1
00:00:04,260 --> 00:00:07,410
Thank you very much and welcome to you all.

2
00:00:07,440 --> 00:00:12,330
Welcome to the warden and thank you for attending. It's a great pleasure to have you all here.

3
00:00:13,200 --> 00:00:17,130
I would like just to say a word or two about the new program for those who don't know about it.

4
00:00:17,610 --> 00:00:23,880
And then to introduce our speakers. New program is called The Political Economy of the Financial Markets.

5
00:00:24,390 --> 00:00:29,910
And when an American academic, Alan Grayson of Maryland, was asked what is political economy?

6
00:00:29,910 --> 00:00:38,010
Is that just an old fashioned Oxford kind of word, an old fashioned, historical Scottish term for economics?

7
00:00:38,010 --> 00:00:45,030
He said, No, no. Economics is about optimising, and political economy is why people don't optimise.

8
00:00:45,390 --> 00:00:48,690
And one more natural topic then financial markets.

9
00:00:48,930 --> 00:00:52,200
Another way of saying that more simply is it's to do with the institutional and

10
00:00:52,200 --> 00:00:56,340
political framework in which financial markets develop and how they interact.

11
00:00:57,090 --> 00:01:03,270
And to give you an idea, we're really we have three streams of research that have already started.

12
00:01:03,270 --> 00:01:07,739
And the members of those research groups are here tonight is research group bring together people in academia,

13
00:01:07,740 --> 00:01:11,970
people in the public sector, and people who work in financial markets.

14
00:01:12,450 --> 00:01:14,760
One is on financial integration in Europe.

15
00:01:15,120 --> 00:01:21,599
Somebody said, if this is multidisciplinary, does that mean you're looking for archaeologists to look into financial integration in Europe?

16
00:01:21,600 --> 00:01:29,579
And the answer is no. Of course, this is a forward looking program. The second is about a familiar topic to people who work on regulation.

17
00:01:29,580 --> 00:01:32,610
That is regulatory capture, indeed, policy capture.

18
00:01:33,430 --> 00:01:38,870
And it was David Vines who pointed out to me, people think of the in industries capturing regulators.

19
00:01:39,190 --> 00:01:45,730
But actually ideology also captures regulators and ideology captures policymakers in issues like monetary policy.

20
00:01:46,060 --> 00:01:52,060
So this question of the capture of policy by different interests and by changing economic circumstances.

21
00:01:52,180 --> 00:01:55,450
Big literature in the seventies and eighties a little bit neglected recently,

22
00:01:55,450 --> 00:01:59,140
but it seems vaguely, vaguely relevant to the financial crisis we've just lived through.

23
00:01:59,950 --> 00:02:06,700
The third is slightly more macro nerdish, and that is you have these policy frameworks like inflation targeting fiscal targets.

24
00:02:07,900 --> 00:02:14,500
And they were meant to insulate policy from politicians and their short term biases and goals.

25
00:02:15,070 --> 00:02:22,420
And yet, in fact, when the private sector developed very big imbalances, credit booms, policymakers became kind of trapped in these very.

26
00:02:22,690 --> 00:02:27,430
In my view, they became trapped in these regimes and failed to respond to the instability that was developing.

27
00:02:27,700 --> 00:02:34,509
So what's the lesson we draw from that? How do we protect policymakers from political goals and yet make them free to

28
00:02:34,510 --> 00:02:38,260
have discretion when they're faced with aberrations in the private sector?

29
00:02:39,610 --> 00:02:43,120
I'm. The way we conducting the program.

30
00:02:43,270 --> 00:02:50,360
One is through research groups that I mentioned and the other will be a series of lectures during the rest of the academic year.

31
00:02:50,380 --> 00:02:57,370
They'll be three or four special lectures. And then in the in the autumn, in the Michaelmas term, every Monday evening at 5:00,

32
00:02:57,370 --> 00:03:03,940
there'll be a seminar of the kind the European Studies Centre is very familiar with, with its core seminar results, with its regular seminars.

33
00:03:04,330 --> 00:03:11,080
So every evening at 5:00 this term, next year, on Monday evenings will be having speakers but from different disciplines,

34
00:03:11,080 --> 00:03:15,040
looking at the role of the financial sector in the economy, not just from a discipline of economics,

35
00:03:15,370 --> 00:03:20,080
but also from disciplines of politics, sociology, history and so forth.

36
00:03:21,750 --> 00:03:27,180
That's enough of the new program now. What I have to do now is to introduce her to speak, because I'm really grateful for you here.

37
00:03:27,300 --> 00:03:35,880
I'm grateful also to to Jane Kaplan, who introduced me to Patricia and said you should read her book on the Great Depression in Europe,

38
00:03:36,660 --> 00:03:40,170
because many people have written about the Great Depression and policy sources in the United States.

39
00:03:40,170 --> 00:03:43,560
But very few people have written exclusively focusing on Europe.

40
00:03:44,340 --> 00:03:49,979
And at the time I was reading a draft of a book that's coming out, I guess in February, is it, David?

41
00:03:49,980 --> 00:03:58,740
A book written by David Vines and Peter TEMIN at MIT, published by Princeton, which has had various titles.

42
00:03:58,740 --> 00:04:05,100
But I think the latest one is the leaderless economy why the world is talking about why

43
00:04:05,100 --> 00:04:09,120
the world fell apart and how David Vines and Peter TEMIN would put it together again.

44
00:04:09,120 --> 00:04:12,899
Is that approximately the shorter? It's a slightly shorter title.

45
00:04:12,900 --> 00:04:15,060
It's an American title. Oxford titles are longer.

46
00:04:16,080 --> 00:04:23,190
So I read these two books in parallel, and what I realised with horror was that Patricia is written around, I guess about 2000,

47
00:04:23,800 --> 00:04:27,640
and when I read it this account of the 19 I was thinking about the thirties,

48
00:04:27,640 --> 00:04:31,440
it was the kind of twenties that horrified me and I thought there are a bunch of things.

49
00:04:31,440 --> 00:04:35,759
And when we had lunch together we talked about it and I said we should really do a joint seminar to look at this.

50
00:04:35,760 --> 00:04:41,250
What a good way to kick off. Nice, optimistic way of kicking off a series of seminars on financial markets.

51
00:04:42,390 --> 00:04:47,850
I hardly need to say it to most of you, but Patricia is professor of international history and Fellow of Jesus College.

52
00:04:48,570 --> 00:04:50,729
She studied at King's College London and then was, I think,

53
00:04:50,730 --> 00:04:58,799
reader in modern history at Keele came here in 2003 after writing that book and is a research director of

54
00:04:58,800 --> 00:05:07,290
modern European Historical Research History Research Centre and the editor of Contemporary European History,

55
00:05:07,290 --> 00:05:13,319
The Journal. And she's been taking a year sabbatical other than preparing for the evening when she is

56
00:05:13,320 --> 00:05:17,100
working on the League of Nations and its economic committees and its institutional role,

57
00:05:17,100 --> 00:05:20,190
which is a riveting topic on which she's published some things earlier.

58
00:05:21,030 --> 00:05:28,559
She will speak first and this will be podcast. So on the whole that we better if we didn't have questions during her talk because otherwise they have

59
00:05:28,560 --> 00:05:33,870
to edit them out because very few of you have signed consent forms allowing yourselves to be podcast.

60
00:05:34,740 --> 00:05:40,200
But then we'll have a break and you can ask Patricia all those questions you wanted to do from a historical perspective.

61
00:05:40,200 --> 00:05:46,680
Let you have that your head on for a few minutes. Then on will come the podcast again for David Vine's talk.

62
00:05:47,160 --> 00:05:50,700
David, as most of you know, is professor of economics and a fellow of Paleo College.

63
00:05:50,700 --> 00:05:59,339
He's also adjunct professor at the Australian National University and a research fellow in CPR, initially educated in Melbourne.

64
00:05:59,340 --> 00:06:02,999
And then he came to Cambridge and studied under and worked with James Mead,

65
00:06:03,000 --> 00:06:06,719
who was what we wouldn't say a disciple of Kagan's, a deep admirer of Kagan's.

66
00:06:06,720 --> 00:06:09,570
And some of David's work in this book is some really, I think,

67
00:06:09,570 --> 00:06:15,240
new work on Keynes at the time of the Macmillan Committee, when we always thought the audience was confused.

68
00:06:15,240 --> 00:06:20,010
But David discovered at the time Keynes was confused is probably a short summary of that too.

69
00:06:20,340 --> 00:06:30,209
More to come. And before coming to to Oxford, he was the Adam Smith Professor of political economy indeed in Glasgow, I think.

70
00:06:30,210 --> 00:06:34,380
Is that right and proper Scottish term?

71
00:06:34,380 --> 00:06:39,990
Okay. I'm a Scot by origins. I can live with this. Let's then begin no more ado.

72
00:06:40,440 --> 00:06:45,780
And Patricia, you will give a lecture, I think, and David will have a PowerPoint to show us some pictures.

73
00:06:45,780 --> 00:06:49,769
And I'm going to give you. Yes, I've succumbed to the bug fest.

74
00:06:49,770 --> 00:06:53,459
That is. Let me give you that. I think I might need this.

75
00:06:53,460 --> 00:06:57,120
I've never spoken in here with this before. I'm going to need to shout it. But.

76
00:06:57,240 --> 00:07:00,420
Right, I think that's very kind on the audience. Okay.

77
00:07:01,710 --> 00:07:08,670
So I'm sort of speaking to the titles that Max provided us with addressing the crisis in Europe and the global economy,

78
00:07:08,670 --> 00:07:10,590
lessons from the 1920s and thirties.

79
00:07:11,040 --> 00:07:20,670
But I should begin by saying that historians, unlike economists, are always very nervous about lessons and are on our natural impulse.

80
00:07:20,700 --> 00:07:24,240
And there are people in this room that know more about this is a kind of function of policy,

81
00:07:24,510 --> 00:07:30,570
is to want to say how the present differs from the past rather than what makes it similar to the present.

82
00:07:31,170 --> 00:07:39,719
Or to try and think about the past and make connections and draw out themes that are not so prominent in contemporary analogies.

83
00:07:39,720 --> 00:07:51,030
And that's what I'm going to try and do in five different ways in the 30 or so minutes that I have allocated to me by Max.

84
00:07:51,960 --> 00:07:57,930
So the first or the first of the five themes is really that I want to say just a little bit about the chronology that we've been provided with.

85
00:07:57,930 --> 00:08:03,390
So the twenties and thirties and why the twenties and thirties and whether we need to stretch that a little bit.

86
00:08:03,840 --> 00:08:12,930
Then something about the relationship between politics and economics and then economics and national security as a way of thinking about ideology.

87
00:08:12,930 --> 00:08:18,839
So I want to ask and obviously in the questions we can think about ideology more because it's a key a key connection.

88
00:08:18,840 --> 00:08:23,270
But I wanted to sort of. From a perhaps less typical angle.

89
00:08:23,870 --> 00:08:31,819
And then say something about the third theme austerity international organisations, international oversight and colonialism.

90
00:08:31,820 --> 00:08:36,770
With regard to the case of Austria in the early 1920s, which I've been doing a bit of work on recently,

91
00:08:37,400 --> 00:08:42,140
and fourthly, the importance and character of multilateral cooperation as I know that.

92
00:08:43,890 --> 00:08:48,540
David is going to say a little bit about may do judging from the book title on the hegemonic stability and the

93
00:08:48,540 --> 00:08:55,529
role of of the leader of the world's banker in in promoting economic financial stability in the interwar period.

94
00:08:55,530 --> 00:09:04,859
And then finally how the origins of of current present day organisations of international financial and economic cooperation.

95
00:09:04,860 --> 00:09:08,190
So the European Union from the EEC to me,

96
00:09:08,850 --> 00:09:17,579
the IMF and the World Bank have their origins and are shaped out of some of the the issues that I'll be talking about in the paper,

97
00:09:17,580 --> 00:09:18,840
that's something I've been working on,

98
00:09:18,840 --> 00:09:24,990
as Max alluded to for a while in the by studying the economic and financial organisation of the League of Nations.

99
00:09:26,570 --> 00:09:30,680
I can't. I've made the mistake of standing up, and now my reading glasses won't work.

100
00:09:30,680 --> 00:09:34,339
So I'm going to just try and pare down to make sense of my text so I might hold this up.

101
00:09:34,340 --> 00:09:43,940
That might work. So in 19 February, 1922, the Austrian ministers, Doctor Ferdinand KUHN and Georg Frankenstein, two particularly well named ministers,

102
00:09:44,150 --> 00:09:54,680
announced to the League of Nations that their fellow citizens faced acute shortages of food, fuel and jobs and that state bankruptcy was imminent.

103
00:09:55,130 --> 00:10:04,070
Theirs was not an isolated horror story. That year, Germany, Greece, Hungary, Bulgaria and Poland were also in the grip of financial meltdown.

104
00:10:05,320 --> 00:10:09,970
Austria's plight in 1922 is a reminder that the Great Depression,

105
00:10:10,510 --> 00:10:17,410
the origins of the Great Depression lay not in the Wall Street crash, but in the First World War and the aftermath of the war.

106
00:10:17,420 --> 00:10:21,010
Most governments, whether old or newly established faced,

107
00:10:21,010 --> 00:10:28,540
testing questions at home as to the result of promises made by those who governed between 1915 and 1918.

108
00:10:28,990 --> 00:10:32,820
And those promises were made in order, of course, to sustain a total war effort,

109
00:10:33,340 --> 00:10:39,730
as did political parties who had sought public support in elections that were widespread at the end of the war.

110
00:10:41,610 --> 00:10:46,500
National politics in 1918 1919, frequently turned on the issue of rights.

111
00:10:46,770 --> 00:10:52,410
So this is a question about how to put expect political expectations into an economic framework.

112
00:10:52,680 --> 00:10:59,340
And these rights included the right to vote independently of land ownership, especially for women, of course.

113
00:11:00,510 --> 00:11:07,649
The right to greater representation by minority groups and colonialist peoples and the right to improved social conditions,

114
00:11:07,650 --> 00:11:11,610
notably in the field of employment, housing and social protection.

115
00:11:12,030 --> 00:11:15,330
So society's expectations of the state had changed.

116
00:11:16,330 --> 00:11:20,070
But economic policy had not. When the war ended,

117
00:11:20,080 --> 00:11:28,690
statesmen encouraged and supported by central banks and big business pulled back on the assumption that market forces would heal war battered economy.

118
00:11:28,690 --> 00:11:33,970
So there's a withdrawal of the state from economic management for a variety of reasons, really, that I've kind of pulled together.

119
00:11:34,780 --> 00:11:40,359
But the problems of such an approach were immediately laid bare by the destructive impact of rapidly rising

120
00:11:40,360 --> 00:11:47,980
levels of inflation unleashed by the war and exacerbated by the challenges of reconstruction without foreign aid.

121
00:11:48,490 --> 00:11:52,420
So there's a question also about needing support, where the support should come from.

122
00:11:53,390 --> 00:11:58,130
And I mean, it's familiar. It's I'm sure it's familiar to all of you. A potent combination of financial,

123
00:11:58,310 --> 00:12:05,960
political and social pressures culminated in episodes of acute hyperinflation that devastated the successive republics of the central powers,

124
00:12:06,230 --> 00:12:09,380
notably those of Austria, Hungary, Germany and Poland.

125
00:12:10,310 --> 00:12:18,860
Austria descended into hyperinflation as early as October 1921, with a monthly inflation rate of about 46% and unemployment running at over 33%.

126
00:12:19,400 --> 00:12:23,330
Hungary Inflation grew to around 33% a month in 1923.

127
00:12:23,600 --> 00:12:30,410
And of course, the famous example is the Weimar Republic in the in 1923, where prices doubled every two days.

128
00:12:30,920 --> 00:12:37,100
But even in the comparatively stable setting of post-war Britain, inflation was about 16% in 1920.

129
00:12:38,420 --> 00:12:41,569
So these impact of inflation had a profound impact around the world.

130
00:12:41,570 --> 00:12:41,990
And of course,

131
00:12:41,990 --> 00:12:50,780
it's a it's a historiography or a kind of historical narrative that comes up a lot in terms of trying to understand why Germany behaves today.

132
00:12:50,930 --> 00:12:55,159
I've tried to sort of broaden our memory of which other states were affected by

133
00:12:55,160 --> 00:12:59,840
it and why they perhaps don't remember the inflation in those sorts of ways.

134
00:13:00,870 --> 00:13:05,040
Governments in the 1920s now made currency stability the primary goal of their efforts,

135
00:13:05,520 --> 00:13:08,820
and that, of course, centred on resurrecting the international gold standard.

136
00:13:09,600 --> 00:13:14,640
For those of you that are sort of unfamiliar with this history, I suspect that this plot is a bit more familiar with it.

137
00:13:15,720 --> 00:13:23,010
A fixed exchange rate mechanism that was widely believed to have facilitated the great expansion of the international economy in the 19th century.

138
00:13:23,370 --> 00:13:28,020
Between 1924 and 1929, 45 countries joined the gold standard.

139
00:13:28,290 --> 00:13:31,710
Most of the British Empire and the Commonwealth joined in 1926.

140
00:13:31,860 --> 00:13:38,370
I think it's sometimes forgotten just quite the number of countries that joined and the speed with which that happened after 1924.

141
00:13:38,370 --> 00:13:44,850
But Austria was the first to go back to the gold standard bound the fates of national economies more closely.

142
00:13:45,180 --> 00:13:53,710
It also made Europe more heavily dependent on international lending and from the US side particularly, but not only to make the gold standard work.

143
00:13:54,660 --> 00:14:02,040
And of course, that lending was conditional on the gold standard being taken up when American loans dried up after 1929 rather than abandoned gold.

144
00:14:02,340 --> 00:14:08,720
Most states. Early European states. You may notice in my talk Britain sometimes a member of Europe and sometimes not.

145
00:14:08,750 --> 00:14:13,040
In this case it's not most states, which is a sort of interwar understanding.

146
00:14:13,130 --> 00:14:15,380
Most states introduce trade and currency controls,

147
00:14:15,620 --> 00:14:22,040
adherence to the gold standard disseminated deflation worsened the depression and encouraged economic nationalism.

148
00:14:22,070 --> 00:14:25,880
I mean, it facilitated it because in order to stay on the gold standard,

149
00:14:26,030 --> 00:14:29,840
you had to you had a number of policy choices, one of which was to close your economy off.

150
00:14:30,940 --> 00:14:37,749
These developments combined condemned the world economy until about 1949 to what some contemporary economist called,

151
00:14:37,750 --> 00:14:41,500
I have this phrase, a permanent condition of quasi emergency.

152
00:14:41,830 --> 00:14:47,860
And I can't help but feeling that we've been living in a permanent condition of quasi emergency for quite a few years, too.

153
00:14:48,130 --> 00:14:54,250
So the first thing I want to say, really, this is my first sort of point, is that really these are four deeply troubled decades, not two.

154
00:14:54,430 --> 00:14:58,510
It's 1915 to 1949 or even 1950.

155
00:14:58,750 --> 00:15:06,130
Mm hmm. And, you know, in doing this, of course, many, many turn to history to assess how bad things were and what lay ahead and the risk.

156
00:15:06,280 --> 00:15:12,610
And this is where this is a kind of professional caveat here. The risk of basing predictions on history alone are considerable in 1928.

157
00:15:12,820 --> 00:15:18,550
President elect Herbert Hoover. Given that in modern times the US had only known a booming economy, claimed,

158
00:15:18,700 --> 00:15:21,940
we shall soon see the day when poverty is banished from the face of the earth.

159
00:15:22,750 --> 00:15:30,640
So this is sort of, you know, the memory of memories are spectacularly conditional on the contemporary and quite short term.

160
00:15:31,270 --> 00:15:36,550
There are important contrasts between the crisis that Europe faces today and that of the interwar period.

161
00:15:37,030 --> 00:15:42,939
The Great Depression became so severe, in part because governments everywhere increased protectionism.

162
00:15:42,940 --> 00:15:52,809
So trade controls, tariff barriers and quotas bound by a dense web of multilateral agreements and by the history of the interwar period.

163
00:15:52,810 --> 00:15:58,570
In fact, one of the most striking differences between then and now so far is that trade has not been politicised.

164
00:15:58,840 --> 00:16:03,700
You know, there is talk, but. As a result, tariffs and quotas are not on the rise.

165
00:16:03,700 --> 00:16:06,939
The other major difference. But this is speaking as a historian.

166
00:16:06,940 --> 00:16:13,780
The other major difference is that events so far have not triggered political violence on anything like the levels of the 1920s or thirties.

167
00:16:14,050 --> 00:16:18,670
Though this is certainly not to ignore the very troubling signs of polarisation and

168
00:16:18,670 --> 00:16:24,190
nationalism in countries facing the deepest cuts in state spending and economic growth.

169
00:16:25,750 --> 00:16:29,320
But these differences should not give rise to any complacency.

170
00:16:29,830 --> 00:16:35,230
The absence of widespread political support for extremist political parties is not the best measure

171
00:16:35,500 --> 00:16:39,960
of whether the political situation may become as serious as it did in the interwar period.

172
00:16:39,970 --> 00:16:47,380
So this is a kind of the media has a tendency to look for fascists and and that kind of rhetoric and behaviour of the far right.

173
00:16:47,410 --> 00:16:50,050
Not saying that we shouldn't look for that we should.

174
00:16:50,410 --> 00:16:58,540
But on a broader canvas, it's important to remember after 1918 that economic nationalism was not just popular with fascists.

175
00:17:00,840 --> 00:17:06,450
I'm not really talking about communist I realise or international socialism in this talk because that doesn't seem to have a current connection.

176
00:17:06,450 --> 00:17:12,359
But. But economic nationalism appealed to political leaders and voters across the political

177
00:17:12,360 --> 00:17:17,940
spectrum because it protected the home market and because it met a newfound expectation,

178
00:17:18,150 --> 00:17:21,900
encouraged in the war that the state would facilitate employment.

179
00:17:22,920 --> 00:17:28,920
The notion of economic self-sufficiency also connected to wider ideas about the state's role in

180
00:17:28,920 --> 00:17:35,280
guaranteeing security that continue to have major implications for global peace and prosperity.

181
00:17:36,320 --> 00:17:41,780
So I can't remember what theme this is. Theme number two. Just got a quick check at the time.

182
00:17:43,100 --> 00:17:46,610
Yes. So economic instability and national security,

183
00:17:46,940 --> 00:17:55,520
it was in 1648 that the Treaty of Westphalia first enshrined that states were responsible for the preservation of security and international peace.

184
00:17:56,750 --> 00:18:00,770
It's a seminal moment, of course, in the history of international relations by the mid-19th century.

185
00:18:00,890 --> 00:18:05,629
This principle had been had become coupled with the notion of territoriality.

186
00:18:05,630 --> 00:18:10,610
So it becomes fixed with the idea that the state is also connected to a bounded piece of territory.

187
00:18:11,850 --> 00:18:15,620
And this began a obsession with protecting national frontiers.

188
00:18:15,640 --> 00:18:19,530
So this is a relatively historically chargeable phenomena.

189
00:18:19,890 --> 00:18:25,890
Borders were increasingly fortified in physical terms and accompanied by new and sophisticated

190
00:18:25,890 --> 00:18:31,110
bureaucratic practices to control the movement of people within as well as between countries.

191
00:18:31,110 --> 00:18:37,380
And of course, I'm looking at Jane Kaplow when I say that, because Jane's the great expert on that state became obsessed with population.

192
00:18:37,620 --> 00:18:40,950
It wasn't just the number of people that counted, but their quality.

193
00:18:41,370 --> 00:18:44,579
Eugenicist ideas fuelled a crude ethno nationalism,

194
00:18:44,580 --> 00:18:54,750
which ranked nations and peoples abroad and justified racist and eugenicist policies towards asocial undesirables and minority groups at home.

195
00:18:56,020 --> 00:19:02,800
In the 1920s and thirties. The new science of nutrition was also important, and this changed the meaning of hunger.

196
00:19:02,980 --> 00:19:08,290
Of course, we think about the hungry thirties hunger from a phenomenon denoting just a lack of food too,

197
00:19:08,290 --> 00:19:10,990
in association with the new term malnutrition.

198
00:19:11,710 --> 00:19:18,580
National security was now understood in relation to the intact ness of the human body, and food became a weapon of war.

199
00:19:18,610 --> 00:19:26,020
And of course, this fits into current debates about food security, which so far separated, seem to be separate from the financial crisis.

200
00:19:26,770 --> 00:19:29,260
But somehow I feel that they're not.

201
00:19:30,220 --> 00:19:36,880
As the influential Polish banker and military strategist Ivan BLOCK declared in 1899, the future of war is not fighting,

202
00:19:37,150 --> 00:19:42,430
but famine, the bankruptcy of nations and the break-up of the whole of social organisations.

203
00:19:44,530 --> 00:19:51,140
Ideas of international society, exemplified by the League of Nations, which existed between 1920 1946.

204
00:19:51,160 --> 00:19:59,649
I feel I have to put the 1946 part because most people think the League of Nations really stopped working about, well, 19, 20 or at best 1936.

205
00:19:59,650 --> 00:20:07,510
But it actually continued throughout the Second World War. The League of Nations sought to combat these trends in an energetic striving for a new

206
00:20:07,510 --> 00:20:13,480
type of diplomacy that would replace state interest with a broader view of states duties.

207
00:20:13,630 --> 00:20:17,740
And I think it's always important to think about that state interest of states duties.

208
00:20:18,880 --> 00:20:24,130
But the League of Nations faced an uphill battle to develop authority on a whole host of questions.

209
00:20:24,130 --> 00:20:30,930
And of course, part of the the key to understanding the travails of the League of Nations lies in its title is A League of Nations,

210
00:20:30,940 --> 00:20:35,610
so that the principal guiding authority of the league was state sovereignty.

211
00:20:35,620 --> 00:20:40,870
So actually going to trying to get states to understand their duties, they're busy asserting their rights.

212
00:20:41,230 --> 00:20:48,760
So that's not terribly unfamiliar. But it's especially important in the context of international economics and finance,

213
00:20:48,760 --> 00:20:52,149
which wasn't included in the brief of the League of Nations at all. To start with.

214
00:20:52,150 --> 00:20:55,330
The league wasn't supposed to have any authority in that field,

215
00:20:55,330 --> 00:21:02,440
apart from a kind of general point that Wilson articulated in the 14 points about promoting free trade.

216
00:21:04,800 --> 00:21:10,860
But the financial crisis and this is also why I started with Austria, the financial crisis in Central and Eastern Europe.

217
00:21:11,100 --> 00:21:17,759
And the campaigning by leading economists, notably Keynes and the economic consequences of the piece is an important part of that dynamic.

218
00:21:17,760 --> 00:21:23,580
So it's not about just about reparations. It's actually about the economics of of the of the peace settlement.

219
00:21:23,590 --> 00:21:28,830
Arthur Pigou and Gustav Castle prompted the leagues, nation states to member states to think again.

220
00:21:29,430 --> 00:21:34,739
And what became the league's economic and financial organisation, which was at the start just a handful of men.

221
00:21:34,740 --> 00:21:41,520
I mean, literally four or five people relied upon a transnational arrangement of private agencies,

222
00:21:41,520 --> 00:21:45,780
banks, universities and scientific societies to make an impact.

223
00:21:46,800 --> 00:21:51,000
Its first groundbreaking act of rescue came in Austria in 1922,

224
00:21:51,540 --> 00:21:57,540
and the Economic and Financial Organisation led by Arthur Salter and amongst supported amongst others by a young pair.

225
00:21:57,540 --> 00:22:03,209
Jakobsen and a clutch of officials at the Bank of England devised a multilateral programme of private,

226
00:22:03,210 --> 00:22:08,850
financial and inter-governmental support that brought stability at a price to Austria.

227
00:22:10,040 --> 00:22:13,250
This is a founding moment in the history, actually, of the IMF,

228
00:22:13,880 --> 00:22:17,600
because this sort of practice of oversight becomes sort of embodied in what

229
00:22:17,600 --> 00:22:21,980
the IMF is institutionally and some of the people that went to work for it.

230
00:22:22,340 --> 00:22:29,069
Something I'll come back to. This fledgling economic and financial organisations persuaded the governments of Britain,

231
00:22:29,070 --> 00:22:33,150
France, Belgium, Italy, Czechoslovakia, the Netherlands and Spain.

232
00:22:33,810 --> 00:22:38,459
I kind of like putting all these states in because you see the good guys up in the 21st century.

233
00:22:38,460 --> 00:22:40,410
Who are the good guys? You know them.

234
00:22:40,470 --> 00:22:48,270
The debt is in the credits to shift around these creditors guaranteed bonds that would be marketed by major Austrian banks in New York and London.

235
00:22:48,870 --> 00:22:55,409
The states were all League of Nations members, and although the US administration could not join because it wasn't a member of the League of Nations,

236
00:22:55,410 --> 00:22:59,640
JPMorgan, Morgan and Company were an important supporter and investor behind the scene.

237
00:23:00,450 --> 00:23:07,710
In return, the Austrian government offered up its state income from its monopoly on tobacco and customs revenue as collateral.

238
00:23:09,230 --> 00:23:17,809
The financial security afforded by these foreign investors was and this arrangement was reinforced by a series of extraordinary political guarantees.

239
00:23:17,810 --> 00:23:22,280
And the stress on this is the political guarantees that for the first time handed

240
00:23:22,280 --> 00:23:27,010
financial oversight of a nation state to an inter-governmental organisation.

241
00:23:27,020 --> 00:23:32,959
They had, in fact attempted to have networks of bankers float bonds in 1921 and 22.

242
00:23:32,960 --> 00:23:38,660
But it's only when the financial oversight and the political support comes in that this scheme works.

243
00:23:40,260 --> 00:23:44,420
The financial security. Afforded by the foreign investors.

244
00:23:45,960 --> 00:23:50,040
And this arrangement was reinforced with the Geneva Protocol is the kind of

245
00:23:50,040 --> 00:23:54,240
the technical term for this negotiated through the Council in October 1922,

246
00:23:54,510 --> 00:24:01,290
required Austria to establish an independent central bank and restabilize its currency on the international gold standard.

247
00:24:02,280 --> 00:24:07,139
I think what I'm doing is I'm blinding myself by stunning light league intervention and

248
00:24:07,140 --> 00:24:11,970
the measures it insisted the Austrian government take made this stabilisation credible.

249
00:24:12,420 --> 00:24:16,560
It agreed to a Austria that is agreed to a rigorous programme of fiscal retrenchment.

250
00:24:16,770 --> 00:24:20,280
Food subsidies were cut and state expenditure was slashed.

251
00:24:20,610 --> 00:24:23,309
Some 50,000 civil servants lost their jobs.

252
00:24:23,310 --> 00:24:30,750
And although pension costs of former officials who once administered the empire remained a considerable drain on resources,

253
00:24:30,900 --> 00:24:34,080
and this literally involved them taking Austrian state officials,

254
00:24:34,080 --> 00:24:40,170
taking their ledgers to League of Nations officials who would look and check the expenditure and sort of, you know, cross things.

255
00:24:40,170 --> 00:24:43,200
Answer, Yes, you can spend this. No, you can't spend that and so on.

256
00:24:44,750 --> 00:24:50,240
The international community's commitment and control over the formulation of Austria's path to recovery

257
00:24:50,420 --> 00:24:54,830
was reinforced by the appointment of a commissioner general of Austrian finances for the league,

258
00:24:55,070 --> 00:25:03,320
the former mayor of the Rotterdam, Alfred Rudolf Timmerman. A powerful personality and a liberal of the classic 19th century variety, the great,

259
00:25:03,320 --> 00:25:09,320
fabulous moustache who had a deep and antipathy to socialism and socialists, which was no accident.

260
00:25:09,320 --> 00:25:14,600
Though the league tried to pretend they didn't know that he had a deep loathing for socialists and socialism.

261
00:25:15,110 --> 00:25:17,060
Timmermans set up shop in Red Vienna.

262
00:25:17,690 --> 00:25:25,280
He collected and analysed intelligence as to Austria's budgetary and monetary performance and sent monthly reports to the Council,

263
00:25:25,280 --> 00:25:30,469
which in turn authorised the tranches of financial aid to Austria for the next two years.

264
00:25:30,470 --> 00:25:37,420
Timmermans enjoyed extraordinary powers determining when and where disciples, governments spent or cut expenditure.

265
00:25:37,910 --> 00:25:43,190
His relations with Austrian politicians became deeply fractious as he became the personification

266
00:25:43,190 --> 00:25:48,140
of an unwelcome international interference in the new country's political and social programs.

267
00:25:48,320 --> 00:25:50,570
And of course, this was a new republic.

268
00:25:51,290 --> 00:25:57,590
However much other countries might have tried to present it differently in the immediate financial terms, Timmerman delivered.

269
00:25:57,890 --> 00:26:04,730
Austria was one of the first nations among those which suspended their membership of the gold standard during the First World War to return to it.

270
00:26:05,000 --> 00:26:08,120
And by 1924, its budget was back in the black.

271
00:26:09,540 --> 00:26:15,780
The league's intervention became a model for the financial rescue of Hungary, Greece and Bulgaria,

272
00:26:16,080 --> 00:26:22,500
and it was also used as a sort of model in the background for the stabilisation of the Weimar Republic.

273
00:26:22,500 --> 00:26:27,420
But it wasn't involved because it was too politically contentious and the league didn't have sufficient power.

274
00:26:27,750 --> 00:26:33,120
And actually Britain and the United States tried to keep the league away from the German question.

275
00:26:36,070 --> 00:26:42,310
Sorry I applied to myself again. But apart from that, there was immediate pain.

276
00:26:42,340 --> 00:26:48,280
I mean, obviously the stabilisation came with increased taxes, cuts in welfare and unemployment provision.

277
00:26:48,310 --> 00:26:53,020
Real interest rates went up while the opportunities to secure domestic credit declined.

278
00:26:54,270 --> 00:27:00,690
It's not without justification. In the eyes of the popular press, the league commissioner of Vienna, Tim Amman,

279
00:27:00,690 --> 00:27:04,590
took on the appearance of a Governor-General of an occupying colonial power.

280
00:27:04,860 --> 00:27:09,240
And what's interesting about this is actually the debate and the use of colonial language around cinnamon.

281
00:27:09,420 --> 00:27:17,610
But also the commissioner who went into Greece and Bulgaria is it's more mixed than it would be if it were in the 21st century.

282
00:27:18,780 --> 00:27:23,939
The the league, the Nick Nicholas Paletas, the first Greek delegate to the league assembly,

283
00:27:23,940 --> 00:27:32,430
publicly praised the practical knowledge of league officials thanks to their long colonial experience, which is not something you get now.

284
00:27:34,030 --> 00:27:38,070
I've never quite sure if he's being ironic, so I think there was an element of that that even then.

285
00:27:38,280 --> 00:27:43,770
But in contrast to Central and Eastern Europe in the West, the world's wealthiest powers,

286
00:27:43,980 --> 00:27:50,200
we stabilise their currencies unilaterally and with no reference to the league or really to one another.

287
00:27:50,220 --> 00:27:56,430
So this is also a a marker of the fact that poorer countries who had to have financial assistance

288
00:27:56,430 --> 00:28:01,830
were forced into coordination and into multilateral coordination and cooperation to some extent.

289
00:28:02,160 --> 00:28:11,190
Whereas Britain, we stabilised sterling in 1925 and France fixed the franc to gold unofficially in 1926 and formally in 1928.

290
00:28:12,530 --> 00:28:20,180
Without really discussing the rate at which they will be stabilising with one another to any great extent.

291
00:28:21,890 --> 00:28:22,430
Castles.

292
00:28:22,430 --> 00:28:29,750
Castles Gustaf Castles issued a series of warnings about this as early as 1920, about the need to coordinate and cooperate that were not heeded.

293
00:28:30,290 --> 00:28:34,340
And this national approach created problems that very quickly came home to roost.

294
00:28:34,790 --> 00:28:41,030
It left pound sterling overvalued at around 10%, and the US dollar and the French franc significantly undervalued.

295
00:28:41,630 --> 00:28:46,550
British economic performance, notably the health of its manufacturing sector, was listless on gold.

296
00:28:46,790 --> 00:28:50,869
French and American exporters, on the other hand, enjoyed considerable supporters,

297
00:28:50,870 --> 00:28:55,130
which reinforced, of course, their commitment to the gold standard in the gold standard order.

298
00:28:56,670 --> 00:29:01,440
And it also reshaped and reinforced their attitudes to internationalism,

299
00:29:01,440 --> 00:29:09,120
which was equated with the gold standard once the world economy turned sour after 1929.

300
00:29:10,170 --> 00:29:14,850
Although instrumental in shaping its creation as early as 1944,

301
00:29:15,300 --> 00:29:19,260
some of the Depression delegation members made criticisms that were to become

302
00:29:19,260 --> 00:29:25,020
commonplace about the architecture of international financial relations after 1945.

303
00:29:25,870 --> 00:29:29,830
The IMF and the World Bank did not have sufficient financial resources.

304
00:29:30,250 --> 00:29:39,010
They were too much of an American show, and they were insufficiently connected and accountable to the humanitarian agenda of the new United Nations.

305
00:29:39,700 --> 00:29:41,770
The UN, too, was far from perfect.

306
00:29:42,160 --> 00:29:50,410
It spent too much time worrying about security interests of nation states and not enough time, as one member of the Depression delegation put it,

307
00:29:50,710 --> 00:29:55,900
trying to connect, quote, to the day to day activities and interests of the great mass of people.

308
00:29:56,290 --> 00:30:00,910
The UN needed to be made less political and more economic, cultural and social.

309
00:30:01,150 --> 00:30:05,680
And this insight really spoke to a wider problem that the groups of economists I

310
00:30:05,680 --> 00:30:10,480
have studied were occupied with how to educate and interest members of the public,

311
00:30:11,200 --> 00:30:16,510
both in the importance of economics, but also into them as to the importance of international society.

312
00:30:16,840 --> 00:30:25,540
And this really remains, I think, a very pressing problem for us today when facing some of the biggest challenges to financial and global security.

313
00:30:25,750 --> 00:30:30,960
Thank you. Thanking Patricia enormously.

314
00:30:31,500 --> 00:30:36,540
I'm stepping into the twenties and thirties with some caution.

315
00:30:37,410 --> 00:30:46,950
Not being course, not being an economic historian myself and I too, found your book on the twenties and thirties enormously revealing.

316
00:30:47,790 --> 00:30:56,040
I've, as Max said, been working on this comparison where again, I wasn't a twenties and thirties person.

317
00:30:57,120 --> 00:31:09,270
Peter TEMIN was. And what I'm trying to do in this talk is draw out some connections of the analysis that we assembled that ran across then and now.

318
00:31:09,840 --> 00:31:17,430
I'll entirely talk about Europe. Any remarks about the wider world will be completely tangential.

319
00:31:18,520 --> 00:31:27,690
Um hmm. I want to start by reminding us of the importance of the growth process.

320
00:31:27,900 --> 00:31:35,370
We've lived in the last four or five years where everyone's worried about the need to return to growth.

321
00:31:36,300 --> 00:31:39,690
That's where I'm going to begin. And then I'm going to talk about.

322
00:31:40,870 --> 00:31:47,710
What I do know about history of economic thought as distinct from facts, Cain's on the impediments to growth.

323
00:31:48,280 --> 00:31:53,679
And then I'm going to use what we learned from modern macroeconomics and Keynes to think

324
00:31:53,680 --> 00:31:58,970
about the impediments to growth in the twenties and thirties debt adjustment difficulties.

325
00:31:58,990 --> 00:32:02,740
We'll talk about the gold standard and the overall level of demand.

326
00:32:03,400 --> 00:32:08,560
And then again, talk about now in exactly the same framework.

327
00:32:11,250 --> 00:32:20,250
One of the most remarkable 12 pages ever written is chapter two of Cain's Economic Consequences of the Peace.

328
00:32:21,680 --> 00:32:25,480
This is a quiet, all words, very short.

329
00:32:25,490 --> 00:32:32,960
But it's a remarkable story of the growth process in Europe during the run up to the First World War,

330
00:32:33,710 --> 00:32:38,030
a very rapid, laboured, labour saving, technical progress.

331
00:32:38,660 --> 00:32:51,230
There's a wonderful paragraph of the rich gentleman lying in bed, in mourning, and all the things that he's able to consume from his bedside.

332
00:32:52,370 --> 00:33:03,860
And rapid labour force growth. We think of that about this standard solo model ways as leading to a rapid rate of economic growth coupled.

333
00:33:04,400 --> 00:33:07,190
And part of this was a high savings rate.

334
00:33:08,030 --> 00:33:17,900
As Kane says, the psychology of society that was such that they grew around the non consumption of the cake instincts of Puritanism.

335
00:33:18,410 --> 00:33:22,820
And so the cake increased. But to what end was not contemplated?

336
00:33:23,330 --> 00:33:28,400
Individuals were inclined not so much to abstain as to defer.

337
00:33:29,490 --> 00:33:33,389
This as those in the audience will know.

338
00:33:33,390 --> 00:33:39,510
This is the Ramsey growth model and it's knows not everyone knows that the Ramsey

339
00:33:39,510 --> 00:33:44,219
GROSS model emerged after a dinner conversation between Kane's and Ramsey,

340
00:33:44,220 --> 00:33:49,980
in which Ramsey said that Cain sent Ramsey away to write down what they'd just been talking about.

341
00:33:49,980 --> 00:33:57,240
And that's that's that model. It's a model of deferring and saving.

342
00:33:58,420 --> 00:34:02,410
But this was an international system within Europe.

343
00:34:03,280 --> 00:34:12,040
The short quote The pace of Germany gave her neighbours an outlet for their products in exchange for

344
00:34:12,040 --> 00:34:18,220
which the enterprise of the German merchant supplied them with their chief requirements at a low price.

345
00:34:18,850 --> 00:34:26,830
Everybody living now will understand what that means about the relationship between Germany and Spain and Greece and Italy.

346
00:34:28,170 --> 00:34:30,750
And furthermore, it was a global system.

347
00:34:32,340 --> 00:34:44,340
The accumulative habits of Europe before the war were necessary condition for the growth of the surplus capital goods accumulated by Europe,

348
00:34:44,610 --> 00:34:50,069
a substantial part of which were exported abroad, where investment made possible.

349
00:34:50,070 --> 00:34:55,020
The development of the new resources of food and materials and transport and enabled the

350
00:34:55,020 --> 00:35:00,510
old world to stake out a claim in the natural wealth and virgin potentialities of the new.

351
00:35:01,080 --> 00:35:08,580
I grew up in Melbourne which was founded by a bunch of, say, bushrangers,

352
00:35:08,580 --> 00:35:21,120
but pretty nearly that who drove out the Aboriginal population in southern Victoria in 1836, by 1880, that's to say 44 years later.

353
00:35:21,360 --> 00:35:26,310
Melbourne took 10% of all of Britain's exports and the railways were built.

354
00:35:26,640 --> 00:35:35,010
And all around the empire this happened. This was a global system and thus the third and fourth parts.

355
00:35:35,220 --> 00:35:39,510
Not only was the Ramsay model there, but the Lewis model comes from that too.

356
00:35:39,540 --> 00:35:46,860
Cheap primary commodities enabling high profits and the accumulation of capital in the industrial centre of the world.

357
00:35:48,750 --> 00:35:54,930
So different from the Maynard Keynes we think about and what the and such an

358
00:35:54,930 --> 00:35:59,520
extraordinary story this was meant to be a book complaining about the peace treaty.

359
00:35:59,910 --> 00:36:05,430
But it writes out what how how the world was meant to work before the treaty messed it all up.

360
00:36:06,230 --> 00:36:11,330
Now, how does the treaty mess it all up? Well, it's about reparations.

361
00:36:11,480 --> 00:36:18,690
That's what the book's about. But then there are that the next ten years.

362
00:36:19,640 --> 00:36:30,230
And Cains discovers that there is much else beyond reparations that needs to be thought about and they treat tract on monetary reform,

363
00:36:30,230 --> 00:36:37,580
the treaties on money, the economic consequences of Mr. Churchill as a story of extraordinarily imaginative

364
00:36:37,790 --> 00:36:42,320
with its with this growth model in his head trying to figure out why it doesn't work.

365
00:36:43,130 --> 00:36:46,880
And I was put onto this by Peter TEMIN.

366
00:36:47,810 --> 00:36:53,320
And going to the Macmillan Committee to see Caines at work ten years later.

367
00:36:53,320 --> 00:36:56,830
Trying to understand the way in which macroeconomics.

368
00:36:57,770 --> 00:37:00,440
Could stand as obstacles to this growth process.

369
00:37:00,980 --> 00:37:08,450
And there's a wonderful letter from Canes to Lydia Lopez over in which he writes, They found my speech perplexing.

370
00:37:08,920 --> 00:37:13,880
I think that I did it all right, but it was unfamiliar and paradoxical.

371
00:37:14,600 --> 00:37:18,739
And the Macmillan committee were quite right to find it perplexing.

372
00:37:18,740 --> 00:37:25,010
It was a complete mess. And that's what's so fascinating to read about it.

373
00:37:25,310 --> 00:37:33,560
This is Britain in 1931, having returned to gold Cain's that this committee of 15 of the most high powered people

374
00:37:33,560 --> 00:37:39,260
in economic and financial people in Britain gets eight full days to expound his views.

375
00:37:40,100 --> 00:37:47,690
And what does he try and talk about? First of all, we we ask what happens in that psychology.

376
00:37:47,690 --> 00:37:52,250
Remember the psychology of societies and savings leading to investment.

377
00:37:52,580 --> 00:37:57,920
What happens if investors are not prepared to make use of the available savings?

378
00:37:59,180 --> 00:38:04,550
He analyses this problem in the light of Britain's unsuccessful return to the gold standard.

379
00:38:04,820 --> 00:38:10,490
Tight money make it course it makes investment for relative to saving.

380
00:38:10,730 --> 00:38:18,200
This is all new stuff. The quantity theory of money is that the back of their minds is macroeconomics, distinguishing investment and saving.

381
00:38:18,200 --> 00:38:22,010
But what happens? Investment falls relative to saving will.

382
00:38:22,280 --> 00:38:29,689
Says Keynes. It causes unemployment and that that's meant to cause wages to fall and so bring about an adjustment of competitiveness.

383
00:38:29,690 --> 00:38:35,060
And that's how the gold standard is meant to work. But actually, wages don't fall and it doesn't work.

384
00:38:35,990 --> 00:38:41,450
And they said to him, Well, then what happens? And he says, Well, it causes unemployment.

385
00:38:41,450 --> 00:38:46,610
And there's a couple of wonderful paragraphs. And then he says, Let me explain.

386
00:38:46,820 --> 00:38:54,200
And then he proceeds to explain how it causes unemployment in an economic model in which all resources are fully utilised and there's no unemployment.

387
00:38:54,830 --> 00:39:04,760
And this is no surprise that they found it perplexing. And the story of the next 18 months is of his Cambridge colleagues figuring out how to get.

388
00:39:05,630 --> 00:39:13,730
Richard Carnes multiplier into this shortage of aggregate demand and the process of real growth can be impeded by

389
00:39:14,030 --> 00:39:24,470
an inadequate monetary policy and can be helped by the gold standard and can be helped by fiscal intervention.

390
00:39:24,620 --> 00:39:31,639
Enormously controversial. Keynes gets crucified on fiscal crowding out by Hopkins at the McMillin committee.

391
00:39:31,640 --> 00:39:39,320
But by 1936, it's it's there then, which is all meant to be about 1930 and the gold standard.

392
00:39:39,320 --> 00:39:45,050
So difficult wage cuts are too slow. But Keynes doesn't advocate leaving the gold standard.

393
00:39:46,860 --> 00:39:51,050
He's posited proposed cash walls if demand expansion.

394
00:39:51,530 --> 00:39:58,819
And as Hopkins and others says, excuse me, this is an economy with an external difficulty and you want to expand.

395
00:39:58,820 --> 00:40:05,750
Right. And there's another letter to Lydia Lowe, Peckover, saying, I found this bit difficult or challenging,

396
00:40:06,050 --> 00:40:12,950
yet he advocates protection and and there's a complete riot.

397
00:40:13,310 --> 00:40:17,630
He has a fight with Lorna Robbins in another committee about that issue.

398
00:40:18,230 --> 00:40:20,960
And there's a discussion of why devaluation is better.

399
00:40:21,470 --> 00:40:27,770
But he doesn't advocate leaving the gold standard for reasons which are obscure and probably internally contradictory.

400
00:40:29,120 --> 00:40:33,470
Then. So we fixed it. General Theory 1936.

401
00:40:33,680 --> 00:40:37,610
Then comes the war. Then comes his heart attack.

402
00:40:37,610 --> 00:40:41,629
Then the war. And then there's the run up to Bretton Woods.

403
00:40:41,630 --> 00:40:46,080
So you think, well, fix the gold standard. So what happens in the clearing union?

404
00:40:46,430 --> 00:40:58,160
It's still a mess. What he wants to propose is endless loans from an international agency which can create bank or running overdrafts.

405
00:40:58,940 --> 00:41:03,890
All the stuff we've been discussing in European adjustment over the last two or three years.

406
00:41:04,610 --> 00:41:07,750
But what about the process of you will see why I'm saying this.

407
00:41:07,760 --> 00:41:15,950
What about the process of adjustment? If wage and price adjustment is too slow and protections ruled out, then.

408
00:41:17,800 --> 00:41:24,040
What does this 18 months of of a really difficult discussion about this.

409
00:41:24,940 --> 00:41:28,630
And. Then there emerges.

410
00:41:29,200 --> 00:41:32,590
What we all teach to undergraduates is the swan diagram.

411
00:41:32,740 --> 00:41:41,320
If you want to have a situation in which your country is not forced to austerity when it's in an external difficulty,

412
00:41:42,040 --> 00:41:51,219
if the country faces a situation where if it tries to keep full employment of demand, it's going to import too much capital flows.

413
00:41:51,220 --> 00:41:55,570
Very difficult to after the thirties.

414
00:41:56,380 --> 00:42:03,010
What do you do? You need another instrument and that instrument is currency depreciation.

415
00:42:03,100 --> 00:42:06,850
You can see why I'm saying all this in what's coming.

416
00:42:07,060 --> 00:42:18,460
It's obvious, but it's worth like this out if devaluing the currency and and crucially judging the degree of austerity by the amount

417
00:42:18,520 --> 00:42:26,350
necessary to release the resources which are demand for for net exports as a result of the currency depreciation.

418
00:42:26,590 --> 00:42:31,960
Then what you've got is an IMF program of 20 years later.

419
00:42:32,620 --> 00:42:38,830
It will take time. You need to be able to borrow during the adjustment period, both officially and from the market.

420
00:42:39,860 --> 00:42:50,030
And to cut forward 20 years. IMF practice came to involve part of the lending coming from the fund with conduct conditionality.

421
00:42:50,040 --> 00:42:56,990
We've talked about that earlier to make sure that the adjustment actually takes place.

422
00:42:58,010 --> 00:42:59,520
We've talked about this earlier.

423
00:42:59,540 --> 00:43:08,650
Valerie Hertzberg talked to us, was all about the need for conditionality to ensure that adjustments actually do take place.

424
00:43:08,660 --> 00:43:14,780
And this was the role of the fund, just as it's the role of European institutions at the moment.

425
00:43:15,960 --> 00:43:21,090
So. What are we thinking? This isn't Cain's, as it's normally told.

426
00:43:21,120 --> 00:43:27,750
This is a person with a growth theory in his head looking at the macroeconomic impediments to that growth process.

427
00:43:28,290 --> 00:43:33,270
There's a wonderful obituary to Cain's by Schumpeter, which gives him be query plus.

428
00:43:35,700 --> 00:43:39,540
And it's you know, I'm Schumpeter. I worked on the theory of economic growth.

429
00:43:39,870 --> 00:43:48,239
This great man wrote 12 amazing pages and tried to make his life's work sorting out these 12 pages.

430
00:43:48,240 --> 00:43:51,690
And all he produces is this silly short run macroeconomic model.

431
00:43:51,990 --> 00:43:59,580
It's sad, isn't it, that it's a wonderful obituary and but the picture is there.

432
00:44:00,270 --> 00:44:07,530
Now, let's just look using that picture at the breakdown in the twenties and thirties,

433
00:44:07,920 --> 00:44:14,760
which he didn't understand in 1930, but he nearly understood by 1944.

434
00:44:14,760 --> 00:44:18,000
And his friends and colleagues worked. It worked out.

435
00:44:18,450 --> 00:44:24,270
And and now let's go back with that to your book of the Gold Standard.

436
00:44:24,600 --> 00:44:30,060
Your book on the Depression in Europe in the twenties.

437
00:44:32,350 --> 00:44:36,070
Start with reparations where Keynes began.

438
00:44:36,640 --> 00:44:44,360
A crucial impediment to growth. How much they caused the German in hyperinflation is.

439
00:44:44,470 --> 00:44:51,820
I'm not an economic historian. There's been much discussion of this, whether it was caused by the hyperinflation,

440
00:44:51,820 --> 00:44:57,040
caused by the need to finance the reparation payments, or whether the link was a more indirect one.

441
00:44:57,790 --> 00:45:05,110
Nevertheless, with the burden outstanding monetary and fiscal discipline was very difficult to institute.

442
00:45:06,000 --> 00:45:17,460
Then comes the Dawes Plan. Without dealing with the liability scheduling payments and it and and within its schedule,

443
00:45:17,760 --> 00:45:21,270
lending could be resumed and the aim of an ultimate payment.

444
00:45:22,080 --> 00:45:36,780
And as you talked about earlier, Patricia, we we have a period of four or five years of really rapid growth financed by borrowing comes to an end and.

445
00:45:36,780 --> 00:45:48,250
2028. 29. And it comes to an end under the shadow of a lack of clarity about how the reparations would be dealt with.

446
00:45:48,510 --> 00:45:57,600
Bruning Wonderful pronouncement in 31 that maybe they won't be paid predates the abandonment of the gold standard after a currency crisis,

447
00:45:58,200 --> 00:46:01,980
something like a month between that statement and the abandonment.

448
00:46:02,640 --> 00:46:11,310
And. And my bottom line, there's some similarity that connects then and now that I want to draw out.

449
00:46:11,970 --> 00:46:18,360
Secondly, this macroeconomic system was one with adjustment constraints.

450
00:46:18,780 --> 00:46:21,960
It's very hard to think about the 1920s.

451
00:46:23,220 --> 00:46:26,520
Economists about the best they can do is two country worlds.

452
00:46:26,790 --> 00:46:33,060
This is a four country world Britain, France, Germany and the US, one by one.

453
00:46:33,330 --> 00:46:38,580
Britain has the problems that Keynes faced, yet the Macmillan Committee.

454
00:46:39,740 --> 00:46:42,110
Germany had returned to gold.

455
00:46:43,070 --> 00:46:52,180
I'm not quite clear about this, but I think the value was uncompetitive and an overvalued exchange rate with a reparations burden.

456
00:46:53,090 --> 00:46:58,340
France returned at a competitive rate and the US was in a competitive position.

457
00:46:59,210 --> 00:47:04,300
Now I'd like to come to your remarks about this.

458
00:47:04,310 --> 00:47:09,140
The gold standard could have worked. Well, just ask yourself how.

459
00:47:10,010 --> 00:47:13,040
Think about Keynes saying Britain's over value.

460
00:47:13,790 --> 00:47:18,290
That's to say uncompetitive and the others are too competitive.

461
00:47:18,560 --> 00:47:25,130
What could have worked but teach undergraduates that you need a period of adjustment?

462
00:47:25,340 --> 00:47:30,410
How long, how quickly do you expect that adjustment to to to work?

463
00:47:31,300 --> 00:47:37,600
And crucially, do you expect the surplus countries to play a useful role in that adjustment process?

464
00:47:38,950 --> 00:47:50,620
Britain Cain's talking about nowhere in history could we get a is there evidence that we could get the necessary fall in wages and prices in Britain?

465
00:47:50,650 --> 00:47:57,790
That's the Macmillan Committee. Where in history is an allowance of policy to have the upward movement.

466
00:47:58,660 --> 00:48:02,560
France sterilises and doesn't allow this to happen.

467
00:48:03,550 --> 00:48:07,570
Now you're nodding. And let me just ask you.

468
00:48:07,750 --> 00:48:16,570
The gold standard could have worked. Does that mean that the U.S. should have run much looser monetary policy during the great boom that led to 1929?

469
00:48:17,960 --> 00:48:22,450
No. But but from 26 on.

470
00:48:22,960 --> 00:48:30,610
What I'm trying to draw attention to is this is a fixed exchange rate system with uncompetitive positions,

471
00:48:30,610 --> 00:48:35,170
asymmetric shocks, boisterous economy in all the twenties,

472
00:48:35,770 --> 00:48:42,880
and the inability that 1928 is full of discussions between Britain and the US

473
00:48:43,210 --> 00:48:46,930
in which the British plead with the Americans not to raise the interest rate.

474
00:48:47,380 --> 00:48:51,640
And and and we get the great boom in 29 as a result.

475
00:48:51,850 --> 00:48:55,780
Fixed exchange rate systems are very difficult to bring about.

476
00:48:56,590 --> 00:49:02,230
Monetary policy is wrong. And furthermore, the adjustment of relative costs and prices is difficult.

477
00:49:04,740 --> 00:49:14,400
And thirdly, this was a system in which global aggregate demand wasn't well managed, not just a relative adjustment,

478
00:49:14,820 --> 00:49:23,250
but absolute global demand, inadequate of aggregate costs and prices in the system were wrong.

479
00:49:23,820 --> 00:49:29,850
The great inflation after the first war had I don't know the evidence of this.

480
00:49:30,660 --> 00:49:37,020
But the it does seem not with too many double negatives.

481
00:49:37,200 --> 00:49:42,750
It does seem that there wasn't enough gold around for the new higher world level of prices,

482
00:49:44,640 --> 00:49:52,060
making that claim strongly as difficult because there were there was withdrawal of gold, as you've described, from circulation.

483
00:49:52,080 --> 00:50:01,590
Nevertheless, even had there not been, this was a system in which the quantity of money had been had that done to it by the post-war inflation,

484
00:50:01,860 --> 00:50:06,540
which had been caused by features that you so well described.

485
00:50:08,750 --> 00:50:18,560
Then you stick on top of this, the drying up of the loans to Germany by 1928, which had begun under the Dawes Plan.

486
00:50:18,950 --> 00:50:25,130
They further dampen demand. Then you have the German reparations difficulty.

487
00:50:25,550 --> 00:50:28,970
And then you have the currency crisis.

488
00:50:28,970 --> 00:50:35,150
Germany and Britain. And then, crucially, you have the wrong response in the US.

489
00:50:35,720 --> 00:50:41,360
Tie money at that stage to prevent the US losing gold rather than loose response.

490
00:50:42,850 --> 00:50:47,980
This is a very difficult system to run when there are asymmetric shocks.

491
00:50:49,800 --> 00:50:53,510
Toto summarise. This system caused.

492
00:50:53,570 --> 00:50:58,970
And you will see why this summary is here, given what I'm going to say about where we are now.

493
00:50:59,320 --> 00:51:10,730
The system cause deficit. Countries deflate since they couldn't devalue, and it didn't ensure that surplus countries correspondingly spent a lot.

494
00:51:11,540 --> 00:51:16,999
It made the relative competitiveness position of countries difficult to default and

495
00:51:17,000 --> 00:51:24,410
over overall this having a stock of a stock of debt which made investment risky.

496
00:51:25,990 --> 00:51:33,850
Growth prospects leading to an adequate level of demand were made worse by the adjustment mechanism and by the overhang of debt.

497
00:51:36,250 --> 00:51:43,520
Now let's. Go fast forward from that story to the world where we are now.

498
00:51:45,920 --> 00:51:51,230
Until 2008, the establishment was the euro was very successful.

499
00:51:52,040 --> 00:51:57,500
High growth rates, high savings in the north and rapid savings in the south.

500
00:51:57,650 --> 00:52:04,220
Go back to Cain's as I was thinking about this this European growth model in the first.

501
00:52:05,130 --> 00:52:12,300
Decade of European Monetary Union looks not dissimilar to the story of Europe before the First World War.

502
00:52:12,390 --> 00:52:19,360
The great vision. So enthusiastically embraced an emerging market all around the south of Europe,

503
00:52:19,660 --> 00:52:25,570
high savings in the north international system and part of a global system.

504
00:52:25,870 --> 00:52:37,620
That's Keynes writing in 1929. And it's a story of the model, of the understanding of what this great new project in Europe was going to do,

505
00:52:37,630 --> 00:52:45,010
led by Chancellor Kohl, whose huge ambition was to reintegrate Europe after the experience.

506
00:52:47,480 --> 00:52:50,540
And I'm on the wrong page. I'm trying to be there.

507
00:52:55,650 --> 00:53:00,600
The the area appeared to be cushioned against shocks and exchange rate.

508
00:53:00,960 --> 00:53:06,510
Of course, they were a thing of the past all. Let's ask ourselves.

509
00:53:07,620 --> 00:53:15,390
What? This? The question Keynes didn't ask himself, didn't know how to in 1929.

510
00:53:15,630 --> 00:53:22,380
In 1919, what was required to make that story before the First World War work?

511
00:53:23,070 --> 00:53:32,310
We now know so much more macroeconomics. We can ask what was required to make this story in the European Monetary Union work.

512
00:53:33,290 --> 00:53:39,560
Wages and prices need to be set in the knowledge that each country needs to remain sufficiently competitive.

513
00:53:40,280 --> 00:53:46,190
And there is some remarkably prescient speeches about this by Otmar Issing,

514
00:53:46,640 --> 00:53:55,820
who is very sceptical about whether the institutional arrangements for doing this in Germany were competitive.

515
00:53:56,060 --> 00:54:02,690
I'm putting this back to front whether Southern Europe was compatible with the institutional arrangements for doing this in Germany.

516
00:54:03,830 --> 00:54:09,240
There are some marvellous. All. Now come to this, the bottom of the plate.

517
00:54:09,900 --> 00:54:20,070
Of course, external balance is needed each period, but each region requires to be solvent in the long run,

518
00:54:20,430 --> 00:54:28,230
just as Texas does and just as Scotland still does within within Britain.

519
00:54:29,550 --> 00:54:38,730
But within that solvency of the. Of of the peripheral regions, there is an ambition of the integration of credit markets.

520
00:54:39,300 --> 00:54:42,840
Risk premium would disappear. Joining common currency area.

521
00:54:43,110 --> 00:54:53,760
And and the crucial discipline mechanism put in place was the stability and Growth Pact to prevent public disorder from destroying this.

522
00:54:54,260 --> 00:54:59,840
This integration. And there are some very it's not just my racing.

523
00:55:00,320 --> 00:55:04,760
It's my colleagues in the macroeconomics profession who wrote papers with forward

524
00:55:04,760 --> 00:55:09,440
looking wage and price setters who would understand the world they were in.

525
00:55:09,830 --> 00:55:14,180
And that discipline would cause them to set wages and prices appropriately.

526
00:55:14,840 --> 00:55:20,180
And they're forward looking like all modern macroeconomics, forward looking consumers,

527
00:55:20,180 --> 00:55:24,020
and they understand the budget constraint and they don't spend too much.

528
00:55:24,890 --> 00:55:30,980
And I and and then you sticking on top of that, the Stability and Growth Pact.

529
00:55:31,460 --> 00:55:38,120
And that's that's a a well-functioning system, you think and my profession thought that.

530
00:55:38,210 --> 00:55:41,390
And the political optimists in Europe thought that.

531
00:55:43,050 --> 00:55:43,980
And then what happened?

532
00:55:45,040 --> 00:55:54,040
Well, this is what happened, though, and that's a picture that's so familiar to all of you that I'd just like to flesh it for you to remember it.

533
00:55:54,430 --> 00:55:58,070
There's an it only goes up to 2008 when the crisis began.

534
00:55:58,120 --> 00:56:02,559
There's unit labour costs in Germany and there's Ireland at the top in Spain.

535
00:56:02,560 --> 00:56:06,010
And Greece isn't on this picture. It's right up at the top somewhere.

536
00:56:07,340 --> 00:56:11,090
And. This is a result of.

537
00:56:12,170 --> 00:56:15,950
Boom in the South and austerity in the north.

538
00:56:17,280 --> 00:56:26,880
Germany joined the monetary union and uncompetitive position and proceeded to do ten very admirable years of of of austerity.

539
00:56:28,280 --> 00:56:35,360
They guess what that was the savings. And that looks just like the savings that Keynes began his story with.

540
00:56:36,150 --> 00:56:44,670
And in the South, there's huge opportunity for for investment and a housing boom in Spain and Ireland.

541
00:56:44,670 --> 00:56:49,770
But all sorts of other stuff, emerging markets. Bought.

542
00:56:50,970 --> 00:56:54,380
That. Takes place now.

543
00:56:54,650 --> 00:57:05,330
Now we're trying to do what Keynes couldn't do in 1930, but began to be able to do in 1936 and 1944 understand the macroeconomics of what went wrong.

544
00:57:06,080 --> 00:57:15,950
First of all, if you're integrating credit markets in this wonderful way, the integration of credit markets,

545
00:57:16,550 --> 00:57:23,900
you certainly haven't got a gold standard constrained operating to discipline the peripheral regions.

546
00:57:24,680 --> 00:57:28,760
So then you ask, how does monetary policy work?

547
00:57:29,000 --> 00:57:32,330
It goes the other way. Everyone has a common interest rate.

548
00:57:32,540 --> 00:57:37,850
There's a boom in the South. Inflation. Real interest rates fall that augments the boom.

549
00:57:38,820 --> 00:57:47,310
And that's Sir Alan Walter's reason for Britain not joining the European monetary system long, long, long ago.

550
00:57:47,340 --> 00:57:52,110
Alan Walters understood this and.

551
00:57:54,050 --> 00:58:01,250
And and there's also an absence of any fiscal constraint on this process because of the Stability and Growth Pact.

552
00:58:01,760 --> 00:58:10,040
Max kept on talking to me during this period about how in the rapidly growing south.

553
00:58:10,400 --> 00:58:16,370
Fiscal revenues were abnormally strong. Not unlike Britain, but much more so.

554
00:58:16,820 --> 00:58:28,640
And in the face of those strong fiscal revenues, there was no discipline on from fiscal policy on this boom in the south, the boom which created that.

555
00:58:30,910 --> 00:58:39,660
As that interpolation in. Small type says a forward looking private sector would understand this.

556
00:58:40,200 --> 00:58:47,999
And my profession, full of people who think that the macro economy is full of forward looking, rational expectations.

557
00:58:48,000 --> 00:58:52,290
People wrote models about how this stuff is stable and.

558
00:58:53,800 --> 00:59:03,070
That's what happened. Now. This also, of course, created current account imbalances.

559
00:59:03,520 --> 00:59:10,040
That's the short story. Now, providing that the South is is solvent.

560
00:59:10,080 --> 00:59:17,660
We're there. We are back at the beginning, price and wage setting decisions and expenditure decisions thought to be stabilising.

561
00:59:17,680 --> 00:59:22,060
Well, that's just a course. That's what happens in an emerging market economy.

562
00:59:22,540 --> 00:59:31,090
An emerging market economy has got lots of investment opportunities and you borrow and invest and grow and and that's wonderful.

563
00:59:31,450 --> 00:59:36,399
And so the my colleagues idea was that this would gradually close up again.

564
00:59:36,400 --> 00:59:44,120
And that's cool. Um. But you can ask now.

565
00:59:44,120 --> 00:59:52,110
Now, here is the here's the really substantive point that I want to make here that could have been right.

566
00:59:54,360 --> 01:00:04,929
Just like the gold standard could have worked. But just like the gold standard was, I put this better than when writing these slides.

567
01:00:04,930 --> 01:00:09,580
Just like the gold standard was fragile with identified reasons.

568
01:00:09,850 --> 01:00:20,169
This was fragile to. Now when you were designing European Monetary Union, I remember John Williamson saying to me,

569
01:00:20,170 --> 01:00:24,220
you know, German reunification was the last asymmetric shock.

570
01:00:24,640 --> 01:00:28,630
This is going to be manageable from now on. And.

571
01:00:29,150 --> 01:00:36,490
And then you impose on this the worst macroeconomic crisis since the 19 late 1920s.

572
01:00:37,360 --> 01:00:41,170
And you've now got a fragile system without adjustment mechanisms.

573
01:00:42,050 --> 01:00:50,750
So let's now just ask what happens in this fragile adjustment mechanism with and use the

574
01:00:50,750 --> 01:00:59,150
same three categories debt adjustment mechanisms and the level of macroeconomic demand.

575
01:01:01,730 --> 01:01:04,880
Risk premium in the South fell to zero.

576
01:01:05,300 --> 01:01:09,530
Way to the left of here. Just like had been hoped.

577
01:01:10,360 --> 01:01:15,060
Then from this is the Greek crisis there.

578
01:01:15,310 --> 01:01:22,930
Greece not on the slide, but you see the risk premium rising and this ends at the end of 2011.

579
01:01:23,020 --> 01:01:29,470
So it's it's a year old and these risk premia.

580
01:01:31,810 --> 01:01:40,540
There's a monetary union in which the great play is low risk premier an investment in the south of the savings in the north.

581
01:01:41,330 --> 01:01:43,750
What happens? You get sovereign risk premia.

582
01:01:44,020 --> 01:01:52,630
The fear that the lack of competitiveness, you ask a country that is uncompetitive is that what's the prospect for tax revenues?

583
01:01:52,870 --> 01:02:01,900
And it's not good. Secondly, there begins by 2011 to be a country risk premium.

584
01:02:02,930 --> 01:02:14,860
Why a? There's a misprint in that slide during the lack of fear that given the lack of competitiveness,

585
01:02:15,940 --> 01:02:21,850
the country won't become competitive enough in the end to be able to service its international debt.

586
01:02:22,510 --> 01:02:31,480
And there's a financial risk premia that the banks were insolvent, given the second problem, and these risk premia became interrelated.

587
01:02:35,000 --> 01:02:42,230
I've lost my page back. I go. So the.

588
01:02:43,190 --> 01:02:47,110
Is. So there's that reset button.

589
01:02:47,170 --> 01:02:51,010
There's that. There's that. And look at.

590
01:02:52,820 --> 01:02:58,250
Adjustment difficulties in the face of this, there is a cooperative solution.

591
01:02:59,480 --> 01:03:02,540
Just like that could have been a gold standard solution.

592
01:03:03,290 --> 01:03:07,160
Or we could see a slide into sovereign default and Euro Break-Up.

593
01:03:08,300 --> 01:03:11,440
Mirroring quite closely what happened in the 1930s.

594
01:03:11,450 --> 01:03:17,990
No one wanted Maynard Keynes and at the Macmillan Committee, not even advocating leaving the gold standard.

595
01:03:18,440 --> 01:03:25,730
This is a slide into something that no one contemplated as part of policy design or.

596
01:03:26,960 --> 01:03:33,110
We could try and meet along with very little debt forgiveness, with austerity,

597
01:03:33,110 --> 01:03:43,730
and with probably ten years of astronomically high unemployment taking us into risk territory that none of us know how to say anything much about.

598
01:03:44,630 --> 01:03:49,960
What does the. Cooperative solution required.

599
01:03:50,560 --> 01:03:55,870
That's a rather bold statement at the top of that page, and I think I should withdraw that.

600
01:03:56,180 --> 01:04:00,880
Here's some thoughts about what a cooperative solution requires.

601
01:04:02,480 --> 01:04:05,840
It a mixture of further lending and.

602
01:04:06,260 --> 01:04:09,650
And just ask yourself, what?

603
01:04:09,860 --> 01:04:18,950
Where are we? Well, what was learned from the 1920s and 1931.

604
01:04:19,010 --> 01:04:22,580
In the setting up of Bretton Woods, the centre of the peace.

605
01:04:22,790 --> 01:04:28,280
You need adjustable real exchange rates in order to correct that problem.

606
01:04:29,390 --> 01:04:32,690
And you can have adjustable nominal exchange rates.

607
01:04:33,170 --> 01:04:36,680
So the adjustment process is an order of magnitude more difficult.

608
01:04:36,980 --> 01:04:40,880
The Asia crisis. Thailand. Korea.

609
01:04:41,420 --> 01:04:47,440
Malaysia. Slightly different. Indonesia crisis for a year.

610
01:04:47,450 --> 01:04:53,150
The worst crisis in history. Some of us thought for about three weeks that it was going to be the Great Depression again.

611
01:04:53,780 --> 01:04:58,050
And within a year and a half, there's the most wonderful process of export led growth.

612
01:04:58,070 --> 01:05:04,100
How they all devalue by 35% and get on with it and do severe austerity.

613
01:05:04,460 --> 01:05:07,860
And the mixture of those two things. So we can't do that.

614
01:05:07,880 --> 01:05:11,610
So what are we going to do? We need expenditure switching.

615
01:05:13,070 --> 01:05:20,750
Well, how do you do that? Southern goods have become much cheaper relative to goods in the north.

616
01:05:21,230 --> 01:05:24,410
It's difficult and too slow in a monetary union.

617
01:05:25,160 --> 01:05:35,210
And the. You ask yourself, Keynes thought the 10% overvaluation of Sterling in 1931 was unfixable.

618
01:05:35,720 --> 01:05:40,940
We're talking numbers 30% in that diagram, and everyone says, Well, you know, hang on.

619
01:05:41,360 --> 01:05:43,040
And that's why I wrote ten years.

620
01:05:43,370 --> 01:05:54,410
This is why now people are talking talking about five, 10% adjustment of real wages, but we're looking at much more required.

621
01:05:54,560 --> 01:05:59,540
We've just got to go on doing that much easier if there's more inflation in the north.

622
01:06:00,500 --> 01:06:03,980
Secondly, not just austerity in the south,

623
01:06:04,670 --> 01:06:17,090
but more expenditure in the north in in disregard of the Stability and Growth Pact ruled out by the rules imposed on the system by the.

624
01:06:17,100 --> 01:06:27,890
Well, I was going to say well-meaning, well thought out stability and growth pact designed to work in in favourable circumstances.

625
01:06:28,990 --> 01:06:37,950
And the only way that that story about more fiscal looseness in the North can be avoided is the two ways.

626
01:06:37,960 --> 01:06:48,040
One. To spend ten years adjusting. Or secondly, to do it by monetary policy and expand by running a surplus relative to the rest of the world.

627
01:06:48,780 --> 01:06:56,560
And I don't want to go there in this discussion, but that creates its own problems, given the global difficulties that we've got.

628
01:06:57,450 --> 01:07:00,870
And so let's just take the first two objectives.

629
01:07:01,200 --> 01:07:05,130
Growth can resume without both of these first two being achieved.

630
01:07:06,120 --> 01:07:10,440
Then what can we say about the adjustment?

631
01:07:11,500 --> 01:07:13,120
It'll take less time.

632
01:07:13,120 --> 01:07:22,389
The more that Germany agrees to a greater expansion of German demand and to a higher inflation in Germany, then we are back to the gold standard.

633
01:07:22,390 --> 01:07:30,250
In 1931, if the US had behaved according to the rules, this might have been saveable at that crucial moment.

634
01:07:30,760 --> 01:07:42,680
And France earlier in 1926. But if it's a ten year period, you work out how you're going to correct this 30% relative cost difference.

635
01:07:43,130 --> 01:07:50,900
Debts will grow and debt and the debt write down issue will become more demanding the longer time that adjustment takes the.

636
01:07:52,280 --> 01:07:59,060
How much write down that it'll depend on the capacity to pay and on who ends up bearing the costs of the write down.

637
01:08:01,940 --> 01:08:05,899
Issues to deal with include the recapitalisation of the ECB to deal with,

638
01:08:05,900 --> 01:08:11,479
write down of the ECB s assets and the extent to which lengthening of loans

639
01:08:11,480 --> 01:08:15,740
can stand in for formal debt write downs in the way that happened this week.

640
01:08:16,790 --> 01:08:22,810
Which didn't. Satisfy many people other than more delay.

641
01:08:25,130 --> 01:08:29,660
So we go right back to the beginning. The reason underlying a growth agenda,

642
01:08:30,260 --> 01:08:42,560
this project of developed developing the South with the savings of the North is a wonderful project, just like the late 19th century.

643
01:08:43,530 --> 01:08:53,750
Was. Just like after the First World War, the agenda has been impeded by macroeconomic constraints.

644
01:08:54,530 --> 01:09:00,260
And there you can let let's put it the following way.

645
01:09:00,460 --> 01:09:06,710
They're the overhang. On top of the bad adjustment process was debt created by war.

646
01:09:07,160 --> 01:09:18,920
Here, the overhang on top of the growth adjustment process is growth is debts created by ten years in which a policy wasn't properly understood.

647
01:09:19,130 --> 01:09:25,520
War leads to problems one way mismanaged policy leads to problems 60 years later.

648
01:09:28,200 --> 01:09:31,740
Three parts of the solution which I've described.

649
01:09:33,210 --> 01:09:37,320
And all of these need to be brought about for growth to be resumed.

650
01:09:38,670 --> 01:09:43,830
Slow adjustment, as we've all said, carries further risks of default and crisis.

651
01:09:44,670 --> 01:09:52,260
And in one sentence, the story about cooperation that you were talking about in the whole last part of your talk,

652
01:09:52,890 --> 01:09:57,120
both to preserve political stability in the south and.

653
01:09:58,090 --> 01:09:58,560
Valerie.

654
01:10:00,070 --> 01:10:10,690
With reference to our discussion earlier, to reassure ordinary Germans that this is only a one off move rather than the long run transfer union,

655
01:10:10,690 --> 01:10:16,599
which involves an understanding about how this is dealing with a problem that the

656
01:10:16,600 --> 01:10:23,230
institutions want we won't ever permit to happen again will try and prevent happening again.

657
01:10:23,470 --> 01:10:27,030
But this is not a permanent bailout solution.

658
01:10:27,520 --> 01:10:38,169
And the final remark that deals with your past, final words, this sort of transfer one off, didn't happen after World War One,

659
01:10:38,170 --> 01:10:47,050
but the Marshall Plan and other security arrangements did happen after World War Two and were part of why that was so different.

660
01:10:48,210 --> 01:10:53,310
This needs leadership, as well as the technical solutions on this on this page.

661
01:10:54,170 --> 01:10:55,500
Thanks very much.