Europe’s Summer Reading List
Barry Eichengreen
10 August 2012
BERKELEY – In August, Europeans head for the beach. The continent shuts down on the assumption that nothing of consequence will happen until everyone returns, suitably tanned, in September. Never mind the subprime crisis of August 2007 or, closer to home, the European monetary crisis of August 1992: the August holiday is a venerable tradition. So, what should Europeans be reading beneath their sun umbrellas this year?
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Milton Friedman’s and Anna Schwartz’s A Monetary History of the United States belongs at the top of the list. At the center of their gripping narrative is a chapter on the Great Depression, anchored by an indictment of the US Federal Reserve Board for responding inadequately to the mounting crisis.
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Friedman and Schwartz are generally seen as reproving the Fed for failing to react swiftly to successive waves of bank failures, first in late 1930 and then again in 1931 and 1933. But a close reading reveals that the authors reserve their most scathing criticism for the Fed’s failure to initiate a concerted program of security purchases in the first half of 1930 in order to prevent those bank failures.
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That is a message that the European Central Bank’s board members could usefully take to heart, given their announcement on August 2 that they were ready to respond to events as they unfolded but were taking no action for now. Reading Friedman and Schwartz will remind them that it is better to head off a crisis than it is to rely on one’s ability to end it.
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A second recommendation is another account of the crisis of the 1930’s, Charles Kindleberger’s The World in Depression, 1929-1939. (If vacationing officials detect a pattern in their summer reading, all the better.) Kindleberger’s point is that avoiding a crisis – and when failing to avoid one, successfully exiting from it – requires leadership.
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Specifically, it requires leadership by a country with the power of the purse and the willingness to use it. The problem in the interwar period, as Kindleberger recounts it, was the reluctance of the leading power, the US, to provide the leadership and financial wherewithal to resolve the crisis.
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In Europe today, reunified and reinvigorated Germany is the only country capable of assuming this role. It could agree to swift bank recapitalization, a banking license for the European Stability Mechanism, and a more expansionary ECB policy. If Germany provided this kind of leadership, other countries would be quick to follow. Europe’s crisis would then be well along the path to resolution.
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Germans sunning themselves on Greek islands, one hopes, would be inspired by such reading. But it is hard to be confident.
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Of course, books by economics professors about the Great Depression hardly a summer holiday make. For variety, European leaders could take along Ron Chernow’s biography of Alexander Hamilton. Hamilton was a colorful character, born out of wedlock, raised in the West Indies, and captain of an artillery company in America’s revolutionary war. More to the point, as George Washington’s Treasury secretary, he crafted the bargain that successfully rationalized the US states’ debts.
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US states entered their new union with different debt loads and different capacities to service them. Hamilton made the case that the federal government should assume responsibility for their liabilities stemming from the costs of financing the war. He identified a source of revenue – the tariff – that could be devoted to this end, and he rendered the bargain politically palatable by making clear that if state governments accumulated additional debts, and again got into trouble, they would not be bailed out a second time.
European officials will argue that their problem is more difficult. Not only does Europe lack a federal government, but there is no desire to create one. A close reading of Hamilton’s accomplishments, however, will remind European readers that there was an equally deep aversion to federalism in the early US. It took politicians with vision and diplomatic skills to craft the political entity that emerged after independence.
Finally, European leaders should consider adding to their book bag Barbara Tuchman’s The Guns of August (again, notice the month). Tuchman describes how a series of individual decisions, all of which seemed sound when considered in isolation, had the unintended consequence of leading Europe into World War I.
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No one is predicting war in Europe today. But what is true of international diplomacy – that a series of seemingly reasonable decisions can have cataclysmic consequences if no one bothers to figure out the endgame – is equally true of international finance. Europe is dangerously close to its financial Sarajevo.
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The continent’s leaders, while relaxing on southern Europe’s crisis-ridden shores, should take Tuchman’s message to heart.
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The continent’s leaders, while relaxing on southern Europe’s crisis-ridden shores, should take Tuchman’s message to heart.
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Barry Eichengreen is Professor of Economics and Political Science at the University of California at Berkeley, and a former senior policy adviser at the International Monetary Fund. He is renowned for his examination of the world’s financial system at its most perilous turning points, from the breakdown of the gold standard in the 1930’s to the reconstruction of the world economy following World War II. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. .
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