The World in DepressionCharles Kindleberger, The World in Depression, 1929-39, 
Chapter 14, "An Explanation of the 1929 Depression," (Berkeley: University of 
California Press, 1973), pp. 291-308



We return to the original questions: what produced the world depression of 1929, 
why was it so widespread, so deep, so long? Was it caused by real or monetary 
factors? Did it originate in the United States, in Europe, in the 
primary-producing countries of the periphery, in the relations among them? Was 
the fatal weakness the nature of the international capitalist system, or the way 
it was operated, i.e. the policies pursued by governments? Were such policies, 
to the extent they were important, the consequence of ignorance, 
short-sightedness or ill-will? Were the depth and length of the depression a 
reflection of the strength of the shock to a relatively stable system, or a 
measure of the system's instability in the presence of a blow or series of blows 
of normal force (however measured)? Or to bring the issue back to the difference 
between Milton Friedman and Paul Samuelson, was the 1929 depression the 
consequence of United States monetary policy or a series of historical 
accidents? Inevitably in drawing the threads together there will be a 
considerable amount of confirmation of preconceptions. We are open to the 
accusation of having selected statistics, facts and incidents from the history 
of the decade which support a position chosen a priori. But we would claim ~hat 
we have not knowingly suppressed any facts that do not fit the explanation which 
follows, nor ignored other explanations such as United States monetary policy 
(Friedman); misuse of the gold standard (Robbins); mistaken deflation (Keynes); 
secular stagnation (Hansen); structural disequilibrium (Svennilson); and the 
like. The chapter is entitled 'An Explanation' not 'The Explanation'.
The explanation of this book is that the 1929 depression was so wide, so deep 
and so long because the international economic system was rendered unstable by 
British inability and United States unwillingness to assume responsibility for 
stabilizing it in three particulars: (a) maintaining a relatively open market 
for distress goods; (b) providing counter-cyclical long-term lending; and (c) 
discounting in crisis. The shocks to the system from the overproduction of 
certain primary products such as wheat; from the 1927 reduction of interest 
rates in the United States (if it was one); from the halt of lending to Germany 
in 1928; or from the stock-market crash of 1929 were not so great. Shocks of 
similar magnitude had been handled in the stock-market break in the spring of 
1920 and the 1927 recession in the United States. The world economic system was 
unstable unless some country stabilized it, as Britain had done in the 
nineteenth century and up to 1913. In 1929, the British couldn't and the United 
States wouldn't. When every country turned to protect its national private 
interest, the world public interest went down the drain, and with it the private 
interests of all.
Asymmetry
If the world economy behaved symmetrically, there could be no world depression. 
A decline in the price of wheat might produce losses for farmers; it would, 
however, lead to gains in real purchasing power for consumers (shifts in real 
income from groups with different marginal rates of saving are ignored). Gold 
losses for one country would be deflationary, but gains for the recipient 
country would yield offsetting expansion. Contractive exchange appreciation 
would be matched by stimulating depreciation. The stock market could not absorb 
funds, since for every buyer that gives up money, there is a seller that gains 
it.
But symmetry is not the way of the world in all times and places, and not for 
the reason of interference by men with, say, the rules of the gold-standard 
game, or that New York as an international financial centre was inexperienced. 
It happened that in Britain, from 1873 to 1913, foreign lending and domestic 
investment were maintained in continuous counterpoint. Domestic recession 
stimulated foreign lending; boom at home cut it down. But the boom at home 
expanded imports which provided an export stimulus abroad in place of domestic 
investment with borrowed funds. Counter-cyclical lending stabilized the system.
In the 1920s, United States foreign lending was positively correlated with 
domestic investment, not counterpoised. The boom of the 1920s was accompani~d by 
foreign lending; the depression of the 1930s saw the capital flow reversed. In 
his The United States and the World Economy, written in 1943, Hal Lary recorded 
the fundamental fact that the United States cut down on imports and lending at 
the same time. The cut in lending actually preceded the stock-market crash as 
investors were diverted from the boom in foreign bonds which followed the Dawes 
loan to the boom in domestic stocks dating from the spring of 1928. The 
deflationary pressure on Germany may be debated;1 the pressure on the less 
developed countries at the periphery is clear cut.2 As Table 1 (p.56) shows, 
moreover, Britain joined the United States in reducing its lending in 1929 over 
1928.
Maintaining a market for distress goods can be regarded as another form of 
financing. Free trade has two dimensions: (a) to adapt domestic resources to 
changes in productive capacities abroad, and (b) to maintain the import market 
open in periods of stress. The first is more readily done by a rapidly growing 
country which needs to transfer resources out of less productive occupations and 
is willing to embrace the competition of imports. By holding firm to free trade 
during depression at some short-run cost to resources in import-competing lines, 
the second provides a market for surpluses accumulated abroad. Britain clung to 
free trade from 1846 (or some year thereafter, such as 1860, when all tariffs 
but those for revenue had been dismantled) until 1916. After 1873, she was not 
growing rapidly, but continued to adhere to free trade since her declining 
industries were exporters rather than import-competers. Her tenacity in adhering 
to free trade in depression may have been born of cultural lag and the 
free-trade tradition of Adam Smith, rather than of conscious service to the 
world economy.
The contrast is with the Smoot-Hawley Tariff Act of 1930. At the first hint of 
trouble in agriculture, Hoover reached for the Republican household remedy, as 
Schumpeter characterized it, in the face of a recommendation of the World 
Economic Conference of 1927 that nations of the world should adopt a tariff 
truce. The action was important less for its impact on the United States balance 
of payments, or as conduct unbecoming a creditor nation, than for its 
irresponsibility. The congressional rabble enlarged protection from agriculture 
to primary products and manufactures of all kinds, and Hoover, despite more than 
thirty formal protests from other countries and the advice of 1,000 economists, 
signed the Bill into law. This gave rise to (or at least did nothing to stop) a 
headlong stampede to protection and restrictions on imports, each country trying 
to ward off deflationary pressure of imports, and all together ensuring such 
pressure through mutual restriction of exports. As with exchange depreciation to 
raise domestic prices, the gain from one country was a loss for all. With tariff 
retaliation and competitive depreciation, mutual losses were certain. The 
formula of tariff truce and exchange stabilization proposed for the World 
Economic Conference of 1933 offered no positive means of raising prices or 
expanding employment. It would none the less have been significant as a means of 
slowing further decline. With no major country providing a market for distress 
goods, or willing to tolerate appreciation, much less furnish long-term capital 
or discounting facilities to countries suffering from payments difficulties, the 
fallacy of composition with the whole less than the sum of its parts ensured 
that deflation would roll on.
Initial conditions
The lack of leadership in providing discount facilities, anti-cyclical lending 
or an open market for goods rendered the system unstable. So did the heritage of 
war, and especially the combination of reparations, war debts, overvaluation of 
the pound and undervaluation of the French franc. One should perhaps add the 
German inflation of 1923, which made that country paranoid in its subsequent 
attachment to deflation. The structural dislocations of war in excess production 
of wheat, sugar and wool, plus ships, cotton textiles and coal, were of less 
consequence and could have been cared for fairly readily by the price system if 
macroeconomic stability could have been preserved. The financial distortions 
made such stability difficult if not impossible to sustain. A far-seeing 
leadership on the part of the United States might have been willing to waive war 
debts, but it would have been difficult to persuade the American voter of the 
merit of the course, especially when Britain and France were receiving 
reparations. Britain was willing to forego reparations, to the extent that war 
debts were written off - an attitude of limited self-denial - but the suggestion 
that the French could write off reparations, after having paid them in 1871 and 
1819, and after four years of cruel war, is to ask too much from history.
The failure to achieve a system of equilibrium exchange rates must be set down, 
like budget-balancing in government accounts, at the door of economic ignorance. 
In the British case, the urge was to restore the status quo ante; it was aided 
by destabilizing speculation. The selection of an exchange rate for the French 
franc was addressed much more clinically--as it could be, since restoration of 
the old par was out of the question--but too little account was taken of the 
earlier export of capital and the need for an import surplus to transfer it 
inward as it returned to France. This can be regarded as economic ignorance of a 
second order. In combination with war debts and reparations, the disequilibrium 
rates made the underlying position weak. It is interesting, though perhaps idle, 
to contemplate whether the depression could still have been avoided, or 
mitigated by some substantial fraction such as two thirds, if the United States 
had managed to keep open its market, maintain long-term capital flowing and 
provide lending of last resort through discounting in crisis. One great 
difficulty was that while the market for goods might be kept open by vetoing 
congressional tariff proposals, and discounting undertaken through government or 
central-bank action, there was no way in which governments of the day could 
sustain international lending. Foreign loans were made by the market, or largely 
not at all. Lending could be stopped by government fiat, as the Capital Issues 
Committee did from time to time in London; it was impossible for government to 
get the private market to start after it had stopped. And to substitute 
government loans for the market on anything but an emergency-discounting basis 
called for machinery which was virtually non-existent. The Bank of France would 
direct President Luther of the Reichsbank to talk loans with private bankers. 
The Department of State could suggest that foreign governments talk to J. P. 
Morgan & Company. They could not produce loans. Leverage was weak.
British leadership
Not until 1931 was it clear that Britain could not provide the leadership. In 
the early 1920s, there were League of Nations programmes for the stabilization 
of the currencies of Austria and Hungary. These were to a considerable extent 
British in spirit, with help of experts from Scandinavia, the Low Countries and 
the Dominions, such as staffed the League of Nations Economic and Financial 
Section. Later the Dawes and Young Plans to settle German reparations were 
dominated by British experts, with Americans serving as front men to foster the 
British hope of tying reparations to war debts. By 1931, British capacity for 
leadership had gone. In small part it had been dissipated in puerile 
central-bank quarrels between Norman and Moreau, although much of the 
competition for domination over the smaller central banks of Europe was the 
product of Moreau's imagination. (Benjamin Strong tried hard to arbitrate these 
quarrels, and his death in 1928 was a loss for the stability of the system.) 
More significant was the burden of French sterling balances, which inhibited 
Britain as a lender of last resort. In the June 1931 crises, the climax of 
weakness was reached on the second Austrian loan for the Kreditanstalt when 
Norman offered 50 million schillings or $7 million as a loan for one week. At 
the World Economic Conference in 1933, it was clear that Britain had turned away 
from a leading world role, cultivating the Commonwealth and freedom to manage 
sterling, and largely leaving it to the United States to devise a world 
programme.
Lack of United States leadership
Revisionist historians, such as William A. Williams, insist that the United 
States undertook a leading world role under Charles E. Hughes as early as the 
Disarmament Conference of 1922.3  It is difficult or impossible to find support 
for this position in the field of international economics, which supports the 
conventional wisdom of such historians as E. H. Carr, that 'in 1918, world 
leadership was offered, by almost universal consent, to the United States . . . 
[and] was declined'.4 There was interest in the affairs of Europe in New York, 
in the Federal Reserve Bank of New York under Strong and Harrison, in the 
financial community represented by such people as Dwight Morrow, Thomas Lamont 
and Norman Davis. A few non-New Yorkers, such as Charles G. Dawes and Andrew 
Mellon, were brought into international finance and diplomacy. On the whole, 
however, the isolationism expressed by Henry Cabot Lodge in leading the 
rejection of the Versailles Treaty and United States adherence to the League of 
Nations typified the dominant sentiment. The United States was uncertain in its 
international role. It felt that the British were shrewder, more sophisticated, 
more devious in their negotiating tactics, so that the United States came out of 
international conferences losers. Stimson would have been willing to undertake a 
major discounting operation to rescue the Reichsmark in July 1931. Hoover, 
Mellon and (though from New York) Mills were opposed to sending good money after 
bad, as discounting calls for. In 1933, James Warburg, Moley and, presumably, 
Woodin and Roosevelt still resisted sending good money after bad. Proposals for 
embryonic international monetary funds were legion; and even Britain presented 
one officially. They were uniformly turned down with a lecture on how much the 
United States had already lost in unpaid war debts and the Standstill 
Agreement.5 It was not until 1942 that Harry D. White began preparing a world 
plan for discussion at Bretton Wood--together with the plan of Lord Keynes--a 
world plan for limited discounting.
Cooperation
Clarke's conclusion that central-bank cooperation was maintained up to mid 1928 
but failed thereafter has already been dealt with in some detail. In summary, 
such cooperation on matters such as hegemony over small central banks or the 
choice of an equilibrium exchange rate was inadequate before 1926, and the Bank 
of France supported the pound loyally (and expensively) in the late summer of 
1931. A deeper question is whether cooperation as such would have been 
sufficient. In America's Role in the World Economy,6 Alvin Hansen prescribed for 
the United States policies of maintenance of full employment at home and 
cooperation with international efforts at freer trade, restoring capital 
movements, improvement of the world monetary system and so on. With the 
advantage of hindsight, it appears that more than cooperation was provided, viz. 
leadership, and that mere cooperation would not have built the institutions and 
policies of the Organization for Economic Cooperation and Development, Group of 
Ten, Bank for International Settlements, International Monetary Fund, 
International Bank, General Agreement on Tariffs and Trade, etc. As an 
acquaintance on the International Monetary Fund staff put it (admittedly to an 
American), if the United States does not take the leadership, nothing happens. 
Leadership may lack followership, and foolish or even sensible proposals may be 
defeated through lack of support. But the most sensible proposals emanating from 
small countries are valueless if they lack the capacity to carry them out and 
fail to enlist the countries that do. The World Economic Conference of 1933 did 
not lack ideas, as that of 1927 seems to have done. The one country capable of 
leadership was bemused by domestic concerns and stood aside.
One special form of cooperation would have been joint Anglo-American leadership 
in the economic affairs of the world. Economists usually agree that such 
arrangements, whether duopoly or bilateral monopoly, are unstable, and so do 
political scientists. Carr states explicitly that the hope for Pax 
Anglo-Saxonica was romantic and that Pax Americana 'would be an easier 
contingency'.7 Vansittart, referring to the Standstill agreements and the German 
occupation of the Rhineland, wrote a' propos of the World Economic Conference: 
'When action was required two years earlier, the two governments [British and 
American] sheltered behind each other like the British and French governments 
three years later."8 With a duumvirate, a troika, or slightly on to say, 'Better 
that a motor car should be in charge of a poor driver than of two quite 
excellent drivers who are perpetually fighting to gain control of the 
vehicle.'11 The analogy of two excellent drivers fighting for control of the 
wheel may be more graphic than apposite. The instability seems rather to have 
come from the growing weakness of one driver, and the lack of sufficient 
interest in the other. William Adams Brown, Jr, describes the gold standard of 
the period as 'without a focal point', meaning that it had two, but the 
conclusions of his monumental work do not dwell on this critical aspect of the 
world economy.12
Role of the small countries and France
One passenger in the vehicle which did not lack interest was France. And one 
group which lacked responsibility - to discontinue the metaphor, or perhaps they 
should be regarded as passengers in the back seat - consisted of the smaller 
countries: Belgium, the Netherlands, Switzerland and Scandinavia. The smaller 
countries can be disposed of first. They are sometimes blamed, as in Born's 
analysis, for having acted irresponsibly in, say, converting sterling into gold 
in the summer of 1931, or raising tariffs with alacrity after 1930. There is, 
however, no universally accepted standard of behaviour for small countries. On 
one showing, they lack power to affect the outcome of great events and are 
therefore privileged to look after the private national interest rather than 
concern themselves with the public good of stability in the world economy as a 
whole. On a somewhat higher ethical level, the small countries may be held 
Kantian Categorical Imperative, which enjoins them to act only in ways which can 
be generalized.
In such circumstances, of course, they would not have withdrawn credits from 
Austria in the spring of 1931, nor from Germany and Britain in the summer, nor 
from the United States in the autumn. The economist chooses between these 
standards perhaps on the basis of comparative cost. If the Netherlands had known 
the cost of leaving its sterling unconverted into gold, it seems unlikely that 
it would have done so, even at the risk of accelerating the collapse of the 
pound and deepening of the world depression. It may be that such countries as 
Sweden, Canada and New Zealand that set high standards of international conduct 
-in foreign aid, contributions to United Nations peacekeeping missions, etc. - 
do so solely from ethical reasons; or they may choose among occasions to take 
largely the opportunities which are relatively cheap. One may thus note that the 
small countries contributed substantially to the deflation by the speed with 
which they cut imports, depreciated, or converted sterling and dollars into 
gold, but find it hard to blame them for it.13
There is another aspect to the role of small countries: they could offer 
programmes for recovery because they knew that the major cost of programmes 
adopted would fall on other countries. Proposals for an embryonic international 
monetary fund in the Washington discussions preceding the World Economic 
Conference of 1933 were put forward by Poland, Turkey, Belgium, the I.L.O., and 
one was made by Britain, though this latter was quickly withdrawn when the 
United States frowned upon it. Lacking resources to make these schemes 
effective, small countries were reduced to advisory roles without conviction, 
even when the proposals were sound. An essential ingredient of followership is 
to convince the leader that he is the author of the ideas which require the use 
of his resources.
The case of France is different. France sought power in its national interest, 
without adequately taking into account the repercussions of its positions on 
world economic or political stability. Its intransigence in the matter of 
reparations or the attempt to attach political conditions to the second Austrian 
credit of June 1931 or the contemplated German loan of July of that year 
illustrate the position. Hurt in the depreciation of sterling in September, the 
Bank of France, under strong political pressure at home, converted its dollars 
into gold in the private national interest during 1931-2, all the while 
protesting its cooperation and concern for the interest of the United States. 
The rivalry between the Bank of France and the Bank of England over which should 
take over the leadership in restoring independence to central banks and 
stabilization of currencies in Eastern Europe would be pathetic, had it not run 
risks of instability for the system as a whole when the French threatened to 
withdraw balances from London.
Not quite big enough to have responsibility forced on it, nor small enough to 
afford the luxury of irresponsibility, the French position in the inter-war 
period was unenviable. It had the power to act as a destabilizer, but was 
insufficiently powerful to stabilize. 'Great Britain and the United States 
together were the active nucleus that replaced the single centre of pre-war 
days, but the position and policy of France actively affected their mutual as 
well as their joint relations to the outlying countries.'14 In these 
circumstances France could be (and was) blamed for upsetting the system when she 
had no capacity to take it over and run it in the presence of two larger powers, 
one feeble, the other irresponsible.
Public v. private interest
Cynicism suggests that leadership is fully rewarded for its pains in prestige, 
and that no matter how much it protests its commitment to the public welfare, 
its fundamental concern is private. Bismarck insisted that free trade was the 
weapon of the dominant economy anxious to prevent others from following in its 
path. 'The white man's burden' is an expression used today only in mockery. A 
country like France deliberately setting out to achieve prestige suggests that 
those with a concern for problem-solving are either perfidious or 
self-deceiving. None the less there is a difference between accepting and 
declining responsibility for the way the system is run. The British accepted 
responsibility, although, as the 50 million schilling loan emphasizes, they were 
unable to discharge it. The French and the United States were unwilling to 
underwrite stability. Under Coolidge and Hoover, the United States refused to 
commit itself to any programme of foreign reconstruction or currency 
stabilization, leaving these questions to the Federal Reserve System.15 There 
was hardly any improvement in Roosevelt's commitment to the world economy until 
timidly in 1936, at the time of the Tripartite Monetary Pact, and ultimately 
during the Second World War. Inside France, as between France and the other 
leading powers, 'all groups thought their opponents more united and dedicated 
than they were, and a concern for the general interest was virtually absent'.16
Unable to cope with the public good, the British more and more turned their 
energy to the private. Keynes's advocacy of a tariff and the refusal to 
contemplate stabilization after 1931 are examples. One may find a hint or two in 
the documents that the initiative came from the Dominions rather than Britain.17 
For a time, until well after the war, the British economics profession and 
public almost drew the lesson that each country should take care of itself 
without regard to external effects.
The point is illustrated in the memorandum written by Hubert Henderson at the 
British Treasury in 1943, entitled 'International Economic History of the 
Interwar Period'. 18 This summarizes the crude view of the depression as 
resulting from nationalism and tariffs, the collapse of world trade, 
bilateralism and preferences and disregard of the advice of the League of 
Nations, leading to the conclusion that after the war there is need for the 
world to be more resolute in avoiding economic nationalism, and attempting to 
construct a freely working economic system with international credits, the 
reduction of trade barriers and the outlawry of qualitative regulation.19 
Henderson states that the history of the inter-war period provides no support 
for this view. He opposes exchange depreciation: '. . . there can be little 
doubt that the depreciation of the pound was in part responsible for the sharper 
fall in gold prices, and disillusionment is general in the United Kingdom and 
still more in the United States on the power of exchange depreciation to promote 
national recovery' 20
But the conventional view is false in all essential respects. The old 
international order has broken down for good. Nothing but futility and 
frustration can come from the attempt to set it up again. Individual countries 
must he free to regulate their external economies effectively, using control of 
capital movements, quantitative regulation, preferences, autonomous credit 
policies, etc.21
This foot-dragging, which Keynes shared during the 1930s and until late in the 
war, is understandable. It misses the main lesson of the inter-war years, 
however: that for the world economy to be stabilized, there has to be a 
stabilizer, one stabilizer.
Counter-cyclical capital movements
Assume that the United States had not led the way to destroying the trade 
mechanism through the Smoot-Hawley Tariff of 1930, and that a discounting 
mechanism had been available to cope with 1931. There would still have been a 
serious depression, if perhaps not so prolonged, owing to the failure of 
counter-cyclical lending, and the absence of machinery such as the World Bank or 
foreign aid coordinated through the Development Assistance Committee (D.A.C.) of 
the Organization of Economic Cooperation and Development (O.E.C.D.), to replace 
the private market with public funds. It remains puzzling that the foreign 
capital market in New York (and to a much lesser degree in London) started to 
come back in the spring of 1930, after the stock-market crash, and then 
relapsed. There was no panic, and no alarm, but 'people felt the ground giving 
way under their feet'. 22 Arthur Lewis's explanation of the relapse in terms of 
the decline of prices is perhaps not wholly satisfactory, nor is the 
'inexperience' of the New York capital market in international lending. They are 
all that is available. Even with anti-cyclical capital movements, there would 
have been a depression. With a flow of international capital positively 
correlated with business conditions in the lending country, the depression was 
inevitably severe. Add to this position, which was perhaps beyond the power of 
policy to correct in the existing state of knowledge, beggar~thy~neighbour 
tactics in trade and exchange depreciation, plus the unwillingness of the United 
States to serve as a lender of last resort in 1931, and the length and depth of 
the depression are explained.
There is one respect in which United States 'inexperience' in lending might be 
said to be relevant to the pattern of lending. A new lender is likely to behave 
differently from an old lender because of the wider array of investment 
opportunities available to it. Consider a country which has been long engaged in 
international investment. Its foreign loans are likely to follow what may be 
called a 'demand model', in which a given flow of savings is allocated between 
domestic and foreign uses depending upon the relative demands from them. A 
domestic boom diverts foreign loans to the home market. Depression at home and 
expansion abroad stimulates foreign lending. The result is a counter-cyclical 
pattern.
When a country begins lending abroad for the first time, however, there are 
likely to be a host of unfilled opportunities for foreign loans. As savings 
become available, they are invested at home and abroad, simultaneously. The more 
profits at home in boom, the more foreign investment. This is a 'supply model', 
in which foreign lending depends on the availability of savings. Alteration 
between demand and supply models is evident in direct foreign investment. That 
it may apply to lending through foreign bonds is only a hypothesis. It would, 
however, explain why United States lending at the beginning of its career as a 
creditor was positively correlated with the domestic business cycle, whereas in 
Britain, the experienced lender, the pattern had been otherwise.
Relevance to the 1970s
Leadership is a word with negative connotations in the 1970s when participation 
in decision-making is regarded as more aesthetic. Much of the overtones of der 
Furhrer and il Duce remain. But if leadership is thought of as the provision of 
the public good of responsibility, rather than exploitation of followers or the 
private good of prestige, it remains a positive idea. It may one day be possible 
to pool sovereignties to limit the capacity of separate countries to work 
against the general interest; such pooling is virtually attained today in some 
of the functions needed to stabilize the world economic system, such as the 
Basle arrangements for swaps and short-term credits which, pending a world 
central bank, serve as a world rediscounting mechanism in crisis. In this area, 
and in the world agencies for maintaining freer trade and a liberal flow of 
capital and aid, however, leadership is necessary in the absence of delegated 
authority. That of the United States is beginning to slip. It is not yet clear 
that the rising strength of Europe in an enlarged European Economic Community 
will be accompanied by an assertion of leadership in providing a market for 
distress or aggressive goods, in stabilizing the international flow of capital 
or in providing a discount mechanism for crisis. Presumably the Basle 
arrangements for the last will endure. There are indications that the European 
market for goods will remain ample, except in agriculture, which is an important 
exception from a world viewpoint. There is still some distance to go to 
stabilize the flow of capital counter-cyclically.
As the United States economic leadership in the world economy falters, and 
Europe gathers strength, three outcomes are politically stable; three unstable. 
Among the stable outcomes are continued or revived United States leadership, 
after the exchange controls of 1963 to 1968 and the l970-7l wave of 
protectionism have been reversed; an assertion of leadership and assumption of 
responsibility for the stability of the world system by Europe; or an effective 
cession of economic sovereignty to international institutions: a world central 
bank, a world capital market, and an effective General Agreement on Tariffs and 
Trade. The last is the most attractive, but perhaps, because difficult, the 
least likely. As between the first two alternatives, the responsible citizen 
should be content with either, flipping a coin to decide, if the third 
alternative proves unavailable, simply to avoid the undesirable alternatives.
The three outcomes to he avoided because of their instability are: (a) the 
United States and the E.E.C. vying for leadership of the world economy; (b) one 
unable to lead and the other unwilling, as in 1929 to 1933; and (c) each 
retaining a veto over programmes of stability or strengthening of the system 
without seeking to secure positive programmes of its own. The articles of 
agreement of the International Monetary Fund (I.M.F.) were set up to provide the 
United States with a veto over action which it opposed. In the 1969 reform which 
legislated the addition of Special Drawing Rights (S.D.R.s) to the monetary 
system, quotas of I.M.F. were adjusted to provide a veto to the E.E.C. as well. 
This leaves open the possibility of stalemate, as in the United Nations Security 
Council, when two major powers are unable to agree. In the circumstances of the 
Security Council there is a danger of regressive spiral into war; the analogue 
in the economic field is stalemate, and depression.
In these circumstances, the third positive alternative of international 
institutions with real authority and sovereignty is pressing.



1. See Heywood W. Fleisig, 'Long-Term Capital Flows and the Great Depression: 
The Role of the United States, 1927-1933', unpublished dissertation, Yale 
University, 1968, passim, and Peter Temin, 'The Beginning of the Depression in 
Germany', Economic History Review, vol. xxiv, No.2 (May 1971), pp. 240-48. 
Fleisig and Temin argue over the size of the shock to the system. If the system 
is basically unstable, this issue is downgraded in importance.
2. Heywood Fleisig, 'The United States and the World Periphery during the Early 
Years of the Great Depression', forthcoming in Herman van der Wee, ed., The 
Great Depression Revisited, Nyhoff, The Hague, 1972.
3. See, for example, William Appleman Williams, The Tragedy of American 
Diplomacy, World Publishing Co., Cleveland, Ohio, 1959, passim, but esp.Chapter 
IV, 'The Legend of Isolationism'. Mr Williams, a Marxist revisionist historian, 
states (p.123): 'Hoover did not grasp the fact that the depression was a sign of 
stagnation in a corporate economy which was born during the civil war and came 
to maturity in the decade from 1895 to 1905'; and (p.128):  '....from the fall 
of 1932 Roosevelt and Hull stressed the importance of foreign trade for domestic 
revival and expansion and for world wide relief of conditions which caused war 
and revolution'.   It is difficult to see how a historian could ignore such 
evidence as the First Inaugural Address, cited earlier, to be able to make such 
a statement about Roosevelt.
4. Edward Hallett Carr, The Twenty Years' Crisis, 1919-1939: An Introduction to 
the Study of International Relations, Macmillan, London, 1939; 2nd edition, 
1946, p.234.
5. Jørgen Pedersen blames the liquidity crisis of 1931 on the United States for 
its failure to support the German mark, and, when that had been forced to 
suspend gold payments, for its failure to underwrite sterling. See 'Some Notes 
on the Economic Policy of the United States during the Period 1919-]932', in 
Hugo Hegeland, ed., Money, Growth and Methodology, In Honor of Johan Akerman, 
Lund Social Science Studies, Lund, 1961, pp.490-91. This would be agreed today, 
and Professor Pedersen put it forward himself, as noted earlier, in 1933. As he 
himself points out, however (p. 494), the United States was acting with 'the 
normal prejudices of the period'.
6. Alvin Hansen, America's Role in the World Economy, W. W. Norton, New York: 
Allen & Unwin, London, 1945.
7. Carr, The Twenty Years' Crisis, 1919-39, pp.233-4.
8. Lord Vansittart, The Mist Procession, the Autobiography of Lord Vansittari, 
Hutchinson, London, 1958, p.466.
11. Edward Nevin, The Mechanism of Cheap Money: A Study of British Monetary 
Policy, 1931-1939, University of Wales Press, Cardiff, 1955, pp. 9n., 12 and 14.
12. William Adams Brown, Jr, The International Gold Standard Reinterpreted, 
1914-34, National Bureau of Economic Research, New York, 1940, vol.11, p.781: 
'The essential difference between the international gold standard of 1928-29 and 
that of 1914 was that when the world returned to gold after the war it built its 
international financial system around a nucleus of London and New York, and not 
a single center.'  The title of his Chapter 20 is 'The Experiment of a Gold 
Exchange Standard without a Focal Point'.
13. For an interesting political model of countries which are free-riders behind 
the leadership of others, see Norman Froelich and Joe A. Oppenheimer, 'I Get 
Along with a Little Help from My Friends', World Politics, vol.xxiii, No.1 
(October1970), pp.104-20. But note, p.119, that leadership is rewarded in this 
model rather than made to pay for the privilege, as implied where the 
responsibilities of leadership are maintaining an open market for goods, a 
counter-cyclical export of capital and a mechanism for rediscounting in crisis.
14. Brown, The International Gold Standard Reinterpreted, 1914-1934, p. 785.
15. Lester V. Chandler, Benjamin Strong, Central Banker, The Brookings 
Institution, Washington, D.C., 1958, p.255.
16. Alfred Sauvy, Histoire économique de Ia France entre les deux guerres, 1: 
1918-1931, Fayard, Paris, 1965, p.73.
17. See Documents diplomatiques français, 1932-39, ier série (1932-1935), Tome 
III, Imprimerie Nationale, Paris, 1967, #47O, Bonnet to Paul-Boncour, 9 July 
1933, p. 871: 'One fact is evident: it is that Britain is not free. Its 
dominions and in particular Canada whose Prime Minister Bennett is a man of 
extraordinary violence have a predominant influence on her, to the point of 
modifying totally her opinion in the space of a few seconds.'  This is doubtless 
hyperbole.
18.   See Hubert D. Henderson, The Inter-war Years and Other Papers, Clarendon 
Press, Oxford, 1955, pp. 23~95.
19. ibid., pp.236 and 290.
20. ibid., pp.260 and 262; see also p.291:  'Of the various expedients which 
different governments employed in the 1930s, none produced more unfortunate 
results than deliberate exchange depreciation. It was the least helpful to the 
countries which tried it, and the most harmful to other countries.'
21. ibid., p. 293.
22. Joseph A. Sehumpeter, Business Cycles. A Theoretical, Historical and 
Statistical Analysis of the Capitalistic Process, vol.11, McGraw-Hill, New York 
and London, 1939, p.911.