The Great Depression And Its Causes

History Of Great Depression

The ‘Great Depression’ And Its Causes

Lionel Robbins is the best-known representative of the first group of economists. He has submitted 'the great depression'2 to a pro­found analysis, in which his thought is specifically linked to the Classical tradition, which he calls the heritage of generations of subtle and disinterested thought. Since most economists use the 1930 crisis as a touchstone to test the proportion of truth contained in earlier theories, it is useful to recall its essential features as they appear to a mind of exceptional honesty and keenness.

To Robbins, then, the crisis of 1930 was the result of a combina­tion of unfavourable circumstances aggravated by a policy which, in England as much as, and perhaps even more than elsewhere, rejected some of the clearest lessons taught by past experience. One of the salient features of his book is the courage he displays in openly reject­ing some of the most popular explanations propounded in his own country under the impact of the first disasters caused by the crisis. The natural tendency in Great Britain was to cast on the economic and monetary policy of other countries responsibility for the events that brought about the resounding collapse of the pound sterling. This was ascribed first to the 'maldistribution' of gold (meaning its so-called 'cornering' first by the United States and then by France), then to the 'sterilization' of gold (that is to say, the alleged refusal of the same two countries to expand their credits in proportion to their gold reserves), and finally to 'failure to observe the rules of the game' of the gold standard (without succeeding, however, in defining these 'rules of the game'). Robbins rejects all these explanations, and sees in the monetary policy of England herself one of the principal causes of the 'great depression.' And here his analysis touches on points of prime importance and interest for any theory of crises. England, he says, made her first mistake in stabilizing the pound sterling at too high a rate. Having made this mistake, she was unable to take the measures needed to determine the price-level resulting from the rate she had adopted. What were these measures? Above all, the restric­tion of credit. The export of gold at this point was a clear indication of the policy to be followed. But, contrary to all the 'rules of the game,' the Bank of England replaced the gold exported by new credits (p. 85). Then there was another mistake: costs of production ought by all possible means to have been reduced to the level of world prices, which had fallen below English prices, but the English pre­ferred to maintain wages at too high a level. Thus, he concludes, the English disequilibrium was due to the choice of a false parity and a refusal to conform to the requirements of this parity (p. 97).

But this specifically English disequilibrium in turn reacted on the economies of other countries. It led other central banks in their turn to break the rules of the game. The Federal Reserve Bank of New York lowered its discount rate in 1927. Why did it do this? To come to the aid of the London market by depriving English short-term capital of the attraction of a more remunerative investment abroad. But what was the result? A speculative rise on the New York Stock Exchange which intensified the later collapse of values by which the crisis began. When it did begin it was again London that prolonged it after the fall of the pound, by leaving the world uncertain as to the rate at which the pound, now released from gold, would be stabilized afresh. Hence arose, through the truly inter­national character of the English currency, that deplorable monetary insecurity in which the whole world was kept for too long a time (p. 106). So London, who advised everybody to observe the classical monetary rules, continued herself to break them. (Pp. 94-95.)

It remains now to explain why the crisis, once started, assumed such exceptional gravity. For it was not a 'normal' crisis when the price-index fell in three years from 93 to 63, and world trade from 68 to 26 milliard dollars, and when the number of unemployed rose to three million in Great Britain, thirteen million in the United States, and six million in Germany. It was in very truth 'the great depression.' Here again Robbins finds the principal cause in the abandonment of tradi­tional teaching. He agrees with Ricardo, who, in a passage already quoted, casts blame upon "the restrictions and prohibitions, to which the absurd jealousies which prevail between the different states of the commercial commonwealth give rise." And Robbins himself blames also the slowness with which freedom was restored to the great markets after the war, the excessive use of customs tariffs, and the rapid multiplication of trusts and cartels.

Is this, then, a sufficient explanation? There is every probability that, when the initial mistake had been made of putting the pound back on the pre-war parity in spite of the creation of an unprece­dented quantity of bank money, all the measures advocated by Robbins —which were, indeed, the logical outcome of that policy—would also have failed, as would, too, the precisely opposite measures advocated (as we shall see presently) by Hawtrey and Keynes. For the crisis of 1930 was only the second stage of the inevitable readjustment of prices which follows every great world war, and which the 1920 crisis had not sufficiently achieved, as paper money was still at that time the currency of all the belligerents except the United States. It was only the return of England to the gold standard in 1925, and the subsequent extension of that standard, that made plain the true situation. What happened then was like what was observed after the abandonment of bimetallism, when the gold extracted from the mines was not suffi­cient to compensate for the demonetized silver that was thrown out of employment, and world prices had to adapt themselves compul-sorily to a quantity of gold that was too small to keep up the level to which universal inflation had gradually, and artificially, raised them. It was this 'deflation,' too prolonged, but inevitable in view of the return of the pound to par, that caused this great disaster. Robbins would certainly not dispute this, but his otherwise penetrating analysis does not perhaps bring Out clearly enough this superposition of a 'normal' crisis on a profound tendency to a fall of prices—a superposition which in itself explains the violence of the 1930 crisis, and which rendered vain all other remedies than the harsh and abrupt adaptation that was brought about by monetary devaluations. The same subject has been dealt with by Nogaro in an important work whose views agree in many respects with those of his English colleague, but he has noted this circumstance more clearly in the following passage, which forms the conclusion of his very complete analysis of all the circumstances of the crisis: "To sum up," he writes, the actual crisis, although its immediate starting-point was the New York crash—an accidental factor—was obviously related to a more remote antecedent^ which is to be found in an essential element in the situation —viz-, the movement of prices.

This movement was not merely that which ordinarily accompanies cyclic crises. The fall began well in advance of the stock exchange crisis, and affected agricultural commodities in particular. This fall was on an altogether unprecedented scale, as the preceding rise had been. The difference between wholesale prices and all other prices—prices of industrial products, retail prices, prices of services—was also on a scale hitherto unknown. It is, therefore, in this circumstance—an entirely exceptional price move­ment, connected no doubt with the disturbances arising from the Great War —that we must look for a large part of the explanation of an economic disequilibrium as serious and prolonged as that which we actually witnessed.

This passage sums up perfectly the most characteristic feature of the crisis of 1930, and combines the interpretations, to be dealt with presently, of Schumpeter and Francois Simiand.