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

As a consequence of these three causes, international trade began to suffer a new injury. The old nineteenth century transfer of goods between industrial and colonial areas (producers of food and raw materials) had begun to decline by a purely natural evolution as the result of the industrialization of colonial areas. But now, as a result of the increase in economic nationalism, another kind of transfer was disrupted. This was the transfer among industrial nations resulting from an international division of labor and an uneven distribution of raw materials. An example of this can be seen in the iron and steel industry of western Europe. There British and German coal, French and Belgian low-grade iron ores, Swedish high-grade iron ores were mingled and combined to permit production of high-grade surgical steels in Sweden, of low-grade building steels in Belgium, of heavy machine products in Germany, and of light steel products in France. This transfer of goods began to be disrupted in the onslaught of economic nationalism after 1929. As a result, history turned backward, and the older interchange of colonial for industrial products increased in relative importance.

Economic nationalism also increased the trend toward bilateralism. This received its chief and earliest impetus from Germany, but it was soon followed by other countries until, by 1939, the United States was the only important supporter of multilateral trade. Most countries justified their acceptance of bilateralism on the grounds that they were compelled to accept it because of economic pressure from Germany. In many cases, this was not true. Some states, like Austria or Romania, were compelled to accept bilateralism because that was the only way they could trade with Germany. But other, more important, states, including Britain, did not have this excuse for their actions, although they used it as an excuse. The real reasons for Britain’s adoption of bilateralism and protection are to be found in the structure of the British domestic economy, especially the growing rigidity of that economy through the great and rapid increase in monopolies and cartels.

The new trade policy of Britain after 1931 was the complete antithesis of that pursued by the United States, although the more extreme and spectacular methods of Germany concealed this fact from many persons until 1945. The United States sought multilateralism and expansion of world trade. Britain sought debt collection and increase of exports through bilateralism. Without equality of treatment, its trade agreements sought to reduce debts first and to increase exports second, if this second was compatible with the reduction of debts. In some cases, in order to reduce outstanding debts, it made agreements to curtail exports from Britain or to reduce quotas on such goods (Anglo-Italian agreements of April 1936, of November 1936, and of March 1938, as amended March 1939). It established payment agreements and clearings with debtor countries. Current trade was subordinated to liquidation of past debts. This was the direct opposite of the American theory which tended to neglect past debts in order to build up present trade in the hope that eventually past debts could be liquidated because of the increased volume of trade. The British preferred a smaller volume of trade with rapid payments to a larger volume with delayed payments.

These tactics did not work very well. Even with clearings and restricted exports Britain had great difficulty in bringing into existence an unfavorable balance of trade with debtor countries. Its balances generally remained favorable, with exports higher than imports. As a result, payments continued to lag behind (two and a half years in respect to Turkey), and it was necessary to rewrite the commercial agreements embodying the new bilateralism (in the case of Italy, four agreements in three years). In some cases (like Turkey in May 1938), special joint trading organizations were set up to sell products of the clearing country in free-exchange markets so that debts owed to Britain from the clearing country could be paid. This, however, meant that the free-exchange countries had to obtain Turkish products from Britain and could sell none of their own products in Turkey because of lack of exchange.

Because of the failure of Britain’s bilateral agreements to achieve what she had hoped, she was driven to replace these agreements by others, always moving in the direction of more control. Clearing agreements which were originally voluntary were later made compulsory; those which were earlier one-ended became later double-ended. Britain made barter agreements with various countries, including one direct swap of rubber for wheat with the United States. In 1939 the Federation of British Industries went so far as to seek an agreement with Germany dividing markets and fixing prices for most economic activities.

As a result of all this, the international commodity markets in which anything could be bought or sold (if the price was right) were disrupted. The center of these (chiefly in Britain) began to disappear, exactly as the international capital market (also centering in Britain) was doing. Both markets were broken up into partial and segregated markets. In fact, one of the chief developments of the period was the disappearance of The Market. It is an interesting fact that the history of modern Europe is exactly parallel in time with the existence of the market (from the twelfth century to the twentieth century).

THE PERIOD OF INFLATION, 1938-1945

The period of reflation, which began in most countries in the first half of 1933, merged into the following period of inflation without any sharp line of demarcation between the two. The increase in prices, prosperity, employment, and business activity after 1933 was generally caused by increases in public spending. As the political crisis became worse with the attacks on Ethiopia, on Spain, on China, on Austria, and on Czechoslovakia, this public spending increasingly took the form of spending on armaments. For several years it was possible in most countries to increase the output of armaments without reducing the output of consumers’ goods or of capital goods merely by putting to work the resources, men, factories, and capital which had been standing idle in the depression. Only when there were no longer any idle resources and increased armaments had to be obtained by diverting resources to this purpose from the production of consumers’ or capital goods did the period of inflation begin. At that point, a competition began between the producers of armaments and the producers of wealth for the limited supply of resources. This competition took the form of price competition, with each side offering higher wages for manpower, higher prices for raw materials. The result was inflation. The money which the community obtained for the production of wealth as well as for the production of arms was available to buy the former only (since arms are not usually offered for sale to the public). This intensified the inflation greatly. In most countries, the transition from reflation to inflation did not occur until after they had entered the war. Germany was the chief exception and possibly also Italy and Russia, since all of these were making fairly full utilization of their resources by 1938. In Britain, such full utilization was not obtained until 1940 or 1941, and in the United States not until 1942 or even 1943. In France and the other countries on the Continent overrun by Germany in 1940 and 1941, such full utilization of resources was not achieved before they were defeated.

The period of inflation 1938-1947 was very similar to the period of inflation 1914-1920. The destruction of property and goods was much greater; the mobilization of resources for such destruction was also greater. As a result, the supply of real wealth, both producers’ and consumers’, was curtailed much more completely. On the other hand, because of increased knowledge and experience, the output of money and its management was much more skillfully handled. The two factors together gave a degree of inflation which was somewhat less intense in the Second World War than in the First. Price controls and rationing were better applied and more strictly enforced. Surpluses of money were taken up by new techniques of compulsory or voluntary savings. The financing of the war was more skillful so that a much larger increase in production was obtained from a similar degree of inflation.