Competitive devaluations in the 1930s: myth or reality?

This article is the first examination of competitive devaluation in the 1930s using data on exchange rates. It analyses the impact of currency changes on foreign trade flows of fourteen industrialized countries 1929–1939. It reviews the development of nominal and real effective exchange rates together with trade and economic growth and conducts a disaggregated analysis of trade and bilateral exchange rates with trade partners. Tests show that the beggar-thy-neighbour effects of exchange rate adjustments were few and temporary. Moreover, it is argued that currency depreciations were expansionary not only for countries that devalued but for the international economy as a whole. This argument draws on Ragnar Nurkse (Nurkse, International currency experience, Lessons of the Inter-War Period. League of Nations, 1944) who undeservingly has been associated with the notion of “competitive devaluation”. Nurkse showed that currency depreciations increased global monetary reserves, an observation that has gone remarkably overlooked in the literature.