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 balance.

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 Poincaré 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.