reformatted golden fetters

Preface
The gold standard and the Great Depression might appear to
be two very different
. It is my
belief 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 main
obstacle to offsetting action. It was the binding constraint
preventing policymakers from warning the failure of banks
and containing the spread of financial panic. For all these
reasons, the international gold standard has been a central factor
in the world 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 conflict in the disintegration during
and after the 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 standard gold 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. When it
was not forthcoming, the economic crisis was inevitable.
This decline in credibility and cooperation during
World War I reflects the confluence of political, economic, and
intellectual changes. In the sphere of domestic politics,
disputes over income distribution and the proper role for the
state have become increasingly popular. In the international
political realm, quarrels over war debts and reparations
soured the prospects for cooperation. Economics and politics
combined to challenge the
independence of the 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 Reviews another
in Administering a common remedy. Placed Against the
background of far - reaching economic exchange Heightened That
the fragility of domestic and international financial
institutions, This was a prescription for disaster.
This book attempts to make these elements together in a
coherent portrait of economic policy and performance
between the wars. My goal is to show how the policies are
pursued, in conjunction with economic imbalances created by
World War I, (p
. My argument is that the gold standard is
fundamentally constrained economic policies, and that it was
largely responsible for creating the economic
environment on which they acted.
These are the final words I will write on
the world economy between the wars. I recall
somebody who has
had a
history of having a history of self-sufficiency . "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 do not think that the interwar period qualifies as history."
The passage of time, if nothing else, has helped to convince
the subject of this volume to qualify 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 one has a pleasant
reminder of what it means 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 be able to detect the influence of a few
years ago. I also received
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 other forms of Who Provided valuable
support, 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 considered my flawless logic. I would like to know more about it.
I am inclined to resist them
.
That is why they are accompanied by lox, bagels, and
strong coffee made them go down easier. Jeff Frieden, who
criticizes the political aspects of the argument, has all the
good instincts of an economist and the good sense not to be
one. Conversations with Michael Bordo, who is the product of
a different intellectual tradition than I, continues to
it does not need a 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 are of 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 This is to commit along the way. I can
vividly remember opening a fifteen - page one - 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 to 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, Peter Feinstein, Peter Hall, Gary Hawke,
Carl - Ludwig Holtfrerich, Susan Howson,
Charles Jamesberger, Lars Jonung, Ian Kung, James 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 indication Clearly my
rationale for Advancing interpretations and analyzes with
qui They disagree. In addition to providing general
reactions, Ian McLean and Steve Webb, graciously responded
to questions. Gerald Feldman shared portions of his
unpublished 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 you for comments on the
manuscript .
The final version of the manuscript is a new and
improved version of the manuscript
. This is my unsubtle
plea that they read this version before dispatching their
devastating reviews.
In what is a work of synthesis, I have tried to keep
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
, Columbia University's Butler Library
, Harvard University's Baker Library
, 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, it is possible to use the language as a
jargon and mathematical apparatus characteristic of research
in economics. Recent developments in economics, I am
convinced, help to clarify our understanding of several
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 icts
arguments and interpretations. Theoretical formulations and
statistical relations inevitably inform all analyzes 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
the articles cited in the notes. I thank my editor at Oxford,
Herb Addison, for guiding my elusive general
reader.

Abstract and Keywords
The gold standard is conventionally portrayed as synonymous
with financial stability, and its downfall, starting in 1929, is
implicated in the global financial crisis and the worldwide
depression. A central message of this book is that precisely
the opposite has been true: it has been synonymous with
stability, the gold standard is the principal threat to
financial stability and economic prosperity between World
Wars I and II. To Understand why, it is Necessary first to
appreciate why the interwar gold standard Worked so poorly
When icts prewar predecessor HAD Worked so well, next, to
Identify the connections entre les gold standard and the
Great Depression, and finally, to show que la removal of the
gold standard in the 1930s established the preconditions for
recovery from the Depression. These are the three tasks
undertaken in the book (which are arranged chronologically),
and they are summarized in the sections of this introductory
chapter.
University Press Scholarship Online
Oxford Scholarship Online
Introduction
Page 2 of 43
Keywords: economic instability, economic stability, financial instability,
financial stability, gold standard, Great Depression, interwar period, World War
I, World War II
"Finance is the nervous system of Capitalism , "Observed
Ramsay MacDonald, intermittently Britain's prime minister
between 1924 and 1935. If so, then the capitalist system in
MacDonald's years suffered from a chronic neurological
disorder. The Wall Street 1929 crash was followed by the
collapse of financial institutions and an implosion of activity on
financial markets. The subsequent downturn became the Great
Depression-the great economic catastrophe of modern times.
That catastrophe was a global phenomenon. Contrary to the
feeling conveyed by much of the literature, qui Focuses
on the United States, the Great Depression Was So severe
PRECISELY Because Were So Many countries affected
simultaneously. No national economy was immune. All
Suffered financial Difficulties Experienced And Many
debilitating financial crisis. It is so logical to seek the
key that unlocks the puzzle of the Depression in the
institutions linking the financial markets of different countries.
Here the standard gold enters the story. For more than a
quarter of a century before World War I, the gold standard
provided for the framework for domestic and international
monetary relations. Currencies were convertible into foreign
exchange rates.
Gold shipments were the ultimate means of balance - ofpayments
settlement. The gold standard has been
remarkably efficient mechanism for organizing financial
affairs. No global crisis comparable to the one that began in
1929 had disrupted the operation of financial markets. No
economic slump comparable to that of the 1930s had so
depressed output and employment.1
The central elements of this system were shattered by the
outbreak of World War I. More than a decade was required to
complete their reconstruction. Quickly it became obvious that
the gold standard was less resilient than its
predecessor predecessor. As early as 1929 the new international
monetary system began to crumble. Rapid deflation forced
countries Producing primary commodities to suspend gold
Introduction
Page 3 of 43
convertibility and depreciate Their currencies. Payments
problems spread next to the industrialized world. In the
summer of 1931 Austria and Germany underwriting the panics
and tax exchange controls, suspending the convertibility
of their currencies into gold. Britain, along with the United
States and France, was one of the countries at the
international monetary system, was (p.4) next to a
crisis, abandoning the gold standard in the autumn of 1931.
Some two dozen follows. The United States
dropped the gold standard in 1933; France, un peu à la
bitter end, which came in 1936.
The collapse of the international monetary system is
commonly indicted for triggering the financial crisis that
has been transformed into an
unprecedented slump. So long as the gold standard was
maintained, it was argued, the post - 1929 recession remained
just another cyclical contraction. But the collapse of the gold
standard destroyed in financial stability, prompting the
capital of the financial
institutions. The financial crisis leapfrogged from country to
country, dragging down economic activity in its wake.
Removing the gold standard, the argument continues, further
intensified the crisis. Having suspended gold convertibility,
policymakers manipulated currencies, Engaging in beggar - thyneighbor
depreciations That purportedly DID nothing to
Stimulate economic recovery at home while only the Worsening
Depression abroad. The world of finance has been
broken down into competing currency areas, disrupting international trade,
foreign investment discouraging, and generally impeding
recovery.
The gold standard, then, is conventionally portrayed as
synonymous with financial stability. Its downfall starting in
1929 is implicated in the global financial crisis and the
worldwide depression. A central message of this book is
precisely the opposite was true. Far from being synonymous
with stability, the gold standard is the principal threat
to financial stability and economic prosperity between the
wars.
Introduction
Page 4 of 43
To Understand why, we must first appreciate why the interwar
gold standard Worked so poorly When icts prewar predecessor
HAD Worked so well. Next, we must identify the connections
between the gold standard and the Great Depression. Finally,
to clinch the argument we must show that removal of the
standard gold in the 1930s established the preconditions for
recovery from the Depression. These are the three tasks
undertaken in this book. The remainder of this chapter
describes the connections between them and summarizes the
evidence presented.
How the Gold Standard Worked
Considerable Agreement exists on the reasons for the contrast
between the stability of the classical gold standard and the
instability of its interwar counterpart. The dominant
explanation is expressed most clearly in the work of Charles
Kindleberger. Kindleberger argues that the stability of the
prewar gold standard resulted from effective management by
its leading member, Great Britain, and his agent, the Bank of
England. The British capital market is said to have increased
its importance when it comes to economic
downturn , damping rather than aggravating the international business
cycle. The Bank of England is said to have been stabilized
by the international standard
. Kindleberger contrasts the prewar situation with the
interwar period, when Britain was too weak to stabilize the
system and the United States was not prepared to do so. In an
implementation of what has come to Be Known as the theory of
hegemonic stability, Kindleberger Concludes que la requisite
stabilizing influences adequately Was Supplied (p.5) Only When
there has Existed dominant economic power, or hegemon, ready
and reliable to Provide it .2
Chapter 2 challenges this argument. It suggests that the
interwar period is very rare for the absence of a
hegemon. Nor Was There That country has singlehandedly
international monetary affairs managed prior to World War I.
London May-have-been the leading international financial
center, purpose It Had significant rivals, notably Paris and Berlin.
The prewar gold standard is a decentralized, multipolar
Introduction
Page 5 of 43
system. Its smooth operation Was not Attributable to
stabilizing action by one dominant power.3
The stability of the prewar gold standard INSTEAD Was the
result of two very different factors: Credibility and
cooperation.4 Credibility is the confidence Invested by the
public in the government's commitment to a policy. The
credibility of the gold standard derived from the priority
attached by governments to the maintenance of balance - of payments
equilibrium. In the core countries-Britain, France,
and Germany-there was little doubt that the recommendations
would have to be taken into account
and the
convertibility of the currency should be maintained . If one of These central
banks lost gold reserves and Its exchange rate Weakened,
funds Would flow in from abroad in anticipation of the capital
gains investors in domestic assets Would ounce reap the
autorités adopté Measures to stem reserves Losses and
Strengthen the exchange rate. Because there was no question
about the commitment to the existing parity, capital flow in
quickly and in considerable volume. The exchange rate of
capital growth and its stabilizing capital
flows minimized the need for government intervention. The
very Credibility of the official commitment to gold Meant That
this commitment Was Rarely tested.5
(p.6) What rendered the commitment to gold credible? In
part, there was little perception that policies
were inconsistent with domestic prosperity.
There was scant awareness that the defense of the gold standard
and the reduction of unemployment might be at odds.
Unemployment emerged as a coherent social and economic
problem only around the turn of the century. In Victorian
Britain
, vagrancy, and destitution. In the United
States, such persons are referred to as out of work, idle, or
loafing but rarely as unemployed. In France and Sweden the
authorities referred to the subject of
vagrancy and vagabondism. These terms betray a tendency to ascribe
unemployment to individual failings and a Lack of
understanding of how aggregate fluctuations Referred to by
Introduction
Page 6 of 43
contemporaries as the trade cycle, affected employment
prospects.6
Even Observers Who unemployment connected to the state of
trade Rarely aggregate fluctuations related to interest rates or
monetary terms. They had limited appreciation of the
central bank. There is no such articulated
theory of how to
be manipulated to stabilize production or reduce joblessness,
like the theories developed by Keynes and others after World
War I. Those who focus on changes in money and credit,
such as Ralph Hawtrey, That thesis argued perversely amplified
the trade cycle.7 Rather than Advocating active monetary
management to Stabilize the economy, the majorité of
Observers Advised is passive and therefore predictable
monetary stance.
The working classes, possessing limited political power, were
unable to challenge this state of affairs. In many countries, the
extent of the franchise was still limited. Labor parties, where
they existed, rarely exercised significant influence. Those who
might have objected to this restrictive monetary policy
were not influenced by it. Domestic
political pressures did not undermine the credibility of the
commitment to gold.
The point should not be exaggerated. By the first decade of
the twentieth century, unemployment had become
prominent social issue. The spread of unionism and the extension
of the franchise had the most political influence of those
most vulnerable to loss of work. There was a growing
consensus that discouraged investment and
depressed trade. Central bankers were not insensitive to these
considerations. Still, when forced to choose between external
and internal targets, they did not hesitate.
Nor did policymakers believe that budget deficits or increased
public spending could be used to stabilize the economy. Since
governments follow a balanced - budget (p
.
Countries rarely found themselves confronted with the need to
eliminate large budget deficits in order to stem gold outflows.
Introduction
Page 7 of 43
Firmly established norms concerning the distribution
of the fiscal burden. For revenues, central governments relied
primarily on import duties; taxes on income or domestic
activity were still costly to collect. The individuals required to
pay import duties, often purchasers of imported foodstuffs and
other consumer goods
. When revenue needs fluctuated, this
could be adjusted accordingly. The need to
eliminate a budget deficit did not open up a
contentious debate over taxation. Governments could credibly
promise to direct fiscal instruments
to balance - of - payments targets.
Thus, a particular constellation of political power, reinforced
by prevailing political institutions, and a particular view of the
operation of the economy provided by the foundation for the
classical gold standard system. This combination of factors-
political institutions and influence on the one hand, the
prevailing conceptual framework on the other-the basis of
the system's credibility.8
Ultimately, however, the credibility of the prewar gold
standard rested on international cooperation. When stabilizing
speculation and domestic action Proved incapable of
accommodating a disturbance, the system Was stabilized
through cooperation Among gouvernements and central banks.9
Minor problems solved by Could Be tacit cooperation,
Generally Achieved without open communication Among the
parts Involved. When global credit conditions were overly
(p.8), they were required, for example,
the requirement for adjustment
. Unilateral action was risky; if one
central bank reduced their discount rate but others failed to
follow, that bank would reserve reserves and might be
forced to reverse the conversion of its
currency. Under such circumstances, the most prominent
central bank, the Bank of England, signaled the need for
coordinated action. When it comes to paying off, other
central banks usually responded in kind. In effect, the Bank of
England provides a focal point for the harmonization of
national monetary policies. By playing follow the leader, the
Introduction
Page 8 of 43
central banks of different countries Coordinated The Necessary
adjustments.10
Major crises, in contrast, Typically required different
responses from different countries. The country has lost its currency
and has converted
to a foreign currency. Other countries had to
loosen domestic credit conditions to make funds available to
the central bank. The follow - theleader
approach Did not suffice, Especially When It Was the
leader, the Bank of England, Whose Were reserved under
attack. Such crises were effectively contained by
central banks and governments.
Central banks and discounted bills gouvernements On Behalf of
the weak - currency country slow gold gold to its central bank.
Consequently, the resources any one country can draw on
its gold parity was under attack far exceeded its own
reserves; they included the resources of the other gold
standard countries. This provided countries with additional
ammunition for defending their gold parities.
What is the commitment to the gold standard credible,
then, was that the international commitment, not just
national. That commitment was activated through
international cooperation.
This theme of cooperative management is different from the
standard gold standard literature, which
emphasizes the Bank of England's hegemonic role. The
incompatibility of the two views but not be overstated,
however. One way of reconciling them is to observe their
relative importance varied with time and circumstances. In
relatively tranquil periods, the Bank of England's tacit
leadership provided the organizing framework for
international cooperation. In times of crisis, in contrast,
international cooperation was key. The Bank of England lost
her leadership status. During crises she est devenu no more than
one of Several central banks Whose collective action Was
needed to Stabilize the gold standard system. At worst, she
lost her ability to contribute to international support
operations. During The Most serious crises, notably in 1890
and 1907, the critical stabilizing role Was exercised by other
Introduction
Page 9 of 43
central banks. The Bank of England becomes a hostage
to international cooperation. Far from international lender of
last resort, she was international borrower of last resort,
reduced to dependence on the assistance of the Bank of
France, the German Reichsbank, and other European central
banks.
(p.9) In the decade leading up to World War I, such
international cooperation has become frequent and
regularized. The leading role of the Bank of England has been
challenged, and international cooperation has become more
prevalent. It is commonplace to assume that the gold standard
has been managed; the point here, which is a departure
from the existing literature, is that much of that management,
especially in times of crisis, has been undertaken collectively by
several countries. But it is important to acknowledge that the role of the
Bank of England
in the operation of the prewar system, to
concentrate on the leadership and neglect the cooperation is
to fundamentally misunderstand its operation.
The two had been
pre-warned by the World War
I, and they had been challenged by an array of political and
economic changes that
had been
predicted. before 1913. Adopting the corporatist strategy for
securing labor peace, the wartime government encourages the
spread of unionism. Issues
, such as the determination of
levels of wages and employment, suddenly became politicized.
Expansion of the franchise and the growth of political parties
dominated by the working classes intensified the pressure to
employment policy targets when employment
and balance - of - payments goals clashed, it was no longer clear
which would dominate. Doubt was cast over the credibility of
the commitment to gold. No longer did it necessarily flow
in stabilizing directions. It might be the opposite, intensifying
the pressure on countries that were losing reserves. The
erosion of credibility has been rendered more
vulnerable to destabilizing shocks.
Introduction
Page 10 of 43
The decisions of central bankers, long considered as obscure,
became grist for the political mill. The monetary authorities have been
attacked by the law for upholding the weight
of the weight of
the masses. They have been so much
loved.
Where the independence of monetary policymakers was most
seriously compromised, explosive inflations ensued. Unable to
balance government budgets, politicians enlisted the central
bank's monetary printing presses to finance their deficits. In
some countries, the result of inflationary chaos and
economic turmoil, lasted until 1926. The lesson drawn was the
need to insulate central banks of political pressures. In
France, Germany, and other countries, steps were taken to
bolster the independence of the monetary authorities. The new
statutes are sometimes tied to the central bankers' hands so
that they are prevented from extending to the
banks. Legislative reform designed to enhance
the credibility of the gold standard thus had the perverse
effect of thwarting cooperation.
(p.10) Those responsible for tax policy Generally enjoyed
Even less insulation than from political Pressures Their
Counterparts in central banks. The study
of the subject of the distribution of the tax burden
that existed before 1913. The level and composition of taxes
were radically altered. Incomes were redistributed wholesale.
The question is whether to retain the new distribution of
fiscal burdens or to restore the old order. Economic interests
fought a fiscal war of attrition, resisting any increase in the
taxes they paid and any reduction in the transfers they
received. Each faction Held out in the hope others que la
Would give in first.12 Even in countries Where central bankers
Retained Sufficient independence from political Pressures That
They Could Be 'counted it to defend gold convertibility, fiscal
policy est devenu politicized. Absent a consensus on the
distribution of Tax Burdens, There Was no guarantee That
taxes Would Be gold raised government spending cut When
required to defend the gold standard. Credibility was the
casualty.
Introduction
Page 11 of 43
The connection between domestic politics and international
economics is at the center of this book. The gold standard, I
argue, must be analyzed as an economic and political
system. The stability of the prewar gold standard is
attributable to a particular constellation of political and
economic forces. Similarly, the instability of the interwar gold
standard is explicable in terms of political and economic
changes. Politics enters at two levels. First, domestic political
pressures influence governments' choice of international
economic policies. Second, domestic political pressures
influence the credibility of governments' commitment to
policies and hence their economic effects.
With the erosion of credibility, international cooperation has
become more important than before the war. Yet the
requisite level of cooperation Was not forth - coming. Three
obstacles blocked the way: domestic political constraints,
international political disputes, and incompatible conceptual
frameworks. Domestic interest groups with The Most hjälper
Were reliable to stave off adjustments' in economic policy That
Would Have Facilitated international cooperation. The
international argument over war debts and reparations hung like
a dark cloud over all international negotiations, Contaminating
efforts to redesign and manage the gold standard system
cooperatively. The competing conceptual frameworks
in the context of
reaching out to a common understanding of their economic problem,
much less agreeing on a solution.
The nature of these conceptual frameworks can be explained
in terms of the historical experiences of the nations
concerned. Different experiences with inflation created
different views of the connections between finance and the
economy and of the role for monetary management. In
countries like France, which has persistently increased inflation,
discretionary monetary management has become more
of a source of financial instability than the solution. In
countries like Britain, they have avoided inflation and
their prewar parities,
and
the importance of these issues is greater
. In the eyes of the
introduction
Page 12 of 43
English, excessive credit creation in violation of the gold
(p.11) standard constraints, which had been circumvented by
international cooperation, had set the stage for the economic
collapse that started in 1929. In the eyes of the British, the
problem is inadequate liquidity resulting from
slavish adherence to the gold standard. Policymakers found it
to be a diagnosis of the problem, much less a
remedy. Hence they found it impossible to co-
operate in the framework of the standard setting and countering the economic
slump.13
It is not entirely accurate to characterize these conceptual
frameworks in such monolithic terms. Doctrinal divisions
existed within countries as well. In the United States, which
finally established a central bank in 1914, officials of the
Federal Reserve Bank of New York, the seat of international
finance, were better attuned to the advantages of international
cooperation than their counterparts on the Board of Governors
in Washington, DC DC The arrival of the Fed on the international
scene was a significant departure from the prewar era.
Disputes between New York and Washington has rendered the
new institution unpredictable. Until the Banking Act of 1935
consolidated power, wielded considerable influence Was by
reserve city bankers from the interior of the country with little
exposure to or sympathy for International considerations.14
The brash newcomer disrupted the clubby atmosphere in
qui European central bankers HAD managed the prewar
system. Prior to World War I, cooperation among the few
important national participants in international markets could
be arranged on an ad hoc basis. But with the addition of new
participants
.
A formal coming might have helped. In the 1920s international
institutions Embodying every major function of the
organisms Established in 1944 at Bretton Woods Were
Proposed by Economists and other experts Both in and out of
government.15 Governments feels delegate access to international
conferences at Brussels in 1920 and Genoa in 1922 in the
hope of an institutional basis for cooperation.
Incompatible conceptual frameworks and the dispute over war
debts and frustrated reparations. The single most
Introduction,
page 13 of 43
remarkable attempt to institutionalize international economic
cooperation, founding the Bank for International Settlements
(BIS) in 1930, was of no consequence. Ongoing international
political disputes, still connected with war debts and
reparations, prevented the BIS from serving as a significant contributor to
international monetary cooperation. The initial
responsibilities of the BIS focused on German reparations;
The link between the reparations
and the United States, the US
Congress refused to allow the Fed to join.
It was still possible for central bankers to meet informally and
for governments to consult. International political
conflict could be affected by ad hoc efforts to co-operate, as in
attempts to arrange French, British, and American loans to
Austria and Germany in 1931. The Austrian loan foundered
over French insistence (p.12) that the supplicant renounce its
prospective customs union with Germany. The German loan
negotiations were disrupted by the dispute over reparations.
Moreover, where contemplating policy has been
strengthened, the role of policymakers has been
strengthened
. A concession by domestic policymakers that
elicits a matching concession abroad, even if it is
better than any other country
. For example, an international
agreement for the
purpose of
encouraging the exchange of goods and services.
Minorities in a strategic political position
.
The argument, in a nutshell, is that credibility and cooperation
were central to the smooth operation of the classical gold
standard. The scope for the purpose of abruptly with the
intervention of World War I. The instability of the interwar
gold standard was the inevitable result.
The Causes of the Great Depression
Given this explanation for the instability of the interwar gold
standard, it remains to link the gold standard to the Great
Introduction
Page 14 of 43
Depression. That link stretches back to the exchange in the
pattern of balance - of Payments settlements bequeathed £ by World War I. The war Greatly Strengthened the balance - of Payments position of the United States and Weakened That of other nations. In the mid - 1920s, the external accounts of other countries Remained tenuously balanced courtesy of long - term capital outflows from the United States. But if US lending was interrupted, the underlying weakness of other countries' external positions would suddenly be revealed. As they would , the conversion of their currencies into gold would be threatened. Their central banks would be forced to restrict domestic credit , even if they would be threatened to recycle their economies into recession. This is what happened when US lending was curtailed in the summer of 1928 as a result of stringent federal reserve monetary policy. Inauspiciously, the monetary contraction in the United States coincided with a massive flow of gold to France, where monetary policy was tight for independent reasons.16 Thus, gold and financial capital were drained by the United States and France from other parts of the world. Superimposed on already weak foreign balance of payments, these events have been greatly magnified monetary contraction abroad. In addition they caused a tightening of fiscal policies in Europe and much of Latin America (p.13). This shift in policy worldwide, and not just the relatively modest shift in the United States, provided the contractionary impulse that set the stage for the 1929 downturn. The minor shift in American policy HAD Such dramatic effects Because of the foreign reaction it Provoked through ict interaction with Existing imbalances in the pattern of international settlements and with the gold standard constraints. This explanation for the onset of the Depression, which emphasizes competitor shifts in economic policy in the United States and abroad, the gold standard as the connection between them, and the combined impact of US and foreign economic policies on the level of activity, has not previously appeared in the literature. Its Elements are familiar, They aim Introduction Page 15 of 43 have-nots-been made together into a coherent account of the causes of the 1929 downturn.17 To Understand how Those coalesce Elements, it is Necessary to return to the economic effects of World War I The war on the competitive position of American producers in international markets for manufactures. This, together with an exceptionally productive agricultural sector, pushed the US trade balance into surplus. Capital transactions reinforced these trends. After the war, reparations began in the United States, to the victorious Allies and from there, in repayment of war debts, to the United States. American lending to Central Europe was needed to recycle these westward flows. Imported capital was required by Western European nations rebuilding their war - torn economies. American loans were essential for both processes. So long as American lending continued, the gold standard remained viable and did not pose a threat to prosperity. But when US capital exports were curtailed, the gold standard was at risk. The policies required to defend it proved inconsistent with economic stability. At first, the process worked smoothly. Generous US lending the nations of Western Europe to repair their devastated economies. Germany and the new nations of Eastern Europe, rewarded for their adoption of austerity measures by a surge of foreign loans, were able to halt their postwar hyperinflations without plunging their economies into extended recessions. Inflows of capital and gold enabled countries like Britain to restore the gold standard parity at relatively low cost. Each of these developments was facilitated by the United States. Low domestic interest rates encouraged (p.14) abundant US financial capital to seek more remunerative employment overseas. The expansion of domestic credit, and the second half of 1927, encouraged American gold to flow abroad. Introduction Page 16 of 43 Accommodating US monetary policy between 1924 and 1927 is not usually cast in this favorable light. More commonly, it is blamed for igniting the Wall Street boom, thus setting the stage for the crash that would initiate the Depression. In fact, there is no evidence that monetary policy played a significant role in the market of the 1920s.18 It is more plausible to argue that the Wall Street boom rather than the other way around. Starting in 1928, Federal Reserve officials concluded that an orgy of financial speculation was diverting money from productive uses. They began tightening monetary policy, increasing the likelihood that the economy would fall prey to recession. Steadily rising domestic interest rates US foreign lending. The debtor nations, heavily reliant on capital imports, felt the effects of the beginning of the summer of 1928. As they weakened their positions, they were forced to adopt more stringent monetary policies and to maintain their position. Sometimes even the most draconian measures did not suffice. The debtors were forced off the gold standard, starting in 1929. Debt was maintained in the hope of closing the Wall Street boom. But the Great Crash was followed by the Great Depression and the collapse of US lending. World trade imploded. Protectionism in the United States and other industrial countries Intensified the primary producers' balance - of - payments problems. Continued difficulties in Latin America in 1931, in Central Europe in 1932, and in Germany in 1933 . For countries like Britain, heavily dependent on interest earnings from abroad, it contributed to the deterioration in the balance of payments, setting the stage for the 1931 sterling crisis. Thus, the same recycling mechanism that underpinned the pattern of international settlements in the 1920s undercut its stability in the 1930s. The initial downturn in the United States Enters this tale as something of a deus ex machina, lowered from the rafters to explain the severity and persistence of Difficulties in other parts of the world. To some extent this is inevitable, for there Introduction Page 17 of 43 is no consensus on the causes of the downturn in the United States. The tightening of Federal Reserve policy in 1928-29 seems too modest to explain a drop in US GNP between 1929 and 1930s . Hence the search for other domestic factors That might-have Contributed to the severity of the downturn, Such As structural imbalances in American industry, (p.15) an autonomous decline in US consumption spending, and the impact of the Wall Street crash on wealth and confidence.19 The debate over the role of such factors remains far from resolution. This is not surprising, since by focusing exclusively on the United States the literature misses a critical facet of the story. It is not possible to understand the causes of the American slump so long as they continue to be considered in isolation from other parts of the world. The downturn that began in the United States in the late summer or early autumn of 1929 was already evident elsewhere, and had been so for as long as 12 months. Consequently, US exports peaked before US industrial production. When domestic demand in the United States weakened, it strengthened the previous decline in export demand. American producers did not have the option of sustaining their profits, but they did not have the option of sustaining production. Therefore, the initial downturn in the United States was unusually severe. Thus, the debilitating downturn of 1929-30 was not simply the product of a contractionary shift in US monetary policy . Policies in other countries were linked to the US by the international gold standard. Given the pattern of international settlements, a modest shift in US policy could have a dramatic impact on the positions of other countries, provoking a greatly magnified adjustment in their economic policies. Monetary authorities outside the United States were forced to respond vigorously to the decline in capital inflows if they wished to stay on the gold standard. Fiscal authorities had to retrench to compress domestic spending and limit demand for merchandise imports. Introduction Page 18 of 43 American policymakers, in contrast, Were not required to react to the improvement in the US balance of payments by loosening the economic kidneys. So long as the Wall Street boom persisted, the Fed continued to raise interest rates instead of allowing them to fall. Rather than being white cushioned by a decline in US interest rates, the rise in rates in Europe and Latin American Was thereby reinforced. With the Fed's failure to repel capital inflows, other countries have been forced to redouble their restrictive efforts. The asymmetry in the gold standard system under which countries in surplus , the forcing them to deflate, was the last thing needed in 1928-29. However, this initial disturbance, one would think that this self - equilibrating trend of the market would have come into play. Wages (p.16) and other costs should have fallen into decline. They did so only modestly. The explanation lies in the "stickiness," in money terms, of other important variables. Mortgages were fixed in nominal terms and ran for years to maturity. Rents were also fixed in nominal terms for extended periods. Bonds paid coupons that were fixed in nominal terms. Claimants to these sources of income-rentiers, capitalists, and workers-each would have accepted a discount in their incomes had they been assured that they were prepared to do the same. Without a mechanism to co-ordinate their actions, no one has been granted concessions.21 None of this explains why governments have been slow to respond to Depression deepened. If wages failed to fall, Officials Could Have used monetary policy to raise prices.22 If private spending collapsed, They Could Have used public spending to offset it. Yet monetary policy in the United States, France, and Britain. Fiscal policy turned contractionary, as . Policy in a stronger way than offset the decline in demand. The response may have been perverse, but it was not paradoxical. It is hard to see what else thesis Officials in countries Could Have Given Their commitment therefore Individually Introduction Page 19 of 43 to gold. Unilateral monetary expansion or expansion of the deficit, threatening the gold standard.23 So long as they remain unwilling to devalue, governments hazarding expansionary initiatives have been forced to draw back. Britain learned this lesson in 1930, the United States in 1931-33, Belgium in 1934, France in 1934-35. Thus, not even the (p.17) leading proprietors of gold, the United States and France, escaped the external constraint.24 The dilemma was made to sacrifice the gold standard in order to reflect, an option most policymakers continued to oppose, or to be able to stabilize the economy in order to defend the gold standard. Finessing this choice required international cooperation. Had policymakers in different countries beens reliable AGREE to one year Internationally Coordinated package of expansionary initiatives, the decline in spending might-have-been moderated or reversed without Creating balance - of - payments problems for Any One Country. Reflation at home ; reflation abroad Would Have Prevented the stimulus to domestic demand from Producing trade deficits and capital flight. Under the standard gold, reflation required cooperation. Without cooperation, reflation was impossible. This lesson was learned the hard way. Repeatedly, domestic political pressures . Quickly the gold standard has been threatened, and they have been forced to draw back. Large and smaller countries were constrained. This is clearly evident in the French experiment with reflationary initiatives under Flanders and Laval in 1934-35. Not even the United States could reflate unilaterally, it would reveal. The problem was not lacking in US leadership, since effective leadership was impossible. It was the failure of cooperation. The 1933 London Economic Conference, was a failure failure. All the obstacles to cooperation that had been disrupted the operation of the gold standard were thrown up again. The issue of war debts, still unresolved, continued to Introduction Page 20 of 43 complicate negotiations. Minority interests blocked international policy trades that would have benefited each of the participating nations. Policymakers in different countries . The British, having the effect of excessively restrictive monetary policies. The French, having suffered double - digit inflation as recently as 1926, blamed the Depression on overly expansive policies that had provoked an unsustainable boom, a devastating crash, and a lingering slump. The American position resembled that of France while Herbert Hoover was president before gravitation towards that of Britain Franklin Roosevelt took office. Different diagnoses of the problem led to different requirements of the Appropriate monetary remedy and to Inability to AGREE year we Coordinated response. So far we have an explanation for the destabilizing impulse and its propagation. The impulse was the restrictive monetary policy pursued by the Federal Reserve for (p.18) domestic reasons, in conjunction with the restrictive policies induced by the operation of the gold standard. It failed to die out Quickly Because Decentralized markets Were Unable to coordinate an immediate adjustment of money wages and prices, and Because The gold standard constraints Prevented gouvernements from Pursuing a reflationary monetary response. But what is this misplaced to the point that a modest monetary correction in 1928-29 gave rise to the economic contraction of modern times? The answer lies in the spread of financial instability starting in the second half of 1930-the bank failures and financial chaos that led to the liquidation of bank deposits and disrupted the provision of financial services. The role of banking crises in the Great Depression is widely accepted for the United States, though the channels through which they affect the economy remain in dispute. But bank failures played an important role in other countries as well. Commercial banks around the world pursued strategies of aggressive expansion that heightened their vulnerability when the Depression struck. If allowed to spread, the bank runs the risk of disrupting the functioning of financial markets. Shattering confidence, discouraging Introduction Page 21 of 43 lending, freezing deposits, and immobilizing wealth, they amplified the initial contraction. This answer to the issue of what amplified the destabilizing impulse only Suggests Reviews another question: Why Did not policymakers Intervene to head off the collapse of Their domestic financial systems? They failed to do so because the gold standard posed an insurmountable obstacle to unilateral action. Containing bank runs required policymakers to inject liquidity into the banking system, but this could be inconsistent with the gold standard rules. Defending the gold parity might require the credentials of the Federal Reserve System at the end of 1931 and again at the beginning of 1933. Even when central bankers risked gold convertibility by intervening domestically as lenders of last resort, the operation of the standard gold could render their counterproductive initiatives . The provision of liquidity has a significant impact on the standard of return . Realizing that convertibility might be compromised and that devaluation might cause capital losses on domestic assets, investors rushed to get their money out of the country. Additional funds injected into the banking system leaked back as depositors liquidated their balances. Perversely, the banking crisis was intensified. International reserves have been depleted as foreign currency, forcing the authorities to intervene in support of the exchange rate. Once the balloon has been punctured, blowing in the air for the breath. These destabilizing linkages between domestic and international financial systems are most prevalent. Europe's banking systems have been interconnected by a network of foreign deposits.