The 1930s witnessed an astonishing implosion of international trade and a dramatic shift in its direction and pattern as regional and colonial blocs supplanted the established network of multilateral settlements. In Discussion Paper No. 837, Research Fellow Barry Eichengreen and Douglas Irwin provide new evidence indicating that the effects of the discriminatory trade policies and international monetary arrangements of this period were neither uniformly favourable nor unfavourable. The balance of their trade-creating and -diverting effects depended rather on policy-makers' motivations and the policies' structure.

For example, British Commonwealth preference reduced trade barriers and encouraged financial links among member countries without hampering their trade and payments with non-members. The German-dominated Central European bloc, in contrast, raised significant barriers to trade and financial relations with the rest of the world. Nor is there any uniform ranking of the relative importance of trade and financial policies. While Commonwealth trade preferences appear to have affected the trade pattern more strongly than the monetary arrangements of the sterling area, the exchange controls and clearing arrangements pursued by Germany and the East European countries in its sphere of influence effectively dominated their commercial policies' impact on trade.
Eichengreen and Irwin also find evidence supporting Nurkse's conjecture that exchange rate variability depressed trade volumes in the 1930s. This runs against the common view that abandoning the gold standard underpinned recovery and hence the revival of trade. They conclude with lessons for the emerging regional trade agreements and currency areas of today: bilateral and regional initiatives to increase trade and monetary integration can benefit participating countries without harming the rest of the world, but they can also have a corrosive impact on the multilateral system. The regional or global character of initiatives appears to be less important than the structure and design of the underlying policies.

Trade Blocs, Currency Blocs and the Disintegration of World Trade in the 1930s
Barry Eichengreen and Douglas A Irwin

Discussion Paper No. 837, September 1993 (IM)