Protectionism and the Gold Standard

“The Great Depression was a breeding ground for protectionism. Output fell, prices declined, and unemployment rose, pressuring governments to do something to revive their economies, even if that meant limiting imports. But contrary to popular perception, some countries went much further down this protectionist road than others, according to a [study by Barry Eichengreen and Douglas Irwin. The authors] conclude that a key factor behind this variation in trade policies was nations' adherence to the gold standard. Those countries that clung to the gold standard were more likely to restrict trade than those that abandoned it.

Previous research has shown that countries that remained on the gold standard tended to endure sharper and longer downturns than those that allowed their currencies to depreciate. Eichengreen and Irwin offer an important trade-policy corollary: without the flexibility to depreciate their currencies, many gold-standard nations turned to trade restrictions in hopes that these would boost their domestic industries and curb unemployment. Thus, the 1930s' rush to protectionism was not so much a triumph of special-interest politics as it was a result of second-best macroeconomic policies, the authors write. Their study "suggests that had more countries been willing to abandon the gold standard and use monetary policy to counter the slump, fewer would have been driven to impose trade restrictions."”

Laurent Belsie, “The Roots of Protectionism in the Great Depression”, National Bureau of Economic Research Reporter (26 October 2009).

http://www.nber.org/digest/oct09/w15142.html


Laurent Belsie has worked for the Christian Science Monitor for 28 years. He now runs the Monitor's “Rebuilding the Economy” section, blogs about the economy, and writes for the National Bureau of Economic Research. Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. Douglas Irwin is Robert E. Maxwell Professor of Arts and Sciences in the Department of Economics at Dartmouth College.


The conclusion of Eichengreen and Irwin’s study is that the more flexible exchange rate systems and macroeconomic policy measures employed today limit the appeal of protectionism, and in doing so allow modern economies more flexibility to adapt and adjust to changes than the fixed exchange rate gold standard of the pre-World War II era permitted. For this reason, protectionist tendencies, while still with us (e.g., the “Buy America” provisions of the 2009 Federal stimulus package), are weaker today than during the years before 1932 when the gold standard was the prevailing exchange rate system underlying the world economy.