The World Economy and National Economies in the Interwar Slump

Published by EH.NET (March 2004)

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Theo Balderston, editor, The World Economy and National Economies in the Interwar Slump. New York: Palgrave Macmillan, 2003. xii + 226 pp. $75 (hardback), ISBN: 0-333-73864-0.

Reviewed for EH.NET by Randall E. Parker, Department of Economics, East Carolina University

Theo Balderston and the line up of international scholars contained in The World Economy and National Economies in the Interwar Slump pursue a very important purpose. As Balderston explains, “the several chapters of this book were commissioned to review the Depression experiences of various countries in the light of their international monetary relations and broadly in the light of the Eichengreen-Temin thesis” (p. 1). I have discovered that wherever one falls on the continuum of opinion regarding the Great Depression, one finds, in no particular order, Eichengreen’s Golden Fetters, Temin’s Lessons from the Great Depression, and Friedman and Schwartz’s A Monetary History of the United States, the main books to reach for in understanding the U.S. experience. Embarking on a reading of Balderston’s book, one wonders if this will now be the volume to reach for in understanding the international experience in light of the Eichengreen-Temin (henceforth ET) thesis. These are words of high praise and they are fulfilled upon completion of the reading.

Chapter one summarizes the ET thesis and the issues to be examined in the subsequent chapters of the book. Balderston, of the University of Manchester, is the author of this chapter and after neatly laying out the essential features of the ET thesis, he comments on the work of other authors in the book, specifically as their contributions “examine the roles of (a) diplomatic conflict, especially in relation to Reparations, (b) of the enlarged demand for gold as a consequence of interwar monetary uncertainties, and (c) of ideologies (note the plural) in the history of the gold standard and the Great Depression” (p. 1).

Chapter 2, written by Pierre Siklos of Wifred Laurier University presents a comparison of the U.S. versus Canada during the Depression. He cuts to the chase in explaining that while much of the literature examines how the Depression was transmitted worldwide, recent inquiry focuses on what can be learned by examining the extent to which economic ideology, politics and institutional factors made the slump as severe as it was. This is where cross-country comparisons are particularly useful. After providing a useful review of the literature, Siklos asks several questions which need explanations. If the price-specie-flow mechanism was working properly, why did U.S. and Canadian prices and interest rates move in the same direction? Why did the U.S. and Canadian economies recover asymmetrically? Why did the Canadian government prefer a stable float of the Canadian dollar instead of maintaining the gold standard? There is significant value added to laying out what we know and what we do not know.

Chapter 3, written by Pierre Villa of Paris IX Dauphine University, claims that French economic policy was beholden to the “balanced budget doctrine” and the “stabilization of credit doctrine,” a close cousin to the “real bills doctrine.” Moreover, the major conclusion is that French management of the Depression would have required changes in the franc/gold parity, short-term interest rates and public expenditures that would have been unthinkable at the time, similar to the argument Paul Samuelson makes regarding the Federal Reserve and changes in the money supply during the Depression. He claims that international policy coordination was inconsistent with the defense of gold ratios and other credibility maintaining rules. Indeed, he sees the Maastricht treaty and the deficit/debt-to-GDP ratios it requires as of the same stripe as gold standard rules in that they prohibit coordination. Perhaps (never mind the structural problems of the French economy). Most of the chapter is devoted to turning what we thought we knew about France during the interwar era on its head. The franc was not undervalued in the late 1920s, it was overvalued. The gold inflows were just a reversal of former gold outflows. French consumption was countercyclical in 1931 and 1932 (surprise!) — opposite to U.S. procyclical consumption. All the results of the Eichengreen-Wyplosz (1988) model … think the opposite. Villa also concludes “monetary policy should be targeted on the real interest rate (GDP growth) (sic.) as adjusted for the public debt trade-off” (pp. 83-84). I’m sure Ben Bernanke and Alan Greenspan would love to hear more on the mechanics of this policy prescription.

Michael Kitson, from the University of Cambridge, writes on the experience in the U.K. during the Depression in Chapter 4. From beginning to end, these fourteen pages are well written, loaded with substantive content and should be considered the place for any student of interwar economic history of the U.K. to start. Kitson provides a nice summary of the deflationary bias of the gold standard and then goes on to discuss factors that may have made the U.K.’s experience during the Depression relatively milder than most countries. Contrary to Eichengreen (1992), Kitson maintains that, given its structural flaws, no amount of cooperation or coordination would have saved the gold standard.

The economic history of Germany is covered by Albrecht Ritschl from Humboldt University in Chapter 5. I must admit that the first half of the chapter contains econometrics that I’m still scratching my head over. Time series with unit roots, confirmed after running Dickey-Fuller tests, are estimated in levels. Cointegration problems that require error-correction models are ignored. Consumption functions are estimated and analyzed with no mention of the permanent income hypothesis. No matter. All of the empirical models were estimated to support the quite believable major conclusion of the first half of the chapter: given its history with hyperinflation, Germany, in spite of the real harm to the economy, needed a credible nominal anchor more than any other major country during the interwar period. This is probably what made them stay on the gold standard long after it was time to leave. Learning this was worth the rocky econometric trip. The second half of the chapter contains a well-argued analysis of the reparations problem that Germany faced and its role in exacerbating the Depression in Germany and the fall of the Weimar Republic.

India and her economic record during the Depression is examined in Chapter 6, written by G. Balachandran of the Delhi School of Economics. Any student of this period with interest in the impact of the Depression on the “periphery” countries will want to pay close attention to this well-written and information-packed chapter. Balachandran suggests that the Depression was a watershed in the independence movement of India due to the uneven impact the Depression had among different segments of the population and the pro-cyclical policies imposed on her by the British. The author, in the first part of the chapter, places the economic experience of India and what occurred back then in the language of the modern literature on the Depression. He then, in the spirit intended for this book, uses the rest of the chapter to explain gold flows and the imperial experience of India as a colony of Britain during the interwar years. Balderston describes this chapter as “scintillating.” To me “scintillating” is a formula one car buzzing by you at two hundred miles per hour. But in the word usage of scintillating meaning “brilliant,” this chapter no doubt fits that description.

New Zealand is discussed in Chapter 7 by John Singleton of Victoria University of Wellington, New Zealand. Given that the New Zealand economy was primarily agricultural in nature, the commodity price shock that hit British and world markets was the main transmission mechanism of the Depression to this country. Therefore, debt deflation is the main explanation for the New Zealand experience, i.e., open Kindleberger (1973) and you have the story here. The way out of the Depression that was taken was the path of orthodox thinking: deflation, wage cuts, and wait for the British economy to rebound. The Labour Party of the time thought the opposite and recommended monetary and fiscal expansion. Devaluation occurred twice in New Zealand, ostensibly to spread the misery of Depression around a bit. Even so, New Zealand did not have a central back to co-ordinate expansionary policy after the devaluation until August 1934. Nevertheless, devaluation was one of the factors that ushered in recovery of the New Zealand economy. The chapter is a standard presentation and well explained. Singleton also presents two pages of text on how the British tried to lead New Zealand and Australia, as members of the sterling bloc, collectively around by the nose in monetary affairs. After the chapter on India, I think there is a theme here.

Paul Gregory and Joel Sailors, both of the University of Houston, write about the Soviet Union in Chapter 8. Gregory and Sailors rightly claim the rapid industrialization and development of the Soviet Union during the interwar made it the model of emulation for Western Europe, and especially Africa, Asia and Latin America in the 1950s and 1960s (I’m sure India and Argentina wish they had that one back). Explaining what made the interwar experience of the Soviet Union different from the rest of the world is the focus of the chapter.

The Soviet Union was an autarkic economy that was shielded from international monetary crises and fluctuations in international capital flows and trade disruptions. No gold standard horrors here for the Soviets. Even better, no deflation either since the consumer price level grew 700 percent between 1928 and 1937. The Soviet economy industrialized very rapidly as is well known. Between 1928 and 1937 investment went up as a share of GNP for 13 to 26 percent while consumption fell over the same period from 85 to 64 per cent of GNP. One wonders if that was from planning or the fact that there were just so many fewer Soviet consumers after Uncle Joe was done with his fun and games. Be that as it may, Gregory and Sailors correctly conclude that the Soviet experience during the interwar era left it unprepared to integrate into the post-WWII world economy. The autarkic isolation they practiced during the Depression (Temin is correct, this was a product of the WWI experience too) left them unable to absorb and utilize “technology transfers, capital transfers, the effects of competition, and the lowering of trade barriers that so impacted on the postwar economic history of the industrialized world” (p. 209).

Chapter 9 concludes with some counterfactual experiments by Eichengreen and Temin. These counterfactuals are highly substantive and are great instructors for the lessons of what we learn from economic history. Ben Bernanke once said to me that counterfactual historical discourses are not meaningful if one asks “how would US history be different if Robert E. Lee would have had an F4 fighter jet?” Right on target, Eichengreen and Temin ask the reasonable questions: What made policy makers steadfastly cling to failed policies long after it was clear the world economy was burning down? What ultimately led to changes in these policies and regimes? How would the Depression have been different if the U.S. had followed Britain off the gold standard in September 1931? How would the Depression have been different if Britain, the U.S., and Germany all devalued in the autumn of 1931? The Depression across the world may have only been a recession. A different economic history may have produced a different history for the rest of the twentieth century. If there was no Great Depression would there have been no World War II? We’ll never know, but that sure sounds right to me.

Theo Balderston is to be credited for putting this book together. Although the quality of the writing is uneven (which one should expect), this book should be viewed as a primer on understanding the international experience during the Great Depression in light of the Eichengreen-Temin thesis. Put a copy next to your copies of Golden Fetters, Lessons from the Great Depression, and A Monetary History of the United States.

References

Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.

Eichengreen, B. and C. Wyplosz. “The Economic Consequences of the Franc Poincare,” in E. Helpman, E. Razin and A. Sadka, editors, Economic Effects of the Government Budget, Cambridge: MIT Press, pp. 257-86.

Friedman, M. and A. J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Kindleberger, Charles P. The World in Depression 1919-1939. Berkeley: University of California Press, 1973.

Temin, P. Lessons from the Great Depression. Cambridge: MIT Press, 1989.

Randall E. Parker is the author of Reflections on the Great Depression (Edward Elgar, 2002) and focuses his research on the economics of the interwar era.