Economic history · The Great Depression
Seven steps, about ten minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Every large economy promised to exchange its money for gold at a fixed price. The promise forced countries losing gold to cut back, and recovery began where the promise was broken.
Britain stopped exchanging pounds for gold in September 1931, and the British recovery began in early 1932. It was an early recovery and not a full one: unemployment among insured workers started at 21.9 per cent and was still in double figures six years later.
The world stopped trading as well. America raised its import taxes in June 1930, Britain ended a century of free trade in February 1932, and world trade fell by about a third. The American tariff itself was far smaller than its reputation.
Seven steps cover Britain's head start, what it was worth, the tariffs, the trade collapse, and how much of the blame the tariff can carry.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 7
A pound note used to be a promise: bring it to the Bank and take gold for it. One September the promise stopped.
Britain stopped exchanging pounds for gold in September 1931, and it was the first large economy to do it.
Sixteen countries left the or cut the value of their money during 1931.
The pound then fell by around 20 per cent.
Britain no longer had to hold the pound at the gold price, and that changed what the government was free to do.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
Britain left the gold standard in September 1931. What could the government then do that it could not do before?
For scale. Sixteen countries left gold or cut the value of their money during 1931.
Britain's recovery began in early 1932, a few months after the suspension.
Because it cuts the price of British goods abroad without anybody cutting a wage. A machine priced at 100 pounds costs a foreign buyer less once the pound is worth less in his currency, so he buys more of them. The fall in the pound allowed exports to rise, and rising exports lifted production and employment at home.
British goods cost less abroad once the pound was cheaper, and no wage had to be cut for that to happen, so foreign buyers bought more of them.
The fall in the pound allowed exports to rise, and the rise in exports then lifted production and employment.
Britain left gold before any other large economy and recovered before them, and the same pattern held in every country that left early.
The pound is worth less against other currencies, and a British machine still carries the same price in pounds. What does a German buyer find when he goes to buy it?
For scale. The pound fell by around 20 per cent after Britain left gold.
British among insured workers stood at 21.9 per cent in 1931.
Britain counted insured workers, meaning the people covered by the state unemployment scheme, rather than every person who wanted a job.
The share of all British adults in work fell to 61 per cent in 1932, the lowest in the whole record. That is a different measure: it counts adults in work, not insured workers out of work.
Britain got an earlier recovery and not a full one, and the figure was still in double digits six years later.
British unemployment was 21.9 per cent in 1931. Where was it by 1937, six years into the recovery?
For scale. The share of British adults in work hit its lowest recorded level, 61 per cent, in 1932.
America raised its taxes on goods coming in from abroad on 17 June 1930, when President Hoover signed the Smoot-Hawley Act.
The Act added about two and a half in every hundred to the American , already high under the Fordney-McCumber Tariff of 1922.
Other countries answered with taxes of their own on American goods.
Smoot-Hawley is the most famous economic mistake of the twentieth century, and how big a mistake it was is the argument this part ends on.
An American shop sells a German machine and an American one side by side. What does Smoot-Hawley do to the German price, and what do buyers do next?
For scale. Hoover signed the Act on 17 June 1930.
Britain put a 10 per cent tax on manufactured goods coming in from abroad in February 1932.
The Import Duties Act brought to an end a long British commitment to free trade.
Britain and the dominions, the self-governing countries of the British Empire, agreed lower taxes on each other's goods at Ottawa in the summer of 1932.
Britain ended a century of free trade in six months, and steered the trade that survived towards the Empire.
Put these four in the order they happened.
For scale. The Import Duties Act taxed manufactured imports at 10 per cent.
World trade collapsed between 1929 and 1932, and the two institutions that measure it do not agree on how far.
It depends which third. Trade can be counted by the amount of goods moved, which is called volume, or by what those goods were worth in money. Prices were falling hard in these years, so the money figure falls much further than the goods figure. The World Trade Organization gives the fall between 1929 and 1932 as 60 per cent in money, and the International Monetary Fund counts the goods instead. Both describe the same collapse.
Trade can be counted by the amount of goods moved, called volume, or by what those goods were worth in money.
The World Trade Organization puts the fall at 60 per cent in money terms, and the counts goods instead.
The money figure and the goods figure describe the same collapse and are not the same number.
Counting the amount of goods moved rather than what they were worth, roughly how far did world trade fall between 1929 and 1932?
For scale. In money terms the World Trade Organization puts the fall at 60 per cent.
It is 1933, and world trade has fallen since 1929 by somewhere between a quarter and nearly a third, depending on which body counts it.
Smoot-Hawley was signed in June 1930 and other countries answered with taxes of their own, so the tariff is the obvious thing to blame.
The Economic History Association measures it and gets a small number: the average import tax rose by about two and a half in every hundred. The International Monetary Fund puts about half the fall in trade down to taxes of this kind.
You are weighing the causes in 1933. How much of the collapse does the American tariff explain?
Most of the measured evidence points at the third answer. The tariff raised average American import taxes by about two and a half in every hundred, and the whole fall in American real exports came to about 1.7 per cent of the 1929 economy.
Where the argument standsThe American economy itself fell about 16.5 per cent between 1929 and 1931, roughly ten times the fall in exports. About half the fall in the volume of world trade is still put down to trade barriers, so the tariff is not nothing. The tariff is far smaller than its reputation.
Smoot-Hawley remains the most famous economic mistake of the twentieth century. The answering taxes are easily made to look bigger than they were.
Module 4 of 7 in The Great Depression
Britain leaves gold
September 1931, first of the large economiesWhen the recovery started
early 1932, about four months laterBritish , 1931 and 1937
21.9%, then 10.7%America raises import taxes
17 June 1930Britain ends free trade
February 1932, 10% on manufacturesWorld trade, 1929 to 1932
down about a third by volumeWhat Smoot-Hawley added to import taxes
about two and a half in every hundredYou met four terms in this module
, , ,
Britain was out of the worst of it by early 1932. The next part is who carried the cost.
[1] When Britain's recovery began: Bank of England Quarterly Bulletin 2010 Q4, The UK recession in context: what do three centuries of data tell us?. "Economic recovery only came early in 1932 following the suspension of the gold standard in the United Kingdom in late 1931. This made possible a reduction in interest rates in 1932 (after an initial increase to 6% designed to reassure financial markets) and a depreciation of the exchange rate of around 20%." The Bank also records that the 1930s fall in Britain was milder than the falls in the United States and Germany.
[2] What happened to British unemployment: House of Commons Library, Unemployment and changes of government. "under the 1931-37 National Government the rate fell from 21.9% to 10.7%". The figures count insured workers, which is the measure Britain kept at the time. The article's later figure of 7.9% belongs to the government that followed and is not run together with these.
[3] How many people were in work: Office for National Statistics, Long-term trends in UK employment: 1861 to 2018. The UK employment rate fell to 61% in 1932, the lowest in the whole series, against an average of about 64% between the wars. The Office for National Statistics has no quarterly figures for the British economy before 1955, which is why so few British 1930s numbers can be sourced to it.
[4] What the American tariff did: Economic History Association, Anthony O'Brien, Smoot-Hawley Tariff. Hoover "signed the Smoot-Hawley bill into law on June 17, 1930". "By this measure, Smoot-Hawley raised average tariff rates by about 2 1/2 percentage points from the already high rates prevailing under the Fordney-McCumber Tariff of 1922." "Between 1929 and 1931, real exports declined by an amount equal to about 1.7% of 1929 real GDP", against real GDP declining "by about 16.5% between 1929 and 1931". The entry's own headings include "Did Retaliation Take Place?" and it warns that "it is possible to overstate the extent of retaliation".
[5] How much of the trade collapse was policy: International Monetary Fund, Finance & Development, Douglas Irwin, Esprit de Currency. "higher trade barriers accounted for about half of the 25 percent decline in the volume of global trade between 1929 and 1932." The other half is put down to falling incomes. The World Trade Organization gives the fall as nearly one third in real terms over the same years, which is why no single figure is printed as the answer.
[6] How Britain gave up free trade: The National Archives, Cabinet Papers, Protectionism and imperial preference. "The enactment of the Import Duties Act in February 1932 inaugurated protectionism in Britain, bringing to end a long period of commitment to free trade. The Act placed a 10 per cent tariff on manufactured imports." The Ottawa conference of July and August 1932 exchanged preferential concessions between Britain and the dominions. The same source records that devaluation of the pound enabled an increase in exports, which then stimulated production and employment.
[7] Who left gold, and when: World Trade Organization, World Trade Report 2007. "Sixteen countries devalued or left the gold standard in the course of 1931." Britain 21 September 1931, the United States 20 April 1933. The report also gives the fall in world trade as 60 per cent in dollar terms and nearly one third in real terms between 1929 and 1932.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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