Couldn't, Wouldn't

The World in Depression 1929-1939, Charles P Kindleberger, 1973 (2012).

Street of New York II, Georgia O’Keeffe, 1926.

The Great Depression is a more ramified disaster than popular understanding may suggest. The 1929 crash might have marked the beginning, but it was not the only turning point. The stillborn revival of 1930 is rarely mentioned, and it is easy to forget that full-blown financial crisis did not occur until 1931, nearly two years after the crash. The course of the Depression further into the 1930s is even more obscure.

For this reason, I imagine that the conflation, ‘1929 = the Great Depression’ is perhaps responsible for our present situation whereby some powerful people erroneously think that the Smoot-Hawley tariff of 1930 alleviated depression, rather than exacerbating it. So I imagine no-one needs convincing today that economic history has a part to play in painting a fuller picture of that terrible decade we know as the Great Depression.

Charles Kindleberger’s The World in Depression 1929-1939 does exactly this. I was inspired to read it by Perry Mehrling’s biography of Kindleberger, Money and Empire, which I reviewed last month. I soon realised my mistake was not having started it sooner! Known for a chart — the famous Kindleberger spiral, featured in my supplemental to this review — and an argument crystallised in Kindleberger’s phrase “the world economy was unstable unless some country stabilised it… in 1929, the British couldn’t and the United States wouldn’t”, this is a book which remains well worth reading fifty years after it was published.¹

Kindleberger’s primary quarry is monetarism, and in particular, the argument of Friedman and Schwartz’s 1963 A Monetary History of the United States that Federal Reserve monetary policy mistakes caused the Depression. But he also has an axe to grind with Keynesianism, and the idea — which he attributes to Paul Samuelson — that the Depression was the result of a “series of historical accidents”. In his view, neither holds. To quote Mehrling, who summarises the argument of World in Depression more lucidly than I ever could, Kindleberger argued that the Depression was fundamentally a result of “market instability that overwhelmed the capacity of policymakers to act”. In Kindleberger’s own words, there were “three particulars” that Britain could not — and the United States would not — perform that might have averted depression: “maintaining a relatively open market for distressed goods”, “providing counter-cyclical long-term lending”, and “discounting in crisis”.

But I do not think that Kindleberger is worth reading today only for the classy charts, the lessons, or even the bold argument. Instead, it is the power of The World in Depression as a work of historical synthesis that draws me in. To the best of my knowledge, there is no author who better describes the Depression as an interlocking series of global economic crises with deep roots and varied consequences: Kindleberger’s is truly a ‘thick’ description. In this sense, I was reminded most of

Adam Tooze

’s 2018 Crashed, a book that remains the fullest description of how the economic crises of the ‘long 2010s’, from 2008 to 2014 and beyond, lock together. Both books emphasise not only the global, but the international aspect of each crisis: how instability was transmitted over time and space, as well as the feedback it generated locally. And thus both provide precisely the perspective that is needed to avoid the narrow framing that can so easily calcify if left unchecked.

There are many examples I could choose to illustrate this, even if it would be impossible to account for everything in detail. Kindleberger’s narrative starts with the recovery from the First World War, naturally emphasising the inter-allied debts, the Dawes Plan and the growth of United States foreign lending, and monetary stabilisation in Britain and France. He then proceeds to analyse the global agricultural depression (with Australia a case study) and the 1927-1929 boom in the US, built on the back of automobiles and accompanied by a simultaneous expansion of domestic and foreign lending. This, Kindleberger argues, crucially contrasted with nineteenth-century Britain, where “foreign lending and domestic investment were maintained in continuous counterpoint”, and was a premonition of the collapse in the US of foreign and domestic lending after 1931. As an aside, I do not believe Mehrling discusses this point in Money and Empire, perhaps since it is not a fundamental part of Kindleberger’s narrative of the Depression. But, it is a point which reminded me of The New Lombard Street — revealing a difference, as it were, between the world the Fed faced in 1929 and that faced by the Bank of England in the nineteenth century.

Then there is the 1929 stock market crash. For a 300-page book, Kindleberger spends only nineteen pages on the crash itself. It is, he writes, less interesting in itself than for “starting a process which took on a dynamic all of its own”. It is worth remembering that it was not clear, even after the dust had settled in 1930, that the crash would lead to a decade-long global depression. President Hoover declared in May 1930 that the worst of the crisis had passed — a hope which Kindleberger wryly remarks “could not have been more wrong”. There was instead a gradual “slide into the abyss”, a crawling deflation. And, as with 2008, this slide would be consummated in Europe. Why did deflation persist? Kindleberger is not certain, but he is clear to point out that the deflation “had nothing to do with the money supply”, in a testament to his ceaseless crusade against monetarism. What he is certain of, however, is that the Fed did not do nearly enough to prevent that deflation transmitting worldwide — hence the ‘wouldn’t’.

Once Kindleberger arrives at 1931 — when the depression went truly global — his descriptive talent shines. He explains with lucidity how the Credit-Anstalt crisis (when the failure of Austria’s largest bank triggered a run on the Austrian currency that was unsuccessfully countered by international central bank cooperation, an episode with complex political, economic, and financial causes of its own²) produced a cascade of bank failures in eastern and central Europe. He then follows through all the way to the Second World War: via the global deflation of 1931-33, the boom of 1933-37, and finally the less discussed recession of 1937 (rarely mentioned, perhaps, since it only affected the extra-European world, given the ‘military Keynesianism’ Europe was entering at the time). Again, the international is always emphasised. Kindleberger darts from Europe to the United States and back again on nearly every page, while never being confusing. His subject is the international monetary and trading system itself, not the sum of countries which participate in it.

If you read my recent review of Money and Empire, you might remember that Kindleberger had a vision for the postwar dollar system which was, while still based around the primacy of the US, profoundly internationalist. You can feel this belief in The World in Depression, which as well as taking an international perspective is also clearly internationalist. Although the Depression may have been triggered by a failure of financial leadership, it persisted because “when every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all”. There is no ambiguity in Kindleberger’s animosity to protectionism and the global rise of tariffs walls after 1930, as his famous spider-web spiral chart reveals.

It is hard not to read these remarks in the context of Kindleberger writing it, deflated as he was by the “Crime of 1971” and the dashing of his international dollar system against the rock of national priority. In this sense, The World in Depression is as motivated by the political concerns of the 1970s as Charles Maier’s Recasting Bourgeois Europe is — albeit, perhaps, concerns specific to Kindleberger.

It is also difficult, however, not to think of our geopolitical context today. The World in Depression was republished in 2012 amid the depths of the Eurozone crisis, with a foreword by

Brad DeLong

and Barry Eichengreen. With events in Europe on their mind, DeLong and Eichengreen argued that Kindleberger had seen how the “ability and willingness to bear the responsibility and sacrifice required for benevolent hegemony [was] likely to falter” in the United States, way back in 1973. Kindleberger anticipated, they argue, what went wrong in 2012 — “extraordinary political dysfunction in the United States preventing the country from acting as a benevolent hegemon, and the ruling Mandarins in Europe, Germany in particular, unwilling to step up or convince their voters that they must assume the task”. This diagnosis is now outdated. The US today actively rebels against the responsibility of benevolent hegemony, while Europe’s Mandarins writhe like lobsters in uncertain, life-threatening moults.

Thinking of our present moment, if we have a major financial crisis tomorrow, central banks would most likely act faster and more effectively than they have in the past.³ But with the absence of the global institutions that Kindleberger craved, and the dysfunction of the institutions we have, is that enough? What World in Depression’s analysis reveals is that when you draw all the threads in, monetary policy is only one amongst many. Would experience be sufficient to overcome a policy-enabled spiral of international trade in a geopolitical order that has recently left safety nets, such as central bank swap lines, shrouded in uncertainty? The World in Depression does not convince me that it would.

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1. I am reading the 2012 reissue of the original 1973 edition, not the updated version Kindleberger put out in the 80s. There are differences (the updated edition is also a partial riposte to Peter Temin’s Keynesian approach in Lessons from the Great Depression. But the jury is out on which is ‘best’, and I have read the original here.

2. This is a key episode in the failure of interwar international monetary policy and the BIS I discussed a while ago in the context of the edited volume The Spread of the Modern Central Bank and Global Cooperation.

3. As of writing, we are not in the middle of a financial crisis… maybe!