Page last updated at 23:20 GMT, Monday, 23 March 2009

Lesson for G20 from 1933 London summit

By Steve Schifferes
Economics reporter, BBC News

Delegates confer with Prime Minister Ramsay MacDonald at the 1933 summit
Delegates confer with Prime Minister Ramsay MacDonald at the 1933 summit

As delegates gather for the G20 summit in London on 2 April, it is worth looking to the last time London hosted a world economic summit.

In June 1933, delegates from 66 countries gathered in London to try and agree plans to revive the world economy in the midst of the Great Depression.

The London Monetary and Economic Conference, organised by the League of Nations, aimed at reviving global trade, stabilising commodity prices, and restoring the gold standard.

Among those who gathered in London's Geological Museum, hosted by UK Prime Minister Ramsay MacDonald, were eight prime ministers, 20 foreign ministers, 80 finance ministers and central bankers, and two heads of state - King Faisal of Iraq and Swiss President Edmund Schulthess.

G20 LONDON SUMMIT
Nicolas Sarkozy (l) and Jose Manuel Barroso (15 October 2008)
World leaders will meet next month in London to discuss measures to tackle the downturn. See our in-depth guide to the G20 summit.
The G20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the US and the EU.

But within a month the conference had collapsed - torpedoed by the opposition of the new US President, Franklin D Roosevelt, to making any agreements that would restrict his freedom to act boldly to revive the US economy as part of the New Deal.

The bad faith engendered by that collapse had political as well as economic ramifications, with the French and British concluding that the US was an unreliable ally, while Germany's new Chancellor, Adolf Hitler, was emboldened to move towards autarchy and rearmament in Germany.

Meanwhile, trade barriers went up across the world, countries engaged in competitive devaluations of their currencies, and rising unemployment contributed to political instability across Europe.

Contradictory messages

FDR appears at 1932 Democratic convention
FDR had pledged to revive the US economy through a New Deal

The US played a key role in the 1933 conference, just as it will at the G20 meeting in April - even then it was the world's largest economy, and also the most severely affected by the economic downturn.

And, in the midst of the Depression, it has also turned to a new leader to replace the discredited Republican administration of Herbert Hoover.

The new president appeared to embrace the cause of international cooperation.

The old fetishes of so-called international bankers are being replaced by efforts to plan national currencies
US President Franklin D Roosevelt, 3 July 1933

"I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment," President Roosevelt had said in his inaugural address in March 1933.

And he appointed a strong advocate of free trade, Secretary of State Cordell Hull, to lead the US delegation.

But behind the scenes it was clear that FDR was hedging his bets.

He let private US bankers, led by James Warburg, begin secret negotiations on currency stabilisation with European central bankers led by the governor of the Bank of England, Montagu Norman.

But he also despatched his personal representative, Raymond Moley, to keep an eye on Mr Hull.

Roosevelt himself distanced himself from the conference, deliberately going on a sailing holiday off the coast of New England.

Bombshell message

View of Wall St from 1929
The 1929 Wall Street crash led to a worldwide slump
But beyond the detailed negotiations there was a fundamental difference of approach between the US and Europe.

The European central bankers wished to return to the conservative principles of the gold standard, which fixed the value of their currencies and therefore forced countries to adjust wages and prices downwards if growth stalled.

The US government with its New Deal was determined to inflate the currency in order to reduce debt and spur expansion, and was sceptical about financial orthodoxy.

And FDR was determined to protect those areas of the economy, particularly agriculture, that had been hardest-hit by the downturn.

So on 3 July he telegraphed a "bombshell" message to the conference accusing it of bad faith and repudiating any attempt to get a deal to fix the value of currencies.

"I would regard it as a catastrophe mounting on a world tragedy," FDR said, "if the conference should allow itself to be diverted by a purely artificial and temporary experiment... the focus on (currency) stabilisation shows a singular lack of proportion and failure to remember the larger purposes for which the conference was called."

And, he added that "the old fetishes of so-called international bankers are being replaced by efforts to plan national currencies" around domestic needs.

Contradictory Lessons

James Ramsay MacDonald
PM Ramsay MacDonald was deeply depressed by failure to reach international agreement
The intemperate message - which was popular in the US - led to the abandonment of the conference and the collapse of attempts to reach a coordinated international approach to the crisis.

The UK Prime Minister could not conceal his hurt at the breakdown of negotiations.

Ramsay MacDonald told the American delegation that "he was hurt by the tone of your message" which he felt was "that of one who stood apart and had little interest in the problems of other nations."

The collapse in confidence, in turn, further reduced economic activity, and led to European nations turning inward, as it pushed the US on the road to isolationism for many years to come.

But current leaders draw different lessons from the breakdown.

For those organising the current G20 summit, the lesson is that boosting confidence by maintaining a united front in the face of the global recession has to be a key objective, whatever the concrete policies that can be agreed.

Critics of such summits, however, warn that they are dangerous because the risk of failure, and its negative effect on confidence, is greater than the potential gain from cooperation.

Hegemony

However, many academics who have studied such negotiations draw another lesson.

They argue that meaningful international agreements are only possible when there is one dominant country that has the economic and political power to enforce a deal.

This was the case in 1944 when the US put through the Bretton Woods deal which created the IMF and World Bank, and in the 1950s when it initiated world trade talks.

But during the Depression, a weakened US had neither the economic power nor the political will to replace Europe as the organiser of the world economy.

With Europe even more divided now, the same issue could shape the G20 summit - whether the US, weakened by its own problems, really wants to take a leading role in sorting out the world's problems as well as its own.

So, 76 years later, the fate of the world economy is again at the mercy of world politics.



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