Monday, November 05, 2007

The Return Of Hawley—Smoot

During the Republican Presidential debate on economics last month Senator John McCain warned of the dangers of the Hawley—Smoot Tariff Act.

For his part, Senator John McCain mentioned Adam Smith's Wealth of Nations and blamed 1930s Smoot-Hawley tariffs for making the Great Depression worse.
Which he like so many other's refer to as the Smoot-Hawley Act. The ghost of Smoot Hawley stalks the world

Now I thought, why would he be referring to characters who sound like they came out of a Lil Abner comic strip.

Well of course he was referring to the Tariff Act which some say resulted in the Great Depression and World War II. Though some divergent thinkers on the right including libertarian historian Murray Rothbard and populist nativist conservative Pat Buchanan disagree with that assumption.

Both Hawley and Smoot were Republican's under a Republican President. And the specter of Hawley-Smoot haunts the minds of Republicans ever since. Not because they take the blame for the Great Depression rather because it led to the New Deal and the three term presidency of FDR.

During the Roaring 20s, the world economy benefited from that great era of globalization and free trade. Then, as now, global trade made a lot of people uncomfortable. And in both cases, politicians responded to public sentiment in exactly the wrong way, by attempting to kill, and successfully killing in the late 1920s, what had become a major source of growth and productivity. There is some danger that they could do it again.

On the eve of the Great Depression, Congress passed the Smoot-Hawley Tariff Act to “protect” American business from “unfair” foreign competition. Other countries retaliated in kind, levying tariffs of their own on American products. As a result, the Great Depression got greater as global trade shriveled and died. Considering this glaring example of what not to do when it comes to trade, you would think policy-makers would not repeat such a mistake. They have.

Tariffs are no longer fashionable, but Congress has managed to find a few new ways to stifle global trade. A good example is the blocking of the Dubai ports deal last year. This happened less than a year after Congress killed the Chinese purchase of a small U.S. oil company, Unocal. In the last year, several bills have been introduced in Congress to place trade restrictions on China.

The bottom line is this: The recent surge in protectionist sentiment is just one more parallel to the Roaring 20s. The implications for the next decade, just as the decisions in the 1920s affected the 1930s, are equally negative. We have all the ingredients in place to make the same mistakes we made then. Let’s hope we learned our lessons and are smarter about it this time.

"If you analyze it I believe the very heart and soul of conservatism is libertarianism. … The basis of conservatism is a desire for less government interference or less centralized authority or more individual freedom, and this is a pretty general description also of what libertarianism is. … I think that libertarianism and conservatism are traveling the same path."

– President Ronald Reagan

That quotation was appropriately reprinted on the first page of the official program for the Conservative Leadership Conference in Reno last weekend, an event that sought to rebuild the largely frayed conservative/libertarian Reagan coalition in time to spare the country from a Hillary Clinton presidency. I spoke to the group about my exit from the Republican Party, but after listening to other speakers and attendees gathered for the three-day event, I must conclude that Reagan's words no longer ring true.

Conservatives and libertarians are marching to different drummers, going on different paths going in opposite directions. The libertarians still are committed to "less government interference" and "less centralized authority," but conservatives these days are more interested in building an all-powerful central government to wage war on real and perceived enemies at home and abroad. Conservatives use the word "freedom" while they wax poetic about American military might. But the policies they promote show no sign of trusting individual Americans to live their lives as they please and every sign of trusting the government to do what is best.

That contrast was nothing compared with what attendees witnessed Saturday morning. Grover Norquist, a prominent conservative activist from Americans for Tax Reform, called on the reconstitution of Reagan's "leave us alone" coalition. The members of that group – gun lovers, home-schoolers, small-business owners, taxpayer advocates – didn't necessarily like each other, he said, but they united in their desire to pursue their lives without excessive meddling from the government. We don't have to "agree on secondary and tertiary issues," he said. "Ours is a low-maintenance coalition that wants to be left alone in the zone that matters to them." By contrast, the Democratic coalition is what he calls the "takings coalition" – the unions, trial lawyers, the dependency movement, coercive utopians and radical environmentalists" who are promoting "a list of things slightly longer and more tedious than Leviticus." These groups can work together as long "as there is more money coming into the center of the table." His solution: Starve the beast through tax cuts and expand the coalition of Americans whose primary goal is to be left alone.

That's my thinking. But immediately after Norquist's talk came Duncan Hunter, a San Diego-area congressman and GOP presidential candidate. While Norquist championed a coalition of people who want government to leave them alone, Hunter championed a government that was about bossing everybody around. "It is in the interests of the United States to expand freedom," he said. "If you don't change the world, the world is going to change you." And, boy, did Hunter offer plans to change the world. He vowed to take on China and Iran, to continue what he viewed as a successful war in Iraq, to crack down on illegal immigration and to expand government spending on the military. He talked about "duty, honor, country" but not about liberty. The crowd – at least the conservative faction – roared its approval.

"That was the scariest s--- I've heard in a long time," I whispered to libertarian writer Doug Bandow, who apparently agreed. Writing in his blog, Bandow contrasted Hunter with Norquist: "Very different was … Hunter, who wants to slap tariffs on Chinese imports, expand the military, close the border and go to war to do good around the world. His trade critique sounds like something out of communist central planning … . With his import limits he would follow the example of the disastrous Smoot-Hawley tariff, which wrecked international markets and helped bring on the Great Depression. Worse, though, he wants to use the U.S. military to 'expand freedom around the world,' when Washington's principal responsibility is to defend America's national security. Undertaking glorious international crusades with other people's lives is Wilsonian liberalism, not responsible conservatism."

Hence the divide. We also saw it the night before when religious conservative Alan Keyes gave a dinner address. He was greeted by a standing ovation by conservatives as he entered the room, while a few of us in the libertarian faction rolled our eyes, grabbed our cigars and quietly headed to the bar.

Libertarian GOP presidential candidate Ron Paul actually won the conference straw poll with 32 percent of the vote, but his nearly one-third support conforms to my sense of the gathering's two-to-one conservative vs. libertarian breakdown.

As I cleared my head on the gorgeous southward drive east of the Sierras along U.S. 395, I was left with only one conclusion: All the king's horses and all the king's men won't put this Humpty Dumpty coalition together again.

Hawley-Smoot was not about industrial production but protectionism for America's farmers. It's impact on Canada was horrendous leading to our own farm crisis which then created the need for the Wheat Board.

Today those farmers as a class are gone, replaced by big agribusiness interests who rely upon subsidies and protectionism. As do their European counterparts. Thus the crisis in global trade talks around agriculture in the WTO. Which for all the talk of free trade remains mired in fights over subsidies to agribusiness versus support for real farmers in the developing world.

Here is a history of Hawley-Smoot and its impacts, which changed the world forever.

It's lessons are hauntingly familiar today as America declines in economic power due to the Iraq war, housing crunch and reliance on domestic credit and consumption by its worker/consumers.

Internationally we have even seen a return of Bank runs which has not happened since the Great Depression and the Canadian economy booms with the loonie at a record high.

Dollar Hits Record Low Vs. Loonie, Euro


Historical Economics

Art or Science?

Charles P. Kindleberger
Professor of Economics Emeritus, Massachusetts
Institute of Technology

Berkeley · Los Angeles · Oxford
© 1990 The Regents of the Univ

The Disintegration of World Trade

The Hawley—Smoot Tariff

The origins of the Hawley—Smoot tariff, as already noted, reach back to the autumn of 1928 when Herbert Hoover, campaigning for the presidency, promised to do something to help farmers suffering under the weight of declining agricultural prices. A special session of Congress was called in January 1929, long in advance of the stock-market crash of


October of that year, and began to prepare a tariff bill. Its scope was widened from agriculture to include industry; Democrats joined Republicans in their support for tariffs for all who sought them; and both Republicans and Democrats were ultimately pushed from the committee room as lobbyists took over the task of setting the rates (Schattschneider, 1935). A groundswell of resentment spread around the world and quickly led to retaliation. Italy objected to duties on hats and bonnets of straw, wool-felt hats, and olive oil; Spain reacted sharply to increases on cork and onions; Canada took umbrage at increases on maple sugar and syrup, potatoes, cream, butter, buttermilk, and skimmed milk. Switzerland was moved to boycott American typewriters, fountain pens, motor cars, and films because of increased duties on watches, clocks, embroidery, cheese, and shoes (Jones, 1934). Retaliation was begun long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to raise rates against United States products, even though rates could be moved up or down in the Senate or by the conference committee. In all, 34 formal protests were lodged with the Department of State from foreign countries. One thousand and twenty-eight economists in the United States, organized by Paul Douglas, Irving Fisher, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox, and representing the "Who's Who" of the profession, asked President Hoover to veto the legislation (New York Times , 5 May 1930). A weak defence was offered contemporaneously by President Hoover as he signed the bill, saying "No tariff act is perfect" (Hoover, 1952, p. 291), and another 45 years later by Joseph S. Davis, who claimed that the Senate got out of hand, but that Hoover had won two key points: inclusion of the flexible provisions permitting the Tariff Commission to consider complaints and recommend to the president higher or lower rates, and exclusion of an export-debenture plan along the lines of the McNary—Haugen bill (Davis, 1975, p. 239). Both views were in the minority.

The high tariffs of 1921, 1922, and a fortiori 1930 were generally attacked on the grounds that the United States was a creditor nation, and that creditor nations were required to maintain low tariffs or free trade in order that their debtors might earn the foreign exchange to pay their debt service. This view is now regarded as fallacious since the macroeconomic impacts effects of tariffs on the balance of payments are typically reversed, wholly or in large part, by the income changes which they generate. Under the post-Second World War General Agreement on Tariffs and Trade, balance-of-payments considerations are ignored in settling on tariff reductions in bilateral or multilateral bargaining. In addition, a careful study for the Department of Commerce


by Hal. B. Lary states that the effect of the tariff increases of 1922 and 1930, and those of the reductions after 1930, cannot be detected in the import statistics. This was partly perhaps because tariffs were already close to prohibitive and early reductions were minimal, but mainly for the reason that wide fluctuations in world economic activity and prices overwhelmed any lasting impact of tariffs on trade (Lary, 1943, pp. 53–4).

The significance of the Hawley—Smoot tariff goes far beyond its effect on American imports and the balance of payments to the core of the question of the stability of the world economy. President Hoover let Congress get out of hand and failed to govern (Schattschneider, 1935, p. 293); by taking national action and continuing on its own course through the early stages of the depression, the United States served notice on the world that it was unwilling to take responsibility for world economic stability. Sir Arthur Salter's (1932, pp. 172–3) view that Hawley—Smoot marked a turning point in world history is excessive if it was meant in causal terms, apposite if taken symbolically.

Retaliation and business decline wound down the volume and value of world trade. The earliest retaliations were taken by France and Italy in 1929. In Canada the Liberal government kept parliament in session during the final days when the conference committee was completing the bill, and then put through increases in tariff rates affecting one-quarter of Canadian imports from the United States. Despite this resistance to its neighbour, the government lost the August 1930 election to the Conservatives, who then raised tariffs in September 1930, June 1931, and again in connection with the 1932 Ottawa agreements (McDiarmid, 1946, p. 273). The action in May under the Liberal, W.L. Mackenzie King, involved both increases and decreases in duties, with Empire preference extended through raising and lowering about one-half each of general and intermediate rates, but lowering the bulk of those applicable to Empire goods. Subsequent measures typically raised Empire rates, but general and intermediate rates more. In September 1930, anti-dumping rates were increased from 15 to 50 percent.

Deepening Depression

The Hawley—Smoot tariff began as a response to the decline in agricultural prices and was signed into law as the decline in business picked up speed. For a time during the second quarter of 1930, it looked as though the world economy might recover from the deflationary shock of the New York stock-market crash in October 1929, which had come on the heels of the failure in London of the Clarence Hatry conglomerate


after the discovery of fraudulent collateral used to support bank loans in September and the failure of the Frankfurt Insurance Company in Germany in August. This is not the place to set forth the causes of the depression in agricultural overproduction, the halt to foreign lending by the United States in 1928, the end of the housing boom, the stock-market crash, frightened short-term capital movements, United States monetary policy and the like. It is sufficient to observe that the chance of recovery was seen to fade at the end of June 1930 with the signing of the Hawley—Smoot tariff, the outbreak of retaliatory cuts in international trade, and the near-failure of the Young loan (to reprime German reparations) in international capital markets. Events thereafter were uniformly depressing, from Nazi gains in German elections in September 1930, the collapse of the Creditanstalt in Vienna in May 1931, the run on German banks in June and July, until the Standstill Agreement that blocked repayment of all German bank credits shifted the attack to sterling, which went off the gold standard in September 1931, followed by the yen in December.

One item of commercial policy contributed to the spreading deflation. In the autumn of 1930, Austria and Germany announced the intention to form a customs union. The proposal had its proximate origin in a working paper prepared by the German Foreign Ministry for the World Economic Conference in 1927. It was discussed on the side by Austrian and German Foreign Ministers at the August 1929 meeting on the Young Plan at The Hague. Germany took it up seriously, however, only after the September 1930 elections which recorded alarming gains for the National Socialists, and Chancellor Brüning felt a strong need for a foreign-policy success. The French immediately objected on the grounds that customs union between Austria and Germany violated the provision of the treaty of Trianon which required Austria to uphold her political independence. France took the case to the International Court of Justice at The Hague for an interpretation of the treaty. Other French and British and Czechoslovak objections on the grounds of violation of the most-favoured-nation clause were laid before the League of Nations Council (Viner, 1950, p. 10). The International Court ultimately ruled in favour of the French position in the summer of 1931. By this time, however, the Austrian Creditanstalt had collapsed — barely possibly because of French action in pulling credits out of Austria, though the evidence is scanty — the Austrian government responsible for the proposal of customs union had long since fallen, and the run against banks and currencies had moved on from Austria to Germany and Britain.

In the autumn of 1931, appreciation of the mark, the dollar and the gold-bloc currencies as a consequence of the depreciation of sterling


and the currencies associated with it, applied strenuous deflation to Germany, the United States and to Western Europe from September 1931 to June 1932. Depreciation of the yen in December 1931 marked the start of a drive of Japanese exports into British and Dutch colonies in Asia and Africa, and of colonial and metropolitan steps to hold them down. June 1932 was the bottom of the depression for most of the world. The United States economy registered a double bottom, in June 1932 and again in March 1933, when spreading collapse of the system of many small separate banks climaxed in the closing of all banks for a time, and recovery thereafter. German recovery started in 1932 after the resignation of Brüning, who had hoped to throw off reparations by deflation to demonstrate the impossibility of paying them, the succession of von Papen as chancellor, the finally the takeover of the chancellorship by Hitler in February 1933. The gold-bloc countries remained depressed until they abandoned the gold parities of the 1920s — first Belgium in 1935, and the remaining countries in September 1936.

In these circumstances, there was little if any room for expansive commercial policy. Virtually every step taken was restrictive.


The Hawley—Smoot Tariff Act occupied most of the time of Congress for a year and a half (Smith, 1936, p. 177). Empire preference was the major issue in Canadian politics for more than half a century (Drummond, 1975, p. 378). The Imperial Economic Policy Cabinet worried more about tariffs than about any other issue (ibid., p. 426), though much of it dealt with objectively insignificant goods (Drummond, 1972, p. 25). Drummond several times expresses the opinion that the Ottawa discussions in the summer of 1932 should have abandoned the question of tariff preferences and focused on monetary policy, and especially exchange-rate policy. In fact Prime Minister Bennett of Canada sought to raise the issue of the sterling exchange rate prior to Ottawa only to be rebuffed by Neville Chamberlain with the statement that the Treasury could not admit the Dominions to the management of sterling. Canada did succeed in getting exchange rates put on the Ottawa agenda, but the Treasury insisted that the question was minor and nothing came of it (Drummond, 1975, pp. 214–16).

Monetary policy and tariff policy were occasionally complements, occasionally substitutes. The Macmillan Committee report contained an addendum, no. 1, by Ernest Bevin, J.M. Keynes, R. McKenna and three others recommending import duties, and, in so far as existing treaties permitted, a bounty on exports, the combination being put


forward as a substitute for devaluation of sterling (Committee on Finance and Industry, 1931). In the event, the United Kingdom undertook both depreciation of sterling and the imposition of import duties.

Sterling left the gold standard on September 21, 1931 and depreciated rapidly from $4.86 to a low of $3.25 in December, a depreciation of 30 percent. Canada and South Africa adopted anti-dumping duties against British goods. On its side, the United Kingdom enacted an Abnormal Importations Act on November 20, 1931 that gave the Board of Trade the right to impose duties of up to 100 percent as a means of stopping a short-run scramble to ship goods to the United Kingdom before the exchange rate depreciated further. While 100 percent tariffs were authorized, tariffs of only 50 percent were imposed. This Act was followed in a few weeks by a similar Horticultural Products Act. Both the Abnormal Importations Act and the Horticultural Products Act exempted the Empire from their provisions (Kreider, 1943, p. 20).

In the Christmas recess of Parliament, Lord Runciman, President of the Board of Trade, persuaded Chamberlain to take up protection as a long-run policy, as had been recommended by Keynes and the Macmillan Committee, prior to the September depreciation, and opposed by Beveridge (1931), since without tariffs, the United Kingdom had nothing to exchange with the Dominions for preferences in their markets. The resultant Import Duties Act of February 1932 established a 10 percent duty on a wide number of imported products — but not copper, wheat, or meat — and created an Import Duties Advisory board, charged with recommending increases in particular duties above the flat 10 percent level. At the last minute a concession was made to the Dominions and colonies. The latter were entirely exempted from the increase, and the former were granted exemption until November 1932, by which time it was expected that mutually satisfactory arrangements for preferences would have been reached. Eighteen countries responded to the Import Duties Act by asking the United Kingdom to undertake negotiations for mutual reductions. The reply was universally negative on the grounds that it was first necessary to arrive at understandings with the Empire (Condliffe, 1940, pp. 300–8). In the spring of 1932, the Import Duties Advisory Board was hard at work raising duties above the 10 percent level, with the notable increase in iron and steel products to 33 1/3 percent. Three years later in March 1935 the iron and steel duties were increased to 50 percent in order to assist the British industry in negotiating a satisfactory basis with the European iron and steel cartel (Hexner, 1946, p. 118).

Imperial economic conferences held in 1923, 1926, and 1930 had all broken down on the failure of the United Kingdom to raise tariffs which


would have put her in a position to extend preferences to the Empire. Substitute assistance in the form of arrangements for Empire settlement or Empire marketing boards failed to produce significant effects on either migration or trade. British bulk-purchase schemes sought especially by Australia had been halted as early as 1922 and had not been resumed. Hopes were high for the Imperial Economic Conference of 1932 in Ottawa which now had British tariffs to work with.

Canada cared about wheat, butter, cheese, bacon, lamb, and apples; Australia about wheat, chilled meat, butter, cheese, currants, dried fruits, and canned fruits; South Africa about wine and dried and canned fruits; New Zealand about butter and mutton. The position differed in those commodities that the Dominions produced in greater amounts than the United Kingdom could absorb, like wheat, in which diversion of Dominion supplies to the United Kingdom from third markets would produce an offsetting increase in non-Dominion sales in non-British markets and leave Dominion export prices overall unchanged, from those in which the United Kingdom depended upon both Dominion and foreign sources of supply, among the latter notably Argentina in meat, Denmark in butter, Greece in dried currants and raisins, and, it would like to think, the United States in apples. Trade diversion from foreign to Dominion sources was possible in this latter group, but only at some cost in British goodwill in the indicated import markets. On this score, the United Kingdom was obliged to negotiate at Ottawa with an uneasy glance over its shoulder.

A significant Dominion manufacture, as opposed to agricultural product, which had earlier received preference in the British market, in 1919 under the McKenna duties, was motor cars. This preference had led to the establishment of tariff factories in Canada, owned and operated by United States manufacturers. Its extension in the Ottawa agreement led to the unhappy necessity of defining more precisely what a Canadian manufactured motor car consisted of, and whether United States-made motor parts merely assembled in Canada qualified as Canadian motor cars.

In exchange for concessions in primary products in the British market, the United Kingdom expected to get reductions in Dominion duties on her manufactures. But it proved impossible at Ottawa to fix levels of Dominion tariffs on British goods. Instead, the Dominions undertook to instruct their respective tariff boards to adjust the British preference tariff to that level which would make British producers competitive with domestic industry. Resting on the notion of horizontal supply curves, rather than the more usually hypothesized and far more realistic upward-sloping curves, the concept was clearly unworkable and gave rise to unending contention. It was abandoned in 1936.


Argentina, Denmark, Greece, Norway, and Sweden were not content to yield their positions in the British market without a struggle. Even before the Import Duties Act had taken effect, Denmark in January 1932 legislated preferences favouring Britain, and on raw materials used in manufactured exports. By June 1932, total imports had been reduced 30 to 40 percent, but import permits issued for British goods allowed for a 15 percent increase (Gordon, 1941, p.80). In similar fashion, Uruguay undertook to discriminate in the allocation of import licences in favour of countries that bought from her. The threat to discriminate against the United Kingdom was clear. Quickly after Ottawa, British customers pressed to take up negotiations postponed from early 1932 and to settle the extent to which Ottawa would be allowed to squeeze them out of the British market.

In the Roca—Runciman Agreement of May 1, 1933, the United Kingdom agreed not to cut back imports of chilled beef from Argentina by more than 10 percent of the volume imported in the year ended June 30, 1932, unless at the same time it reduced imports from the Dominions below 90 percent of the same base year. This was disagreeable to Australia, which was seeking through the Ottawa agreements to break into the chilled-beef market in the United Kingdom, in which it had previously not been strong (Drummond, 1975, p. 310). Three-year agreements with Denmark, Norway, and Sweden, running from various dates of ratification about mid-1933, provided minimum butter quotas to Denmark and (much smaller) to Sweden, a minimum bacon quota to Denmark amounting to 62 percent of the market, and agreement not to regulate the small and irregular shipments of bacon, ham, butter, and cheese by Norway. But guarantees to these producers left it necessary, if domestic British producers of, say, butter were to be protected, to go back on the Ottawa agreements which guaranteed unlimited free entry into the British market. The position was complicated by New Zealand's backward-bending supply curve which increased butter production and shipments as the price declined, and Australian policy, which evoked the most profound distrust from New Zealand, of subsidizing the export of butter to solve a domestic disposal problem (Drummond, 1975, pp. 320ff., 475). The problems of the Dominions and of the major foreign suppliers of the British markets for foodstuffs compounded the difficulties of British agriculture. In defence of the lost interest, the British agricultural authorities developed a levy-subsidy scheme under which tariffs imposed on imports were segregated to create a fund to be used to provide subsidies to domestic producers. The levy-subsidy scheme was first applied in the United Kingdom on wheat in 1932; strong voices inside the British cabinet urged its application to beef, dairy products, and bacon and ham. Wrangling over these proposals went on between


British and Commonwealth negotiators for the next several years as the United Kingdom tried to modify the Ottawa agreements, with Dominion and foreign-supplier consent, in order to limit imports. In the background, dispute deepened within the British cabinet between the agriculture minister, Walter Elliott, who wanted subsidies, and the chancellor of the exchequer, Neville Chamberlain, who feared their effect on the budget and consistently favoured raising prices and farm incomes, in the United Kingdom and abroad, by cutting production and limiting imports.

In its agreements in Scandinavia, the United Kingdom sought to bind its trading partners to give preferences to British exports, and especially to guarantee a percentage share of the market to British suppliers in that sorely afflicted export industry, coal. In eight trade agreements, British coal exporters were guaranteed generally the major share of import volume, with quotas as follows: Denmark, 90 percent; Estonia, 85 percent; Lithuania, 80 percent; Iceland, 77 percent; Finland, 75 percent; Norway, 70 percent; Sweden, 47 percent. In addition, Denmark agreed that all bacon and ham exported to the United Kingdom should be wrapped in jute cloth woven in the United Kingdom from jute yarn spun in the United Kingdom (Kreider, 1943, pp. 61–2). The Danish government gave British firms a 10 percent preference for government purchases, and undertook to urge private Danish firms to buy their iron and steel in the United Kingdom wherever possible. Kreider notes that these agreements constrained British trade into a bilateral mode: British agreements with Finland lifted the unfavourable import balance from 1 to 5 against the United Kingdom in 1931 to 1 to 2 in 1935. The agreement with the Soviet Union called for the import/export ratio to go from 1 to 1.7 against the United Kingdom in 1934 to 1 to 1.5 in 1935, 1 to 1.4 in 1936 and 1 to 1.2 in 1937 and thereafter. Argentina agreed to allocate the sterling earned by its exports to the United Kingdom to purchases from the United Kingdom.

The Ottawa agreement dominated British commercial policy from 1932 to the Anglo-American Commercial Agreement of 1938, and to a lesser extent thereafter. It was continuously under attack from foreign suppliers other than the United States that entered into trade and financial agreements with the United Kingdom, and from the United States which undertook to attack it as early as the World Economic Conference of 1933. But at no time could the agreement have been regarded as a great success for the Empire. It produced endless discussion, frequently bitter in character, and dissatisfaction on both sides that each felt they had given too much and gained too little. By 1936 and 1937, there was a general disposition to give up the attempt, or at least to downgrade its priority.


The Netherlands

The United Kingdom embraced free trade, broadly speaking, with the repeal of the Corn Laws in 1846, and gave it up with the McKenna duties in 1916. The Netherlands' support goes back at least to the sixteenth century, and lasted until 1931. A faithful supporter of attempts to spread freer trade throughout the world from the World Economic Conference in 1927 until the Convention for the Abolition of Import and Export Prohibitions and Restrictions and the Conference with a View to Concerted Economic Action, the Netherlands ultimately turned to the smaller arena of the Oslo agreement of Scandinavia and the Low Countries. The pressure from declining wheat prices, however, proved too severe. In 1931 the Netherlands undertook to regulate farm prices and marketing. The Wheat Act of 1931 set the domestic price at 12 florins per 100 kilograms at a time when the world price had fallen to 5 florins, necessitating the first major break with the policy of free trade in nearly three centuries. There followed in 1932 as a response to the depreciation of sterling, first an emergency fiscal measure establishing 25 percent duties generally, and then in agriculture the Dairy Crisis Act and the Hog Crisis Act, which were generalized in the following year as the Agricultural Crisis Act of 1933 (Gordon, 1941, p. 307). The freer-trade tradition of the Oslo group continued, however. At the depth of the depression in June 1932, the Oslo group concluded an agreement to reduce tariffs among themselves on a mutual basis by 10 percent per annum for five years. Though it was already blocking out the discrimination to be achieved at Ottawa two months later, the United Kingdom objected on the grounds that the arrangement would violate the most-favoured-nation clause. After dissolution of the gold bloc in 1936, the Oslo group resumed its example-setting work in reducing trade barriers, agreeing first to impose no new tariffs and then to eliminate quotas applied to one another's trade on a mutual basis. Since the most-favoured-nation clause applied only to tariffs and not to quotas, there was no basis for an objection or to claim extension of the concession.

During the period of restricted trade, the Netherlands licensed not only imports, but in some cases exports. The latter practice was followed where quotas in foreign import markets left open the question whether the difference between the domestic price and the world price would go to importers or exporters. A law of December 24, 1931 established a system of licensing exports in instances of foreign import quotas, with permits distributed among exporters in accordance with the volumes of some historical base period. Licence fees were then imposed, in the amount of 70–100 percent of the difference between the


world price and the domestic price in the import market, with the collected proceeds distributed to Dutch producers. The purpose of the fees was to divert the scarcity rents available from import restriction, first to the exporting country as a whole, and then, within the exporting country, from exporting firms to agricultural producers (Gordon, 1941, p. 356).


The French are often given the credit in commercial policy between the wars for the invention of the quota, a protective device which was to flourish until well into the 1950s, and even then to experience revival in various forms in the 1970s. While its origins go well back in time, the proximate causes of the quota in 1930 were the limitation on France's freedom of action imposed by the network of trade treaties it had fashioned, beginning with that with Germany in 1927, and the difficulty of ensuring a restriction of imports sufficient to raise domestic prices — the object of the exercise — in the face of inelastic excess supplies abroad. Like the Hawley—Smoot tariff increases in committee, quotas spread from agricultural produce to goods in general.

Under an old law of December 1897 — the so-called loi de cadenas — the French government had authority in emergency to change the rate of duty on any one of 46 agricultural items. The emergency of falling agricultural prices after 1928 caused the laws of 1929 and 1931 which extended the list. With especially wheat in excess supply overseas in regions of recent settlement like Australia and Canada, the French decided that raising the tariff under their authority would not only pose questions about their obligations under trade treaties, but might well not limit imports, serving only to reduce world prices and improve the terms of trade. Australia, in particular, lacked adequate storage capacity for its wheat and had no choice but to sell, no matter how high the price obstacles erected abroad. The decision was accordingly taken to restrict quantity rather than to levy a customs duty (Haight, 1941, p. 145). The device was effective. As the depression deepened, and as imports grew with the overvaluation of the franc, it was extended to industrial goods. Other countries followed suit, especially Germany with its foreign-exchange control. In 1931, Brüning and Pierre Laval, the then French premier, reached an agreement establishing industrial understandings to coordinate production and trade between German and French industries. One such understanding in electrical materials developed into a cartel. The rest were concerned primarily with restricting German exports to France. When they failed to do so, they


were replaced by French quotas (Hexner, 1946, pp. 119, 136). After a while, the French undertook bilateral bargaining over quotas, which led in time to reducing quotas below desired limits in order to have room to make concessions during negotiations.


Less by design than by a series of evolutionary steps, Germany developed the most elaborate and thoroughgoing system of control of foreign trade and payments. Foreign claims on Germany were blocked on July 15, 1931, when Germany could no longer pay out gold and foreign exchange to meet the demands of foreign lenders withdrawing funds. This default was followed by a negotiated Standstill Agreement between creditors and Germany, involving a six-month moratorium on withdrawals, subsequently renewed. The decision not to adjust the value of the Reichsmark after the depreciation of sterling in September 1931 made it necessary to establish foreign-exchange control, and to prevent the free purchase and sale of foreign currencies in the private market. The proceeds of exports were collected and allocated to claimants of foreign exchange seeking to purchase imports. Clearing agreements developed under which German importers paid Reichsmarks into special accounts at the Reichsbank in favour of foreign central banks, which then allocated them to their national importers of German goods. The foreign central bank faced a particular problem whether or not to pay out local currency to the exporter in advance of its receipts of local currency from national importers of German goods. Some central banks did pay off local exporters against claims on the German clearing, following what was later called the "payments principle," and experienced inflation through the resultant credit expansion. Other central banks made their exporters wait for payment which both avoided monetary expansion and held down the incentive to export to Germany (Andersen, 1946).

A number of countries with large financial claims on Germany, such as Switzerland, insisted that the proceeds of German exports be used in part to pay off creditors abroad, thus converting "clearing" into "payments" agreements. These payments agreements were also used in a few cases to require Germany to continue spending on non-essential imports of importance to the exporter, such as tourism in Austria.

Germany set limits on the use of foreign-owned Reichsmarks within Germany as well as against their conversion into foreign exchange. They were not permitted to be used for many classes of exports, capable of earning new foreign exchange, but only for incremental exports


which could be sold only at implicit depreciated exchange rates, for travel within Germany — the so-called Reisemark — and under certain limitations for investment in Germany. Foreshadowing some postwar limitations on foreign direct investment, permission was granted for investment by foreigners in Germany with outstanding mark balances only when the investment was considered generally beneficial to the German economy, was made for at least five years, did not involve a foreign controlling interest in a German enterprise, and did not exceed a stipulated rate of interest (Gordon, 1941, pp. 92–3).

In August 1934, the New Plan was adopted under the leadership of the German minister for economics, Hjalmar Schacht. In the words of Emil Puhl, an associate of Dr Schacht's at the Reichsbank, it provided totalitarian control over commodities and foreign exchange, with stringent controls on imports and on foreign travel, administered through supervisory boards for a long list of commodities and foreign exchange boards in the Reichsbank (Office of the Chief Counsel for Prosecution of Nazi Criminality, 1946, VII, p. 496). Along with trade and clearing agreements, designed especially to ensure German access to food and raw materials, and to promote exports, the Reichsbank developed a series of special marks for particular purposes. In addition to the Reisemarks for travel, there were special-account (Auslands-Sonder-Konto , or "Aski") marks which came into existence through imports of raw materials, especially from Latin America, and which were sold by the recipients at a discount and used by the buyers on a bilateral basis for purchases of incremental German goods. The incremental aspect of the exports was, of course, difficult to police. Because Aski-marks would be sold only at a discount, the raw-material supplies against them tended to raise their prices in the bilateral trade (Gordon, 1941, p. 180). On the German side, Schacht established a price-control agency in 1935 in each export group — amounting to 25 in all — to prevent German exporters from competing with one another for export orders and to assure that all exporters sold at the highest possible price (Office of the Chief Counsel, 1946, VII, p. 383).

Beginning in 1934, German foreign-trade plans were intended particularly to ensure access to imported food and raw materials. The New Plan, and especially the Four Year Plan which succeeded it in the fall of 1936, were designed to produce synthetic materials, especially Buna-S (synthetic rubber) and gasoline from coal, where foreign supplies for wartime needs could not be assured. Particular problems were encountered in non-ferrous metals, in iron ore, for which the low-grade Salzgitter project was developed in the Four Year Plan, and in synthetic fertilizer required for self-sufficiency in food. Schacht at the Reichsbank, Goering as Schacht's successor in the Economics Ministry and


as the head of the Four Year Plan, and the War and Food Ministries wrangled among themselves over policies, including especially whether to export wheat against foreign exchange following the bumper crops of 1933 and 1934 or to conserve it as a war reserve; whether to hoard Germany's meagre free foreign-exchange reserves or to spend them for crucially short raw materials; the mobilization of privately owned foreign securities and their conversion to cash for buying materials; the pricing of exports; the purchase of unnecessary imports like frozen meat from Argentina, for lack of which Schacht was unable to conclude a favourable trade treaty, etc. (Office of the Chief Counsel, 1946, vol. VII). The documents published by the prosecution at the Nuremberg postwar trials reveal considerable internal dissension, especially in the exchanges between Schacht and Goering that lasted through 1937 and ended in Schacht's defeat and resignation.

German sentiment had continuously decried the loss of the country's African colonies in the Versailles treaty. Schacht continuously referred to the loss in Young Plan discussions of the late 1920s and was still harping on the issue in an article in Foreign Affairs in 1937. In a conversation with the American ambassador, Bullitt, in the fall of 1937, Goering noted that Germany's demand for a return of the German colonies which had been taken away by the Versailles treaty was just, adding immediately that Germany had no right to demand anything but these colonies. Particularly sought were the Cameroons which could be developed by German energy (Office of the Chief Counsel, 1946, vol. VII, pp. 890, 898). Three weeks earlier, however, in a private conference, Hitler had stated that it made more sense for Germany to seek material-producing territory adjoining the Reich and not overseas (ibid., vol. I, p. 380). And at a final war-preparatory briefing in May 1939, he went further to explain the need for living space in the East to secure Germany's food supplies. It was necessary to beware of gifts of colonial territory which did not solve the food problem: "Remember blockade" (ibid., vol. I, p. 392). The directive to the Economic Staff Group on May 23, 1941 just before the attack on the Soviet Union stated that the offensive was designed to produce food in the East on a permanent basis.

It was widely claimed that Germany squeezed the countries of southeast Europe through charging high prices for non-essential exports, while not permitting them to purchase the goods they needed, at the same time delaying payment for imports through piling up large debit balances in clearing arrangements. In a speech at Königsberg in August 1935, Schacht expressed regret that Germany had defaulted on debts to numerous pro-German peoples abroad, indicated confidence that Germany could obtain the raw materials it needed, acknowledged


that the trade relations of Germany with different countries had changed a great deal, but insisted that these new relations had created for a number of countries new possibilities of exporting to Germany which had helped relieve them from the rigours of the world depression (Office of the Chief Counsel, 1946, vol. VII, p. 486). In a polemical exchange in 1941, Einzig insisted that Benham was in error in holding that southeast European countries had improved their terms of trade in dealing with Germany, which paid higher prices than Western Europe was able to pay, and sold German goods competitively in the area. A postwar analysis of the matter tended to show that Benham and Schacht had been right (Kindleberger, 1956, pp. 120ff.).

An intellectual defence of the Benham—Schacht position had been offered in a somewhat different context as early as 1931 by Manoilesco, who expressed the view that the theory of comparative advantage had to be qualified if the alternative to tariff protection for an industry were either unemployment, or employment at a wage below the going rate. His statement of this position in The Theory of Protection and International Trade (1931) was strongly attacked on analytical grounds by the leading international-trade theorists of the day — Haberler, Ohlin, and Viner, each in extended treatment — but was resurrected after the war by Hagen, and then generalized into a second-best argument for interference with free trade, e.g. by tariffs. When the conditions for a first-best solution under free trade do not exist, protection may be superior in welfare for a country to free trade. By the same token, export sales at less than optimal terms of trade may be superior to no exports and unemployment.

The Union of Soviet Socialist Republics

During the 1920s, commercial policy in the Soviet Union had been the subject of a great debate under the New Economic Plan, between the Right that advocated expansion of agriculture, and of other traditional exports, plus domestic production of manufactured consumer goods to provide incentives for farmers, and the Left that favoured development of domestic heavy industry and the relative neglect of agriculture. Under the proposals of the Right, exports of agricultural products would be expanded to obtain imports of machinery, metals, raw materials, and exotic foodstuffs such as coffee and tea. This was the trade-dependent strategy. The Left, on the other hand, sought to increase trade in order to achieve autarky as rapidly as possible, as it feared dependence on a hostile capitalist world. With Stalin's achievement of power, the Left strategy was adopted in the First and subsequent Five Year Plans.


Strong efforts were made to reduce dependence on imports to a minimum. Territorial losses during the First World War, land reform which divided large estates, and the inherent bias of planning which favoured domestic users over foreign markets helped reduce the ratio of exports to national income, which fell from a figure variously estimated within the range of 7–12 percent in 1913 to 3.5 at the interwar low in 1931. Estimates of the volume of Soviet exports vary, depending upon the weights chosen, but on the basis of 1927–8 weights, exports fell from 242 in 1913 to 53 in 1924–5 before recovering to 100 in 1929. Thereafter they rose sharply to 150 in 1930 and 164 in 1931 with disastrous consequences for the Soviet peoples (Dohan and Hewett, 1973, p. 24).

In 1930 and 1931, Soviet exports conformed to the model of the backward-bending supply curve in which volume increases, rather than decreases, as price falls. Declines in the prices of grain, timber and oil, starting as early as 1925, had threatened the Soviet Union's capacity to pay for the machinery and materials necessary to complete its Five Year Plans, and threatened as well its capacity to service a small amount of foreign debt contracted in the 1920s. To counter this threat, the Soviet authorities diverted supplies of foodgrains from domestic consumption to export markets, shipping it from grain-surplus areas to export ports and leaving internal grain-deficit areas unsupplied. The result was starvation and death for an unknown number of the Soviet people numbering in millions. The world price of wheat fell by half between June 1929 and December 1930, and more than half again by December 1932. So hard did the Soviet Union push exports that supplies of pulp wood, woodpulp, timber, lumber, and even coal, asbestos, and furs threatened to enter the Canadian market, a notable exporter of these products in ordinary times, and led the Canadian government in February 1932 to prohibit the import of these commodities from the Soviet Union (Drummond, 1975, p. 205). Similar discriminatory restrictions were taken in many other markets. The dysfunctional character of forcing exports on the world market became clear and the volume of Soviet exports levelled off and started downward in 1932. As primary-product prices rose after 1936, moreover, the export volume declined sharply below the 1929 level.


Japan had not participated fully in the boom of the 1920s, but the fact that it had restored the yen to par after the First World War as late as January 1930 made it highly vulnerable to the liquidity crisis of 1930 and 1931. It was vulnerable, too, because of heavy dependence on silk, a


luxury product, about to experience both a sharp decline in its income-elastic demand and severe competition from rayon and later from nylon. In 1929 silk was responsible for 36 percent of Japanese exports by value, and produced 20 percent of Japanese farm income. The price of silk fell by about half from September 1929 to December 1930. With the help of the depreciation of the yen after December 1931, it reached a level of $1.25 a pound in March 1933, compared with $5.20 in September 1929.

The combination of sharp exchange depreciation and the collapse of the American market in silk produced a drastic reorientation in Japanese export trade, away from North America and Europe and toward Asia, Africa, and Latin America. Export drives were especially intense in British and Dutch colonies, and in the so-called "yen bloc" of Korea, Formosa, Kwantung, and Manchuria. The Japanese share of the Netherlands East Indies market, for example, rose from 10 percent in the 1920s to 32 percent in 1934 before restrictive measures were applied under the Crisis Act of 1933 (Furnival, 1939, p. 431; Van Gelderen, 1939, p. 24). Japanese exports to the yen bloc rose from 24 percent in 1929 to 55 percent in 1938, with imports rising from 20 to 41 percent over the same period (Gordon, 1941, p. 473). Within Asia, Japan developed sugar production in Formosa and stopped buying it in Java in the Netherlands East Indies. The British and Dutch Empires imposed quantitative restrictions on Japanese imports, especially in textiles. Foreshadowing a technique extensively used by the United States after the war, at one stage the British asked the Japanese to impose export controls on shipments to India or face abrogation of the Indo-Japanese Commercial Convention of 1904 (Drummond, 1972, p. 133). By 1938 Netherlands East Indies imports from Japan were down to 14 percent of the total from a high of 30 percent in 1935 (Van Gelderen, 1939, p. 17). Japanese fear of reprisals led them to amend the Export Association Act of 1925, which had been enacted to promote exports, so as to control exports in accordance with restrictions imposed by importing countries (Gordon, 1941, p. 360).

The World Economic Conference of 1933

Sir Arthur Salter termed the Hawley—Smoot tariff a turning-point in world history. Lewis Douglas thought the Thomas amendment under which the dollar was devalued in March 1933 marked "the end of Western civilization as we know it" (Kindleberger, 1986, p. 200). W. Arthur Lewis regarded the failure of the World Economic Conference of 1933 as "the end of an era" (Lewis, 1950, p. 68). Each characterization contained an element of hyperbole. The World Economic Con-


ference offered only the slightest of chances to reverse the avalanche of restrictions on world trade and to stabilize exchange rates. The reversal in tariffs came the next year with the June 1934 Reciprocal Trade Agreements Act in the United States. More stability in exchange rates took root with the Tripartite Monetary Agreement of September 1936 among, initially, the United Kingdom, France, and the United States.

The inspiration for a new world economic conference after 1927 went back to the early years of deflation and to a suggestion of Chancellor Brüning of Germany to treat disarmament, reparations, war debts and loans as a single package to be settled on a political basis, rather than separately in each case by economic experts. A preparatory commission of economic experts under the auspices of the League of Nations fashioned a package of somewhat different ingredients, in which the United States would lower the Hawley—Smoot tariff, France would reduce quota restrictions, Germany relax foreign-exchange control and the United Kingdom would stabilize the pound. War debts were excluded from the agenda by the United States, and consequently reparations by France and the United Kingdom. Pending the convening of the conference, delayed first by the November 1932 elections in the United States and then by domestic preoccupations of the newly elected President Roosevelt, Secretary of State Cordell Hull tried to work out a new tariff truce, but ran into blocks. The United States desired new tariffs on farm products subject to processing taxes under the new Agricultural Adjustment Act; the United Kingdom had some pending obligations under the Ottawa agreements; France reserved her position until she could see what would happen to US prices as a response to the depreciation of the dollar initiated in April 1933. Only eight countries in all finally agreed to a truce on May 12, 1933, many with explicit reservations. In the final preparations for the conference, commercial-policy measures seemed secondary to all but Cordell Hull, as contrasted with the problem of raising international commodity prices and international public-works schemes, for neither of which could general solutions be found. In the end the United States broke up the conference by refusing to stabilize the exchange rate of the dollar (only to reverse its position seven months later in February 1934), the British felt moderately comfortable with their Empire solution in trade with the vast volume of wrangles still to come, and the gold bloc battened down to ride out the storm. The only positive results were an agreement on silver negotiated by Senator Key Pitman of the US delegation, and bases laid for subsequent international agreements in sugar and wheat. Perhaps a negative result was the de facto constitution of the sterling bloc with most of the Commonwealth, save Canada and the subsequent withdrawal of the Union of South Africa, plus foreign adherents such as Sweden, Argentina, and a number of countries in the Middle East.


Commodity Agreements

From the decline in commodity prices in the mid-1920s, one after another attempt had been made to devise schemes for raising prices. Some were private, like aluminum, copper, mercury, diamonds, nickel, iron and steel; some were governmental. Of the governmental, some were under the control of a single government — Brazil in coffee, Chile in nitrates, the United States in cotton, the Netherlands East Indies in cinchona bark; others, especially in sugar and wheat, were worldwide. Some of the private/government agreements in iron and steel, petroleum, and aluminum were regional, especially European (Gordon, 1941, pp. 430ff.).

The Chadbourne Plan in sugar was reached in May 1931 among leading export countries — Belgium, Cuba, Czechoslovakia, Germany, Hungary, Java, Peru, and Poland — later joined by Yugoslavia. But British India, France, the United Kingdom, and the United States — important consumers that also maintained substantial production — remained outside the agreement. The United States formulated its own legislation, the Jones—Costigan Act of 1934, which assigned rigid quotas to imports from abroad and discriminated in favour of Cuba. Under the Chadbourne Plan, production declined among the signatories but rose almost as much outside. Particularly hard hit was Java, which lost both the Japanese and the Indian markets, the former to Formosan production, the latter to domestic production. Unsold stocks in Java reached 2 1/2 million tons in 1932, and the government took over in January 1933 as the single seller. The failure of the Chadbourne scheme led the World Economic Conference to push for a new agreement, which was finally reached under League of Nations auspices only in May 1937 at the height of the recovery of primary-product prices.

The World Economic Conference was the twentieth international meeting on the subject of wheat after 1928 when the price of wheat started to plummet — two of the meetings dealt with imperial preference, seven were limited to Eastern Europe as already mentioned, and eleven were general. The agreement that emerged after the World Economic Conference achieved a system of export quotas for major producers, but no agreement on acreage controls to limit production (Malenbaum, 1953).

Tea was regulated in this period by an international committee which met in London. In March 1931 the four leading producers of tin—Malaya, Bolivia, Nigeria, and the Netherlands East Indies—cooperated in the Joint Tin Committee. In May 1934 nine countries in Southeast Asia producing 95 percent of the world's rubber supply undertook to impose export quotas to reconstitute the Stevenson rubber plan which had broken down in 1928 (Van Gelderen, 1939, pp. 51ff.). Their


problem was complicated by sharply differing supply elasticities in the plantation and the native sectors, the latter characterized in many countries by backward-bending responses. As rubber prices rose in the 1936–7 inventory boom, a number of governments sought to tax away the price increase from the producers, but until the price collapse of September 1937 succeeded mainly in raising the price to buyers in a sellers' market. With the eventual decline in prices, the incidence of the export taxes shifted back from the foreign consumer to the domestic producer and in most instances they were quickly removed.


In December 1934 a border incident occurred between Italian Somalia and Ethiopia. Italy demand an apology; Ethiopia refused. With tension rising, the League of Nations sought to arbitrate but received no help from Italy. After further border clashes, Italian troops invaded Ethiopia on October 3, 1935 without a declaration of war. Later in the month, the League of Nations declared Italy the aggressor and voted sanctions to be applied to her in arms supply, finance, and export-import restrictions. The League did not, however, decree sanctions in the critical item, oil. Germany refused to comply with the League vote; the United States, though not a member of the League of Nations, was strongly sympathetic. Oil sanctions were discussed again in March 1936. At this time an attempt was made to apply them informally through major world oil companies. These companies stopped selling to Italy, but the increase in oil prices thereby brought about encouraged a vast number of small shippers to enter the business for the first time and to deliver oil to Italian troops at Red Sea ports in the full quantities required. With the fall of Addis Ababa, the Italians proclaimed empire over Ethiopia and withdrew from the League. League members continued to apply sanctions with increasing resolution until July 15, 1936, when sanctions were abandoned (Feis, 1946, vol. III).

The Disintegration of the World Economy

In a few countries — notably France and the United States — foreign trade fell by the same proportion as national income from 1929 to 1938. In others trade fell more than output. Thus the ratio of imports to industrial production declined by 10 percent in the United Kingdom, nearly 20 percent in Canada, 30 percent in Germany, and 40 percent in Italy. Crop failures in the United States in 1934 and 1936, and in Germany in 1937 and 1938, prevented the decline in the proportion of


imports from being wider (Meade, 1939, pp. 107–8). Buy-British and Buy-American campaigns, involving government discrimination against foreign as against domestic suppliers with margins of initially 10 percent, increased to 25 percent, in the United States, and 100 percent for items under $100, were often supported by programs affecting state governments, and campaigns to persuade the general public to discriminate as well (Bidwell, 1939, pp. 70–1 and Appendix A). The major influences, to be sure, were higher tariffs, quotas, clearing and payments agreements, and preferential trade agreements.

What trade remained was distorted, as compared with the freer market system of the 1920s, both in commodity and in country terms. The index of German imports for 1937, with a base of 100 in 1929, strongly reflected Wehrwirtschaft , and especially rearmament: "other ores" 153, manganese ore 142, iron ore 122, iron and steel 121, copper 100, cotton 73, wool 62, coal 59, oil seeds 57, timber 28 (Meade, 1938, p. 128). The share of Germany in Turkish, Greek, and Italian imports rose between 1928 and 1939 respectively from 13 to 43 percent, 8 to 29 percent, and 10 to 24 percent; the same percentages of national exports to Germany rose from 13 to 43 percent, 27 to 39 percent and 13 to 17 percent for the same countries in the same order (Thorbecke, 1960, p. 100). By 1937, bilateral clearings amounted to 12 percent of total world trade and 50 percent of the trade of Bulgaria, Germany, Greece, Hungary, Romania, Turkey, and Yugoslavia (League of Nations, 1942, p. 70). Pioneering estimates of the shrinkage of multilaterally as opposed to bilaterally balanced trade were made for the League of Nations Economic and Financial Department by Folke Hilgerdt. In 1928, bilateral balancing of export and import values between pairs of countries on the average covered 70 percent of merchandise trade, with about 5 percent more covered by exports or imports of services or capital movements, and 25 percent balanced multilaterally (Hilgerdt, 1941). Hilgerdt's two studies emphasized the shrinkage of the proportion of the trade balanced multilaterally during the depression years, without furnishing a precise estimate for the end of the 1930s (Hilgerdt, 1941; 1942). A postwar study on a somewhat different basis furnished a comparison for 1938 with 1928, shown in Table 6.1.

Major changes occurred both world-wide and within Europe. On a world basis, the largest change shown in the Hilgerdt analysis derived from the fact that the developing countries of the tropics no longer earned large surpluses in merchandise trade with the United States to pay their interest on debts owned to Europe, and especially to the United Kingdom. Regionally, within Europe, the most important change was the failure of Germany to earn an export surplus in Europe, largely the United Kingdom, to enable her to pay for her net imports of raw materials from overseas. Another striking feature was the shift by the


Table 6.1 Proportions of world trade balanced bilaterally and multilaterally, 1928 and 1938 (as percentage of total)

By non-merchandise











Source: Thorbecke (1960, p. 82).

United Kingdom of procurement from Europe to the sterling area. France, the Netherlands, and especially the United Kingdom diverted trade from the rest of Europe to their colonial empires, a trend which would be reversed after the Second World War, and especially after the formation of the European Economic Community in 1957 and the United Kingdom's accession to it in 1973. In 1913 22 percent of British exports went to the Empire. By 1938 the figure had more than doubled to 47 percent. In imports, the proportion rose over the same period from 22.3 to close to 40 percent. As noted earlier, the figures might have risen further had it not been for what has been called "Imperial Insufficiency" (Hancock, 1940, p. 232; see also Drummond, 1972).

World Trading Systems

Recovery of raw-material prices from 1933 to 1937 was followed by some considerable reduction in tariffs, and relaxation of quota restrictions. The renewed, though less far-reaching, decline of these prices in September 1937, outside the fields dominated by European rearmament, set back the movement towards freer trade. The last five years of the interwar period were most clearly characterized by what have been called disparate "world trading systems" (Tasca, 1938). At the limits were the system of German trade, locked into a network of bilateral clearing and payments agreements, and practising autarky for the sake of war economy (Petzina, 1968), and at the other extreme, the United States, which stood aloof from all payments and clearing agreements, with few quota restrictions, largely in agriculture, some subsidies to export in agricultural commodities, plus government credit through the Export-Import Bank for export promotion. Within Europe, the Balkan countries were nearer to the German model, the Oslo group to the American. Midway between was the Empire preference scheme of the United Kingdom, the Dominions, India, and the dependent colonies. Latin America had been hard hit by declines in raw-material prices and the decline in foreign lending, but was hopeful of trade expansion under


the Roosevelt "good neighbor" policy. The Soviet Union went its own way. Anxious to join a system, but largely orphaned outside them, were the Middle East and Japan, the latter of which carved out its own Greater East Asia Co-Prosperity Sphere.

There were limited attempts at achieving a single unified world trading system. The League of Nations Committee for the Study of the Problem of Raw Materials reported in September 1937 at a time when payments difficulties had eased but the position was on the point of reversal (Meade, 1938, p. 162). It found few problems of supply or access to materials, and argued in favour of valorization schemes to raise prices provided that consumers' interests were safeguarded. The report went to the League of Nations Assembly where it was pigeonholed as a consequence of the sharp check to commodity prices and deterioration in payment balances.

Before that time, the British and French governments had asked Paul Van Zeeland, a former Belgian prime minister, to prepare a program for world action in the commercial-policy field. In January 1938, the Van Zeeland report was presented to the public, equally an inopportune time. It called for reciprocal reductions of tariffs, generalized by the most-favoured-nation clause, replacement of industrial quotas by tariffs or by tariff quotas, removal of foreign-exchange control, clearing agreements, and the ban on new lending in London; and, as a final step when all else was in operation, six-month agreements on foreign-exchange rates leading ultimately to the establishment of fixed rates under the gold standard (Meade, 1938, p. 159). The report was received with universal agreement that the restoration of trade was needed, but equally universal reluctance on the part of all governments to take any decisive initiative in the matter (Condliffe, 1940, p. 47).

The 1937–9 recession in fact led to increases in tariffs in Belgium, France, Greece, Italy, the Netherlands East Indies, Norway, Sweden, Switzerland, and Yugoslavia in 1938, and in that stronghold of free-trade sentiment, the Netherlands, in March 1939. Rubber and copper quotas, which had been freed in 1937 under their commodity schemes, were tightened down again. Brazil, Colombia, and Japan extended their foreign-exchange restrictions. Germany and Italy introduced the death penalty for violations of foreign-exchange regulations in December 1936 and June 1939, respectively. Italy also constituted a Supreme Autarky Commission in October 1937 (Meade, 1939, p. 197). In all, the number of clearing and payments agreements rose from 131 on June 1, 1936 to 171 by January 1, 1939 (Gordon, 1941, p. 131).

Meanwhile some considerable relaxation of commercial policy was underway in the United States, led by Cordell Hull, whom Herbert Feis, his economic adviser in the Department of State, called a monomaniac


on the subject of tariff reductions (Feis, 1966, p. 262). Hull had long been a Congressman from eastern Tennessee, which specialized in tobacco for export, before becoming Secretary of State, and had been in opposition to the Fordney–McCumber and Hawley–Smoot tariff increases in 1922 and 1930 as a member of the House of Representatives Committee on Ways and Means. As early as the World Economic Conference of 1927, as a Congressman, he had been thought to believe that the tariff of the United States was the key to the entire world situation (US Department of State, Foreign Relations of the United States , 1928, vol. I, p. 239). As Secretary of State and leader of the United States delegation to the World Economic Conference of 1933, he had been frustrated in his attempts to get world tariffs reduced by the repudiation of President Roosevelt which prevented him from encountering the profound disinterest of the other countries. The tariff truce of May 1933 lapsed when the conference failed, but Secretary Hull persevered. At the Seventh Conference of American States at Montevideo in November 1933 – the first having been held in 1889 – he had tariffs put on the agenda for the first time and induced President Roosevelt to offer the Latin American republics tariff reductions (Gordon, 1941, p. 464). The main business accomplished at Montevideo was the strengthening of the most-favoured-nation clause, as Hull had tried to do at London, by government agreement not to invoke the clause in order to prevent the consummation of multilateral tariff reductions in agreements to which a government was not a party. The full agreement provided for no tariff reductions, and was signed by eight countries, though ratified only by the United States and Cuba (Viner, 1950, p. 37).

Upon his return from Montevideo, Secretary Hull found that the President had established an Executive Committee on Commercial Policy under the chairmanship of George Peek, agricultural expert and opponent of trade liberalization, and that the committee had already drafted a bill providing for trade treaties to be subject to Senate ratification. This was unsatisfactory to Hull. The Department of State had already been negotiating with Argentina, Brazil, Colombia, Portugal, and Sweden in the summer of 1933, had signed an agreement only with Colombia, but had not submitted it to the Senate for ratification. In early 1934 new legislation was drawn up that delegated authority from Congress to the Executive branch of government to conclude reciprocal trade agreements on its own authority. The draft legislation was completed on February 24, approved by President Roosevelt on February 28, passed the House of Representatives on March 20, the Senate on June 4, and was signed into law on June 13, 1934 as the Reciprocal Trade Agreements Act. The initial delegation of authority was for a


period of three years. The legislation was renewed in 1937 and 1940. It provided for mutual bilateral reductions in tariff duties, generalized by the most-favoured-nation clause, limited to 50 percent of the existing (largely Hawley–Smoot) tariff levels.

Even before the legislation had been drafted, further talks were going forward to reduce tariffs, with Belgium and Denmark in January 1934, and with Canada. Canada and the United States each made official public statements on the subject in February 1934, emphasizing the importance of their mutual trade relations. A request for negotiations was made by the Canadian government in November 1934 and an agreement was achieved a year later to the effect on January 1, 1936. Canada received concessions on 88 items, largely primary products, including, along with Hawley–Smoot items, the lumber and copper affected by the US Revenue Act of 1932. United States concessions obtained from Canada were largely in manufactured goods.

The first agreement under the Reciprocal Trade Agreements Act, however, was that concluded with Cuba in August 1934. By November 1939, agreements had been reached with 20 countries, 11 of them in Latin America. A second agreement was concluded with Canada in November 1938, but the most important was the British agreement concluded simultaneously with the revision of the Canadian agreement.

In the British and Canadian agreements, the United States hoped to break down Empire preference. This was beginning to happen of its own accord. In a British–Canadian trade agreement of 1937, five years after the Ottawa agreements of 1932, the British persuaded the Canadians to abolish the doctrine of equalizing competition and to substitute fixed tariff rates and fixed preferential margins in the agreements (McDiarmid, 1946, p. 295). New Zealand was ready to abandon the Ottawa agreements, and started to conclude agreements outside them with Sweden (1935), Greece (1936), and Germany (1937), and was negotiating a dozen others (Hancock, 1940, p. 278). Britain, meanwhile, was highly critical of Australian performance under Ottawa, on the ground that Australia had persistently violated its commitments. Australian Tariff Board studies were limited, and even when the Tariff Board recommended reductions on British goods, the government often failed to introduce them in Parliament (Drummond, 1975, pp. 392ff.). British and Australian interests were only partly complementary. Accordingly the United Kingdom, Canada, and the other Dominions as well were ready in their agreements with the United States to sacrifice advantages in each other's markets in return for significant compensation in the market in the United States (Hancock, 1940, p. 265).

To an extent, the Anglo-American trade agreement was more symbolic than effective. Two years of hard bargaining went into it, and


it lasted only eight months, from January 1, 1939 until British wartime controls were imposed on the outbreak of war with Germany in September 1939. Reductions were agreed on nine items in which trade amounted to no more than $350 per annum. Important concessions, as in cotton textiles, were prevented from being generalized to Japan and other competitors through reclassification. Full 50 percent reductions in the United States were made on 96 items but the total trade involved was worth only $14 million. Under all 20 agreements, the unweighted (equal weights) United States ad valorem duties were reduced from 57 percent on products subject to the tariff to 35 percent, a reduction of 39 percent, whereas the reduction under the British agreement, from 42 to 30 percent on the same basis, amounted only to a reduction of 29 percent. The 35 percent level achieved on January 1, 1939 was somewhat lower than the Fordney–McCumber average of 38.5 percent and the Payne–Aldrich tariff (1909) of 40.8 percent, and well below the Hawley–Smoot average of 51.5 percent. It was nevertheless still well above the 1913 Underwood level of 27 percent (Kreider, 1943, pp. 170ff.).

Moreover, the trade agreements applied largely to industrial products and materials. United States opposition to Empire preference had export concerns in view, especially in competition with Canada in pork and apples. The reductions in tariffs under the agreements, however, went side by side with continued US protection against agricultural imports and subsidies on agricultural exports. Protection was required under those domestic programs which raised prices in the United States and would, without new restrictions, have attracted further supplies from abroad; and subsidies were deemed necessary to offset the price disadvantage this imposed on American producers in their traditional markets. The trade agreements reduced tariffs on a few items, such as maple sugar from Canada, which had been a particular irritant under the Hawley–Smoot Act, and altered the arbitrary valuations on fresh fruits and vegetables early in the season that had hitherto been kept out of Canada by this device. A sanitary agreement between the United States and Argentina on the regulation of foot-and-mouth disease was not ratified by Congress (Bidwell, 1939, pp. 217–18); and independence for the Philippines was accelerated to push its sugar production outside the tariff borders of the United States. On the whole, the trade agreements marked the beginning of regarding liberal commercial policies as appropriate only for manufactures, and their inputs, and leaving agricultural trade largely to special arrangements.

A small beginning was made by the United States on what was to be a major postwar issue, East–West trade. The United States was unwilling to recognize the government of the Soviet Union all through the


1920s. With President Roosevelt's New Deal, this was changed and recognition was accorded in 1933. In the mid-1930s, the United States and the Soviet Union undertook a series of trade agreements. In 1935, the Soviet Union contracted to purchase at least $30 million worth of US goods in the following year; in return, the United States accorded the Soviet Union most-favoured-nation treatment. In August 1937, under a new pact, the Soviet Union agreed to step up its purchases from the United States to $40 million (Gordon, 1941, p. 407).

British adherence to the more liberal trade policies pursued by Cordell Hull was highly ambiguous. Kreider claims that the British concessions were not spectacular but represented a reversal of policy (1943, p. 240). At the same time, the British government was unwilling to repudiate the principle of Ottawa, despite its effects, as Mackenzie King claimed, in destroying the principle of imperial harmony (Drummond, 1975, p. 316).

Moreover, British ministers were experimenting with a new technique quite at variance with the American professed principle of increased reliance on the international market. Mention was made above of the special tariff assistance given to the iron and steel industry to assist in its negotiations with the International Steel Cartel. At the depth of the depression, in October 1933, the British had encouraged negotiations between Lancashire and Indian cotton textile mill owners. The resultant Less–Mody pact of October 1933 provided that India would lower her tariffs on British textiles to 20 percent while holding those against other (i.e. Japanese) goods at 75, to which they had been raised from 31 1/2 percent in August 1932 in several steps. As part of the negotiation, involving governments and business groups on both sides, the British agreed to take 1 1/2 million bales of cotton that had piled up as a result of a Japanese retaliatory boycott. At the time Lord Runciman stated: "The work of the Delegation has gone some way in justifying the Government in their belief that the best approach to the problem of international industrial cooperation is by the method of discussion between industrialists" (Drummond, 1972, p. 316).

In early 1939, immediately after signing the Anglo-American Reciprocal Trade Agreement in November 1938, and as part of an export drive, the British Board of Trade encouraged the visit to Düsseldorf of a delegation of the Federation of British Industry to meet with the Reichsgruppe Industrie, its institutional counterpart, and to fix quantitative relationships between the exports of the two countries in each commodity and market. In prospect, The Economist , after some qualifications, expressed itself as approving (CXXXIV, no. 4585 (February 25, 1939), p. 383). The agreement was concluded on March 16, 1939, one day after the German invasion of Czechoslovakia (text in Hexner, 1946,


Appendix III, pp. 402–4). The British government repudiated the agreement on political grounds, but not before The Economist had denounced it on the grounds that it involved cartelization of domestic industry as well as of trade, that it would extend Anglo-German subsidies to exports, and that it might involve joint action against competitors who refused to join the arrangement, including possible American firms (CXXXIV, no. 4589 (March 25, 1939), p. 607).

In Eastern Europe the German bloc was strengthened in ways to guarantee German access to raw materials and foodstuffs in short supply. An agreement with Hungary in 1934 provided for a shift of Hungarian agriculture from wheat to oilseeds with an assured outlet in Germany. German treaties with Romania in March 1935 and again four years later fostered the expansion of Romanian agriculture in oilseeds, feedgrains, and vegetable fibers, as well as industrial and financial cooperation, including the development of Romanian transport and petroleum under German–Romanian companies supervised by joint government commissions (Gordon, 1941, pp. 425–6). In 1937, the proportion of German exports sold through clearing agreements amounted to 57 percent, while 53 percent of her imports came through clearings. The comparable figures for Turkey were 74 and 72 percent respectively, for Romania 67 and 75 percent, for Switzerland 28 and 36 percent, for Sweden 17 and 24 percent, and for the United Kingdom 2 and 2 percent (Gordon, 1941, Table 7, p. 133).

The disintegration of world trade thus proceeded, despite the attempts of the United States, the Oslo group, Premier Van Zeeland under Anglo-French auspices and the economists of the Economic and Financial Department of the League of Nations. With some prescience Condliffe (1940, p. 394) concluded his book written at the outbreak of the Second World War: "If an international system is to be restored, it must be an American-dominated system, based on Pax Americana ."


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