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

As a result of the recession of 1937, the governmental policies of 1933-1935, which had given the first recovery, were intensified and gave rise to a second recovery. Bank rates were lowered—in some cases to 1 percent; deficit spending was resumed or increased; all efforts to get back on a gold standard were postponed indefinitely; in the United States, the sterilization of gold was ended, and all thoughts of reducing the buying price of gold were abandoned. The chief new factor after the recession was one which was of minor but rapidly growing importance. The deficit spending which had been used to pay for public works projects before 1937 was increasingly devoted to rearmament after that date. Britain, for example, spent £186 million on arms in the fiscal year 1936-1937 and £ 262 million in the year 1937-1938. It is not possible to say to what extent this increase in armaments was caused by the need for deficit spending and to what extent it was the result of the rising political tensions. Similarly, it is not possible to say which is cause and which effect as between political tensions and rearmament. Indeed, the relationships between all three of these factors are mutual reactions of cause and effect. At any rate, after the recession of 1937, armaments, political tensions, and prosperity increased together. For most countries, the political tensions led to the use of arms in open conflict long before full prosperity had been achieved. In most countries, industrial production exceeded the 1929 level by the end of 1937, but because of the increase in population, efficiency, and capital this was achieved without full utilization of resources. In the United States (with Canada as an appendage) and in France (with Belgium as an appendage) production continued low throughout the 1930’s, reaching the 1929 level in the first pair only in the late summer of 1939 and never reaching the 1929 level in the second pair. As a result of the failure of most countries (excepting Germany and the Soviet Union) to achieve full utilization of resources, it was possible to devote increasing percentages of these resources to armaments without suffering any decline in the standards of living. In fact, to the surprise of many, the exact opposite resulted—as armaments grew, the standard of living improved because of the fact that the chief obstacle in the way of an improving standard of living—that is, lack of consumers’ purchasing power, was remedied by the fact that armament manufacture supplied such purchasing power in the market without turning into the market any equivalent in goods which would use up purchasing power.

The recovery from depression after 1933 did not result in any marked reduction in the restrictions and controls which the depression had brought to commercial and financial activity. Since these controls had been established because of the depression, it might have been expected that such controls would have been relaxed as the depression lifted. Instead, they were maintained and, in some cases, extended. The reasons for this were various. In the first place, as the political crisis became more intense the value of these controls for defense and war was realized. In the second place, powerful bureaucratic vested interests had grown up for enforcing these controls. In the third place, these restrictions, which had been established chiefly for controlling foreign trade, proved very effective in controlling domestic economic activity. In the fourth place, under the protection of these controls the difference in price levels between some countries had grown so great that the ending of controls would have torn their economic structures to pieces. In the fifth place, the demand for protection from foreign competition remained so great that these controls could not be removed. In the sixth place, the debtor-creditor relationships between countries still remained valid and unbalanced and would have required new controls as soon as the old ones were lifted to prevent unbalanced payments and deflationary pressure. In the seventh place, the existence of “imprisoned capital” within national economic systems made it impossible to raise the controls, since the flight of such capital would have been disruptive of the economic system. The chief example of such imprisoned capital was the property of the Jews in Germany, amounting to over 10 billion marks.

For these and other reasons tariffs, quotas, subsidies, exchange controls, and government manipulations of the market continued. The moment at which these controls could have been withdrawn most easily was at the beginning of 1937, because by that time recovery was well developed and the international disequilibriums were less acute because of the disruption of the gold bloc late in 1936. The moment passed without much being accomplished, and, by the end of 1937, the recession and the mounting political crisis made all hopes of relaxing controls Utopian.

Such hopes, however, were found both before and after 1937. These included the Oslo Agreements of 1930 and 1937, the Ouchy Convention of 1932, the Hull Reciprocal Trade Program of 1934 and after, the Van Zeeland Mission of 1937, and the constant work of the League of Nations. Of these, only the Hull Program accomplished anything concrete, and the importance of its accomplishment is a subject of dispute. The Hull Reciprocal Trade Program is of more importance from the political than from the economic point of view. It openly aimed at freer and multilateral trade. The act, as passed in 1934 and renewed at regular intervals since, empowered the executive branch to negotiate with other countries trade agreements in which the United States could reduce tariffs by any amount up to 50 percent. In return for lowering our tariffs in this way, we hoped to obtain trade concessions from the other party to the agreement. Although these agreements were bilateral in form, they were multilateral in effect, because each agreement contained an unconditional most-favored-nation clause by which each party bound itself to extend to the other party concessions at least as great as those it extended to the most favored nation with which it traded. As a result of such clauses any concessions made by either tended to be generalized to other countries. The interest of the United States in removing the restrictions on world trade was to be found in the fact that she had productive capacity beyond that necessary to satisfy articulate domestic demand in almost every field of economic activity. As a result she had to export or find her hands full of surplus goods. The interest of the United States in multilateral trade rather than in bilateral trade was to be found in the fact that her surpluses existed in all types of goods-foodstuffs, raw materials, and industrial products—and the markets for these would have to be sought in all kinds of foreign economies, not in any single type. The United States had excess supplies of food like wheat, pork, and corn; of raw materials like petroleum, cotton, and iron; of specialized industrial products like radios, automobiles, and locomotives. It was not possible to sell all these types to a food-producing country like Denmark, or to a raw-material-producing country like Canada or the Malay States, or to an industrial country like Germany or Britain. Accordingly, the United States became the world’s chief defender of freer and multilateral trade. Her chief argument was based on the fact that such trade would contribute to a higher standard of living for all parties. To the United States, whose political security was so sound that it rarely required a moment’s thought, a higher standard of living was the chief aim of existence. Accordingly, it was difficult for the United States to comprehend the point of view of a state which, lacking political security, placed a high standard of living in a position second to such security.