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Golden Fetters

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Barry Eichengreen discusses the link between the Great Depression of the 1930s and the the gold standard.

Image courtesy of interviewee. March 7, 2024

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This video discusses the historical analysis of the Great Depression and the economic theories surrounding its causes, primarily focusing on the role of the gold standard and international cooperation among central banks. Originally, the pre-war gold standard was deemed effective due to its credibility and cooperation among nations, which helped maintain stable exchange rates. However, World War I disrupted these systems, leading to changes in political power dynamics and the ability to cooperate internationally regarding financial stability.

The author reflects on their academic efforts to understand the impacts of the Great Depression beyond the United States, emphasizing that global financial crises can transmit problems across borders—an issue that resonated during the 2008 financial crisis as well.

This video further asserts that abandoning the gold standard allowed countries to regain control over their monetary policies, which enabled them to adapt to local economic needs. Historical evidence indicates that countries began to recover after leaving the gold standard, with subsequent adjustments in monetary policy leading to economic recovery.

Overall, the author draws lessons from the Great Depression that remain relevant today, emphasizing the importance of credible monetary regimes and international cooperation in addressing financial crises. The insights gathered from past crises informed better responses during the 2008-2009 financial turmoil, underscoring the ongoing relevance of these economic principles.

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Here are five key points from the given video:

1. **Great Depression as a Macroeconomic Enigma**: The speaker reflects on the Great Depression of the 1930s, stating that its causes were widely debated during their graduate studies in the late 1970s. This fascination with understanding the Depression drives their research and writing, particularly the impacts of international financial crises.

2. **Global Nature of the Great Depression**: The video emphasizes that previous economic literature often focused primarily on the U.S. perspective, neglecting the global ramifications of the Great Depression. The speaker highlights that financial crises were transmitted across borders, affecting multiple countries.

3. **Collapse of the Pre-War Gold Standard**: The speaker argues that the gold standard, which functioned effectively prior to World War I due to credibility and international cooperation, faced collapse due to altered political and economic realities post-war. They note how rising priorities among the electorate shifted focus from maintaining the gold standard to addressing employment concerns.

4. **Lessons from Historical Financial Crises**: Drawing parallels between the Great Depression and the global financial crisis of 2008-2009, the speaker identifies the importance of timely responses to economic downturns and deflation. They argue that the lessons learned from the past, such as the need for stable monetary policies and international cooperation, resulted in more effective crisis management in the modern convideo.

5. **Regaining Policy Flexibility Post-Gold Standard**: The abandonment of the gold standard is portrayed as a crucial moment that allowed governments and central banks to regain flexibility in monetary policy. This flexibility enabled them to adapt to local economic needs, stabilize their economies, and ultimately recover from crises, as evidenced by the experiences of various countries during the Great Depression.

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Here are some key quotes from the video:

1. **On the Great Depression and its significance:**
- "Was it Ben Bernanke, who called the Great Depression of the 1930s, the Holy Grail of macroeconomics?"

2. **About the research impetus:**
- "The question of what caused the Great Depression was very much up in the air when I was in graduate school in the late 1970s."
- "The fact that the Great Depression was a global phenomenon... was not really part of the conversation."

3. **On the gold standard's effectiveness:**
- "The argument that I try to make in the book is that the pre-war gold standard worked because it was tailored to... a particular set of political and social circumstances."

4. **Key elements of the gold standard:**
- "The critical elements... were the two Cs: credibility and cooperation."
- "Credibility meant that maintaining the stable exchange rates of the gold standard was the highest priority for... central banks."

5. **Impact of World War I:**
- "Both of those pillars of the pre-war gold standard were toppled... by World War I."

6. **Shifts in political dynamics post-war:**
- "The limited franchise... was no longer a tenable situation... when you'd sent millions of men off to fight the war."

7. **On international cooperation:**
- "International cooperation was much more difficult... after four years of French warfare."

8. **Deflation as an international issue:**
- "When the US had deflation and a financial crisis, our deflation became your deflation."

9. **Lessons from the Great Depression:**
- "The response to the global financial crisis of 2008, 2009 was better because we did learn some lessons from the mistakes committed not heading off deflation."

10. **Keynes's perspective on the gold standard:**
- "John Maynard Keynes... said, this is a good thing. We have been freed of our gold fetters."

11. **Economic recovery following currency depreciation:**
- "About a year after countries abandoned the gold standard and allowed their currencies to depreciate, they begin to recover."

12. **Policy stability in financial crises:**
- "In an unstable situation, stabilizing monetary and fiscal policies are your friend."

13. **Importance of credibility in current convideos:**
- "The credibility of the monetary regime is important."

14. **International cooperation post-crisis:**
- "International cooperation is important as well... we saw that after the global financial crisis with... dollar swap lines."

These quotes encapsulate the main themes and arguments in the video, focusing on the historical convideo of the Great Depression, the gold standard, the importance of international cooperation, and lessons learned for modern economic policy.

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Was it Ben Bernanke, who called the Great Depression

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of the 1930s, the Holy Grail of macroeconomics?

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I think it may have been.

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And it was, the question of

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what caused the Great Depression was very much up in the air

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when I was in, in graduate school in the late 1970s.

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Uh, that is what I worked on,

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not entirely successfully in my PhD dissertation,

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but, it in turn motivated me to, think again

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and work on golden fetters for much of the 1980s.

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The other motivation was that,

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the literature on the Great Depression was really

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disproportionately a literature on the United States

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and people doing American economic history,

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and American macroeconomics didn't pay much

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attention to the rest of the world.

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So the fact that the Great Depression was a global

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phenomenon, and that financial crises

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and depression were transmitted

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between countries across borders was not really part

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of the conversation.

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Charles Kindleberger

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and MIT professor had written a book,

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the World in Depression in the seventies, that kind

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of opened the door

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to thinking more broadly about the depression

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as a global phenomenon.

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But that is what motivated me

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and what I tried to do in the book.

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The argument that I try to make in the book is

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that the pre-war gold standard worked

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because it was tailored to, it was suitable

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to a particular time

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and place, a particular set of political

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and social circumstances, a particular

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intellectual UA that existed in the late 19th century,

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but that was effectively, toppled

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by World War I.

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So the critical elements, I think that, were central

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to the operation, of the gold standard

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before 1913, were the two Cs credibility

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and cooperation, where credibility meant that

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maintaining the stable exchange rates of the gold standard

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was the highest priority for, central banks

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politicians and accepted by the public as well,

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because, those who might have pointed

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to other priorities like organized labor

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were not widely organized in this earlier period.

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Uh, modern Keynesian theories of

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how monetary policy might affect not only the exchange rate,

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but the labor market and unemployment hadn't been ar

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articulated in that earlier time.

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So, so, central bankers commitment to,

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maintaining the stable exchange rates of the gold standard

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and open international financial markets was credible.

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It went unchallenged markets and people believed

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That it would be maintained, and,

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and that was kind of a self-fulfilling prophecy

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cooperation refers to international cooperation

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where central banks

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and governments, came

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to one another's aid periodically when, stability

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of domestic finances

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and a particular country's commitment to the gold standard,

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was challenged.

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So the Bank of France lent gold to the Bank

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of England in extremists.

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Uh, the State Bank of Russia lent gold to the Bank

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of France, similarly in, in, in, in difficult periods.

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So both of those pillars

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of the pre-work gold standard were toppled, as I said

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before, by World War I,

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the limited franchise, the fact

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that working people couldn't vote in

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many countries before the war.

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That was no longer a situa,

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that was no longer a tenable situation when you'd sent

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millions of men off to fight the war in the trenches

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for multiple years.

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So the franchise was broadened,

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and people who were more concerned about their employment

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prospects than, preoccupations

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of financiers could vote in governments

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with different priorities starting in the 1920s.

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And international cooperation was much more difficult,

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obviously, after four years of French warfare,

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the re German reparations tangle the French

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and Belgian occupation of the rural valley, all these

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problems that arose on the diplomatic front in the 1920s.

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So when push came to shove,

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when a massive financial crisis broke out in 1931,

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people didn't automatically believe

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that the gold standard would be a stabilizing mechanism

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rather than a destabilizing mechanism.

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And the cooperation that had helped to support it

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before 1913 was no longer there.

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When you have a set of exchange rates that are all fixed

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to gold, when they all trade under law

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at a fixed domestic currency price for an ounce of gold,

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they're a, they're fixed indirectly to one another.

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So this was a system of, of pegged exchange rates with

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open, international, product

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and capital markets, at least before 1931.

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So when the US had deflation

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and a financial crisis, our deflation became your deflation.

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And deflation in the US became deflation in the rest

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of the world because price, the, the price of

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a particular commodity, be it a, a, a bushel of wheat

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or a bale of cotton

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or whatever, was tied together on, on,

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on, on global markets.

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And secondly, destabilizing financial

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impulses were transmitted internationally.

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Banks held deposits in, in foreign banks.

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So when that foreign bank had a problem and failed

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or shut its doors, for,

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for a period that created problems for

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banks in other countries that were linked to them through

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international financial markets.

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So these, these are problems that we have become familiar

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with in our own age, that during the global financial crisis

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of 2008, 2009, financial problems

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in one country didn't stay in one country,

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but they were transmitted internationally.

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And after 2008,

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when everybody became worried about deflation, we recognized

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that if deflation was allowed to occur,

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it would become a global problem.

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So one argument I like to make,

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and I'm not alone in making it, is that the response

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to the global financial crisis of 2008, 2009 was better

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because we did learn some lessons from the mistakes

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committed not heading off deflation, not moving quickly

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to contain financial crises.

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In 19 29, 19 31, Britain had an,

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financial and political crisis in 1931 that,

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caused, other individuals, banks

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and governments to take gold, which they had

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in effect on deposit in London

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and repatriate it, bring it back home,

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because they worried about whether Britain's commitment

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to make it available would be, honored.

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Britain was forced to abandon the gold standard

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and allowed the pound sterling to depreciate,

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which many people had been taught to think of

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as a catastrophe.

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But John Maynard Keynes in a, in a newspaper article right

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after the event said, this is a good thing.

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We have been freed of our gold fers.

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So he called it gold fetters.

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I, tried

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to make it a little bit more social media friendly

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by calling it Golden Fetters.

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But the idea is that when Kanes said we, he meant the uk,

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but more broadly, I would say governments

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and central banks regained their room for maneuver,

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their ability to adjust monetary

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and to a lesser extent fiscal policies to meet the needs

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of the local economy and, stabilize the situation.

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And Gaines was right to recognize that.

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So it's evident in the, in, in the time series in

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that about a year

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after countries abandoned the gold standard

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and allowed their currencies to, to depreciate, they begin

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to recover because prices stop falling

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and they, in some cases begin rising

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because if you depreciate your currency,

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your exports become more competitive.

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And if domestic demand is scarce,

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having additional external demand, export demand

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is a good thing.

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And finally, monetary policy can be used a, a, a, as you

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suggested, Sam, to give an additional boost the economy,

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the equivalent of quantitative easing, if you will,

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in the modern context.

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So different countries devalued at, at,

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at different points in time.

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They needed about three

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or four quarters for their economies to respond,

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relative prices and production to adjust.

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And, and at that point,

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they bottomed out and began to recover.

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The other thing you see is

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that some countries never go off the gold standard

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until the bitter end, where the bitter end is typically the

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end of 1936 and they don't recover.

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So you see it in the cross section that,

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Britain recovers in 1931,

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the US recovers when it goes off the gold standard in 1933,

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France and Belgium

09:58.365 --> 10:00.985
and Switzerland don't recover until 1937,

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after they finally abandoned the gold

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standard at the bitter end.

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In, in an unstable situation, stabilizing monetary

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and fiscal policies are your friend, that

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that's a key lesson.

10:15.405 --> 10:18.305
And it was learned from this earlier experience.

10:18.605 --> 10:23.225
And, the lesson was powerfully deployed, as I said

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before in 2008, 2009,

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that the credibility of the monetary regime is important.

10:32.815 --> 10:34.875
So if you have a problem,

10:35.185 --> 10:37.835
hopefully financial capital flows toward your

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country rather than away.

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Uh, many countries now have credible inflation targeting

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regimes where they are credibly committed to

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bringing inflation back to 2% and holding it there.

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So they're not quite there yet, as you and I talk today.

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But I think that commitment is credible

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and everybody believes that sooner

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or later, except for a few unusual cases.

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Turkey Springs to mind, we could point to a few others.

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There is this credible commitment,

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which is a stabilizing force

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and that international cooperation is important as well.

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And, and we saw that

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after the global financial crisis with,

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dollar swap lines

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and credits that the Federal Reserve extended

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to foreign central banks.

Understanding the Global Impact of the Great Depression

00:00:00 - Was it Ben Bernanke, who called the Great Depression of the 1930s, the Holy Grail of macroeconomics? I think it may have been. And it was, the question of what caused the Great Depression was very much up in the air when I was in, in graduate school in the late 1970s. that is what I worked on, not entirely successfully in my PhD dissertation, but, it in turn motivated me to, think again
00:00:34 - The other motivation was that, the literature on the Great Depression was really disproportionately a literature on the United States and people doing American economic history, and American macroeconomics didn't pay much attention to the rest of the world. So the fact that the Great Depression was a global phenomenon, and that financial crises and depression were transmitted
00:01:05 - of the conversation. Charles Kindleberger and MIT professor had written a book, the World in Depression in the seventies, that kind of opened the door to thinking more broadly about the depression as a global phenomenon. But that is what motivated me and what I tried to do in the book. The argument that I try to make in the book is that the pre-war gold standard worked because it was tailored to, it was suitable
00:01:35 - and place, a particular set of political and social circumstances, a particular intellectual UA that existed in the late 19th century, but that was effectively, toppled by World War I. So the critical elements, I think that, were central to the operation, of the gold standard before 1913, were the two Cs credibility
00:02:09 - maintaining the stable exchange rates of the gold standard was the highest priority for, central banks politicians and accepted by the public as well, because, those who might have pointed to other priorities like organized labor were not widely organized in this earlier period. modern Keynesian theories of
00:02:38 - but the labor market and unemployment hadn't been ar articulated in that earlier time. So, so, central bankers commitment to, maintaining the stable exchange rates of the gold standard and open international financial markets was credible. It went unchallenged markets and people believed That it would be maintained, and, and that was kind of a self-fulfilling prophecy cooperation refers to international cooperation

International Financial Cooperation and Challenges

00:03:09 - and governments, came to one another's aid periodically when, stability of domestic finances and a particular country's commitment to the gold standard, was challenged. So the Bank of France lent gold to the Bank of England in extremists. the State Bank of Russia lent gold to the Bank of France, similarly in, in, in, in difficult periods. So both of those pillars
00:03:41 - before, by World War I, the limited franchise, the fact that working people couldn't vote in many countries before the war. That was no longer a situa, that was no longer a tenable situation when you'd sent millions of men off to fight the war in the trenches for multiple years. So the franchise was broadened, and people who were more concerned about their employment prospects than, preoccupations
00:04:14 - with different priorities starting in the 1920s. And international cooperation was much more difficult, obviously, after four years of French warfare, the re German reparations tangle the French and Belgian occupation of the rural valley, all these problems that arose on the diplomatic front in the 1920s. So when push came to shove, when a massive financial crisis broke out in 1931,
00:04:46 - that the gold standard would be a stabilizing mechanism rather than a destabilizing mechanism. And the cooperation that had helped to support it before 1913 was no longer there. When you have a set of exchange rates that are all fixed to gold, when they all trade under law at a fixed domestic currency price for an ounce of gold, they're a, they're fixed indirectly to one another.
00:05:19 - open, international, product and capital markets, at least before 1931. So when the US had deflation and a financial crisis, our deflation became your deflation. And deflation in the US became deflation in the rest of the world because price, the, the price of a particular commodity, be it a, a, a bushel of wheat or a bale of cotton or whatever, was tied together on, on,
00:05:49 - And secondly, destabilizing financial impulses were transmitted internationally. Banks held deposits in, in foreign banks. So when that foreign bank had a problem and failed or shut its doors, for, for a period that created problems for banks in other countries that were linked to them through international financial markets. So these, these are problems that we have become familiar

Global Impact of Economic Crises and Recovery

00:06:24 - of 2008, 2009, financial problems in one country didn't stay in one country, but they were transmitted internationally. And after 2008, when everybody became worried about deflation, we recognized that if deflation was allowed to occur, it would become a global problem. So one argument I like to make, and I'm not alone in making it, is that the response
00:06:58 - because we did learn some lessons from the mistakes committed not heading off deflation, not moving quickly to contain financial crises. In 19 29, 19 31, Britain had an, financial and political crisis in 1931 that, caused, other individuals, banks and governments to take gold, which they had
00:07:27 - and repatriate it, bring it back home, because they worried about whether Britain's commitment to make it available would be, honored. Britain was forced to abandon the gold standard and allowed the pound sterling to depreciate, which many people had been taught to think of as a catastrophe. But John Maynard Keynes in a, in a newspaper article right after the event said, this is a good thing. We have been freed of our gold fers.
00:07:59 - I, tried to make it a little bit more social media friendly by calling it Golden Fetters. But the idea is that when Kanes said we, he meant the uk, but more broadly, I would say governments and central banks regained their room for maneuver, their ability to adjust monetary and to a lesser extent fiscal policies to meet the needs of the local economy and, stabilize the situation.
00:08:33 - So it's evident in the, in, in the time series in that about a year after countries abandoned the gold standard and allowed their currencies to, to depreciate, they begin to recover because prices stop falling and they, in some cases begin rising because if you depreciate your currency, your exports become more competitive. And if domestic demand is scarce,
00:09:03 - is a good thing. And finally, monetary policy can be used a, a, a, as you suggested, Sam, to give an additional boost the economy, the equivalent of quantitative easing, if you will, in the modern context. So different countries devalued at, at, at different points in time. They needed about three or four quarters for their economies to respond, relative prices and production to adjust.

Lessons on Gold Standard and Economic Recovery

00:09:34 - they bottomed out and began to recover. The other thing you see is that some countries never go off the gold standard until the bitter end, where the bitter end is typically the end of 1936 and they don't recover. So you see it in the cross section that, Britain recovers in 1931, the US recovers when it goes off the gold standard in 1933, France and Belgium and Switzerland don't recover until 1937, after they finally abandoned the gold
00:10:06 - In, in an unstable situation, stabilizing monetary and fiscal policies are your friend, that that's a key lesson. And it was learned from this earlier experience. And, the lesson was powerfully deployed, as I said before in 2008, 2009, that the credibility of the monetary regime is important. So if you have a problem,
00:10:37 - country rather than away. many countries now have credible inflation targeting regimes where they are credibly committed to bringing inflation back to 2% and holding it there. So they're not quite there yet, as you and I talk today. But I think that commitment is credible and everybody believes that sooner or later, except for a few unusual cases.
00:11:25 - There is this credible commitment, which is a stabilizing force and that international cooperation is important as well. And, and we saw that after the global financial crisis with, dollar swap lines and credits that the Federal Reserve extended to foreign central banks.

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