high unemployment throughout the 1920s after leaving gold in 1931 it was one of

High unemployment throughout the 1920s after leaving

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high unemployment throughout the 1920's; after leaving gold in 1931, it was one of the first countries to recover. The biggest prob- lems of food and raw materials exporters were falling prices and the drying up of overseas markets. Thus we need not look to the domestic financial system as an im- portant cause in every case. 2) The countries in which banking crises occurred (the United States, Germany, Austria, Hungary, and others) were among the worst hit by the depression. Moreover, these countries held a large share of world trade and output. The United States alone accounted for almost half of world industrial output in 1925-29, and its imports of basic raw materials and foodstuffs in 1927-28 made up almost 40 percent of the trade in these commodities.37 The reduction of im- ports as these economies weakened exerted downward pressure on trading partners. 3) There were interesting parallels be- tween the troubles of the domestic financial system and those of the international system. One of the Federal Reserve's proudest accomplishments had been the establish- ment, during the 1920's, of an international gold-exchange standard. Unfortunately, like domestic banking, the gold-exchange stan- dard had the instability of a fractional- reserve system. International reserves included not only gold but also foreign cur- rencies, notably the dollar and the pound; for countries other than the United States and the United Kingdom, foreign exchange was 35 percent of total reserves. In 1931, the expectations that the interna- tional financial system would collapse be- came self-fulfilling. A general attempt to convert currencies into gold drove one cur- rency after another off the gold-exchange standard. Restrictions on the movement of capital or gold were widely imposed. By 1932, only the United States and a small number of other countries remained on gold. As the fall of the gold standard parallelled domestic bank failures, the domestic in- solvency problem had an international ana- logue as well. Largely due to fixed exchange rates, the deflation of prices was worldwide. Countries with large nominal debts, notably agricultural exporters (the case of Canada has been mentioned), became unable to pay. Foreign bond values in the United States were extremely depressed. 36U.S. Department of Commerce (1975), N278 and N283. 37U.S. Department of Commerce (1947), pp. 29-31. This content downloaded from on Wed, 17 May 2017 02:12:24 UTC All use subject to
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VOL. 73 NO. 3 BERNANKE: GREAT DEPRESSION 275 As in the domestic economy, these prob- lems disrupted the worldwide mechanism of credit. International capital flows were re- duced to a trickle. This represented a serious problem for many countries. To summarize these observations: the fact that the Great Depression hit countries which did not have banking crises does not pre- clude the possibility that banking and debt problems were important in the United States (or, for that matter, that countries with strong banks had problems with debtor insolvency).
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