Parallels between the financial crisis of 2008 and the Great Depression usually compare their causes and economic effects. This paper looks at the institutional effects of economic crisis on small states. Faced with severe economic hardship in the 2008 financial crisis, small states could resort to a rescue package extended by the international financial institutions conditioned on the adoption of austerity measures. What happens is often seen as a weakening of the state internationally vis-a-vis the IMF, ECB or foreign governments and strengthening of the state domestically vis-a-vis the electorate, which accepts austerity in an undemocratic manner of decision making. During the Great Depression and the collapse of the world trade system, when these pooled financial resources were not available, many small states in the European periphery became dependent on foreign power while at the same time strengthened state monopoly over economic decision making. The mechanism of dependency was based on economic integration in regional blocs rather than limitation on fiscal policy as it is today. What are the institutional effects in small states following the Great Depression is my main research question. The paper offers a case study of the policies pursued by Bulgaria in the 1930s. As a small agricultural country Bulgaria suffered declining revenues from exports and diminishing foreign reserves, which put pressure on its national currency. The choice of exchange control in 1931 opened the way to intensive bilateral clearing trade with Germany in the so-called clearing bloc. This trade arrangement allowed for reflating the domestic economy out of the depression and brought about a state corporatist regime in Bulgaria. The state gave up international authority to Germany and was simultaneously empowered domestically vis-à-vis societal actors. Nevertheless, this mechanism of overcoming the depression based on economic integration with a core state and boosting certain interest groups was distinctly different from the current practice and was associated with state empowerment rather than tying the hands of the government.
