INTRODUCTION

This chapter focuses on a selection of policy issues that were important to contemporaries of the period and remain on the policy agenda today. The interwar experience of diverse exchange rate regimes, protectionism, mass unemployment, poor long-run economic growth, disintegrating world trade and high business cycle volatility makes the period extremely interesting to policy-makers. The objectivity of historical lessons, however, needs to be placed in the context of the interests of policy-makers. Their attempts at instituting change may result in interpretations of the past that are misleading as universal policy lessons. To illustrate the nature of this problem we should note that recent historical research has completely reversed many of the interpretations made by economists in the early postwar period. For example, postwar policy-makers used the interwar experience to draw the lesson that high costs are incurred when fixed exchange rates are allowed to collapse. The League of Nations (Nurkse, 1944) suggested that the period of devaluation and protectionism during the 1930s left all nations worse off. There is now extensive evidence, however, that the gold exchange standard that operated in the 1920s was far from ideal. The system was maladjusted in the sense that it operated around an asymmetric adjustment mechanism, with only deficit countries having to generate adjustment in response to balance of payments problems; surplus countries continued to maintain their surpluses during 1925–33 (Temin,1989; Eichengreen, 1992; Kitson and Michie, 1994). Breaking from this system allowed the UK economy to benefit from expansionary non-inflationary policies in the 1930s. This example illustrates how the lessons of history evolve in the light of new evidence about the past and new policy debates that encourage economic historians and policymakers to reevaluate the foundations of old facts.