The G20 London Summit in April will be Barack Obama’s first trip to Europe. The Canadians get him first (apparently this is traditional), while the Japanese (who see the G20 as an evil plot to dilute their influence) are hoping for a sneaky bilateral before the big G20 powwow.
But London will be the big one. Gordon Brown – tired of saving the world on his lonesome – will slip into the role of Robin. Obama will play Batman and kick the world back into shape. The role of Joker is yet to be cast.
But will the summit be a success? The British PM has a lot riding on it, and not just because he believes he can use the event to transform his electoral prospects. We’re in the midst of “the first financial crisis of the global age,” he says, and the best solution is try to bind all the key global issues (economy, trade, climate change, energy, development etc) into a new vision for a “global society”.
“This is not like the thirties,” Brown told a Davos audience (slightly plaintively, perhaps). “The world can come together.” But will it? And more to the point, will Obama reserve sufficient bandwidth to global coordination? Or will he be sucked into further America First policies, as the mess at home hoovers up a growing proportion of his time, energy and political capital?
The past does not dictate the present of course, but the historical precedents are not so good. The nearest equivalent to the London Summit in the thirties was World Monetary and Economic Conference, which was held in the summer of 1933.
This meeting, which bought 66 countries together in last ditch attempt to trigger global economic recovery, was derailed by a new US President – Franklin D Roosevelt – who had recently been elected in a landslide. Roosevelt rejected a compromise deal that had been hammered out by his own delegation.
The result was humiliation for a weakened British Prime Minister, and a furious reaction from the other European nations, led predictably enough by the French. The Germans, meanwhile, were left out on a limb. Hitler – just settling in as Chancellor – was forced to disown his Economic Minister mid-summit. It was an early setback for him on the international stage.
Time Magazine had a great contemporary report:
Not since Wartime has short, narrow Downing Street been so jammed with reporters from wall to wall. A message from President Roosevelt was expected and delegates of the World Monetary and Economic Conference had been waiting all day for it.
Suddenly the Prime Minister’s motor car was sighted and word whipped round that the message had come. Scot MacDonald, alighting hatless in full evening dress, stepped inside and tried to calm the delegates, urged them by inference to go home.
“I will wait up for a message from President Roosevelt,” he cried, “even if I have to sit up until four in the morning…The moment I hear I shall let you all know…Goodnight…Goodnight all.”
The American delegation had been noticeably weak at the summit, refusing to make any decision without referring back to its President at home (a bad habit that persists to this day, driving other negotiators up the wall). So tempers were already wearing thin when they gave provisional approval to a plan to shore up the global currency system, maintaining its fraying link to gold (at least for a while).
The UK had been forced off the gold standard in 1931, after a series of runs on the pound, thus increasing pressure on both the US and the other European countries. Now Roosevelt had confiscated all bullion held by US citizens and had started what would be a 40% devaluation against gold.
Relishing the limelight and playing to an adoring domestic audience, Roosevelt kept the British PM, Ramsey MacDonald waiting all night and well into the next day, before unleashing a bombshell telegram, which denounced “the fetishes of so-called international bankers” and vetoed US involvement in an global deal.
“I do not relish…continuance of the basic economic errors that underlie so much of the present worldwide depression,” he said. His priority was building a “sound internal economic system” at home, not global currency systems. The World Economic Conference was dead despite some attempts to revive it.
Will history repeat itself? If it does, as I argued in a recent paper, it could well be the result of tit-for-tat currency devaluations. The US’s Tim Geithner has since sized up to China, accusing it of manipulating its currency. Wen Jiabao’s responded sharply in public and, we are told, furiously in private. If US-China friction grows, the London Summit will prove very chilly indeed.
Obama, of course, has strong cosmopolitan instincts and probably imagines himself at the G20 cutting a visionary and far-sighted deal. But history shows that domestic pressures are hard to resist for a new US President. Remember Smoot-Hawley, which crept up on Herbert Hoover shortly after his election, and which he signed into law despite protest from virtually the whole economist profession.
In the wake of the failed summit, Roosevelt had some success with his policy of focusing exclusively on domestic solutions to the US’s economic problems. But the impact of the New Deal has often been exaggerated. Niall Ferguson argues that his efforts were little better than Hoover’s:
Roosevelt wanted to raise agricultural prices and to cut government spending, an unpromising combination at the best of times; the majority of his schemes merely tended to increase the power of the federal government by demanding stricter supervision on banks, national planning for public utilities and centralized control over relief efforts. The resulting jobs for bureaucrats made only a modest dent in the unemployment numbers.
It took the Second World War that finally put paid to the Great Depression. It was a global solution to a global problem, of course. Just not the kind of solution that I think Gordon Brown has in mind…
Addendum: Was Roosevelt right to dump the gold standard and let the dollar devalue?
Almost certainly – yes. Keynes was a huge supporter,believing the world desperately needed to escape the straitjacket imposed by gold. But just nine months later, he was left wondering whether the President really knew what he was doing. In an open letter, he told Roosevelt that “the recent gyrations of the dollar have looked to me more like a gold standard on the booze than the ideal managed currency of my dreams.”
The President had the right instincts, Keynes thought, being the only world leader who “sees the necessity of a profound change of methods and is attempting it without intolerance, tyranny or destruction.” But like leaders today, he was facing a completely unfamiliar set of dilemmas and was left “feeling [his] way by trial and error.” (Expect Obama to be getting the same critique in a few months’s time.)
Ben Bernanke, however, is more sympathetic. A noted expert on the causes of the 1930s Great Depression, he argued a few years ago that devaluation put a quick stop to US deflation and led to one of the best ever years for the stock market in 1934.
Back then (2002), Bernanke thought the lessons of the thirties were mainly academic ones. The chances of the US experiencing deflation in the foreseeable future were ‘remote indeed’, while if deflation did come calling, the Federal Reserve had plenty of tools to head it off and, if the worse happened, cure it.
Now, of course, he leads the Fed, which now sees US deflation as an increasingly immediate risk. I wonder if he’s still confident that he has all the tools he needs. And if a devaluation of the dollar – to raise the price of imports while boosting exports – might eventually be one of them…
Click for more Global Dashboard coverage of the G20 and the London Summit.
