The Dutch version of 20th-century depressions (18-5-2020)

Written by: Jan Luiten van Zanden

Economic crises are good for economic history. Suddenly there is a big demand for putting the economic downturn into perspective, often focusing on the question how the new crisis compares with the mother of all crises, the 1930s. A related question is about the lessons learned from previous crises, and how this will affect the management of the new crisis. And there is almost always the idea that the Netherlands as a small, open economy will suffer more than the big neighbours. Initially I thought that this time is really different, but gradually parallels with the 1930s become more clear. One possible similarity is related to the international economy, which was extremely frail in the 1930s, and its collapse was one of the main reasons why that depression was so severe. The same might happen now; in particular the tension between the USA and China is a real concern.

Another possible parallel between earlier crises and this one relates to the performance of the Dutch economy. In 1929, 1973 and 2008, at the start of each ‘serious’ crisis, the position of the Dutch economy was relatively strong, as shown by high GDP growth, low unemployment, and a comfortable international position (large surpluses on balance of payments, strong growth of exports). During the first years of all three crises it did well, much better than leading countries such as the USA (always extremely crisis-prone) and Germany. The years leading up to 1929 have been described as ‘the good years before the great depression’, and if you look at the statistics the downturn in the Netherlands only starts in 1930/31 (where the peak in activity in Germany and the USA was already in 1928). The 1970s were perhaps even more extreme: the growth of consumption and government expenditure – helped by booming exports of natural gas – more or less compensated the downturn of the international economy in 1973-75, and the 1970s as a whole were still relatively good. The collapse came during the second stage of the crisis in 1982-83. And on a smaller scale this also happened after 2008: initially the economy continued to enjoy the echo- effects of the prosperity of the years before the financial crisis, but gradually the good performance was followed by a typical ‘Dutch’ stagnation during the second stage of the crisis (in 2011-2013).

In all three cases initial optimism was followed by a Dutch drama, a continuation of the crisis when large parts of the world economy were recovering already. In the 1930s the Gold Standard was the main cause of the poor performance. Ironically, because the international position of the economy was so strong at the start of the 1930s, the Netherlands was not pushed out of the Gold Standard in 1931-1933. The defence of gold became a primary policy objective until the end of 1936. This caused a serious overvaluation of the guilder, which made exports uncompetitive, and blocked the recovery of the economy. The Dutch continuation of the depression was caused by strict monetary policies that were made possible by the ‘gold curse’, the vast gold reserves of the Dutch national bank.

In the 1970s natural gas played the role of gold. And again, orthodox monetary policies aimed at linking the Dutch guilder to the German mark, caused an overvaluation of the guilder, which made Dutch industry uncompetitive. The structural problems of this sector were behind the severity  of the downturn of 1982/83. This chain of events became known as the ‘Dutch disease’, the combination of an overvalued exchange rate caused by exports of natural gas, and the decline of industrial exports and employment caused by this overvaluation.

This 1970s focus on linking the guilder to the mark was a predecessor of the European Monetary System introduced in the 1990s, which played such a central role in the European continuation of the financial crisis of 2008. Again the Dutch economy started the crisis in a comfortable position, and urged for financial and monetary orthodoxy – if only to keep the euro-system intact. The tensions within the EMU – Greece, Portugal, Italy, Spain, Ireland – were behind the ‘second’ crisis of 2010-2013. But the Netherlands also had its own ‘problems’; recovery was constrained by the huge pensions reserves which had to be restored, inducing savings instead of spending, and by the strong effects of the dip in the housing market on private expenditure. Whereas most northern European countries only went through a brief recession in 2008-2009, the Netherlands experienced another one in 2011-2013.

In 2020 the Dutch economy is again in a comfortable position, both internationally and domestically. Unemployment is low, as it was in 2008, 1973 and 1929. ‘Intelligent’ lockdown and an easy switch to the internet will probably mean that the economic effects of the first wave will not be as dramatic as elsewhere. And again our policy makers within EU and ECB demand restrictions on rescue packages and limitations on stimulating policies – orthodoxy rules in Den Haag.

Dutch policy makers appear to have made the same mistakes thrice during less than one century. This is perhaps indicative that this poor performance during crisis years is not due to bad luck, but has deeper roots. It may simply mean that the institutions, the mindset that brings success in good years, is a handicap in bad years. When the depression starts to hit the world economy, Dutch policy makers think they have their home in order, and that the formula that they have applied to ‘win the peace’ should also be used to ‘win the war’, to meet the challenge of the crisis. But perhaps a war requires different rules than peace. By preaching and practicing their orthodoxy, they may not only harm the recovery of the Dutch economy, but also do much damage to other members of the euro-group (as we saw in 2010-2013; the real problem is of course the EMU, but that is another story). So the question remains, will we in the next ten years make the same mistakes as in the 1930s and ‘long’ 1970s, and repeat the experience of the 2008-2013 period?  Should there not be some kind of rule that you are allowed to make a mistake three times, but then you’r out?

Continue reading: In honour of Janne Heyndericx (19-5-2020)