Fat-Tailed Contagion wrote:Hi Bogleheads:
Are there any examples in history that can help guide us in the current financial climate?
- No political opinion, I am looking to find global historical examples of what has happened when a government has intervened with stimulus after a near collapse and what the eventual consequences were.
Thank you all for the great insights in advance!
OK we have the early 1930s when the reverse happened. There was an effective collapse, and governments cut back sharply on spending. France, Britain USA all had brutal depressions. The period 1929 to about 1932, with FDR assuming power in March of 1933 (inauguration was later then) stabilizing the bank panic by closing the banks, etc.
Then things changed. The first thing was to abandon the Gold Standard. As each country in turn abandoned the Gold Standard (first Britain, then the USA, then France last in 1935) its economic recovery began.
Roosevelt's early New Deal policies were small by modern standards, but they did alleviate some of the desparation of economic disaster. The Civilian Construction Corps gave meaningful work to hundreds of thousands of able bodied men, for example. Ditto Dust Bowl relief. You only have to read John Steinbeck to realize how thin these threads were, but they were real. The US economy began a gradual recovery from hitting bottom in 1930-31.
However in 1937-38, FDR, concerned about his standing in the polls and Congressional Elections, cut back spending sharply at the same time as the Fed raised interest rates. 1938 saw a return to a brutal recession, even Depression. What changed after that was global rearmament, which stimulated US export industries, and then post 1940, US domestic rearmament-- massive fiscal stimulus.
In France they staggered from political crisis to political crisis, and eventually Leon Blum's Alliance Populaire came to power and abandoned the Gold Standard (the Franc Fort policy). There were then crippling conflicts with trade unions over attempts to lengthen working hours and cut pay in this period. France's industrial base was left critically weakened, when it became clear by 1938 that another war with Germany was inevitable.
The rapid collapse of France in 1940 in 6 weeks against Hitler can be traced to the social and economic divisions of France in the 1930s, as well as to the dearth of young men-- the fathers of the 18 year olds of 1939 had died in the trenches of 1914-1918, a demographic effect which can still be seen to day in the population of France-- 3 million men, or something like half of those aged 18-35, died in that war.
In Britain the Labour Government fell and a National coalition government was founded. The first thing the government did in 1931 was abandon the Gold Standard. Relief for the unemployed was introduced but there were major cutbacks in government spending-- the Royal Navy fleet mutinied over pay that had not been paid.
What caused the British economic recovery was a change in mortgage lending laws, which allowed middle class people like teachers, civil servants and white collar office workers for the first time to buy houses. Moving out along the suburban electric railways and subways, ordinary Britons for the first time could buy their own homes. The results around prosperous southern cities like London was extraordinary- a physical doubling in size. Endless estates of semi detached houses, with separate garages and rounded bay windows. During the 1930s the British economy did better than most of its allies, however deep structural issues (the decline of textiles, steel, shipbuilding, coal) caused great poverty and suffering in northern industrial cities-- it really was a divided nation (and still is, in that way).
Salient statistic: in 1938 Britain built 300,000 houses. In 2007, during a property boom with a population c. 50% larger, they built around 220k. The firm of Taylor Woodrow, started in 1924 by a 17 year old (his uncle had to be the company's first director, as he was too young) has since then built over 2 million homes or about 1/15th of all the houses in Britain.So in conclusion:- the only country really to try a Keynesian fiscal stimulus was Nazi Germany
, and it worked, but it seriously distorted the German economy- -Hitler in 1939 was in for serious domestic unrest if he had not gone to war
- the US and UK dabbled in it, but never on the scale that really would have changed the situation. UNTIL rearmament began in earnest.
Then the governments spent their money, raised taxes to get more, and borrowed even more. Full employment resultedOn Monetary Policy inflation was low or negative throughout the 1930s, essentially globally