BBC BLOGS - Stephanomics
« Previous | Main | Next »

Protectionism wasn't the problem

Post categories:

Stephanie Flanders | 08:50 UK time, Wednesday, 4 February 2009


Politicians and commentators keep warning that "protectionism is what made the Great Depression Great". It's a good line. Pity it isn't true.

Before you ask, I'm not endorsing protectionism. Or suggesting it could be a route out of our economic troubles. But it didn't cause the Great Depression.

If that sounds too heretical for the BBC Economics Editor, I should tell you that the US Federal Reserve chairman, Ben Bernanke, agrees.

Academics have been arguing over the causes of the 1930s slump for decades. I can't do justice to the arguments here. But I've been going back over the competing theories. Protectionism and the infamous Smoot-Hawley legislation raising US tariffs in 1930 are surprisingly low on the list.

A crude summary of the state of academic thought in this area would be "Friedman & Schwartz meet Eichengreen, in a world of bank panics and John Maynard Keynes".

Let me explain. In a classic work, Milton Friedman and Anna Schwartz say the US downturn of the 1930s was the Fed's fault, by failing to inject cash into a fragile banking system after the crash of 1929.

At a party for Friedman's 90th birthday, Bernanke (then a Fed Governor), said: " I would like to say to Milton and Anna: Regarding the Great Depression - you're right, we did it. We're very sorry. But thanks to you, we won't do it again."

But didn't protectionism help transmit America's problems around the world? Well, not really. Bernanke, Barry Eichengreen and other distinguished economists have established pretty convincingly that it was the gold standard that helped turn a mismanaged US stock market crash into a global slump - by causing a prolonged and devastating period of falling prices.

It was the gold standard - in effect, a fixed exchange rate system anchored by the price of gold - that led the world's leading economies into a deflationary spiral. That was because the only way for deficit countries to stem the resulting flow of gold - money - out of the country was by shrinking domestic demand, which led to a further downward spiral in prices and incomes.

Since everyone was doing the same thing (and surplus countries like the US were not allowing inflows of gold to stimulate demand), this didn't help countries out of their hole - they just collectively dug themselves deeper and deeper. The first countries to dump the gold standard were also the quickest out of deflation and the quickest to recover.

The depression certainly did see a collapse in global trade and capital flows, and a descent into protectionist tariffs and laws. But a fair reading of the evidence suggests these were more the result of the global downturn than the cause.

According to Peter Temin, a distinguished economist at the Massachusetts Institute of Technology, exports were 7% of American GDP in 1929. They fell by 1.5 percentage points in the next two years.

Given the fall in world demand in those years, not all of that fall can be attributed to other countries' retaliation against the US tariffs. And even if it were - overall, GNP over the same period fell by 15%.

So, on any reasonable assumptions, Temin says "the fall in export demand can only be a small part of the story." And, as he points out, even that loss in foreign demand from the tariff would have been partly offset by the fact that the tariff diverted demand from foreign to home-made goods.

His conclusion? "Any net contractionary effect of the tariff was small."

This shouldn't come as a surprise. Even the greatest fans of free trade would admit that the benefits of lower tariffs - or costs of higher ones - are fairly small beer when compared to the kind of collapse in incomes and employment we saw during the depression.

To repeat, I'm not endorsing protectionism, or a policy of "national self-sufficiency" (though intriguingly for his modern admirers, that's what Keynes supported in 1933).

The world is more interconnected than in the 1930s, and in the financial realm, especially, the crisis is going to require international cooperation to fix. That's not going to happen if countries are at each other's throats.

But in constantly warning against overt protectionism, governments may be once again overstating their capacity to affect events.


The better lesson of the 1930s may be that you don't need tariffs or a revolt against foreigners to cause a collapse in world trade and capital flows. A fully-synchronised global downturn can do that all by itself.


Page 1 of 2

  • Comment number 1.

    Having just watched "1929 The Great Crash" on BBC2, it would appear the depression was mainly caused by a large number of American banks going bankrupt. The life savings of US citizens and US businesses were lost, and those businesses that needed to borrow money couldn't. This led to a drop in demand for goods and services which led to high unemployment, and the vicious circle of unemployment = no money to buy goods and services.

  • Comment number 2.

    I think this is a wonderful post. I also think it will fall on deaf ears.

    No government likes to admit they really can't control something, and certainly in Britain the public don't like to hear it. It would mean we have to change things ourselves.

  • Comment number 3.

    Isn't the problem that many, such as Gordon, have blamed "a global problem" for the crash (as with the Great Depression).

    So they now can't be seen to be to enthusiastic about globalisation as they try to create a "Not me, guv!" image.

    Hence we have "British Jobs for British workers!" whilst simultaneously being forced to stress protectionism is a bad thing.

    For me the credibility of sorting out the problems so we don't spend decades in stagflation is ultimately.

    So its not until the leaders show the courage to say we did this and this and this wrong - and now we have fixed it - that confidence will return.

    Hence I disagree with your reasonable assertion on the news the other day that "nobody does see crashes coming" - hence nobody should be expected to see them coming. But they should have known if they understood the economic activity going on - as with the toxic debt.

    If you want confidence to return addressing that deficiency may be an idea?

  • Comment number 4.

    A fully synchronised global downturn can do that all by itself.

    Wasn't it just our bad luck to have two governments like Bush and Blair/Brown in control of two of the most financial important countries in the world at the same time.

    The only more frightening scenario would have been to have Bush and 'make it a double' Yeltsin at the helm simultaneously.

    Really though, what a once-in-a-lifetime confluence of perfect idiocy. No wonder we're having a worldwide recession 'that started in America'. What did we ever think was going to happen when we let the likes of Bush and Brown near controls at the same time. It was like giving live hand grenades to a bunch of kids.

  • Comment number 5.

    Stephanie, you say that it was not trade protectionism that caused the Great Depression, but the desire to retain gold, and hence a monetary base, by individual countries. Do we not have a direct analogy at present. Countries are encouraging banks to lend at home and retrench abroad, reducing the international availability of credit. This is, it seems to me, equally a form of protectionism, although of the monetary rather than trade variety. In addition, if this action restricts more profitable lending activities by banks, it will further reduce the available capital of those banks, and hence their ability to ride out the storm.

  • Comment number 6.

    If the Great Depression was due, more or less, to the gold standard, could this current downturn be due to the oil standard? It seems to me that oil may well have replaced gold as the primary medium of international exchange.

  • Comment number 7.

    Perhaps the cause of a lot of situations like this is when people realise they are being taken for fools buying things they don't need and don't really want with money they haven't got.

    Sooner or later borrowed money has to be repaid, and when people reach their own day of reckoning (by realisation of the futility of it all, or realisation that they are struggling to service their debts) they stop spending. When people stop spending a consumer-based economy slows.

    Having restrictions on how much money can be thrown around simply means we hit the day of reckoning sooner, and therefore the slowdown is restricted in its severity.

    IIRC the US didn't go into hyperinflation after the Depression, who knows how much longer it will be able to borrow $1,000,000,000,000+ pa to fund its profligate ways.

  • Comment number 8.

    History shows us that, if anything, during periods of protectionism the US economy actually grew. However, that's history.

    Surely the greqtest lesson to be drawn from the 1930's crash is that the world has changed since then. Whatever the cause(s) of the Depression (and I favour the "Gold Standard" argument), there was little globalisation, free movement of money, nor such global competition as there is now.

    We might now argue that, whereas the 1930's Depression was caused by too tight control of money supply, the current one has been caused by too lax control? But, as with the debate over the Depression, we can't write the history book of the current crisis until it's well over. Then the arguments can start: and there's nothing that economists like better than arguing over the what and why of past events. (Not so good at the future, though!)>

  • Comment number 9.

    Quote "... gold standard - in effect, a fixed exchange rate system anchored by the price of gold - that led the world's leading economies into a deflationary spiral"

    So China pegging its (and Hong Kong's) currency to the US Dollar means we have a repetition of the great depression.

    Quote "the only way for deficit countries to stem the resulting flow of gold - money - out of the country was by shrinking domestic demand, which led to a further downward spiral in prices and incomes."

    Quote "Since everyone was doing the same thing (and surplus countries were not allowing demand to be stimulated), this didn't help countries out of their hole - they just collectively dug themselves deeper and deeper. "

    So China's (surplus) largescale measures to boost its internal demand by protectionistly boosting internal production without raising imports into China will not lift the West (deficit) out of the coming depression.

    The pound needs to devalue to 1 USD = 1 GBP and 1 GBP = 0.70 Eur to stop a devastating depression here in the UK, with risk of revolution. But I cannot see the Europeans allowing that to happen (they will be secretly glad to see Britain in revolution).

  • Comment number 10.

    I thought economic theory was clear that free trade delivered large economic benefits. yet you are saying that tariffs and other barriers to trade don't do any harm. Seems a contradiction.

    But if what you say is correct and given the US has a massive trade deficit, then logically they should impose tariffs - they will bring jobs home and get rid of the deficit, tax revenues would improve and the budget deficit could be eliminated too.

    Same fro Britain.

  • Comment number 11.

    interesting blog...surely the idea about the fixed exchange-rate under the gold standard can be compared to that of the UK joining the euro

    if we were under the euro now, our currency would not be able to devalue in reflection of our economy to simulate demand and thus a downward spiral of prices would commence until countries coordinated policy.

  • Comment number 12.

    The most effective form of legal protectionism is the low FX we are seeing now. It inhibits imports and encourages exports. To the extent that it is upsetting other G7 memebrs. Therefore it is effective.

  • Comment number 13.

    Since 1.5 percentage points of 7% is 21.4%, and the overall drop in GDP was just 15%, I think it's fair to say that you just proved that the rise in protectionism helped worsen the crisis, even if it wasn't the original cause nor the main culprit.

    15% of 7% would be just 1 percentage point, so I guess we can establish the rising protectionism caused the American GDP to drop by roughly 0.5%, which imho is quite a lot, considering that exports only accounted for a mere 7% of the total economy.

    Sure, there were other factors that were more important, but protectionism helped put another nail in the coffin.

  • Comment number 14.

    #1 MrTweedy.

    Correct yet again. I'm afraid the economic theorists will have no time for your simple explanation however. It all has to be made insanely complex so that they can kid themselves that ordinary folk simply wouldn't understand how it all works.

    The 1929 crash was exactly as you say. All these banks went bankrupt because once again folk had borrowed insane amounts of money for assets that were simply waaaaay overvalued. In 1929 it was shares. In 2007 it was houses.

    Turns out we all borrowed too much. And now we can't borrow any more. Turns out that the previous decade of insane borrowing and faux borrowed wealth was the period of anomaly and now we're actually back at where our economy should be. Trouble is that in the intervening decade an awful lot of folk built their life around an expectation that perpetual borrowing Uber Alles was actually a quite normal state of affairs.

    Turns out they were wrong. Shame. The only downside as far as I can see is that the message doesn't yet appear to have penetrated the thick skull of the Maximum Leader. He still plans to borrow ever onwards and upwards to a perpetually borrowed future. Well, it worked for the last decade - why stop now eh?

  • Comment number 15.

    It is definitely important to put the risk of protectionism into perspective. It has been raised as something of a bogeyman by politicians. However, that does not excuse trivialising the threat that it poses.

    I do think there is a danger of getting obsessed with the past as a key to the future. We are not currently at risk of repeating the Depression of the 1930s. We are at risk of a Depression of our own, with different causes, effects and cures.

    Globalisation has made the world's economies much more interdependent than they used to be, so the impact of protectionism on frail world economies at this moment would be likely to be much more significant than in the 1930s. Protectionism is a temptation that world leaders must collectively resist.

  • Comment number 16.

    Awful article.

    You state politicians are wrong for saying that protectionism made the great depression worse than it would have been...because it didn't cause the great depression.

    That isn't what is being said and you are grossly mis-representing the economic argument.

    Protectionism didn't cause the great depression in anyway. There were a multitude of reasons that are well argued and will never be resolved. You are right that the main reasons were that liquidity was not provided by the Fed and the gold standard caused a domino effect: the first out were the least hit.

    However, protectionism and the Smoot-Hawley act did have a huge effect in making everything much worse. The recognised figures (US State Dept) for exports falls are actually more like 61% and you utterly fail to mention the effect on imports, which fell 66%.

    You have 'attacked' this from completely the wrong angle.

  • Comment number 17.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 18.

    i have never read such load off tosh in my entire life

  • Comment number 19.

    Oops! I'm sorry. Of course, if the exports were contracting at the same level as the rest of the GDP, they should of course have stayed at the same 7% as they were before.

    Thus the full 1.5% is their contributing factor, and a Great Depression without protectionism would have seen a contraction of the economy by no more than 13.5%. Add in the positive spinoff effects of higher foreign income relative to what actually happened, and the drop could have been even lower.

    The Great depression would still have happened and it would still have been huge, but a 1.5 % drop in GDP is clearly something people well could have lived without.

  • Comment number 20.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 21.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 22.


    Your blog today, like other days, is well thought out, researched and presented. Something other BBC Bloggers (no names etc...) could learn from.
    The argument seems to be Global Free Trade versus Protectionism and I can see why this polarisation is a necessary evil to make the point in economic terms.
    Of course, there are many shades of grey in between and, crucially, when it comes to "Free Trade" the devil is in the detail.
    For Global Free Trade to succeed and be sustainable, most of the key economies must "Play by the rules."
    I have been very much disappointed by the lack of open debate about how China has behaved in all of this. I think many people believe that:

    China has manipulated exchange rates to allow exports to grow to fuel its growth.

    China has given exporters subsidies for the same reason.

    Chinese manufacturers have a dubious record on product safety, with the government acting late (and somewhat savagely) in some cases.

    China is allowed to operate without the tight environmental restraints that European and US competing companies have to work within.

    China has a horrendous record in enforcing foreign company patents and preventing outright forgery.

    China, until very recently, doesn't seem to have done much to encourage domestic consumption.

    Helped by all of the above, China has massively grown exports and killed off competition in other countries. It hasn't really just been about cheap labour when you consider the list above.

    Consequently, as a country China has ammassed huge foreign currency reserves and is now in a position to pick off any tasty western assets it chooses (and these assets are cheap now). My understanding is that the Chinese exporting companies have been pretty much forced to hand in their Dollars, Sterling and Euros to the Chinese government in exchange for Renmimbi, which will have helped grow the currency cash pile.

    The truth is that you can pretty much buy any asset you want in the UK, even if you are a Chinese company. Is the reverse true?

    Why dont Western governments react to this?

    Well, a year or two ago, Gordon Brown was happy to let Chinese goods pour in. It kept inflation down, allowing us to have historically low interest rates and lower wage claims. Low interest rates mean rising asset prices (including houses), and tax receipts must have benefitted.

    The reasons for tolerating China's manipulation have changed a bit now. And not for the better.
    Western governments will rely on Chinese funds as they borrow to support our banks. We dare not risk upsetting them.

    That is why there is no real challenge from Western governments. In Scotland, we have a saying.

    The game's a bogey.

    Oh, and to the guy who keeps asking, "Where did all the money go?" Read the above.

    Go on Stephanie - make a name for yourself. Do a really good piece on China.

  • Comment number 23.

    re: #16 Kevin Boatang:

    I think the figures you quote are what happened within two years of the Smoot Hawley act, ie 1930-32.

    Flanders seems to be looking at what happened between 1929 and 1931. Plus if you consider that the entire econmy shrunk by 15% in that time, and that exports portion of that shrank another 21.4%, you get a total drop in exports 1929-1930 by roughly 33%. Guess the other half of the drop you refer to may have occurred the following year?

    There was a good article on Smoot-Hawley in the Economist in December last year:

    I'll just add two quotes from that:
    "few economists think the Smoot-Hawley tariff (as it is most often known) was one of the principal causes of the Depression."
    "Nevertheless, the act added poison to the emptying well of global trade"

  • Comment number 24.

    An interesting theory,however the gold standard has been superseded with other forms of monetary support such as reserve currencies and the use of international markets. Protectionism still exists in various forms across the globe and has never really gone away. Many of the world's poorer countries would find the notion that in any realistic way that free trade exists is a myth.
    The current crisis still has much of its root in the unregulated systems which "create" money from nothing and then sell it. It also stems in part from the establishment of "markets" for goods which do not exist, goods which are not the property of notional sellers and markets which cannot (because of features of their nature) be properly competitive. many "products" in the financial markets are so convoluted as to be incomprehensible to even some of those selling them. What they represent is in reality not a product at all, but a notion of a way for the seller to make money. This in itself is an impact upon the money supply.
    These false products and markets need to be regulated (preferably out of existence) to bring about stability and focus the minds of bankers etc on the issue of rebuilding confidence.

  • Comment number 25.

    Fundamentally, The Depression, the Credit Crisis, all recessions are caused by banks.

    Banks lend fractionally, this means they create new credit when a loan is taken out. This causes a credit based boom and inflation. Following the boom is a completely inevitable bust.

    Change the way banks lend, ban fractional lending and the booms and busts go away.

  • Comment number 26.

    I think, as with most things history teaches us about a depression, the effect of protectionism cannot be underestimated for the larger social effects it has on a country.

    I don't think anyone's arguing protectionism caused this crisis (indeed, quite possibly the opposite would be true). The concern about protectionism for me comes straight out of Lincolnshire, and its associated wildcat strikes. In times of recession, prejudiced attitudes start to increase as people:

    1) Become more desperate for a job;
    2) Look for a scapegoat to blame their hardship on.

    The chilling thing about protectionism for me personally is not an economic problem, but a problem concerning social harmony. It is a policy that world leaders, especially in the EU, need to be overly cautious with while immigration remains such a hot potato.

  • Comment number 27.

    Stephanie - An excellent blog which deserves wide publicity.

    One point though. I believe that the UK is more of a trading nation than the USA and that cross border trade is a much greater proportion of countries economies now than in the 1930s.

    So the potential impact of protectionism on the Uk in 2009 may well be greater than its impact in the USA in the 1930s.

  • Comment number 28.

    Well said. This is a great article that challenges the political parrots to start addressing reality rather than repeating rubbish.

    There is an even bigger quesytion we in the UK could ask. Is the debt level, personal £1.5trillion, corporate ? and state £0.5trillion and rising fast plus state pensions £1.0trillion plus PFI £0.3trilliion is unsustainable in the new era and if so what must happen ?

    Any government must face and solve this debt burden either by slieght of currency or by ensuring we the UK create more wealth than we consume. That surely means reversing the last six years of booming spend. Yet we here the government has provided nighe on £200billion to the Banks in the last four months.

  • Comment number 29.

    In dealing with the current financial instability and economic recession crises, I think it might be more relevant to focus our attention to the real causes of the crises as related to the failure of the government macroeconomic fiscal and monetary policies in maintaining financial stability and economic growth. At this stage, the issue is not protectionism vis-à-vis globalization as debated by different schools of thought, rather than the need for identifying the effective remedies for dealing with the crises' consequences once the financial system finally is stabilized. I think it is appropriate to suggest that instead of increasing the bailout to the ailing banks and investment institutions from the tax payers money, Britain needs to inject huge public investment for modernizing the physical, social and environmental infrastructure for reversing the economic downturn and reducing unemployment.
    Sabri Zire Al-saadi

  • Comment number 30.

    Stephanie, excellent blogs. I look forward to each one.

    Wikipedia quotes Greenspan as saying "The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit".

    Could we be experiencing an effect of abandoning the gold standard?

  • Comment number 31.

    Dear Stephanie
    Thank you for this I was just pondering this very thought today.

  • Comment number 32.

    "It was the gold standard - in effect, a fixed exchange rate system anchored by the price of gold - that led the world's leading economies into a deflationary spiral."

    Surely, the anchoring to the gold standard is incidental here - what is relevant is the fixed exchange rates.

    In the Eurozone, this is exactly the situation with their common currency, but with different circumstances and regulations in the individual member states. The pressures of the recession will highlight these differences without the safety valve of exchange rate adjustment. This will lead to increasingly severe unemployment problems in the less efficient Eurozone economies with no way out except leaving the Euro.

    Retaining the £ sterling is one of the very few advantages we still have in this increasingly difficult situation.

  • Comment number 33.

    Stephanie wrote

    "In a classic work, Milton Friedman and..."

    In my opinion any analysis that relies on any work, no matter how 'classic' by Milton Friedman is fundamentally flawed.

    further you also wrote

    "At a party for Friedman's 90th birthday, Bernanke (then a Fed Governor), said:..."

    Isn't this the self same Ben Bernanke who admitted before Congress that he didn't know what was happening and was wrong just a few months ago.

    Again just my opinion - I think that your economics education is fundamentally flawed as you were educated by people and into a philosophy of economics that gave us 'light regulation' and has now admitted that it does not know what to do as what has happened is beyond their understanding.

    Firedman went to his grave thinking he was right even though there was already ample evidence to the contrary - nice for him but very bad for the rest of us.

    This whole discussion shows how un-scientific and full of mumbo-jumbo the academic business of economics has become. Generals fighting armchair wars!

    Economics since the war has been shown to be a fraud, and wrong. Let us go further back to Keynes and indeed Marx and not rely on the nonsense taught in the West's universities in recent decades. Your economics education was basically fraudulent I suggest you ask for your money back (that is if the value of money had not been comprehensively destroyed by your chums!)

  • Comment number 34.

    No comments on the link to Keynes - maybe everyone else already knew it by heart. I have never read a word by him before - what a mind! As an accountant who only finds value in the human aspects of what I do, I found section IV especially relevant. 75 years later we are no closer to bringing anything beyond pounds and pence into our calculation of what "pays".

  • Comment number 35.

    Welcome back Stephanie Flanders! We've missed your intellectual depth.

    However (and as you imply), not all countries are as relatively big and self-sufficent as the USA was in the 1930s, or nowadays. Europe relies more heavily on its own inter-member trades. Therefore we cannot afford to jeopardise those inter-dependencies, nor either in our labour markets or financial services. Going back to beggar-my-neighbour devaluations and tariffs is not good policy in such an inter-connected continent.

    Moreover, both the USA and Britain now rely heavily on inward FDI to support our economic and financial activities. If we cut imports from, say, Asia, we could affect those big cash inflows that we've geared ourselves to rely upon.

    Some further ecomnomic analyses of this global saga will be needed. Soon. And often.

  • Comment number 36.

    It seems that both Protectionism and Globalization have become dirty words, depending on which constituency is being addressed.
    For those who have suffered under the last twenty years of outsourcing (and in-sourcing as at Lincoln) the G-word hurts the ears. For those with an eye on the bigger picture, trade and employment have become so complex and incestuous that the P-word is distasteful enough to be linked with Xenophobia. That is too trite a generalization and increases the current polarization.
    Yes, all global citizens are free to get on their bikes and trudge around the world for work. However, has anyone calculated or put a value on the social costs of leaving home and family for weeks, months, years on end? Sometimes the mantra of Globalization at all costs defies common sense, that's all. I suppose that economists do not factor social unrest into their calculations. Call it mild P as opposed to the X factor...

  • Comment number 37.

    So, the Great Depression was the result of poor policy decisions made in the 1930s.

    Three questions for you then:-

    1. Why then should we not conclude that the severity of World War II was the result of a failure to negotiate peace terms in the immediate aftermath of war's declaration? And little or nothing to do with decisions taken in the years leading up to it.

    2. What evidence is there that the abandonment of the Gold Standard in the 1930s would have led, in overall terms, to a better socio-political outcome than that which actually ensued?

    3. There are some who would maintain that the chief responsibility for the dislocation of the 1930s was the earlier non-prevention of anti-intellectual gaming of the system, rather than any real fault in the system itself. How has this line of thinking been disproved?

  • Comment number 38.

    Excellent post Stephanie. Tell it as it is.

    Trouble is too many of today's 'so called experts' neither know nor care what really happened then. Too young and inexperienced.

    Wise heads on older shoulders is what is needed.

    Trouble is, most of the older generation packed up when the saw the 'writing on the wall' or were turfed out through ageist policies and business 'red tape'.

    Businesses have been continually strangled by regulation to the point where UK plc is no longer Great Britain and where most companies outsource, globally and heavy manufacturing industries to the Far East and China for production.

    We could repair UK plc if Governments only realised that we can have manufacturing bases here and produce goods in the UK and in the process, help the environment, by not having to import from all corners of the globe, if only they would support them, instead of tying them up in bureaucracy, red-tape, crippling taxes and idiotic european directives.

    They just cannot (or will not) see it. The correspondent that spent a week in Euro Commision land summed it up, when he said "it's like being in the clouds".

    Too many dreamers and idealists out of touch with reality, living in city appartments and too ready to dictate. (didn't we go to war to rid a country recently of a dictator?)

    There is nothing we couldn't do or source, if we let businesses thrive in local communities instead of driving them away either as too noisy, too dirty etc etc or taxing them to the hilt.

    We do also have commonsense and hard working people locally too, not just China or India, so we don't need to import that either!

    I sometimes wonder if UK will end up as an island known only for its green fields and lack of industry - a tourist park, where the population survive entirely on the barest of wages through servicing the needs of global tourists holidaying in 'UK-parcs'.

  • Comment number 39.


    You should work in the oil/gas sector where there is not just no protectionism but where foreign companies are dominant in all the high tech value adding strategically critical bits of the industry.

    We blew a huge economic opportunity through our dogmatic attitude to the free market. Unfortunately though nobody else took the same view so our industry stagnated whilst everyone else prospered.

    The Govt and the City needs to explain why it is that a tiddly nation like Norway has done far better than the UK in setting up and growing major international players whilst we haven't.

  • Comment number 40.

    Bairdstafford makes an interesting point. A key difference between now and the 30's is the growth of oil production and consumption and the global supply networks for energy.

    However, if you'll pardon the pun, it's effect is much more fluid than the Gold standard.

    At the prices seen in 2007 it was likely to have been a key contributor to economic tension and at current prices the opposite.

    Too much to hope that this will render the economy self righting but I suspect that if fuel prices had not fallen back so much recently then the strikes we have seen recently would have been as nothing.......

  • Comment number 41.

    Sanity4all, nearly right...

    the British Isles will be wholly tarmacced and used as a giant offshore runway for the continent of Europe.

    Now where did I read that before?

  • Comment number 42.

    Excellent blog presenting a very good argument.

    Also Pensfold Message 27 has made a very good point about the greater negative impact of protectionism on the UK than on the US.

    I think we can all agree that the Great Depression was primarily caused by a credit crunch as the banking system imploded. We have recently narrowly averted the same circumstances by the taxpayer putting a raft under the banking system.

    Having prevented the worse case scenario we are now left with a not-the-worse case scenario which still looks grim.

    The banking bail-out remains unfinished business and is going to rumble on in some form or another for a few years yet.

    The fact that liquidity is now very tight is the major prevailing issue. It would seem that a busted bank, dependant upon taxpayer capital remains busted,

    This leads us into the next question concerning the global economy. Why should the UK taxpayer be expected to underpin world credit? We can keep our bit of the world economy propped up but we can't underpin everyone. I expect the same applies to the US taxpayer.

    So some sort of national ring fencing has to apply. Is this protectionism? Not to my mind but clearly it is to the EU whose spokesmen on Newsnight last night were contorting themselves with rage that Obama wants US steel to be used in the infrastructure projects the US taxpayer is funding as a fiscal stimulus. They are frothing themselves up into a trade war with the US. So who are the real protectionists?

    Like all things a sense of proportion is required. I will confess to being a free trader. I work in the global economy. Yet I see that local supply is more carbon friendly and requires less finance, I see little point in shipping consumer junk around the world, and I see no reason to move entire work-forces around Europe. The list goes on.

    In order to get out of the current mess we need a great deal less dogma, more practicality and far less sloganising.

  • Comment number 43.

    At last, some sense being spoken. Unfortunately, I do not expect it to make any difference at the highest levels.

  • Comment number 44.

    This debunk of a myth is fantastic. I really learnt a lot from this authoratitive and compact little essay - especially since it quoted sources. You´ve convinced me.

    Well done Stephanie.

    However, as some of the oither commentators have noted, our politicians will probably continue to be guided by myth and belief.

  • Comment number 45.

    Great article. Thanks for providing a more in depth analysis and questioning the Government sound-bites!

    I also think it should be questioned who the winners and loosers are. It seems that any change, e.g. in interest rates or currency exchange, results in winners and loosers. (The BBC tends to dwell on the loosers somewhat, e.g. high oil prices bad for business, and then 6 months later BP profits hit by low oil prices, etc.)

    With Globalisation vs. Protectionism there will also be winners and loosers. E.g. the US steel workers will benefit from Obama's "Buy American" clause, and the banks seem to benefit from Globalisation. (To be cynical, I would say the banks like Globalisation because it lets them do deals off-shore that their regulators won't let them do at home!)

    My impression is that Protectionism is being demonised by the government because the banks still carry too much power over them, despite the fact that the government theoretically owns a lot of them. If it was Globalisation that allowed the banks to run out of control, and in turn caused the current downturn, then maybe it is Globalisation that should be demonised!

  • Comment number 46.

    No. 14 .....U9461192

    The simple truths are often overlooked, but they can never be escaped.....
    One day, all borrowing must be paid back.

    As Niall Ferguson wrote in yesterday's Financial Times:
    "Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt." ......."There is a better way to go, but it is in the opposite direction. The aim must be not to increase debt but to reduce it."

  • Comment number 47.

    Not sure what Wee Scamp is saying. Oil and Gas are riddled with protectionism and cartels, it's hard to find concrete examples of significance where one or other does not exist. OPEC being the most obvious.

  • Comment number 48.

    One needs to be careful to distinguish between protectionism and the steps needed to fix the problems relating to the crisis.

    Firstly injecting more liquidity in the market.

    Secondly fixing the structural problems in the economy. In this case fixing the financial services market, the disparity in the manufactured versus imported goods and the balance between manufactured goods and services. This is a deliberate oversimplification of the problem to make the point.

    Thirdly is restoring confidence in the economy by removing the recession or at least the fear thereof. Part of this can only be done by reducing unemployment.

    All of these require the encouragement of the consumption of local goods and services, however once confidence is returned comsumption will still require additional (foreign) goods and services.

    I can't see any other way of doing it.

  • Comment number 49.

    Re: Stephanie Flanders, 'Protectionism ...'

    Yes, it's about time someone pointed this out (Keynes being back in fashion).

    Nevertheless, it wouldn't, on balance, be a good idea to over-protect home industry - the resulting increase in price (=reduction in demand) won't help worldwide employment and that surely is the key policy aim. (Unless maybe you advise George Osbourne).

    Still, the response so far of the mercantilists, especially Germany, is surely self-defeating?

    Unless they (the mercantilists) cooperate at the forthcoming summit I fear the arguments for protection becoming ever more logical. One shouldn't even think it of course but one (unworthy) consolation might be be that German, not Anglo, workers pay the bigger price.

  • Comment number 50.

    Well said Stephanie!

  • Comment number 51.

    Keynseian nonsense, coming off the Gold standard was the problem.

    During the depression the US govt confiscated all the Gold, you had to hand it in for a paper note.

    Then when they completely abandoned any semblance of a Gold standard by abandoning the Bretton Woods agreement in 1971, that's when all this nonsense started.

    FIAT money never works just look at history, whether it's Caligula, Wiemar republic or Mugabe, or any one of many examples.

    As soon as money has no intrinsic value other than being a number on a piece of paper, it can only last as long as people have confidence in the issuer, and less and less people around the world these days have confidence in the not really Federal at all with no Reserves, nor the US govt.

    After all the US may have the worlds biggest economy but being the biggest debtor nation in the world, it is therefore the poorest country in the world, even poorer than Zimbabwe.

  • Comment number 52.

    "If the Great Depression was due, more or less, to the gold standard, could this current downturn be due to the oil standard?"

    No, because we aren't on an oil standard - the gold standard fixed each currencies value in relation to gold, which means effectively all participants effectively part of a single currency in some senses (similar to the ERM I guess). As all currencies float against oil prices, the situation is completely different.

  • Comment number 53.

    Politicians, Institutional bankers and the spin doctor classes of financial services have had 40 years of telling what is right and wrong about the economy and the harsh facts that they are not admitting to themselves is that they are all wrong and their theories have failed.FACT.

    An eminent and sensible economist in Davros said last week that it was a mistake to pour money into sick and dying banks. He was right.

    The money would have been better spent clearing the debt of businesses and individuals and getting the economy moving. All governments have done is stuff money into banks and banks have kept it and are still not servicing the economy.

    We should forget that banks are money making machines; they are suppliers of services and money; end of story.

    Now our politicians are saying that protecting borders and industry is not the right thing to do even though it is practiced everywhere except Britain.The biggest problem is that our politicians haven't done a real job in their lives and couldn't run a tap; they are all non job theoreticians guided by over zealous and lazy over paid public servants.

    Blocking our borders for three years would be a good thing.Stop anything and everything from entry that can be produced or grown here! It would get our clothing, furniture, food, farming , vehicle industries, engineering industries really moving. Our only real exports in the last 30 yrs has been financial services and that has now sunk.If anyone wanted to import, they would have to open their doors to us exporting to them on certain things.

  • Comment number 54.

    Stephanie....seeing that Morals seem to have been 'risk managed ' these last few years....can you tell us sometime....what the state of ethical investment is/how it has where in the news has there been mention of theCOOP bank or Building Societies that did not de-mutialise.... thats the sort of 'protectionism 'that I prefer....

  • Comment number 55.

    And then again, there's the A-word.
    All across the UK, there is a swathe of 50 somethings being made redundant, who still have a bit of life left in them, yet are coming up against the brick wall of 12 year old Human Resource managers, clutching their shiny US business manuals. Or robo- recruitment websites which crash at any date of birth on the wrong side of 35. All the retraining courses on offer cannot alter a person's date of birth.
    The term Human Resource is a loaded one. Economists only see the resource bit, not the human behind it. Mild Protectionism will rapidly become a generational issue, not just a nationalistic one. Politicians will have to get to grips with this too.
    Look well at the world weary faces of social unrest. They mirror your own. There is a lost generation of experience being wasted out there.

    To sack a worker is to lose a customer.

  • Comment number 56.

    Thankfully the vast amount of discussion on the current crisis is done in cyber-space, and we are not destroying the environment to put it in print - (please tell me I'm right!)

    The article just re-inforces the believe that the career of politician or economist is exactly the same as journalist.

    They are all "has beens".
    All they can talk about is what has been, but they talk about it endlessly, because life is too complex to summarise in their 15 minutes of being famous.

    None of them are able to control the present, nor predict the future, certainly no more effectively than the bulk of the population.

    How many times in the last 5 years have you had the conversation ' well I don't know how ' person X / demographic Y (delete as appropriate) ' can afford that ' new furniture / new car / mortgage (select as appropriate).
    Well guess what, you predicted the future - they can't!

  • Comment number 57.

    You can argue about the Great Depression as much as you like. This isn't a replay.
    1. The players are different.
    2. The cut-outs are stopping the Crash repeating for the same reasons. That doesn't mean we're not crashing for different reasons, reasons to do with trust in the cut-outs.
    3. The size of the economy's different - we've more reserves in the system to carry us through the trough.
    4. The major players aren't recovering from a World War.
    5. The US has an honest broker in place.
    6. Failures were allowed to fail then. Now they just poison the system for genreations to come.

  • Comment number 58.

    No 7 - Thoughtcrime2008

    "Perhaps the cause of a lot of situations like this is when people realise they are being taken for fools buying things they don't need and don't really want with money they haven't got.

    Sooner or later borrowed money has to be repaid, and when people reach their own day of reckoning (by realisation of the futility of it all, or realisation that they are struggling to service their debts) they stop spending. When people stop spending a consumer-based economy slows."

    Exactly! Well said. The penny's dropped. We have all collectively realised that by going into debt to buy discretionary items we don't really need, we are now paying 20 - 30% over the original price of the goods, thank's to extortionate credit card interest rates - even now. What's more, those goods were overpriced to start with.

    Also we have become better informed. As people who have never been out of work lose their jobs, and run out of money, they discover that things like housing allowances are just for those who rent. Not even (so far at least) any help for interest on mortgages, and never likely to be any help to cover the principal. What a shock it must be to some working families to discover that they can get more from benefits by not working than they had in their take home pay.

    The government seem to be under the mistaken illusion that the demand for all these discretionary goods is still there, but lack of finance from the banks means we can't buy it. Fiddlesticks! the banks make money out of lending. There are heaps of us who still have all our credit lines intact.

    The truth is we have realised for a long time that UK plc is a ripoff, and now we are acting on that realisation, by keeping our hands firmly in our pockets.

    About time. At least some of us will reduce our debt burden. it's a pity the Governemnt is intent on mortgaging future generations to the hilt and beyond.

  • Comment number 59.

    #46 MrTweedy...

    Niall Fergusson seems to have the right idea. I'm genuinely at a loss to understand why there is any debate about this. The causes of this recession are so blindingly obvious (we've had a debt-fuelled binge 'justified' by insanely over-valued property for the last decade) that I just can't understand why the politicians are unable to just get up and tell the truth.

    It's not difficult to explain. It's not difficult to understand. It won't even come as news.

    In our heart of hearts we know it to be true. Speaking to mothers at the school gate they confide about writing off the deposit on their skiing holiday. They'll lament the loss of the deposit of course but they'll all admit that secretly they knew they were just riding the wave. Remortgaging, buying the new cars and other toys and living the lifestyle they've always wanted. On borrowed money. Oh well, they've had some fun - time to draw their horns in. The voters do get it. They don't even blame the government. After all the government didn't force us to go out and borrow all that money.

    We got it into our collective heads to go and borrow all that money. Okay, the government set a very bad example but hey, we're adults we could have voted them out. We certainly didn't need to emulate them in their tenuous grip on financial reality.

    The point I'm trying to make is that the politicians seem determined to avoid telling us the truth. Why? Because we won't be able to take the remedy? Which is to work hard, save money and pay off our debts? Okay, it's not very exciting - but it will work. Certainly not as exciting as printing money which will appear to work only for as long as the government resists the urge to add a zero to the banknotes. There is no historical example for the printing of money to end well. Not one. Plenty of examples where it ended very badly though.

    And all the time Brown is wandering about, head in his hands, lamenting that he has no clear historical blueprint on how to go forward. Helllllloooo. There are heaps of historical blueprints. You work hard, make do with less and pay off your debts. That's how it works.

    You do not print money. That screws the economy completely. There is no end of historical proof for that.

    It seems most politicians and financial journalists are all living in some kind of parallel universe to the boring old one that the rest of us have to make do with.

  • Comment number 60.

    Have people even read the article?

    The great depression was caused for various reasons, it was made even worse because of protectionism.

    That is the accepted, valid, fact.

    Flanders is arguing that protectionism didn't cause the great depression, which misses the point by a country mile.

    No one is saying it caused the great depression, the Smoot-Hawley act didn't even come into force until after the crash.

    She has compiled an argument using post-event legislation not causing the event in the first place.

    What has caused the current situation is banks not knowing who is going to be left holding the wrapped up bomb when the music stops because of the total lack of regulation, relaxed by Clinton, Bush, Blair and Brown.

    #33 Friedman was actually right, but his policies were never implemented in the right or full way - they were always mangled because politicians are terrified of losing their almighty grip on the state. Unlike the great Keynsian experiment which was embraced fully and directly led to the UK going bust in 1976 and gives the politicians everything they want - more control.

    A situation we are living through again right now

  • Comment number 61.

    If you extend your analysis to Marx's Capital you will find the answer to the cause of the depression of the 1930's & today's credit crunch.

    Put as simply as possible, the rising organic composition of capital (look it up on Wikipedia) depresses the rate of profit so that businesses hoard money rather than produce at a loss.
    The depression causes capital to depreciate which causes the organic composition of capital to rise and so the rate of profit, and so those businesses that are still around start expanding production again.

    In reality there are more complicated factors than this, but it's essentially the organic composition of capital, the rate of exploitation and the turnover rate of capital that determine the rate of profit.

    Good that you're trying to be scientific though.

  • Comment number 62.

    Interesting blog,but it ignores a very important part of the Great Depression.
    At the time half of all Americans were directly or indirectly involved in agriculture which was the worst hit sector in the US economy.Protective tarrifs for US manufacturing led to retaliation against American food exports.Overproduction could not be mitigated by exports and agricultue collapsed.Result - near insurrection in the Mid West and some great literature.

  • Comment number 63.

    It is interesting that most of the analysis looks at this period from an American perspective, naturally. That is the impact of US tariffs on the US economy.

    But as your lovely graphic indicates, world trade plummeted in the period up to 1933 so something else was going on.

    To illustrate, if I make widgets that I normally sell for £1 and wish to compete with widget makers who sell for a similar price in a country that imposes a 10% tariff on widgets, I need to sell my widgets for 90p.

    If I can't sell for 90p then my market shrinks and my overheads increase as a proportion of revenue.

    This means loss of profits, leading to less future investment or less spending of profits or lower wages for employees and maybe lower taxes to be paid.

    In other words, when you impose a tariff you are more likely to affect other nations than yourself including the extent to which they remain competitive in the long run through renewed investment.

    Perhaps this is why world trade plummeted between 1929 and 1933 as shown by the chart rather than just US GDP

    Or am I missing something

  • Comment number 64.

    Sounds like a bit of a straw man argument to me. Are any serious commentators really saying that protectionism caused the great depression? I don't think I've heard any.

    But what I have heard many times is that protectionism made the depression longer and deeper than it would have been, once it got going. I don't think I've yet been convinced that that isn't true.

  • Comment number 65.

    I have argued, both here and on Robert Peston's blog, that protectioism was not the sole driver of The Great Depression. Rather, it is a natural reaction to the crisis.

    I agree with Stephanie that this depression (let's start being honest and call it by its real name) is different. The UK entered the 1930s depression with a large manufacturing base. We do not have that this time. We enter with a large financial services sector which is collapsing in front of us.

    If the depth and breadth of this recession mirrors that of the 1930s, then we need to start planning now. Rather than looking for some global system to come to our rescue, our government (be it Labour or Conservative) needs to plan how to use its scarce resources.

    I offer the following as a starter plan:

    1 Control of the Utilities. Existing companies to act as managing agents for the period of the crisis. No profits to exported from the country. State control of pricing.

    2 Identification of of manufacturing companies that have strategic importance. A no failure guarantee.

    3 Immediate implementation of major infrastructure projects.

    4 All firms granted 'protection' to be required to commit an greed % of profit to R&D and training.

    5 Major investment in research.

    6 identification of industries that will give us a competitive advantage in the future and government sponsorship.

    OK so this breaks EU regulations - well just watch France and Germany do the same.

    This is not a comprehensive list. rather it is a thought starter. The aim is to ensure that we meet our NEEDS and come out of this depression with hope for the future.

    Also note that in the above, I have not resorted to tarrifs though they may be required in some areas.

  • Comment number 66.

    Dear Stephanie

  • Comment number 67.

    Dear Stephanie
    You are correct- Protectionism did not cause the Economic Crisis we are now all suffering, it had absolutely nothing to do withe the cause, The cause was created by a world think tank named Bilderberge, there is no doubt that these individuals are behind the MONEY AND ECONOMIC BLOC.

  • Comment number 68.

    Excellent post, Stephanie. This myth regarding protectionism needs to be brought to the public's attention.

    Obviously, a sudden lurch to protectionism would cause havoc - companies that rely on exports couldn't just switch to meeting domestic demand overnight. But some degree of protectionism may well be unavoidable, and we must be careful we don't get caught in a situation where other countries take protectionist measures and we fail to do the same - that would be the worst possible situation. Indeed (as #22 descibes), one-sided protectionism in our trade with China over the past decade is one of the key causes of our current problems.

    I do have a nagging feeling though that the current recession is not just caused by the bursting of asset bubbles and failure of the banking system. The rates at which consumers are cutting back on spending and at which big successful companies are announcing huge redundancies seem to have developed a momentum of their own, as if there were pent up issues in the background (the sort of thing described by #7) which the banking crisis has finally triggered.

    The cycle of unemployment leading to reduced demand leading to more unemployment is probably the biggest issue we now face. An interesting question might be whether it is easier for individual governments to take action on this if the world economy becomes less globalised?

  • Comment number 69.

    Agree that protectionsm did not cause the Great Depression however it definately exacerbated it and lengthened it so would be foolish to ignore. Peter Temin does not quote the effects on imports which is the area I would expect to be most effected by protectionist legislation. There could be a knock on effect however there would be a time lag between the US's legislation and other countries - which is why he only notes the effect over a 2 year period I suspect. The other problem with his chosen 2 years is that according to your own chart world trade contracted by by 38% 1929 - 1931 but by a further 46% over the next two years. Convienent quoting of 'facts' is so irritating.

  • Comment number 70.

    Re: #14.

    Excellent post, I agree completely.

    To those who just superficially scanned this thread while "scrolling through" I strongly recommend that you read post #14.

  • Comment number 71.


    "Stephanie....seeing that Morals seem to have been 'risk managed ' these last few years....can you tell us sometime....what the state of ethical investment is/how it has where in the news has there been mention of theCOOP bank or Building Societies that did not de-mutialise.... thats the sort of 'protectionism 'that I prefer...."

    I have a mortgage with a mutual society and bank with the co-op.

    Of course I still have to bail out those who invested riskily in Icelandic banks and the UK banks who p!%$£d away their depositors monies in obscene bonuses and speculative gambles even though I did not benefit from the risky high returns. I chose to get a steady fair return on my money.

    Will any bankers ever be called to account for their actions. If they were accountants or lawyers or doctors they would be struck off for incompetance and unable to practice in their field.

  • Comment number 72.


    What a load ot twaddle!

    "the rising organic composition of capital (look it up on Wikipedia) depresses the rate of profit so that businesses hoard money rather than produce at a loss."

    Now, in the real world just show me which companies have hoarded money. If they had, they would not be sinking in debt!

  • Comment number 73.

    Stephanie: I don't know why you are so keenly pointing out that you're no fan of 'protectionism' (P word).

    Protectionism is like flat. There is no such thing as flat but there are grades of flatness. I have YET to hear a constructive analysis of what P means because as an active exporter around the world I can tell you there is P in many forms all over the world already.

    Ask anyone in Greece what the import tarrif is on raceparts imported direct from the USA. Or anyone in Canada or NZ Australia what the 'tarrifs' are on raceparts imported from the UK (our 'Commonwealth partners BTW). South Africa? No-one with any sense exports to that country because of the punitive tarrifs. Try buying silk or gold or other 'strategic' products from the US ally in the war on terror - Uzbekistan. It's a long list, longer than you might imagine. We have P ALREADY!


  • Comment number 74.

    Lionel Robbins wrote a thoughtful "succinct commentary" entitled "The Great Depression", in 1934 when its causes and effects would have been a good deal more topical than they can possibly be even today.
    In his account of the Great Depression Professor Robbins is careful not to try to apportion the blame for the events surrounding it. Instead, he carefully enumerates a catalogue of the political as well as economic sources of the depression, which he defines as a "general contraction of trade". (p. 65)
    One contributory cause was what he calls restrictionism, or "the policy of restrictions on international trade". His analysis of their effects of is at odds with that of Ms Flanders.
    Robbins writes "... the atmosphere of trade depression is favourable to ... panic measures ... and whenever a depression occurs ... there is to be witnessed the odd spectacle of the nations of the world zeaously endeavouring to bring about a further contraction by excluding each other's products."
    Referring to the Hawley-Smoot Tariff Act, Robbins accuses such obstructions to trade of encouraging deflation and of rendering rapid recovery even more problematic.
    There must be doubt as to the drift of Ms Flanders's argument. And there are reasons for panic if serious attempts are made now to erect obstructions to free world trade in the vain belief that they will be a remedy to the recession and not a further cause of a grim depression.

  • Comment number 75.

    Possibly, the protectionism that developed in the thirties had a bigger depressive effect in those countries which had a higher level of exports as a proportion of exports than did the USA. E.G. UK, or third world countries. Can anyone elucidate?

  • Comment number 76.

    An author is right the protectionism did not cause of the Great Depression. However, no reputable economist in the world argue that.
    The real argument is that the protectionism made the depression a Great One. It really deepen major economic problems America faced at the time.
    Similarly, new protectionism (luckily in the smaller sacle, some lessons probably were learned) will do the same. Here, in Canada idea of retaliation to American protectionism becoming popular.
    Let's start global trade war! Let's have an unemployment rate 25% or more!

  • Comment number 77.

    The difference today is that a greater number of people had access to money/borrowing. That is the difference, and it will affect all of us. People thought that they could borrow, and were allowed to do so, and the day of reckoning was the last ting in their minds, or it seems in the minds of the lenders.
    We have so much information now continually pouring out from all of the media and this is at least a non hysterical blog.

  • Comment number 78.

    The author of this article urgently need to go back studying. Out of the article it appears her knowledge of economics is not only insufficient, but her statements are also incorrect and politically stained.
    Maybe she needs to read some books by Ludwig Von Mises (like human behavior).
    Deflation only comes after inflation and if Money creation is linked to GOLD the amount of inflation and deflation is limited. Only when there is no link (and during the last great depression, the link between paper money and gold was on and off), we have huge inflation, hyperinflation and deflation.
    Not only Von Mises (, but economic history is a proof of the only have to make you home work and try to avoid to explain it all as the politicians do.
    Additionally, the author is blind for the happenings in Zimbabwe, Argentina, etc..These are modern happenings and they proof again that what she's trying to make believe, is completely incorrect!

  • Comment number 79.

    No. 65 .....foredeckdave

    Please forgive my black humour, as I do tend to agree with your judgement.

    2. "Identification of manufacturing companies that have strategic importance. A no failure guarantee."

    Answer - Bicycle manufacturers. They keep cropping up on TV for some reason. Even Boris Johnson was singing the praises of London's bicycle companies. We'll cycle our way out of recession.....

    3 "Immediate implementation of major infrastructure projects."

    Answer - the 2012 Olympics.

    4 "All firms granted 'protection' to be required to commit an agreed % of profit to R&D and training."

    Answer - Loss making businesses will be encouraged to spend more on research.

    5 "Major investment in research".

    Answer - We need to research why toast always falls butter side down. It's important to spend millions of tax payer money to find out why that is. Food will be a scarce commodity in the future.....

    6 "Identification of industries that will give us a competitive advantage in the future and government sponsorship."

    Answer - We'll all be Formula 1 racing drivers. We're good at that. It should provide employment for at least 3 million of us.

    I do apologise, but I had to escape the reality of the recession for a minute or two.

  • Comment number 80.

    If you praise Stephanie do you get moderated quicker?


  • Comment number 81.

    Any kind of protectionism in Britain is unlikely to work. The consumer is too smart to put up with it.

    Say China can land a t-shirt here for £1, which Primark then sell for £2. Brown and his cohorts then approach a local clothes maker who tells them here in Britain he can make the same T-shirt, but for £5, which would retail for £7.50. So we put a 400% tariff on imported T shirts. Now there's a level playing field. It costs the same to import a T-shirt from China as it does to produce one here. But who is going to pay £7.50 for a £2 T-shirt?

    More worrying for Britain is the requirement that we have to be prepared to employ foreign EU labour ahead of our own. As in the Total debacle that is going on at the moment. Total won't care - they're French owned anyway. I can understand the sub contractor - he already employs the Portuguese and Italians and has nothing for them to do - why not bring them to Britain to work if that is where he has work for them? But from Britain's point of view, it's nonsensical. Instead of having a British oil worker paying £300-400 tax and NI contributions a week, the remaining taxpayers now have to support him and his family, at a cost of £300 - £400 a week, by the time you throw in housing benefit and council tax benefit. What an idiotic state of affairs.

  • Comment number 82.

    The relationship between the Great Depression and protectionism is one of those chicken&egg issues. But one thing that isn't discussed here is the relationship between the world's economic difficulties during that time and the seeming triumph of totalitarianism...and totalitarianism's ghastly consequences. Certainly the people who put together the Bretton Woods institutions believed in that relationship. Economics and politics are joined at the hip, and to overlook one is to miss the big picture.

  • Comment number 83.

    I am not an economist but I can see what the antithesis of protectionism (that is globalization) has done to the standards of living in the United States.
    Real wages have decreased for many as a result of the loss of entire areas of manufacturing to cheaper imports and the flight of capital in the quest for cheap labor.
    Since the 1980's the two-wage household has become the pattern. People have to work longer hours, and many have to work more than one job. Furthermore, many households have resorted to borrowing for everyday expenses.
    There is no way that developed countries can maintain their way of life while competing with 3rd World manufacturing.
    Being a woman I applaud the opportunity of having a carreer and a job outside the home. However, I do not think that I am better off than my mother when I am actually forced to work to make ends meet.
    I believe we have to take some steps back and establish some protections for our home industries and set some taxes or penalties on our capital earnings on foreign soil. We must protect our jobs, not just for us but for our children and their children. Perhaps there could be regional blocks with semi-free trade rules such as the EU or USA/Canada. But we should maintain out manufacturing capabilities.
    It is awful to think that if China imposes a trade boycott on the USA today, we would experience a shortage of just about every conceivable thing.
    By the way Steph: great column!!!

  • Comment number 84.

    This is a very US-o-centric point of view. Maybe protectionism wasn't so important for the US but what was the effect on Germany and Japan, countries without natural resources such as oil? Do the studies discuss that?

  • Comment number 85.

    1 1/4 hours to moderate comments. Its hardly conducive to a good conversation.

  • Comment number 86.

    #14, 70 - generally and irrationally blaming all borrowing again, huh?

    Easy target guys, so since you're on the 'if you knew what you were talking about' tack I will point out that the root cause in this country is the balance of trade. In deficit for, what decades?

    You can't run any country off 'internal money' whether folk borrow_or_not. Esp the UK where the Guvt consumes tax revenue like it grew on trees.

    Think about it.


  • Comment number 87.

    1929 is not 2009, and there is no surety what caused or deepened the C20th depression. What is important is how we get out of the current one, and whether we should seek to become self-sufficient as a country. The lads at Lindsey are effectively reminding us of the importance of community, and the need for national governments to be able to do something to ensure social cohesion through full employment. Globalisation and supra-governments like the EU render useless the likes of Westminster. Likewise, the uselessness of Regional Development Agencies is revealed by this Depresion.

    Many people remark on the pace of life. Let's cool it, and insofar as is possible, meet British needs through products grown and made in Britain. That's not protectionism, just commonsense, (and, no doubt to some, heresy). .

  • Comment number 88.

    #60. kevinboatang wrote:

    "#33 Friedman was actually right"

    I am not going to get into a slanging match, but I disagree with you.

    He was philosophically in error. His policies may or may not have been used by national economic managements is their own way, but that is beside the point. His philosophical vision that the free market would benefit from light regulation, or indeed no regulation, was and is crazy. This was the element of his economic mumbo-jumbo that was taken up by the Regans and Thatchers and I do not recall that he complained over much at the time.

    So, can show me that he actually complained vociferously that his policy philosophy was being implemented wrongly? - he could have done so but I don't recall that he did (nor his followers the other Boys from Chicago.)

    I recall vividly the enormous destructive consequence to Chile where his ideas were given full reign - the man was a menace to society.

  • Comment number 89.

    #79 MrTweedy

    You are perfectly welcome. Your reply helped my day too!

  • Comment number 90.

    Thankyou, at last someone saying that protectionism is not all bad.
    The argument used by the free traders that protectionsim leads to a slump caused by a tit for tat reduction in imports seems unconvincing, particularly at a time when spending on anything by consumers in all countries is well down. If a measure of protectionism returns production that has been outsourced to China and India to the western countries consuming the goods, creating jobs and decent salaries, then perhaps we can start to redress the falling purchasing power in those countries, get money circulating within those western economies and reduce the balance of trade defecits.
    Getting healthy internal economies up and running must come before the protection of a 'global' economy. What international trade can a country with poor levels of employment carry out, without resorting to external borrowing, or foreign investment?

  • Comment number 91.

    We may not need to worry about protectionism and truning recession into depression. Your chart on mortgage supply sums it up, banks are still not lending and deals are only in plentiful supply if you can put down 40% deposit.

    When will this sad tired government realise it has once again been had by the Banks, and will it do as Obama has and insist executives can't earn more than $500k salary or the equivalent in £1?

    Your assessment is as always spot on but tragically the banks seem intent on collapsing this economy on their own.

    In the name of God wont this government realise and stop what is happening,

    Much as I am not in favour of nationalisation, maybe making the Post office into a super bank thowing in RBS and Lloyds might be the answer.

    At least then we will get movement and stop what is looking like an inevitable end result happening.

  • Comment number 92.

    Was this really J M Keynes in 1933, or economic commentator 2009?:

    "Yet the new economic modes, towards which we are blundering, are, in the essence of their nature, experiments. We have no clear idea laid up in our minds beforehand of exactly what we want. We shall discover it as we move along, and we shall have to mould our material in accordance with our experience."

  • Comment number 93.

    No. 86 ....guycroft

    I agree that we should have a balanced economy. A little bit of self sufficency is needed to protect ourselves in times of trouble. Outsourcing all our manufacturing to the far east is risky, because Asian companies will eventually compete against us with their own designs. Also, if British businesses have foreign owners, such as the case with the UK car industry, all the profits could be sent back to the parent company abroad by way of dividends.

    Banking and insurance are big "invisible" earnings for the UK, and were actually in trade surplus before the crisis. They partly offset Britain's trade deficit in "visible" goods. A viable and robust banking industry is important for Britain.

    Worth bearing in mind that Japan has a large trade surplus, and is the world's secong largest economy, but has still suffered economic problems since its boom ended in 1989. Their banking crisis is of course famous, and their their stock market index has fallen from 39,000 to 8,000 since its peak in 1989.

    We need to find a way to share the wealth of nations as equally as possible. With modern technology, a good standard of living should be attainable for all.....

  • Comment number 94.

    No. 88 ....John_from_Hendon

    Some commentators say the "Miracle of Chile" was one of the Chicago Boys' big successes. They turned round an inflation ridden sick economy. Chile is now a relatively healthy economy, and credit is generally given to the monetarists for the turnaround.

    Milton Friedman was against state ownership, and supported the idea of free trade and light regulation. However, he advocated very strict control over the money supply. Some argue that lack of control over the money supply actually caused the rampant asset price inflation seen in the UK and US in recent years.

  • Comment number 95.

    Interesting to notice that H.R.1, the stimulus bill passed by the House of Representatives and containing the "Buy American" clause, also contains a cute get-out clause. This allows the administration to exempt any purchase from buying American steel "if it is in the public interest".

    Will the Obama administration choose to use this clause? Let's hope so:

  • Comment number 96.

    I find this topic very interesting albeit is also of tremendous importance at this point. I support the latest move of president Obama limiting the income of bank execs. Nationalization of the banks on the other hand (and I am not afraid of the word "N"), may prove a moot issue: people in general have over-borrowed and have just engaged reverse gear in spending. The era of over-consumption is over. I do think this recession, or depression, will last for a while. What I believe is important in the long term, for the health of the western economies, is to reverse the trend of capital flight overseas in search of cheap labor. The elimination of the flood of low priced imports (see tariffs)and the resurgence of domestic industries is vital to maintain a solid baseline of personal income. Globalization is a panacea for capital but for no one else. The degradation of the manufacturing sectors, both in the USA and Britain is the ultimate culprit in the birth of "bubbles" which up to now have kept alive the illusion of growth.
    And if foreign capital wants to sell products in our countries, let them install factories here, employing Americans in the USA and Britons in the UK.

  • Comment number 97.

    "59. At 1:33pm on 04 Feb 2009, U9461192 wrote:

    Which is to work hard, save money and pay off our debts? Okay, it's not very exciting - but it will work."

    No... It won't.

    It will not because 97% of our money IS credit. Attempting to pay our debts will destroy that credit and make the Credit Crunch worse, not better. Not only that, it will fail miserably because there is more debt than there is credit. All the credit could be consumed and still not pay all the debts.

    I suggest you find out what the nature of our money really is before attempting to give advice about it. Try the "Money as Debt" video on Google Video to start with.

    What ended the depression in the USA was the printing of enough money to finance the war. Printing money causes inflation, it is simple. The Credit Crunch is deflation, the destruction of money. You fight one with the other. You print money to fight the deflation and you increase the banks reserve ratios to limit their ability to multiply it with credit and cause hyperinflation.

  • Comment number 98.

    Stephanie, I think it a tad simplistic to say that the deprssion was caused by this or that when a lot of things were involved (ridiculous lending and hence expansion of "money" supply, government stimulus, malinvestments caused by said inflation etc)

    I think you would benefit from reading a couple of alternative views, first from Antel Fekete which is a quick read and second from Rothbard which is not.

    [Unsuitable/Broken URL removed by Moderator]
    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 99.

    #97 "Printing money causes inflation, it is simple. The Credit Crunch is deflation, the destruction of money. You fight one with the other. You print money to fight the deflation and you increase the banks reserve ratios to limit their ability to multiply it with credit and cause hyperinflation."

    Absolutely right. That's exactly what should be done.

    Of course that still leaves a number of other problems to be dealt with, like trade imbalances, excessive debt and a downward spiral of unemployment and reduced demand, but you're quite correct that this is the first thing to do in order to counteract the Credit Crunch. We then have to deal with the other problems....

  • Comment number 100.

    #97 true-liberal wrote:
    "59. At 1:33pm on 04 Feb 2009, U9461192 wrote:

    Which is to work hard, save money and pay off our debts? Okay, it's not very exciting - but it will work."

    No... It won't."

    Yes it will - obviously it doesn't mean paying off all the debt. It's about ratios of debt to earnings, etc, that need to be restored to sustainability/equilibrium. If we hadn't had the crazy lending from the banks the housing bubble would have burst around 2003-2004 at the latest leading us into a normal recession. Instead what we now have thanks to the banks is the complete collapse of the financial system followed by depression. There is nothing about this entire situation that is not related to the housing bubble and the lending practices of the banks in relation to it. Nothing.

    "The Credit Crunch is deflation, the destruction of money"

    Nope, try again. The credit crunch is the destruction of money created through debt that was UNSUSTAINABLE in relation to the borrowers' ability to pay.

    Do you have any idea what a bubble is, or do you actually think that the 400% rise in house prices in my street over a seven year period was sustainable?


Page 1 of 2

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.