Neither the US nor China is willing to assume the responsibility
“The 1929 depression was so wide, so deep and so long because the international economic system was rendered unstable by British inability and United States unwillingness to assume responsibility for stabilising it.”
Such was the economic historian Charles Kindleberger’s conclusion about why the Depression became an international catastrophe. The world economy, he argued, needs a hegemon: a leader willing to incur some cost and risk for the sake of the whole. “For the world economy to be stabilised,” he wrote, “there has to be a stabiliser, one stabiliser.”
For decades after the second world war, the US was that leader. From the Latin American debt crises of the 1980s to the Asian financial crisis of 1997 and the global financial crisis in 2008-09, Washington co-ordinated the response, and prospered by doing so.
Yet America’s ability to act as hegemon was already in decline because of the growth of China. After the US made clear in Munich last week that it no longer guarantees European security, who now can believe it will underwrite the global economy?
China, for its part, shows no willingness to take responsibility. Rather, it acts as a destabilising force by creating a domestic deflation that other countries must absorb. With no single country or bloc large enough to dominate, or willing to lead, we are entering a perilous new era of instability.
Without an economic hegemon in the 1930s, wrote Kindleberger, there was nobody to provide three crucial functions: to maintain a relatively open market where countries in distress could sell their goods; to provide long-term loans to countries in trouble; or to act as a global central bank, and offer short-term credit against collateral in times of crisis. The result was protectionism, currency devaluations, wrangling over war debts and contagious financial crises that swept from one centre to the next.
Even in good economic times, the US is no longer willing to offer these services, or only at a price. Donald Trump’s love of tariffs is becoming institutionalised. His attitude to supportive long-term lending is well-exhibited by the curious suggestion that American aid to Ukraine was actually an investment, and demands a financial return: a new war debt in the making.
Americans might well retort: why should we do this for the world? Reasonable enough, but if not America then who? And if the answer is “nobody” then we are back to the 1930s and should prepare for the challenges of that era.
There are differences between the 1930s and today that provide at least some greater stability to the system. Floating exchange rates, if left to function, should offset Trump’s tariffs. As long as the US continues to consume more than it produces then it will provide a market to the world.
The Bretton Woods institutions — the World Bank and the IMF — still exist to provide long-term credit to countries in trouble, while the network of currency swap lines centred on the US Federal Reserve is a mechanism to provide international liquidity in times of trouble. The large foreign exchange reserves accumulated by China and other Asian countries offer them some insurance.
But none of this should offer too much comfort. The IMF struggled to accommodate Greece, Ireland and Argentina; a crisis in a large economy would overwhelm its resources. It usually takes US leadership to get the IMF moving anyway, and for similar reasons it is hard to imagine Asian countries lending as a group in times of need. American willingness to tolerate a strong dollar and provide liquidity are part of the current framework but in bad times they would surely be tested.
Kindleberger published his book, The World in Depression, in 1973 and ended it with a few words on “relevance to the 1970s”. His concern then was for deadlock between a declining US and a rising European Economic Community — a fear that, 50 years on, seems so quaint as to be charming. He hoped for “international institutions with real authority and sovereignty”. Today, that too seems quaint.
The “relevance to the 2020s” of Kindleberger’s book is greater and gloomier. We have two competing superpowers, the US and China. Both fancy themselves as hegemons; neither is willing to accept the responsibilities of the role. The US vows vengeance on anybody who threatens the primacy of the dollar even as its own actions put that primacy in doubt. China rails against its lack of status in the current economic system, even as it plays a prime role in destabilising it.
With luck, there will be no crisis on a scale that needs leadership and global co-ordination to resolve — but luck always runs out in the end. It makes sense to bolster the international institutions as much as possible. It makes sense, too, to run sensible domestic policies and not end up dependent on the kindness of strangers, an unhelpful truism, like advice not to let your house catch fire.
“If leadership is thought of as the provision of the public good of responsibility, rather than the exploitation of followers or the private good of prestige, it remains a positive idea,” wrote Kindleberger. The US, for all its failings, provided that kind of leadership. The world awaits, with trepidation, the experience of an economic or financial crisis without it.
By Robin Harding.
The exclusive was recently published by The Financial Times.
