Friday, July 27, 2007

Deep, But Interesting Reading

I just finished Barry Eichengreen's Golden Fetters: The Gold Standard and the Great Depression, 1919 - 1939. I decided to read this book after reading Essays on the Great Depression by Fed Chairman Ben Bernanke (see review on May 3). Chairman Bernanke cited Eichengreen's book several times. With each successive citation I thought to myself "This seems to be an important book. I should look into it." And although I had already begun reading Golden Fetters, I received additional impetus when Chairman Bernanke recommended the book at an employee meeting at the Chicago Fed in June, 2007. I'm glad I read the book.

The book is not one most people would pick up as a "summer read." It is a history about the most significant economic event of the twentieth century. For many it will take a dedicated effort. But Eichengreen provides a great deal to digest to anyone who finds the Great Depression an interesting WORLD event, beyond the shores and borders of the United States.

Eichengreen's main point is that the rush to return to the gold standard by major economic powers at the end of World War I failed to bring the stability that many remembered from the pre-war period and hoped to regain. Unfortunately, the players failed to recognize that the economic environment had changed. Prices and wages had escalated in all the economies with the war. This meant that a return to the prewar standard would call for a return to pre-war wages as well as prices. While many pursued this, it ran afoul of new political and economic realities. Wages had escalated and workers were not willing to give up their nominal and real gains; and governments were not prepared to counter the growing political power of the workers in the shadow of the Russian Revolution.

Eichengreen also points to the lack of cooperation among the economic powers to support the gold standard in other countries. That cooperation had been a significant reason for the success of the standard pre-WWI. The lack of cooperation made it much harder for any nation to attain or maintain the standard in the post war environment.

Finally, the failure of the United States, the largest holder of gold at the outbreak of the Depression, to use that gold to kick start the money supply and economic activity is interesting. Only when the U.S. goes off the gold standard does it begin to see what I would call significant economic expansion - and this matches the experience of many other countries. Those that go off gold first, recover first - those that wait until the end, recover last. And by that time, the winds of World War II are beginning to blow, creating yet another economic environment.

I would recommend this book to any teacher who would better understand this important era in U.S. and world history. It may be a challenge, but the insights are valuable.

I look forward to your comments.

Posted by TSchilling at July 27, 2007 11:06 AM

Reading your blog entry on Eichengreen's book gave me an idea--an active learning lesson on the Gold Standard could be an excellent tool for high school teachers. I don't think anyone has ever done that before. It would be interesting if the activities in the lesson could simulate the difficulties of getting back to a worldwide gold standard in the presence of significant macroeconomic and international shocks.

Posted by: Andrew H. at August 1, 2007 10:20 AM

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