Exchange rate regimes and economic recovery in the 1930s

INTRODUCTION The 1930s witnessed a number of major policy shifts: the government devalued sterling in September 1931 and replaced the high interest rate policy of the 1920s with a ‘cheap money’ policy between 1932 and 1939; the protection of the manufacturing sector was extended significantly in 1932 breaking away from a long tradition of unilateral free trade; the international payments system was transformed from a fixed exchange rate regime between 1925 and 1931 to a managed exchange rate after devaluation. This chapter focuses on the effects of exchange rate policy on economic performance during the 1930s. However, it should be noted that the occurrence of a number of policy changes at a similar point in time makes it extremely difficult to distinguish individual policy impacts. In this chapter the experience of the UK is analysed using the comparative approach developed by Choudri and Kochin (1980) and Eichengreen and Sachs (1985). During this period the world economy can usefully be divided into at least two groups of countries: those that devalued and came off gold in the early 1930s, such as the UK, and the ‘gold bloc’, a group of countries that remained committed to the fixed gold parity they had established in the 1920s. The major countries in this latter group included Belgium, France, Italy, the Netherlands and Switzerland. The cross-sectional differences in the economic performance of these exchange rate policy zones provide interesting insights into the effects of devaluation and the propagation mechanisms by which these came about.