Thank you very much and welcome to you all.
Welcome to the warden and thank you for attending. It's a great pleasure to have you all here.
I would like just to say a word or two about the new program for those who don't know about it.
And then to introduce our speakers. New program is called The Political Economy of the Financial Markets.
And when an American academic, Alan Grayson of Maryland, was asked what is political economy?
Is that just an old fashioned Oxford kind of word, an old fashioned, historical Scottish term for economics?
He said, No, no. Economics is about optimising, and political economy is why people don't optimise.
And one more natural topic then financial markets.
Another way of saying that more simply is it's to do with the institutional and
political framework in which financial markets develop and how they interact.
And to give you an idea, we're really we have three streams of research that have already started.
And the members of those research groups are here tonight is research group bring together people in academia,
people in the public sector, and people who work in financial markets.
One is on financial integration in Europe.
Somebody said, if this is multidisciplinary, does that mean you're looking for archaeologists to look into financial integration in Europe?
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.
That is regulatory capture, indeed, policy capture.
And it was David Vines who pointed out to me, people think of the in industries capturing regulators.
But actually ideology also captures regulators and ideology captures policymakers in issues like monetary policy.
So this question of the capture of policy by different interests and by changing economic circumstances.
Big literature in the seventies and eighties a little bit neglected recently,
but it seems vaguely, vaguely relevant to the financial crisis we've just lived through.
The third is slightly more macro nerdish, and that is you have these policy frameworks like inflation targeting fiscal targets.
And they were meant to insulate policy from politicians and their short term biases and goals.
And yet, in fact, when the private sector developed very big imbalances, credit booms, policymakers became kind of trapped in these very.
In my view, they became trapped in these regimes and failed to respond to the instability that was developing.
So what's the lesson we draw from that? How do we protect policymakers from political goals and yet make them free to
have discretion when they're faced with aberrations in the private sector?
I'm. The way we conducting the program.
One is through research groups that I mentioned and the other will be a series of lectures during the rest of the academic year.
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,
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.
So every evening at 5:00 this term, next year, on Monday evenings will be having speakers but from different disciplines,
looking at the role of the financial sector in the economy, not just from a discipline of economics,
but also from disciplines of politics, sociology, history and so forth.
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.
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,
because many people have written about the Great Depression and policy sources in the United States.
But very few people have written exclusively focusing on Europe.
And at the time I was reading a draft of a book that's coming out, I guess in February, is it, David?
A book written by David Vines and Peter TEMIN at MIT, published by Princeton, which has had various titles.
But I think the latest one is the leaderless economy why the world is talking about why
the world fell apart and how David Vines and Peter TEMIN would put it together again.
Is that approximately the shorter? It's a slightly shorter title.
It's an American title. Oxford titles are longer.
So I read these two books in parallel, and what I realised with horror was that Patricia is written around, I guess about 2000,
and when I read it this account of the 19 I was thinking about the thirties,
it was the kind of twenties that horrified me and I thought there are a bunch of things.
And when we had lunch together we talked about it and I said we should really do a joint seminar to look at this.
What a good way to kick off. Nice, optimistic way of kicking off a series of seminars on financial markets.
I hardly need to say it to most of you, but Patricia is professor of international history and Fellow of Jesus College.
She studied at King's College London and then was, I think,
reader in modern history at Keele came here in 2003 after writing that book and is a research director of
modern European Historical Research History Research Centre and the editor of Contemporary European History,
The Journal. And she's been taking a year sabbatical other than preparing for the evening when she is
working on the League of Nations and its economic committees and its institutional role,
which is a riveting topic on which she's published some things earlier.
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
to edit them out because very few of you have signed consent forms allowing yourselves to be podcast.
But then we'll have a break and you can ask Patricia all those questions you wanted to do from a historical perspective.
Let you have that your head on for a few minutes. Then on will come the podcast again for David Vine's talk.
David, as most of you know, is professor of economics and a fellow of Paleo College.
He's also adjunct professor at the Australian National University and a research fellow in CPR, initially educated in Melbourne.
And then he came to Cambridge and studied under and worked with James Mead,
who was what we wouldn't say a disciple of Kagan's, a deep admirer of Kagan's.
And some of David's work in this book is some really, I think,
new work on Keynes at the time of the Macmillan Committee, when we always thought the audience was confused.
But David discovered at the time Keynes was confused is probably a short summary of that too.
More to come. And before coming to to Oxford, he was the Adam Smith Professor of political economy indeed in Glasgow, I think.
Is that right and proper Scottish term?
Okay. I'm a Scot by origins. I can live with this. Let's then begin no more ado.
And Patricia, you will give a lecture, I think, and David will have a PowerPoint to show us some pictures.
And I'm going to give you. Yes, I've succumbed to the bug fest.
That is. Let me give you that. I think I might need this.
I've never spoken in here with this before. I'm going to need to shout it. But.
Right, I think that's very kind on the audience. Okay.
So I'm sort of speaking to the titles that Max provided us with addressing the crisis in Europe and the global economy,
lessons from the 1920s and thirties.
But I should begin by saying that historians, unlike economists, are always very nervous about lessons and are on our natural impulse.
And there are people in this room that know more about this is a kind of function of policy,
is to want to say how the present differs from the past rather than what makes it similar to the present.
Or to try and think about the past and make connections and draw out themes that are not so prominent in contemporary analogies.
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.
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.
So the twenties and thirties and why the twenties and thirties and whether we need to stretch that a little bit.
Then something about the relationship between politics and economics and then economics and national security as a way of thinking about ideology.
So I want to ask and obviously in the questions we can think about ideology more because it's a key a key connection.
But I wanted to sort of. From a perhaps less typical angle.
And then say something about the third theme austerity international organisations, international oversight and colonialism.
With regard to the case of Austria in the early 1920s, which I've been doing a bit of work on recently,
and fourthly, the importance and character of multilateral cooperation as I know that.
David is going to say a little bit about may do judging from the book title on the hegemonic stability and the
role of of the leader of the world's banker in in promoting economic financial stability in the interwar period.
And then finally how the origins of of current present day organisations of international financial and economic cooperation.
So the European Union from the EEC to me,
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,
that's something I've been working on,
as Max alluded to for a while in the by studying the economic and financial organisation of the League of Nations.
I can't. I've made the mistake of standing up, and now my reading glasses won't work.
So I'm going to just try and pare down to make sense of my text so I might hold this up.
That might work. So in 19 February, 1922, the Austrian ministers, Doctor Ferdinand KUHN and Georg Frankenstein, two particularly well named ministers,
announced to the League of Nations that their fellow citizens faced acute shortages of food, fuel and jobs and that state bankruptcy was imminent.
Theirs was not an isolated horror story. That year, Germany, Greece, Hungary, Bulgaria and Poland were also in the grip of financial meltdown.
Austria's plight in 1922 is a reminder that the Great Depression,
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.
Most governments, whether old or newly established faced,
testing questions at home as to the result of promises made by those who governed between 1915 and 1918.
And those promises were made in order, of course, to sustain a total war effort,
as did political parties who had sought public support in elections that were widespread at the end of the war.
National politics in 1918 1919, frequently turned on the issue of rights.
So this is a question about how to put expect political expectations into an economic framework.
And these rights included the right to vote independently of land ownership, especially for women, of course.
The right to greater representation by minority groups and colonialist peoples and the right to improved social conditions,
notably in the field of employment, housing and social protection.
So society's expectations of the state had changed.
But economic policy had not. When the war ended,
statesmen encouraged and supported by central banks and big business pulled back on the assumption that market forces would heal war battered economy.
So there's a withdrawal of the state from economic management for a variety of reasons, really, that I've kind of pulled together.
But the problems of such an approach were immediately laid bare by the destructive impact of rapidly rising
levels of inflation unleashed by the war and exacerbated by the challenges of reconstruction without foreign aid.
So there's a question also about needing support, where the support should come from.
And I mean, it's familiar. It's I'm sure it's familiar to all of you. A potent combination of financial,
political and social pressures culminated in episodes of acute hyperinflation that devastated the successive republics of the central powers,
notably those of Austria, Hungary, Germany and Poland.
Austria descended into hyperinflation as early as October 1921, with a monthly inflation rate of about 46% and unemployment running at over 33%.
Hungary Inflation grew to around 33% a month in 1923.
And of course, the famous example is the Weimar Republic in the in 1923, where prices doubled every two days.
But even in the comparatively stable setting of post-war Britain, inflation was about 16% in 1920.
So these impact of inflation had a profound impact around the world.
And of course,
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.
I've tried to sort of broaden our memory of which other states were affected by
it and why they perhaps don't remember the inflation in those sorts of ways.
Governments in the 1920s now made currency stability the primary goal of their efforts,
and that, of course, centred on resurrecting the international gold standard.
For those of you that are sort of unfamiliar with this history, I suspect that this plot is a bit more familiar with it.
A fixed exchange rate mechanism that was widely believed to have facilitated the great expansion of the international economy in the 19th century.
Between 1924 and 1929, 45 countries joined the gold standard.
Most of the British Empire and the Commonwealth joined in 1926.
I think it's sometimes forgotten just quite the number of countries that joined and the speed with which that happened after 1924.
But Austria was the first to go back to the gold standard bound the fates of national economies more closely.
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.
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.
Most states. Early European states. You may notice in my talk Britain sometimes a member of Europe and sometimes not.
In this case it's not most states, which is a sort of interwar understanding.
Most states introduce trade and currency controls,
adherence to the gold standard disseminated deflation worsened the depression and encouraged economic nationalism.
I mean, it facilitated it because in order to stay on the gold standard,
you had to you had a number of policy choices, one of which was to close your economy off.
These developments combined condemned the world economy until about 1949 to what some contemporary economist called,
I have this phrase, a permanent condition of quasi emergency.
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.
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.
It's 1915 to 1949 or even 1950.
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.
And this is where this is a kind of professional caveat here. The risk of basing predictions on history alone are considerable in 1928.
President elect Herbert Hoover. Given that in modern times the US had only known a booming economy, claimed,
we shall soon see the day when poverty is banished from the face of the earth.
So this is sort of, you know, the memory of memories are spectacularly conditional on the contemporary and quite short term.
There are important contrasts between the crisis that Europe faces today and that of the interwar period.
The Great Depression became so severe, in part because governments everywhere increased protectionism.
So trade controls, tariff barriers and quotas bound by a dense web of multilateral agreements and by the history of the interwar period.
In fact, one of the most striking differences between then and now so far is that trade has not been politicised.
You know, there is talk, but. As a result, tariffs and quotas are not on the rise.
The other major difference. But this is speaking as a historian.
The other major difference is that events so far have not triggered political violence on anything like the levels of the 1920s or thirties.
Though this is certainly not to ignore the very troubling signs of polarisation and
nationalism in countries facing the deepest cuts in state spending and economic growth.
But these differences should not give rise to any complacency.
The absence of widespread political support for extremist political parties is not the best measure
of whether the political situation may become as serious as it did in the interwar period.
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.
Not saying that we shouldn't look for that we should.
But on a broader canvas, it's important to remember after 1918 that economic nationalism was not just popular with fascists.
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.
But. But economic nationalism appealed to political leaders and voters across the political
spectrum because it protected the home market and because it met a newfound expectation,
encouraged in the war that the state would facilitate employment.
The notion of economic self-sufficiency also connected to wider ideas about the state's role in
guaranteeing security that continue to have major implications for global peace and prosperity.
So I can't remember what theme this is. Theme number two. Just got a quick check at the time.
Yes. So economic instability and national security,
it was in 1648 that the Treaty of Westphalia first enshrined that states were responsible for the preservation of security and international peace.
It's a seminal moment, of course, in the history of international relations by the mid-19th century.
This principle had been had become coupled with the notion of territoriality.
So it becomes fixed with the idea that the state is also connected to a bounded piece of territory.
And this began a obsession with protecting national frontiers.
So this is a relatively historically chargeable phenomena.
Borders were increasingly fortified in physical terms and accompanied by new and sophisticated
bureaucratic practices to control the movement of people within as well as between countries.
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.
It wasn't just the number of people that counted, but their quality.
Eugenicist ideas fuelled a crude ethno nationalism,
which ranked nations and peoples abroad and justified racist and eugenicist policies towards asocial undesirables and minority groups at home.
In the 1920s and thirties. The new science of nutrition was also important, and this changed the meaning of hunger.
Of course, we think about the hungry thirties hunger from a phenomenon denoting just a lack of food too,
in association with the new term malnutrition.
National security was now understood in relation to the intact ness of the human body, and food became a weapon of war.
And of course, this fits into current debates about food security, which so far separated, seem to be separate from the financial crisis.
But somehow I feel that they're not.
As the influential Polish banker and military strategist Ivan BLOCK declared in 1899, the future of war is not fighting,
but famine, the bankruptcy of nations and the break-up of the whole of social organisations.
Ideas of international society, exemplified by the League of Nations, which existed between 1920 1946.
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.
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
type of diplomacy that would replace state interest with a broader view of states duties.
And I think it's always important to think about that state interest of states duties.
But the League of Nations faced an uphill battle to develop authority on a whole host of questions.
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,
so that the principal guiding authority of the league was state sovereignty.
So actually going to trying to get states to understand their duties, they're busy asserting their rights.
So that's not terribly unfamiliar. But it's especially important in the context of international economics and finance,
which wasn't included in the brief of the League of Nations at all. To start with.
The league wasn't supposed to have any authority in that field,
apart from a kind of general point that Wilson articulated in the 14 points about promoting free trade.
But the financial crisis and this is also why I started with Austria, the financial crisis in Central and Eastern Europe.
And the campaigning by leading economists, notably Keynes and the economic consequences of the piece is an important part of that dynamic.
So it's not about just about reparations. It's actually about the economics of of the of the peace settlement.
Arthur Pigou and Gustav Castle prompted the leagues, nation states to member states to think again.
And what became the league's economic and financial organisation, which was at the start just a handful of men.
I mean, literally four or five people relied upon a transnational arrangement of private agencies,
banks, universities and scientific societies to make an impact.
Its first groundbreaking act of rescue came in Austria in 1922,
and the Economic and Financial Organisation led by Arthur Salter and amongst supported amongst others by a young pair.
Jakobsen and a clutch of officials at the Bank of England devised a multilateral programme of private,
financial and inter-governmental support that brought stability at a price to Austria.
This is a founding moment in the history, actually, of the IMF,
because this sort of practice of oversight becomes sort of embodied in what
the IMF is institutionally and some of the people that went to work for it.
Something I'll come back to. This fledgling economic and financial organisations persuaded the governments of Britain,
France, Belgium, Italy, Czechoslovakia, the Netherlands and Spain.
I kind of like putting all these states in because you see the good guys up in the 21st century.
Who are the good guys? You know them.
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.
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,
JPMorgan, Morgan and Company were an important supporter and investor behind the scene.
In return, the Austrian government offered up its state income from its monopoly on tobacco and customs revenue as collateral.
The financial security afforded by these foreign investors was and this arrangement was reinforced by a series of extraordinary political guarantees.
And the stress on this is the political guarantees that for the first time handed
financial oversight of a nation state to an inter-governmental organisation.
They had, in fact attempted to have networks of bankers float bonds in 1921 and 22.
But it's only when the financial oversight and the political support comes in that this scheme works.
The financial security. Afforded by the foreign investors.
And this arrangement was reinforced with the Geneva Protocol is the kind of
the technical term for this negotiated through the Council in October 1922,
required Austria to establish an independent central bank and restabilize its currency on the international gold standard.
I think what I'm doing is I'm blinding myself by stunning light league intervention and
the measures it insisted the Austrian government take made this stabilisation credible.
It agreed to a Austria that is agreed to a rigorous programme of fiscal retrenchment.
Food subsidies were cut and state expenditure was slashed.
Some 50,000 civil servants lost their jobs.
And although pension costs of former officials who once administered the empire remained a considerable drain on resources,
and this literally involved them taking Austrian state officials,
taking their ledgers to League of Nations officials who would look and check the expenditure and sort of, you know, cross things.
Answer, Yes, you can spend this. No, you can't spend that and so on.
The international community's commitment and control over the formulation of Austria's path to recovery
was reinforced by the appointment of a commissioner general of Austrian finances for the league,
the former mayor of the Rotterdam, Alfred Rudolf Timmerman. A powerful personality and a liberal of the classic 19th century variety, the great,
fabulous moustache who had a deep and antipathy to socialism and socialists, which was no accident.
Though the league tried to pretend they didn't know that he had a deep loathing for socialists and socialism.
Timmermans set up shop in Red Vienna.
He collected and analysed intelligence as to Austria's budgetary and monetary performance and sent monthly reports to the Council,
which in turn authorised the tranches of financial aid to Austria for the next two years.
Timmermans enjoyed extraordinary powers determining when and where disciples, governments spent or cut expenditure.
His relations with Austrian politicians became deeply fractious as he became the personification
of an unwelcome international interference in the new country's political and social programs.
And of course, this was a new republic.
However much other countries might have tried to present it differently in the immediate financial terms, Timmerman delivered.
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.
And by 1924, its budget was back in the black.
The league's intervention became a model for the financial rescue of Hungary, Greece and Bulgaria,
and it was also used as a sort of model in the background for the stabilisation of the Weimar Republic.
But it wasn't involved because it was too politically contentious and the league didn't have sufficient power.
And actually Britain and the United States tried to keep the league away from the German question.
Sorry I applied to myself again. But apart from that, there was immediate pain.
I mean, obviously the stabilisation came with increased taxes, cuts in welfare and unemployment provision.
Real interest rates went up while the opportunities to secure domestic credit declined.
It's not without justification. In the eyes of the popular press, the league commissioner of Vienna, Tim Amman,
took on the appearance of a Governor-General of an occupying colonial power.
And what's interesting about this is actually the debate and the use of colonial language around cinnamon.
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.
The the league, the Nick Nicholas Paletas, the first Greek delegate to the league assembly,
publicly praised the practical knowledge of league officials thanks to their long colonial experience, which is not something you get now.
I've never quite sure if he's being ironic, so I think there was an element of that that even then.
But in contrast to Central and Eastern Europe in the West, the world's wealthiest powers,
we stabilise their currencies unilaterally and with no reference to the league or really to one another.
So this is also a a marker of the fact that poorer countries who had to have financial assistance
were forced into coordination and into multilateral coordination and cooperation to some extent.
Whereas Britain, we stabilised sterling in 1925 and France fixed the franc to gold unofficially in 1926 and formally in 1928.
Without really discussing the rate at which they will be stabilising with one another to any great extent.
Castles.
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.
And this national approach created problems that very quickly came home to roost.
It left pound sterling overvalued at around 10%, and the US dollar and the French franc significantly undervalued.
British economic performance, notably the health of its manufacturing sector, was listless on gold.
French and American exporters, on the other hand, enjoyed considerable supporters,
which reinforced, of course, their commitment to the gold standard in the gold standard order.
And it also reshaped and reinforced their attitudes to internationalism,
which was equated with the gold standard once the world economy turned sour after 1929.
Although instrumental in shaping its creation as early as 1944,
some of the Depression delegation members made criticisms that were to become
commonplace about the architecture of international financial relations after 1945.
The IMF and the World Bank did not have sufficient financial resources.
They were too much of an American show, and they were insufficiently connected and accountable to the humanitarian agenda of the new United Nations.
The UN, too, was far from perfect.
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,
trying to connect, quote, to the day to day activities and interests of the great mass of people.
The UN needed to be made less political and more economic, cultural and social.
And this insight really spoke to a wider problem that the groups of economists I
have studied were occupied with how to educate and interest members of the public,
both in the importance of economics, but also into them as to the importance of international society.
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.
Thank you. Thanking Patricia enormously.
I'm stepping into the twenties and thirties with some caution.
Not being course, not being an economic historian myself and I too, found your book on the twenties and thirties enormously revealing.
I've, as Max said, been working on this comparison where again, I wasn't a twenties and thirties person.
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.
I'll entirely talk about Europe. Any remarks about the wider world will be completely tangential.
Um hmm. I want to start by reminding us of the importance of the growth process.
We've lived in the last four or five years where everyone's worried about the need to return to growth.
That's where I'm going to begin. And then I'm going to talk about.
What I do know about history of economic thought as distinct from facts, Cain's on the impediments to growth.
And then I'm going to use what we learned from modern macroeconomics and Keynes to think
about the impediments to growth in the twenties and thirties debt adjustment difficulties.
We'll talk about the gold standard and the overall level of demand.
And then again, talk about now in exactly the same framework.
One of the most remarkable 12 pages ever written is chapter two of Cain's Economic Consequences of the Peace.
This is a quiet, all words, very short.
But it's a remarkable story of the growth process in Europe during the run up to the First World War,
a very rapid, laboured, labour saving, technical progress.
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.
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.
And part of this was a high savings rate.
As Kane says, the psychology of society that was such that they grew around the non consumption of the cake instincts of Puritanism.
And so the cake increased. But to what end was not contemplated?
Individuals were inclined not so much to abstain as to defer.
This as those in the audience will know.
This is the Ramsey growth model and it's knows not everyone knows that the Ramsey
GROSS model emerged after a dinner conversation between Kane's and Ramsey,
in which Ramsey said that Cain sent Ramsey away to write down what they'd just been talking about.
And that's that's that model. It's a model of deferring and saving.
But this was an international system within Europe.
The short quote The pace of Germany gave her neighbours an outlet for their products in exchange for
which the enterprise of the German merchant supplied them with their chief requirements at a low price.
Everybody living now will understand what that means about the relationship between Germany and Spain and Greece and Italy.
And furthermore, it was a global system.
The accumulative habits of Europe before the war were necessary condition for the growth of the surplus capital goods accumulated by Europe,
a substantial part of which were exported abroad, where investment made possible.
The development of the new resources of food and materials and transport and enabled the
old world to stake out a claim in the natural wealth and virgin potentialities of the new.
I grew up in Melbourne which was founded by a bunch of, say, bushrangers,
but pretty nearly that who drove out the Aboriginal population in southern Victoria in 1836, by 1880, that's to say 44 years later.
Melbourne took 10% of all of Britain's exports and the railways were built.
And all around the empire this happened. This was a global system and thus the third and fourth parts.
Not only was the Ramsay model there, but the Lewis model comes from that too.
Cheap primary commodities enabling high profits and the accumulation of capital in the industrial centre of the world.
So different from the Maynard Keynes we think about and what the and such an
extraordinary story this was meant to be a book complaining about the peace treaty.
But it writes out what how how the world was meant to work before the treaty messed it all up.
Now, how does the treaty mess it all up? Well, it's about reparations.
That's what the book's about. But then there are that the next ten years.
And Cains discovers that there is much else beyond reparations that needs to be thought about and they treat tract on monetary reform,
the treaties on money, the economic consequences of Mr. Churchill as a story of extraordinarily imaginative
with its with this growth model in his head trying to figure out why it doesn't work.
And I was put onto this by Peter TEMIN.
And going to the Macmillan Committee to see Caines at work ten years later.
Trying to understand the way in which macroeconomics.
Could stand as obstacles to this growth process.
And there's a wonderful letter from Canes to Lydia Lopez over in which he writes, They found my speech perplexing.
I think that I did it all right, but it was unfamiliar and paradoxical.
And the Macmillan committee were quite right to find it perplexing.
It was a complete mess. And that's what's so fascinating to read about it.
This is Britain in 1931, having returned to gold Cain's that this committee of 15 of the most high powered people
in economic and financial people in Britain gets eight full days to expound his views.
And what does he try and talk about? First of all, we we ask what happens in that psychology.
Remember the psychology of societies and savings leading to investment.
What happens if investors are not prepared to make use of the available savings?
He analyses this problem in the light of Britain's unsuccessful return to the gold standard.
Tight money make it course it makes investment for relative to saving.
This is all new stuff. The quantity theory of money is that the back of their minds is macroeconomics, distinguishing investment and saving.
But what happens? Investment falls relative to saving will.
Says Keynes. It causes unemployment and that that's meant to cause wages to fall and so bring about an adjustment of competitiveness.
And that's how the gold standard is meant to work. But actually, wages don't fall and it doesn't work.
And they said to him, Well, then what happens? And he says, Well, it causes unemployment.
And there's a couple of wonderful paragraphs. And then he says, Let me explain.
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.
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.
Richard Carnes multiplier into this shortage of aggregate demand and the process of real growth can be impeded by
an inadequate monetary policy and can be helped by the gold standard and can be helped by fiscal intervention.
Enormously controversial. Keynes gets crucified on fiscal crowding out by Hopkins at the McMillin committee.
But by 1936, it's it's there then, which is all meant to be about 1930 and the gold standard.
So difficult wage cuts are too slow. But Keynes doesn't advocate leaving the gold standard.
He's posited proposed cash walls if demand expansion.
And as Hopkins and others says, excuse me, this is an economy with an external difficulty and you want to expand.
Right. And there's another letter to Lydia Lowe, Peckover, saying, I found this bit difficult or challenging,
yet he advocates protection and and there's a complete riot.
He has a fight with Lorna Robbins in another committee about that issue.
And there's a discussion of why devaluation is better.
But he doesn't advocate leaving the gold standard for reasons which are obscure and probably internally contradictory.
Then. So we fixed it. General Theory 1936.
Then comes the war. Then comes his heart attack.
Then the war. And then there's the run up to Bretton Woods.
So you think, well, fix the gold standard. So what happens in the clearing union?
It's still a mess. What he wants to propose is endless loans from an international agency which can create bank or running overdrafts.
All the stuff we've been discussing in European adjustment over the last two or three years.
But what about the process of you will see why I'm saying this.
What about the process of adjustment? If wage and price adjustment is too slow and protections ruled out, then.
What does this 18 months of of a really difficult discussion about this.
And. Then there emerges.
What we all teach to undergraduates is the swan diagram.
If you want to have a situation in which your country is not forced to austerity when it's in an external difficulty,
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.
Very difficult to after the thirties.
What do you do? You need another instrument and that instrument is currency depreciation.
You can see why I'm saying all this in what's coming.
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
necessary to release the resources which are demand for for net exports as a result of the currency depreciation.
Then what you've got is an IMF program of 20 years later.
It will take time. You need to be able to borrow during the adjustment period, both officially and from the market.
And to cut forward 20 years. IMF practice came to involve part of the lending coming from the fund with conduct conditionality.
We've talked about that earlier to make sure that the adjustment actually takes place.
We've talked about this earlier.
Valerie Hertzberg talked to us, was all about the need for conditionality to ensure that adjustments actually do take place.
And this was the role of the fund, just as it's the role of European institutions at the moment.
So. What are we thinking? This isn't Cain's, as it's normally told.
This is a person with a growth theory in his head looking at the macroeconomic impediments to that growth process.
There's a wonderful obituary to Cain's by Schumpeter, which gives him be query plus.
And it's you know, I'm Schumpeter. I worked on the theory of economic growth.
This great man wrote 12 amazing pages and tried to make his life's work sorting out these 12 pages.
And all he produces is this silly short run macroeconomic model.
It's sad, isn't it, that it's a wonderful obituary and but the picture is there.
Now, let's just look using that picture at the breakdown in the twenties and thirties,
which he didn't understand in 1930, but he nearly understood by 1944.
And his friends and colleagues worked. It worked out.
And and now let's go back with that to your book of the Gold Standard.
Your book on the Depression in Europe in the twenties.
Start with reparations where Keynes began.
A crucial impediment to growth. How much they caused the German in hyperinflation is.
I'm not an economic historian. There's been much discussion of this, whether it was caused by the hyperinflation,
caused by the need to finance the reparation payments, or whether the link was a more indirect one.
Nevertheless, with the burden outstanding monetary and fiscal discipline was very difficult to institute.
Then comes the Dawes Plan. Without dealing with the liability scheduling payments and it and and within its schedule,
lending could be resumed and the aim of an ultimate payment.
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.
2028. 29. And it comes to an end under the shadow of a lack of clarity about how the reparations would be dealt with.
Bruning Wonderful pronouncement in 31 that maybe they won't be paid predates the abandonment of the gold standard after a currency crisis,
something like a month between that statement and the abandonment.
And. And my bottom line, there's some similarity that connects then and now that I want to draw out.
Secondly, this macroeconomic system was one with adjustment constraints.
It's very hard to think about the 1920s.
Economists about the best they can do is two country worlds.
This is a four country world Britain, France, Germany and the US, one by one.
Britain has the problems that Keynes faced, yet the Macmillan Committee.
Germany had returned to gold.
I'm not quite clear about this, but I think the value was uncompetitive and an overvalued exchange rate with a reparations burden.
France returned at a competitive rate and the US was in a competitive position.
Now I'd like to come to your remarks about this.
The gold standard could have worked. Well, just ask yourself how.
Think about Keynes saying Britain's over value.
That's to say uncompetitive and the others are too competitive.
What could have worked but teach undergraduates that you need a period of adjustment?
How long, how quickly do you expect that adjustment to to to work?
And crucially, do you expect the surplus countries to play a useful role in that adjustment process?
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?
That's the Macmillan Committee. Where in history is an allowance of policy to have the upward movement.
France sterilises and doesn't allow this to happen.
Now you're nodding. And let me just ask you.
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?
No. But but from 26 on.
What I'm trying to draw attention to is this is a fixed exchange rate system with uncompetitive positions,
asymmetric shocks, boisterous economy in all the twenties,
and the inability that 1928 is full of discussions between Britain and the US
in which the British plead with the Americans not to raise the interest rate.
And and and we get the great boom in 29 as a result.
Fixed exchange rate systems are very difficult to bring about.
Monetary policy is wrong. And furthermore, the adjustment of relative costs and prices is difficult.
And thirdly, this was a system in which global aggregate demand wasn't well managed, not just a relative adjustment,
but absolute global demand, inadequate of aggregate costs and prices in the system were wrong.
The great inflation after the first war had I don't know the evidence of this.
But the it does seem not with too many double negatives.
It does seem that there wasn't enough gold around for the new higher world level of prices,
making that claim strongly as difficult because there were there was withdrawal of gold, as you've described, from circulation.
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,
which had been caused by features that you so well described.
Then you stick on top of this, the drying up of the loans to Germany by 1928, which had begun under the Dawes Plan.
They further dampen demand. Then you have the German reparations difficulty.
And then you have the currency crisis.
Germany and Britain. And then, crucially, you have the wrong response in the US.
Tie money at that stage to prevent the US losing gold rather than loose response.
This is a very difficult system to run when there are asymmetric shocks.
Toto summarise. This system caused.
And you will see why this summary is here, given what I'm going to say about where we are now.
The system cause deficit. Countries deflate since they couldn't devalue, and it didn't ensure that surplus countries correspondingly spent a lot.
It made the relative competitiveness position of countries difficult to default and
over overall this having a stock of a stock of debt which made investment risky.
Growth prospects leading to an adequate level of demand were made worse by the adjustment mechanism and by the overhang of debt.
Now let's. Go fast forward from that story to the world where we are now.
Until 2008, the establishment was the euro was very successful.
High growth rates, high savings in the north and rapid savings in the south.
Go back to Cain's as I was thinking about this this European growth model in the first.
Decade of European Monetary Union looks not dissimilar to the story of Europe before the First World War.
The great vision. So enthusiastically embraced an emerging market all around the south of Europe,
high savings in the north international system and part of a global system.
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,
led by Chancellor Kohl, whose huge ambition was to reintegrate Europe after the experience.
And I'm on the wrong page. I'm trying to be there.
The the area appeared to be cushioned against shocks and exchange rate.
Of course, they were a thing of the past all. Let's ask ourselves.
What? This? The question Keynes didn't ask himself, didn't know how to in 1929.
In 1919, what was required to make that story before the First World War work?
We now know so much more macroeconomics. We can ask what was required to make this story in the European Monetary Union work.
Wages and prices need to be set in the knowledge that each country needs to remain sufficiently competitive.
And there is some remarkably prescient speeches about this by Otmar Issing,
who is very sceptical about whether the institutional arrangements for doing this in Germany were competitive.
I'm putting this back to front whether Southern Europe was compatible with the institutional arrangements for doing this in Germany.
There are some marvellous. All. Now come to this, the bottom of the plate.
Of course, external balance is needed each period, but each region requires to be solvent in the long run,
just as Texas does and just as Scotland still does within within Britain.
But within that solvency of the. Of of the peripheral regions, there is an ambition of the integration of credit markets.
Risk premium would disappear. Joining common currency area.
And and the crucial discipline mechanism put in place was the stability and Growth Pact to prevent public disorder from destroying this.
This integration. And there are some very it's not just my racing.
It's my colleagues in the macroeconomics profession who wrote papers with forward
looking wage and price setters who would understand the world they were in.
And that discipline would cause them to set wages and prices appropriately.
And they're forward looking like all modern macroeconomics, forward looking consumers,
and they understand the budget constraint and they don't spend too much.
And I and and then you sticking on top of that, the Stability and Growth Pact.
And that's that's a a well-functioning system, you think and my profession thought that.
And the political optimists in Europe thought that.
And then what happened?
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.
There's an it only goes up to 2008 when the crisis began.
There's unit labour costs in Germany and there's Ireland at the top in Spain.
And Greece isn't on this picture. It's right up at the top somewhere.
And. This is a result of.
Boom in the South and austerity in the north.
Germany joined the monetary union and uncompetitive position and proceeded to do ten very admirable years of of of austerity.
They guess what that was the savings. And that looks just like the savings that Keynes began his story with.
And in the South, there's huge opportunity for for investment and a housing boom in Spain and Ireland.
But all sorts of other stuff, emerging markets. Bought.
That. Takes place now.
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.
First of all, if you're integrating credit markets in this wonderful way, the integration of credit markets,
you certainly haven't got a gold standard constrained operating to discipline the peripheral regions.
So then you ask, how does monetary policy work?
It goes the other way. Everyone has a common interest rate.
There's a boom in the South. Inflation. Real interest rates fall that augments the boom.
And that's Sir Alan Walter's reason for Britain not joining the European monetary system long, long, long ago.
Alan Walters understood this and.
And and there's also an absence of any fiscal constraint on this process because of the Stability and Growth Pact.
Max kept on talking to me during this period about how in the rapidly growing south.
Fiscal revenues were abnormally strong. Not unlike Britain, but much more so.
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.
As that interpolation in. Small type says a forward looking private sector would understand this.
And my profession, full of people who think that the macro economy is full of forward looking, rational expectations.
People wrote models about how this stuff is stable and.
That's what happened. Now. This also, of course, created current account imbalances.
That's the short story. Now, providing that the South is is solvent.
We're there. We are back at the beginning, price and wage setting decisions and expenditure decisions thought to be stabilising.
Well, that's just a course. That's what happens in an emerging market economy.
An emerging market economy has got lots of investment opportunities and you borrow and invest and grow and and that's wonderful.
And so the my colleagues idea was that this would gradually close up again.
And that's cool. Um. But you can ask now.
Now, here is the here's the really substantive point that I want to make here that could have been right.
Just like the gold standard could have worked. But just like the gold standard was, I put this better than when writing these slides.
Just like the gold standard was fragile with identified reasons.
This was fragile to. Now when you were designing European Monetary Union, I remember John Williamson saying to me,
you know, German reunification was the last asymmetric shock.
This is going to be manageable from now on. And.
And then you impose on this the worst macroeconomic crisis since the 19 late 1920s.
And you've now got a fragile system without adjustment mechanisms.
So let's now just ask what happens in this fragile adjustment mechanism with and use the
same three categories debt adjustment mechanisms and the level of macroeconomic demand.
Risk premium in the South fell to zero.
Way to the left of here. Just like had been hoped.
Then from this is the Greek crisis there.
Greece not on the slide, but you see the risk premium rising and this ends at the end of 2011.
So it's it's a year old and these risk premia.
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.
What happens? You get sovereign risk premia.
The fear that the lack of competitiveness, you ask a country that is uncompetitive is that what's the prospect for tax revenues?
And it's not good. Secondly, there begins by 2011 to be a country risk premium.
Why a? There's a misprint in that slide during the lack of fear that given the lack of competitiveness,
the country won't become competitive enough in the end to be able to service its international debt.
And there's a financial risk premia that the banks were insolvent, given the second problem, and these risk premia became interrelated.
I've lost my page back. I go. So the.
Is. So there's that reset button.
There's that. There's that. And look at.
Adjustment difficulties in the face of this, there is a cooperative solution.
Just like that could have been a gold standard solution.
Or we could see a slide into sovereign default and Euro Break-Up.
Mirroring quite closely what happened in the 1930s.
No one wanted Maynard Keynes and at the Macmillan Committee, not even advocating leaving the gold standard.
This is a slide into something that no one contemplated as part of policy design or.
We could try and meet along with very little debt forgiveness, with austerity,
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.
What does the. Cooperative solution required.
That's a rather bold statement at the top of that page, and I think I should withdraw that.
Here's some thoughts about what a cooperative solution requires.
It a mixture of further lending and.
And just ask yourself, what?
Where are we? Well, what was learned from the 1920s and 1931.
In the setting up of Bretton Woods, the centre of the peace.
You need adjustable real exchange rates in order to correct that problem.
And you can have adjustable nominal exchange rates.
So the adjustment process is an order of magnitude more difficult.
The Asia crisis. Thailand. Korea.
Malaysia. Slightly different. Indonesia crisis for a year.
The worst crisis in history. Some of us thought for about three weeks that it was going to be the Great Depression again.
And within a year and a half, there's the most wonderful process of export led growth.
How they all devalue by 35% and get on with it and do severe austerity.
And the mixture of those two things. So we can't do that.
So what are we going to do? We need expenditure switching.
Well, how do you do that? Southern goods have become much cheaper relative to goods in the north.
It's difficult and too slow in a monetary union.
And the. You ask yourself, Keynes thought the 10% overvaluation of Sterling in 1931 was unfixable.
We're talking numbers 30% in that diagram, and everyone says, Well, you know, hang on.
And that's why I wrote ten years.
This is why now people are talking talking about five, 10% adjustment of real wages, but we're looking at much more required.
We've just got to go on doing that much easier if there's more inflation in the north.
Secondly, not just austerity in the south,
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.
Well, I was going to say well-meaning, well thought out stability and growth pact designed to work in in favourable circumstances.
And the only way that that story about more fiscal looseness in the North can be avoided is the two ways.
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.
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.
And so let's just take the first two objectives.
Growth can resume without both of these first two being achieved.
Then what can we say about the adjustment?
It'll take less time.
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.
In 1931, if the US had behaved according to the rules, this might have been saveable at that crucial moment.
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.
Debts will grow and debt and the debt write down issue will become more demanding the longer time that adjustment takes the.
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.
Issues to deal with include the recapitalisation of the ECB to deal with,
write down of the ECB s assets and the extent to which lengthening of loans
can stand in for formal debt write downs in the way that happened this week.
Which didn't. Satisfy many people other than more delay.
So we go right back to the beginning. The reason underlying a growth agenda,
this project of developed developing the South with the savings of the North is a wonderful project, just like the late 19th century.
Was. Just like after the First World War, the agenda has been impeded by macroeconomic constraints.
And there you can let let's put it the following way.
They're the overhang. On top of the bad adjustment process was debt created by war.
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.
War leads to problems one way mismanaged policy leads to problems 60 years later.
Three parts of the solution which I've described.
And all of these need to be brought about for growth to be resumed.
Slow adjustment, as we've all said, carries further risks of default and crisis.
And in one sentence, the story about cooperation that you were talking about in the whole last part of your talk,
both to preserve political stability in the south and.
Valerie.
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,
which involves an understanding about how this is dealing with a problem that the
institutions want we won't ever permit to happen again will try and prevent happening again.
But this is not a permanent bailout solution.
And the final remark that deals with your past, final words, this sort of transfer one off, didn't happen after World War One,
but the Marshall Plan and other security arrangements did happen after World War Two and were part of why that was so different.
This needs leadership, as well as the technical solutions on this on this page.
Thanks very much.