Published by EH.NET (April 2001)
Patricia Clavin, The Great Depression in Europe, 1929-1939. New York:
St. Martin’s Press, 2000. viii + 244 pp. $65 (cloth), ISBN: 0-312-23734-0;
$21.95 (paperback), ISBN: 0-312-23735-9.
Reviewed for EH.NET by Pete Ferderer, Department of Economics, Macalester
College, St. Paul, Minnesota.
Patricia Clavin provides a narrative account of the Great Depression in
Europe written for non-economists. She addresses four questions: What were the
origins of the depression? Why was it so severe? How was the recovery effected
and was it sustainable? And what were the implications of that recovery for
political relations in, and between, nation-states?
Clavin’s account reflects the new consensus that the international gold
standard, and the monetary collapse it helped produce, takes center stage in
explaining the Great Depression. Her primary objective is to show how the
political behavior of different interest groups within nations, as well as
cooperation among nations, affected the evolution of policy and commitment to
the gold standard. From this perspective the relevant question is not what
should have been done to prevent the Great Depression, but what
could have been done given the constraints placed on policymakers by
the “historical political economy.”
The book echoes many of the themes emphasized by Barry Eichengreen in
Golden Fetters (1992). Moreover, it incorporates new scholarship
produced since the publication of Eichengreen’s classic and offers a somewhat
unique perspective. For these reasons, the book will make a valuable
contribution to the library of anyone who is interested in this fascinating
period of history.
Clavin begins by providing a detailed account of the numerous economic,
political, and social changes produced by the First World War. She then
explains how the interplay between these changes undermined economic policy
cooperation as countries returned to gold in the second half of the 1920s.
The destruction of labor, land and capital during the war caused European
products to be less competitive in world markets and made Europe dependent on
capital flows from the United States. The unproductive deployment of these
inflows, most notably in Germany, sowed the seeds for the debt crisis that
began to simmer in 1927. As concerns about debt servicing grew, governments
became more willing to impose tariffs and quotas on imports to protect foreign
exchange. Moreover, the structural shift in the balance of payments and
emergence of the United States as a net creditor shifted the “balance of
monetary power” to the Federal Reserve. According to Clavin, this was a
problem because the Federal Reserve lacked the experience and “cosmopolitan”
perspective on questions of international finance to provide effective
leadership to the system.
The political and social changes were equally important. First, the peace
treaties failed to institutionalize international economic cooperation among
nations. Second, boundaries were redrawn as the old empires of Central and
Eastern Europe were dismantled and economically integrated regions sliced up.
In some cases (i.e., Germany, Austria and Hungary) nations were prohibited
from cooperating with one another. Third, extension of the vote to
disenfranchised groups (i.e., the working class, women, and younger citizens)
“altered the context for, and expectations of, economic policy” (p. 8).
Fourth, the proliferation of new constitutions based on proportional
representation helped to shift the focus of policy from external to internal
According to Clavin, the interplay among these economic, political and social
changes “provided an ideal climate for economic nationalism to flourish” (p.
8). In this context, the hyperinflation and “creeping protectionism” of the
1920s are easy to understand: inflation and tariff taxes were politically
expedient and “enabled governments to sidestep awkward political choices and
helped to ease the distributional conflict in society” (p. 31).
Economic nationalism conditioned the choice of exchange parities when
countries returned to the gold standard. Seeking to reestablish itself as a
financial power (and benefit the financial interests of London), Britain
sought credibility and returned to gold with sterling overvalued. Motivated in
part by “fascist bravado,” Italy returned to gold with the lira overvalued. In
France, the political calculation of the Poincar? government was different:
“Instead of asking, as they had in London and Rome, how much deflation
industry and agriculture could bear, the question was one of how much
inflation the French middle classes could tolerate without wiping out their
fixed assets entirely” (p. 55). The uncoordinated manner in which the parities
were chosen destabilized trade patterns and revealed, from the outset, that
the viability of the system was in question. The subsequent sterilization of
gold inflows by the Federal Reserve and Banque de France provided further
evidence that governments were unwilling to cooperate and play by the “rules
of the game.”
The deterioration of relations among nations further disrupted relations
within nations. In countries with overvalued currencies (i.e., Britain after
its return to gold, the U.S. and gold bloc after the sterling devaluation in
1931, and the gold bloc after dollar devaluation in 1933), policymakers were
forced to pursue deflationary policies. These policies reduced confidence and
increased political instability. As competing interest groups (industrialists,
bankers, farmers and workers) blamed one another for the economic malaise, or
people simply blamed those who were different (Jews and Gypsies), social
tension proliferated. As one Australian farmer wrote to Keynes following a
meeting with a local banker, “we left immediately, with hot blood in our
heads, to go home and organize a rifle club” (p. 105).
One of the contributions of the historical-political approach is that it sheds
light on the deeper forces that produced the monetary collapse. In addition,
it helps explain why the monetary collapse had persistently non-neutral
effects. The rise in protectionism and other rent-seeking behavior brought
about by deflation reversed the gains from trade and reduced technological
transfer. Also, political instability reduced capital accumulation by raising
uncertainty. In short, the feedback between political and economic outcomes
caused the classical dichotomy to breakdown during the Great Depression.
So why didn’t governments respond in a more productive manner to the economic
collapse? Policy was constrained by interest group politics and the collective
memory of 1920s inflation. The latter generated a “deep fear of budget
deficits amongst politicians and the public at large, and made any kind of
monetary and fiscal experimentation in the Great Depression politically,
technically and psychologically very difficult, if not impossible” (p. 35).
As the depression deepened, however, the constraints on policy innovation
became less binding and societies were reorganized. Germany provides the
starkest case. While state spending was only 17 percent of GNP in 1932, it
stood at 33 percent in 1938. Under the Nazis, Germany became a command economy
with the government placing strict controls on foreign trade, prices, wages,
and banking. Its powerful economic expansion made it easier for Germany to
bring other countries of Eastern and Central Europe, desperate for export
markets, into its political orbit. In contrast, the rise of fascism in Germany
fostered cooperation within the French Left, which lead to the rise of the
Popular Front in 1936 and its unique set of policy innovations. Britain, which
suffered smaller income declines, experienced relatively little change in the
balance of power among government, business and labor.
The fact that the industrialized world overcame the economic devastation
produced by the Second World War — changes that were more dramatic than those
associated with the First World War — without descending into another
depression, is testimony to the important role that political relations among
and within nations play in economic development. World leaders had learned an
important lesson from history and were highly motivated to create
“institutionalized international cooperation on finance and trade” (p. 214).
Despite their various shortcomings, the Bretton Woods institutions (the IMF,
World Bank and GATT) stand as important symbols of human progress.
Pete Ferderer is Associate Professor of Economics at Macalester College. He
has written several papers on the Great Depression, including “To Raise the
Golden Anchor? Financial Crises and Uncertainty During the Great Depression,”
(co-authored with David Zalewski) Journal of Economic History, Vol. 59,
No 3 (Sept. 1999). His current research focuses on the provision of liquidity
to securities markets by “market makers” during the interwar period.
|Subject(s):||Macroeconomics and Fluctuations|
|Time Period(s):||20th Century: Pre WWII|