golden fetters
Preface
The gold standard and the Great Depression might appear to
be two very different topics requiring two entirely separate
books. The attempt to combine them here reflects my
conviction that the gold standard is the key to understanding
the Depression. The gold standard of the 1920s set the stage
for the Depression of the 1930s by heightening the fragility of
the international financial system. The gold standard was the
mechanism transmitting the destabilizing impulse from the
United States to the rest of the world. The gold standard
magnified that initial destabilizing shock. It was the principal
obstacle to offsetting action. It was the binding constraint
preventing policymakers from averting the failure of banks
and containing the spread of financial panic. For all these
reasons, the international gold standard was a central factor
in the worldwide Depression. Recovery proved possible, for
these same reasons, only after abandoning the gold standard.
The gold standard also existed in the nineteenth century, of
course, without exercising such debilitating effects. The
explanation for the contrast lies in the disintegration during
and after World War I of the political and economic
foundations of the prewar gold standard system. The dual
bases for the prewar system were the credibility of the official
commitment to gold and international cooperation. Credibility
University Press Scholarship Online
Oxford Scholarship Online
(p.xi) Preface
Page 2 of 6
induced financial capital to flow in stabilizing directions,
buttressing economic stability. Cooperation signalled that
support for the gold standard in times of crisis transcended
the resources any one country could bring to bear. Both the
credibility and the cooperation were eroded by the economic
and political consequences of the Great War. The decline in
credibility rendered cooperation all the more vital. When it
was not forthcoming, economic crisis was inevitable.
This decline in credibility and cooperation during and after
World War I reflected a confluence of political, economic, and
intellectual changes. In the sphere of domestic politics,
disputes over income distribution and the proper role for the
state became increasingly contentious. In the international
political realm, quarrels over war debts and reparations
soured the prospects for cooperation. Economics and politics
combined to challenge and ultimately to compromise the
independence of central bankers, the traditional guardians of
the gold standard system. Doctrinal disagreements led
countries to diagnose their economic ills in different ways,
thereby impeding their efforts to cooperate with one another
in administering a common remedy. Placed against the
background of far‐reaching economic changes that heightened
the fragility of domestic and international financial
institutions, this was a prescription for disaster.
This book attempts to fit these elements together into a
coherent portrait of economic policy and performance
between the wars. My goal is to show how the policies
pursued, in conjunction with economic imbalances created by
World War I, (p.xii) gave rise to the catastrophe that was the
Great Depression. My argument is that the gold standard
fundamentally constrained economic policies, and that it was
largely responsible for creating the unstable economic
environment on which they acted.
I like to pretend that these are the final words I will write on
the world economy between the wars. I recall some who
questioned at the outset whether a study of a period through
which they themselves had lived was properly regarded as
history. “So you're an economic historian,” one of my future
colleagues in the Harvard economics department greeted me
(p.xi) Preface
Page 3 of 6
when I arrived to interview for my first academic job. “Surely
you don't think that the interwar period qualifies as history.”
The passage of time, if nothing else, has helped to convince
skeptics that the subject of this volume qualifies as history. It
is up to me, I suppose, to convince them that its treatment
qualifies as economics.
The process of writing a book such as this serves as a pleasant
reminder of what it means to belong to a community of
scholars. It was Jeff Sachs who first suggested that I write this
book rather than the less tractable volume I initially
envisaged. He will detect here the influence of a series of
conversations begun nearly ten years ago. I also received
valuable encouragement, both written and verbal, from
innumerable other friends and colleagues. Without
denigrating the gratitude I feel to any of those individuals who
devoted their scarce time to reviewing drafts of the
manuscript and who provided other forms of valuable
assistance, I must single out three with whom I had very
extended conversations. Peter Temin's thoughtful comments
were especially important for shaping the book's final form.
My initial impulse, as always, was to resist Peter's challenges
to what I regarded as my impeccable logic. I should know by
now that however much I am inclined to resist them, I will feel
compelled in the end to address Peter's points as best I can.
That his comments were accompanied by lox, bagels, and
strong coffee made them go down easier. Jeff Frieden, who
critiqued the political aspects of the argument, has all the
good instincts of an economist plus the good sense not to be
one. Conversations with Michael Bordo, who is the product of
a different intellectual tradition than I, continue to
demonstrate that doctrine need be no barrier to the search for
understanding in history and economics.
The author of a work of synthesis risks offending specialists.
Instead of protecting their turf, experts on aspects of
international finance, international relations, and economic
history that I had not broached before encouraged me to stray
onto unfamiliar turf, graciously pointing out errors of fact and
interpretation that I threatened to commit along the way. I can
vividly remember opening a fifteen‐page single‐spaced letter
from Peter Kenen and making a mental note to call my editor
(p.xi) Preface
Page 4 of 6
and announce that the manuscript would be delayed. Others
who responded with great care, and to whom I am deeply
grateful, include Alberto Alesina, Ben Bernanke, Charles
Calomiris, Marcello de Cecco, Brad DeLong, Trevor Dick,
Stanley Engerman, Charles Feinstein, Peter Hall, Gary Hawke,
Carl‐Ludwig Holtfrerich, Susan Howson, Toru Iwami, Harold
James, Lars Jonung, Charles Kindleberger, Adam Klug, Robert
Keohane, Diane Kunz, Maurice Levy‐Leboyer, Peter Lindert,
Charles Maier, Donald Moggridge, Douglass North, John
O'Dell, Ronald Rogowski, Christina Romer, Anna Schwartz,
Mark Thomas, Gianni Toniolo, Eugene White, and Elmus
Wicker. Where we continue to differ, I hope that they (p.xiii)
will see that I have done my best to indicate clearly my
rationale for advancing interpretations and analyses with
which they disagree. In addition to providing general
reactions, Ian McLean and Steve Webb graciously responded
to data questions. Gerald Feldman shared portions of his as
yet unpublished study of the German hyperinflation, which
helped me to clarify aspects of Chapter 5. Theo Balderston's
unpublished manuscript similarly helped to clarify portions of
Chapters 8 and 9. I thank them as well for comments on the
manuscript.
The final version of the manuscript is considerably changed—I
like to think improved—from the version read by and reacted
to by all those persons mentioned above. This is my unsubtle
plea that they read this version before dispatching their
devastating reviews.
In what is intended as a work of synthesis, I have tried to keep
to a minimum references to unpublished sources. Inevitably I
have been forced back to the archives, however, where the
secondary literature is contradictory or incomplete. For
permission to cite materials in their possession, I am grateful
to the Federal Reserve Bank of New York (Strong Papers and
related documents), Columbia University's Butler Library
(Harrison Papers), Harvard University's Baker Library
(Lamont Papers), the League of Nations Archives at the United
Nations in Geneva, the French Ministry of Finance, the Bank
of France, and the British Public Record Office.
(p.xi) Preface
Page 5 of 6
Similarly, I have tried to keep as unobtrusive as possible the
jargon and mathematical apparatus characteristic of research
in economics. Recent developments in economics, I am
convinced, help to clarify our understanding of several
disputed aspects of the gold standard and the Great
Depression. Work on the time consistency of economic policy,
game theoretic treatments of international policy coordination,
and stochastic models of exchange‐rate target zones are three
examples of literatures that bear directly on the issues this
book is concerned with and that lend structure to its
arguments and interpretations. Theoretical formulations and
statistical relationships inevitably inform all analyses of this
kind. But I have tried to state them nontechnically and keep
them from interrupting the narrative. For formal statements of
the models and econometric tests, readers may refer to
journal articles cited in the notes. I thank my editor at Oxford,
Herb Addison, for guiding my quest to bag the elusive general
reader.
The gold standard and the Great Depression might appear to
be two very different topics requiring two entirely separate
books. The attempt to combine them here reflects my
conviction that the gold standard is the key to understanding
the Depression. The gold standard of the 1920s set the stage
for the Depression of the 1930s by heightening the fragility of
the international financial system. The gold standard was the
mechanism transmitting the destabilizing impulse from the
United States to the rest of the world. The gold standard
magnified that initial destabilizing shock. It was the principal
obstacle to offsetting action. It was the binding constraint
preventing policymakers from averting the failure of banks
and containing the spread of financial panic. For all these
reasons, the international gold standard was a central factor
in the worldwide Depression. Recovery proved possible, for
these same reasons, only after abandoning the gold standard.
The gold standard also existed in the nineteenth century, of
course, without exercising such debilitating effects. The
explanation for the contrast lies in the disintegration during
and after World War I of the political and economic
foundations of the prewar gold standard system. The dual
bases for the prewar system were the credibility of the official
commitment to gold and international cooperation. Credibility
University Press Scholarship Online
Oxford Scholarship Online
(p.xi) Preface
Page 2 of 6
induced financial capital to flow in stabilizing directions,
buttressing economic stability. Cooperation signalled that
support for the gold standard in times of crisis transcended
the resources any one country could bring to bear. Both the
credibility and the cooperation were eroded by the economic
and political consequences of the Great War. The decline in
credibility rendered cooperation all the more vital. When it
was not forthcoming, economic crisis was inevitable.
This decline in credibility and cooperation during and after
World War I reflected a confluence of political, economic, and
intellectual changes. In the sphere of domestic politics,
disputes over income distribution and the proper role for the
state became increasingly contentious. In the international
political realm, quarrels over war debts and reparations
soured the prospects for cooperation. Economics and politics
combined to challenge and ultimately to compromise the
independence of central bankers, the traditional guardians of
the gold standard system. Doctrinal disagreements led
countries to diagnose their economic ills in different ways,
thereby impeding their efforts to cooperate with one another
in administering a common remedy. Placed against the
background of far‐reaching economic changes that heightened
the fragility of domestic and international financial
institutions, this was a prescription for disaster.
This book attempts to fit these elements together into a
coherent portrait of economic policy and performance
between the wars. My goal is to show how the policies
pursued, in conjunction with economic imbalances created by
World War I, (p.xii) gave rise to the catastrophe that was the
Great Depression. My argument is that the gold standard
fundamentally constrained economic policies, and that it was
largely responsible for creating the unstable economic
environment on which they acted.
I like to pretend that these are the final words I will write on
the world economy between the wars. I recall some who
questioned at the outset whether a study of a period through
which they themselves had lived was properly regarded as
history. “So you're an economic historian,” one of my future
colleagues in the Harvard economics department greeted me
(p.xi) Preface
Page 3 of 6
when I arrived to interview for my first academic job. “Surely
you don't think that the interwar period qualifies as history.”
The passage of time, if nothing else, has helped to convince
skeptics that the subject of this volume qualifies as history. It
is up to me, I suppose, to convince them that its treatment
qualifies as economics.
The process of writing a book such as this serves as a pleasant
reminder of what it means to belong to a community of
scholars. It was Jeff Sachs who first suggested that I write this
book rather than the less tractable volume I initially
envisaged. He will detect here the influence of a series of
conversations begun nearly ten years ago. I also received
valuable encouragement, both written and verbal, from
innumerable other friends and colleagues. Without
denigrating the gratitude I feel to any of those individuals who
devoted their scarce time to reviewing drafts of the
manuscript and who provided other forms of valuable
assistance, I must single out three with whom I had very
extended conversations. Peter Temin's thoughtful comments
were especially important for shaping the book's final form.
My initial impulse, as always, was to resist Peter's challenges
to what I regarded as my impeccable logic. I should know by
now that however much I am inclined to resist them, I will feel
compelled in the end to address Peter's points as best I can.
That his comments were accompanied by lox, bagels, and
strong coffee made them go down easier. Jeff Frieden, who
critiqued the political aspects of the argument, has all the
good instincts of an economist plus the good sense not to be
one. Conversations with Michael Bordo, who is the product of
a different intellectual tradition than I, continue to
demonstrate that doctrine need be no barrier to the search for
understanding in history and economics.
The author of a work of synthesis risks offending specialists.
Instead of protecting their turf, experts on aspects of
international finance, international relations, and economic
history that I had not broached before encouraged me to stray
onto unfamiliar turf, graciously pointing out errors of fact and
interpretation that I threatened to commit along the way. I can
vividly remember opening a fifteen‐page single‐spaced letter
from Peter Kenen and making a mental note to call my editor
(p.xi) Preface
Page 4 of 6
and announce that the manuscript would be delayed. Others
who responded with great care, and to whom I am deeply
grateful, include Alberto Alesina, Ben Bernanke, Charles
Calomiris, Marcello de Cecco, Brad DeLong, Trevor Dick,
Stanley Engerman, Charles Feinstein, Peter Hall, Gary Hawke,
Carl‐Ludwig Holtfrerich, Susan Howson, Toru Iwami, Harold
James, Lars Jonung, Charles Kindleberger, Adam Klug, Robert
Keohane, Diane Kunz, Maurice Levy‐Leboyer, Peter Lindert,
Charles Maier, Donald Moggridge, Douglass North, John
O'Dell, Ronald Rogowski, Christina Romer, Anna Schwartz,
Mark Thomas, Gianni Toniolo, Eugene White, and Elmus
Wicker. Where we continue to differ, I hope that they (p.xiii)
will see that I have done my best to indicate clearly my
rationale for advancing interpretations and analyses with
which they disagree. In addition to providing general
reactions, Ian McLean and Steve Webb graciously responded
to data questions. Gerald Feldman shared portions of his as
yet unpublished study of the German hyperinflation, which
helped me to clarify aspects of Chapter 5. Theo Balderston's
unpublished manuscript similarly helped to clarify portions of
Chapters 8 and 9. I thank them as well for comments on the
manuscript.
The final version of the manuscript is considerably changed—I
like to think improved—from the version read by and reacted
to by all those persons mentioned above. This is my unsubtle
plea that they read this version before dispatching their
devastating reviews.
In what is intended as a work of synthesis, I have tried to keep
to a minimum references to unpublished sources. Inevitably I
have been forced back to the archives, however, where the
secondary literature is contradictory or incomplete. For
permission to cite materials in their possession, I am grateful
to the Federal Reserve Bank of New York (Strong Papers and
related documents), Columbia University's Butler Library
(Harrison Papers), Harvard University's Baker Library
(Lamont Papers), the League of Nations Archives at the United
Nations in Geneva, the French Ministry of Finance, the Bank
of France, and the British Public Record Office.
(p.xi) Preface
Page 5 of 6
Similarly, I have tried to keep as unobtrusive as possible the
jargon and mathematical apparatus characteristic of research
in economics. Recent developments in economics, I am
convinced, help to clarify our understanding of several
disputed aspects of the gold standard and the Great
Depression. Work on the time consistency of economic policy,
game theoretic treatments of international policy coordination,
and stochastic models of exchange‐rate target zones are three
examples of literatures that bear directly on the issues this
book is concerned with and that lend structure to its
arguments and interpretations. Theoretical formulations and
statistical relationships inevitably inform all analyses of this
kind. But I have tried to state them nontechnically and keep
them from interrupting the narrative. For formal statements of
the models and econometric tests, readers may refer to
journal articles cited in the notes. I thank my editor at Oxford,
Herb Addison, for guiding my quest to bag the elusive general
reader.
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