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THE ECONOMIC DISINTEGRATION OF EUROPE:
TRADE AND PROTECTION IN THE 1930s
by
Richard T. Griffiths
Introduction
The increasing momentum towards protectionism in Europe from the late 1920s onwards
was to usher in an era of peace-time trade restriction unknown since the age of high mercantilism
in the eighteenth and early nineteenth centuries, but it is important not to paint the 1920s
themselves in too favourable a light. The neo-classical conditions of international free trade were
already becoming a myth in the 1880s and the years before the First World War had been
characterised by an extension of protection both in terms of the range of products covered and the
levels of duties imposed. It is instructive to note that at no time in the inter-war years did Europe
manage to get levels of protectionism back down to the relatively high levels prevailing in 1913.
Although by 1924/5 many of the immediate post-war problems had disappeared and Europe
entered a period of economic growth, it proved difficult to dismantle the elaborate network of
protectionism built up since before the War. One of the reasons was that prolonged isolation from
international market forces had tended to distort national economic structures and national price
structures. In both cases the dislocation, social and economic, of freeing trade implied a conflict
with entrenched vested interests as well as entailing definite political risks. A second factor was
that in the high-tariff countries of Eastern and Southern Europe customs duties constituted an
important and easily collected source of revenue which governments, grappling with problems of
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balancing budgets, were unwilling to forego. Moreover, in the Balkans, which was the
storm-centre of the protectionist movement, high industrial tariffs were part and parcel of
development programmes based on import substitution.
If such internal domestic consideration provide one part of the explanation, institutional
difficulties in the way of economic disarmament constituted another. At the heart of the problems
lay the 'Most Favoured Nation' (MFN) clause, which before the War had underpinned virtually all
international tariff treaties. Basically what this entailed was that all countries imposed a maximum
and minimum schedule of duties - the minimum applying to those countries which did not
discriminate against itself, the maximum to those which did. In this way, any concessions made in
bilateral trading agreements (the usual way of fixing tariffs both before and after the War) were
extended to all trading partners via the MFN clause, or else the parties' own favoured treatment by
other countries would lapse. Now the problem arose when, for example, bilateral concessions
between two European countries had, under the MFN clause, to be extended to a third party which
itself had high, non-negotiable tariffs and which was already running a massive
balance-of-payments surplus. This would obviously reduce the enthusiasm of both negotiating
partners for making significant concessions. Seen in this light, American commercial policy must
be interpreted as a serious constraint on European trade negotiations. The 1921 Emergency Duties
Act on agricultural products and the Fordney-McCumber tariff of 1922 had led to a massive rise in
levels of American protectionism and it was already known, in 1928, that a further escalation was
being planned (this was to emerge as the Hawley-Smoot tariff of 1930).
There were a number of ways round this problem, all of which offended the spirit, if not
the letter, of the MFN clause. The first was the almost unheard-of practice of introducing
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bargaining tariffs, tarifs de combat, and negotiating afterwards. In this way duties on most items of
bilateral trade could be reduced but often leaving the remaining high level and affording extra
protection in other directions. A second tactic lay in defining tariff schedules so specifically that
any concessions were virtually meaningless to third party traders. A final practice was simply to
note that the MFN clause did not apply to forms of import limitations other than tariffs (ie. to
quotas, licenses, veterinary regulations, anti-dumping measures etc.) and to negate the effects of
tariff concessions in this way.
Some progress towards the resolution of this last point was made at the World Economic
Conference in Geneva in 1927 and at subsequent meetings. Agreement was reached in principle 'to
abolish within six months all import and export prohibitions or restrictions' subject to ratification
by 18 states by September 1929. Since by that date only 17 ratifications had been received, the
agreement lapsed. It is easy to exaggerate this failure and to view it as a tragic missed opportunity.
Like most international agreements to emerge in this period it was essentially a compromise
hedged with various escape clauses. Excluded from the agreement were purchases by public
services, trade in arms and munitions, sanitary regulations for plants and animals and products of
state monopolies. In addition, restrictions could be reimposed 'on moral and humanitarian grounds'
or 'for the purpose of protection, in extraordinary and abnormal circumstances, the vital interests of
the country'. In the light of these reservations it is unlikely that the implementation of the
agreement would have had any practical effect in dampening the protectionist storm that was to
follow. By September 1929 'extraordinary and abnormal circumstances' had either already arrived
or were just around the corner.
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The weakening of agricultural prices, the reduced level of recycling of the American
balance-of-payments surplus, the impact of deflation on industry and employment and, finally, the
collapse of the European financial system undermined whatever relatively favourable conditions
had prevailed after 1925. Levels of protectionism in Europe rose inexorably upwards and levels of
trade first plummeted downwards faster than production and failed later to pick up in line with
production.
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Table 13.1 Indicators of European Output and Trade
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
100
97 96 96 99 102 104 105 109 n.a.
i) European Agrarian Production
ii) Europ. Ind.
Production
100
92
81
70
76
85
92 100 100 n.a.
iii) Real Value
Eur. Imports
100
98
95
?
80
81
80
iv) Real Value
Eur. Exports
v) Intra-Europ.
Imports as %
Europ. Imports
54(1928)
81
90
100
93
83
68
68
69
70
72
83
na
60
54
na
na
54
na
51
52
87
76
Source: League of Nations: World Production and Prices, Review of World Trade, various years
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However there was not only a change in the level of trade restriction but a mutation in its
form. Between 1929 and 1933 protectionism had ceased to be merely a response to deteriorating
internal conditions but became, instead, a weapon for reshaping international relations along
consciously preconceived lines. Before examining these developments it is necessary to analyse the
qualitative changes implied by the adoption of different means of trade restriction.
FROM 'MARKET' TO 'NON-MARKET' FORMS OF TRADE RESTRICTION
The object of this section is to make some sense of the complexity of instruments
employed by governments to influence, for whatever reason, the volume of their foreign trade. In
particular there was a shift from what can be called 'market' forms of trade restriction towards what
we can describe as 'non-market' constraints on trade. By 'market' forms of trade restriction we mean
those instruments which, having been employed, permit the actual volume of imports to be
determined by price and income elasticities of demand. With 'non-market' forms, on the other hand,
such considerations become irrelevant since the volume of imports is determined in advance. It is
possible, within this framework, to envisage a spectrum ranging from deflation, exchange
depreciation and tariffs, all of which are market controls, to quotas/licenses and exchange control.
This spectrum not only reflects the erosion of market mechanisms in determining the volume of
trade, it also mirrors the increasing bureaucratisation of the management of the foreign trade sector
whereby decisions over the distribution of imports (by product or by country) are increasingly
removed from public accountability or even public knowledge.
Domestic deflation
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The most open form of limiting imports, and that favoured by neo-classical doctrines of
the gold and gold-exchange standards, was domestic deflation. In theory a link was supposed to
exist between the means of external payments and the domestic money supply. A deficit in the
balance of payments would imply a reduction in those means and therefore a contraction in the
money supply which, in turn, was supposed to lead to a fall in the domestic price level. The same
process would also have been operating, only in reverse, in surplus economies. The resultant
change in international competitiveness produced by relative movements in price levels should
have led to the restoration of equilibrium on both sides of the equation. Thus, in theory, the system
was
supposed
to
be
both
self-regulating
and
asymmetrical,
achieving
long-term
balance-of-payments equilibrium on the basis of fixed exchange rates.
In practice the gold-exchange standard broke the link between the means of foreign
payments and the domestic monetary base and this, combined with the political reluctance of
governments to countenance inflationary policies, allowed surplus economies to break the
asymmetry by continuing to accumulate gold and foreign exchange reserves whilst neutralising the
effect on the domestic economy. A deficit country does not have that option. Faced with an
outflow of gold and foreign exchange, and confronted with a finite limit to such reserves, it will be
forced, eventually, to act to remedy the deficit. Should a government decide to do this by deflation,
it will raise the price of credit and, where necessary, reduce the contribution of its own borrowing
requirements towards the expanding monetary base. The effects should be two-fold - price should
fall because of the contraction of the money supply and demand should fall because of the increase
in the price of credit and the reduction in government expenditure. Insofar as deflation is successful
in adjusting the ratio of home:competitors' prices, it relies entirely on the price mechanism to
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equate supply and demand. Insofar as it serves to reduce the total level of demand it is
indiscriminate in its effects on imports or domestic production.
The implementation of such a policy, however, is fraught with difficulties. For example, if
the intended effect is on prices, then not all elements in the price structure are likely to be flexible
in a downward direction in the same degree. Thus those trading sectors of the economy in which
inflexible price elements play an important role are likely to feel themselves under pressure at an
earlier stage than other and governments may feel impelled to take action to ameliorate the
situation. But in removing one sector from the full force of deflationary pressures, not only will
government be acting against the logic of its overall policy, it will also tend to throw the full
weight of readjustment onto relatively unprotected sectors. A second consideration militating
against this policy option is that the reduction in domestic demand required to achieve
balance-of-payments equilibrium is likely to exceed to some considerable degree that share of total
demand represented by the balance-of-payments deficit. A further problem which may be expected
is that as levels of economic activity fall, so too will government revenue at a time when its
commitments in other directions (unemployment relief, the cost of covering operating deficits in
public services etc.) might be expected to increase. In such circumstances governments could
easily find themselves fighting a losing battle to close the yawning gap between income and
expenditure, prescribing for each new deficit a further massive dose of deflation which only serves
to exacerbate the situation. Finally, the impact of all these problems will be intensified if, at the
same time, surplus economies are not deflating their own levels of demand or, worse still, are
themselves deflating or taking other measures (devaluation, dumping etc.) to reduce their external
prices.
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We have dwelt so long on the question of deflation because it stands apart from other
strategies for trade restriction by virtue of its emasculating impact on domestic economic activity.
It is perhaps surprising, with hindsight, to realise just how far governments were willing to go
along with such a policy option.
Devaluation or exchange depreciation
Devaluation or exchange depreciation represents an alternative method of achieving a
revision of home:'competitors' price ratios without having to embark on the thankless and
self-defeating exercise of destroying the domestic economic base. By raising the price of
purchasing foreign currency and, conversely, lowering the price of purchasing one's own,
devaluation serves to raise the price of foreign goods expressed in terms of domestic currency (and
vice versa). This, in turn, should stimulate foreign demand for exports as well as domestic demand
for import substitutes, both of which will have an expansionary effect on the economy. Whether or
not it will correct the balance of payments is another matter. This will depend on the relative
elasticities of demand for imports and exports since the gold or foreign exchange costs of imports
will remain unchanged whilst the gold or foreign exchange yield of exports falls. If demand for
both imports and exports are relatively inelastic, it is possible that the deficit will remain.
Moreover, the increased domestic currency price of imports will have a cost-push effect on
domestic price levels which may erode the competitive edge given by the devaluation. This fear of
the inflationary consequences may prove part of the explanation for the reluctance of governments
to embark on such a policy, though it says volumes about misplaced priorities that this should have
been a major consideration when the world was experiencing its steepest price fall in history.
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A second factor militating against this option was that foreign holders of domestic
currency would receive less gold and foreign exchange than previously and it was considered by
countries with adequate gold and foreign exchange reserves to be something of a betrayal of
foreign confidence to take such an unforced measure. This phenomenon operated in reverse for
countries with large foreign debts expressed in terms of foreign currencies. They experienced
something of an unexpected wind-fall since devaluations elsewhere reduced the amount of
domestic currency required for the servicing and repayment of those debts - a benefit they might
have been reluctant to sacrifice by devaluing themselves.
A final consideration behind a reluctance to devalue may have been a fear that its effects
might be counteracted by retaliatory devaluations elsewhere. However, the decision not to devalue
at a time when major competitor nations were doing so was merely to intensify the deflationary
pressures, which then had to be resolved in other ways.
Tariffs
The final market-oriented form of trade restriction is the imposition of tariffs. Whereas
deflation or devaluation were non-selective in their effects, tariffs were usually discriminatory in
their treatment either of different goods or of different countries (depending on their export
structures). Once imposed, however, the market mechanism was left to achieve equilibrium in
supply and demand. Tariffs operated by imposing a frontier tax on imports designed to raise their
price relative to domestic products and thereby discourage their consumption.
The problem with tariffs is that they were largely ineffective at a time of falling prices. In
such circumstances governments attempting to rely predominantly on this form of trade restriction
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were faced with two alternatives - either a mad pantomime of constantly revising tariff schedules
every few months to keep pace with falling prices or the adoption of sliding-scale duties (which
increase the rate of duty as prices fall) which were unwieldy and cumbersome to administer.
A further difficulty in using tariffs as a front line of defence lay in the fact that the rates for
many products were fixed by bilateral trade treaties. Short of ripping these up, and inviting
retaliatory action, governments had to consider tariffs on a wide range of goods as immutable, at
least in the short term. An ingenious way round this problem was the 'tariff quota' in which a
predetermined quantity of goods would be allowed into the country at the old level (with the quotas
usually biased in favour of treaty signatories) whilst the remainder would be charged at the new,
higher rate. In this way the fiction could be maintained that duties had not been raised. This was
sporadically popular in 1931 and 1932, but Switzerland was the only country which used it on any
scale in the 1930s. Elsewhere, the practical limitations of tariffs in protecting price levels and the
administrative hassles involved in tariff revisions, especially if they still had to pass through
parliament, led countries to turn to more direct means for controlling the level of imports.
Quantitative trade restrictions
We now come to a whole panoply of measures in which the quantities or, very
occasionally, the values of goods which may be imported are fixed without any consideration at all
of the price mechanism. Into this category fall, primarily, quotas (where the quantities to be
imported are fixed in advance) and licenses (where imports are determined by an administrative
authority on the merits of each individual case). Also in this category are mixing and milling
regulations (where imports are linked to domestic consumption and prevalent in foodstuffs) and
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veterinary and hygiene prohibitions. These measures, it must be emphasised, did not replace tariffs.
These continued to be imposed. Indeed, since the import of a restricted item could be a lucrative
business, additional licence fees and supplementary duties were often imposed to cream off excess
profits.
The advantage of these methods over tariffs was that they virtually removed the domestic
price level from external influences. They also allowed governments to determine, within very fine
limits, the composition of imports. The only practical problem involved, particularly in the case of
quotas, lay in the administration of their allocation. The first quotas tended to be 'open' - the
borders were closed as soon as the quantity had been fulfilled. This proved unsatisfactory since it
discriminated against more geographically distant trading partners and since it also tended to lead
to a situation where some importers were left without raw materials etc. whilst speculators
cornered the market. This latter problem was fairly easily solved by allocating distribution on the
basis of the previous year's requirements, though this left open the question of how to treat new
firms and how to avoid penalising expansion plans of more efficient producers.
Distributing quotas among supplier nations was more complex. At first sight the
distribution on the basis of a previous year would have seemed to be the most equitable solution,
but the apparently neutral choice of a 'normal year' could in itself be discriminatory if imports in
that year from a particular source were unusually high or unusually low. For many countries,
however, such niceties did not arise. Quotas and licenses were viewed as a weapon for securing the
maximum possible trade advantage and were allocated on the basis of reciprocity in bilateral
negotiations. Quantitative trade restrictions became increasingly common in the area of agriculture
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from the late 1920s onwards but after 1931 their incidence mushroomed as they were applied over
the whole range of traded goods.
Exchange control
1931 was also the year in which a number of European countries stumbled across the most
potent of trade restrictions yet discussed - exchange control. Exchange control was initially seen as
an instrument for currency defence, to place a check on the ability of investors and speculators to
exchange domestic bonds or currency into foreign exchange or gold, so placing a strain on official
reserves. However, if the regime were extended to commercial as well as to capital transactions, it
meant that potential importers would be unable to purchase foreign currency, and thus foreign
goods, regardless of their attractiveness at current exchange parities. Not only did exchange
controls offer unbounded opportunities for reducing imports but, by discriminating in allocations
of foreign currency, governments were able to influence both the structure and origin of imports in
an unprecedented manner. Two problems still remained - the fact that, in the absence of
devaluation, exports were relatively uncompetitive in world markets and, secondly, the question of
converting a series of ad hoc administrative decisions into a regularised trading strategy which
would best serve the national interest.
Among exchange control countries these problems were solved by the conclusion of
bilateral clearing agreements. Each country opened a credit in its own currency upon which
importers from the other country could draw for the payment of its requirements. In this way trade
could continue up to the annual credit limit without involving either party in any foreign exchange
losses at all, even if trade were temporarily (as permanently) in deficit. So as not to allow a
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scramble for these credits to develop and in order to maintain control over the type of trade for
which they were used, these clearing agreements were reinforced by domestic systems of licenses
and permits. By offering rebates to importers and subsidies to exporters, countries were able to
surmount the problem of overvalued exchange rates.
Although it was easier for pairs of countries which had already established the
bureaucratic apparatus of exchange control to conclude clearing agreements with each other, the
system was also employed in trade agreements with countries maintaining free exchanges. For
exchange control countries such trading contacts were desirable either because they could not
adequately satisfy their import requirements from trade with other exchange control economies or
because they could not fully dispose of their export surpluses there. This trade with free exchange
economies offered opportunities for securing vital imports or for earning 'free' foreign exchange
with which to purchase them on world markets.
Viewed from the standpoint of free exchange economies the desire for trade was equally
pressing but for different reasons. Firstly, like exchange control countries, their export sectors had
been hard hit by the Depression and increased trade, in whatever direction, offered the opportunity
for alleviating some of the consequences. Secondly, when exchange control had been imposed,
many of these countries had assets, both financial and commercial, 'frozen' in blocked currency
accounts. Not only could they not withdraw these assets, but interest payments and other earnings
were often blocked as well. In such circumstances they would aim for a deficit on their trade, in
order to obtain real goods in exchange for these inconvertible assets. But obtaining 'free' currency,
as we have seen, was one of the aims of exchange control countries and without at least some
concession in this direction, it was possible that they might not trade at all. What usually emerged
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was a compromise whereby the deficits of free exchange partners would be 'paid' by a reduction in
their blocked currency claims and a (small) percentage allocation of convertible currency.
ATTEMPTS TO FIND AN INTERNATIONAL SOLUTION
By 1932 the full armoury if trade restrictive measures had been brought into operation,
though there was a learning period before the full potential was realised. Once introduced, they
acted as a catalyst in crystallising 'national' trading policies, they led to the emergence of national
interest groups and they increasingly distorted national price structures. All these factors served to
aggravate problems dismantling trade barriers should external circumstances ever improve. It
became obvious to many observers that, if they wished to reverse the process, action had better
come earlier than later. The scene was set, against the background of plunging levels of
international trade (see Table 13.1) for a series of international conferences aimed at economic
disarmament.
In February 1930, after half a year in which measures of agricultural protection had
mushroomed apace, the first of a series of tariff truce conferences was held under the auspices of
the League of Nations. Over the proceedings hung the shadow of impending tariff increases in the
United States, a country absent from the conference. Nevertheless, 18 signatories (including the
UK, France, Germany and Italy) did manage to agree a tariff truce to last until April 1931. Within
three months the agreement had collapsed. In June 1930 the Hawley Smoot tariff, which brought
about the largest increase in duties in United States history, came into force. It was immediately
followed by a massive round of retaliatory measures throughout most of Europe. The two further
conferences, in November 1930 and March 1931, similarly failed to produce anything by way of
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concrete results largely because France, Germany and the Eastern European and Danubian states
refused to become party to any agreement.
By the time the next major conference met in Stresa in September 1932, the problems to
be tackled had grown enormously. On the one hand, as a consequence of the financial crisis which
had reverberated through Europe in the summer of 1931, many of countries in Central and Eastern
Europe had adopted regimes of exchange control. On the other hand, the British devaluation in
September 1931 had been the signal for many countries (not only in Europe) to follow with similar
action. Moreover the UK had abandoned its liberal tariff regime with the Emergency Duties Act of
November 1931, consolidated into a general tariff in February the following year. Finally,
sandwiched between these twin pressures, countries with overvalued but still fully convertible
currencies had increasingly supplanted tariffs by quota regimes as their major line of commercial
defence. The conditions for success were far from auspicious and, in the event, the conference was
a failure. Among the proposals which came to nothing were the setting up of a Currency
Normalisation Fund to assist debtor nations to dismantle exchange controls and a series of
alternative plans for assisting European agricultural exporters.
The last grand show-piece conference to be held, and perhaps the most resounding failure,
was the World Monetary Conference, which took place in London in June 1933. The main
problem on this occasion was that a few weeks before it was due to begin, the United States had
abandoned the Gold Standard but had yet to decide at what level to stabilise the dollar. The
sticking point was that nobody else felt that they could discuss the reduction of tariffs and
quantitative restrictions on trade until it was known what the financial situation would be, once the
dollar had stabilised. Thus observers were treated to the spectacle of the world's leading statesmen
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making eloquent speeches endorsing the general aims of the conference, though usually with
reservations on individual points, and then scarcely had the negotiations begun when the
conference was adjourned and everyone went home again.
The collapse of the London conference was a deep psychological blow to those who
believed that an international solution to the Depression was possible, but there is no reason to
believe that, had the conference run its full course, any emerging proposals on currency measures
or reduction in protectionism would have been implemented, still less that they would have
restored economic activity or the workings of the international financial system. There is no reason
to believe that it would have been more successful than its less illustrious predecessors in
achieving practical results of any importance. It is perhaps appropriate to examine briefly the
reasons behind the failure of the conference system in these years.
At the more superficial level, there always seemed to be a problem about agreeing strategy.
This is most easily illustrated in the area of tariffs. Should there be fixed percentage reductions
across the board, even though this was resented by low tariff countries? Would it be better to
stipulate maximum duties knowing this would be opposed by high tariff countries who had most to
lose? Could not a solution be found in limiting reductions to a 'basket' of commodities, realising
the difficulties in finding a basket to satisfy all countries? Perhaps it would be more promising to
attempt reductions among a group of countries but risking proposals being torpedoed by non-party
countries insisting that concessions be extended to them as well under the MFN clause? Such
conflicts, however, represented really the surface of deeper and more fundamental problems.
At a slightly deeper level was the fact that the groundwork for discussions was never
adequately prepared in advance. The League never had more than half a dozen senior officials at
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Geneva concerned with questions of commercial policy, obviously inadequate for the detailed
spadework required. More important still, the need for a larger staff was not appreciated because
League officials never saw it as their task to prepare detailed recommendations. This, in turn,
stemmed partly from a belief that if only governments would pause and think, they would realise
that League strategy was in everybody's interest and partly because the League was reluctant to
interfere with the preserve of domestic policy matters.
This reluctance to overstep some invisible line between commercial policy on the one
hand and general economic policy on the other also contributed to an artificial
compartmentalisation of problems; commercial policy was an integral part of economic policy as a
whole, or was at least rapidly becoming so. Moreover, in isolating commercial policy it was
concentrating on one side-effect of the Depression (protectionism) rather than its cause. As long as
nations experienced the Depression in different ways and in different intensities (conditioned, for
example, by whether they were international creditors or debtors, industrialised or agrarian etc.) so
their national policy perspectives would be different and so too their perspectives on commercial
policy. The vexed problems of how best to approach the liberalisation of commercial policy, which
we examined above, were in reality the surface expression of deep-seated and possibly
irreconcilable differences in national priorities. The result was that, viewed from the standpoint of
national governments, these various conferences appeared as pious exhortations of the desirable
rather than the attainable; exhortations which had little practical relevance for the task of
day-to-day policy making.
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THE DISINTEGRATION OF EUROPE AND THE EMERGENCE OF REGIONAL
TRADING BLOCS
Whilst the conference system under the auspices of the League of Nations floundered on
the rocks of timidity on the one side and misplaced idealism on the other, groups of countries with
convergent interests attempted to accommodate themselves as best they could to the deteriorating
economic environment. The effects of this on the growth of international trade and finance were
less than optimal but although the ratio trade:GNP shrank in the 1930s, to describe the period as
'autarky' is to oversimplify the situation.
Even the larger European economies were inextricably linked to the international trading
system with 15-20 per cent of their national income derived from exports. Their recovery policies
may have placed an accent on domestic as opposed to overseas demand, but they were still
dependent on foreign sources of raw materials and foodstuffs and their trading policies were often
directed towards deflecting the sources of these imports into preconceived channels. For smaller
European countries even limited 'autarky' was impossible, since the structures of their output were
geared towards export markets and the absorption of surpluses by increased domestic demand
offered only a limited way out of their problems. Their domestic recovery was premissed on their
ability to resolve their export problems by accommodating themselves as best as possible to the
changing European order. A fall in their trade:GNP ratios is more a symptom of a failure to
achieve this accommodation than a reflection of a conscious decision to embark on a policy of
autarkic economic recovery. Thus behind the bald statistics of trade decline or stagnation,
important changes were taking place in the distribution of trade: changes which in large measure
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determined the success or failure of other recovery policies, changes which fragmented the
European trading system in separate trading blocs.
The Sterling Area
The devaluation of sterling in September 1931 marked the beginning of the formation of
an area of relative trade growth and exchange stability centred on the United Kingdom. Although
primarily intended to avert an international liquidity crisis, the depreciation of sterling served to
improve the UK's international competitiveness and forced major trading partners to reappraise the
parities of their own currencies. Two factors played a role in their decisions. If the UK was a major
trading partner, a decision not to devalue would increase the difficulties of access to UK markets
and they would face increased competition in world markets from countries which had devalued. A
decision to devalue would remove those difficulties and give their exports a competitive edge in
markets of countries which had maintained their gold parities. A second consideration lay in the
proportion of their reserves held in the form of sterling balances. If this were considerable, they too
might be liable to increased international speculation. Thus the UK decision triggered similar
action elsewhere. By the end of October 1931 virtually all of the Commonwealth (with the
exception of South Africa which remained on the Gold Standard until December 1932) had broken
their link with gold as too, within Europe, had the Scandinavian and Baltic states (except Estonia,
which joined the sterling area but did not devalue until 1933), Ireland and Portugal. A number of
countries even took the opportunity of depreciating against sterling as well. Australia and New
Zealand had already taken this course in 1930 and by the spring of 1933 all the Scandinavian
currencies had stabilised with depreciated sterling parities.
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Thus far all we have witnessed is the common reaction of a group of countries with a
greater or lesser degree of economic dependence on the United Kingdom to the change in the
international constellation caused by the depreciation of sterling. These countries began to coalesce
into a distinct economic bloc as a result of the Ottawa Conference which met in July and August
1932. At the Imperial Conference held in 1930 the British had withstood pressures from
Commonwealth grain exporters for preferential access to British markets but it now reversed this
stance and a system of mutual trade preferences became the cornerstone of a strategy aimed at
promoting intra-Commonwealth and Empire trade. Basically the UK granted privileged tariff
access to her markets for a number of products of importance to Commonwealth exporters (even if,
in the case of wheat, this implied further increases in duties against 'foreign' suppliers) and
guaranteed a share of the market by means of quotas on a number of others. In return they gave
preferential treatment of imports of manufactured goods from the UK. All the agreements were
intended to run for five years, though when the time came for renewal they were extended
indefinitely. Their effect was to reinforce the tendency, already likely in the wake of the 1931
devaluations, to divert trade increasingly to within the group.
The other institutional initiative to impart a greater degree of cohesion was the formation
of the sterling area whereby member countries agreed to link their exchange-rates to sterling.
Central banks would cooperate to maintain rates within the narrow bands permitted. The only other
obligation undertaken by member countries was to accept sterling as the medium of exchange for
commercial transactions within the group. Although membership was primarily made up of
overseas dependencies, within Europe Portugal joined almost immediately and by 1933 so too the
Scandinavian and Baltic countries. Whilst devaluations within the group did occasionally occur,
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the result was the creation of an area of exchange stability which facilitated the expansion of
intra-group trade.
So far only the Commonwealth countries benefited from all the measures discussed. In
order to mesh what we can call 'sterling area Europe' closer into the system, in the course of 1933
and 1934 the UK concluded a series of bilateral trade agreements based on the Ottawa principles.
Seen from the standpoint of these countries, they had gained nothing and in terms of primary
products had actually lost out as a result of the Ottawa agreements. For them the UK market
represented a considerable export outlet (ranging from 81 per cent of Ireland's exports, 61 per cent
of Denmark's in 1931 at the top of the scale to 23 per cent of Portugal's at the bottom) and
concessions from the UK would alleviate the problem of their export sectors. To the UK, however,
they were considerably less important as export outlets and in a world glutted with foodstuffs and
raw materials, there were plenty of alternative sources for imports. However, with the exception of
Portugal, the UK ran a substantial balance-of-trade deficit with each. It was therefore in the UK's
interest to seek agreements to close these deficits, especially if thereby these countries would be
locked into the sterling area, so that remaining deficits could be settled without foreign exchange
loss. If, in the process, the problem of some of the UK staple industries could be lightened, so
much the better. Thus agreements were concluded with all the Scandinavian and Baltic countries
(including Lithuania, not formally a member of the sterling area) and Portugal, whereby tariffs
were reduced or eliminated altogether on a number of items of mutual importance to trade and
guaranteed quotas given on others. This applied particularly to UK imports of meat and dairy
produce (subject to quotas after the Ottawa agreements) and UK exports of coal.
23
Table 13.2 The Geographical Distribution of UK Trade as a percentage of World Trade
i) UK with Commonwealth
ii) UK with Sterling
Area Europe
iii) UK with rest
of Europe
iv)UK with rest of
World
v) Total UK
Imports
1928 1932 1935 1938
Exports
1928 1932 1935 1938
3.4 5.9 5.5 6.3
4.3 4.5 4.4 4.5
2.1 1.7 2.4 2.1
1.3 0.7 1.8 1.7
4.1 5.8 3.3 3.6
3.4 3.6 2.9 2.5
7.1 2.9 6.6 6.4
16.7 16.3 17.8 18.4
3.4 1.1 2.9 2.5
12.4 9.9 12.4 11.4
Source: Calculated from League of Nations, Europe's Trade, Geneva, 1941 and Network of Worls
Trade, New York, 1942.
24
Having examined the institutional structure of the ties designed to strengthen economic
relations within the sterling area, we are now in a position to analyse their effects. In interpreting
the changes observed, it is necessary to add one important caveat - even should they conform to
expectations, factors other than altered trade regimes and exchange rate adjustments may also have
played a role (notably the rates of economic recovery). Nevertheless, the impact on the structure of
trade was considerable. If we begin with the centre of this nucleus, the United Kingdom, we can
see these changes from the data in Table 13.2. The first thing to note is that whilst the UK's imports
rose faster than world imports as a whole over the decade, exports lagged behind the world
recovery. The main beneficiary of this growth of imports was Commonwealth whose trade with the
UK performed 85 per cent better than the performance of world imports, though there was also
clear evidence of a deflection of import sources within Europe of 'sterling area Europe' even
though imports did little more than match the world trend. On the export side, the relative
importance of the Commonwealth increased but as a share of world trade, the figure remains
constant. However, albeit from a much smaller base, there is a noticeable increase in UK exports to
'sterling area Europe' which bettered the world trend by 50 per cent over the decade, reflecting the
much more favourable agreements which the UK had been able to exact when negotiations were
untrammeled by political sympathies.
25
Table 13.3 The Share of Sterling Area Europe in European Trade as a percentage of
Intra-European Trade
Imports
1928 1932 1935 1938
i) Sterling Area Europe
Intra Trade
ii) Intra-Trade of Sterling Area Europe
(minus UK)
iii) Sterling Area Europe
with Rest of Europe
Source: See Table 13.2
13.7 10.7 17.5 16.6
1.8 1.6 2.5 2.7
21.7 20.5 19.0 21.7
Exports
1928 1932 1935 1938
13.3 10.3 16.5 17.0
3.6 1.7 2.4 2.3
15.1 11.0 15.1 16.0
26
In looking at the position of 'sterling area Europe' within Europe (Table 13.3) in the
context of both imports and exports, it is clear that its relative importance increased over the
decade, outperforming the trend of intra-European exports by virtually 30 per cent. As a
comparison between columns i and ii suggests, this improvement is entirely attributable to the
pivotal position of the United Kingdom in this trade reflecting the failure of the 'Nordic union' to
translate itself into significant economic results as well as the collapse of the efforts of the Baltic
countries in May 1934 to strengthen their mutual economic ties. The area's trade with the rest of
Europe remained relatively stable.
The Reichsmark Bloc
The aftermath of the 1931 financial crisis created conditions for the emergence of a
trading bloc. It left in its wake a number of debtor countries with overvalued and inconvertible
currencies. Moreover, with the exception of Germany, they were dependent for a large proportion
of their foreign currency earnings upon sales of agricultural produce on a saturated world market.
Among their number were Bulgaria, Greece, Hungary, Romania, Turkey and Yugoslavia. Their
trading difficulties with 'free-exchange' countries were further compounded by the fact that having
just seen their claims 'frozen', they were unwilling to countenance further leakage of foreign
currency to these insolvent debtor nations. Moreover, the export package of these debtors was
generally insufficiently attractive to tempt creditors to run up the trading deficits which might
enable them to liquidate their blocked balances in the form of real goods. Germany was somewhat
of an exception to this pattern because of its importance as a market for many European countries
27
and because its exports were generally more attractive than those of the agrarian nations of
East-Central Europe.
Difficulties in trading with what was left of the multilateral trading system was not the
only factor which bound exchange-control nations together. The very operation of an
exchange-control regime involves the subjection of virtually every trading decision to bureaucratic
approval and this was often imposed on top of controls over agrarian production and exports which
had been introduced in the early years of the Depression. This quasi-monopoly which the state held
over foreign trade made it easier for these countries to negotiate and realise trade agreements than
it was for countries where decisions over what to import or export were less centralised.
All that was required to breathe life into the bloc was a decision on the part of a net
importer of agrarian and other primary products to divert its source of imports in favour of these
smaller exchange-control economies. That decision was eventually made by Germany when the
Nazis came to power and negotiated a series of annual bilateral treaties with each in turn. For
Germany the attraction was that it could acquire imports for other countries without having to use
any of its scarce foreign exchange reserves, the rest were simply pleased to have found an outlet for
export products which no other market would accept.
Because of the bellicose nature of Nazi propaganda and the ultimately aggressive nature of
its foreign policy, there is a tendency to view German trading policy first and foremost as an
adjunct of expansionary political ambitions. To obtain a more dispassionate assessment, it is worth
making a few comparisons between the RM bloc and the sterling area. The central feature of both
blocs was the link between a large industrial importer of primary products and a number of
semi-dependent primary exporters. In the British case, however, the primary producing periphery
28
was not only far larger in area and population than the hinterland into which Germany was trying
to expand its trade but large parts of it (especially Scandinavia and the Dominions) were also more
prosperous. Moreover in the case of foodstuffs in particular, the UK's level of self-sufficiency was
far lower than Germany's. These two factors contributed to the greater success of the UK in
diverting trade to within the group than Germany. The share of UK imports from these sources
rose from 42.2 per cent in 1929 to 54.7 per cent in 1938 (exports from 51.8 per cent to 61.6 per
cent) whilst Germany's imports from the Reichsmark bloc rose from 3.7 per cent in 1928 to 11.9
per cent in 1938 (exports from 5.0 per cent to 13.2 per cent).
29
Table 13.4 The Geographical Distribution of German Trade as a percentage of World Trade
Imports
1928 1932 1935 1938
i) Germany with RM Bloc
ii) Germany with Rest
of Europe
iii) Germany with
Latin America
iv) Germany with Rest
of World
v) Total Germany
Source: See Table 13.2
0.4 0.4 0.8 1.1
4.3 3.2 3.8 3.9
1.2 na
3.7 na
1.2 1.5
2.2 2.7
9.6 8.3 8.0 9.2
Exports
1928 1932 1935 1938
0.4 0.4 0.7 1.0
5.8 6.9 5.7 5.6
0.6 na
0.8 1.1
1.6 na
1.6 1.8
8.7 10.6 8.8 9.5
30
The total level of Germany's trade relative to the world pattern is the reverse of the UK's taken over the period as a whole its level of imports falls relatively faster than world imports whilst
its exports relatively outperform the world trend, this being a reflection of the bilateralism (or even
the cultivation of balance of trade surpluses) force upon the trading relations of exchange-control
economies. Within that pattern, however, there is a marked shift towards the Reichsmark bloc,
both of imports and exports such a degree as to constitute an area of real trade growth, and a
smaller shift towards another area being cultivated for political reasons - Latin America.
Given that the agrarian nations of the bloc were able to expand their exports to Germany
more rapidly than the world as a whole managed to perform, the question arises whether this
constituted an 'exploitation' of their economies by Germany. One piece of evidence cited in this
direction is the passive trade balances Germany ran with these countries, though in this context it
must be remembered that the UK also ran deficits with the rest of the sterling area, with the
noticeable exception of India. The fundamental difference, however, was that sterling balances
could be used in intra-trade and were also convertible into foreign currency to buy goods elsewhere.
Reichsmark balances held by Germany's trading partners could only be used to buy German goods
and this was ultimately to render these countries highly vulnerable to their use for political and
economic leverage, which Germany was to do when the 1937/38 depression increased their market
problems. Against this, however, had to be set the fact that Germany was at least willing to buy
produce which these countries had difficulties in selling elsewhere.
31
Table 13.5 The share of the Reichsmark bloc in European Trade as a percentage of Intra-European
Trade
Imports
1928 1932 1935 1938
i) RM Bloc Intra-Trade
ii) Intra-Trade of RM
Bloc (minutes Germany)
iii) RM Bloc with Rest
of Europe
Source: see Table 13.2
3.7 3.3 5.7 8.1
1.1 0.5 1.0 1.0
19.4 14.1 16.2 17.3
Exports
1928 1932 1935 1938
3.6 3.0 5.6 8.0
0.9 0.7 0.9 0.9
22.1 26.3 23.9 23.7
32
Within the context on intra-European trade, the trade between members of the Reichsmark
bloc (Table 13.5) shows a spectacular increase, outperforming Europe as a whole by more than 100
per cent. As was the case with 'sterling area Europe', a comparison of columns i and ii reveals that
this was entirely attributable to the trading links with the centre-country. Despite this success,
however, the importance of the rest of Europe remained considerable and, although column iii does
not show this, this was also largely attributable to Germany. By 1938 the rest of Europe still
provided 40 per cent of Germany's import requirements and in order to pay for these, Germany was
forced to export in excess of the value of the import bill. Now a trade surplus within Europe had
traditionally been part of the German payments pattern and the income had been used to offset
deficits with the rest of the world. In the 1930s, this was no longer the case, since part of the
surpluses were earmarked for bilateral debt reduction and debt service.
This reflects the ultimate limitations of the German trade drive into the centre and South
of Europe. The needs of the centre were too diffuse and the capacities of their periphery too limited
to allow the creation of a mutually interdependent trading group relatively isolated from the world
economy. Indeed, this kind of arrangement was only possible by creating a position of dominance
from Germany's eastern borders to the Urals or, alternatively or concomitantly, by subjugating the
developed economies of the West. The only foreign policy initiative capable of accomplishing that
was nothing short of outright war.
The Gold bloc
The growing number of European nations either trading with depreciated currencies or
operating exchange control regimes left an increasingly isolated group of countries which
33
attempted to maintain both the gold parties and the free convertibility of their currencies. This
decision had left their domestic price levels seriously out of line with international prices and had
greatly eroded their competitiveness on world markets. In an effort to redress the former they
embarked on a policy of domestic deflation whilst, to mitigate the latter, levels of protectionism
(particularly using quotas) were raised and extended over a great range of products. The failure of
World Economic Conference in 1933 should have disabused them of any hope of a quick or
universal return to the gold standard but, in practice it only seemed to increase the intransigence.
The conference did, however, act as a catalyst for six remaining countries (France, Belgium,
Luxembourg, the Netherlands, Switzerland and Italy), with Poland as more of a passive member,
to agree to act in concert both for the defence of their currencies and the mutual expansion of trade.
A series of conferences were held to this end culminating in Brussels in October 1934 with a
decision to expand intra-area trade by 10 per cent in the following year. Before the year was out,
Italy had imposed exchange controls (December 1934) and devalued (March 1935) and had
effectively left the bloc. The performance of the remainder is shown in Table 13.6.
34
Table 13.6 The Share of the Gold Bloc in European Trade as a percentage of Intra-European Trade
Imports
1928 1932 1935 1938
i) Intra Gold Bloc Trade
8.7 10.6 8.4 8.2
ii) Gold Bloc Trade with 18.8 22.3 19.3 16.9
Rest of Europe
Source: see Table 13.2
Exports
1928 1932 1935 1938
8.4 10.8 8.5 8.4
22.8 17.4 19.7 18.5
35
Far from becoming an area of mutual trade expansion, their performance was as bad, or
worse, than that of Europe as a whole. There were a number of reasons why this should have
proved the case. In the first place the trading bonds binding individual members of the bloc were
weak. In fact only French trading links with Switzerland and Belgium and the latter's trading links
with the Netherlands were of any major importance. A second reason was that their national
interests in trade expansion were sharply divergent. France had a strong balance of payments
surplus with other bloc members and, given her deteriorating position elsewhere, she wanted to
keep it that way. The interest of other bloc members lay precisely in reversing that situation.
Equally, in the case of a number of important export producers, interests of defending national
production on the one hand and expanding exports on the other were bound to come into conflict particularly in the case of coal, cereals, animal and dairy produce. The chances of reconciling these
difficulties were reduced by the choice of bilateral negotiations as the means of achieving trade
concessions and by the lack of any central coordination. France, for example, refused point-blank
to alter its quota policy in favour of bloc members (though it did agree to allot them any unfilled
quotas).
The major stumbling block, however, was the relative overvaluation of their currencies
and the relative slowness of their domestic recoveries. Not only, therefore, were their markets
expanding more slowly than those elsewhere, but those products which they were willing to import
were often available more cheaply from non-bloc nations. Mutual trade concessions implied a
commitment to purchase goods from the most expensive source. In the light of these
considerations it is not surprising that intra-bloc trade dependence either stagnated or declined.
36
Only in the case of the Netherlands was there evidence of increased import penetration by other
members of the bloc and in no case did the other bloc members increase as a export outlet.
The Empire option
Part of the reason for the failures of the gold bloc as a platform for trade expansion was
that for every country concerned it was very much a second-best option. Without exception, on the
eve of the Depression, Germany and the UK had represented far more important outlets than had
any individual bloc member and throughout the 1930s it remained a policy priority to find some
accommodation within their respective trading regimes for expansion in these directions, usually
without much success. For three of those countries (France, Belgium and the Netherlands), another
option was available, that of intensifying trading links with dependent overseas territories. In each
case the means employed were mutual tariff and quota concessions of the kind which had
characterised the Ottawa agreements.
37
Table 13.7 Motherland Trade with 'Empires'
A) as a percentage of trade with the centre country
Imports
1928 1932 1935 1938
Exports
1928 1932 1935 1938
i) UK with Commonwealth 30.2 36.4 39.0 41.9
44.4 45.4 47.6 49.9
ii) France with colonies
protectorates etc.
12.0 20.9 25.8 27.1
18.8 31.9 31.6 27.5
iii) Belgium with
colonies etc.
3.9 3.8 7.3 8.3
2.6 1.3 1.0 1.9
iv) Netherlands with
colonies
5.5 5.0 7.2 8.8
9.4 5.9 5.7 10.7
B) As a percentage of World Trade
i) UK with Commonwealth
3.4 5.9 5.5 6.3
4.3 4.5 4.4 4.5
ii) France with colonies
protectorates etc.
0.8 1.7 1.7 1.5
1.1 1.9 1.8 1.1
iii) Belgium with
colonies etc.
0.1 0.1 0.2 0.2
0.1 neg. neg. 0.1
iv) Netherlands with
colonies
0.2 0.2 0.2 0.3
0.2 0.2 0.1 0.3
Source: see Table 13.2
38
As is shown in Table 13.7, in each case there was a deflection of sources of imports
towards the respective 'empires' and in the case of France and the Netherlands there was a lesser
accompanying diversion of exports. In no case, however, did these countries attain the level of
centre-country dependence achieved for the United Kingdom, whether measured in relative or
absolute terms.
A major factor limiting further expansion of the intra-empire trade of the gold bloc
countries was the fact that the mother country not only maintained overvalued gold parities for
their domestic currencies but also the colonial currencies linked to them. Considering the depth of
the price falls in the kind of primary products in which they specialised and the degree of their
currency depreciation in competitive areas, this decision made their international trading positions
difficult and depressed their levels of demand. So long as the metropole was willing to extend
import preferences in favour of high cost colonial products, there was little doubt that the colonies
would utilise them, in a similar way as did the Reichsmark bloc hinterland. A number of factors
prevented mother country imports rising further, besides the fact that their protracted domestic
recoveries depressed demand. There was the specific problem that in foodstuffs colonial imports of
rice, grain, sugar and, in the French case, wine was in direct or indirect competition with domestic
production. The most important reason, however, lay in the structural limitation in the home
country markets. Most of the colonies produced surpluses of minerals or tropical foodstuffs far in
excess of the capacity of home consumption to absorb them.
Alternative regional groupings
39
Within Western Europe a recurrent theme in international trade diplomacy was an attempt
to strengthen mutual trading links within Benelux and between Benelux and the Scandinavian
economies. None of these efforts were to come to anything. In 1930 the two sets of economies
signed the Oslo agreement in which the signatories undertook to inform each other of proposed
tariff increases and to allow a month for consultations and possible modification before they took
effect. The treaty was still-born. The gathering recession and the devaluations less than a year later
played havoc with the environment within which cooperation was to have taken place. When the
British started to restrict agricultural imports, Scandinavian exports, now highly competitive in
price, were increasingly diverted onto Benelux markets. There they, in turn, responded by
imposing quotas, relations were soured and the two groups began to drift apart.
In July 1933 the Benelux countries signed the Ouchy Convention whereby they agreed to
erect no new quotas against each other's trade and to reduce tariffs on their intra-trade by 10 per
cent a year over five years. Their hope was that the Convention would act as a focus for tariff
disarmament and that other nations would accede. At the very least it was hoped that other nations
would waive their rights to reciprocity of treatment under the MFN clause. When the UK refused,
in November 1933, the Convention collapsed.
Following the final dissolution of the Gold bloc in 1936, an attempt was made to relaunch
the Oslo initiative of the early 1930s. The Dutch and Belgian devaluations had done much to
relieve their foreign trade problems and made possible the dismantling of part of the quota systems.
As long as they were willing to accept the Scandinavian preferences with the UK, the portents for
success were favourable. In May 1937 the Hague agreement was signed whereby it was agreed to
abolish quotas on a number of products, not to raise mutual tariffs and to waive the right to
40
introduce new quotas on a further range of goods. This time the 1937/38 recession intervened, the
Benelux countries began to feel the blast of Scandinavian competition and the agreement was
allowed to lapse after a year.
41
Table 13.8 The Share of Central/Eastern European Blocs in European Trade as a Percentage of
Intra-European Trade
Imports
1928 1932 1935 1938
i) Little Entente
Intra-trade
ii) Balkan Entente
Intra-trade
iii) Tripartite Countries
Intra-trade
iv) Core ex-AustroHungarian Empire
Source: see Table 13.2
0.9 0.9 0.9 0.9
Exports
1928 1932 1935 1938
0.8 0.9 0.9 1.0
0.8 0.7 0.8 1.0
0.7 0.7 0.8 1.0
1.2 1.1 1.6 1.4
1.5 1.3 1.8 1.5
2.6 1.6 1.6 1.3
2.8 1.8 1.7 1.3
42
Within Central and Southern Europe trade was largely channelled through clearing
agreements. Superimposed upon this, however, was an overlapping network of multilateral trading
pacts. Given the prevalence of exchange control and the opportunities this already afforded for
directing trade, these agreements should be seen more as declarations of intent than as concrete
policy measures. As Table 8 shows, they were almost all limited in scope and their degree of
success was mixed.
Two of these agreements involved the Balkan states - the Little Entente, formed in early
1934, and the Balkan Entente, formed a year later. Czechoslovakia and Romania were party to both
agreements, joined by Yugoslavia in the former and by Greece and Turkey in the latter. Despite the
fact that both agreements linked an industrialised importer with agrarian exporters, neither
agreement succeeded in achieving an increased share of intra-European trade largely because they
depended on Czechoslavakia's willingness to undermine its agrarian protection to absorb much
larger quantities of agrarian imports and because the 'hinterland' lacked the capacity or the means
to absorb the relatively sophisticated Czech industrial exports. A final factor was that cutting right
across the intentions of these pacts was the relative attractiveness of German markets.
In 1934 the Tripartite agreement was signed between Italy, Hungary and Austria, again
with the aim of mutual trade promotion. Typically it brought together two agrarian importers (Italy
and Austria), but undermining the intensification of trading links was the increasing deflection of
Hungary's trade towards Germany and the promotion of domestic agrarian production in Austria
and, more especially, Italy. The agreement might have been totally still-born had not events of a
political nature intervened in the form of Italy's invasion of Ethiopia and the League's subsequent,
partially successful, call for a trade boycott. These two factors contributed to an intensification of
43
Italy's trade links with the other two parties. However, as far as the Austria/Hungary trading axis
was concerned, the agreement was something of a dead letter and, relative to the rest of Europe,
trade within the bloc declined.
This leads us, finally, to consider the former, pre-war free trade area represented by the old
Austro-Hungarian Empire. A whole series of special conferences had been called in the 1920s with
the aim of trying to weld the pieces of the dismembered Empire back together again, at least
economically, but to no avail. The Depression, however, weakened their positions further and in
1934, as we have seen, Austria and Hungary became party to a mutual trade pact. In 1935/36 this
agreement was extended to cover Czechoslovakia via bilateral trading agreements. The practical
results were negligible and trade between the members declined even further. Not even the
Depression, it seems, could prevent the further economic disintegration of the Austro-Hungarian
Empire.
Conclusion
We intimated at the beginning of this review of regional trading blocs that one policy
available to larger economies to recover from the Depression was the promotion of domestic
demand whilst attempting to insulate the economy from external market forces. The trading policy
of such countries was largely confined to securing sources of imports, to reducing potential strains
on the balance of payments and to promoting certain exports. For them, trade policy could be seen
as an important but subsidiary concern. For smaller economies, securing export markets within this
changed environment was of primordial importance since the effects of supporting surplus export
capacity could place a crippling strain on the economy and prevent policy initiatives in other
44
directions. Within Europe, and between metropolitan countries and their colonies, there emerged
pockets of regional trade growth, which contrasted sharply with the trends towards bilateralism
(where trade tends to settle at the lower import requirement) and trade contraction elsewhere.
Three factors seem to have been important in conditioning the success of establishing such
regional groups:
- In the first instance, there had to be a certain complementarity between exports and import
requirements upon which trade could expand. In practice this seemed to boil down to an industrial
core and a primary producing periphery.
- Secondly, there had to be a capacity on both sides to absorb a sufficiently increased volume of
imports to make any agreement worthwhile.
- Thirdly, the export prices of the countries concerned had to be competitive or alternatively the
countries concerned had to offer non-market trade advantages such as special payment regimes etc.
When such conditions were met, a climate for mutual trade expansion could be created
which met the aspirations of the centre country and. sometimes, those of the junior partners as well
(certainly Finland, Latvia and some of the Balkan states benefitted positively in the short-term
from the arrangements they were able to make, rather than merely make up the lost ground of the
early Depression years).
Whilst within the regional groups concerned there was some satisfaction in the
arrangements made, and whilst they were certainly preferable to floundering in a morass of
protectionist, beggar-thy-neighbour policies, there are grounds for asking whether these
arrangements did not represent a sub-optimalisation for Europe as a whole. Central to them all was
an intensification of industrial-agrarian exchange, so much so that a number of League of Nations
45
reports written in the war years accepted this as the pattern for planning future strategy. In the long
term, however, it meant tying growth to the capacity of agrarian economies to change and to
increase their purchasing power and it also diluted the technological content of the industrial
exchange. After the war the industrial/agricultural exchange axis did not become the engine of
(Western) European growth but the exchange of sophisticated industrial products and components
between and among the highly industrialised countries. The arrangements we have seen seem
almost, with hindsight, to have been intent on institutionalising an anachronistic trading structure
and to that extent they should be considered as a 'second-best' option. Creating conditions for the
exercise of a first-best option, however, seemed to have been beyond the capacities of policy
makers in the 1930s within the situation with which they were confronted.
Looking across the span of the Second World War, it is worth making two last remarks. In
the first place, the groups we have considered reveal the genesis of post-war relationships. The
colonial link in Britain and France, which determined so much of post-war history were (re-)forged
in these years (though the origins of French policy lay in the 1920s) as too was the
institutionalisation of the ties between Scandinavia and the UK. The abortive attempts to form
Benelux also anticipated post-war developments. On the other hand, it must be remembered that
the war tore a gash through the integration of Central Europe with the rest of the continent.
Finally, it is instructive to reflect that whilst the 1930s has gone down in history as the
decade of protectionism, the situation described in this chapter was child's play compared with
what followed in the immediate aftermath of the war when there was scarcely a country in Europe
which did not have exchange control regimes on commercial transactions and which did not have
46
virtually its entire foreign sector subject to state trading monopolies and other quantitative trade
restrictions.