PRINCETON – The world is confronted by a dramatic financial crisis that many policymakers believe is more severe than the interwar Great Depression. Before 2008, experts said that a new Great Depression was impossible because of the strength and the depth of the cooperative mechanisms set up at the end of World War II.
The G-20 summit has thus created enormous expectations that internationalism may once again overcome a plethora of economic problems. Unfortunately, the magnitude of the expectations alone suggests that disappointment is almost certain.
The symbolism of the location is unfortunate, as it carries a reminiscence of the main abortive attempt to manage the world economy during the Great Depression. The 1933 World Economic Conference also met in London, at the Geological Museum, with an even broader range of participants from 66 countries. The participants at the 2009 summit may not visit the Geological Museum, but they will have to deal with the specter of conferences past, for the failure in 1933 offers important lessons for our current leaders.
First, as with the G-20 summit, everyone expected the London Conference to fail. The plenary meeting was paralyzed by the way in which the preparatory commissions had worked. Monetary experts argued that an agreement on currency stabilization would be highly desirable, but that it required a prior agreement on the dismantling of trade barriers – all the high tariffs and quotas that had been introduced in the course of the depression.
Trade experts met in parallel and made the mirror image of this argument. They agreed that protectionism was obviously a vice, but thought that it was a necessary one that could not be addressed without monetary stability.
Only leadership by a determined great power, prepared to sacrifice its particular national interests in order to break the resulting impasse, might conceivably have saved the meeting. But such leadership was as unlikely then as it is now.
Indeed, the second lesson of the London Conference of 1933 consists in governments’ unwillingness in times of great economic difficulty to make sacrifices that might entail a short-term cost. Even if the result would have been longer-term stability, the immediate political consequences were too unpleasant. In adverse economic circumstances, governments felt vulnerable and unsure, and they could not afford to alienate public support.
Finally, faced by a realization of inevitable failure, participants look for a scapegoat. The 1933 Conference looked like a classic detective novel in which every party had a reason to be a suspect. Britain and France had turned away from internationalism, adopting trade systems known as “Imperial Preference,” which favored their vast overseas empires. Germany’s president had just appointed Adolf Hitler’s radical and aggressive government. The German delegation was led by Alfred Hugenberg, who was not a Nazi but wanted to show that he was an even more implacable nationalist than Hitler himself. The Japanese government had just sent troops into Manchuria.
Of all the major powers in London, the United States looked the most reasonable and internationalist by far. It had a new, charismatic president, who was known as an Anglophile and a cosmopolitan spirit. Franklin Roosevelt was already taking vigorous action against the depression, and was trying to reorder the failed US banking system.
Roosevelt did not know what line to take at the conference, and his stream of advisers offered inconsistent counsel. At last, he lost patience and announced that for the moment the US had no intention of stabilizing the dollar. This message, delivered on July 3, 1933, was known as “the bombshell.” Roosevelt talked about the need to restore “the sound internal economic system of a nation” and condemned the “old fetishes of so-called international bankers.”
Everyone pretended to be shocked at the failure of internationalism. But, at the same time, they were delighted to have found someone who could be blamed for the failure of the conference.
In 2009, we face a similar set of circumstances. The lines of conflict have been clearly drawn in advance. The US wants the world to embark on macroeconomic stimulus programs, and thinks that the complicated task of reinventing and reordering financial supervision and regulation can wait. Many European countries cannot afford a stimulus package, owing to overstretched public finances, and instead want to make progress on the international regulation of banking.
The alibis for failure are also already prepared. The new summit is unlikely to produce either a coordinated stimulus package or a detailed blueprint for a foolproof system of financial regulation. Throughout the meeting, participants will be waiting for the moment when one of the leaders (maybe Angela Merkel) loses patience and makes the obvious and true remark that the process is a waste of effort. Then everyone will denounce this honest politician for having wrecked internationalism.
In the 1930’s, it was the autocratic and belligerent governments of Germany and Japan that could derive the most capital from the failure of the London conference. Failure at today’s London conference is also likely to be used as a rhetorical weapon against the large Western governments, and to provide a rationale for implementing new forms of state capitalism.