Kindleberger and His Explanation of the 1929 Depression

In chapter 14 of The World in Depression, 1929-1939, Charles Kindleberger offers an explanation for the Great Depression of the 30's, and why that depression had such a dramatic scope. He stresses the fact that this is just "an" explanation, and not "the" explanation.

Taking the questions of "what?" and "why?" as starting points, Kindleberger suggests that the Great Depression could have been a "fortuitous event," "the consequence of U.S. Federal Reserve Board deliberate and misguided policy" (incompetence or ignorance), or the product of a complex and intricate international system.

For him, instability in the system in the absence of stabilizer is likely to occur. He supports his argument by first giving the example of Britain before WWI and then referring to the decline of British hegemony and the lack of leadership of the U.S. Kindleberger argues that the international economic system was rendered unstable by the British inability and the American unwillingness to stabilize it by taking on the role of an economic hegemon, although Kindleberger hesitates to use this term. The responsible unit (or hegemon) would have to fulfill the following functions:

1) Maintaining Open Market for Distress Goods: Kindleberger wants to avoid another "Smoot-Hawley" because it had negative effects for international economic relations and thus for the stability of the system.

2) Providing Countercyclical Lending: This leading country is supposed to stabilize the system; when there is a recessionary period at home, they should expect investment (which is lending) from abroad, so when expansionary period at home, they should also pursue investment abroad. The problem that arose in the 30's comes in part from the fact that the U.S. cut back both lending and imports, which imbalanced the system.

3) Policing Stable System of Exchange Rates: In the 19th century, the exchange rate was stable because it was fixed to the Gold Standard. In the 30's, however, there was a competitive depreciation of domestic currencies that aimed at increasing exports. The response to that race to the bottom came in 1944 and the Bretton Woods Agreement.

4) Ensuring the Coordination of Macroeconomic Policies: Countries should avoid monetary policies conducted mainly for domestic purposes (e.g. sterilization of gold by the U.S. and France).

5) Acting as Lender of Last Resort

According to Kindleberger, if those 5 functions are fulfilled by a single country, especially the "lender of last resort," then the international economic system should be able to adjust to a crisis such as that of 1929.