Hugh Williams - Fifty Things You Need to Know About World History

Further afield the freedom movements that had begun to develop in the colonial territories of the great powers pointed to economic misery as the inevitable legacy of selfish, wealth-obsessed masters. The man who would become the first Prime Minister of an independent India, Jawaharlal Nehru, said in a speech in 1929: ‘Our economic programme must … be based on a human outlook and must not sacrifice man to money.’ In Brazil, where growing prosperity suddenly began to decline, Getulio Vargas, one of the country’s most influential leaders in the whole of the twentieth century, seized power in 1930 and became known as ‘The Father of the Poor’. Economic turmoil had a global impact. At the end of the nineteenth century, capitalist economies were controlled by a few people and their mistakes could generally be contained without triggering revolutionary reverberations. By the middle of the twentieth century, the widening of the democratic process that accompanied the continuing march of industrialisation meant that ‘the market’ was everybody’s concern. The whole world demanded answers when things went wrong.

‘The market’ ran free. Capitalism was the great conqueror.

Answers could no longer be heard above the noise of war by the end of the 1930s. But in the fifty years that followed peace the world economy was further transformed. To begin with reconstruction was slow and in many countries, including Britain, times were harsh and austere. Gradually, however, as the old Bolshevik Communist system in Russia collapsed, China began to open its doors, the European Community grew larger and communications improved through the growth of the internet and air travel, the privations of the past slipped away. ‘The market’ ran free. Capitalism was the great conqueror. In Britain and America emphasis on the power of individuals to control their economic destinies became the dominant feature of policy-making. This approach spawned attitudes that were satirised in the film Wall Street in 1987. One of the main characters is a ruthless corporate financier called Gordon Gekko. ‘Greed,’ he tells a shareholder meeting, ‘for lack of a better word is good. Greed is right, greed works.’

Gordon Gekko is a caricature used to capture a prevailing mood. But when the Credit Crunch struck twenty years after he first appeared on the screen, his speech had something of a prophetic ring to it. In the film Gekko gets his come-uppance. In real life, too, the good times stopped as lifestyles financed by credit were no longer sustainable. In this atmosphere what people had once applauded as a healthy aspiration for wealth-creation was now condemned as nothing better than careless greed. The banks were blamed for over-extending themselves and lending money to creditors whose earnings could not support the debts they were encouraged to take on. The BBC Reith Lecturer Michael Sandel described the end of what he called three decades of ‘market triumphalism’. It was time, he said, to think again about what ‘the market’ was for. Putting it all down to greed was too easy because greed, in the form of self-interest, was how markets functioned. What was wrong was allowing them to intrude into areas of public policy for which they were entirely inappropriate. Arguments like this are significant. If heeded, they mean that the Credit Crunch will result in a fundamentally different approach towards money and how it is made.

What Do We Mean By ‘Financial Crisis?’

A financial crisis occurs when institutions or assets lose a great deal of value. Financial crises occurred more frequently from the seventeenth century onwards with the increasing circulation of money, the development of banking institutions, and globalisation.

Stock market crashes and financial bubblesoccur when speculation drives up the price of an asset or stock above its true value. When participants begin to sell the stock, panic-selling often takes over, and the price declines dramatically, prompting a stock-market crash. ‘Tulip Mania’ in the 1630s is regarded as the first economic bubble. Prized as a luxury during the Dutch Golden Age, speculative trading saw tulip prices peak and collapse in 1636–37. In 1825 the stock market in London crashed partly as a result of highly speculative investments in Latin America, including the imaginary kingdom of Poyais, and nearly led to the collapse of the Bank of England. The best-known crash is that of Wall Street in 1929.

Bank runsoccur when depositors rush to withdraw more money from the banks than the banks hold at the time with the result that depositors lose their assets. The Great Depression in America in 1931 saw a ferocious run on the Bank of the United States.

Currency crises and hyperinflationoccur when the supply of paper money increases dramatically causing the value of the currency to decline. The Weimar Republic of Germany experienced this in 1923 when the Deutschmark fell to a value of DM 4,200,000,000,000 to the dollar. Between 1945 and 1946 Hungary experienced hyperinflation when prices rose by over nineteen percent per day.

It is still too early to know whether the Western world will change its attitude towards markets and what they are for. But if they do, it is more than likely that those changes will be created, not by the application of a new philosophy, but by the impact of harsh economic reality. The principal difference between the Great Depression and the Credit Crunch is the effect upon the poorer people of the industrialised nations. In the Great Depression this was devastating, not least because to begin with banks did not know how to cope with it. In particular they made the fatal error of restricting money supply by raising interest rates. In America, the Federal Reserve, the country’s central bank, did not intervene and lend to struggling banks in order to prevent their collapse. In the Credit Crunch the reverse happened. Interest rates fell and failing banks were bailed out by governments. This and the improvements in social welfare that have taken place since the end of the Second World War meant that the immediate consequences of the crisis were reduced. The sight of large crowds of homeless or unemployed people has not so far been a feature of the collapse in the markets.

In the longer term, however, that may change: the price of quick salvation is high. The cost of rescuing the financial systems of the West has plunged its governments into deep debt. In 2009 the International Monetary Fund reported that the world’s ten richest economies had borrowed a total of more than $9 trillion in order to cope with the crisis. In a weak global economy, paying back these huge sums will prove a hard task. In Ireland the economic improvements of the previous twenty years have been all but extinguished by the financial turmoil. Everywhere countries face the prospect of introducing older retirement ages, higher taxes and deep spending cuts. In 1929 the sudden shock of the Wall Street Crash led to immediate devastation and despair. In 2010 the aftermath of shock may have been delayed, but not necessarily eradicated. The Credit Crunch could yet lead to the long term of erosion of wealth in the modern world.

Freedom is a much-abused concept. In English we use two words meaning the same thing – ‘freedom’ and ‘liberty’. The first has a Teutonic root, the second comes from the Latin. Most other European languages have only one word, for example, liberté in French, freiheit in German or libertad in Spanish. The sad fact is that however many words are used to describe it, in the history of the world those promising liberty or freedom have often lied. Movements claiming to set people free have ended up imprisoning or suppressing them. True freedom is both hard to find and define. Like happiness, with which it is often associated, it is one of the most desired yet most elusive accompaniments to the progress of mankind.