Deepening Depression

The Hawley—Smoot tariff began as a response to the decline in agricultural prices and was signed into law as the decline in business picked up speed. For a time during the second quarter of 1930, it looked as though the world economy might recover from the deflationary shock of the New York stock-market crash in October 1929, which had come on the heels of the failure in London of the Clarence Hatry conglomerate

after the discovery of fraudulent collateral used to support bank loans in September and the failure of the Frankfurt Insurance Company in Germany in August. This is not the place to set forth the causes of the depression in agricultural overproduction, the halt to foreign lending by the United States in 1928, the end of the housing boom, the stock-market crash, frightened short-term capital movements, United States monetary policy and the like. It is sufficient to observe that the chance of recovery was seen to fade at the end of June 1930 with the signing of the Hawley—Smoot tariff, the outbreak of retaliatory cuts in international trade, and the near-failure of the Young loan (to reprime German reparations) in international capital markets. Events thereafter were uniformly depressing, from Nazi gains in German elections in September 1930, the collapse of the Creditanstalt in Vienna in May 1931, the run on German banks in June and July, until the Standstill Agreement that blocked repayment of all German bank credits shifted the attack to sterling, which went off the gold standard in September 1931, followed by the yen in December.

One item of commercial policy contributed to the spreading deflation. In the autumn of 1930, Austria and Germany announced the intention to form a customs union. The proposal had its proximate origin in a working paper prepared by the German Foreign Ministry for the World Economic Conference in 1927. It was discussed on the side by Austrian and German Foreign Ministers at the August 1929 meeting on the Young Plan at The Hague. Germany took it up seriously, however, only after the September 1930 elections which recorded alarming gains for the National Socialists, and Chancellor Brüning felt a strong need for a foreign-policy success. The French immediately objected on the grounds that customs union between Austria and Germany violated the provision of the treaty of Trianon which required Austria to uphold her political independence. France took the case to the International Court of Justice at The Hague for an interpretation of the treaty. Other French and British and Czechoslovak objections on the grounds of violation of the most-favoured-nation clause were laid before the League of Nations Council (Viner, 1950, p. 10). The International Court ultimately ruled in favour of the French position in the summer of 1931. By this time, however, the Austrian Creditanstalt had collapsed — barely possibly because of French action in pulling credits out of Austria, though the evidence is scanty — the Austrian government responsible for the proposal of customs union had long since fallen, and the run against banks and currencies had moved on from Austria to Germany and Britain.

In the autumn of 1931, appreciation of the mark, the dollar and the gold-bloc currencies as a consequence of the depreciation of sterling

and the currencies associated with it, applied strenuous deflation to Germany, the United States and to Western Europe from September 1931 to June 1932. Depreciation of the yen in December 1931 marked the start of a drive of Japanese exports into British and Dutch colonies in Asia and Africa, and of colonial and metropolitan steps to hold them down. June 1932 was the bottom of the depression for most of the world. The United States economy registered a double bottom, in June 1932 and again in March 1933, when spreading collapse of the system of many small separate banks climaxed in the closing of all banks for a time, and recovery thereafter. German recovery started in 1932 after the resignation of Brüning, who had hoped to throw off reparations by deflation to demonstrate the impossibility of paying them, the succession of von Papen as chancellor, the finally the takeover of the chancellorship by Hitler in February 1933. The gold-bloc countries remained depressed until they abandoned the gold parities of the 1920s — first Belgium in 1935, and the remaining countries in September 1936.

In these circumstances, there was little if any room for expansive commercial policy. Virtually every step taken was restrictive.