Wednesday, April 01, 2009
The geopolitical origins of the Great Depression
Francis Gavin at McKinsey's "globalization" blog has written a very interesting post about an essential difference between today's financial crisis and the Great Depression.
But the key differences between the current crisis and the past are less economic than political. The Great Depression was the offspring of the killing fields of Europe: the First World War had destroyed trading patterns, undermined currencies, and produced massive public debts. Who would foot the bill for this catastrophe? The Americans had financed the British and French victories, and expected to be paid back in full. The British and French demanded that Germany carry the cost by paying reparations. Germany —which been victorious on their Eastern front and had prevented Allied forces from entering their territory—had agreed to end the war in part because of Woodrow Wilson’s promise not to impose a victor’s peace. When this promise was broken and massive reparations were imposed, a bitter decade-long battle over who would pay what ensued. From this toxic environment of distrust and enmity emerged a series of unsustainable deals, whereby America financed Germany’s reparations to Britain and France, which were recycled back to the United States in the form of war debt payments. If American financing dried up – which it did during the late 1920s—the whole scheme would collapse, taking the international monetary system with it.
RTWT, and discuss whether Galvin is right that this is a meaningful difference. I wonder if the "recycling" of savings from China to the United States does not amount to much the same thing, albeit in reverse and without the same animosity.
CWCID: Paul Kedrosky.
3 Comments:
By 
MEANA55, at
Wed Apr 01, 11:55:00 AM:
If Mr. Gavin's premises about the roots of the Great Depression are correct, then the two collapses are much more alike than different.
If the USA financed Germany's reparations obligations under the Treaty of Versailles and then received some of that same money back via loan repayments from France and Britain, then that situation is absurd on its face.
Perhaps more deeply thinking about it may lead me to Mr. Gavin's conclusion that it was unsustainable. If I stipulate for the sake of argument that this situation was unsustainable, then the Great Depression was caused by the crippling cost of bankrolling the world's pretending that Germany could be punished under the terms set forth in the treaty.
The current crisis is rooted in everyone's having had to bankroll the government's fiat declaration that mortgage applications that represent unacceptable risks by any objective standard were just as good as any other application.
Fiction is not reality no matter what DoJ, HUD, the GSEs, the United States Code, or the League of Nations says. So where's the difference?
By 
, at
Wed Apr 01, 12:56:00 PM:
I wonder if the "recycling" of savings from China to the United States does not amount to much the same thing, albeit in reverse and without the same animosity.
Don't be so sure about the lack of animosity. Gwei-lo, foreign devils, and all that.
By , at
Wed Apr 01, 06:18:00 PM:
It's my understanding that Weimar Germany paid back some part of its war-incurred debt with purposely devalued currency. It simply kept the printing presses running non-stop day and night. I believe it was none other than William Shirer who makes that point in his classic treatise, The Rise and Fall of the Third Reich.
It is in fact an effective way of paying off existing debt, but the collateral damage makes any short term advantage gained by employing such a gambit a long-term Pyrhhic 'victory'.
Just the other day I watched an Obama advisor strenuously deny that producing trillions of dollars out of thin air would have any deleterious effect. Sorry, but I don't believe it. I think the historical record, as well as common sense, argues more convincingly otherwise. (Especially considering that our debts, as currently structured, will be ongoing.)
