This Time, Maybe It's Not So Different

A couple of followup notes inspired by a reading of Liaquat Ahamed's absorbing Lords of Finance: The Bankers who Broke the World (2009). File these under "this time, it's not so different."

One: there is nothing new about a two-tier recovery--ie recovery for some, stagnation for others. Consider the north of England. Remember how Maggie Thatcher broke the unions and drove the northerners into poverty and squalor? But Ahamed reminds us that the north had been in trouble for a generation. Indeed, the traditional "Victorian" industries--textiles, metal-bashing--had never really recovered from World War I. The thread that runs through so much of post-WWI British economic history is: what to do with the persistent squalor of the permanently redundant?

And it's not just Britain. Much has been made lately about how the Roosevelt Administration didn't do all that much to reduce unemployment. True; but easy to overlook is the fact tht GDP in the early part of the Roosevelt administration did just fine. So there was a "recovery" of sorts: it's just that a quarter of the work force didn't (or so no reason to) notice. I suppose you could tie all of this together with Simon Johnson's "Banana Republic" theory of the modern U. S. Economy: that we are a tiny slice of intriguing high rollers, perched on an ever more detached and irrelevant lumpen (my phrasing, not Simon's, but I think I have the general principle right).

And two, a point about banking. Ahamed points out that Britain developed its preeminence as a money center back int he 19th Century when it had a lot of money. It persisted in pretending it was a money center in the 20s and forward long after the surplus had gone.

Of course, you can say that in a way it worked, still works. Brits probably do have some situational advantage in money management, and may also enjoy the accidental magic of path dependence--same reason Pakistan makes soccer balls. Yet at least some of the British mistakes in policy management in the 20s may be traceable to its illusionary embrace of a ghost--its conviction that it retained a centrality in finance when events had passed it by.

Can the same thing be said about the US today? Well, as many have said, we really have not lost our manufacturing preeminence--we've only lost some of it. Still, nobody can gainsay the fact that others are catching up with or surpassing us. And banking is one of those industries that follows naturally on an economic boom--once a nation amasses a lot of wealth, it finds itself a banking center, where it wanted to or not.

And while I am here, allow me to pinpoint one issue I think Ahamed gets wrong. He blames many of the ills of the 20s/30s on the gold standard, and rigid adherence thereto by the Brits, the US, the Germans, the French. But I don't think his evidence quite supports his case. What he demonstrates is not so much the evil of the gold standard per se, but rather the suicidal of the Brits in trying to maintain its gold standard at such a high peg. Overpegging gold impoverished the British working class and it distorted policy in the US and France as they sought to cope with the British miscalculation. There may be inherent problems with any gold standard, but Ahamed has not demonstrated them here.

A final note, fascinating to me as I remember my youth as a shabbas goy in the Jewish resort town of Bethlehem, BH. Per Ahamed, one reason our betters chose Bretton Woods, NH, as the site for the greaat 1944 monetary conference is that Bretton Woods was one of those very rare (in NH at least) fancy hotels that actually accepted Jews. Would have been awkward to have a world monetary conference in the US without the US Secretary of Treasury Henry Morgenthau.