Opinion: How Mr Smoot and Mr Hawley deepened the depression

By Neville Bennett APEC is undoubtedly correct to attempt to broaden trade. In the 1930's, economies were damaged by a sharp fall in trade, a collapse in international finance and international investment. Freedom of trade was replaced by protection, quotas, tariffs and migration blocks. There were no multinational solutions; every country pursued its own short-term advantage. World trade plunged by about 67% from 1929 to 1934. The dog-eat "“dog element is epitomized by the US's Smoot-Hawley Tariff of June 1930. It raised tariffs on 20,000 imports, imposing an effective tax rate of 60% on more than 3,000 products. This was tantamount to economic warfare.

The US ignored massive protests from its trading partners and economists. The tariff damaged trade, and influenced the crash of US exports of US$2,341 million in 1929 to US$784 million in 1934. I derived this data from Wikipedia, and note that its article misses two major points. When the US introduced large hurdles to foreign imports, it denied foreign countries the chance to earn dollars to repay their debts. Moreover shutting down imports, while pushing exports vigorously, was a policy deliberately designed to attract all gold in circulation, a policy which weakened international currency settlements. The rationale of Smoot-Hawley was to protect US farm prices: an interesting example of keeping your cake and eating it too. It squeezed foreign farm imports (like those from Canada) yet expected to export farm produce too. The recent Bush administration had a similar attitude: it subsidized many farm products like cotton and then impoverished African farmers by selling cotton cheaply on the world market. It vigorously preached free trade while discriminating against some New Zealand produce. The fall in trade is not easily measured as currencies and prices were depreciating. The value of Kiwi trade in 1929 was an index value of 92. Trade almost halved to an index of 54 in 1932, but had recovered its value in NZ dollars and index number of 90 by 1936. This disguised the real change when trade is measured in terms gold or sterling. In terms of gold, trade depreciated from an index of 190 in 1929 to 71 in 1932 and 90 in 1936. Trade on gold terms did not recover before the wool boom in the 1950's. The NZ dollar depreciated by 25% against sterling; and trade in sterling terms did not reach 1929 levels until 1943. Two other things are noteworthy about NZ trade in the depression. The Dominion coped with falling income by creating a higher volume of exports while drastically curtailing imports. This is interesting because, theoretically, an increase in exports responds to the incentive of higher prices. But in the 1880' and 1930's export volumes increased as prices fell because internal demand declined and exporters increased effort. The volume of exports measured in NZ currency increased by one third, 1929-1936, for almost identical returns. In sterling terms, returns for greater volume brought about 18% less money. Imports almost halved as belt-tightening was the standard response. In real terms, imports valued in sterling did not recover to 1929 levels until 1943. Why were export prices falling? It is worth emphasizing that the world economy had a grave structural problem in the 1920' and 1930's: an over-production of primary produce. This arose in part because international capital had invested heavily in primary production and infrastructure before World War One. In New Zealand, foreign capital had developed railways, shipping, harbours, meat works and refrigeration etc and had developed markets, mostly in the UK, for wool, meat and dairy. Developments occurred globally where opportunities existed, often using imported cheap labour such as Indians in the Fiji sugar industry. The result was a massive supply of primary produce, spurred on by later developments like electrification and the petrol engined -trucks and tractors. Demand for primary produce slowed in the developed world, partly because there was heavy unemployment in Europe, even in prosperous years. Manufactured goods increased in price, while primary produce fell. The British net barter terms of trade increased from 100 in 1913 to 138 in the Depression (Source: W.Ashworth Economic History of England p.349). This meant that England could swap its products, like cars, for an increasing amount of primary produce. Primary producers rarely tried to limit their output in order to increase prices. Primary producers found their position was extremely vulnerable. The long- term consequence was a determination to diversify rather than specialize in products in which they appeared to have a natural advantage. Australia and New Zealand tried hard to industrialize for economic and security motives, but progress was hampered as usual by a lack of capital and low productivity. The Depression had the terrible effect upon mult-inationalism: every country placed increasing emphasis on internal problems. William Ashworth in A history of the International Economy, remarks on policies "˜carried so far in a number of cases as to involve a deliberate exclusion of outside economic contacts which were not absolutely indispensible", (p.252). The US and totalitarian countries conducted trade on a bi-lateral basis. Most countries dare not move from their protected position to share in unproved international benefits. Most countries adopted a fortress mentality. New Zealand may have been fortunate in its membership of the Commonwealth. It joined the sterling bloc, easing its international payments and getting preferential access, through the Ottawa treaties, to many markets. It would have found survival difficult without the British connection. Sterling countries pooled their receipts in London, allowing member states greater flexibility. Other blocs emerged around the mark, franc, dollar, lira and yen. Countries were forced to protect their currency reserves, and usually did this by discriminating against imports. International migration almost ceased (Australia lost population) and international investment withered. Space does not allow me to investigate the weakness of the institutions and organization of the international financial system which prevented countries achieving their potential. As in 2007-8 debtors who relied on short-term finance often perished. The gold standard collapsed in 1931. There were no global- scale replacements until Breton Woods after the War. This limited earnings from foreign trade. I might return to this topic with examples of Germany's Autarky and paying for imports from the Balkans with cuckoo clocks.