Tuesday, 8 November 2011

Financial crises: when history speeds up


Time doesn't pass at one speed. It's an insight from quantum mechanics, but it could apply to the historian's trade too.

Sometimes it slows down, and sometimes it speeds up. You can track a problem in an archive - say, the struggle to defend sterling between the IMF London visit of 1961 and the final and traumatic devaluation of November 1967, when Harold Wilson's Labour Government and Chancellor James Callaghan (above) finally had to admit defeat. Some months look pretty calm: there are a couple of letters expressing satisfaction with the state of the currency and bond markets, perhaps, or a few press cuttings. And then some months (for instance, during the crisis of November 1964, after Labour had raised old age pensions and spooked the markets) see a great big deep tray of documents crash onto your desk.

In fact, the long, slow break up of one fixed exchange-rate system - the Bretton Woods link to the dollar, which took shape at a New Hampshire hotel in 1944, experienced trauma after trauma from the moment most currencies became convertible again after the Second World War (in 1959) to the 'closing of the gold window' and the destruction of the system at the hands of the Americans themselves in 1971.

The Suez Crisis of 1956 lifted the curtain on this period, in actual fact, when the Americans pulled the plug on sterling and forced an Anglo-French invasion of Egypt to turn tail. Then there was the aforementioned financial crisis of 1961 following a short, sharp pre-election recession; then an ill-fated 'dash for growth'; then three years of agony when the markets took against the election of a Labour administration in 1964; then the general gold crisis of March 1968. Policymakers ended up exhuasted, unhappy and deeply disillusioned.

The underlying cause? One currency (the dollar) was completely misaligned against the others. Sound familiar? Today, when effectively the German Deutschmark is far too weak against the other currencies held prisoner within the Eurozone, there's the same problem. But if Ireland, Italy, Spain, Greece and Portugal can't revalue or be rescued by a radical one-state fiscal union across the Eurozone, they'll have to go on suffering for years and years - and years.

We could be in for a lot of this, and for a long time. I know it's depressing, but that's the lesson of post-war financial crises. Sorry.

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