Trade Policy Disaster: Lessons from the 1930s

Published by EH.Net (June 2012)

Douglas A. Irwin, Trade Policy Disaster: Lessons from the 1930s.? Cambridge, MA: MIT Press, 2011. xv + 195 pp. $25 (cloth), ISBN: 978-0-262-01671-1.

Reviewed for EH.Net by Florian Ploeckl, Department of Economics, University of Oxford

Occasionally we face a trilemma, a situation where we can only get two out of three choices and are forced to sacrifice one of them. The international finance literature has recently popularized the notion of an international finance trilemma, which describes a country?s choice between capital mobility, fixed exchange rates, and independent monetary policy and demonstrates that states have to sacrifice one — they can`t have their cake and eat it too (Obstfeld and Taylor 1998). The simplicity of its structure has made it, or slightly different formulations, also a popular teaching tool. But as Doug Irwin points out in his new book, Trade Policy Disaster, there is actually a closely related open economy trilemma, featuring the choice between independent monetary policy, gold standard parity (or fixed exchange rates) and open trade, which was recognized already decades ago by economists like Graham, Friedman and Meade.

Irwin?s central thesis argues that this trilemma became stark during the years leading into the Great Depression and that many states chose to sacrifice open trade and subordinate their trade policy to support their respective monetary systems, usually the gold standard.? His book is a tour de force explaining trade policy throughout the Great Depression on a global scale.? It utilizes the outlined trilemma framework to illuminate the existing institutional and economic structures, the major policy options available and the reasons behind the actual observed choices. The first chapter sets up the analysis by looking at the emergence of protectionism during the Great Depression, the monetary arrangements at the time and how the trilemma links them together. Chapter 2 then provides a narrative focusing on the decisions by the major powers, the UK, the U.S., Germany and France and respective smaller states in the related economic blocs. This is followed in chapter 3 by a closer look at quantitative and qualitative evidence for the causes and consequences of the trilemma. Chapter 4 concludes with a summarizing discussion of trade policy and exchange rate regimes during the decades following the Great Depression and a final comparison between the situation in the 1930?s and the current economic circumstances.

The issue of trade policy during the Great Depression has obviously been the focus of intense scrutiny ever since the interwar period. The author of the book himself has made contributions to this debate and those are important pieces of the puzzle he presents. The book isn?t intended to present a new argument, but to combine what we know already into one coherent explanation. The central part of this story is the impact of monetary arrangements. The international financial system recovered from the shock of the First World War, but states were not able to return it to the balance and stability of the pre-war arrangements. When international and domestic imbalances required adjustments, states initially rejected the use of exchange rate mechanisms and many turned to various forms of trade restrictions. Irwin demonstrates the respective logic of this preference for trade policy adjustments as well as that of the chosen trade restriction mechanism for the major international powers and a number of smaller states. The discussion doesn?t attempt to rehabilitate contemporary policy makers but does show how their reactions were shaped by economic constraints like the trilemma, political ideology, public opinion and the arguments and advice of economists. Shifting towards a more technical analysis the author in chapter 3 brings together academic results to show the economic consequence of protectionism, trade restrictions and the emergence of trade blocs. Irwin lays out in direct comparison to these why adjustments to the monetary system, in particular the abandonment of gold, would have been the better option to mitigate the economic problems arising during the interwar period.

The book is clearly targeted at a wider audience. Its relatively short length, under 200 pages in a small format, and a fluid, clear writing style make it very accessible and suitable for interested readers from a wide variety of backgrounds, including those? outside of academia.? The description and evidence marshaled to support its arguments rely predominantly on narrative evidence, eschewing extensive quantitative and technical details.? Some points are clarified with a number of simple graphs, like the iconic contracting spiral of trade volume during the Great Depression, and contemporary cartoons. A particular strength is Irwin?s ability to seamlessly weave the views of contemporary economists into the story, providing an illustrative link between policy making and the academic world.

In conclusion the book provides an accessible, yet comprehensive and convincing explanation of trade policy in the 1930?s, in particular the constraints governments faced in their decision making and the origins and reasons behind the rise of protectionism during the Great Depression.

References:

Maurice Obstfeld and Alan M. Taylor (1998) ?The Great Depression as a Watershed: International Capital Mobility over the Long Run,? in The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, edited by Michael D. Bordo, Claudia Goldin and Eugene N. White, Chicago: University of Chicago Press

Florian Ploeckl is currently a Marie Curie Fellow in the economics department at the University of Oxford and a Research Fellow at Nuffield College. His work focuses on the role of geography for the development of trade institutions, urban systems and information services.?

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