Worse than the Great Depression

http://business.timesonline.co.uk/tol/business/economics/article5699906.ece


Worse than the Great Depression

Last updated at 8:46 AM on 11th February 2009 Daily MailOnline

Most Labour politicians possess only the cloudiest and most naive understanding of how the British economy really works.

This charge cannot, however, be levelled at the Education Secretary Ed Balls, a former Financial Times journalist who worked at the Treasury for ten years.

So Balls's terrifying warning that the world has entered its worst recession for over a century needs to be taken very seriously indeed - and all the more so because he is the closest confidant of the Prime Minister and therefore privy to all the latest inside information.
Is he right? Ed Balls said this is the most serious recession for 100 years

Is he right? Ed Balls said this is the most serious recession for 100 years

The first thing to be said about Balls's apocalyptic warning is that it shows that the Government is a complete and utter shambles.

It is fewer than three months since Chancellor Alistair Darling used his autumn financial statement to forecast a slight recession with a soft landing.

Official Treasury figures, approved by Darling, predicted it would last for the first six months of this year followed by economic recovery.

Less than a month ago, even, senior ministers claimed to be detecting signs of economic recovery.

Baroness Vadera, the trade minister, talked of 'green shoots', while housing minister Margaret Beckett foresaw an improvement in the property market.

But Ed Balls had a very different view this week. 'The reality is that this is becoming the most serious global recession for 100 years,' he said.
This means we are potentially facing conditions worse than the Great Depression of the 1930s, with all that entails in terms of mass unemployment, poverty, starvation and - equally potentially - the rise to power of the Far Right.
Everyone must pray this is not the case. But as things stand, Balls's analysis looks far more acute than that of any other Government minister, including the Chancellor of the Exchequer, whose training as a provincial solicitor is hardly the best background for playing the role of national finance chief in a crisis.

Indeed - as Ed Balls has spotted - the parallels between the events of the past six months and the start of the Great Depression of the 1930s are so close they border on the uncanny.

The start of this latest global economic meltdown can be dated with absolute precision to the moment in September when Wall Street crashed and the investment bank Lehmann Brothers went bust.

That financial crisis had immediate knock-on effects around the rest of the world, and Britain was among the first countries to suffer.

The Great Depression arrived in precisely the same way. Here is the account given by the great historian AJP Taylor in his classic history of Britain between the wars.

'The great economic depression broke over the world in October 1929. The causes of this lay outside Great Britain, principally in the general reliance on American loans and American prosperity.

On October 24, 1929, the speculative bubble burst in the United States, and American money ceased to flow.'

AJP Taylor might just as well have been describing the chain of events over the past six months, not 1929 and 1930.

More spooky still, events since last autumn's cataclysm in Wall Street have moved in exactly the same way, and at the same remorseless pace, as they did 70 years ago.

Industrial production has gone into freefall, there has been a very swift contraction of the money supply, and a terrifying surge in personal and corporate bankruptcy.

The huge question now is whether America, Britain and the rest of the world really will follow the same terrible course as in the 1930s.

If they do - as Ed Balls believes - then the decade ahead will be grim beyond belief, with terrible consequences for each and every one of us.

Worryingly, exactly the same trends are at work. Unemployment and economic depression have returned to Europe with a virulence not seen since the 1930s.

Already there are signs that the Far Right is gaining in confidence; for example the recent electoral gains made by the Austrian Freedom Party and the growing support for xenophobic Dutch politician Geert Wilders.

Even apparently minor details of everyday life are beginning to repeat themselves. For instance, cinema audiences shot up sharply in the 1930s as families looked for a cheap source of entertainment.
Trigger: The scene outside the New York Stock Exchange on the day of the Wall Street crash in 1929 which was the start of the Great Depression

Trigger: The scene outside the New York Stock Exchange on the day of the Wall Street crash in 1929 which was the start of the Great Depression

People are flocking in record numbers to the cinema in 2009. Bankers became hate figures in 1930, and they are equally excoriated today.

In the United States Barack Obama has already signalled that he is ready to support protectionism - the disastrous strategy that had such calamitous consequences around the world 70 years ago.

Indeed it is worth remembering that industrial production in the United States halved in the three years which followed the Wall Street collapse of 1929.

Menacingly, the final quarter of last year also saw U.S. industrial output slide into freefall.

Britain was not quite so badly hit in the 1930s as America - though this was in part because our economy had already shrunk by one quarter in the economic depression which followed World War I.

Nevertheless, it was bad enough. Unemployment doubled from 1.5 million to around three million in the years after 1929. It should be noted, however, that the British population was around 45 million back then, or about 25 per cent less than in 2009.

Paradoxically, life got very much better for those who kept their jobs. The cost of living fell sharply, so their spending power rose. Some parts of Britain, in particular the South-East, were actually far more prosperous at the end of the 1930s than before.

But for those who did lose their jobs, life was truly terrible. Stricken by unemployment, thousands of families struggled to survive on handfuls of bread and vegetables; not surprisingly, these were years when thousands of children still died of tuberculosis, whooping cough, measles and diphtheria.

They were years when visitors to Northern cities often saw children, barefoot and in rags, starving in the streets; when just one in four grown men in the industrial areas of South Wales had a job; when a hunger marcher, tramping grimly down towards the capital, was spotted taking the ham out of his sandwich and posting it back to his family.

That picture may sound impossibly remote from Britain in 2009. But is it?

The worrying fact is that if the economic situation is as dire as Ed Balls says, we will be quite unable to pay for the generous welfare state which has protected the vulnerable since the end of World War II.

As mass unemployment returns, the welfare bill will grow exponentially. At the same time, economic collapse will have a calamitous effect on government revenues.

Even Alistair Darling's sanguine economic forecast last November, which was based on the prospect of a mild recession, projected national borrowing of over £100billion next year.

But if Balls turns out to be right, and he very well may be, our financial deficit will soar towards an incredible £500 billion.

We will be unable to finance it and Britain will be faced with a financial crisis and potential bankruptcy.

Whatever government is in power will be forced to raise taxes and make huge cuts in all forms of spending.

Most worrying of all, there may be no way out. In the United States, President Roosevelt's New Deal, contrary to popular myth, made little or no difference.

Britain and the U.S. remained sunk in stagnation throughout the 1930s.

In the end the only salvation was war - which galvanised economies across the world.

We must pray that history will not repeat itself.