Britain in the Great Depression and post-Brexit

Barry Eichengreen recounts an important piece of the history of the Great Depression in Brexit and the Pound in Your Pocket Project Syndicate 09/13/2016:

In 1931, when the UK abandoned the gold standard, sterling plummeted by 30%. Like now, the country relied heavily on exports of services – not just banking services but also shipping and insurance. And the external environment was even more unfavorable than it is now.

Yet, despite these headwinds, the merchandise trade deficit fell by a quarter between 1931 and 1932. By 1933, the services balance was strengthening as well. At this point, the economy was on the road to recovery.

Three circumstances made this possible. First, excess capacity enabled companies to ramp up production. Second, Britain was able quickly to put in place a set of favorable trade deals, negotiated with Commonwealth countries at the Ottawa Conference in 1932. Third, political uncertainty fell sharply, as the Labour government, widely blamed for the 1931 crisis, was replaced by a Conservative-dominated cabinet with broad popular support.

He goes on to say with reference to Britain's current economic situation that currency flexibility - which members of the eurozone do not have - can be helpful. But it can't in itself restore full economic health.

The Great Depression and today's

Paul Krugman at his blog - which you can access via his Twitter page (@NYTimeskrugman) and not get blocked from reading the posts if you go to each one via a link on Twitter or elsewhere - has been talking a lot lately about how well Keynesian predictions have held up during the current depression.

In Monetarism Falls Short (Somewhat Wonkish), he provides this helpful guide to economists:

There have, however, been a couple of side shows, with what I guess now constitutes mainstream Keynesianism – carried forth in public debate by Martin Wolf, Simon Wren-Lewis, Brad DeLong, Jonathan Portes, Paul DeGrauwe, and whatshisface [Krugman himself], among others – subjected to non-austerian criticism on both flanks. On the left are the Modern Monetary Theory types, who assert exactly what the austerians like to claim, falsely, is the Keynesian position – that budget deficits never matter (except for their direct effect on aggregate demand). On the right are the market monetarists like Scott Sumner and David Beckworth, who insist that the Fed could solve the slump if it wanted to, and that fiscal policy is irrelevant.

Now, there won’t and can’t be any current-events test of MMT until we get out of the slump, because standard IS-LM and MMT are indistinguishable when you’re in a liquidity trap. But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.

You can get a regular dose of MMT views on the New Economics Perspecvtives blog.

One of those Keynesians mentioned by Krugman, Brad DeLong, has written a new preface to an important book on the Great Depression. DeLong's co-author on the preface is Barry Eichengreen, who wrote the book on the gold standard in the Great Depression, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (1992).

Their New preface to Charles Kindleberger, The World in Depression 1929-1939 is available online. They write:

It might be hoped that something would have been learned from this considerable body of scholarship. Yet today, to our surprise, alarm and dismay, we find ourselves watching a rerun of Europe in 1931. Once more, panic and financial distress are widespread. And, once more, Europe lacks a hegemon – a dominant economic power capable of taking the interests of smaller powers and the operation of the larger international system into account by stabilising flows of finance and spending through the European economy. The ECB does not believe it has the authority: its mandate, the argument goes, requires it to mechanically pursue an inflation target – which it defines in practice as an inflation ceiling. It is not empowered, it argues, to act as a lender of the last resort to distressed financial markets, the indispensability of a lender of last resort in times of crisis being another powerful message of The World in Depression. The EU, a diverse collection of more than two dozen states, has found it difficult to reach a consensus on how to react. And even on those rare occasions where it does achieve something approaching a consensus, the wheels turn slowly, too slowly compared to the crisis, which turns very fast.

The German federal government, the political incarnation of the single most consequential economic power in Europe, is one potential hegemon. It has room for countercyclical fiscal policy. It could encourage the European Central Bank to make more active use of monetary policy. It could fund a Marshall Plan for Greece and signal a willingness to assume joint responsibility, along with its EU partners, for some fraction of their collective debt. But Germany still thinks of itself as the steward is a small open economy. It repeats at every turn that it is beyond its capacity to stabilise the European system: "German taxpayers can only bear so much after all". Unilaterally taking action to stabilise the European economy is not, in any case, its responsibility, as the matter is perceived. The EU is not a union where big countries lead and smaller countries follow docilely but, at least ostensibly, a collection of equals. Germany’s own difficult history in any case makes it difficult for the country to assert its influence and authority and equally difficult for its EU partners, even those who most desperately require it, to accept such an assertion.6 Europe, everyone agrees, needs to strengthen its collective will and ability to take collective action. But in the absence of a hegemon at the European level, this is easier said than done.

Tags: kindleberger, eu, great depression

Hitler's and the NSDAP's employment programs during the Great Depression

Charles Kindleberger in his classic, The World in Depression 1929-1939 (1973) described the measures taken by Hitler and his NSDAP (Nazi Party) to combat unemployment after he took power in January 1933.

Kindleberger's description is deficient in two respects that are worth mentioning before getting to his text. The NSDAP was interested in creating jobs for so-called Aryan Germans, i.e., non-Jews. Jews were increasingly restricted in their employment and progressively pushed out of the civil service, the professions and eventually from the whole country. Most Jews who lived in Germany in January 1933 had passed away or emigrated by 1940, when Jews were completely banned from leaving the country. Those who did emigrate had most of their money and property confiscated by the Reich government. Both the restriction of employment by German Jews and the confiscations were significant factors in providing employment to "Aryan" Germans. Kindleberger's book omits discussions of the racial policy aspect of the NSDAP recovery program.

Kindleberger also makes the mistake that is still too common of assuming that the famous Autobahn highway project was primarily a civilian program. Originally planned under the Weimar Republic, the Autobahn construction was seen by Hitler first and foremost in its military aspect. Hitler's primary jobs program was war, and the Autobahn was part of that. In his very first cabinet meeting as Chancellor, he instructed his ministers to consider all such projects primarily with reference to their usefulness in rebuilding Germany's war capacity. The official record of the meeting relates the Führer's direction, "Dieser Gedanke müsee immer und überall im Voerdergrund stehen." ("This thought must always and everywhere stand in the forefront.") The Autobahn project was specifically discussed in that context at the same meeting. The transportation advantages offered by a good national highway system to a war economy was the priority reason for Hitler in building the Autobahn. (The ministerial meeting protocol is quoted by Hans-Henning Scharsach in Haiders Clan. Wie Gewalt entsteht, 1995)

Despite those two significant omissions, Kindleberger's description does a good job of showing how Hitler's employment policies were embedded in a system of coercion and far-reaching denial of rights to German workers, "Aryan" or otherwise. On the first International Workers Day that Hitler was in power, May 1, 1933, the Nazi government banned all independent trade unions and required workers to join a nationwide company union directed by the regime.

Kindleberger refers in the following to "socialist" aspect of the program of the NSDAP, the "S" standing for "socialist". The Nazis never took the "S" more seriously than a superficial, and failed, attempt to appeal to industrial workers. The working-class vote was largely divided between the two parties that understood themselves as distinctively representative of the working class, the Social Democratic (SPD) and Communist (KPD) Parties. The Röhm-Strasser wing of the NSDAP did call for more drastic curbing of the powers of the German capitalist class to be taken over by the German national state and the Nazi Party, which presented itself as the party of the Aryan race, not of the working class. Given the almost exclusively polemical usage of "socialist" in contemporary American politics, understanding the "socialist" rhetoric as used by the NSDAP is no doubt puzzling to most Americans who first encounter it.

Kindleberger refers to the purge of Ernst Röhm, the head of the SA (Brownshirts) paramilitary group, a purge that came in 1934 and became known as the Night of the Long Knives:

Hitler's accession to full power in March 1933 was a forecast of far-reaching changes in the German economic system. In Munich, in 1920, the National Socialist party had laid down a list of twenty-five points, largely economic and social, directed against capitalism, 'interest slavery', and the like, and in favour of colonies, land reform, pensions for old people and the development of the middle class through assistance to shopkeepers.

Those 1920 program demands were long retained but offer little actual guide to the policies the NSDAP pursued. The Party had allied throughout the twenties with other rightwing parties. And made a deal with German conservatives to get Hitler appointed as Reichskanzler in January 1933:

A four-year plan announced in the spring of 1933 promised the rescue of the peasant and the worker, the latter by an attack on unemployment. Agriculture was to be reformed through the establishment of the Reichsnährstand (Food Estate), which controlled prices and then production. Unemployment was attacked through conscription (in March 1935), the development of parastatal bodies, such as the storm troopers and the S.A., and especially in spending on public works and armaments. But the anti-capitalism of the initial stages did not survive for long. The purge of 30 June 1934 was not economic in origin, but it none the less had the effect of moving party doctrine in a more conservative direction in respect of income distribution, if not of control of industry. Control was provided by the law of 27 February 1934, 'Gesetz zur Vorbereitung des organischen Aufbaus der deutsche Wirtschaft' (Law for the Preparation of the Organic Constitution of the German Economy), which laid out a criss-crossed pattern of industrial and regional Überwachungsstellen (Control Offices). Initially, these Control Offices regulated imports on the basis of goods quantities, but this task was eventually turned over to the Reichsbank and operated through foreign-exchange controls. [my emphasis in bold]

The mechanisms used by the NSDAP government were not always in themselves dictatorial or distinct to the German regime. But, as Kindleberger notes there, public employment was provided to a major extent through military and paramilitary organizations, which Hitler planned to use for war, and much of the public spending was for armaments.

On 2 May 1933, the S.S. seized all offices of trade unions in Germany; officials were arrested, and union property was confiscated. The property was incorporated into the Nazi-controlled Deutsche Arbeitsfront (German Labour Front), which included entrepreneurs and professional men as well as workers. Wages and working conditions were regulated'by Treuhänder der Arbeit (Labour Trustees), appointed for each district. The German Labour Front included Social Honour Courts to deal with abuses by employers or agitation by workers; and Kraft durch Freude ('Strength through Joy'), which organized workers and youth in holidays through taxes on workers' salaries. In particular, workers were required to carry a work book by which both their jobs and movements were controlled.

A great deal of historical works has been done in recent years on institutions like those acted as mechanisms of political and social control under the direction of the Nazi government, e.g., Götz Aly, Hitler Volksstaat. Raub Rassenkrieg und nationaler Sozialismus (2005) and Götz Aly (ed), Volkes Stimme. Skepsis und Führervertrauen im Nationalsozailismus (2006). But the topic had received excellent treatment in much earlier studies as well, like Franz Neumann's Behemoth: The Structure and Function of National Socialism 1933-1944 (1942/1944).

Continuing with Kindleberger; he refers here to Hjalmar Schacht (1877-1970), former German central banker who later served as Economics Minister under Hitler and as director of the office to develop a war economy:

Since an early task was to eliminate unemployment, the National Labour Service was established for a variety of projects ranging from agriculture, reclamation, road construction and,ultimately, military installations. It was made compulsory in June 1935. Workers with agricultural training were dismissed and sent back to farms. All labour was frozen in its jobs in 1934. A campaign was undertaken to drive women from gainful employment and back to the hearth. These efforts, it was later thought, prevented Germany from undertaking full mobilization after 1938 and during the Second World War.

Hjalmar Schacht fought hard to prevent deficit financing rising above a dangerous level until 1938,when he resigned. But spending for public works, including Autobahnen, was undertaken through special paper discounted by banks. The effect was rapidly to reduce unemployment from 6 million in October 1933 to 4·1 million a year later, 2·8 million in February 1935, 2·5 million in February 1936, and 1·2 million in February 1937. At the time when the Second Four-Year Plan was introduced, by Hitler in a speech at Nuremberg in September 1936, and formally in October of that year by Herman Goring, anti-depression policy was a thing of the past. Women who had received marriage loans were allowed to take jobs. The forty-hour week was ignored, although the forty-eight-hour week did not come in until August 1938. In June 1938,the Compulsory Labour Decree (Dienstverpflichtverordnung) provided that any inhabitant of the Reich had to accept any work or vocational training assigned to him or her by the Labour Front.

The Second Four-Year Plan also turned policy definitely away from unemployment towards preparation for war. It still [sic] contained schemes for public buildings and Autobahnen, but the emphasis was on providing synthetic industries in rubber, oil, fats, etc., to protect Germany against blockade in time of war. [my emphasis in bold]

John Kenneth Galbraith approached the German actions to combat the Great Depression from a different angle in The Age of Uncertainty (1977). Even Galbraith overstates the civilian nature of the Autobahn construction. But he points out how some of the technical levers used by the German government produced useful results in generating employment:

The Nazis were not given to books. Their reaction was to circumstance, and this served them better than the sound economists served Britain and the United States. From 1933, Hitler borrowed money and spent - and he did it liberally as Keynes would have advised. It seemed the obvious thing to do, given the unemployment. At first, the spending was mostly for civilian works - railroads, canals, public buildings, the Autobahnen. Exchange control then kept frightened Germans from sending their money abroad and those with rising incomes from spending too much of it on imports.

The Nazis weren't aiming at a "socialism" that would have put the means of production under the control of a workers' state, a definition that the SPD and KPD could presumably have agreed upon at the proverbial 30,000-ft. level in 1933. But the Nazis also weren't willing to confine themselves to the conventional advice that had been followed faithfully by the Weimar government from 1930 and whose results had brought the NSDAP to power.

Galbraith:

The results were all a Keynesian could have wished. By late 1935, unemployment was at an end in Germany. By 1936, high income was pulling up prices or making it possible to raise them. Likewise wages were beginning to rise. So a ceiling was put over both prices and wages, and this too worked. Germany, by the late thirties, had full employment at stable prices. It was, in the industrial world, an absolutely unique achievement.

Again, restrictions on non-"Aryan" workers and professionals and confiscation of money and property from emigrating Jews played a part in that result.

Galbraith suggests that a less doctrinaire examination of the German experience by foreign observers in the 1930s could have provided some useful empirical lessons.l :

The German example was instructive but not persuasive. British and American conservatives looked at the Nazi financial heresies - the borrowing and spending - and uniformly predicted a breakdown. Only Schacht, the banker, they said, was keeping things patched together. (They did not know that Schacht, so far as he was aware of what was happening, was opposed.) And American liberals and British socialists looked at the repression, the destruction of the unions, the Brownshirts [SA], the Blackshirts [the SS], the concentration camps, the screaming oratory, and ignored the economics. Nothing good, not even full employment, could come from Hitler. It was the American case that was influential.

Tags: hitler,

john kenneth galbraith, kindleberger, nazism, nsdap, great depression

Yes, we are officially technically in a recovery

The National Bureau of Economic Research is the generally-recognized referee for setting the starting and ending dates of recessions. Their September 20, 2010 statement explains their scoring of the most recent recession, which they judge began in December 2007 and ended in June 2009, which is the "trough month" in their terminology:

The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.

The Great Depression contained two distinct recessions, as illustrated in this chart of Paul Krugman's from his blog post Glenn Beck and the Fed, 1935 02/02/2011.


The Great Depression is conventionally dated from 1929 to 1939 or so. Wartime production, which began well before the attack on Pearl Harbor, finally brought employment back to non-depression levels. But there were two official recessions within that longer period.

Tags: great depression, paul krugman, us economy