Only two major countries – China and Spain – were not on the Gold Standard at the onset of the Great Depression in 1929. As a consequence both countries avoided the most negative consequences of the Great Depression. That is a forcefully demonstration of how the “wrong” exchange rate regimes can mean disaster, but also a reminder of Milton Friedman’s dictum never to underestimate the importance of luck.

I have recently found this interesting paper by

Cheng-chung Lai and Joshua Jr-shiang Gau on the “Chinese Silver Standard Economy  and the 1929 Great Depression”. Here is the abstract for you:

“It is often said that the silver standard had insulated the Chinese economy from the Great Depression that prevailed in the gold standard countries during the 1929-35 period. Using econometric testing and counterfactual simulations, we show that if China had been on the gold standard (or on the gold-exchange standard), the balance of trade of this semi-closed economy would have been ameliorated, but the general price level would have declined significantly. Due to limited statistics, two important factors (the GDP and industrial production level) are not included in the analysis, but the general argument that the silver standard was a lifeboat to the Chinese economy remains defensible.”

If anybody has knowledge of research on Spanish monetary policy during the Great Depression I would be very interested hearing from you (lacsen@gmail.com).

PS Today I have received Douglas Irwin’s latest book “Trade Policy Disaster: Lessons From the 1930s” in the mail. I look forward to reading it and sharing the conclusions with my readers. But I already know a bit about the conclusion: Countries that stayed longer on the Gold Standard were more protectionist than countries with more flexible exchange rate regimes. This fits with Milton Friedman’s views – see here and here.