“History shapes policy response for better or for worse.” This was one of several messages delivered by Barry Eichengreen, Professor of Economic and Political Science from the University of California, Berkeley, during a lecture on the topic “The Great Depression and the Protectionism Temptation”, delivered at the Graduate Institute on 5 September 2009.

Speaking on the occasion of the closing ceremony of the 8th Conference of the European Historical Economics Society, Professor Eichengreen, a world-renowned expert in 20th century economic history, began his talk by reiterating that there has been much discussion recently among economists and in academic circles about the similarities between the current global crisis and the Great Depression of the 1930s. There is increasing convergence of opinion that just like its predecessor some 80 years ago, the current crisis too has been caused by failures of governance. And, as Professor Eichengreen explained, the similarities do not stop here. Just as the economic crisis of the 1930s resulted in a devastating rise in protectionism, so there are signs that the current global crisis could see the spectre of protectionism rear its head again. If the world is to avoid a repeat of 1930’s-style protectionism it is necessary to fully understand the events of the last century and draw on the lessons learned to inform current economic and fiscal policy.

Looking at the Great Depression and the current global crisis, Professor Eichengreen noted that the parallels are “on point”. He remarked that just as the aftermath of the crash of 1929 witnessed a contraction in global trade, so the 12 months after April 2008 witnessed an even bigger contraction in global manufacturing and production and trade. Although there seems to be signs of a recovery – particularly in the manufacturing sector – these may yet be premature. Furthermore, despite recent rallies of the stock market, the decline in stock market wealth remains greater now than at the same time in the depression. This may be because, as Professor Eichengreen pointed out, present-day policy-makers failed to appreciate the impact of derivatives and credit default swaps, probably precisely because they did not exist previously!

Turning to the issue of protectionism, Professor Eichengreen acknowledged that while current levels fall far short of those witnessed after 1929, trade has nonetheless contracted more in the present-day crisis.

And it is here, Professor Eichengreen argued, that lessons from the past could really be used to inform current global financial policy. He also noted that while perhaps the specific reasons underpinning the rise of protectionism in the 1930s may be somewhat different today, the underlying causes are in fact very similar.

In the 1930s, argued Professor Eichengreen, the response by some governments was to take countries off the gold standard. Once these countries, led primarily by the USA and Great Britain, were no longer tied to this economic standard, it allowed their exchange rates to float, enabled them to lower their interest rates and stimulate trade in their manufactured goods and services sectors. However, the move away from the gold standard was by no means a coordinated response and the result was an equal lack of coordination in the outcome. For instance, France, Switzerland and the Netherlands – dubbed the “gold bloc” – in an attempt to retain their status as banking centres, did not remove themselves from the gold standard right away. As a result, their exchange rates remained pegged to this standard and they had less flexibility surrounding currency values. The resulting failure to devalue their currencies made their goods less competitive. In response they began to impose trade tariffs and barriers to protect domestic produce. For Eichengreen, the biggest failure of this system was the lack of coordination among governments surrounding monetary policy.

Although the world is no longer tied to the gold standard today, there are very powerful lessons to be drawn from this experience. Central banks reacted much faster to the economic downturn than they did 80 years ago. Professor Eichengreen believes that this was a result of lessons learned from history. Furthermore, the prospects are brighter today than they were in the 1930s. Unlike their early 20th century counterparts, central banks now enjoy far greater levels of flexibility in their monetary and fiscal policies. The present day equivalent of unpegging economies from the gold standard is the implementation of economic and fiscal stimulus packages. Today’s stimulus packages raise demand everywhere and therefore benefit trading partners. However, Professor Eichengreen cautioned, that, just as a failure to coordinate monetary policy resulted in a rise in protectionism, a present day failure to coordinate fiscal stimulus packages could be equally devastating. If countries feel that others are gaining more from their stimulus packages than they are, the temptations will be to resort to potentially harmful trade barriers. Looking forward to the G20 meeting in Pittsburgh later this month, Professor Eichengreen concluded that there is a very real need for governments to cooperate when implementing their fiscal stimulus policies to avoid history repeating itself.

The 8th Biennial Conference of the European Historical Economics Society (EHES) was hosted by the International History and Politics unit of the Graduate Institute. It brought together scholars of economic history from leading European Universities and international research institutions, and offered participants an opportunity to interact and share their views on economic history, comparative world economic history and economic policy informed by history. Marc Flandreau, professor of International History and Politics at the Graduate Institute, is President of the European Historical Economics Society.

For more information on the Conference please visit EHES conference and EHES News