Anthony Gokianluy

PLSC 20716 Memo 4

The role of interest groups in the debate over the gold standard reveals how politics influences economic and monetary policy throughout the interwar years. Economic arguments dominated the discussion over the institution of the gold standard for national governments, but domestic political and social factors still had a major effect in influencing policy decisions. It is also the case that the interests of many political and social groups, such as labor, often clashed with the goals of national groups that included politicians and bankers on the gold standard. The ideas of political theorists on the factors shaping economic policy build on each other: Gourevitch identifies that association among social groups can lead to changes in economic regulatory policies, while Simmons adds that domestic politics and class shifts can determine which economic policies are eventually implemented. Eichengreen and Temin observe that most economic change is hindered by the preferences of those in power. A groups situation can reflect its policy preferences, especially in the post-First World War economic recovery period. Monetary expansion during the First World War led to inflation, which was addressed by European governments through reduced government services and lowered production costs in a move to restore the gold standard. The deflationary actions hurt the worker by significantly lowering wages and producing unemployment. However, the growth of trade unionism and collaboration amongst labor groups in opposition to the deflationary policy helped slow the downward wage adjustments (Eichengreen & Temin, p.192). Gourevitch also writes that the pattern of alliances and interactions among social actors can shape key economic policies (Gourevitch, p.97). He gives the example of late 19th century Britain, that after many years of free trade, the opposition from the metal producers and grain farmers over economic liberalism of the finance-shipping-insurance grouping led to a resurgence of sympathy for protectionism (Gourevitch, p.97). Policy influences by various groups also highlight the political struggle between national governments and labor. Governments that relied on the political support of working-class constituencies were more likely to expand the money supply and protect employment (Simmons, p.48). The orientation of the government determined how well it could relate to various interest groups, left-leaning governments such as that of Britain tended not to raise taxes or cut financial support to the unemployed. While the orientation of the government is important when considering the interests of domestic groups, the policy preferences of the worker in this period of time generally went against that of their national governments, especially if the ruling parties were center-right. Most national governments upheld the gold standard for its ability to stabilize exchange rates and encourage foreign investment, but what made the transition from the gold standard difficult in the interwar economic crises was that the mentality of the gold standard was integral to the ideology of those segments of society that controlled economic policies (Eichengreen & Temin, p.185), particularly the banks. In 1930s America, the economic and monetary preferential treatment was clear, so long as Hoover remained in office, the investing classes would shape policy (Eichengreen & Temin, p.205). With the gold standard, Central banks were also able to restrain and control the money supply. Given the stubbornness of national governments to deviate from the gold standard despite its ineffectiveness in the economic circumstances, public and interest groups forced changes in economic policy by removing the ruling parties from power[Economic] recovery began when mass politics in its various guises removed [the ruling party] from office (Eichengreen & Temin, p.185). Simmons presents a similar understanding in relation to class and party shifts, as the Left gains representation in governance, we might expect a reduction in tariff barriers (Simmons, p.50). Ultimately, political will by various national groups including the government shaped the choice of policies in different countries. Domestic political conditions and constraints (Simmons, p.7) can help us understand what factors affected macroeconomic preferences for or against the gold standard in the interwar years.

Anthony Gokianluy

PLSC 20716 Memo 4

German voters transformed the Nazis from a fringe party to a presence in the Reichstag in the 1930 election (Eichengreen & Temin, p.204) in a move against traditional politics. Political power over monetary policy was not only political groups, but also wealthy individuals like Henry Ford, who influenced the US President Hoover to maintain purchasing power and implement a high-wage policy (Eichengreen & Temin, p.197). The policy was successful until the onset of the Great Depression where the demand for labor fell but wages remained high, producing pockets of unemployment. Preferences of various groups played a considerable role in explaining the choice of policies in different countries (Gourevitch, p.103) inconceivable that macroeconomic preferences could not be understood without reference to domestic political conditions (Simmons, p.7) domestic political constraints Domestic politics determined state monetary policy at an international level. conservative polities with independent monetary institutions tended to maintain currency stability but threw up protective barriers to trade (Simmons, p.4). The norms of the gold standard were highly conditioned in some cases not only by structural features of a countrys domestic economy and its relationship to the international economic system, but also by the domestic political constraints and preferences based on political objectives (Simmons, p.18). as the Left gains representation in governance, we might expect a reduction in tariff barriers (Simmons, p.50) between 1879-1914 classes perceptible shift in the balance of power between classes that eventually changed the institutional and philosophical supports of externally oriented monetary policies (Simmons, p.22) Though patterns varied across countries, workers undeniably had an unprecedented voice in governance following World War Iincreased political representation was accompanied by a revolution in labor organization and industrial action (Simmons, p.25). Keynes observed in 1922 that the choice between inflation or deflation comes down to an agonizing outcome of a struggle among interest groups (Simmons, p.28) Contemporaries found it impossible to break out of the established mindset even when this radical change in circumstances rendered ineffectual the application of conventional remedies (Eichengreen & Temin, p.184) Governments with working-class constituencies may be perceived as being less willing to deflate and more likely to expand the money supply to protect employment than governments of the center-right (Simmons, p.48)

Discussion Questions:

Anthony Gokianluy

PLSC 20716 Memo 4

1) In an economic crisis such as the Great Depression, would you prefer to lower wages and production costs (deflationary policy) or preserve the purchasing power of consumers (High-Wage Policy) to stimulate demand? What would the consequences of the policy you chose be and how would other external factors influence your decision? 2) To what extent do you believe that political and social factors, as opposed to economic factors or rationales, in the interwar years influenced the variations in the commitment to the gold standard among countries (Simmons, p.50)? 3) If governments abandoned the gold standard, which supported a stable exchange rate and encouraged unprecedented levels of foreign investment (Eichengreen & Temin, p.187), would the Great Depression have been as bad or as widespread?