Great Depression/Tutorials
The aftermath of war
The first world war had an intense and lasting disruptive effect, leaving the international economy in an unusually fragile condition. There had been an unprecedented loss of life and productive manpower in Europe, 8 million men having been killed and 15 million incapacitated. The financial consequences had also been severe: budget deficits had multiplied, gold stocks had been depleted, onerseas assets had been sold, and the wartime allies owed nearly $2 billion to the United States (which, must be considered to have been a large sum, bearing in mind that prices are now about 20 times, and US output about 100 times what is was then), and productive capacity had suffered a consideable setback [1]. Writing in 1919, John Maynard Keynes presented a graphic picture of the poverty and deprivation, and of a gloomy prospect for the years to come, remarking that
- "We are thus faced in Europe with the spectacle of an extra-ordinary weakness on the part of the great capitalist class, which has emerged from the industrial triumphs of the nineteenth century, and seemed a very few years ago our all-powerful master" [2].
A further increase in the fragility of the international economy was created by the return to the gold standard after its wartime suspension. The United States returned in 1919, and most other countries between 1924 and 1927 [3]. A substantial disruption was caused by Britain's 1925 decision to return at the pre-war exhange rate of $4.86 (a decision that had been opposed by Keynes, who warned that it could leadto an international depression [4]). The hope that the gold standard would exert a stabilising influence as it had before the war was soon disappointed [5]. It was a system with an inbuilt tendency to deflation. As explained by Peter Temin and others, that could happen because, whereas countries with balance of payments deficits were forced to reduce deflate in order to preserve their gold reserves, surplus countries were free to "sterilise" gold inflows and so prevent any increase in their money supply. Such sterilisation was, in fact practised from time to time by the two major surplus countries, the United States and France (that between them came to hold 60 per cent of the world's gold reserves) [6] [7]. Countries with small gold reserves were especially vulnerable to gold outflows and the general strike of 1926 has been attributed to deflationary policies that were forced on the British government by its determination to stay on the gold standard [8].
- ↑ Guilio Gallarotti: The Anatomy of an International Monetary Regime: The Classical Gold Standard, Oxford University Press, 1995 (quoted by Peter Bernstein op cit p285)
- ↑ John Maynard Keynes: The Economic Consequences of the Peace, Macmillan 1919
- ↑ For the dates at which countries returned to the gold standards sse the table on page 74 of Ben Bernanke: Essays on the Great Depression, Princeton University Press 2004
- ↑ John Maynard Keynes: The Economic Consequences of Mr Churchill, Hogarth Press 1925
- ↑ Natalia Chernyshoff, David Jacks and Alan Taylor: Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard NBER Working Papers 11795 November 2005.
- ↑ Peter Temin: Lessons from the Great Depression MIT Press
- ↑ Ben Bernanke and Harold James: "The Gold Standard, Deflation and Financial Crisis in the Great Depression" in Ben Bernanke: Essays on the Great Depression, Princeton University Press 2004
- ↑ Taylor: The 1926 General Strike Society Today, Economics and Social Science Research Association, August 2007