[영문 에세이] 전지구적 대공황 극복과 금본위제

1929년 대공황의 극복기와 금본위제의 역할 

에세이 주제: What brought about the recovery from the Great Depression in the United States and the rest of the world? How important was the gold standard in the recovery process?

Introduction

This essay will argue that a) the expansionary monetary policy brought about the recovery from the Great Depression in America and the rest of the world and b) the gold standard was unimportant in this recovery process as it hindered the countries’ recovery. The former will be argued in two ways: firstly, the significant effects the monetary expansion (in the form of declined nominal interest rates) had on the United States (US) will be explained and secondly, the monetary expansion’s role (in the form of increased money supply) on realising the devaluation’s macroeconomic effects on the rest of the world will be analysed. By understanding how nominal interest rates and money supply can stimulate spending in both short and long-run, we can better judge the significance of monetary expansion on the recovery. The answer to the latter question will demonstrate how the gold standard constrained countries from achieving economic recovery and why suspending it was crucial. To further accentuate the validity of the arguments above, this essay will first refute Temin and Wigmore’s claim that the recovery was driven by a shift in expectations. Then, Eichengreen and Sachs’s view on the role of devaluation as the causal factor of recovery will be evaluated.

Expansionary Monetary Policy

America

Having experienced a substantial gold inflow ($758 million) from devaluation (under Roosevelt’s ‘New Deal’), the US money stock surged and thus, the domestic government was able to supply more money into its economy by employing expansionary monetary policy in the form of lowering the nominal interest rates (Romer, 1992). As acknowledged by Romer’s ‘transmission mechanism’, under fixed or increasing inflation expectations, a decline in the nominal interest rates implies a fall in the real interest rates. This then stimulates spending “by lowering the cost of borrowing and by reducing the opportunity cost of spending” (Romer, 1992:775). While the intuition behind this mechanism can explain how monetary expansion boosts an economy, how can we argue this to have brought about the recovery from the Great Depression? The answer is twofold. 

Firstly, the ‘transmission mechanism’ is consistent and applicable to the recovery phase in the 1930s. In Romer’s regression analysis which is used to estimate ex ante real interest rates by assessing the correlations between the quarterly ex post real interest rates and the relevant explanatory variables, she finds that the monetary policy variable (as one of the explanatory variables) was negatively correlated with the ex post real rates. Provided that changes in policy do not immediately affect output, “the first lag of the monetary policy variable enters the regression with a coefficient of -0.463 and has a t-statistics of -3.02” (Romer, 1992:777). The negative coefficient and the statistically significant t-value demonstrate the monetary expansion’s effects on real interest rates; supporting the first half of the ‘transmission mechanism’ intuition. The second half of the intuition can be explained with Table 1.

Table 1. Correlation between spending and real interest rates, 1934-1941 (Source: Romer,1992:780)

The large values of -0.687 and -0.746 show a strong negative correlation between the real interest rates and spending (in the forms of investment and consumption); further supporting the mechanism above. On top, the negative coefficients throughout the whole period of the 1930s (with averages of approximately -0.344 for investment and -0.338 for consumption) suggest the extent to which monetary expansion ultimately led to the stimulation of aggregate demand for both short and long-run; bringing about the economic recovery. 

Secondly, the effects of monetary expansion outweighed that of fiscal expansion. This is supported by Romer’s derivation of the monetary and fiscal policy multipliers on output change during the recovery phase, each with values of 0.823 and -0.233, respectively (Romer, 1992:766). While the former implies that a growth rate of money supply below one percentage point (pp) than normal results in a lower real output growth relative to normal by 0.832 pp, the latter implies that a one pp increase in the surplus-to-GNP ratio depresses the growth rate of real output compared to normal by 0.23 pp (Romer, 1992). As shown here, the magnitude of the former coefficient outweighs the latter by approximately 253% and this highlights the greater significance monetary policy had on output change. This can be reinforced by the large differences between the actual real gross national product (GNP) and the GNP under normal monetary policy from 1933 to 1937: Romer finds that the real GNP in 1937 would have been nearly 25 percent lower than it actually was if normal monetary policy was employed after 1933 (Romer, 1992:768). On the contrary, the GNP under normal fiscal policy shows great similarity to the actual real GNP and this distinction further accentuates the critical role that the monetary expansion played in bringing about the recovery from the Great Depression. 

On evaluating the credibility of the arguments above, one may deem such approach to overlook the causality of the shift in expectations on the recovery. This is acknowledged by Temin and Wigmore’s view that Roosevelt’s new policy regime “altered expectations and stimulated investment” (Temin and Wigmore, 1990:483). However, this view fails to see that an expectation cannot, by itself, maintain the recovery phase without policy results. As demonstrated in Table 1, even the effects of policy change gradually fade and so, the credibility of the long-run effects of expectations is questionable. Therefore, such approach is arguably short-sighted. Furthermore, Romer’s ‘transmission mechanism’ has already shown that monetary expansion can lead to a fall in real interest rates with fixed inflation expectations that in turn, stimulates investment. Therefore, monetary expansion is still shown to be effective, independent of expectations. This shows that expectation alone is arguably a mere contributory factor to the effects of monetary expansion and we can see that it was the monetary expansion that fuelled the recovery as the ‘engine’ in America. 

    Rest of the world  

In an international context, the expansionary monetary policy ensured that the devaluation-generated macroeconomic effects towards the recovery were effectively realised for mutual benefits among different countries. Let us first note that this essay acknowledges that devaluation by itself could have opened up initiatives for recovery (by suspending the gold standard). However, such initiatives provide limited scope of solely focusing on the domestic economy and thus are characterised as ‘beggar-thy-neighbor’ policies without monetary expansion, whereby devaluations are “seen as attempts to better a country’s position at the expense of its neighbors” (Eichengreen and Sachs, 1985:926). To better understand this, Table 2 compares the effects of devaluation with and without monetary expansion. 

Table 2. Impact of exchange-rate depreciation on endogenous variables (Source: Eichengreen & Sachs)

As shown above, the impact of exchange-rate depreciation on the endogenous variables, under ‘sterilized devaluation’ (depreciating country switches expenditure towards domestic goods), differs significantly to the impact under ‘unsterilized devaluation’ (depreciating country increases money supply). The negative signs for ‘sterilized devaluation’ under the ‘foreign output’ and ‘interest rate’ variables demonstrate that without increasing money supply, the foreign output and the interest rates are negatively affected by the domestic devaluation. On the contrary, there are no definitely negative signs under ‘unsterilized devaluation’. This shows a more favourable effect on the trading partners and is more likely to lead to mutual gains, bringing about the recovery as a whole. This analysis confirms the significant role monetary expansion played in attributing to the world recovery and as acknowledged by Eichengreen and Sachs, accompanying devaluation with monetary expansion could cause gold to flow abroad; which in turn would “reduce world interest rates and thereby stimulate demand” (Eichengreen and Sachs, 1985:935) in domestic and foreign countries.  

Consider, now, another point made by Eichengreen and Sachs: if it was “adopted even more widely and coordinated internationally” (Eichengreen and Sachs, 1985:928), devaluation could have accelerated the recovery. This statement underlines the significance that devaluation could have had, if it was better applied globally. However, claiming the strengths of devaluation based on hypothetical assumptions are arguably unrealistic as there is no way of testing this claim. Furthermore, as mentioned above, monetary expansion was needed, in the context of the recovery, to appropriately extend the effects of devaluation from the domestic market to a global sphere: devaluation “allowed countries to expand their money supplies without concern about gold movements and exchange rates” (Romer and Pells, 2019: Page 3). This shows that monetary expansion was more effective in actually driving the recovery as devaluation was only able to introduce and indirectly cause the recovery.  

The Gold Standard 

The discussions on the significance of devaluation and monetary expansion throughout this essay indicates how important it was for countries to suspend the gold standard in order to achieve recovery from the Great Depression. By assessing the implications of the gold standard and evaluating their effects on the US and the rest of the world, we can show that the gold standard was not important for the recovery process yet, it was crucial to suspend it for the recovery. 

Firstly, “under the gold standard, each country set the value of its currency in terms of gold and took monetary actions to defend the fixed price” (Romer and Pells, 2019: Page 2). This shows constraints on the involved countries’ ability to set their own currency values at competitive levels and thus, the suspension of the gold standard implies that such countries were able to move from a fixed to more flexible exchange rates. This meant that the countries were enabled to devalue, bringing about positive results mentioned throughout the essay; ultimately experiencing a recovery. 

In the US, one of the key causes of the rapid growth of the money stock was “the gold inflow produced by the revaluation of gold” (Romer, 1992:773). This shows that if the US had not suspended the gold standard, it would not have experienced such high inflows of gold that ultimately led to its recovery. Therefore, the extent to which the American recovery would have occurred, in the absence of the gold standard suspension, is uncertain. Moreover, it is important to note that the US was a surplus country as the end-recipient of all war debts following the First World War. Therefore, suspending the gold standard was not a necessary policy change. Yet, after leaving the gold standard, the percentage changes in real GNP rose 33 percent between 1933 and 1937, while the rate had declined significantly (by 35 percent) between 1929 and 1933 (Romer, 1992). Thus, while the gold standard was not important throughout the recovery process of the US, it was important that the US had suspended the gold standard in 1931 under Roosevelt administration to achieve recovery.  

For the countries in the rest of the world, the financial positions of those who remained in the gold standard (commonly referred to as ‘Gold Bloc’ countries) “deteriorated seriously beginning in 1934, culminating in May 1935 in a marked loss of confidence in the sustainability of their parities and flight of international capital” (Eichengreen and Sachs, 1985: 930). Having explained the recovery of those countries that had suspended the gold standard and subsequently devalued, it is arguable that had the Gold Bloc countries left the gold standard earlier, they would not have experienced the Great Depression for as long as they did. As Perry and Vernengo acknowledge, the countries that depreciated first by leaving the gold standard were the first to recover. Therefore, this indicates that the gold standard was “to blame for the depth of the global slump” (Perry and Vernengo, 2011:3).     

Conclusion 

To conclude, the expansionary monetary policy spearheaded the recovery from the Great Depression. By stimulating the components of demand in the forms of declined interest rates and increased money supply, monetary expansion fuelled the recovery as the ‘engine’ across all non-Gold Bloc countries. While expectations from policy shift and devaluation also contributed to the recovery, the effects were not as significant as monetary expansion. Having analysed the damaging effects that the gold standard had on the countries worldwide, it is also evident that the gold standard was unimportant in the recovery process as it only hindered countries from experiencing recovery. However, it was also crucial to time the suspension of the gold standard during the recovery process: the earlier the suspension occurred, the better it was for the recovery. 

Bibliography

Eichengreen, B. & Sachs, J. (1985) Exchange Rates and Economic Recovery in the 1930s. The Journal of Economic History, 45 (4): 925-946  

Perry, N. & Vernengo, M. (2011) What Ended the Great Depression? Reevaluating the Role of Fiscal Policy. Levy Economics Institute of Bard College, 678: 1-20.  

Romer, C.D. & Pells, R. H. (2019) Great Depression. [online] Available from: https://www.britannica.com/event/Great-Depression (Accessed 17 March 2019). 

Romer, C. D. (1992) What Ended the Great Depression? The Journal of Economic History, 52 (4): 757-784.   

Temin, P. & Wigmore, B. A. (1990) The End of One Big Deflation. Explorations in Economic History, 27: 483-502.