(The Causes of the 1929-33 Great Collapse: A Marxian Interpretation, byJames Devine in Research in Political Economy. vol. 14: pp. 119-194, with annotation added.)
[introduction] [previous section] [end of this section]
[section III] [section IV ]
[appendices] [references] [notes] [short version] [new analysis of the future]
Within the world's capitalist core, the 1920s were part of a temporary truce in the middle of what Winston Churchill termed the "Second Thirty Years' War" or what Goldstein [1988: 285] calls the third modern hegemonic war.25 Despite the truce, the intensity of international tensions was very similar to those existing before World War I; what differed was the form of the strain, as trade rivalry had replaced military contention. The tensions both before and after the War can be further understood in terms of the stage that capitalism was passing through, specific to the period from about 1870 to 1945 and very different from those during the other hegemonic wars: the 1920s should be seen as part of the classical Monopoly Capitalist or Imperialist stage.26 For this period, as Bukharin argued, "the anarchic structure of world capitalism is expressed in two facts: world industrial crises on the one hand, wars on the other" [1917: 53].
That is, both the first World War and the 1929-33 Collapse should be seen as encouraged by the dynamics of this species of world capitalism. Thus, the common view [e.g., Maddison, 1982] that the War was a shock entirely exogenous to capitalism should be rejected.
In most of the core countries, capitalist competition had been transformed and limited since the mid-19th century, as domestically-based capitalist industries became increasingly concentrated and centralized. The rise of these limits on atomistic competition -- cartels, trusts, joint-stock corporations, and the like -- spawned the term "Monopoly Capitalism." But instead of being abolished, capitalist competition increasingly spilled out on the international level. As nationally-based capitalists pushed for state policies in their favor (especially tariffs), competition shifted from being firm-against-firm to being increasingly nation-against-nation. In many ways, this shift to "national capitals" (state/capital unity) intensified competition. Further, by limiting foreign competition, protection (along with transportation and communication costs) gave further support for the consolidation of cartels in each country. Thus, protectionism and the centralization of capital interacted, reinforcing each other to form a vicious circle.27 [[p. 130]]
Nation-against-nation competition was based on and intensified by ethnic nationalism, which had arisen as part of capitalist socioeconomic development (rather than as an exogenous force). Economic and political unity -- fomented by absolutist monarchs -- encouraged the rise of the nation-state. Within this framework, nationalism represented a cross-class alliance, replacing overt class struggle: this involved an uneasy merger of popular and democratic proto-nationalisms of the working classes, the ethnic-linguistic chauvinism of many of the middle strata, and elite state-patriotism aimed at stabilizing the social situation, legitimating taxes and centralized government, and raising troops [cf. Hobsbawm, 1990].28 Nationalisms defined themselves relative to each other as the modern nation-states increasingly began to collide in economic and military competition.
More specifically, Germany and the U.S. led the way in eschewing free trade. They did not encounter the limits to import-substitution so familiar to their latter-day imitators in the periphery and thus could challenge the international economic hegemony of Britain. Their accomplishments were aided by the U.K.'s reluctance to use tariffs in retaliation. That country had not progressed as far down the road toward Monopoly Capital and had not yet declined enough in relative power to be driven to protectionism. Crucially, the power of the internationally-oriented and rentier segments of the British capitalist class, which were not very interested in the fate of domestic industry, encouraged this passivity in the face of other nations' rising competition.29
Nationalist competition to promote industry reinforced the normal process of capitalist competition-via-accumulation. Given the anarchic organization of the world economy, the usual shortage of markets faced by the individual capitalist became more evident on the macroeconomic level. Aldcroft [1977: 6] notes the appearance of industrial excess capacity before the War, especially in Britain. He also notes that the international over-supply of primary products -- and cartel-type efforts to limit production -- was already developing in this period. These problems were not as severe as after the War, since that calamity led to their intensification. But even the limited pre-War over-production reinforced existing nation-against-nation conflict over access to markets.
More important than any overproduction, the uneven economic development of the core capitalist powers, i.e., the decline of British hegemony and its balance of power, destabilized the European equilibrium. This balance (what Karl Polanyi  idealized as the "Hundred Years Peace") had been largely restricted to the European core, was quite far from absolute, and approached true peace only at the turn of the century. But compared to the hegemonic wars, i.e., those of Mercantilism, the 1793-1815 wars, and (especially) the two World Wars, it was peace.
The upsetting of the balance of power stimulated a rush to gain colonies, especially in Africa, the Caribbean, and the Pacific and also the common use of the term the "new Imperialism" or simply "Imperialism." The incessant search for new product markets and low-cost raw material sources (and safe locations for [[p. 131]] investment) was linked to state-against-state competition (and the search for coaling stations for the navy). Germany, the U.S., and other nations tried to emulate the established colonial empire of England, as a way to boost economic and political power on the world stage.
Nationalist crusades in the colonies (often fomented by political and military elites) also helped mitigate the domestic social stresses. Sometimes the conquered areas could be directly colonized by disgruntled or ambitious workers (often involuntarily), while colonial administration and military functions could sop up parts of the reserve pool of unemployed workers (including the "second sons" of aristocrats) that threatened social stability.30
The competition in trade and the struggle for colonies encouraged military rivalry. Some nations, especially Britain and Germany, engaged in arms races, accumulating battleships and military bases.31 Given the way that the major powers were crowded in Europe, this inter-state rivalry was a central structural cause of World War I, and also of the social, economic, and political chaos afterwards.
Rather than presenting a complete explanation of the Great War, the point here is to examine the relevance of rampant competition between national capitals in the post-War era. With the additional element of increased social disorder (class conflict) and a change in the form of international contention, it helps to explain the main elements of Temin's  description of the international political economy, i.e., the clash between nation-state rivalry and the deflationary policy regime. These should be seen as aspects of an internal contradiction of the political economy of a stage of world capitalism. The class dimension is central: the quest for the restoration of capitalist order was ultimately contradicted by the effort to boost profits.
Neither the War nor the 1919 Treaty of Versailles abolished the inter-state discord characterizing the Imperialist stage: there was no overall victor (hegemon) with the power to impose a long-lived solution.32 Though President Wilson sailed to Europe, with grand images of leadership (his Fourteen Points), his attempt to be the hegemon was in vain. To the extent that some sort of pacifying principle was applied, it was ethnic nationalism (a.k.a. "the right of nations to self-determination"), enshrined as the major principle for redrawing national boundaries in the wreckage of the multinational empires. The diplomats struggled to deal with widespread social conflicts, including the challenge of the Bolshevik and Hungarian Revolutions: compared to boiling social conflicts, ethnic nationalism seemed a superior organizing principle. However, this principle was hardly sufficient to maintain world order. Several new nations were created to compete on the world scene.
Sometimes these were based on intellectual abstractions imposed from above that did not fit with the fuzziness of [[p. 132]] ethnic boundaries. So some (such as Czechoslovakia) were born suffering from structural instability. Further, economic rationality was often ignored in a way that hurt the potential for prosperity: the newly-created national boundaries often had no connection with economic realities [cf. Aldcroft, 1977, chs. 2-3].33
Even peace did not arrive in Europe until 1923: the British naval blockade imposed food shortages and even starvation on Germany for five months after the 1918 armistice, while the Russo-Polish and Greco-Turk wars continued into the 1920s. Crucially, the Versailles Treaty itself was a continuation of the War by other means against the losers, encouraging economic stagnation and social unrest (as Keynes pointed out).34 But military antagonisms cooled as the decade progressed, despite such events as the French and Belgian occupation of the Ruhr in January 1923. Their power withered by War and dominated by debt, the major nations signed arms-control and -reduction agreements during the 1920s (the Naval Arms Conferences of 1921-22 and 1929). In fact, the 1928 Kellogg-Briand Pact, ultimately ratified by sixty-four nations, renounced war as an instrument of national policy.
But instead of being abolished, only the form of state-against-state rivalry changed: instead of a rush for colonies, arms races, and military rivalry, discord among the core capitalist states operated primarily on the economic plane until the 1930s (the rise of Hitler and remilitarization).35 The further struggle for colonies by the traditional European powers was discouraged by the unprecedented destructiveness of the War, the absence of easy and profitable targets in the periphery, by the victory of two-thirds of the Triple Entente, and by the diminishing returns that set in after the initial stages of colonization.36
As Maddison [1982: 92] writes, this entire period was one of generalized "beggar-your-neighbor" policies, i.e., creeping protectionism. New nations imposed tariffs as an easy way to raise revenues to finance shaky states and to promote national development, while older nations used them to fight domestic stagnation. After some post-War retreats, the vicious circle of protectionism and cartelization began again. Kenwood and Lougheed argue that
In only one respect did pre-war trends continue into the interwar period. In the field of commercial policy the movement towards protectionism became more marked, as international considerations were increasingly subordinated to national monetary and employment policies made necessary by post-war reconstruction and, later, by the onset of a world depression [1971: 175].37
These problems were recognized by the World Economic Conference of 1927 and elsewhere, but generally ignored in practice, especially as the world trade situation began to deteriorate and each nation retaliated in a growing trade war. The political forces favoring international contention were too strong.
As noted, the relatively calm inter-state rivalry of this period was merely a temporary truce in a longer war, which ended only in 1945. In that year, the U.S. became the new hegemon, succeeding the U.K. The [[p. 133]] fact that the U.S. had suffered scant damage (in either World War) to its own territory and actually had amplified its relative advantages in international military, manufacturing, trading, and financial rivalry was a crucial determinant of this "passing of the torch." The period between the wars, on the other hand, was an interregnum. The absence of a military and economic hegemon meant that it was unlikely that any Bretton Woods-type agreement could have been created (though important aspects of it had been proposed) or that if one had been made, that it would have lasted. Even the League of Nations was rejected by the rising but not-yet superpower, as "isolationist" U.S. Republicans opposed any world union not completely under their government's control.38 All of this encouraged chaos, and intensified economic competition between nations.
This view goes deeper than Kindleberger's, focusing on the economic and military power of the hegemonic nation instead of simply financial and trade matters.39 The provision of so-called "international collective goods" -- e.g., an international central bank -- will occur only if there exists a country (or a very tightly-knit coalition of countries) with economic and military dominance. In very simple terms, few nations' elites will accept domination by a supranational organization (or a super-power) unless they (1) are pushed to accept the system by the big power(s) using sanctions or threats, or (2) clearly control the organization and thus benefit from it, as with the big power(s) themselves. It helps to have a clear common enemy which raises the benefits to each country, as with the Soviet Union after World War II: the Cold War and the Truman-McCarthy Red Scare helped unite the core capitalist world's elites, allowing the establishment of post-World War II international institutions.
After World War I, on the other hand, the power of the United States was not large enough relative to its competitors to the hegemon's throne. Both France and the U.K. still had their hegemonic pretensions. The emerging Soviet Union was hardly a threat sufficient to unify the contentious core capitalist countries for long. Also, as Goldstein [1988: 341] suggests, the delay in the accession of the U.S. to the throne arose partly because the location of the capitalist world system's core shifted away from Europe; the rising power could not immediately move beyond its traditional sphere of influence. One can also point to a learning process: after World War II, many of the power elite feared a replay of the inter-War period and consciously sought to avoid a repeat of the negative results.40 Finally, as developed in sections D and F, below, the U.S. did not yet have the internal solidity necessary to playing a hegemonic role.
This vision of hegemony implies that Kindleberger's emphasis on the need for a world central bank is less accurate than Temin's stress on "intense nationalist rivalry" as a structural cause of the Collapse. But intense international discord does not automatically cause an economic Collapse. If the War had been even less decisive or destructive, it is likely that countries would have dedicated more resources to war preparations. Even though the regular balancing of government budgets was still the orthodoxy, military spending and especially wars have been [[p. 134]] the traditional exceptions to that rule. Thus, the world could have stumbled onto military Keynesianism (and/or war), maintaining macroeconomic stability of sorts. In sum, it was not simply the international rivalry that encouraged Depression as much as the specific degree and type of rivalry that existed after the War.
C. The Restoration.
Turn next to the dominant "policy regime" that Temin  argues existed during the 1920s: laissez-faire, a deflationary bias, and the gold standard. This regime, whose origin he does not try to explain, should be seen as part of the post-War conservative Restoration movement [cf. Maier, 1988] -- the effort to clean up the economic, political, and social mess that was partly intensified and partly created by the War. The form of this response depended on the interests of the politically-dominant fractions of the capitalist class. On the other hand, the success of this Restoration in attaining its goals of order-creation and profit-promotion resulted in part because of the weakness of the resistance offered by the working class, the petty bourgeoisie, and the more "enlightened" elements of the capitalist class.
This Restoration was organized in a completely different way from that of the post-World War II era. In the latter, a triumphant United States reorganized the world from a position of strength, steeled by the crusade against "Godless Communism." It could thus could back up its efforts to restore order and normal economic operations with a flood of Marshall Plan dollars and C.I.A.-organized covert operations [cf. Armstrong et al., 1991: part I].41 In contrast, the post-World War I Restoration began with most industrial countries starting from a position of weakness, engaging in only futile efforts at international co-ordination.
In the so-called "return to normalcy" of U.S. President Harding and other leaders, capitalist governments reacted to the Bolshevik revolution and also serious revolts in the losing countries (Germany, Hungary, Austria, and to a lesser extent, Italy) and the post-War waves of strikes and disorders. To some extent, working-class grievances had been suppressed by and channeled into nationalistic fervor during the War. But these reappeared with a vengeance toward the end, and in the aftermath, as the accumulating costs, stupidity, and immorality of the War became increasingly obvious; the birth of an alternative in Russia further stimulated this change of heart. Both the War's losers and its European winners (the U.K., France, Italy) did poorly immediately after the War. On the other hand, the U.S. was faring relatively well, barely having dipped its toe into the Great War. But even it was not exempted from the post-War strike wave and world recession.
Finally, U.S. leaders were responding to the pressure put on business by the long-term fall in profitability since the turn of the century [Duménil et al., 1987; Duménil and Lévy, 1991]. Whether other countries were suffering from similar [[p. 135]] long-term declines is a topic for further research; in any case, many were suffering from short-term declines as a result of the end of artificially-high War profits, post-War adjustments, and recession. At least for the U.S., corporate War profits had been high and those of the immediate post-War era were disappointing (see charts 3-B and 3-D, below). Laissez-faire, the reaction against the corporate-liberal "Progressive Era" and War-time central planning in the U.S., represented a return to "that old time religion" perceived as having promoted profitability and prosperity in the previous century.42 This "religion" did not exclude international protectionism: the ascendant U.S. Republicans, for example, had been the pro-tariff party since the 1850s. But then again, in practice laissez-faire has always meant intervention in markets to aid business and the rich, as with the massive railroad land-grants of the 19th century U.S. or the "trickle-down" policies of the Reagan and Bush administrations. That is, laissez-faire represents the political-economic program of a specific fraction of the capitalist class more than a set of principles of "hands off the market."
D. Deflationary Bias.
The deflationary tinge of the interwar years reflected its political economy. Political elites were responding to the political, social, and economic chaos -- linked to serious inflation -- after World War I in Germany, in the other losing powers, and in the fragile new states of central Europe. Deflation was also encouraged by the international regime. In turn, this bias helped cause the Collapse, just as military Keynesianism after World War II contributed to the rise of stagflation in the 1970s.
Power elites usually resemble the stereotyped French generals who always are fighting the previous war: just as those of a later generation were to respond to the Depression with Keynesianism, the late-1920s elites were working to prevent the recurrence of the interconnected threats of social disorder and hyperinflation.
The post-War social havoc encouraged large government deficits: embattled governments lost much of their ability to raise or to collect taxes and suffered simultaneously from increased costs of rebuilding and reconverting the economy and of establishing and maintaining social order. Given the shakiness of these states, creditors were unwilling to lend at anything close to normal or affordable interest rates (so such loans veered toward Ponzi finance). So unbridled money-printing, hyperinflation, and finally economic collapse were encouraged, as with revolutionary Russia, post-World War II Nationalist China, many Latin American nations in recent decades, or the new capitalist countries of Eastern Europe after 1989.
The inflationary process had extra force because the political crisis interacted with and intensified social antagonisms; it became more difficult to push adjustment costs onto any sector: in order to reconcile conflicting claims on the [[p. 136]] domestic product and to avoid straightforward class-against-class conflict over the real product's distribution, inflation was encouraged.43 As inflation intensified, this spurred further conflict as the less-organized sectors organized to try to reverse losses in real income and to catch up with the more organized ones. Such a vicious circle of conflict and inflation makes demand-side anti-inflationary tools much less effective and thus more costly. With a boldness reminiscent of Milton Friedman, one might say that hyperinflation is always and everywhere a phenomenon of political collapse and social conflict.44
Turning to the most famous example, the German government faced a defeated army marching home in chaos, war- and blockade-imposed food shortages, mutinies, proto-Nazi freikorps, and socialist revolts. Order was eventually restored, but at a cost. The costs of creating order included a decreased ability to collect or raise taxes and the need to maintain the support for the government of a significant percentage of its own personnel: thus the budget deficit could not be cut. Moreover, Germany had lost territory and productive capacity and had to pay reparations. The Franco-Belgian occupation of the Ruhr in 1923 was the straw that broke the bank, setting off hyperinflation. Some have argued that the government provoked this debacle deliberately in order to prove that reparations could not be paid [cf. Aldcroft, 1977: 84]. But the fact that the government might have been so desperate is a symptom of the severe social and political antagonisms present. On the social-conflict dimension of the German hyperinflation, Burkett and Burdekin  show how the societal conflict between workers and their employers helped create the hyperinflation. This hyperinflation only ended when the economic civil war had been won by the capitalist class, imposing higher unemployment on the workers and weakening their organizations. [In the economics literature, this has been termed a change in the "policy regime."]
This formed the model for the deflationary consensus. The immediate post-War "pent-up demand" inflations (in most countries), the hyperinflations (in Germany, Poland, Hungary, Austria, and Russia), and the relatively minor inflations during the 1920s (in France, Belgium, and Italy) also strongly encouraged the deflationary bias of policies in the late 1920s and early 1930s. The chain of inflation terrified bankers, central bankers, and many ordinary citizens world-wide. This, combined with foggy memories of the deflation during the "good old days" before the War, the fresher remembrance of inflation and shortages during the War, and most importantly, the normal anti-inflationary bias of bankers, formed the basis for an international deflationary consensus. The backbone of this consensus is the bourgeois effort to use monetary discipline as a weapon of class struggle.
On the international level, Arsen  and Marglin  point out that the absence of a hegemon encourages deflation. The penalties for running a balance of payments surplus are less obvious and direct than those for running a deficit. A country that runs a payments surplus imposes a deficit on others, while a deficit country that deflates in order to attain trade balance will broadcast deflation to the world. To solve this, "the hegemonic country must possess an internationally dominant manufacturing sector which generates a permanent trade [[p. 137]] surplus . . . [and] must also be willing to lend and invest abroad an amount greater than its trade surplus" [Arsen, 1991: 5; cf. Marglin, 1992: 10].
On a more concrete level, deflationary policies were encouraged by the unstable network of payment of reparations and debt service left over from the War, with actual and threatened non-payment as a constant theme for the entire decade [Aldcroft, 1977: ch. 4]. The accumulation of international debts had allowed the European powers to push many of the costs of the War into the 1920s: in that decade, the chickens were coming home to roost. Further, England and especially France continued to fight the War by pushing for German reparations payments, no matter what the economic and social impact on Germany, on the world, and in the end, on them. At the same time, France lead efforts to prevent the large rise of German exports needed to finance reparations payments.
Reparations and international debts have directly deflationary effects, as countries must raise taxes or cut government spending and then translate these funds into foreign currency. The former depresses domestic aggregate demand, ceteris paribus, while the latter involves cutting imports and promoting exports. As Kindleberger and Aldcroft each argue, Germany always tried to get out of its reparations (actual payments were relatively small) and at the end of the 1920s pursued deflationary policies in order to convince the world that it needed to get off the hook. In sum, domestic consumption is cut while any world market over-supply is exacerbated. The export-promotion effort, if common enough on a world scale, encourages competitive devaluation, export subsidies, import controls and the like; as was discovered in the 1930s, when this process is competitive, few countries gain permanently and all can lose -- as the volume of world trade shrinks. During the 1980s [and 1990s], competitive austerity programs all across the world (especially in Latin America, but elsewhere) encouraged world depression, but the realization of that tendency in the form of world collapse was largely blocked by countries which were willing and able to run large current-account deficits and accumulate international debt (especially the U.S.) But during the late 1920s, such offsets did not exist.
As the 1920s progressed, one could see the development of a rough triangle of payments. Germany paid (some) reparations to England and France, while those countries paid interest to the U.S. Completing the triangle, and keeping things going for awhile, were U.S. loans to Germany (under the 1924 Dawes plan and the 1930 Young plan). But as Aldcroft notes, "Germany was simply incurring one debt to pay another (in fact building up an even larger debt in the process) so that the problem of real redemption was never faced squarely" [1977: 92]. Like Ponzi finance, the "triangle" was unstable. The shift of funds to the New York stock market (starting in 1928) helped break the triangle, though given its instability it is quite possible that another shock could have had the same impact. As both Kindleberger and Aldcroft note, the shaky triangle could have been made firm if there had been an effort for a general settlement. But the U.S. almost always refused to allow linkage of war debt-service and reparations: only [[p. 137]] piece-meal case-by-case solutions were allowed. So the interregnum again played its structural role in encouraging Collapse.
As Temin notes, a deflationary consensus such as existed in the late 1920s could have dominated Kindleberger's hypothetical world central bank, thus negating the positive impact of such a bank. This possibility seems likely: consider how the contemporary I.M.F. pushes large numbers of nations to restructure in a deflationary way, ignoring any potential depressionary effects on the world level. Thus, we might provisionally see the existence of a hegemonic power as necessary but not sufficient to world economic stability. "Restorationist" and deflationist ideology might dominate policy, as Temin argues, swamping the positive aspects of leadership and causing macroeconomic disaster.
But what are the bases of such ideology? First, if the hegemonic power (or coalition) is not very strong relative to contenders, then it is more likely, in desperation, to follow world macro-destructive policies (even though they feed back and hurt the power); only when it is largely insulated from economic competition, can the hegemon's ruling elite stand above the fray and take a global view, seeing that their narrow domestic goals can be served by world stability.45 Second, we must go beyond Temin: for the dominant power to play its stabilizing role, it must have domestic tranquility; facing an overt civil war between classes, ethnic groups, or whatever, even the most internationally powerful nation will be pushed to turn inward and to abdicate its Kindlebergian responsibilities in the name of Restoration. Again, the powerful U.S. of the two decades after World War II, easily able to contain or suppress most of its internal conflicts, was less likely to ignore its impact on the world. So in the end, hegemony becomes crucial: a strong power will eschew deflationary ideology. This point reinforces our emphasis on the costs of nationalist rivalry (Temin) over the need for an I.M.F. (Kindleberger). [On the other hand, a hegemon might become drunk with power, imposing its image of how the "world works" on the rest of the world ignoring the impact on the world economy, as in the 1990s. In that case, it seems that hegemonic power is necessary but not sufficient to stabilize the world. See the end of this paper for a discussion.]
The gold standard (a.k.a. the "gold exchange standard") is often seen as central to the instability of the world economy of the 1920s [Temin, 1989, 1993; Eichengreen, 1992; Cooper, 1992]. But this system's rise was not an accident, since it was a part of the multi-pronged, if somewhat incoherent, effort to restore social order and business profitability. First, in the absence of a hegemonic military and economic power or a strongly unified combine of nations willing and able to impose a non-metallic international system of payments, the gold standard is an obvious artifice (in some ways like the Versailles emphasis on ethnic nationalism). In order to have a world currency not backed by gold, such as the dollar since the 1970s, its circulation must be backed by the military and economic power of the country issuing the currency. Marx [1867: ch. 3] saw inconvertible paper currency as only being feasible when the government forces its circulation. Extending his thesis to the international arena,46 a world government could force the circulation of such money on the international level. More generally, the [[p. 139]] stronger the government -- or the stronger the hegemonic power -- the greater the stability of such a paper-money system, ceteris paribus.
Another reason for the acceptance of the gold-exchange standard was its well-known deflationary bias (reinforced by the post-War shortage of gold), which melded well with the policy tone of the era. This international deflationary bias in turn pushed contractionary domestic monetary policies on those countries committed to fixed exchange rates. In theory, on the other hand, fiscal policy is made more powerful by fixed exchange rates. However, for reasons developed in section III.E, expansionary fiscal policy was generally ruled out during this period. On the other hand, contractionary fiscal policy was encouraged (in response to recession-induced deficits).
The gold standard's instability was also not accidental. Though the gold standard was an "obvious artifice," it hardly solved the problems of international payments, especially in the long run, given the absence of a hegemon. As discussed above, the asymmetries of international payments imply the need for hegemony. The gold standard had worked relatively well during the during the 19th century, as Britain was able (given its economic power) to shoulder the relatively small short-term costs of adjustment. But in the long run, without a hegemon, the asymmetries undermine the operations of an informal gold standard of the sort that predominated in the 1920s [cf. Eichengreen, 1992; Cooper, 1992]. There was no simple agreed-upon process of exchange-rate adjustment.47 With or without gold, with or without fixed exchange rates, the international monetary system needs clear "rules of the game," enforced by some central agency. But in the 1920s, there was no hegemon to back up any such agency. As a substitute for a hegemon's role, one can point to war or war-preparation: during World War I, the world monetary system was inflationary rather than deflationary. But, as noted, that form of international competition faded during the 1920s.
On a more concrete level, the gold standard was disrupted by the policies of major participants during the 1920s. In 1925, Britain, led by rentiers, financial capitalists, and international investors with little concern for the domestic economy, went back to gold with the pound clearly overvalued, at its pre-War value.48 This policy, justified by hopes of returning to former financial glories through the application of economic magic [and obedience to the then-outmoded rules of the gold standard game], encouraged domestic deflation, stagnation, and social strife (e.g., the General Strike of 1926). On the other hand, France continued its international competition by accumulating gold reserves (which was mostly sterilized), imposing trade deficits on other countries. In 1928, in fact, France started to accept only gold in some international transactions. The U.S. also accumulated gold during the 1920s, though with less determination.
F. The Pre-Depression.
Deflationary policies, technical changes such as the introduction of artificial rubber, and the rush of combatants back into production after the War encouraged [[p. 140]] a world primary products depression [Lewis, 1949; Aldcroft, 1977: ch. 9; Kindleberger, 1986: ch. 4], including U.S. agriculture (the "Farmer's Depression"). This not only hurt the ability of these sectors to demand manufactured goods, but made them dubious debtors, prone to bankruptcy but desperate to get new loans (often to finance the maintenance of stocks in an effort to prop up prices or to finance interest payments on old debt). In the late 1920s, there was some recovery of the primary products markets, but this prosperity was quite dependent on the prosperity of the manufacturing sectors of the core capitalist countries.49 So when industry slipped into recession, the primary producers fell even more steeply.
The fact that the world commodity depression involved the U.S. has an important implication for Kindleberger's view. He sees the unwillingness of the U.S. to accept "distress goods" (goods in extreme excess supply) as a key element of the failure of U.S. leadership in the 1930s. But with his focus on New York and Washington decision-makers, Kindleberger forgets that the politically-crucial U.S. agricultural sector shared in the world distress. This made the passing of the Smoot-Hawley tariff not simply a matter of irresponsibility: the pressure from farmers (who were more powerful in 1930 than in recent years) and other suffering sectors overwhelmed the petitions of economists and other nations. This suggests that the problem was that U.S. had not sufficiently settled its domestic problems and so was not yet enough of an international economic power to make the short-term sacrifices required to be the world leader that Kindleberger prescribes.50
For many countries and sectors, the Depression started long before 1929. The Collapse was not only an aggregate disaster but also a downward convergence of the prosperous toward the sluggish sectors, the forcible adjustment of the relations among unevenly-growing parts of the world economy. The non-farm U.S. was one of the few major capitalist sectors that escaped the post-War chaos, while New York had become the financial capital of the world. These facts of uneven development on a world scale make matters a little easier for those examining the origins of the Collapse. A good first approximation of the story behind the Collapse can be discovered by focusing attention on the U.S.: when U.S. growth stopped, a world Collapse (the end of the late 1920s boom) was encouraged. The world crisis then fed back to depress the U.S. economy further. This focus on the U.S. seems a general consensus among students of this period [cf. Romer, 1993].
Given the above litany of world economic problems, this attention is understandable. However, looking at the world from the primary-producing periphery rather than the manufacturing centers, one might conclude that the Depression actually began in 1919-1920. In fact, one should wonder why the entire world economy (rather than simply primary products) did not collapse into Depression as a result of the sharp post-War recession that hit many countries around the world. [[p. 141]]
An immediate reason for recovery from that collapse -- rather than a 1930s-type stagnation -- was the obvious need for reconstruction after the War, to "get business moving again" (mitigating realization problems), and to avoid even worse delegitimation and social tension than actually occurred. Reconstruction and a wave of technical spin-offs from the War (and the fact that the War had delayed [invention or] implementation of civilian technologies) then stimulated a shaky business recovery, competitive expansion, and late-decade prosperity. However, as the need for reconstruction abated, and as rebuilt industries began to compete with similar industries abroad and the international imbalances discussed above intensified, the world became increasingly dependent on U.S. leading sectors for demand stimulus.
The actual drama of the Collapse of the world economy centered on two nations, the U.S. and Germany. Germany, saddled as it was with reparations and debts, was clearly dependent on the former nation, and on the general health of the world economy. Other nations had already begun their depressions (such as England) or suffered a delayed reaction and thus had a hard time prospering amidst the general stagnation (such as France). In the end, however, the U.S. was the capstone in the world arch, so special attention must be given to that country. Turn next to an examination of its "bootstrap" growth.
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[appendices] [references] [notes] [short version] [a new analysis of the future]