draconian ‘clearing arrangements’ as the exchange controls became too porous.