Charles P. Kindleberger �An Explanation of the 1929 Depression� 1986

							Tatsuya Nishida                                         Tatsuya_Nishida@ksgphd.harvard.edu




        Charles P. Kindleberger, “An Explanation of the 1929 Depression” 1986

A. Abstract

     Interested in questions on why the depression of 1929 was so widespread, so deep and so long,
      the author argues that the international economic system was unstable because British was
      unable to and U.S. was unwilling to assume responsibility for stabilizing it.
     The author claims that the leading countries should assume the responsibilities of 1)
      maintaining an open market for distress goods (free trade), 2) providing stable monetary
      liquidity, 3) monitoring and stabilizing exchange rates, 4) ensuring the coordination of
      macroeconomic policies, and 5) acting as a lender of last resort.
     The author argues that leadership, not cooperation among major countries, is crucial to
      maintain the stability of international economic system.


B. Summary of the Article
1. Why was the depression of 1929 was widespread, deep and long?
 The author is interested in questions on why the depression of 1929 was so widespread, so deep
    and so long.
 The author argues that the international economic system was unstable because British was
    unable to and U.S. was unwilling to assume responsibility for stabilizing it by discharging the
    following five functions
    (1) Maintaining an open market for distress goods
    The author argues that Britain clung to free trade until 1916 while U.S. took protectionist
    measures such as the Smoot-Hawley Tariff Act of 1930.
    (2) Providing countercyclical lending
    The author discusses that Britain tended to lend financial liquidity abroad on countercyclical
    basis. For instance, domestic recession stimulated foreign lending, while a boom at home
    caused both lending to be cut back and imports to be expanded, providing an export stimulus
    abroad in place of domestic investment with borrowed funds. On the other hand, the author
    says that U.S. foreign lending was positively correlated with domestic investment, not
    counterpoised in the 1920’s.
    (3) Policing a stable system of exchange rates
    Exchange rates were stable in the nineteenth century because of the gold standard. But, the rates
    were unstable after the World War I due to the depression and many countries’
    beggar-thy-neighbor tactics.
    (4) Ensuring the coordination of macroeconomic policies
    Macroeconomic policies were coordinated automatically in the nineteenth century under the
    gold standard. But, the gold standard basically broke down in the interwar period when the
    U.S. and France accumulated and sterilized gold.
    (5) Acting as a lender of last resort.
    The author argues that many countries were enthusiastic to rescue their domestic banks or
    provide liquidity in their domestic market, while the lender of last resort was most
Tatsuya Nishida                                        Tatsuya_Nishida@ksgphd.harvard.edu




    conspicuously missing in the international dimension.
   Denying a view that the shocks to the system such as overproduction in primary goods were so
    great that they would overwhelm any set of defenses, the author claims that any random shock
    to the system could not set the unstable system toward depression if some countries were
    willing and able to act as a stabilizer.

2. Transition of leadership and lack of U.S. leadership
 The author argues that it was not clear until 1931 that Britain could not provide the leadership.
     The burden of French sterling balances inhibited Britain as a lender of last resort.
 However, the U.S. was uncertain in its international role partly due to its isolationism, and
     partly due to the loss of unpaid debts.

3. Was cooperation sufficient to maintain the stability of international economic system?
 The author argues that leadership, not cooperation among major countries, is crucial to
    maintain the stability of international economic system.
 The author believes that the above-mentioned five functions must be organized and carried out
    by a single country that assumes responsibility for the system.
 Although small countries proposed on how to stabilize and institutionalize international trade
    and finance, and exchange rates, the author believes that these proposals are valueless if they
    lack the capacity to carry them out and fail to enlist the countries that do.

4. Implications for Today
 Looking at declining the U.S. economic leadership in the world economy during the 1980s and
     believing that a single country or institution should assume the leadership of maintaining the
     stability of international economy, the author argues that effective cession of economic
     sovereignty to international institutions (a world central bank) is pressing.
 On the other hand, the author is skeptical about the effectiveness of cooperation among G7
     countries or US-EU-Japan troika.

C. Some Comments
 Based on historical experiences, the author argues that leadership is a key for the international
    economic system to work, but cooperation does not work in the international economic system.
    But, it seems more important to consider under what conditions cooperation work, what prevented
    cooperation, and under what conditions the leadership is more effective than cooperation.
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