1 00:00:00,016 --> 00:00:03,136 [BLANK_AUDIO] Hi, welcome back.

This week, we're going to talk about the world crisis of the 1930s. It starts with a terrific shock to modern capitalism and collective security. You know, when you're at a loss to figure out what's going on some place around the world, starting with analyzing guns and money is a pretty [LAUGH] good rough and ready place to look. Here let's reverse the order and start with money and then go to guns. Modern capitalism, we've talked about it in this Course, is really a creature of the late 1800s. Standardized money built around the gold standard, modern corporations. Let's get into the gold standard issue. Now, I hope for some of you when I talk about the gold standard, your brain is telling you it s time to take a nap. But, it's actually kind of interesting, if you'll take a minute on this. Because you all kind of know that demand, and demand is just a fancy word for how much we can buy, but the amount of stuff people can buy is linked somehow to economic growth. More people are buying stuff, the more they're making stuff, all that. I know for those of you who have taken advanced economics this may seem a little too basic, but there is a little bit of a payoff here. The amount of demand is clearly linked, to the amount of money available. And that money can be supplied, you know, by private sector, public sector, but there is some relationship between how much stuff people can buy and the amount of money that's available. So, if you have a gold standard system, that means the amount of gold is somehow linked to the amount of money available. If the amount of gold is fixed, demand somehow becomes anchored by that. Now the good part of that is that means the money is hard, it feels really stable, very stable value, very stable exchange rates.

The bad side of that is if you're increasing production a lot then demand has trouble keeping pace unless people are digging a lot more gold out of the ground. Now, I've simplified it, because people are creating paper instruments to try to multiply the value of gold in different ways. More technically the gold standard was called the gold exchange standard. There is both gold and paper. But, it is useful to kind of think about It, as a start in these, fairly simple ways. Because one of the arguments about the causes of the Great Depression of the late 20s and early 1930s, is that these, this gold standard wasn't just an anchor. They were, as the economic historian Barry Eichengreen famously put it, golden fetters. Chaining the world economy, keeping it from getting economic growth. Here are the countries on the gold standard during the period we are looking at. If you kind of think about what are the engines of the world economy? Britain is in gold in 1929. So is the United States, France, Germany. China, by the way, still uses silver, its traditional mineral of value, as the basis for its monetary system. So everybody is using gold. Now, one of the things about the gold standard is: Since the amount of money you have is based on the amount of gold, what happens if all the gold is running out your country? What are you supposed to do as your people are buying more stuff than they're bringing in? Well, if your people are buying more stuff than they're bringing in, you've got to attract more gold to your country, so you hike up interest rates. So that if someone puts more money in your country they earn more from doing that. But hiking up interest rates, as you know, makes it harder for people to buy stuff, but it does attract more gold. So that's the way the system was supposed to rectify itself: like, you're buying too much. We'll hike up interest rates.

We'll attract more gold. You'll buy less stuff. You'll get back in balance. That's kind of the theory of it. The point for our purposes is by the late 1920s most of the key countries are back on gold after the disruption of the First World War. The big economies though are not in such terrific shape. They really are, in a way, still recovering from the First World War. Germany is rebuilding its economy. There are intense arguments over the reparations the Germans are being asked to pay to make good for the damage the Germans caused in places like France. They're supposed to pay huge amounts of money. Frankly, as the Germans had asked the French to do after the Franco-Prussian War. The Germans bitterly resist, and then one way of resisting is, well, we'll just print a bunch of money and make our money worthless. They go into a period of hyperinflation, where their money becomes worthless. Germany is an economic mess in the early 20s. But here we are, late 1920s, remember my last talk, people are trying to patch things up and get things back together again, partly with U.S. credit. Mid to late 1920s, Germany has got a new currency; it's being backed a lot by U.S. loans. So crudely put: what's happening is a kind of hydraulic system in which U.S. loans, private loans go to, say, the Germans. Who then can use that to pay reparations money to the British and the French or otherwise pay back loans from them. Then the British and the French can use that money to pay back the huge loans they still owe the United States from World War I, when the United States was doing so much to finance the war, especially during about the last year and a half. So that's kind of the hydraulic loop that is sustaining this economic recovery and the health of a financial system that's spreading

money out to economies in Eastern Europe, for example, or South America for a few years during the 1920s. But they're all still struggling. The German economy is just barely back on its feet. The British economy has re-stabilized its currency, but it's struggling with very significant labor unrest in the mid-1920s, trying to motor up again. The United States had a boon during World War I, when it was supplying all this stuff to the Allied powers. Right after the war ended, the U.S. had a sharp recession that triggered a lot of that labor-management disputes that you were reading about in years like 1919. Economic times were really hard in 1919, 1920. U.S. is coming out of that. Now, actually, U.S. agriculture, which is still a big part of the economy in the 1920s, is not really coming out of it very well. U.S. agriculture is limping along all through the 1920s. But U.S. industry is going, going, going. People are loaning and borrowing a lot of money. One reason is because, all of a sudden, industry has access to all kinds of new money. Why? There's a thing called a stock market. Now, public investment in stocks is a pretty new thing. In a way, it's another thing that World War I taught people to do. All through World War I, the governments went around asking their publics to loan them money. The publics loaned them money to fight the war in the form of War Bonds. But after the war was over people had gotten used to, for the first time really on a mass scale, millions of people buying securities that they would hold instead of just cash in the bank. Now here are these stocks, securities in corporations. Corporations that are rocketing along, changing value year to year, like in radio. People were throwing money into that stock market. The companies with all that money were growing fast.

Their stock values are rising. People investing more. People borrowing to invest more. So the Americans look like they're having a lot of economic growth, alongside their sputtering agricultural economy, but a lot of this is becoming an investment bubble. The investment bubble in the United States pops in 1929. Here is a basic chart showing you what happened in the October crash. Many of you have already seen images like this, newspaper headline from October 1929, speaks for itself. Lines of people gathered outside of a bank. Of course, banks mostly put their money out on the streets to borrowers. People are worried about whether the banks are still safe. They're crowding around to try to get their money out. But here's one of the main points I want to make. The 1929 crash did not cause the Great Depression. The Great Depression happens in a couple of stages. Economies are already sputtering in 27 and 28; it's masked a little bit by some of the bubble. Then the bubble pops in 1929. Economies reset 1929, 1930; they go down, but they're still rocking along a little bit, even bumping up a little bit in 1930. Take a look at this chart. You can see how in the beginning of 1930 stocks are beginning to come back up again, though they're beginning to slump later in the year. It's important to think of the Great Depression as something that happens in two main stages. First, there is the financial crisis in the United States in 1929, but then as folks think they're recovering, there is another financial panic. But this one originates in Europe, and it's in 1931. And it's the second panic and the response to that coming on top of the first, that's what sends it over the cliff. And that panic has its roots in European politics as much as in general economics.

So in a way, if we're looking at the question: Why the worldwide Great Depression? Yes, the 1929 crash figures in that. But what we really want to look at is: What choices did the people make after the bubble popped in October 1929 in the United States? First, they made choices about liquidation. What liquidation meant in 1930 is kind of like the word we use today: deleveraging. It meant clear up your debts by selling stuff and getting the cash. Put yourself back into cash. That was the conventional wisdom of the day. But, if the conventional wisdom of the day is you need to get out of the stock market, get back into cash, you're going to stop buying stuff. And you're going to hold onto your money. Those political choices are all over the place. Governments balancing the books. Individuals balancing the books. Demand is going down, both public and private. Now economic historians today argue about what government should have done to offset that declining demand. Some would say, there should have been a lot of public spending. But, our thinking wasn't modern enough then for that. And besides, people were afraid to spend more money because they thought that would undermine the value of their currency and the gold standard. The other argument is you could pump more private money in. But central banks back then thought that they needed to adopt a more careful policy about printing money because otherwise the gold would run away to places where people weren't printing paper money. Then they'd have to raise interest rates to pull the gold back. Which would curb their domestic demand. So the answer is that you don't expand your money supply in this gold standard system. Gold standard again. Then the argument would be, though, well, yes, but was that a structural problem? Did it have to be that way or could you've

managed that problem through cooperatively resetting your exchange standards in relation to gold, so that several countries could, working together, have increased their money supply without playing beggar thy neighbor against each other? But then that would require international cooperation. But what that implies is: the problem here is not just structural. You have a gold standard. If only we didn't have the gold standard, no problem. The problem is significantly political. The political inability to cooperate in solving the problem, whether through monetary policies or trade policies or other things. So, in addition to the domestic politics of liquidation, there's another big factor we need to look at: the international politics surrounding debt and trade. Remember that hydraulic chain that I talked about, U.S. loans to Germany, Germany then paying back money to the British and the French. But after the financial crisis of 1929, the U.S. isn't loaning so much money to the Germans or other Europeans. So the Germans have less money, therefore the British and French have less, and so on. So how did the British, French, Germans work out this financial challenge they face in 1930, 1931, especially since their loans are helping to hold up banks in a lot of Eastern Europe too, like Austria, Hungary? There the politics of the relationships, especially between the French and the Germans, poison the prospects for financial cooperation, as well. The French can't really help out the Germans, because the Germans are trying to beat the French out of having to pay any more reparations. They can't come to a settlement of this issue. The result is no financial cooperation to solve these problems. The political causes of these disagreements freeze up financial markets in Western Europe. The result being, then, when there's a run on an Austrian bank in 1931, the Austrian

bank goes belly up. And then when Austrian banks go belly up, no one knows where it'll stop. Now you have a huge financial crisis in Europe. The result is this: 1931 - Great Britain announces suspension of the gold standard. The country that's the anchor of the gold standard, more than any other in the whole world, the anchor indeed of a commitment even to free trade, has gone off the gold standard. We're just going to print our own money, guys, and we'll work out how to exchange it. So remember this chart about the Dow Jones industrial average. Remember that in the middle of 1930, it's gone down to about here? But that's actually about the level it was even in October of 1928, not so terrible. But by the end of 1932, the Dow Jones Industrial Average will be about here. That's what's happening when the other shoe drops in 1931 and the aftermath. So modern capitalism is in huge trouble. Let's see what's happening with the systems for collective security. The early 1930s don't make a whole lot of sense, unless you understand that the reactions to World War I are still reverberating, especially in countries like Britain, France, and United States. A deepening horror and revulsion about what happened in the trenches. Culturally, nothing better symbolizes this trend than the worldwide acclaim for this book, by a German named Erich Maria Remarque. Here's Mr. Remarque. And this is his book. The cover you're seeing is the first English edition of All Quiet on the Western Front, the story of a young, innocent German patriot, who volunteers for service, chronicling his war experiences. It really is a moving novel and authentically told. It gripped a huge worldwide audience with its powerful message about hypocrisies of patriotic rhetoric,

the futility of the war, the essential solidarity of the fighting men on both sides, who were really common victims. The book was made into a movie. The movie won the Academy Award for best picture of the year in 1930, I think. And by the way still has some of the most realistic cinematic images of World War I you can find on film because back then they were able to film using veterans and a lot of people who actually remembered what stuff looked like. One interesting footnote: the book is not quite as popular in Germany as it is elsewhere. It's competing with other books by German veterans like Ernst Jnger, who wrote books like Storm of Steel, actually celebrating the wartime experience as a period of personal trial, heroism, comradeship. Another challenge confronting the great powers like Britain and France in the early 1930s was a sense of imperial weariness. Finances were tight. The empires were not hugely profitable; if anything, they were probably a net financial burden. So instead of an issue of expanding their empires, they're looking more at how to beat a slow and dignified defensive retreat. For instance, this is an image from the roundtable conference between the British government and representatives of political factions in India. This particular roundtable conference, one of a series, was held in London in 1931. You can probably make out the distinctive figure of Mahatma Gandhi, seated at the table here. One of the things I liked about this Photograph: You see how almost everyone in the room is looking up at the photographer, but Gandhi doesn't bother. What are they discussing? They're discussing the terms of Indian self-government. This is a British Labour government that's inclined to try to

retreat, at least to some degree, from the burdens of empire. They're talking to Indians about: If we begin to retreat and give you self-government, what will that self-government look like? The British are trying to negotiate an arrangement and what powers Britain retains, what powers the Indians have. And if the Indians have power, who are the Indians? Who will rule? The princes and their domains? The Indian National Congress? Hindu nationalist movements, Muslim nationalist movements? And so on. Even the issue of how the lower castes of Hindu society, the so called untouchables, represented here by a man named Ambedkar, even those issues are coming up. Would the untouchables have a right to vote in the new India with its self-government? With these issues on the table, the roundtable conference ends in failure. Britain can't yet find a way to work its way out of these burdens. In the meantime, the Indian National Congress and its allies decide that their agenda is going to become one of complete independence. Here's the tricolor flag actually that India arrives at as it's national symbol in 1930 and 1931. The emblem in the foreground is actually a symbolized representation of the spinning wheel: homemade textiles, instead of clothes made in the mills of British Manchester. Meanwhile, do you remember how the agenda of disarmament had been kind of the issue the League of Nations was really working on? There had been some important naval disarmament in the 1920s, and I told you that late in the 1920s they're working on how to reduce armies. Turns out to be much harder. In fact, so hard that by the beginning of the 1930s, the disarmament agenda is falling apart. There's going to be a final world disarmament conference in 1933. It'll come to a complete failure. And, as if that were not enough, there are clear crises and challenges to collective security taking place in the Far East, led by Japan.

I'll come back to those next time. See you then.