Economic Crises and Global Politics in the 20th Century

Alexander Nützenadel, Cornelius Torp

• Publisher: Taylor & Francis
• Year: 2016
• Print ISBN: 9780415840088
• eBook ISBN: 9781134928712
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book analyses the history of economic crises from the angle of international politics and its transformation throughout the 20th century. While political and economic debates in the wake of the present financial crisis are revolving around the question of how to create effective forms of global governance, historians have discovered a long tradition of international economic regulation that can be traced back to the late 19th century. In the global economy, sovereign defaults, banking crises and currency crashes have been recurrent phenomena. At the same time, alongside the growing globalization of commodity and capital markets, nation-states have introduced new forms of regulation both on the national and international level. The experience of economic crises has been an important driver behind numerous initiatives to foster global politics.

The purpose of the book is to reconnect economic history with the perspectives of political economy and the history of international relations. It forms a dialogue between the disciplines that have been increasingly separated throughout the past decades. With first-rate economic historians and political economists writing for a wider audience, it simultaneously makes public debates and methods of recent cutting-edge research in economic history within a wider academic community.

This book was originally published as a special issue of the European Review of History.

Introduction

Alexander Nützenadel^a and Cornelius Torp^b

^aDepartment of History, Humboldt University, Berlin, Germany; ^bDepartment of History, Martin Luther University of Halle-Wittenberg, Germany/Freiburg Institute for Advanced Studies, Freiburg, Germany

I.

The hour of crisis is the hour of history. In the aftermath of the financial collapse of 2007/8, the ensuing deep recession and the recent European debt and currency crisis, economists and politicians have increasingly looked backwards in order to find orientation and advice. In the public debate, past economic crises, in particular the Great Depression of 1929, became important reference points when the unfolding of the current crisis and economic policies were considered.¹ The new importance of economic history is itself an outcome of the crisis. In the years leading up to the current crisis, many policy makers, investors and economists seemed convinced that the old rules of boom and bust no longer applied. As Carmen Reinhart and Kenneth Rogoff put it in their sweeping book on eight centuries of financial crises, the common creed was ‘This time is different.’² Like many times before, decision makers and the public were full of hope that the recent boom, unlike all the other past booms followed by tremendous crashes, was built on solid fundamentals and farsighted economic policy. The last years which saw the most severe economic crisis since the Great Depression have proven them wrong. As a result, not only the wider public but also the economics profession, which overwhelmingly used to base empirical studies of financial crises on datasets beginning no earlier than 1980,³ have increasingly turned towards the more distant past for insights. History matters again.

This special issue analyses the history of economic crises from the angle of international politics and its transformation throughout the twentieth century. It concentrates on the time since the late nineteenth century when the modern world economy came into being. The present crisis of the global financial system has triggered an intensive debate on the question of how financial markets can be effectively controlled by political institutions. It is usually argued that there is a basic asymmetry of power between global market actors (banks, financial investors, corporations) and political institutions, which still operate within the framework of the nation-state.⁴ While political and economic debates are revolving around the question of how to create effective forms of global governance, historians have discovered a long tradition of international economic regulation that can be traced back to the nineteenth century. In the global economy, not only sovereign defaults, but also banking crises and currency crashes have been recurrent phenomena. At the same time, alongside the growing globalisation of commodity and capital markets, nation-states have introduced new forms of regulation both on the national and international level. The emergence of nineteenth-century internationalism was closely linked to economic globalisation.

The experience of economic crises has been an important driver behind numerous initiatives to foster global politics. Formal institution building and informal co-operations often went hand in hand. As early as 1890, when the collapse of the Baring Bank threatened to destroy the international financial system based on the Gold Standard, a consortium of more than 100 private and central banks constituted a fund to guarantee the debts of Barings, thereby averting a larger economic crisis. During the twentieth century, there were many other examples of multi-layered systems of institutionalised and informal cooperation in international finance. For example, banking diplomacy played an important role in the numerous attempts to stabilise international finance in the post-Versailles order.⁵ Soft-power and pragmatic solutions also have characterised international debt regulation during recent decades when official International Monetary Fund (IMF) and World Bank policies were accompanied by informal bodies such as the Club of Paris.

While there exists a vast amount of literature on the history of international economic co-operation in the nineteenth and twentieth centuries,⁶ research has failed to systematically explore the relationship between economic crises and international orders. Moreover, most studies on specific economic crises consider the international political dimension merely with regard to its narrow historical context. The long-term effects of economic turmoil for global politics are rarely considered.⁷ Several reasons are responsible for this lack of interest. The majority of studies on international co-operation are written by historians or political scientists.⁸ While the first group is primarily interested in diplomatic or political aspects of economic co-operation, the latter often takes economic themes as case studies to explore general trends of political institution building over time. In the plethora of literature on global governance, the economic sphere essentially remains a side note.⁹

The purpose of this special issue is to reconnect economic history with the perspectives of political economy and the history of international relations. It aims at a dialogue between the disciplines that have been increasingly separated throughout the past decades. With first-rate economic historians and political economists writing for a wider audience, it simultaneously attempts to make public to the historical community the debates and methods of recent cutting-edge research in economic history.

II.

By exploring the connection between economic crises and transformations of global order, we can distinguish two different aspects. On the one hand, both present and historical experience illustrate that economic crises frequently destroy international regimes. The international Gold Standard that had guaranteed stability and growth for almost half a century¹⁰ was overwhelmed by the monetary problems (payment imbalances, inflation, and so on) caused by the First World War and the following economic turmoil. The Great Depression of 1929 brought the final collapse of international monetary co-operation and trade which, after the war, had just been re-established with huge efforts.¹¹ A similar effect could be observed for the 1970s, when the economic recession and the oil crisis meant not only the end of Keynesian receipts, but also provoked the final disintegration of the Bretton Woods system of fixed exchange rates and monetary co-operation.¹² The present economic meltdown, in turn, which began in 2007 with a sub-prime mortgage crisis in the United States, unveiled the downsides of a flawed global financial system in which both the incentives to take on risks and the dangers those risks posed were enormous. At the same time, the economic collapse and the European sovereign debt crisis in its wake threaten the currency system of the Euro.

On the other hand, economic crises are potential starting points for more international co-operation. The establishment of the international Gold Standard in the second half of the nineteenth century was not only brought about by the expected technical and economic advantages of a common currency, but was also intended to function as a strong barrier against the tides of the global economy which was periodically hit by recessions and monetary crises. After the First World War, the search for a new international economic order was promoted not only by national governments in Europe and abroad, but also by the newly created League of Nations. In fact, the inter-war period saw a series of international conferences and other diplomatic initiatives with the objective of solving the pending international debt problems and currency imbalances.¹³ Beyond the short-term problems of post-war reconstruction and crisis management, these initiatives aimed at the formation of a permanent system of international economic governance. Even though these initiatives had only limited success due to the US reluctance to be actively involved in such a global system, they formed the breeding ground for a more comprehensive structure of global governance established after the Second World War. The experience of the Great Depression was a major factor in the success of the Bretton Woods conference and the following initiatives which were now actively supported by the US administration and many governments of other Western nations.¹⁴ Finally, in the 1980s and 1990s, the initiatives towards establishing a common European currency were heavily inspired by the idea of achieving a stable monetary order working as a defensive shield against the ups and downs of the global economy experienced since the early 1970s.

These observations may serve to illustrate the fundamental transformative powers of economic crises, whether they be destructive or constructive. Moreover, they bear witness to the border-transcending nature of both modern economic crises and political-economic regimes. Our insights into the nature of economic crises, especially in their global dimensions, however, are still rather superficial. As a matter of fact, the meaning of the term ‘crisis’ is rather opaque in economic literature. Even though the term is frequently used in general debates, there is little research on the causes and the unfolding consequences of economic crises. In the language of economics, the term ‘crisis’ is rarely used. Most economists refer to the more technical notion of ‘recession’, defined as a significant contraction of the gross domestic product (GDP) in two consecutive quarters. The majority of macroeconomic models can only explain minor fluctuations of the business cycle, while larger downturns are referred to as exogenous shocks. The irrelevance of crises in mainstream economics together with the little attention given to financial institutions and markets are held to be the main reasons for the poor performance of the economic profession on the eve of the recent crisis. Perceiving crises as basically avoidable disturbances of the economic equilibrium, most economists faile...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Citation Information
• Notes on Contributors
• 1. Introduction
• 2. Crises and policy responses within the political trilemma: Europe, 1929–36 and 2008–11
• 3. Public debt and financial crises in the twentieth century
• 4. What do we need to bring about a financial crisis? A long-term look at the development of banking systems, money supply and crises 1850–2010
• 5. Financial crises and the balance of power in international finance, 1890–2010
• 6. The German transfer problem, 1920–33: a sovereign-debt perspective
• 7. Economic crises in the ASEAN area: types and responses
• 8. Crying on Lombard Street: fixing sovereign defaults in the 1890s
• 9. The crisis before the crisis: the ‘problems of modern society’ and the OECD, 1968–74
• 10. Finance is History!
• Index