The World In Depression: Charles Kindleberger

If I misapply an economic term or fail to grasp all the macroeconomic stuff, my bad. I think the purpose of reading this piece was to impart a counterargument to Polyami and Friedman while demonstrating how interrelated economic developments in one region are impacted by another while also illuminating why states sometimes fail to act in the aggregate interest of the world economy.

According to Kindleberger, five institutions are needed for the stability of the world economy:
1. A relatively open market for distressed goods
2. Countercylical or at least long-term lending
3. Stable exchange rates
4. A coordination of macroeconomic policy
5. A lender of last resort that discounts or otherwise provides liquidity in a crisis

Kindleberger contends that provided these functions, the economic system could handle and adjust to shocks to the market. Even given the overproduction of raw materials into primary products, the French clamor for strict reparations, the American stubborness for debt-payment, currency chaos, and halts in foreign lending from New York coupled with the Stock Market crash, Kindleberger argues that the United States and Great Britain acted in concert to secure global financial stability, the worst of the Depression could have been averted.

Free trade, the process that sets domestic resources amenable to productive capacities abroad and keeping import markets open, was abandoned in 1930 with the Smoot-Hawley Tariff. Rather than incurring some short-term costs by keeping markets open to surplus goods from abroad where demand declined, the United States set off a process of protectionism by raising rates on all kinds of imports. Tariff retaliation and competitve depreciation led to mutual losses everywhere. With no country providing a market for surpluses or willing to incur appreciation of it currency, which would damage export-oriented industries while hurting those competing with imports on the domestic market, or offer capital loans or discounts to nations struggling with debt. In other words, what was good for the one not good for the whole.

Countercyclical lending, as practiced by the British in the nineteenth century, helped stabilize the economy from shocks in the global market. The British would import during boom periods and cut spending abroad, thereby lessening the impact of bad investment on borrowed funds in recession periods while encouraging production abroad. After World War I, the U.S. decided to lend and export during a boom period, which was not a good long-term plan.

In the nineteenth century, the gold standard established the exchange rate for currencies. After the inflation following World War I, the equilibrium for a number of reasons was not correctly established. With export prices going down after the Depression hit, smaller countries in a quasi-competitive manner devalued their currencies, which led to only further deflation as domestic prices remain unchanged while reducing prices in appreciating countries.

Gold standard also allowed for greater coordination of macroeconomic policies. Domestic usurptation of this responsibility subordinates the aggregate interest to the rabble of protection.

The lenders of last resort protect against depositors and prevent widespread panic withdrawal. No one did this in the 1930s. Bed.