Niall Ferguson on Great Depression

“Recovery from the Depression plainly called for new economic policies in all countries; by 1933, as Roosevelt said, the traditional remedies favoured by his predecessor Herbert Hoover had been discredited. Any country that adhered tenaciously to the combination of sound money (the gold standard) and a more or less balanced budget was doomed to a decade of stagnation. Nor were tariffs the answer. However, there was a variety of different ways to engineer economic recovery. At one extreme were the policies of the Soviet Union, based on state ownership of the means of production, central planning and the ruthless coercion of labour. At the other, there was the British combination of currency devaluation, modest budget deficits and a protectionist imperial customs union. Other measures - such as the system of bank deposit insurance introduced in the United States - did not constitute a drastic break with the liberal economic order. Most countries adopted policies somewhere in between these two extremes, combining increased state involvement in employment, investment and the relief of poverty with looser fiscal and monetary policies and measures to limit the free flow and/or pricing of goods, capital and labour.”

“The symptoms of the Depression were much easier to discern than its causes. Between 1929 and 1933 American gross national product fell by nearly half in nominal terms, or 30 per cent when allowance is made for the simultaneous decline in prices. The first sector to be severely affected was construction; by 1930, however, the collapse in activity had spread to agriculture, manufacturing and finance. Investment imploded; so did exports. This crisis of capitalism was not confined to the United States; it was a global phenomenon, as Figure 6.1 makes clear. The combined output of the world's seven biggest economies declined by close to 20 per cent between 1929 and 1932. But there were significant national and, indeed, regional differences in the timing and severity of the Depression. The United States was not the first to suffer, partly because monetary tightening there initially affected other countries by luring short-term capital back to New York, and partly because other central banks were restricting credit for reasons of their own. Argentina, Australia, Brazil, Canada, Germany and Poland all turned down sooner. But only two countries suffered such severe contractions as the United States. One was Germany, where construction had peaked as early as 1927. The other was Austria.”

“The key point is that the political consequences of these new economic policies varied much more between countries than the policies themselves. Only in some countries was the adoption of new economic policies subsequent to, if not actually conditional upon, a political switch to dictatorship. The English-speaking world saw a variety of departures from economic orthodoxy without any erosion of democracy. So too did Scandinavia; it was in the 1930s that the Swedish Social Democrats laid the foundations of the post-1945 European welfare state. Ironically, moves away from democracy in other countries were sometimes justified by the need for more stringently orthodox fiscal policies, on the ground that the parliamentary system, with its special interests represented in the legislature, made it impossible to run balanced budgets. In fact, unbalanced budgets provided a generally beneficial stimulus to demand. It should also be remembered that changes of monetary policy did not require any diminution of democracy since in most countries before the Depression central banks were not democratically accountable. Some had their independence from parliamentary control legally enshrined. Others - notably the Bank of England and the Banque de France - were still considered to be private firms, accountable to their shareholders rather than to voters, even if their role and mode of operation were governed by statute.”