Economic Lessons of the 1930s

H. W. Arndt

• Publisher: Routledge
• Year: 2014
• eBook ISBN: 9781136916885
• Topic: Business
• Subtopic: Business General
• Index: Business

First Published in 1963. In undertaking a series of studies on post-war economic problems, the Economic Group of the Chatham House Reconstruction Committee decided to prepare a report on the economic lessons of the nineteen-thirties. Described as obviously controversial, this title seeks to educate on the economic activity of the 1930s and how the authors, from their 1960s perspective, view the decisions made. Beneficial to any student of economics or those looking to broaden their historical perspective on this time period.

Chapter One

THE NINETEEN-TWENTIES

I. THE WORLD ECONOMIC SITUATION IN THE NINETEEN-TWENTIES

THE great depression ended a period of short but rapid and in many respects unexampled economic progress. By 1925 most of the immediate problems of post-war reconstruction appeared to be solved. Most of the advanced industrial countries had recovered from a brief but severe post-war slump. The political problems which had prevented economic progress during the first five years after the war seemed settled. The frontiers of the European countries seemed at last stabilized; the reparation problem, which had been the immediate cause of the Ruhr invasion and monetary chaos in Germany, was temporarily solved by the Dawes Plan. By 1925 order had been restored in the internal monetary systems of most countries, and, with the exception of France, all the major countries of the world had returned to the gold standard, which seemed to have resumed its function as the automatic mechanism for the adjustment of the international economic system. Between 1925 and 1929 world production of primary products rose by 11 per cent, industrial production by something between 23 per cent and 27 per cent, and the quantum of world trade rose by about 20 per cent.¹ At the same time, there was considerable progress during the decade in industrial productivity, national incomes, and standards of living, though the rate of progress varied greatly in different countries.

However, the equilibrium of the world economic situation throughout the first post-war decade was unstable. While the immediate causes of the depression must be sought primarily in the internal economic development of the countries concerned—and especially in the internal development of the U.S.A., from where the crisis and depression spread throughout the world—the fact that the depression did spread to every country, its severity, and the obstacles to recovery during the nineteen-thirties are largely accounted for by three outstanding factors in the economic conditions of the world during the post-war decade which were all to some extent but different aspects of the same problem.

The world war had meant a violent breach in the continuity of economic change. For four years and more the production and distribution of goods, and the mechanism of trade and exchange, had been governed in the belligerent countries primarily by the exigencies of war, and in the neutral countries by the abnormal conditions of blockade, shipping shortage, greatly extended or vanished markets, and freedom from powerful competitors. The territorial changes and reparations conditions of the peace treaties had added to the dislocation caused by the war. These upheavals alone would have given rise to difficult problems of economic adjustment. They were greatly aggravated by the fact that war conditions had prevented the normal piecemeal adjustments of production and trade in different countries to long-term trends of economic development, such as changes in population trends, in consumers’ tastes, or in the rate of economic progress of different countries or industries. These changes, which in the absence of war would have led, through the free play of market forces, to a series of small adjustments, had now in some instances resulted in major maladjustments of production and trade. Some of these problems were solved during the years of post-war reconstruction. But some others had grown too large to be corrected by market forces, supplemented occasionally by uncoordinated and often misguided efforts of national Governments. They could be covered up by international credits and were temporarily concealed by the prosperity of the decade. But they re-emerged after 1929 and became at any rate part causes of the great depression.

a. One of these problems was the development of relative overproduction in some branches of world agriculture. War conditions and remarkable improvements in agricultural technique had led to an immense expansion of agricultural production during the years of the war. A constant demand for their products at steadily rising prices had encouraged overseas agricultural producers to take new land under the plough, and to increase production per acre by the application of new techniques. At the same time, European countries, shut off from some of their normal peacetime supplies had also expanded and intensified agricultural production. With the removal of the exceptionally favourable conditions of the war this unprecedented growth of productive capacity might in any circumstances have presented a serious problem. It was aggravated by the fact that after the war the demand for some of the most important agricultural products, especially cereals, ceased to expand at the pre-war rate, owing primarily to changes in nutritional tastes (in turn the symptom of rising standards of living), but also to the beginnings of the trend towards stationary populations in north-west Europe and North America, and to measures of agricultural protection.

The result was a relative surplus productive capacity of the large primary producing countries and a tendency for agricultural prices to fall relatively to those of manufactured goods. The relative cheapening of food and raw materials benefited the industrial countries. It stimulated their production and the volume of trade in materials and led to a rapid rise in their standard of living. But, since it meant that a smaller volume of manufactures could be bought in exchange for a given weight of primary products, the export trades of the manufacturing countries suffered some relative reduction in quantity. The share of manufactures in world trade decreased throughout the years of prosperity and would have decreased very much more if it had not been maintained by international loans which enabled primary producing countries to import finished goods on credit. The fall in agricultural prices which, after the first collapse during the immediate post-war depression, had been held up for several years by improved demand, and in 1927 and 1928 by the accumulation of stocks, resumed its course after the bumper harvest of 1928 and was further accelerated by the American slump and the release of stocks. It was one of the contributing factors in the world depression. It upset the balances of payments of the primary producing countries, forcing them to protect their currencies or default (or both), and led some of the industrial countries to protect their domestic agriculture by tariffs and their balances of payments by exchange control or devaluation.

b. Even more important in the long run was the tendency, which began during the war and continued during the post-war decade, towards a reversal of the process of increasing international specialization. It is customary to refer to this tendency by the convenient, but inadequate term of ‘economic nationalism’. The term ignores the fact that, to some extent, the changes in world trade and the measures of protectionism that were adopted in most countries were the natural, and not always harmful, reactions to profound long-term trends which had been accelerated by the war. The war marked the beginning of the end of the process by which the advanced industrial countries of Europe, under the leadership of Great Britain, had for most of the nineteenth century invested vast amounts of capital in the development of large new territories in the Southern and Western Hemispheres for the production of their food and raw material supplies. Investment opportunities in this field had begun to slacken before the war. During the war secondary industries had been developed in all the overseas primary producing countries under the stimulus of the need to replace imports from Europe and of the freedom from European competition. After the war this policy was continued and infant industries were protected by tariffs. The increased difficulties of the primary producers in finding markets for their products merely encouraged the tendency in the new countries, especially the British Dominions, India, and South America, to replace specialization by a better internal balance of production.

At the same time, technological changes lessened the advantages of rigid international specialization between the European industrial countries and the overseas agricultural territories. The development and diffusion of new power resources (oil and hydroelectric power) lessened the need for rigid localization of industry on the basis of coal supplies. The gradual replacement of steel by light metals altered the relative advantages of various countries as the producers of the most important industrial raw material. Mechanization widened the scope of industry based on cheap rather than skilled labour, and the growing importance of tertiary industry implicit in rising standards of living, coupled with decreasing transport costs, reinforced the tendency towards the localization of consumers’ goods industries near their markets rather than near the supply of basic raw materials.

These long-term trends largely account for the ‘economic nationalism’ of the new non-European territories, and the difficulties of the export trades of the European industrial countries during the immediate post-war years. But economic nationalism in the usual meaning of the term had some additional effect in hampering international trade and disturbing the international economic system. It was due partly to the peace treaties which had multiplied national frontiers and broken up larger economic units. The policies of the majority of the small newly-created states of central and south-eastern Europe that tried, not altogether unjustifiably, to foster industrial development almost regardless of considerations of relative costs were the outstanding examples of ‘economic nationalism’ during the nineteen-twenties. At the same time, Germany and other industrial countries of Europe began to adopt or increase measures of agrarian protection, which in turn heightened the difficulties of the overseas primary producer. Lastly, the U.S.A. continued its protectionist policy in circumstances which had changed profoundly since 1914.

c. This leads us to the third and most important cause of the economic instability of the world before 1929. War debts and reparations, the sale of external capital assets during the war by the United Kingdom, and changes in world trade had completely altered the equilibrium of international payments. The U.S.A. had replaced Great Britain as the leading creditor country. Even without the war the U.S.A. would probably have achieved a favourable balance of payments by 1920; as a result of the war the U.S.A. was owed $10 milliard of ‘political debts’ in addition to some $2—4 milliard on private account.¹ At the other end of the scale was Germany, saddled with a burden of reparations which was determined in 1924 at a rate of about £50—125 million a year. The repayment of these colossal debts in the only form in which international debts can be repaid, that is, in the form of goods, would have involved a profound alteration in the direction of world trade and profound changes in the internal economic structure especially of the ultimate creditor country, the U.S.A. Such a change was never even contemplated in the U.S.A., where the tariff was closely bound up with the internal political situation, and guarded by powerful vested interests. The only alternative to accepting repayment in the form of European exports was to re-lend the money to the European debtors. During the nineteen-twenties, therefore, the U.S.A. increased her tariff walls, but at the same time lent abroad on long-term more than she received in interest and repayment of old debts. By 1929 her net annual capital exports, largely to Germany, reached $5 milliard.² While Great Britain, in spite of an increasingly adverse balance of trade, also continued to lend abroad, the debtor countries of Europe and South America immensely increased their long-term and, what was especially dangerous, their short-term indebtedness. Germany in particular enjoyed a period of prosperity and rapid economic progress which was entirely dependent on the continuation of foreign borrowing. While it lasted, this arrangement concealed the disequilibrium and facilitated the task of European reconstruction. But with the depression and the failure of continued credits from the U.S.A. the structure collapsed.

On these conditions of economic and financial maladjustment had been superimposed a rigid, and at the same time delicate, mechanism for the automatic control of international payments. It is more than doubtful whether the gold standard, which had functioned well enough in the pre-war world of laisser-faire and relatively unimpeded international trade, was compatible with the rapidly changing relative national price levels and the greatly increased obstacles to automatic adjustment of the nineteen-twenties. Even had it been worked strictly in accordance with the rules of the game it would, in these conditions, have served to transmit economic disturbances from one country to another. In fact, the Governments of the world, while eager to revive the gold standard as a symbol of the return to ‘normalcy’, did not stick to these rules. Largely for reasons of national policy, currencies were undervalued or overvalued. Nor were Governments prepared (or able) to take the drastic measures of internal deflation required by the gold standard system in countries with a temporarily or permanently overvalued currency. With the beginning of the depression the maintenance of the gold standard would have become increasingly difficult for some countries. It was wrecked by the large and increasing movements of short-term capital which constituted an altogether new and disturbing phenomenon of the post-war period.

These international movements of ‘hot money’, as it came to be called, were themselves the result primarily of political and economic instability, though their volume was increased by the adoption in many countries of the so-called gold exchange standard and the increase in Government financing by means of short-term bills and securities. They darted about between the financial centres of the world in search of temporary security or speculative profit and at frequent intervals exerted a dangerous pressure on the gold and foreign exchange reserves of one or the other country. After the collapse of the Wall Street boom and during the depression, one country after another, faced with sudden recalls or flights of short-term funds, was forced to protect its currency either by depreciation or exchange control. The financial crisis greatly accelerated the spread of the depression and contributed to its severity.

II. THE UNITED STATES

IN any account of the economic condition of the world between the two wars the U.S.A. must occupy a central position. In view of the position of the U.S.A. as the leading creditor country, as one of the greatest import markets, and as one of the most important producers and exporters of many agricultural products and raw materials, her economic condition and policy had a more direct effect on world economic conditions than those of any one other country. For the purposes of this report, the U.S.A. is of further interest because from 1933 onwards the American Government under President Roosevelt pursued the most signicant experiment in raising a large capitalist economy out of the depths of economic depression.

When President Roosevelt entered on his first term of office on 4 March 1933, the economic life of the U.S.A. was in a state of suspended animation after an almost continuous decline for four years from the peak of prosperity in 1929. In 1920–1 the U.S.A. had passed through a short post-war slump which was the more severe because it had been postponed for two years by a remarkable flow of exports to Europe and by large-scale government expenditure. In 1922, however, the U.S.A. entered on a seven years’ period of rapid economic progress and unprecedented prosperity. The national income, expressed in 1929 dollars, rose...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• FOREWORD by Viscount Astor
• 1. THE NINETEEN-TWENTIES
• 2. THE UNITED STATES: INTERNAL POLICY
• 3. THE UNITED STATES: FOREIGN ECONOMIC POLICY
• 4. GREAT BRITAIN
• 5. FRANCE
• 6. GERMANY: INTERNAL POLICY
• 7. GERMANY: FOREIGN ECONOMIC POLICY
• 8. NOTE ON SWEDISH RECOVERY POLICY
• 9. INTERNATIONAL ACTION IN THE ECONOMIC FIELD
• 10. THE LESSONS
• APPENDIX. Dissenting note by Sir Andrew McFadyean
• INDEX