Kindleberger and His Explanation of the 1929 Depression
In chapter 14 of his book entitled The World in Depression, 1929-1939, Charles Kindleberger offers an explanation to understand what led to the Great Depression of the 30's, and why that depression had such a dramatic scope. Of course, he stresses the fact that this is just "an" and not "the" explanation.
Taking the questions of "what?" and "why?" as starting points, Kindleberger then suggests that the Great Depression could have been a "fortuitous event" (hazard), "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, 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/leader (although Kindleberger doesn’t like this term, it is basically what his thesis implies). 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 turned out to be terrible for international economic relations and thus terrible for the stability of the system.
2) Providing Countercyclical Lending: supposed to stabilize the system = when recessionary period at home, investment (=lending) from abroad and when expansionary period (boom) at home, 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 made the system imbalanced.
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: to 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 last one (lender of last resort), then the international economic system should be able to adjust to a crisis such as the one that hit the world in 1929.
He finally refines his question = were the conditions very unique in 1929 or could a depression easily happen in case that a fairly harsh shock combines with the absence of a stabilizing country?
For him, the second part is likely to be true (instability in the system and absence of stabilizer). 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.
