Three Essays on Trade and Finance in the Interwar Period

Dissertation in Economics

Mentoring team:
First supervisor: Prof. Irwin Collier PhD
Second supervisor: Prof. Dr. Barbara Fritz
Third supervisor: Prof. Dr. Jonathan Fox

Summary

This dissertation consists of three essays that deal with trade and finance in the interwar period. The first essay estimates the individual contributions of different trade costs to the collapse of world trade during the 1930s. The second essay narrates the early history of the Federal Reserve System and its relation to the market for bankers’ acceptances. The third essay estimates the impact of loan supply shocks to output dynamics during the Great Depression in Germany.

The first of three essays — Chapter 2: Return of the Tariffs: The Interwar Trade Collapse Revisited — examines the causes of interwar trade collapse. Was the collapse of world trade between 1928 and 1937 caused by higher transport costs, increased protectionism or the collapse of the gold standard? Using recent advances in the estimation of gravity equations, I examine the partial and general equilibrium effects of bilateral distance, international borders, and the payment system on trade. My results suggest that had average tariff and non-tariff trade barriers remained at their 1928 level, total international trade would have been 64.6% higher in 1937. Had the gold standard not collapsed in 1931 and had the British Empire not departed to establish its own currency and trade blocs, internationaltrade would have been 3% larger. Finally, had transport costs remained at their 1928 level, global trade would not have been significantly different nine years on. These results are supported by over 6,000 new hand-collected observations of ad-valorem ocean freight rates for cotton, which show an average increase of only 1.2 percentage points between 1928 and 1936. When expressed as an index, the movement of freight rates mirrors the evolution of the elasticity of trade to distance over the period.

The essay — Chapter 3: Liquidating Bankers’ Acceptances: International Crisis, Doctrinal Conflict and American Exceptionalism in the Federal Reserve 1913-1932— seeks to explain the collapse of the market for bankers’ acceptances between 1931 and 1932 by tracing the doctrinal foundations of Federal Reserve policy and regulations back to the Federal Reserve Act of 1913. I argue that a determinant of the collapse of the market was Carter Glass’ and Henry P. Willis’ insistence on one specific interpretation of the “real bills doctrine”, the idea that the financial system should be organized around commercial bills. The Glass-Willis doctrine, which stressed non-intervention and the self-liquidating nature of real bills, created doubts about the eligibility of frozen acceptances for purchase and rediscount at the Reserve Banks and caused accepting banks to curtail their supply to the market. The Glass-Willis doctrine is embedded in a broader historical narrative that links Woodrow Wilson’s approach to foreign policy with the collapse of the international order in 1931.

The third essay — Chapter 4: Credit Constraints and the Propagation of the German Great Depression— is a joint project with Walter Jansson (Bank of England). We evaluate the contribution of exogenous loan supply shocks to output and investment dynamics during the Great Depression in Germany. Based on a time varying vector autoregression, we identify loan supply shocks in addition to standard macroeconomic shocks. Our results indicate that the whole period between 1927 and 1932 was associated with credit constraints, supporting the view that a structurally weak banking sector was was an important contributor to the German Great Depression.