The Great Depression in Europe, 1929-1939

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

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 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.