Gold standard and gold-standard mentality in Switzerland 1929-1936 Elisabeth Allgoewer May 2003 Outline Contents................................................................. ii Tables................................................................... v Figures.................................................................. v 1. Introduction .......................................................... 1 2. Macroeconomic developments.......................................... 20 3. The dominance of orthodox arguments in the economic policy debate up to 1933 . 47 4. The demand for adjustment on the background of contemporary business cycle theory ............................................................. 80 5. The turning tide: the opposition’s demand for expansionary policies leading the headlines 1934-1935 ................................................. 119 6. Swiss views on money in the interwar years .............................. 149 7. A golden calf? The debate about devaluation 1935-1936..................... 177 8. Gold-standard continuity despite devaluation.............................. 211 Appendix I: Dates and events .............................................. 227 Appendix II: The members of the Federal Council 1929-1936 ..................... 232 Bibliography............................................................ 233 i Contents Tables v Figures v 1. Introduction 1 The Eichengreen-Temin explanation of the Great Depression................... 2 Switzerland and the Eichengreen-Temin hypothesis .......................... 6 Ideas and economic policy .............................................. 8 Political debates and the gold-standard mentality in Switzerland ............... 12 2. Macroeconomic developments 20 The depression of the 1930s in longer-term perspective ...................... 22 Strong outward orientation............................................. 24 Bilateral trading arrangements .......................................... 28 Changes in trade patterns during the depression............................. 30 “Invisibles”......................................................... 34 Monetary conditions.................................................. 37 The development of the domestic sector .................................. 41 Recovery after devaluation............................................. 43 Concluding remarks .................................................. 44 3. The dominance of orthodox arguments in the economic policy debate up to 1933 47 Early perceptions of the world-wide slump and its effects on Switzerland ........ 47 “Inflation or deflation”: the policy options presented by Federal Councillor Musy in February1932 ................................................ 56 The Federal Council’s policy guidelines of March 1932 and reactions in parliament ......................................................... 65 The government’s wage reduction bill submitted in June 1932 ................. 71 Concluding remarks: the early phase in economic policy debates............... 77 ii 4. The demand for adjustment on the background of contemporary business cycle theory 80 Overinvestment arguments and the case for adjustment....................... 80 Underconsumption arguments and the demand for expansionary policies......... 87 The controversy between overinvestment and underconsumption views .......... 93 Additional arguments: the Swiss Statistical Society’s annual meeting in May 1933 . 97 Swiss overinvestment and underconsumption arguments in the context of contemporary business cycle analysis and Keynesian macroeconomics ......... 102 The predominant “gold-standard mentality” and the emergence of alternative policy proposals .................................... 103 Drawing on the contemporary literature .......................... 105 Underconsumptionist concepts of aggregate demand ................ 106 Classical roots of underconsumption theories ...................... 107 Supply vs. demand side explanations of economic activity ............ 108 Intertemporal models......................................... 109 Information and coordination failures ............................ 110 A sectoral model of production.................................. 111 Say’s law of markets.......................................... 112 Harmony vs. anarchy in a market economy and the scope for macroeconomic planning ...................................... 113 Some appraisals ............................................. 116 Concluding remarks: the academic debate and the gold-standard mentality ...... 117 5. The turning tide: the opposition’s demand for expansionary policies leading the headlines 1934-1935 119 Government by emergency legislation................................... 119 The opposition’s crisis initiative of spring 1934............................ 125 The government’s response ........................................... 130 Federal Councillor Schulthess’s “Aarauer speech” of November 1934 .......... 137 Indications for a rapprochement between government and opposition? .......... 142 Concluding remarks: changing weights in the economic policy debates......... 147 iii 6. Swiss views on money in the interwar years 149 The demand for monetary reform by Gesell followers....................... 149 The debate during the economic crisis after World War I .................... 153 The stabilization of the Swiss franc ..................................... 156 The revival of Gesell’s following with the onset of the Great Depression........ 158 Swiss economists’ monetary thinking in the context of the contemporary debate . 164 Concluding remarks: influences on the Swiss views on money................ 175 7. A golden calf? The debate about devaluation 1935-1936 177 Die Nation as spearhead of a mainstream advocacy of devaluation after October 1935 ....................................................... 178 The social democrats’ continued support for the gold parity .................. 182 Swiss economists and the defense of the gold standard...................... 184 The export industry’s position on devaluation: some comments ............... 188 The Federal Council’s position in the fall of 1935: the gold parity, balanced budgets and adjustment policies again ................................... 196 The Federal Council’s quest for delegated powers .......................... 202 The parliamentary economic policy debate on the eve of the devaluation........ 206 Concluding remarks: policy positions on devaluation ....................... 208 8. Gold-standard continuity despite devaluation 211 The devaluation decision ............................................. 211 The Federal Council’s interpretation .................................... 215 Devaluation in parliament............................................. 217 After devaluation ................................................... 222 Concluding remarks: the gold-standard mentality endures .................... 224 Appendix I: Dates and events 227 Appendix II: The members of the Federal Council 1929-1936 232 Bibliography 233 iv Tables Table 1: Exports per capita 1840-1910 (current prices in US $, three-year averages) .... 24 Table 2: Trade in goods with Germany (in million SFR) 1927-1938 ................. 28 Table 3: Net capital exports (in million SFR) 1924-1938 .......................... 35 Figures Figure 1: Index of real GDP and cost of living, 6 countries, 1929=100 ............... 5 Figure 2: Index of real GDP and cost of living, 1914=100 ........................ 23 Figure 3: Exports, imports and trade balance (nominal in million SFR) 1924-1938..... 25 Figure 4: Index of the volume of industrial production (1929=100) ................. 26 Figure 5: Main countries of origin of Swiss imports 1928, 1935 and 1938 ........... 31 Figure 6: Main export destinations 1928, 1935 and 1938 ......................... 32 Figure 7: Exports by sector 1924-1938 in million SFR and percent of total exports .... 33 Figure 8: Gold and foreign exchange reserves, M1 and M3 (in million SFR) 1924-1938 38 Figure 9: The official discount rate 1925-1940 ................................. 39 Figure 10: Market interest rates and inflation 1929-1938 .......................... 40 Figure 11: Yearly construction spending by private and public sectors in million SFR . 42 Figure 12: Registered job seekers 1918-1938 ................................... 44 Figure 13: The main chain of arguments in overinvestment theories ................. 82 Figure 14: The main chain of arguments in underconsumption theories ............... 91 v 0 1. Introduction The Great Depression has been called a “defining moment” of the 20th century.1 This is certainly an adequate description from the point of view of the economic historian. But is just as valid from the perspective of the historian of economic thought. The worldwide recession of the 1930s, with its enormous declines in output and employment and the breakdown of international trade and capital flows, was a unique episode in macroeconomic history.2 It set the stage for Keynesian macroeconomics, which would, in turn, deeply influence economic policies and the evolution of institutions in the era after World War II. The recent decade has seen a renewed interest in the analysis of the interwar years. This research is characterized by a vision of the depression as an international phenomenon. The latter was pioneered by Kindleberger (1973) who stressed the diverse origins of the depression, which he traced back into the 1920s and across the globe. This contrasted starkly