Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

The reason why a policy of short-run self-interest on the part of one country was in such sharp conflict with any similar policy pursued by another country does not rest on the fact that the interests of one country were adverse to those of another. That would have been a problem to be treated by simple compromise. The conflicts between economic nationalisms were based on the fact that, viewed superficially, the crisis took entirely different forms in the chief countries of the world. In the United States, the most obvious manifestation of the crisis was low prices, which by 1933 made the whole banking system insolvent. High prices became, thus, for the United States, the chief goal of debtors and creditors alike. In Britain, the most obvious manifestation of the crisis was the outflow of gold which jeopardized the gold standard. A rectification of the international balance of payments rather than a rise in prices thus became the chief immediate aim of British policy. In France, the crisis appeared chiefly as an unbalanced internal budget. The French gold supply was more than adequate, and prices, as a result of the substantial devaluation of 1928, were considered extremely high. But the unbalanced budget created a great problem. If the deficit were filled by borrowing the result would be inflationary and injurious to the creditor classes who had suffered so greatly in the 1920’s. If the deficit were filled by taxation, this would lead to deflation (with its decline in business activity) and a flight of capital out of the country. To the French government the only way out of this dilemma was to be found in an increase in business activity, which would increase the tax yield without any rise in rates. It could see no value in the American concern with higher prices or the British concern with trade balances as short-run objectives.

This contrast between the various kinds of impact which the economic and financial crisis made on the various countries could be extended to lesser countries. In Switzerland (where gold reserves were well over 100 percent) the chief problem was “hot money.” In Germany, the chief problem was foreign debts, but this soon developed into a combination of all the ailments which were afflicting other countries (low prices, unfavorable balance of trade, unbalanced budget, panicky short-term loans, and so on). In the Netherlands and in the countries of eastern Europe, the chief problem was “segmentation of prices” (that is, that prices of food and raw materials, which they sold, fell faster than prices of manufactured goods which they bought).

As a result of the crisis, regardless of the nature of its primary impact, all countries began to pursue policies of economic nationalism. This took the form of tariff increases, licensing of imports, import quotas, sumptuary laws restricting imports, laws placing national origin, trademark, health, or quarantine restrictions on imports, foreign-exchange controls, competitive depreciation of currencies, export subsidies, dumping of exports, and so on. These were first established on an extensive scale in 1931, and spread rapidly as a result of imitation and retaliation.

As a result of such economic nationalism, it soon appeared that the disappearance of the old multilateral system of world finance centering in London would be followed by the breaking of the multilateral system of world trade (also centering in Britain) into a number of partially segregated markets operating on a bilateral basis. International trade declined greatly as the following figures indicate:

Value of Trade in Millions of Dollars

1928

1932

1935

1938

Europe’s Trade

58,082

24,426

20,762

24,065

World’s Trade

114,429

45,469

40,302

46,865

THE CRISIS IN THE GOLD BLOC, 1934-1936

After the breakup of the World Economic Conference, the United States continued its policy of domestic inflation. As the dollar depreciated, the pressure on the franc increased, while the pound, through the use of the Exchange Equalization Account, tried to follow a middle ground in a depreciated, but stable, relationship to the franc. In this way, by purely artificial means, the pound was kept at about 85 francs. In the late summer of 1933 (September 8th) the United States Treasury began to depreciate the dollar by buying gold at constantly increasing prices (about $30 an ounce, compared to the old stabilization rate of $20.67). This put pressure on the franc as well as on the pound. Deflation became increasingly severe in France, and, in October 1933, a budget deficit of over 40 billion francs gave rise to a Cabinet crisis. By the end of 1933, the gold price in New York reached $34, and the dollar, which had been at 4.40 in relation to the pound in August, fell to 5.50. On February 1, 1934, the United States went back on the gold standard at a considerable devaluation under the old price. The gold content was cut to 59.06 percent of the 1932 amount. At the same time, the Treasury set up a standing offer to buy gold at $35 an ounce. This served to remove much of the uncertainty about the dollar, but stabilized it in regard to the franc at a level which put great pressure on the franc. At this price for gold, the metal flowed to the United States, France losing about 3 billion francs’ worth in February 1934.

Thus the world depression and the financial crisis which France had escaped for over three years were extended to her. France had been able to escape because of her drastic devaluation in the 1920’s, her well-balanced economy, and her ability to keep down unemployment by placing restrictions on the entrance of seasonal labor from Spain, Italy, and Poland. The crisis of the pound in September 1931 had begun to spread the crisis to France, and the crisis of the dollar in 1933 had made the situation worse. The American actions of 1934, which gave the world a 59-cent dollar and $35 gold, made the position of the gold bloc untenable. They had to suffer a severe deflation, or abandon gold, or devaluate. Most of them (because they feared inflation or because they had foreign debts which would increase in weight if their currency was to depreciate) permitted deflation with all its suffering. Italy even ordered deflation by decree in April 1934, in order to maintain business activity by forcing costs down as much as prices. Eventually, all members of the gold bloc had to abandon gold to some extent because of the pressure from the dollar.

Belgium was the first member of the gold bloc to yield, setting up exchange controls on March 18, 1935, and devaluating the belga to about 72 percent of its former gold content on March 30th. The final blow which forced the change was the British tariff on iron and steel established on March 26, 1935. As a result of this quick and decisive devaluation, Belgium experienced a considerable amount of economic recovery. Almost at once, production and prices rose, while unemployment fell.

The other members of the gold bloc did not profit by the example of Belgium, but determined to defend the gold content of their currencies to the limit. France was the leader in this movement, and by her policy was able to influence the other members of the bloc to resist with the same vigor. This determination of France to defend the franc is to be explained by the fact that the great mass of Frenchmen were creditors in some way or other, and having lost four-fifths of their savings in the inflation of 1914-1926 did not view with any pleasure another dose of the same medicine. In this effort to defend the franc, France was aided greatly by the activity of the British Exchange Equalization Account which bought francs in enormous quantities whenever the currency became very weak. By 1935, the resources of the Account capable of being devoted to this purpose were largely expended, and the franc fell below the gold export point for long periods. The Bank of France raised its discount rate from 2 1/2 percent to 6 percent (May 23-28, 1935) with depressing economic results. Laval in July obtained emergency powers from the Assembly, and adopted a policy of deflation by decree, cutting ordinary public expenditures for the year from 40 billion to 11 billion francs, cutting all public salaries by 10 percent, and also reducing all rents, the cost of public utilities, and the price of bread.