Similarities, it turns out, there were, but contrasts, too. Whereas widespread price inflation characterised the Eighties, the Wall Street crash of October 1929 - 'the moment in the story of a flood when the last sod in the dyke gave way' - was preceded by a prolonged fall in the prices of internationally traded commodities. Significantly, in a book of 479 pages the word 'inflation' does not once appear. Nor, indeed, does 'growth' - the prime objective of economic policy was not growth but stability.
In the Twenties and Thirties world trade was dominated by the exchange of foodstuffs, raw materials and other primary products for manufactured goods from Europe and the United States. 'Overproduction' of commodities, in the sense of flooding world markets with more than they would take at prices above production costs, therefore had a devastating effect on international trade. This was countered in turn by defensive tariffs and schemes of market control.
When export prices sank, the burden of debt became intolerable for many borrowing countries, and much had to be rescheduled, or written off, causing injury to the credit capacity of lending institutions. But this appears to have been a lesser ingredient in the causes of world depression in 1928-31 than it was 60 years later.
In one aspect of international finance, there was a striking similarity. The gold standard was the simulacrum of the European Monetary System, except that it extended far beyond Europe. Britain, which had restored the pound to its pre-1914 parity with the golden dollar in 1926, was forced off the gold standard in 1931, just as it was forced off its overvalued place in the exchange rate mechanism in 1992. The United States abandoned the standard in 1934, as an incident of President Roosevelt's New Deal; the 'Gold Bloc' of France, Belgium, the Netherlands and Italy broke down in 1936. Germany, not formally on the gold standard, stubbornly refused to devalue the Reichsmark, in its own interest as perceived by the all-powerful chairman of the Reichsbank, Hjalmar Schacht. We seem to be back on the same old circuit.
The key question for us now is, how did the world recover from its economic plight, which produced mass unemployment almost everywhere? Efforts to achieve international agreement on corrective measures were not to much avail. The World Economic Conference of 1933 was a conspicuous failure. Its initial emphasis on the need for stable exchange rates was torpedoed by the US Secretary of State, Cordell Hull, in terms dictated by President Roosevelt:
'The world will not long be lulled by the specious fallacy of achieving a temporary and probably an artifical stability in foreign exchanges on the part of a few large countries only. The sound internal economic system of a nation is a greater factor in its wellbeing than the price of its currency.'
The British Commonwealth economic conference at Ottawa in 1932, though proclaimed a success, did as much to hinder trade in the world at large as to promote it between the participants. The Bank for International Settlements had a good record in mitigating the strain of international debt and monetary upheavals, but it had become a sideshow. In the Three- Power Currency Declaration of 1936, Britain, France and the United States pledged to pursue, in concert, stability in currency exchanges. They called for action to develop world trade by relaxing and eventually abolishing quotas and exchange controls, and they invited all nations to co-operate in those aims. 'While the new international co-operation did not alter the aims of national monetary policies,' I wrote at the time, 'it prevented them from becoming dangerously competitive and jealous, and set up a technical collaboration capable of maturing gradually into a more permanent international system.' In 1948 such a system did emerge in the General Agreement on Tariffs and Trade, and the fate of Gatt is obviously crucial for the world's economic future.
Although in the Thirties freer trade was elevated as an ideal, the practice was rather the opposite. The spirit of the times favoured government intervention that we would now call anti-market. International output control, defensive tariffs and other economically artificial means were widely used in attempts to escape from the depression. Anticipation of war was one cause, among others, of national protectionism.
The answer to the question about recovery is, broadly, that most countries hauled themselves up by their own bootstraps. There was no golden rule. Governments everywhere had to balance the call for reflationary finance against the need for budgetary economy, the evil of unemployment against the danger of a deteriorating trade balance. The United States, though best placed to follow its own line, adopted no clear or consistent course. After a presidential election curiously like that of 1992, in which an inertial Republican was replaced by an energetic Democrat, Roosevelt's New Deal was a mixed bundle of expedients, some inflationary, others the opposite; but it did stir the sludge of depression and revived business confidence. The primary producers righted their trade balances by internal belt-tightening, external tariffs and exchange depreciation.
All the industrially advanced countries, not least Britain, went through a painful phase of budgetary stringency, cuts in real wages and heavy unemployment. On the whole, the countries that had depreciated their currencies against gold began to recover sooner than those which had not. Their competitive advantage was not, as they had feared, quickly wiped out by the effect of more costly imports on domestic price levels. 'Just as, when wholesale prices fall, retail prices lag behind' - a phenomenon that had greatly vexed the Chancellor of the Exchequer, Philip Snowden, earlier - 'so when wholesale prices rise again retail prices rise more slowly and may even go on falling for a time.' The trade deficit/surplus did tend to worsen for those countries that took the opportunity to reflate a little, but this did not halt their progress nor inhibit the slow revival of the world economy.
Governmental measures were powerfully aided by the inbred resilience of market economies, taking advantage of changes on the demand side such as the armaments boom of the late Thirties (whose immediate effect, however, was more psychological than material) and a big rise in the need for housing in Britain and North America. Some commodity prices were stabilised by international control schemes, but the more pervasive and lasting cause was the reduction of excess capacity and the upturn of demand.
The Great Depression was precipitated by a fall in prices. Now, price inflation is a prime enemy - and rightly so after our experiences of the past 30 years. Compared with 1929-37, a vital extra parameter has entered the calculations of statesmen and economists. They know recovery engineered at the cost of inflation would be fatally flawed. That is one reason why the lessons of the Great Depression should be read with sceptical caution.
The author was editor of the 'Sunday Times', 1950-61, and has written several books on international economics.Reuse content