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1 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 2 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 3 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. 4 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. 5 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 6 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 7 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 8 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. 9 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. 10 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 11 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 12 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 13 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 14 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 15 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 16 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 17 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 18 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. 19 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 20 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. 21 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, 22 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.