9 - Exchange rates and economic recovery in the 1930s

Summary

Whether they are concerned with the magnitude of the initial contraction or the retardation of the subsequent recovery, most analyses of the Great Depression attach considerable weight to the effects of economic policy. The misguided actions of the Federal Reserve and the unfortunate commercial initiatives of the executive and legislative branches are blamed for transforming the American recession into an unprecedented depression. Perverse monetary and fiscal responses in such countries as Germany and France are blamed for reinforcing the deflationary pressures transmitted from the United States to the rest of the industrial world. In desperate attempts to promote recovery, or at least to provide insulation from destabilizing foreign shocks, national authorities had recourse to currency devaluation and tariff escalation. Such initiatives are typically characterized as beggar-thy-neighbor policies. Individually they are seen as attempts to better a country's position at the expense of its neighbors; together, it is argued, they disrupted international economic relations and, by impeding foreign trade, destroyed one of the only remaining sources of autonomous demand.

With notable exceptions, such as “cheap money” in Britain after 1931, fiscal expansion in Sweden, and industrial policy giving way to central control in Germany, public policy receives little credit for helping the economies of Europe find their way out of the Great Depression. One can conceive of various policies these nations might have pursued: devaluation, protection, monetary expansion, and fiscal stimulus.