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

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СКАЧАТЬ became clear that banks all over the world had extended credit unwisely and were about to collapse. This, combined with a general market recession, created the most serious global economic crisis for nearly a century. It became known as the Credit Crunch.

      It is with some caution that I decided to include the Credit Crunch in this book. When in the future people look back at the first years of the twenty-first century, the world’s economic problems that began in 2007 may not appear particularly significant. But for those who have lived and are living through them they represent a moment of reckoning. The Credit Crunch brought to a shuddering halt a cycle of prosperity and growth that had lasted, with one brief interlude, for more than thirty years. It seemed unstoppable and its sudden end sent waves of fear and panic round the world. As fear subsided it was replaced by sober reflection. Many people, particularly in the West, began to reassess their attitudes towards individual wealth. The chief executive of the Royal Bank of Scotland that lost more than £24 billion in 2008 – the biggest in Britain’s corporate history – was urged to relinquish part of his pension as the public mood turned against the big salaries and bonuses earned by senior managers.

       Waves of fear and panic went round the world.

      In 2009, in a BBC Reith Lecture, an American political philosopher argued that it was time that the self-interest of the individual was replaced by what he called ‘a new politics for the common good’. It is still too early to say whether these agonies of conscience have made a long-term difference to the way men and women behave. In part they are simply the result of the anxiety people always feel during a period of economic decline when wages and profits are falling, concerns that tend to evaporate once growth and prosperity return. That is why the Credit Crunch is important. Whether it was just another blip in the economic cycle, or something far more, only time will tell.

       ‘Banking,’ said Walter Bagehot, ‘is a watchful but not laborious trade.’

      In 1873 the banker, journalist and author Walter Bagehot published a book about banking in Britain called Lombard Street. Britain was then the richest country in the world, its money markets a global hub for credit and exchange. Bagehot was a shrewd and lucid observer of British public life. ‘Banking,’ he said, ‘is a watchful but not a laborious trade.’ Watchfulness, however, had not been much in evidence in a recent banking scandal. In 1866 a private bank called Overend, Gurney & Company, collapsed. It had over-extended its lending and had invested heavily in the surging growth of the railways. When the market weakened it found itself unable to meet its liabilities. ‘In a short time,’ remarked Bagehot, its managers had ‘substituted ruin for prosperity and changed opulence into insolvency.’ Other banks followed Overend, Gurney & Co. into liquidation and a variety of companies also failed as the credit crisis took its toll on the country’s economy. The directors of Overend, Gurney & Co. asked the Bank of England for help, but were refused. They were eventually tried for fraud at the Old Bailey, though the court found them guilty of ‘a grave error’ rather than a crime. Twenty-four years later, in 1890, the bank of Baring Brothers nearly collapsed because of unwise investments it made in Argentina. This time the Bank of England did step in, averting a crisis that might have brought the whole of the British banking system to its knees. Bagehot had proposed this course of action: he believed the Bank of England should be used as a central bank whose reserves could help other banks and businesses weather the difficulties of the economic cycle.

      These dramatic events shook the confidence of Britain’s powerful commercial interests, but they made few long-term differences to the way people behaved. Britain in 1900 was very similar to Britain in 1870 and its Prime Minister, the Marquess of Salisbury, a typical product of the grand Victorian world – aloof, patrician and suspicious of democratic change.

      But by the time the next crisis arose, thirty years into the twentieth century, the situation had changed dramatically. As with the Credit Crunch, the Great Depression of the 1930s began in America when the country’s stock market crashed in 1929. Although America had enjoyed a period of booming economic growth, there was still a wide division between rich and poor. The rich pumped their surplus cash into speculative stocks. When these failed not only they, but the poor they had left behind, suffered terribly. This suffering, which spread into Europe and the rest of the world, meant that the Great Depression had enormous political consequences. In America, President Roosevelt’s New Deal introduced fierce banking regulations, farm subsidies and a more inclusive approach to many aspects of the economy. In Britain, Prime Minister Ramsay MacDonald formed a National Government to try to cope with the crisis. In Germany and Italy, Hitler and Mussolini used economic misfortune to strengthen their call for vigorous anti-democratic measures. The Great Depression did not create fascism, but it certainly helped.

      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 СКАЧАТЬ