The Pandemic Depression
The Global Economy Will Never Be the Same
The overuse of analogies from the past is the bane of reasonable historians, and perhaps no parallels are more clichéd than ones comparing current events to those of the 1930s. The problem with such analogies, of course, is that history does not repeat itself: not every troubling event should bring to mind the ascent of Adolf Hitler and the path to world war.
Yet the quick succession of the United Kingdom’s vote to leave the European Union and the election of Donald Trump to the U.S. presidency invites comparison to a phenomenon that defined the early 1930s: deglobalization. Hitler aside, the similarities are worth worrying about, since they suggest that when hegemonic states unilaterally scrap their commitments to an open economic order, the consequences extend far beyond their borders, eroding the economic prospects of the world’s poorest countries and global security.
GLOBALIZATION'S FIRST WAVE
The globalizing trends of the last few decades are far from unprecedented. As the economic historian Harold James has noted, an analogous reprocess took place between the 1880s and the early 1930s, boosting international trade, encouraging the development of emerging markets, and cementing the industrializing United States as one of the world’s key economies.
In spite of the era’s more primitive technology, the first age of globalization was in many ways deeper than the current one. Travelers did not need passports, investments were not constrained by borders, and labor moved far more freely than it does today. A considerably higher proportion of workers moved abroad in search of jobs: New York in the north and Buenos Aires in the south were the preferred destinations for those seeking to escape their poor prospects in Asia and western Europe. The British Empire, with its broad legal system and formidable Royal Navy, underpinned this free trade system. And London’s gold standard acted as the monetary linchpin of a truly global financial architecture, much as the gold-convertible U.S. dollar did during the Bretton Woods era.
Although World War I suspended this order temporarily, it began to crumble only after the Wall Street crash of 1929—a market implosion that the West's own experience after the collapse of Lehman Brothers tracked closely until Ben Bernanke, a historian of the interwar period who happened to be running the Federal Reserve, unleashed quantitative easing. The U.S. crash graduated into the Great Depression when it set off a crisis across the Atlantic centered in Europe’s undercapitalized banking system. The serial offender of the age was neither Greece nor Italy but an overindebted Weimar Germany, whose constrained government in 1931 had to do what Western governments did in 2008 and 2009: bail out banks and bankers.
This calamity and the ensuing social discontent gave Nazism its first electoral steam at the national level. Yet what is often forgotten is that it was none other than the United Kingdom that deserted the liberal order it had spawned and sponsored. In 1931, amid party divisions reminiscent of the current travails of both the Conservative and Labour Parties, London abandoned the gold standard and unilaterally devalued the pound sterling, unleashing a series of competitive devaluations that bring to mind what former Brazilian Finance Minister Guido Mantega decried as “currency wars” in 2010.
The United Kingdom deserted the liberal order it had spawned and sponsored.
At their core, the United Kingdom’s choices were a bid to put the country ahead of international arrangements and globalization as a whole, much like the British electorate’s June vote for Brexit. Back then, the market responded swiftly, resetting British prices to a lower base. The pound's devaluation against all other major currencies since the EU referendum is akin to the earlier abandonment of the gold standard, for it has made British goods far more competitive than they were before June.
London then added insult to injury: it almost simultaneously raised tariffs, introducing what a young Neville Chamberlain called “imperial free trade,” by which trade within British dominions would remain free but tariffs would be raised on trade with other markets. Of course, if free trade applied only to the British Empire, it was not free at all. Foreigners saw the maneuver for what it was—protectionism—much as many of today’s observers regard the United Kingdom’s departure from the EU as a path to the eventual introduction of new industrial subsidies and at least some trade tariffs. Less developed countries fared the worst: from Argentina to Japan, export-focused economies suffered the brunt of the economic contraction, inviting politicized militaries to sideline liberal civilians in government.
In 1931, the British Treasury acknowledged the severity of its actions. “No country ever administered a more severe shock to international trade than we did when we both depreciated the pound [and] almost simultaneously turned from free trade to protection,” one Treasury official noted. A few months later, the editors of The Economist agreed: “The abandonment by Britain of the post-war gold standard,” they argued, “has set in motion forces which have had lethal effects on the world’s monetary and commercial activities.” The global system teetered.
It fell to the United States to deliver the final blow. When Franklin Delano Roosevelt first sought the White House, the wealthy New Yorker ran a campaign that channeled popular discontent and promised to end the Depression. His opponent was Herbert Hoover, an establishment incumbent often derided as a Wall Street stooge. Roosevelt eschewed technocratic advisers and promised to restore the U.S. economy by prioritizing domestic recovery above all else. As was the case for Trump this year, rural voters were crucial to securing the electoral landslide that brought Roosevelt to power in 1933. A few months after his inauguration, rather than agreeing to a new currency arrangement with France and the United Kingdom, Roosevelt famously railed against the “fetishes of so-called international bankers” and followed the United Kingdom into unfettered devaluation. Washington’s unilateral move unleashed another round of competitive devaluations all over the world, deepening the trade crisis and encouraging new barriers.
To paraphrase the great economic historian Charles Kindleberger, this was a system that the United Kingdom was unable and the United States unwilling to preserve. By the time Roosevelt devalued the U.S. dollar, Hitler was already Germany’s chancellor. Yet the United States’ unilateral abandonment of the global monetary system had second-order consequences: it allowed Berlin to renounce Germany’s international debts and exert newfound economic strength abroad. In 1934, Hjalmar Schacht, Hitler’s economic minister, complained in an essay in Foreign Affairs about U.S. trade policy, suggesting that Nazi Germany sought access to new markets only so that its economy could recover. Soon afterward, Berlin was implementing a policy of economic nationalism that sought to create an informal German economic empire in Europe.
Both the Brexit vote and Trump’s election have challenged a consensus on free trade that has reigned for 40 years. How the world got here is up for debate. But it is imperative to understand that the last time around, the biggest losers of deglobalization were among the world’s poorest nations, which were deprived of trade as a way to improve their lot. Those late to the most recent wave of globalization—particularly Latin America’s postpopulist governments and East Asia’s export-focused economies—should beware. Even if the destinies of emerging-market states do not matter to developed countries’ electorates, the systemic effects of unilateral moves should be a cause for worry for all. Such choices can leave everyone worse off and ultimately damage the states that made them.
On the whole, the world was a lot poorer when the United Kingdom and the United States prioritized their own economic recovery without regard for the international system. And as Roosevelt learned during World War II, the systems that states destroy in only a few years can take decades to repair.
The last time around, the biggest losers of deglobalization were among the world’s poorest nations.
Last but not least, trade policy is never just about trade. The shipwreck of globalization profoundly undermined international security arrangements. The erosion of the framework for international cooperation on economic policy also fatally wounded the League of Nations, rendering its sanctions useless against the grandiose designs of rising European authoritarians. And it was an economic crisis that transformed an authoritarian but capitalist Benito Mussolini into the conqueror of Ethiopia, embroiling Italy in a peripheral war that was a worrying omen of wider wars to come.
History does not repeat itself, nor does it end. No system is meant to last forever. As we come to terms with the fact that U.S. and British electoral choices suggest that the peak of globalization may be behind us, we would do well to remember that openness need not end in tragedy. Reform is possible, and it is far preferable to throwing our global system into the dustbin of history.