CAMBRIDGE – Greece has bought some time with a new package of financial support, but the country is not out of the woods yet. It remains to be seen whether the souped-up austerity policies that Prime Minister George Papandreou’s government has promised will prove to be politically acceptable and sustainable.
History suggests some grounds for skepticism. In a democracy, when the demands of financial markets and foreign creditors clash with those of domestic workers, pensioners, and the middle class, it is usually the locals who have the last say.
Britain’s exit from the Gold Standard in 1931 remains the historical landmark. Having made the mistake of restoring parity with gold at a level that left the economy desperately uncompetitive, Britain struggled for several years with deflation and rising unemployment. Industries such as coal, steel, and shipbuilding were hit hard, and labor strife became rampant. Even as unemployment reached 20%, the Bank of England was obliged to maintain high interest rates in order to prevent a massive outflow of gold. Eventually, increasing financial-market pressure pushed the country off gold in September 1931.
It wasn’t the first time that financial probity had required the real economy to suffer under the Gold Standard. What was different was that Britain had become a more democratic society: the working class had become unionized, the political franchise had expanded fourfold since the end of World War I, mass media publicized ordinary people’s economic plight, and a socialist movement was waiting in the wings. Despite their own instincts, central bankers and their political masters understood that they could no longer remain aloof from the consequences of economic recession and high unemployment.