1‘The establishment of a sound national economy’
The Politics of the Great Depression
‘Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men … They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
‘The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.’
Inaugural address of President Roosevelt, 4 March 1933
Franklin Delano Roosevelt addressed these words to a nation in the grip of the worst depression of the modern age. It was a critical time both for the United States and the world. Since 1929, commodity prices and output had collapsed, destroying the livelihood of farmers across the globe. In the United States, the price of wheat fell from a peak of $2.16 a bushel in 1919 to $1.03 in 1929 to 84 cents in 1934, and to 69 cents in 1939. Over the same period, the price of cotton dropped from 35.3 cents to 16.8 cents, 12.4 cents and 9.1 cents.1 Similarly, Australian sheep farmers selling merino fleeces in Britain received 35.4 (old) pence a pound in 1929 and only 15 pence in 1932.2 Across the world, from coffee growers in Brazil to wheat farmers in Canada, farmers suffered a fall in their income that was exacerbated by a drop in production (Figure 1). Many primary producing economies suffered from balance of payments deficits and difficulties in servicing their debts, which led to a mixture of currency devaluation, the imposition of trade barriers and debt defaults.
As a consequence, primary producers cut their consumption of industrial goods, which compounded depression in the developed economies. World industrial production fell even more than primary production, by around 30 per cent from the peak of 1929 to the trough of 1932 – a drop that was particularly serious in Germany where industrial output fell by 39 per cent, compared with 18 per cent in the United States and 11 per cent in Britain. Unemployment in the major industrial economies rose and remained stubbornly high. In the United Kingdom, unemployment among workers over the age of sixteen who were covered by state insurance rose from 11 per cent in 1929 to 22.5 per cent in 1932, and it remained at 13.3 per cent in 1938. In the United States, unemployment rose, on one estimate, from 3.2 per cent in 1929 to a peak of 25.2 per cent in 1933 and was still over 19 per cent in 1938. The level of unemployment was even higher in Germany, where it reached 30.1 per cent in 1932.3 The fall in production of both primary and industrial goods led to a collapse of world trade by about a quarter between 1929 and 1932, and a failure to regain its previous levels before the Second World War (see Figure 1).
Figure 1: World trade and production, 1926—1938 (1929 = 100)
Sources: League of Nations, World Production and Prices, 1938/39 (Geneva 1939) appendix III Barry Eichengreen and Douglas Irwin, ‘The slide to protection in the Great Depression. Who succumbed and why?’, NBER Working Paper 15142 (2009), 45.
These economic problems were an integral part of the geopolitical crisis of the early 1930s. The world faced conflict between fascism and Communism. Mussolini had been in power in Italy since 1922, and Hitler became Chancellor of Germany in January 1933 in part because the Weimar Republic had failed to resolve the financial crisis that hit Germany in 1931.4 In Asia, the Japanese army embarked on military incursions in China in 1931, launching a new era of imperial expansion that was pursued by Italy in Ethiopia in 1935 and Germany in eastern Europe. These imperial projects created the conditions that led to global war, with the German invasion of Poland in 1939 and the Japanese attack on Pearl Harbor in 1941.5 In the Soviet Union, Stalin had embarked on agricultural collectivization and rapid forced industrialization. In hindsight, we know that the Soviet economy failed, but at the time (and despite the devastating impact of famine and terror) it appeared to many observers in depression-ridden states to be a success. Liberal democracies and capitalism did not look secure, and both fascism and Communism offered plausible alternatives. These thoughts were in Roosevelt’s mind as he delivered his inaugural address. His ambition was to overcome ‘fear itself’ and to rescue American democratic capitalism from its opponents.
An inaugural presidential address is an occasion for high-minded generalities rather than specific policies, and Roosevelt was undecided precisely how to deal with the depression. He called for a change in ethics, the rejection of material wealth as the standard of success, an end to ‘callous and selfish wrongdoing’ in banking and business. He also called for action by the government to put people to work through the planning of transport and other public utilities, the supervision of banking, an end to speculation with other people’s money, and the creation of ‘an adequate but sound currency’. By such means, he would put ‘our own national house in order’. The major issue that puzzled the new team in the White House was whether putting the ‘national house in order’ meant economic nationalism or internationalism. In his address, Roosevelt was less concerned about the international situation:
Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy. I favor as a practical policy the putting of first things first. I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment.6
After the First World War and the Versailles Peace Conference of 1919, America’s position in the world had remained uncertain. President Woodrow Wilson’s vision at Versailles was national determination, with an end to great power and imperialist rivalry between France, Britain, Germany, Italy, Russia and Japan. Unlike European powers, America – with a few exceptions – did not seek colonial possessions. Wilson’s aim was to ensure that other countries did not intervene in the American sphere of influence in Latin America, and that American goods and capital had equal access to world markets without discrimination. On that basis, American productive efficiency would allow national success without the need for militarism and imperialism. Although the Republicans were more inclined to combine equal or open access in foreign markets with protection of the domestic market, Wilson and the Democrats were willing to reduce protective duties. Beyond such generalities, Wilson and his successors lacked an effective strategy to stabilize the world economy or to create collective security after the war. Despite emerging from the war as the world’s largest economy, greatest financial power and central player in world politics, the federal government of the United States lacked the administrative and fiscal capacity to provide leadership. Instead, it turned to a conservative vision of ‘normalcy’ that minimized the role of the federal state. Meanwhile, the collapse of imperial structures in central Europe and the Middle East led to a power vacuum in Eurasia. America failed to provide leadership, yet the prospect of its future dominance impelled Italian Fascists, German National Socialists, Soviet Communists and Japanese militarists to take radical action.7
Roosevelt served in Wilson’s administration and attended the Versailles conference. He shared Wilson’s hostility to imperialism and believed that American security required a liberal world order; however, he differed from Wilson’s inflexible and dogmatic approach, as we will see when he turned to the construction of a new world order during the Second World War.8 In 1933, he was more concerned with pressing problems at home. During the election campaign of 1932, the Republicans supported tariffs to protect American markets and to preserve standards of living.9 The Democrats were divided. At one extreme were free traders – largely Southerners such as Cordell Hull, a senator from Tennessee, who believed that tariffs led to retaliation, international economic hostility, the destruction of trade, loss of export markets for farmers, and increased costs of production. By contrast, liberal international trade allowed the advance of civilization through prosperity, peace and cultural exchange. Not everyone in the Democratic Party agreed. Al Smith, the Democratic presidential candidate in 1928, saw protection as a way of securing support from agricultural and industrial workers.10
During the campaign, Roosevelt had to create a coalition of inconsistent views and interests, which required ambiguity and the hope that he would not need to resolve his dilemma before winning the election. The Democratic platform proposed ‘a competitive tariff for revenue with a fact-finding tariff commission free from executive interference, reciprocal tariff agreements with other nations, and an international economic conference designed to restore international trade and facilitate exchange’. It offered some reassurance to all views.11 As the campaign proceeded, Roosevelt distanced himself from Hull’s internationalism, both because of his reading of public opinion and because of the influence of his advisers or ‘Brains Trust’ that grew up around economists Raymond Moley and Rexford Tugwell.
Roosevelt’s dilemma did not disappear after the election. The academics of the Brains Trust lacked a political constituency, whereas Hull was a significant politician with a large electoral base. Hours after the inaugural speech in which Roosevelt pledged himself to create a ‘sound national economy’, he swore in Hull who, as Moley remarked, had a ‘burning faith that the salvation of the world depended upon the revival of international laissez-faire capitalism’ as Secretary of State. Moley complained that Roosevelt had no sense of ‘the fundamental conflict between his New Deal and the beliefs of the older Democrats, the basic incongruity of his own program and Hull’s Adam Smith economics’.12 Tugwell ruefully remarked that ‘there is no one who can say whether the Roosevelt mind changed or whether it was never made up’.13 More plausibly, Roosevelt used ambiguity to hold together competing visions. He was wary of taking positions, preferring an ‘evasive liberalism’ that allowed him ‘to shelter himself from controversy and keep to generalizations calculated to offend no one’.14 Henry L. Stimson, the secretary of war from 1940 to 1945, likened a conversation with the president as ‘very much like chasing a vagrant beam of sunshine around a vacant room’.15 Roosevelt was, in the memorable phrase of Richard Hofstadter, ‘the patrician as opportunist’.16 The president admitted to being devious and disingenuous – as he put it, ‘I am a juggler, and I never let my right hand know what my left hand does.’ This trait drove his colleagues to distraction, but allowing different departments and officials to have responsibility for the same tasks and to devise competing solutions meant he had the final say. Competitive administration meant that power was concentrated in the White House.17
The difficulty in bringing diverging views together also applied to monetary policy. Populists had long argued for rising prices to inflate away the debt of farmers by monetizing silver to increase the money supply, which at the time was pegged to the gold standard. On the other hand, financial interests wanted ‘sound’ money, and workers would benefit from falling prices. The Democratic platform of 1932 again tried to offer reassurance to both sides: ‘We advocate a sound economy to be preserved at all hazards and an international monetary conference … to consider the rehabilitation of silver and related questions.’18 The Brains Trust believed that recovery should start at home by raising prices. The drastic fall in prices during the depression meant that the real burden of debt rose, and purchases of goods were delayed in the expectation that prices would fall still further. Rising prices were needed to break the cycle of debt and deflation, and to stimulate demand. The Brains Trust was also committed to a policy of planning. Moley was responsible for Roosevelt’s ‘Forgotten Man’ speech of April 1932 that blamed the depression on rural poverty and low commodity prices, which meant that farmers did not have the ability to buy industrial goods. His emphasis on internal domestic causes and solutions did not mean a return to an old vision of America as ‘a nation of small proprietors, of corner grocers and smithies under spreading chestnut trees’. It meant preventing destructive competition by ‘concentrated economic power’ through regulation and planning. Moley developed a programme of domestic reforms and economic policies, including social insurance, public works, and the restoration of prices and wages to their pre-depression level.19 The programme might entail abandoning the gold standard, which limited a country’s ability to devalue its currency or to raise the overall price level. Roosevelt’s reference in his inaugural address to a currency that was ‘adequate but sound’ hinted that the gold standard was too limited, and that the monetary supply might need to be increased to end the downward pressure on prices. But could a currency be sound if it cut free from gold and was consciously managed? Roosevelt’s financial advisers included James Warburg, a Republican Wall Street banker and son of Paul Warburg, a founding father of the Federal Reserve system. Warburg Jnr was willing to accept occasional devaluations by reducing the gold content of the dollar in agreement with other countries. However, he insisted that the gold standard rather than a managed currency was vital for sound currency and stability.20
Roosevelt came to office at a critical time of intense uncertainty both at home and abroad. During his first hundred days, he pushed legislation through Congress to expand the power of the executive and the federal government, with a commitment to act without delay even if it meant breaking with normal governmental procedure.21 His focus was on immediate do- mestic concerns. Prevarication and uncertainty continued in international economic policy where three outstanding problems – of trade, money and debt – were causing deep divisions between the major economies.
TRADE WARFARE
Prior to the First World War there was no formal institution of global governance to set, let alone enforce, rules on trade. Disputes were covered by public international law, in the case of the trading rights of neutrals in times of war, and by private international law between traders through national courts or arbitration. Sovereign states set their tariffs and other forms of trade restrictions or subsidies as they wished, according to their needs for revenue, their wish to maintain employment or encourage economic development, and in response to domestic political pressures. They would be alert to the possibility of retaliation from other countries, but there were no international rules or institutions to prevent unfair competition.
What did emerge in the second half of the nineteenth century were bilateral trade treaties between countries that incorporated the ‘most favoured nation’ principle, which became Article 1 of the General Agreement on Tariffs and Trade in 1947: ‘any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.’22 At first sight, ‘most favoured’ suggests that a country would have special treatment from another. In fact, it means that the signatories of a trade agreement are committed to treat each other as well as they treat a third party who has also signed a trade treaty. Hence if countries A and B negotiate an agreement, any concession in an agreement between A and C would be extended unconditionally to B – and any agreement between B and D would be extended unconditionally to A and C in an interlocking set of agreements. By this means, no country would be treated worse than the country that is treated best in any bilateral agreement. Such unconditional, automatic extension of benefits was open to the criticism that it gave something for nothing, and until 1922 the United States adopted a conditional form of the most favoured nation principle, which extended concessions negotiated by A and B to C only after a further round of negotiations with C.23
Before 1914, networks of bilateral treaties based on the most favoured nation principle led to the construction of trade blocs rather than to more general multilateral trade. An initial trade bloc of interconnected treaties emerged from the Cobden–Chevalier Treaty between Britain and France in 1860. It did not last, for France and Britain did not renew the treaty in 1880 because of political pressures in both countries. The Anglo-French network broke down and was replaced after 1892 by another network based on Germany, which aimed to build a central Europe bloc. The challenge from German and American competition and protectionism started to cause alarm in Britain by the end of the nineteenth century, when the question arose whether Britain should abandon its policy of unilateral free trade and retaliate by increasing its tariffs, create a preferential trade bloc within the empire, or maintain and reshape free trade.24
In 1903, Joseph Chamberlain – the social reforming former Lord Mayor of Birmingham who was now Colonial Secretary – proposed import duties with preference for the empire. He came to this policy through a commitment to social reform. His proposal for ‘Tariff Reform’, according to the slogan of the movement, ‘Means Work For All’. Its supporters claimed it would create full employment and end poverty, with income from tariffs financing welfare reform. Imperial preference would still allow imports of cheap food from the empire, so domestic consumers would not suffer. The result – so its supporters argued – would be a strong domestic market supplemented by a prosperous imperial market, creating a large economic unit to rival Germany and the United States.25
Chamberlain did not convince all his colleagues in the Conservative Party, let alone in the Liberal Party, which portrayed tariff reform as a ruse by landed aristocrats to increase food prices and by selfish industrialists to protect the home market. Free trade was more than an economic policy –to Richard Cobden, leader of the movement for free trade in Britain that secured the repeal of the protective corns laws in 1846 (and signatory of the Anglo-French treaty of 1860), it was also about peace, civilization and morality. Free trade would bring nations together in harmony through comparative advantage, joining them in civilizing commerce rather than the militarism of protectionist Prussia. It purged politics of vested interests, so sparing Britain the pork-barrel politics of the United States. By sweeping away monopolies, it allowed the free association of citizens in co-operative societies, friendly societies and trade unions, and permitted an economy of independent firms rather than American and German trusts and cartels. At the time of the centenary of Cobden’s birth in 1904, the future Liberal prime minister Henry Campbell-Bannerman expressed the stark choice facing Britain: ‘One road … leads to Protection, to conscription, to the re- ducing of free institutions to a mere name … And the other leads to the consolidation of liberty and the development of equity at home.’26
Political mobilization against tariff reform led to free-trade victories in the elections of 1906 and 1910. But if social welfare and employment could not be provided by tariff reform, they would have to be funded through a progressive income tax that might alienate middle-class electors. The Labour Party supported free trade and made common cause with progressive ‘new Liberals’ in redefining trade as ‘free’ on condition that it rested on fair conditions of production and employment both at home and abroad. Above all, John Hobson – a leading Liberal thinker and unorthodox economist – argued that huge disparities of income and wealth meant under-consumption by workers and excess savings by the rich, so that excess goods and capital were exported and thus fuelled imperialism. Free trade should therefore be combined with redistribution of income and the taxation of unearned wealth arising from the increase in land values or profits generated by society as a whole and appropriated by individuals. Support for free trade moved from a simple attack on ‘food taxes’ to positive action against the social problems of unfettered exchange and in support of balance in society.27
The First World War marked a further shift in the culture of free trade in Britain to international co-ordination of production and markets. The Allies came together to co-ordinate the use of scarce resources through bodies such as the Wheat Executive of 1916 and the Allied Maritime Transport Council of 1917. They were crucial to the operation of the war and were part of the shift from Cobdenite free trade to international planning and co-ordination of markets and resources. At the Maritime Transport Council, Arthur Salter, an experienced British civil servant, worked with a French official, Jean Monnet. Both went on to work in the League of Nations after the war. The pursuit of Cobdenite internationalism shifted from free trade to a greater interest in organization and planning that could blur the line with imperial preference as a form of planned, co-ordinated trade. Although some Liberals clung to unilateral free trade, a growing belief in the international regulation of markets by rules and institutions began to mutate into an assumption that protectionism could save undeveloped countries from exploitation, and that co-ordination by international organizations would avoid disruptive economic fluctuations and apportion resources by need. A new economic internationalism of collective agreements was needed.28
The shape of internationalism to be taken after the war was a matter for dispute. At the Paris Economic Conference of 1916, the French minister of commerce and industry, Étienne Clémentel, proposed the continuation of wartime bodies to control the supply of raw materials, and the imposition of a post-war blockade of Germany and its allies in central Europe. It would be the continuation of war by other means. In his nightmares, Clémentel envisaged a politically and economically integrated customs union of Germany and the Austro-Hungarian empire, and the only way to prevent such a disaster was by using new international bodies to control the supply of raw materials. The Allies supported the proposal in 1916, and at Versailles Clémentel and his assistant Monnet proposed a new economic order of European co-operation or ‘organized peace’. The idea was rejected by President Wilson, who feared a collapse into trade blocs; he wanted an open-door policy and equality of treatment.29
The Versailles Treaty removed Germany’s status as a most favoured nation for five years, and also dismembered the Austro-Hungarian empire. This situation created a serious problem. Germany remained the most important economy in Europe, at a time when the three major empires to the east – those of Russia, Austria–Hungary and the Ottoman Turks – were weak and divided, with smaller, fragile powers in central and eastern Europe. In the 1920s, competing proposals for the new European economic order were put forward, from a ‘Danubian’ trade zone in central Europe that would limit German access to markets, to Germany’s plans for Mitteleuropa. The French countered with a plan for a wider European customs union that would contain German influence. In 1929, Aristide Briand, the former president and current foreign minister of France, proposed to the League of Nations the creation of a European economic union.30
Despite their differences in scale and membership, and their different geopolitical ambitions, these schemes all needed an institutional and legal structure provided by the League to define the operation of the most favoured nation principle, and the relationship between regional and international trade. Members of a free-trade area can reduce tariffs between themselves and retain their own external tariffs without making concessions to non-members with whom they can still negotiate bilateral treaties on the unconditional most favoured nation principle. By contrast, members of a customs union, with a single external tariff, lose independent authority to make treaties with non-members; the customs union as a whole negotiates external treaties. Both approaches needed a legal or institutional structure to codify bilateral treaties and most favoured nation rules. This task was taken up by the League’s Economic Committee, and the League’s World Economic Conference at Geneva in 1927 endorsed the unconditional most favoured nation principle as the standard against which national and imperial trade policies should be judged.31
Copyright © 2023 by Martin Daunton
