“Expansionary monetary policy is not the main explanation of either the turning point or the extent of the economic recovery in the 1930s” Discuss.
This essay will argue that monetary policy was important to starting the recovery in the early 1930s, but is by no means the explanation for the extent of the recovery, which relied on fiscal policy and the growth of the manufacturing sector to keep going through the late 1930s.
Worswick (1984) wrote that ‘spontaneous forces alone will not count for the recovery. Policy made important contributions.’ According to Worswick, and in line with much of the literature, the abandonment of gold and the depreciation of sterling were key to economic recovery. After Britain abandoned the gold standard in 1931, a managed floating exchange rate was adopted, in order to give British exports a competitive edge, this being the first way in which monetary policy contributed to recovery. The success of this stimulus to exports, however, was negligible. As sterling fell from £1=$4.86 to a low of £1=$3.24, exports did grow, and finally stabilised in 1932, despite continuing to fall in the continent, but it is estimated to have contributed very little to the recovery. Although exports initially rose by 24% in the last quarter of 1932, thanks to the depreciation of sterling, this was not maintained for the rest of the decade. Only 7% of new jobs between 1932 and 1937 were located in export-sensitive industries.
A more prominent contribution of monetary policy to economic recovery came in the form of ‘cheap money’. Broadberry (1986) found that the major effects of monetary policy were transmitted via interest rates and the external sector through the exchange rate, contributing to the 13% depreciation of sterling between 1931-1933, which raised output by around 3% through improvement in the balance of trade, and thus began the recovery.