SIX months ago I attempted to outline in these pages[i] the tasks lying ahead of the World Economic Conference. What, now, are the lessons which should be learned from the story of that Conference? And what should be done in the coming months regarding the problems with which it endeavored to deal? To attempt an answer to the first of these questions is obviously an easier task than to answer the second; for while economic conditions are changing with such bewildering rapidity it is a hazardous undertaking, if not actually rash, to attempt to prescribe for the future. If I take the risk once more, I hope the readers of FOREIGN AFFAIRS will bear in mind the handicaps under which I write.
I
The chief lesson of the World Economic Conference is to reinforce and drive home a conclusion which emerges from the history of all international conferences since the war, namely, that there is little hope of achieving agreement among a large gathering of statesmen or even of experts unless the ground has been thoroughly and systematically prepared beforehand and a general understanding reached by negotiation or otherwise as to the character and terms of the agreement to be concluded.
This process of preparation had been undertaken in the case of the World Conference and some progress had been made in laying down lines of agreement on the chief items of the agenda. But the Report of the Preparatory Committee — though unanimous — was not a wholly satisfactory document from this point of view. Its comments were often vague and covered up differences of opinion which were bound to emerge when general resolutions were converted into action. Even in regard to monetary policy, on which the greatest measure of agreement was attained, there were differences of opinion as to the possibility of government or banking action fostering a rise of prices and as to the time that might be required before an international monetary standard could be reëstablished. Great Britain, for example, held that such a standard could only be attained by degrees, as other conditions were realized. Nevertheless, it was a very important fact that common ground had been reached regarding the general proposition that in the monetary sphere the chief task of the Conference should be to organize an eventual return to an international standard, which could only in practice be a gold standard, and regarding some of the principles involved in working it. The conclusions of the Committee on Commercial Policy, however, were much less definite, and though the experts insisted most emphatically on the need for removing trade restrictions there was no very clear indication as to how this was to be done.
But in spite of this weakness it was not altogether out of the question that the Conference might have made substantial progress even on commercial policy, for experience has shown that there is such a thing as a momentum created by success; and if the Conference could have worked out a plan for a gradual return to some form of the gold standard there would have been a very strong inducement to take the second and essential step of creating the trading conditions under which it could function.
But the basis of this understanding was undermined by America’s departure from gold and by the evolution of her great recovery experiment, which, as its various phases developed, made her less and less willing to contemplate an immediate stabilization; created increasing uncertainty as to the ultimate rate at which she might eventually stabilize; and even cast doubts on the question as to whether she intended to return to the gold standard at all. Thus before they met the ground had been cut away from the feet of the statesmen at precisely the point where they had imagined that their foothold was most secure. As we look back, we see clearly that the wisest course would have been to postpone the Conference until a fresh basis of agreement could be worked out. This decision should have been taken at the end of May.
The impossibility of reaching agreement on the monetary issue, however, served to throw into sharper relief the fact that there was no common basis of agreement on commercial policy. When the Conference came to discuss such matters as tariffs and exchange restrictions in the light of the knowledge that there could as yet be no general plan for reorganizing international economic intercourse, all the various national preoccupations and prejudices came to the surface and provided arguments for the cynics who have asserted that if America’s monetary situation had not proved an insuperable barrier, there were a dozen different nations whose short-sighted economic policies would have ensured the Conference’s failure.
But so far the adjournment of the Conference has not led to disaster. Although every statesman, from the King downwards, and every commentator, had declared that the strongest reason for believing in the success of the Conference was that no nation would dare to face the consequences of failure, the dispersal of the delegates has not been followed by anything in the nature of a crisis or renewed depression. Were we, then, all wrong in our prognostications? The answer, I believe, is that from the long distance point of view the world will sooner or later suffer grievous material harm if there is no international agreement; but that for the time being there are a number of factors in our favor.
One of these emerges from the proceedings of the Conference itself. At one time there was real danger of a hasty adjournment in an atmosphere that would have exacerbated national temper and suspicion. But this was avoided by the continuation of the Conference for a further three weeks, during which passions had time to cool and it was possible to provide for the continuation of its work on what is for the present a more humble scale. Hence, though the danger that the nations may turn their attention to yet more extreme experiments in economic nationalism is a very real one, it is something gained that the Conference broke up in an atmosphere of good will and with the conviction that its task would have to be taken up again. If the good ship was prevented by a cyclone from getting very far on its voyage, it at least was saved from becoming a total wreck and was towed back safely in to port.
A second and more practical consideration is the fact that a study of the curves of economic activity in recent times suggests very definitely, in the case of many nations at all events, that the acuter phases of the depression have been passed, and that the disharmonies created in the economic system by the crisis are beginning to work themselves out. In Great Britain’s case, for example, it certainly looks as though midsummer 1932 was the turning point, and that since that date things have been slightly on the mend. If President Roosevelt’s program is successful in America, and is so designed as not to create new disturbances for other countries, this upward trend may be expected to continue. While this possibility remains, and so long as the natural forces of recovery are allowed to operate, there is no reason why the nations should take precipitate action which might start a new slump. Since the Conference ended there has been one fresh default; but on the other hand some international lending in the London market has begun again for the countries of the Empire, while a loan has been raised for Austria. The tariff truce, moreover, remains in existence, and unless some vital change occurs we may at least expect that the obstructions to trade will not get worse.
The position, however, is still very precarious. Social order in many countries is still in danger through the unemployment of vast numbers of the population; debtors have not yet obtained any substantial relief and as time passes will get nearer to the breaking point. Thus while most countries of the world are not actually losing ground and some are actually gaining, a new disaster might easily be precipitated if either the political situation were allowed to get out of hand or unwise monetary or commercial policy by any important nation were to produce a new dislocation in international trade, with its normal corollary of a further fall of world prices.
II
This leads me to consider what is to be done in the forthcoming months. Clearly this question cannot be answered at all precisely until we can foresee the course of events a little more definitely. There never was a time when it was more difficult to prophesy, and anything that may be said now can only be of the most tentative description.
The great uncertainty is the outcome of the American experiment, the course of which must affect for good or ill every country of the world. Will the President succeed in his threefold object of raising simultaneously the wage level, the price level and the volume of production?
This task of leaping to a new price basis, under state direction and almost at a single stride, has never before been attempted in a country of competitive enterprise, and it is obviously a task full of difficulties. If it be true that one of the major causes of economic depressions is the emergence of a disproportion between various forms of production, and between economic phenomena such as saving and investment, wages and commodity price levels, etc. — and clearly this “bad timing” has played a very important rôle in the present depression — it must require the greatest skill or the most phenomenal luck to get all the wheels in the complex machinery of a nation revolving again at the proper speed in relation to one another. With speculation playing a part in some processes, but not in others, with production rising in anticipation of costs in some directions, with the impact of rising costs affecting different industries and large and small firms in quite different ways, there will inevitably be much friction and many adjustments will have to be made. These difficulties can be overcome only by a tremendous momentum of expansion. No one can yet say whether the President’s herculean efforts will succeed or not, and the world is watching the outcome with great interest, not to say anxiety.
If the plan succeeds, as all must sincerely hope, it may prove of great benefit to every country, provided the rise of prices takes place without further exchange complications. If this happens, the monetary conditions in the countries of the British Empire are such that the upward movement will extend freely and naturally to these countries. There is no possibility of similar or coördinated plans for raising prices by direct action being worked out for any considerable number of countries of the world; but cheap money and capital expenditure should make possible a general, if moderate, rise of prices. It should be added, however, that those who desire to see such a movement in the Empire take a modest view of the rise of prices that ought to occur, for they are conscious that a big rise has similar, if opposite, dangers to those of a rapid fall. These dangers include the dislocating effects of undue speculation, excessive investment in those directions where prices are particularly responsive, and a new disturbance in the distribution of the national income. In short, in attempting to correct one set of evils we can easily overreach ourselves and create new ones. It therefore is wise to err on the side of caution rather than risk too much.
This parallel rise, however, will not come about if a price rise in the United States is accompanied by a more than proportionate depreciation of the dollar, for this would have a deflationary effect on prices in other countries and lead to renewed lack of confidence, diminished buying power and increased unemployment. A deflationary tendency of this kind abroad unquestionably operated to depress world trade in 1931 when the pound went off gold, and prevented any appreciable recovery in Britain. The most disconcerting feature of American events in May and June was that in this instance also the international depreciation of the dollar again ran ahead of its internal purchasing power. An unbalanced movement of this kind not merely causes, or threatens to cause, a shift in existing trends of commerce, but invites competitive depreciation and tends to bring about great capital movements which disturb the foreign exchanges out of all relation to the normal levels resulting from price conditions and the balance of trade. A successful American experiment may be of great general benefit, but only on condition that there is no undue disturbance of the international exchanges.
If, on the other hand, the American experiment suffers setbacks owing to the impossibility of driving the whole team forward at the same pace, industrial recovery in America must hang fire for a while until any abnormal increases of production that may have taken place have been liquidated and prices that have risen out of proportion have adjusted themselves once more. But unless fresh adjustments have to be made on a very great scale I see no reason why a check to the United States boom should generate a world slump or that anything worse should happen than that America would fall back to the slower but definite tempo of recovery which has for some time been noticeable in most countries which are free from political disturbances.
III
What are other countries likely to do while the fate of this great experiment is still in the balance? So far as Great Britain and the countries of the Empire are concerned, although they will be extremely anxious to foster and develop such recovery as has been achieved up to date, they are unlikely to take any spectacular action to induce either an artificial rise of prices or an economic expansion. The idea is deeply rooted that recovery would be imperilled rather than assisted by stimulating a speculative movement founded on the anticipation of government action which may or may not be successful, and that it is better to coax than to cajole. This cautious attitude applies even more to the exchange situation than to production and prices. Although British policy, as announced at the World Conference and endorsed by the Dominions both at Ottawa and in London, rejects the possibility of stabilizing on gold until some rise of prices has taken place, we are not unconscious of the fact that this doctrine involves something of a paradox, particularly if it applies over a part only of the international field. The theory of an artificially engineered price rise followed by stability recognizes that the condition at which we are finally aiming — the condition that will preserve equitable relations between different parts of the economic structure, once more make possible reasonable and durable contractual relations between debtor and creditor, and restore confidence in the monetary and banking system — is one of stable prices, or, in other words, stability in the value of the monetary medium. Yet we have first to attain it by a process which deliberately creates distrust in the monetary medium, tends to cause a flight from currency into goods, and produces the disturbing international movements of capital to which I have already referred. This contradiction can only be circumvented if the price movement is general, moderate in amount, and attained by degrees rather than by violent jerks. Such considerations are considered very important in London, whose international business as a monetary, commercial, insurance and shipping center would be seriously menaced by grave distrust of the pound.
On the other hand, the declaration of the Empire countries at the end of July made it quite clear that in present circumstances the pound will not at present be formally linked to gold — partly because circumstances may arise which would make it impossible for us to maintain any parity that might be chosen now, and partly because any formal link would tend to discourage the upward movement of prices which we think ought to take place. The pound is strengthening its prestige as a stable currency in the sense that it is not at the mercy of speculative or other influences which have nothing to do with the underlying conditions of trade, and it continues, as it has done for many months past, to be fairly stable in relation to gold currencies. If the violent American exchange movements of the last few months die down this link may well become the basis of a permanent stabilization. But for the moment there is nothing to do but to wait upon events.
Meanwhile, for reasons which are partly political and partly psychological, the gold countries will do their best to remain on gold. This is almost certainly in the interests of the world; for if the gold link were snapped now in countries which have in varying degree already experienced the evils of extreme inflation and have a passionate desire to avoid a repetition of these unhappy experiences, it might create internal reactions leading possibly to social and political trouble, as well as international exchange movements which might prove extremely difficult to control. This does not mean that these countries must be a drag upon world recovery and the general upward movement of prices. The economic sphere of the countries still upon gold is relatively so small that if American prices rise, and if this movement is accompanied by a similar if smaller movement in other non-gold countries, the movement would almost certainly extend to gold prices themselves, provided always that the exchanges of the countries that are off gold do not pursue so erratic a course as to upset the trade of the world. It is to the interest of non-gold countries who are pursuing a definite price raising policy to watch the exchange position carefully and to see that the course of their exchanges does not produce a new international disequilibrium.
If this objective is kept in mind there is no reason why the course of events should be further disturbed in the next few months by a fresh crop of tariff increases or of trade restrictions. The tariff truce is still in being, and the only consideration which is likely to lead countries to embark once again on a course that would obviously be harmful to everybody would be a desire to get into a position to safeguard themselves against the effect of some new or violent exchange fluctuation. Indeed, there is no reason why modest steps should not be taken between particular countries to ease some of the more extreme restrictions where they are proving obviously harmful.
IV
If this is a correct appreciation of the course of opinion and of events in the near future, how and when can we take up again the broken thread of international coöperation?
So far as monetary policy is concerned, it is clear that for the moment little can be done. At the time of writing there is a small setback to the price recovery; but if this proves temporary, and the rise that has been achieved up to the present is held, there is no reason why there should be any fresh violent exchange disturbance. This is true even of the United States — set as she is on the attainment of a substantially higher price level. Price movements in the past, both upward and downward, have taken place on quite a large scale without throwing the whole exchange position of the world into chaos. These exchanges should be a function of the trading position between the different countries. Even in the present condition of the world a resumption of the upward movement can perfectly well take place without involving big exchange fluctuations which merely send fugitive capital flying round the world and confer temporary advantages on one country at the expense of corresponding disadvantages to others.
But it is not to be expected that America will yet be ready to stabilize the dollar, even if she has made up her mind whether or no she intends ultimately to adopt a commodity dollar rather than coöperate in working some form of international gold standard which will aim at greater stability in the value of gold than has obtained in recent years. If she decides for the commodity dollar, then complex questions will arise in working out normal financial relations between this new standard and metallic currencies. But, in any case, there is every reason why the various countries should attempt, if possible by international understanding, to prevent the movements of capital to which I have referred. It is true that it is extremely hard to prevent these movements in times of abnormal exchange variations, for experience has shown that there are a hundred ways in which the elusive capitalist can get round the most carefully devised schemes. Indeed, there is no final cure which will reduce these movements to the normal requirements of trade, except comparative exchange stability. But it is highly desirable that the central banks should try to work out plans which would discourage such movements, and if possible render them unprofitable, by the use of central funds. The declared intention of the Empire countries on the one hand, and the gold countries on the other, to prevent, as far as possible, any exchange variations within these groups, will at least tend to check these capital movements over a large area of the world in the next few months.
A more fundamental and difficult question is how to take up again the problem of reducing trade restrictions, whether for the sake of releasing the trade of the world, or as a necessary condition of exchange stability. Here again all that can be done in the immediate future is for discussion to be resumed as quickly as possible between countries whose mutual exchange rates can be kept comparatively stable. There is no reason, for example, why the countries of Central Europe should not be working out measures for relaxing their trade barriers generally, and in particular the crisis measures which have been imposed in the last two years.
At an early date, moreover, the problem of international indebtedness must compel creditor countries to consider their commercial policy vis-à-vis their debtors. This is perhaps the most important method of easing the position of the latter. But even if trade restrictions are relaxed sufficiently to permit of some increase of trade, if the plight of agricultural countries is somewhat relieved, and some upward movement of prices takes place, this will solve the debtor question only in part. In the autumn the position of countries whose accumulated debt is heavier than can be liquidated by ordinary trade means during the next two or three years must be taken up afresh, and negotiations entered upon with a view to lowering rates of interest from the present high figures, which are clearly more than the economy of these countries can possibly stand.
A hand-to-mouth policy in regard to the exchanges; the maintenance of cheap money conditions; modest efforts to mitigate restrictions within limited groups of countries; and an adjustment of the more flagrant cases of burdensome indebtedness — this is not an exciting program. But such stop-gap measures are all that are possible until the outcome of the American experiment is known. The World Conference had no alternative but to leave to the discretion of its Bureau the decision when and in what field international discussion should be resumed. Until the time is ripe for taking up the broken threads once more, the world can at best only expect the modest advance of the past ten months to continue: for until there is a radical break with the nationalist trends of the past three years no country can hope to regain the high points of material prosperity which were touched in the past decade. And a break with the past involves reopening all the longrange problems which I attempted very inadequately to discuss six months ago in these pages.
[i] FOREIGN AFFAIRS, April 1933.
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