Putin, Not Just Paulson, Setting Decade's Course

Sept. 24 (Bloomberg) — When Hank Paulson powers over like a battleship to Capitol Hill from the Treasury, the eyes of the entire world are on him. That's too bad because there is a real battleship that also requires monitoring as it powers toward the Atlantic. It is Russia's Peter the Great cruiser, which just departed Severomorsk with three other craft to join the navy of Venezuela's Hugo Chavez in maneuvers.

The U.S. always turns inward at times of economic crisis. There's a sense of apocalyptic self-importance — "We are the (economic) world" — that goes beyond the numerical value of globalization. Most of the energy goes toward blame — go after the Lehman Brothers Holdings Inc. bosses, unseat the chairman of the Securities and Exchange Commission, halt the Sith Lord short sellers.

Turning inward, the U.S. forgets that its domestic negatives represent opportunity to foreign challengers, and that we ignore those challengers at our peril. Hard as it is to conceive on the Hill, Vladimir Putin represents a greater threat to global stability than either Dick Fuld or Chris Cox.

Consider another moment of economic crisis — the Great Depression. In 1930, President Herbert Hoover signed the Smoot-Hawley Tariff Act, which raised taxes on imports to historically high levels, even though he knew better because macaroni makers and hemp-cord manufacturers were important constituents in the Republican Party.

The severe unemployment — two or even three in 10 — provided the second argument for the tariff. The Hoover administration wasn't wildly protectionist. It was just so preoccupied with domestic troubles that it didn't have time to think past these obstacles.

America First

President Franklin D. Roosevelt also put America first in 1933. London was hosting a monetary conference in the hope that the U.S. would join Europe in writing an international arrangement that might help the world out of the Depression. Bank of England Governor Montagu Norman, especially, was counting on U.S. Secretary of State Cordell Hull and U.S. Treasury Secretary William Woodin to write a sterling-dollar agreement.

But FDR had other concerns. Commodity prices at home were in the toilet. Mobs of farmers dangled lynching ropes before the noses of Midwestern judges who dared to permit foreclosures. It was time for "individual countries to restore their economic strength," FDR said in a statement transmitted to the surprised Europeans. He was going to inflate at home regardless of what Europe said.

'On Your Own'

Other measures Roosevelt would take were recognizing the young Soviet Union and appeasing domestic silver miners by driving up prices for the metal with the Silver Purchase Act. This regardless of what happened to China's fragile silver-based economy.

Taken together, these moves told the rest of the world: "You're on your own."

The consequences of these steps we now know. At home, they may have calmed public rage, but they didn't bring recovery. Abroad, they were disastrous. The internationalists in Germany were humiliated; the head of Hitler's Reichsbank, Hjalmar Schacht, told foreign correspondents that "the depreciation of foreign currencies has further strangled exports" and Germany would therefore take its future in its own hands.

With U.S. recognition in his back pocket, Josef Stalin began to prosecute his Great Terror. As China scholar Lyric Hughes Hale has pointed out, the rise in silver prices caused by the U.S. punished Chinese borrowers and strengthened the followers of Mao Zedong at a moment when they looked irreversibly weak. Today we are again jerking China around by permitting movements in the dollar for domestic political purposes.

Off the Hook

Historians highlight other points. Harold James of Princeton University sees the decision of the U.S. Congress not to ratify the League of Nations treaty as the signal event.

James also points to the unique damage that can happen during financial turmoil in Washington and on Wall Street: "There is a sense that this is a crisis that weakens, and so other nations can take advantage."

This time, of course, the political story isn't about losing Europe. It is about losing Latin America — to Moscow-backed Chavez, the host of the naval exercise. With Russia behind him, Chavez is likely to fill the vacuum left when Fidel Castro passes.

Cheap Insurance

One of the more compelling figures at the United Nations General Assembly this week is President Alvaro Uribe of Colombia. To sign off on a free-trade agreement with Bogota is one of the cheapest forms of insurance against Chavez the U.S. could take. Yet due to other preoccupations — this week, bringing Sith Lords to their knees — U.S. House Speaker Nancy Pelosi won't do it.

At issue is a difference between politics and economics. Politics are binary — you do either foreign or domestic, but not both at once. In reality, the two are linked. To talk about foreign issues at times like this is sometimes deemed elitist and distant. A multisyllabic-trade agreement makes for much less interesting television spots than, say, a tirade about the gas price at the pump.

But many of the same farmers who hungered because of grain prices in the 1930s found themselves battling in Europe or on the Pacific Islands in the 1940s. In the long run, foreign issues have a way of becoming immediate as well.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2008 Bloomberg

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