The gathering of the leaders of the G20 today in London draws the hopes (and some fears) of people worldwide: the gravity of the economic crisis and its shock-waves alarms anyone who is paying attention. One might hope that the leaders will pull from their collective sleeves the four aces hiding there, to be used in a dramatic conclusion to the crisis: game over, game won, we can all breathe a sigh of relief and go on about our lives. This morning, British Prime Minister Gordon Brown and President Barack Obama predicted that the conference would produce a dramatic plan to fight the crisis.
A reading of the history of economic summits would prompt one to be quite cautious, for it shows a wide variance of results. Rather than four aces, it seems just as likely that the leaders will show a weak hand. To get a sense of the results that today’s conference might offer, consider four important forebears:
- 1910. Jekyll Island Shooting Party. As Sean Carr and I described in our book, The Panic of 1907, the absence of a lender of last resort was a major weakness of the American financial system at the dawn of the 20th Century—the 11 bank panics that occurred between 1815 and 1914 underscored the fragility of the financial system and the need for reliable intervention when panic struck. After the Panic, the U.S. Congress chartered the National Monetary Commission to recommend changes in public policy. The Commission toured the money centers of Europe and gathered evidence in favor of introducing a central bank into the U.S. financial system. In November, 1910, Senator Nelson Aldrich of Rhode Island secretly gathered five senior bankers and an Assistant Secretary of the Treasury at the Jekyll Island Club on the Atlantic coast of Georgia—the pretense under which these men gathered was to go duck hunting. The club offered the visitors something other than ducks: seclusion to concentrate. The seven individuals were aligned on the urgency and need for a central bank. They were experts and very well briefed. And each in his own way was powerful and in a position to influence the advancement of the plan. The result of the gathering was a proposal for a central bank to be chartered by the Federal Government and led by Governors drawn from across the country. The resulting plan for a “National Reserve Association” was similar to a design proposed by one of the members a few years earlier. The plan found its way into the final report of the National Monetary Commission and was substantially adopted as the Federal Reserve Act in 1913, arguably the high-water mark of the Progressive Era of U.S. politics. The little conference at Jekyll Island arguably produced a big win.
- 1919. The Paris Peace Conference opened on January 18, 1919 and closed a year later with the opening of the League of Nations, whose framework was established in the conference. It was perhaps the most complex negotiation undertaken in history to date. It failed to achieve in any lasting fashion the main goals of its architects. The conference actually solemnized five main treaties, each of which dealt with one of the losing countries in the First World War—the most famous of these was the Versailles Treaty that dealt with Germany. The net effect of the conference was to impose draconian terms for reparations on the vanquished. In protest, John Maynard Keynes resigned from the British delegation to the conference and penned a brilliant critique of the terms, The Economic Consequences of the Peace. In essence, the terms created a self-fulfilling prophecy: they impoverished Germany, depressed the economic recovery of the entire European economy, laid seeds of the Great Depression, and ultimately created a rogue state and a return to hostilities. How did this happen? The vanquished states had no voice in the discussions. The sheer scale of the conference created noise, complexity, and intrigue–the conference brought together 32 countries, the “Allies.” The victors brought differing objectives to the conference and failed to gain much in the way of alignment. The victors lacked foresight. The U.S., brimming with revulsion at the European war, began to recede into isolationism, which the idealistic Woodrow Wilson failed to detect. The American people mainly wanted their loans to Britain and France to be repaid. Therefore the British and French demanded reparations sufficient to satisfy their debts to America and then added to them punitive payments. The proud British, desiring to re-establish status as the leader in world finance returned its currency to the gold standard at its pre-war exchange rate without realizing that the pre-war rate was unsustainable in light of post-war realities. This was a lose-lose economic conference on grand scale.
- 1933 The London Monetary and Economic Conference. Hosted by the U.K. Prime Minister, this conference sought to address the causes of the incipient Great Depression. The gathering drew 20 foreign ministers, 80 finance ministers and central bankers, and two heads of state—with their advisers and observers, the gathering swelled to over a thousand people. Britain’s King George V opened the conference with call for altruism: “In the face of a crisis, which all realize and acknowledge, I appeal to you all to cooperate for the sake of the ultimate good of the whole world.” Ultimately the conference was thwarted by U.S. President Franklin D. Roosevelt who forbade the American delegation from committing to any outcome that would restrict his ability to deal with economic conditions in the U.S. Roosevelt resisted requests from the American delegation to give them latitude to roll back American protectionism. And shortly before the conference convened, Roosevelt took America off the former gold standard; this left the conferees to argue about currency stabilization rather than America’s gold reserves. But Roosevelt instructed the American delegates that they were there to discuss economic recovery and not to focus on currency stabilization. The conference sputtered toward a close after 15 days with nothing to show for its efforts. Another lose-lose outcome.
- 1944. The United Nations Monetary and Financial Conference (Bretton Woods). Though the conference engaged some 44 nations and 750 delegates, intellectually and politically, it was dominated by two countries, Britain and the U.S., and by the leaders of those two delegations, John Maynard Keynes and Harry Dexter White, Assistant Secretary of the Treasury for International Affairs. The Americans and British had negotiated much of the structure of the new financial system over two years before the conference convened—this enabled the conference to complete its work in only 22 days. The resulting agreement structured a global monetary arrangement that bore strong similarities to the system outlined by Keynes in his critique of the WWI peace terms 20 years earlier. Currencies would be pegged to gold, but also adjustable. An international central bank would be established—this eventually morphed into founding the World Bank, International Monetary Fund, and Bank for International Settlements, institutions that exist today. The core principle behind the accord was the concept of open markets and the end to economic nationalism. This system functioned well until the early 1970s, a 30-year stretch of high economic growth. Bretton Woods is the iconic success of economic conferences.
In short, two of these conferences succeeded; two failed. What lessons ((A book by Mancur Olson, The Logic of Collective Action, gives an excellent discussion of these and other lessons related to the challenges of arranging agreements.)) can we draw?
- People and nations will not necessarily act collectively even when it is in their rational self-interest to do so. It takes leaders to galvanize action and a sufficient possibility of alignment.
- Leaders need to exercise all the instrumentalities necessary to achieve outcomes: more than inspirational communication and appeals to altruism, leaders need to put resources behind their proposals and perhaps resort to bluffing, threats, and coercion.
- The barriers to collective action are special interests, large size, and problems of communication. Leaders must pay attention to out-groups who can destabilize a consensus.
- Complicated solutions to complicated problems take a great deal of time and attention to work out. Sturdy foundations are laid over years before the conference itself.
As we understand the current positions of the G20 countries, one would have to conclude that these problems will prevail. It is not clear that there is the strength of leadership or the will to align. America and Britain are isolated by the accusation that this crisis stems from the excesses of Anglo-American finance. It is not clear that the leaders will bring incentives or threats sufficient to motivate alignment.
Most importantly, the conferees are divided among special interests. The divisions are huge. The not-so-distant failure of the Doha Round of trade negotiations hovers over this conference like Banquo’s ghost. At the heart of that failed round is a contest between the haves and have-nots, the developed and emerging: this is a geopolitical, rather than economic, contest by countries such as Brazil, China, India, and Russia for greater influence over global institutions. They want a place at the table. Given their rapid rates of growth, they are likely to earn that place sooner rather than later.
Unfortunately, resolving the global balance of power is beyond the scope of today’s London conference. Gaining any meaningful collective action will take more time. Meanwhile economic conditions aren’t improving….