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Another Great Depression?

Posted October. 09, 2010 10:41,   


An emergency alarm was issued Thursday ahead of the annual meetings of the World Bank Group and the International Monetary Fund in Washington. World Bank President Robert Zoellick warned of another Great Depression, saying if tension over exchange rates escalates into global disputes and protectionism, the mistake of the 1930s will be repeated. The head of the international organization is tasked with helping governments that seek to depreciate their currency values reach a consensus. So Zoellick’s mention of the Great Depression demonstrates how grave the situation is.

Opinions differ on the cause of the Great Depression. Conservative economist Milton Friedman blamed Washington for reducing the money supply and Keynesian economist Paul Samuelson argued that complex factors came into play. After World War I, the U.S. emerged as the world`s largest creditor. European countries became debtors and raced to depreciate their currencies to achieve current account surpluses. Such measures seek benefits at the expense of others and led the world economy to calamity. The current global situation resembles what happened shortly before the Great Depression.

Charles Kindleberger, an authority on studies of the Great Depression, cited lack of leadership in the world economy as the cause of the debacle. The U.K., which turned into a debtor nation after World War I, lost its leadership and the U.S., which emerged as the world`s most powerful country after the war, could not exhibit its leadership because of domestic issues. A law on tariffs similar to the Currency Reform for Fair Trade Act that passed the U.S. House of Representatives last month was enacted in the U.S. in 1930, prompting countries to adopt protectionist measures. The World Economic Conference was held in 1933 to seek a global consensus but bore no fruit.

China, the world`s biggest creditor with two trillion dollars in foreign currency reserves, has emerged as a superpower like the U.S. did in the 1930s. IMF Managing Director Dominique Strauss-Kahn urged Beijing to be responsible for the global economy by raising the value of the yuan. Chinese Premier Wen Jiabao rejected the request, saying the yuan`s rapid rise will instead adversely affect the world economy. An international measure like the 1985 Plaza Accord in which Japan and Germany agreed to appreciate their currencies is urgently needed. President Lee Myung-bak indicated that the exchange rate issue will be put on the agenda of the Seoul G20 summit slated for next month. Whether the summit can find a breakthrough is drawing attention. The event will also serve as the touchstone of Korea’s leadership ability in resolving the issue.

Editorial Writer Park Yeong-kyun (parkyk@donga.com)