ISSUE: Winter 1937
The election returns seem to have written an emphatic approval of, among other things, Secretary Hull’s program for broadening the channels of international trade. Or have they? In any case, those who see recovery as a world problem are inclined to be cheerful. They have been spared, certainly, the Republican tariff planks and they have some other substantial grounds for optimism. But it had best be kept within bounds, if disillusionment is not to follow. We are a nation of enthusiasts, subject to the waves of action and reaction. It is rather encouraging to see that the wave has held for four years. Let Democrats, however, remember Wilson’s decline and fall.
For the moment the Democrats are a little dazed at the unexpected magnitude of victory. They are like that pious revivalist who prayed for rain, and got a cloudburst. Like him they are inclined to view the flood with mixed feelings: “O Lord, Thy servant would have been grateful for a mid-dlin’ rain; right pleased with a soaker; but, O Lord, Thou knowest this is plum’ ridiculous!”
After all, did the election sanction the New Deal’s general economic nationalism, or Mr. Hull’s liberalism? It is too early to tell.
The soundness of Secretary Hull’s efforts can hardly be doubted. In the face of bitter opposition, often bitterest from within the ranks of his own party, he has held to his aim and brought it to pass: in spite of the sabotage of the egregious George N. Peek, Mr. Hull won from Congress a mechanism for tariff making that is superior to anything we have heretofore enjoyed. In a time of desperate economic nationalism he has employed the negotiating power vested in him to win back American markets and to remove the most useless and rankly inequitable barriers of our tariff against imports. For the first time in years our imports balance exports. And he has done so without giving up his main objective of lowering tariffs all around through maintaining the “most favored nation” clause intact.
The conservative (old line liberal) tribute to this feat of statesmanship was the support of about eighty per cent of the American press for Mr. Hull’s program, while about the same percentage damned the New Deal as a whole. In circles where to vote for Roosevelt was tantamount to forfeiting social respectability, there was the somewhat timid defence: “I’m voting not for Roosevelt for President but Cordell Hull for Secretary of State.” I heard even one or two quips, smacking of lese majesty if not blasphemy, about a double act of God. But that was in Massachusetts!
It was a revolutionary step to remove the tariff from the absurd procedure which Congressional enactment has always meant. The kind of “grab-bag” effect of this procedure, recently studied by Mr. E. E. Schattschneider in “Politics, Pressures, and the Tariff,” reached its reductio ad absurdum in the Smoot-Hawley monstrosity, of which even its authors were hardly proud. Everyone got something at the expense of the American consumer, with the general result of putting our national economy on stilts and rendering our farm problem insoluble. The uneven rigidity of prices in the “administered” area, where cartels and monopolies flourished behind tariff protection, led to the desperate expedient of the N.R.A.—practically effecting a compulsory form of cartels for all business. Then the A.A.A. had to boost farm prices another jump—a double one—to catch the industrial prices at “parity.”
It is something to be able, as we now are, to make tariffs under a reasonable form of protectionism which weighs really national interests. That is all that can be claimed for the Hull trade treaties so far. It is something to escape the fruits of an election victory for a party whose tariff planks seem to have been written to please Mr. Peek, the Chemical Foundation, Mr. Hearst, and the Saturday Evening Post school of traveling-salesman economists. Praise be for escaping a trial of Mr. Peek’s “Beggar-my-neighbor” sort of bartering which would ultimately have made Washington set up an export-import control to rival Russia’s. It is something to escape all this—but it is not too much.
It is perhaps still more that Secretary Wallace seems heartily sick of trying to please all the farmers and talks of giving up “production control.” In all conscience, the Supreme Court has crippled any prospects of an administrable solution along the A.A.A. lines. Mr. Wallace may be fishing for a constitutional amendment by threatening to turn loose farm production for a year and let the farmers see how they like it. But if the tariff can be whittled down meantime and industrial prices made really competitive, he might be surprised to find the memory of A.A.A. checks not quite as powerful as he expects. A good crop year coinciding with a healthy consuming power might not produce so drastic a drop in farm income.
It becomes important, therefore, to estimate the prospects of a return of our domestic policy to Wilsonian lines—lower tariffs and anti-monopolistic policies.
II
Of course the possibility of a general war introduces incalculable factors into any equation. And it is just the threat of such a general war that limits any sound and lasting hopes of real international recovery. A simple way of putting it is that nations whose major energies are bent on rearmament and on an economic self-sufficiency adequate to support war are not good trading prospects. They will buy whatever raw materials they can’t produce, and finished products, too, if their armament factories aren’t yet adequate to the hurry orders. But they can’t pay for them unless other nations will take goods that other nations do not want. The apt illustrations are Germany, Italy, and, to a growing extent, Japan; All three will buy, and buy strongly, as far as they can command foreign exchange. Germany and Italy, though, can command very limited export markets, and Japan is finding new doors slammed in her face every day-including our own.
This business of foreign exchange, of course, rests ultimately on trade balances. The gold flow has set so heavily toward the United States that it can not much longer clear the short-term capital movements even of fairly solvent countries like Britain and France. Foreign investments in the United States are now estimated to be seven billion dollars. Much of this may be American capital repatriated. But there is a steady flow from abroad. This is partly due to panic money seeking safe investments and to the speculative bull market thus induced. But the clearing of balances for increased exports to these countries requires that we take more of their goods or services. Will we? Unless the monetary entente with Britain and France is backed up by a willingness on our part to take much larger quantities of British and French goods, there is small hope of holding the present parities. If our exchange fund is used to support the pound and franc indefinitely, and without a greater reversal of trade balances, we may well find ourselves holding an expensive bag. It is no secret that the British think that the pound is overvalued at anything around five dollars. It is equally true that the hard-pressed Blum government may have to reduce the gold content of the franc much lower. A great European statesman last year gave it to me as his guess that every continental currency would in a few years go the inflationist route, and to a degree horrifying to holders of fixed-interest obligations.
Nor are we in a strong position to meet this by further alteration of the gold content of the dollar. We might try to keep on speaking terms with the pound sterling by this device. But in the long run the American price level will be determined by domestic policies. Without disastrous internal inflation we can follow the pound only by altering our trade balances to follow the British. And that means taking more goods to cheapen the dollar in terms of pounds.
Britain, as our greatest market and the controlling force in the Sterling Area (or Sterlingaria, as it is coming to be called, in no spirit of mockery), holds the key position in setting our export prices on some commodities of great political as well as economic importance to this country: farm exports, notably cotton and tobacco. A trade agreement with Great Britain would therefore seem to be a cardinal matter of policy for the success of the Treasury’s monetary agreements and of the whole of Mr. Hull’s program. A consideration of the prospects for a really successful trade agreement with the United Kingdom will therefore set the general prospects for recovery through foreign trade. And since England stands as no other power does as the index of world economy, an understanding of the British position is essential to gauge our own.
The Ottawa Imperial Economic Conference in 1932 stands as a landmark for a great turning point in the economic history of our times. During the previous year a Tory government, exploiting the facade of a National Union Coalition brought in by the Anti-Labour landslide of 1931, had already embarked on high protectionism for England. By allowing the pound (or aiding it) to find a level about forty per cent below its normal gold-parity, Britain had obtained the formidable additional protection of a devalued currency. But Ottawa, by tying in the Dominions and the Colonial Empire to the imperial system, riveted the higher tariff system on to British policy as long as the Conservatives retain power in England, and perhaps longer, if the agreements are presently to be renewed for another five years. Powerful vested interests, not easy to dislodge, are built up behind this imperial tariff structure.
The first thing to note is that the chief British imports affected by the tying agreements of the Ottawa Conference are those agricultural products and primary commodities in which we are interested as exporters. The wheat, cattle, pork, fruit, and general farm products covered by the agreements bolster first of all the position of the home farmers in Britain, politically impregnable, and apt to retain the balance of conservative victory for some years to come. (This is my view in spite of the shifting of Major Walter Elliot to a minor post in the Baldwin ministry, from the Department of Agriculture and Fisheries. This “demotion” has been interpreted as meaning a swing away from Major Elliot’s planned economic nationalism for the British farmer.) After the home farmers come the Dominion producers, with low tariff (preferential) rates. Then, by a series of added treaty agreements, rates slightly higher have been accorded to countries like Argentina, the Scandinavian countries, and others whose control is vital to Britain’s loans and export industries. Even Germany comes in for special treatment in the effort to collect some of the loans which Dr. Schacht has cannily turned into an asset for his export trade.
In the crown colonies and protectorates too, Great Britain has begun to close the door to goods of non-imperial origin. Even in the mandates the open-door principle is subject to administrative manipulation.
Thus even if we are willing to increase the import of British goods beyond those already let in through most favored nation clauses and via the Canadian trade agreement—for example, whiskies and alcoholic beverages—the British on their part will find it most difficult to turn the flow of their imports back to us. They stand heavily committed to the producers of their own Dominions and to the Argentine to fill their import quota of meat from these sources.
Nor are tariffs alone in question: there are many nations for which a linkage to sterling is not, as it is for us, a convenience, but a vital necessity. Even countries not friendly to Britain, like the Irish Free State and Egypt, find it impossible to divorce their currencies from the pound. This means that they must, at all costs, maintain a trade balance with England. The Irish had to accept punitive tariffs against their cattle and dairy exports to England after Mr. de Valera’s refusal to pay the land annuities. They had no choice but to sell in the British market. That means that our own farmers can hardly hope competitively to displace these producers. One must include in this category the mounting imports of cotton from the Empire, the Sudan as well as Egypt proper, and Mesopotamia and India—all tied to sterling.
The British have led the way of late, too, in control over the production of basic commodities like tin, rubber, tea, jute, etc. The Dutch in the East Indies have both political and economic reasons for coming in on the most important of these schemes—the tin and rubber agreements—which were not present ten years ago at the time of the ill-fated Stevenson Act. Japan as a bogey man is of great use to the British. The result is an exploitation of tin prices, which is maintained by export taxes against shipments for smelting outside the Empire and by rigid production control in the Malay States and Nigeria.
III
The short of the matter is that the British Empire is closing up like an oyster. It is normally our principal market, the United Kingdom leading even Canada in the volume of trade with the United States. Taken as a whole, the Empire accounts for over one-third of our total exports. By making triangulation of trade possible, its fertilizing influence affects our entire trade balance. American capital, which was invited to participate in the Rhodesian copper field and in other imperial ventures, is now being frozen out. If we cannot pry open the Empire, we must turn to competition in the sterling countries—about the only ones left open for imports. There we are at a disadvantage for two principal reasons: the first is that England affords the great market for these countries, and has anchored them in this habit by linking their currencies to the pound through every variety of exchange control. The second is even more important today: Great Britain, through the City, is the one remaining source of foreign lending open to countries who are in the market for loans. The great American gusher of the ‘twenties has been pumped out. Nor is there any real sign that our foreign lending will be resumed soon. The investors of this country are pretty well shell-shocked, still, by the losses incurred through the indiscriminate lending of the Coolidge era of high finance.
In the absence of a renewal of foreign lending, Mr. Hull’s trade development program must remain a reasonably modest one. He has to work toward a balanced import-export relationship for the United States, since no benevolent investors are willing to make the foreign loans which alone permitted us to maintain a tremendous surplus of exports. There was a very close relationship between the fourteen billion dollar export surplus which we could show during the post-war period and the volume of our total foreign lending during the same years.
Of course foreign lending is quite sound, provided the United States as a nation is willing to permit repayment. But losses under our old protectionist (or tariff prohibitionist) policy are too fresh in mind for American investors. They are properly skeptical of any sweeping tariff reform.
The modest program of selling abroad only what other people can pay for by exports into the American market is therefore indicated as a present necessity. The trade treaties are aimed at broadening this flow of imports. Aided by a measurable degree of recovery in most parts of the world, they are succeeding in this limited objective. For the first time in a very long period our 1935 imports exceeded our exports. The trend has continued into 1936, so that we have achieved a balance of international payments which indicates a true reciprocity of trade.
The Republicans during the campaign professed to be very much alarmed at this state of affairs. They pointed to the sharp drop in cotton, tobacco, and wheat exports without allowing for the fact that there was no mortal way for foreign countries to buy more of these commodities unless we took more goods, or continued to give them the goods through uncollectible loans. And in the matter of the drop of other farm exports, Republicans conveniently ignored two years of drought as well as the universal trend toward self-sufficiency in agriculture on the part of other powers.
For many years the Republican apologists have been talking mercantilism of the crudest sort, measuring our prosperity in terms of an excess of exports and welcoming the draining of the rest of the world of gold. This “Beggar-my-neighbor” policy has been revived by Mr. Peek, who proposes in effect to come to direct barter on a simple two-party basis. The inevitable result would be to set up quotas for import and export to individual countries that would have to be managed from Washington. The title of this remarkable piece of propaganda, broadcast in the usual lavish way by the Chemical Foundation, is “Why Quit Our Own?” The context of the quotation is Washington’s much-abused “Farewell Address” and of course runs on “to stand on foreign ground.” In fact, Mr. Peek’s proposals would land us a long way toward Russian export-import monopoly under state control, or the German version of control by the state. For in no other way could the administrative decisions necessary to implement Mr. Peek’s program be carried out. After all his flings at New Deal “regimentation,” he proposes a Foreign Trade Commission whose working would mean as much “regimentation” even as the N.R.A.
Mr. H. B. Elliston of the Christian Science Monitor has pointed out that Mr. Peek’s approval of Germany’s methods of barter has been answered by Dr. Schacht himself. Mr. Peek says: “Germany during 1934-35 went into barter in such a big way that the record of her transactions fills a good-sized book. For instance she traded machinery, goods, and chemicals with Brazil for coffee, cottons, tobacco, and cocoa, and she made much the same kind of a bargain with Colombia. She traded coal and barbed wire with Cuba for molasses and honey. Almost every nation has tried some barter.” But Dr. Schacht, in a mood of despair, had this to say of this system: “Do you really believe this is a normal state of affairs? We are forced to calculate the equivalent of exported goods with a certain brutality of the Middle Ages and to replace the normal play of exchange and credits by a dreadful bureaucracy which is just as hard for those to endure who are at the head as for those who are its victims . . . unspeakably barbaric.”
Mr. Hull’s trade agreements do at least have the advantage of making trading opportunities open to all and of avoiding the pitfall of all quota systems. The freedom to negotiate on an agreement rather than a treaty basis frees him from the impossible job of placating two-thirds of the Senate on each treaty.
The fruits of these agreements can be expected slowly, in the shape of broadened openings for mutual trade and in the education of the American people out of the crass mercantilism in which they have so long been nurtured. It is true that the gains of foreign trade probably exercise a disproportionate influence on domestic business generally. Yet it may also be true that the gains of American exports and imports reflect better world business conditions quite as much as they reflect the effects of the tariff reductions contained in the agreements. The agreements in special cases, such as Cuba and Canada, have accomplished a great deal in a short time, doubling our agricultural exports to Cuba in the first year, and showing a very marked rise in Canadian imports as well as exports. But these agreements with neighboring states, whose economies are naturally linked to our own, were not only the easiest to negotiate but the most fruitful for that very reason. Of the fourteen so far negotiated, the most important are those with friendly states like Brazil. The hardest nuts to crack, Great Britain, France, and the Fascist states, remain to be tackled.
In spite of the fact that France is eager for an agreement with us that will further aid her wine growers and luxury industries, she is in almost as difficult a position as Britain. France too is having to close up her colonial empire still more tightly—and she was never as devoted to the Open Door as was Britain. Her farmers are pretty desperate, in spite of the tardy devaluation of the franc. Her gold supply was rapidly dwindling under the panic of her wealthy citizens, confronted by a Front populaire which threatened to give them a genuinely “left” government for the first time in many years. War and all its dreadful presentiments hang over France like a paralyzing miasma.
As for Germany and Italy, the simple fact is that they cannot produce goods enough of a character which we are willing to accept to purchase as much from us as we should like. The adverse balance of trade grows in Germany, in spite of Dr. Schacht’s efforts, along with the re-adoption of ersatz products intended to replace imports, as in the time of the blockade. With Italy an adverse trade balance is chronic and is not now being balanced by either tourist expenditures or emigrant remittances.
IV
The conclusion which I reach is that circumstances beyond Mr. Hull’s control may limit the possibilities of his program. But it is a lower tariff program, and that is useful to us and sets a good example in bad times. There is a sort of defeatism in the air just now which is poisonous. People take war for granted and nationalism’s triumph as inevitable. It is a grand thing to have as Secretary of State a man who never loses faith or courage.
The shadow of war may have fallen too ominously for Great Britain, for example, to back us in what has been her own traditional policy: freer trade and absolutely free and equal access to the world’s natural resources. There lie her long-run interests, as much in associating this country with her in the capitalist development of the British Empire’s resources as in throwing them open to the world. Secretary Hull is keeping the door open for Britain to turn toward freer trade.
But today Britain’s quandary is that of all the “haves.” Can she placate Germany and Italy by freer access to colonies alone? Will not this have to be accompanied by capital which Britain can hardly lend to powers that may be at her imperial throat in the Mediterranean, or threatening her definitely at home? Prestige for the dictators can be dearly purchased if bestowed on them by the democracies.
But this very threat of war brings to our hands one real weapon which might turn the trick, if the game were close. Britain and France have begun to be agitated by fear that their repudiation of the war debts will deprive them of all possibility of borrowing again in times of great future need —war.
Perhaps I may be permitted a story that has an apt moral. I remember being present—somewhat foolhardily—in the Chamber of Deputies the night of the ratification of the Mellon-Beranger agreement on French war debt repayment. It was no time for an American to make himself known as such. “Uncle Shylock” was the most flattering epithet which I heard applied to Uncle Sam.
The debate was of course even more heated and noisy than usual. Poincare was ill and Briand was trying to get a vote of confidence that seemed improbable. The defence of the agreement was half-hearted. It was assailed with equal vigor from the right and the left. M. Chiron, then Minister of Finance, was bravely sacrificing himself to make a Roman holiday for the deputies. They were enjoying a victim, and the most frantic bell-ringing of the President of the Chamber, M. Buisson, had little effect. He had at one time actually to get out his hat with the threat of putting it on to suspend the seance.
One phrase of M. Cheron’s, however, did produce a dead silence for a moment in the Chamber—surely a very rare thing! He had produced little effect by representing how exposed the French finances were. But when he managed to make himself heard in saying, “S’il vienne une guerre pro-chaine,” there was immediate silence. M. Cheron exploited his moment by adding, “l’appui Americain serait pour nous tres precieux.”
Unfortunately, intent on making the most of his great moment, he delivered a sweeping gesture in proclaiming that “Un jour viendra . . .” and knocked over a glass (presumably of water), whose contents poured down from the rostrum on to the head of the recording clerk underneath. As that unfortunate functionary mopped his bald head, a strong odor of creme de menthe rose through the entire chamber. It was unmistakable. The Chamber went into convulsions.
Finally some wag made himself heard over the uproar by shouting at the top of his voice, “Pas de publicite, ici. C’est un parfum, ca!”—knowing of course that un jour viendra was manufactured by M. Coty, a bitter political opponent of M. Cheron. The latter had to quit speaking. But aided by the fortuitous amusement of the Chamber, Briand seized the occasion to put a vote of confidence, which he carried by six votes, several of them later changed! Whether it was the joke, or the creme de menthe, or M. Cheron’s mention of American aid in the next war, or all three, the debt was ratified. Certainly the importance of American assistance was not lost from sight at that time (1929). A few years later, in 1932 and 1933, apparently the prospect of aid seemed so slight that repudiation was deemed safe, an example which Britain shortly followed.
Today both countries seem to be having misgivings. In any struggle on the continent, their ability to buy in our markets or to raise money here will be stretched to the limit. Unless the debts are cut of the way, there is less than no hope of getting aid from the United States on any substantial basis. And undoubtedly the repudiation of the war debts has enormously strengthened isolationist and neutrality-at-any-cost sentiment in this country.
The debts are worth something today as a trading point, and it may be something more tangible. Years ago I proposed that we attempt to achieve two things before compromising on a debt settlement limited to original capital account, with some write-offs.
The first was to get all the colonies—those that were saved by the Allies through winning the War—opened up as much as the “A” mandates for both trade and equal access to raw materials. We asked nothing at the end of the War. Now we are asked to pay for the Allies, too. If we demanded this, it would save face for the colonial powers and would take away the last pretence to injustice from the dictators. We should be able, for our part, to set aside huge stocks, on government account and not for commercial use except by agreement with the producing countries, of some of the non-ferrous metals that we lack: tin, chromium, manganese, etc., from England, and radium from Belgium.
The second point was that the debts should be used as an additional leverage to force a general revision of tariffs downward. Now this proposal runs into the changed conditions which have riveted tariffs pretty firmly. Probably some headway could still be made, particularly in removing quota restrictions, and administrative discriminations such as arbitrary valuation, restrictions on samples, etc. We might link the debt payments with an exchange credit to support the dollar in both London and Paris until the movement of goods and services was more regularized.
Today the benefits of such an arrangement should be limited to those nations which were prepared to play ball along these lines. Germany would have to change her tactics in order to get free access to colonies. She would have to stop playing off fifty-seven varieties of marks on the rest of the world and give up the exchange controls by which she is building up armaments under forced draft. In other words, the old world of comparatively free exchange of goods cannot be made free of access to the new world of totalitarian states, if the latter insist on remaining armament factories rather than trading nations.
The simple method of bringing this about would be a sort of economic league, based on lowered tariffs throughout the Sterling Area, France, Holland, Belgium, Switzerland, and the United States, for the benefit of the members. Most of South America comes in here, either under the Sterling Area or by a tie-up with the United States. Resumption of trade relations on a flexible scale is necessary to real currency stabilization. But currency stabilization helps to produce that trade, and operates as a powerful persuader to Mussolini to keep clear of German lead strings.
But the simple method is of course far from being simple. It is something to aim for, without too much hope of getting any large results—certainly not at once.
The signs for the moment are that Mr. Hull is going to do some economic courting in Buenos Aires. As the prospects of general international settlements seem more remote in this troubled world, the prospects of regional settlements seem fairer. Unfortunately our economy is not sufficiently complementary to that of the South American countries. Our farmers and miners feel no Pan-Americanism. Buenos Aires may be important politically. But the road to world trade leads through London, the only center for triangula-tion of trade which is left in this mad and not very merry world.
