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Watching the markets in Shanghai
Watching the markets in Shanghai
Jean-Marc Vittori

PARIS — Five years after the collapse of Lehman Brothers, it seems that we are passing through an unprecedented layer of thick fog. We see one country suddenly accelerating while its neighbor suffers a “sudden stop.” But this isn’t the first time. The world was consumed by the same sort of uncertainty five years after another crash: the one in Wall Street in 1929. Is it 1934 all over again?

At first glance, of course, everything has changed. The world is now infinitely more open and much richer than it was back then. And information technologies have turned the world into a village. We are supposed to have learned a lot from the Great Depression that followed Black Thursday. Central banks, in particular, have led monetary policies that have not stifled the economy, contrary to their predecessors in the 1930s.

Global growth resumed in 2009 after one year of decline, whereas it had decreased for more than three years in the early 1930s, just like the stock market, according to an article written by economists Barry Eichengreen and Kevin O’Rourke. The France of 2013 is also very different from 1934. The standard of living is five times higher. Even though there are political scandals, they are nothing like the Stavisky Affair and the deadly riots that followed.

On an economic level, the countries’ situations are strikingly similar. Let’s first consider their monetary situations.

Today, as in the 1930s, the United Kingdom and the United States seem to be getting back on their feet ahead of continental Europe. But the United Kingdom had been the first country to devalue its currency relative to gold in 1931, by 24%. The pound sterling suffered once again at the end of 2008, and its euro value today is still a quarter less than it was before Lehman’s bankruptcy.

In the 1930s, the United States followed suit in currency devaluation two years later. But Americans did things differently by carrying out a selective “internal devaluation.” In some industrial sectors such as automobile manufacturing, wage costs (salaries and future retirements) decreased significantly.

Meanwhile, the European countries are hanging onto their single currency, just as they hung on to the “gold bloc” in the 1930s. Their economies will suffer in the longer term. The exception is Germany, which was not part of the 1930s gold bloc and performed internal devaluation in the 2000s, before the crash, for its own specific reason (the compensation of the country’s reunification bill).

A time of rigor

The second similarity to the 1930s is budgetary. After the 1929 crash, as in 2009, most heads of state let deficits run their course — or let “automatic fiscal stabilizers work,” as we say today. Then they wanted to tighten things up. In 1932, Franklin Roosevelt was elected president of the United States on the promise to rebalance public accounts by reducing expenses by 25%. Once in the White House, he maintained the deficit at a high level, as the U.S. has these last few years.

But in Europe, it was a time of rigor. In 1931, German Chancellor Heinrich Brüning suddenly reduced public spending. In 1934, French Prime Minister Gaston Doumergue made cuts in public sector wages and pensions. Prime Minister Pierre Laval made even more important cuts in the same sectors the following year. He also increased taxes. History repeats itself. Last year, the French government reduced the “structural” budget deficit like it hadn’t since the beginning of the crisis and announced new saving measures for 2014.

Learning from the past

It would be easy to make sarcastic comments about the various governments’ inability to learn from the past. Amid such extreme tensions, they are stuck in a maze of contradictory coercions — between electors, lobbies and creditors, between competiting and confusing analyses. The first lesson is that it is very complicated to understand such an important crisis five years after its symbolic start, just as it is very complicated for a captain to know his location during a storm.

The second lesson is perhaps the importance of looking at the past’s future — in other words, what happened after 1934? Five years later, war broke out. Before that, America fell into recession by increasing taxes, thinking that it was in the clear. Another five years later, it is 1944. The conflict is devastating, killing millions, reducing activity by half in France compared to what it was in 1929. Twenty years later, it is 1954. The American recession is just a distant nightmare. European markets are booming. French production has already increased by a third compared to 1929.

In the 21st century, war should not break out. If Europe sometimes seems too divided, it is important to remember that it is much more united than it was 80 years ago. The real lesson here is elsewhere. A deep crisis lasts a long time. If it sometimes leads to the worst, it can also allow us to build a better world.


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