University of California The Economic Collapse of 1929 to1934 Reading Analysis

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analysis of readings on European economic history 

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C H A P T E R
8
The Established Order Collapses
In January 1936 Britain’s Left Book Club commissioned George Orwell
to investigate social conditions in the country’s depressed economy. The
result, The Road to Wigan Pier, shocked the nation with its descriptions
of destitution and despair. Orwell summarized the bewilderment and
pervasive misery that had descended upon the unemployed, depicting
the “decent young miners and cotton-workers gazing at their destiny
with the same sort of dumb amazement as an animal in a trap. They
simply could not understand what was happening to them. They had
been brought up to work, and behold! it seemed as if they were never
going to have the chance of working again.” 1
The economic collapse of 1929-1934 was unprecedented in its depth
and breadth. There had been cyclical crises before, but never like this.
The economies of the industrialized world disintegrated for five years
and more, as output dropped by one-fifth and unemployment went
above one-quarter of the labor force almost everywhere. Financial and
currency crises ricocheted around the world in the space of weeks,
binding economies together as they plummeted downward. No major
nation was spared.
Carl Sandburg had callE)d Chicago “City of the Big Shoulders” and
described it “Laughing the stormy, husky, brawling laughter of Youth,
l
173
GLOBAL CAPITALISM
I 174
half-naked, sweating, proud to be Hog Butcher, Tool Maker, Stacker of
Wheat, Player with Railroads and Freight Handler to the Nation.” But
now Chicago was not laughing or proud; in the winter of 1930-1931 a
reporter wrote of this capital of American industry, “You can ride across
the lovely Michigan Avenue bridge at midnight with the lights all about
making a dream city of incomparable beauty, while twenty feet below
you, on the lower level of the same bridge, are 2,000 homeless, decrepit,
shivering and starving men, wrapping themselves in old newspapers to.
keep from freezing, and lying down in the manure dust to sleep.”2 The
/
halting recovery of the 1920s had come to an end.
The end of the boom
The end started innocently enough, with a gradual decline in
growth outside North America. In 1928 farm conditions in the major
producers took a tum for the worse, while much of Europe and Asia
began to fall into recession. The United States continued to boom. With
foreign investments less attractive, American ~apital headed home,
and the stock market surged remarkably: The Dow Jones Industrial
Average rose nearly without interruption from 191 early in 1928 to 381
in September 1929.
A doubling of stock prices in little over a year far surpassed any return
available abroad, and the supply of American money to the world dried
up. In the first half of 1928 new American lending to foreigners averaged $140 million a month. This declined.by half to $70 million between
mid-1928 and mid-1929 as money flooded into the stock market, and
by the last half of 1929 foreign loans were down by another half, to $35
million a month. If one takes into account money coming back to the
United States as debts were repaid, an even starker picture emerges: A
net outflow of $900 million in 1927-1928 turned into a net outflow of
just $86 million a year between 1929 and 1931. 3
When the American money that had fueled world economic growth
headed homeward, it turned a milcf recession elsewhere into a
full-fledged crisis. 4 As money flowed into the United States and the dollar, investors unloaded other currencies. European governments facing
a sell-off on the foreign exchanges responded as usual, raising interest
rates and imposing austerity. Higher interest rates were supposed to
THE ESTABLISHED ORDER, COLLAPSES
I 175
attract capital back to the economy and its currency, while austerity
would restrain wages and profits in order to make the country’s goods
more competitive on world markets.
Even the American authorities faced serious challenges. The Federal
Reserve wanted to curb what it regarded as excessive speculative behavior on Wall Street, by raising interest rates to draw money away from
stocks and make it harder to borrow. But an increase in American interest rates would suck capital out of Europe and Latin America, making
business conditions more difficult there. If the Fed kept interest rates
steady, the stock market bubble would continue; if it raised interest
rates, it would worsen Europe’s economic problems. In the event, the
Fed thought that its principal commitment was domestic, and in August
it raised interest rates a percentage point to persuade investors to avoid
further stock market speculation. In fact the stock market did begin to
decline, in late summer and early fall of 1929.
In late October 1929 the frenzy came to an end. In three weeks the
market lost all the ground it had gained in the previous year and a half.
In three months American industrial production fell by 10 percent and
imports by 20 percent. Prices of commodities dropped astonishingly
steeply. In the summer of 1929, when economic contraction was already
in the air, rubber was going for 21 cents a pound; by early 1932 its price
was 3 cents a pound and still falling. Other raw materials prices came
down almost as dramatically; copper, for example, went from 16 to 5
cents a pound. Farm products were just as hard hit: From summer 1929
to their trough in late 1932 or early 1933, silk dropped from $5.20 to
$1.25 a pound; cotton, from 18 to 6 cents a pound; coffee from 23 to 8
cents a pound. It was not just poor countries’ products that suffered, as
a bushel of corn fell from 92 to 19 cents, and wheat, the world’s most
important crop, dropped from $1.50 a bushel in summer 1929 to 49
cents a bushel at the end of 1932.5
Manufactured goods prices declined, but not so fast. By one measure,
while American farm prices fell by 52 percent between 1928 and 1933,
prices of metal products and building materials dropped by 18 percent,
while consumer durables prices fell 8 percent. 6
Commodity-producing nations were especially hard hit by the combined
effect of price declines, the slump in American and European
I
demand for their exports, and the cutoff of American lending. Within a

few months of the American stock market crash, Argentina, Australia,
Brazil, and Canada responded to the collapse of their export prices by
formally or informally taking their currencies off gold. Their defection
GLOBAL CAPITALISM
I 176
·from gold standard rules was worrisome, but they were after all rela- ··
tively minor economies facing a very serious commodity price collapse.
Industrial country governments, however, had another idea of what
to do about the price declines: nothing. Received wisdom and prewar
experience said that the recession would correct itself. Once wages got
low enough, capitalists would start hiring back workers; once prices fell
far enough, consumers would start buying. As prices and wages dropped,
demand would rise, until balance was restored.
The Fed turned to the usual monetary tools to impose a sharp and
quick bout of austerity. This policy of liquidationism aimed to force
down prices and wages so that excess stocks of labor, food, and goods
would be liquidated. The advice of Treasury Secretary Andrew Mellon
to President Hoover was typical: “Liquidate labor, liquidate stocks,
liquidate the farmers, liquidate real estate … purge the rottenness out
of the system.” 7 So the Fed kept interest rates relatively high-2.5 percent at a time when prices were falling at about 15 percent a year-and
attempted to oversee an orderly working out of what it believed was a
typical cyclical decline. Prices and wages would fall, and eventually the
economy would rebound.
But the results were troubling, not only in the United States but in virtually all the developed world. American indusfrial production dropped
26 percent from its August 1929 peak to October 1930, prices by 14
percent, personal income 16 percent. 8 The average household had lost
the income gains of the previous five years and more, and there was
no sign of an end to the decline. Unemployment too was on the rise:
From 3 percent in 1929, the jobless rate went to 9 percent in 1930 and
to 16 percent in 1931. In Germany the collapse was even faster, from 8
percent unemployment in 1928 to 22 percent in 1930 and 34 percent in
1931. 9 The already weak British economy turned down further, bringing
with it the Scandinavian and Baltic countries in its commercial orbit.
Japan was dragged down by the lending cutoff and a 43 percent decline
in the price of silk, its principal export, over the course of a year. Only
France seemed immune to what was now clearly a worldwide crisis, and
by the end of 1930 the French expansion too seemed precarious at best.
Governments redoubled efforts to shore up confidence in their financial P.rudence and commitments to gold. The leaders of the principal
central banks consulted almost continually to try to craft a way out.
There even seemed to be progress on the issue of reparations, as a
European conference chaired by American businessman Owen Young
agreed to regularize German payments. The Young Plan also established
THE ESTABLISHED ORDER COLLAP SES
I 177
a Bank for International Settlements to help smooth the process and
provide a venue for international monetary and financial cooperation. 10
And in February 1930 an international conference to reduce trade barriers was convened.
But these international initiatives were ineffectual, especially without
real American involvement. Most governments had to rely on their own
efforts to try to pull themselves out of the decline. Great Britain seemed
uniquely suited to search for imaginative alternatives. In July 1929
a minority Labour government headed by Ramsay MacDonald took
power, ruling with the support of the Liberals and the backing of some
of the country’s leading economic thinkers, including Keynes. Yet the
government was immobilized by the conflicting pull of its constituents.
On the one hand, it held firm to the country’s commitment to free trade,
balanced budgets, and the gold standard; on the other, it was desperate
to respond to the demands of collapsing industries and unemployed
workers. Ip the end it temporized feebly for two years.
Germany, probably hardest hit by the crisis, was tom apart even more
completely. Two years of traditional austerity succeeded only in driving
unemployment to astronomical levels. The Center-Left coalition government collapsed early in 1930, to be replaced by the government by decree
of Heinrich Bruning, a prominent Catholic politician. Bruning seemed
to have no new ideas and called a new election in September 1930. The
principal result was a great increase in political support for the two parties
least committed to orthodoxy, the Communists and the Nazis. The former
took 13 percent of the vote, up from 10 percent two years earlier; the
latter increased their popular votes from under 3 percent to 18 percent.
The country divided into warring factions, with its international economic
relations one of the principal battlefields. Still, the government did almost
nothing to counteract the slump. This inaction was immensely costly;
even modest measures to stimulate the economy would, subsequent analysis has shown, have been enough to stop the Nazis’ electoral advances. 11
The U.S. government too turned inward toward traditional American
responses to economic downturns. The first such response was trade
protection. From the middle of 1929 through early 1930 Congress
worked on the Smoot-Hawley Tariff Act, which promised to raise substantially American trade barriers. Despite pleas from foreign trade
partners and from a petition of 1,028 American economists, Congress
passed the bill, and President Herbert Hoover signed it in June 1930.
Within a few months other countries also began raising their own trade
barriers, whether for their own reasons or in retaliation. 12
GLOBAL CAPITALISM
I 178
But economies did not recover, and unemployment kept increasing.
In 1933, the fifth year of the downturn, American unemployment was .
25 percent, and it stood at comparably high levels elsewhere. This was
long past the time when “natural” economic forces should have kicked
in to set economies right. Deflation and liquidation, far from rekindling
economic growth by lowering prices and wages enough to encourage
new investment and consumption, seemed to be deepening the decline.
And the economic decline was astoundingly deep. Industrial production dropped precipitously, typically by between 20 and 50 percent over
a two- or three-year period. In the 1920-1921 recession the American
economy had contracted by 4.percent; between 1929 and 1933 it shrank
by 30 percent. The American economic collapse was one of the worst
in the world, but other countries were not far behind. The 1928-1935
peak-to-trough decline in GDP-that is, the fall from the high point in
1928 or 1929 to the nation’s low point, typically in 1932 or 1933-was
of 25 to 30 percent in the United States, Canada, Germany, a_nd several
Latin American countries and of 15 to 25 percent in France, Austria,
and much of central and eastern Europe. 13
The downturn fed on itself, in large part through wl;iat economist
Irving Fisher called debt deflation. During the 1920s there had been
a big increase in lending, and even many consumers had come to rely
on installment credit to purchase the new consumer durables. Debtors
could not service their debts when incomes collapsed while debt obligations stayed constant. Deflation forced debtors to reduce consumption
and investment, leading to further price declines. By the beginning of
1934 in the average American city over a third of home mortgage holders were behind in their payments; in Cleveland the proportion was
nearly two-thirds. 14
Distress was especially pronounced among people or countries that
specialized in raw materials and farm goods, whose prices had fallen two
or three times more than those of other goods. By 1933 nearly half of
all American farmers were behind in their mortgage payments, and over
· that year some two hundred thousand farms were foreclosed. The foreclosure rate was ten to twenty times normal; in some states one-quarter
to one-third of all farms were foreclosed between 1928 and 1934. 15 The
United States, like almost every country, experienced massive agricultural bankruptcies and rural unrest.
And still political and business leaders followed the prescriptions of
previously prevailing wisdom. The generally accepted view of business
cycles was that an upswing led to speculative excesses, which had to be
THE ESTABLI SHED ORDER COLLAPSE S
I 179
cleared away by an inevitable downturn. The liquidation of past errors
was a good thing, and attempts to mitigate its effects were counterproductive. The liquidationists insisted that the boom of the 1920s
had to be unwound in order to set the economy back on a healthy
path. That meant liquidating bad investments, bad loans, and useless
products. This was difficult but necessary, for as Lionel Robbins put it
in 1935, “Nobody likes liquidation as such…. [But] when the extent
of mal-investment and over-indebtedness has passed a certain limit,
measures which postpone liquidation only make matters worse.” 15 The
intellectual pedigree of this view was impeccable, and it had seemed
to work well in previous crises. Traditionalists argued that government
inaction-even action to accelerate the “purgative” effects of the downturn-would eventually speed recovery. Don’t just do something, they
said to governments, stand there.
Herbert Hoover, after the fact, blamed the paralysis of his administration in part on the prevalence of these views: “The ‘leave-it-alone
liquidationists’ headed by Secretary of the Treasury Mellon … felt that
government must keep its hands off and let the slump liquidate itself.
. . . He held that even panic was not altogether a bad thing. He said:
‘It will purge the rottenness out of the system. High costs of living and
high living will come down. People will work ‘harder, live a more moral
life. Values will be adjusted, and enterprising .people will pick up the
wrecks from less competent people.’ “17 Support for liquidationism
was not based only on moral and intellectual appeal; businessmen had
self-serving reasons to justify layoffs and wage cutting. Orthodoxy was
especially strong among businesses that relied on large amounts oflabor,
for which reducing wages was crucial. Firms in more capital-intensive
lines, such as the auto, machinery, and petroleum industries, were less
sensitive to labor costs, and they were more likely to argue that wage
cutting was self-defeating because it reduced consumers’ purchasing
power. 18 But many businessmen naturally endorsed the idea that lower
wages were needed.
The reward for enduring all these rigors was supposed to be that
eventually the wave of deflation and bankruptcies would create the
conditions for its reversal and recovery. Yet traditional inaction, which
had previously righted troubled economies, did not work. Prices and
l
wag~s continued to fall, failures proliferated, unemployment rose, further’ and further, and there was no sign of a turnaround. The generally
self-equilibrating mechanism of pre-1929 business cycles was broken.
Why weren’t the old solutions working? As Keynes had anticipated,
GLOBAL CAPITALISM
I 180
reduced flexibility of prices and wages meant that the postwar econ::
omy was not responding as before to a slump. Oligopolistic firms that
cut back on sales while keeping prices high produced less than they
otherwise would; unions that held out for higher wages at the expense
of lower employment restricted the supply of available jobs. Firms and
unions with market power could produce less and sell at a higher price,
leaving machinery and workers idle. In sectors that approximated pre1914 conditions, such as agriculture, prices fell precipitously, while
farmers produced as much as or more than before. But the orthodox
purgative mechanism that depressions were supposed to activate was
not operating in many parts of the economy and was not rekindling
overall economic growth.
As the new wage and price rigidities imposed themselves, recovery
lagged and dragged. Unemployment remained high in almost every
country, even as real wages-the purchasing power of wages relative to
prices-stayed steady or even rose, especially in sectors dominated by
large enterprises or unionized labor, or both. In the United States, for
example, the average hourly wage of manufacturing workers went from,
fifty-seven cents in 1929 to fifty-four cents in 1934, a fall of 5 percent,
while consumer prices dropped over 20 percent. Even with 22 percent
of the labor force unemployed and millions of Americans looking desperately for work, the real wages of those with jobs were much higher
in 1934 than in 1929. As late as 1939, with American unemployment
still 17 percent, real wages were 15 percent higher than in 1934-and
fully 40 percent higher than in 1929. Real wages tended to increase or
stay constant in oligopolistic industries-utilities, finance, manufacturing-but declined by 15 to 25 percent in such competitive sectors as
farming, domestic service, and construction. While as much as a quarter
of the labor force was out of work and clamoring for jobs, wages in many
industries were high and rising. 19
There was nothing reprehensible in capitalists and workers banding
together to protect themselves by keeping prices, profits, and wages
as high as they could. The fact that this interfered with the orthodox
adjustment mechanism is not necessarily a strike against it. After all,
adjustment drove economy-wide wages down very far very fast, and
whi’e recovery might be quick, the pain and suffering of the crisis
we~e very severe. The ability of many firms and unions to resist price
and’ wage cuts kept factories more idle and unemployment higher than
otherwise, but it also provided better wages and earnings to the labor
and capital that were employed in these privileged sectors. How one
THE ESTABLISIIED OR.DEil COLLAPSES
I 181
weighed this trade-off depended on which side of the scale one occu~
pied; the gains of employed workers resulted, to some extent, in the
continuing unemployment of others.
Deflation was not the solution and might be part of the problem.
Indeed, eventually many governments harnessed corporate and union
efforts to sustain prices and wages to a more general attempt to reverse
the d~flationary circle. Fascist regimes encouraged corporations to cartelize to keep prices from collapsing. Social democratic governments
brought labor and capital together to hammer out agreements to prop
up wages and prices. America’s New Dealers railed against “cutthroat
competition” and used new laws and regulatory agencies to facilitate
corporate and labor organization that they hoped would reverse the
deflation. In many cases, governments themselves organized markets
against deflation such as by launching agricultural programs to keep
farm prices high. All these measures were undoubtedly motivated by a
mix of concern over deflation and the more prosaic desire of producers
to keep the prices and wages they charged- as high as possible.
The deflationary damage was done by the time governments got
involved. For nearly five years after the Depression began, many prices,
especially of primary products, collapsed. But deflation did not perform
as anticipated and, as before 1914, set the stage for recovery. Wage and
price rigidities meant that contrary to the prescriptions of orthodoxy,
contraction did not give way to recovery.
Gold and the crisis
Deflation and prolonged depression triggered financial and currency panics that moved around the world, at times like a gradually
spreading stain, at times with lightning speed. Shocks were carried
from country to country by skittish investors shifting money from one
market to another. Proliferating bankruptcies raised the specter of bank
failures, and when depositors pulled their money out, they turned fear
into, reality. Beginning in May 1931, panics swept from Austria through
Poland, Hungary, Czechoslovakia, and Romania and eventually to
Germany, then to Switzerland, France, the United Kingdom, Turkey,
Egypt, Mexico, and the United States. In six months, eighteen national
banking systems had faced the financial abyss. 20 In the five years before
GLOBAL CAPITALISM
I 182
the summer of 1929, there were only four appreciable national banking
crises; in the five years after, there were thirty-three.
“These heroes of finance,” Henrik Ibsen had written, “are like beads
on a string-when one slips off, all the rest follow.” 21 The effects of
financial failure were profound; by the end of 1933 half the American
financial institutions in business in 1929 were gone. 22 The impact was
not felt only by bankers; alarmed lenders stopped supplying funds to
almost all borrowers. Farm bankruptcies could, by scaring bankers and
investors, dry up money available to industry.
Financial difficulties brought national banking systems and the international financial system to a standstill. As heavily indebted people and
countries cut back on their purchases and investments, this reinforced
the vicious debt-deflation cycle, further depressing local and world
prices. 23
Governments searching for alternatives to deflationary paralysis and
financial ruin ran into an apparently immovable international object,
gold. Attempts to halt deflation and raise prices were blocked by government commitments to the gold values of their currencies. As two economic historians put it, the gold standard’s “rhetoric was deflation, and
its mentality was one of inaction.”24 Countries on gold had to let prices
take their course, for national prices were simply a local expression of
world prices. Attempts to print money would lead investors to sell off
the (debased) national currency for gold. The gold standard ruled out
monetary stimulation, and there were no other options. Almost nobody
supported deficit spending-Roosevelt’s campaign against Hoover in
1932 attacked the president’s inability to balance the budget-and trade
protection, another common remedy, had been tried everywhere and
found wanting. Gold ruled.
Gold retarded a government response to the crisis, and it also sped
the international transmission of financial shocks. The slightest hint
that interest rates in, say, Belgium, might go down led investors to
pull money out of Belgium and put it somewhere safer. As capital fled
Belgium, the fears became self-fulfilling: Money became scarcer, debtors defaulted, and banks failed. Governments were besieged by speculative flows of “hot money” seeking short-term security and returns. As
Herbert; Hoover put it, gold and financial movements were “a loose
cannon on the deck of the world in a tempest-tossed era.”25
Far from absorbing shocks, the gold standard heightened their effects.
When investors took money out of a country, they had to sell the
national currency. To get money out of Belgium, for example, specula-
‘
THE ESTA BLISHED ORDER COLLAPSE S
I 183
tors had to convert Belgian francs into more reliable sterling or dollars
or into gold. As they sold francs to the Belgian government for gold or
dollars, eventually the authorities would run out of either or both and
would have to go off gold. The government needed to raise Belgian
interest rates in these circumstances to entice investors to continue to
hold assets in the franc-Belgian government bonds, for exampleand to stave off a run on t4e currency. In this way, the gold standard
required that national governments passively accept international financial exigencies, even if this meant sacrificing local conditions to maintain
the exchange rate.
Countries with weak banking systems were particularly likely to collapse under the strain of financial and currency attacks. Where banks
were tied to industry, as in much of central Europe, financial distress
was quickly transmitted to the rest of the economy. Banks that relied on
money from abroad-half of Germany’s bank deposits belonged to foreigners in 1930-were especially exposed, for foreigners could pull their
money out with ease. But vulnerability to international financial whims
was universal and contributed to the speed with which the Depression
became, and remained, global. 26
Financial and currency pressures began a string of national crises
that brought the international monetary and financial system to a halt.
In May 1931 the Creditanstalt, Austria’s largest bank and a longtime
Rothschild affiliate, failed. The government stepped in immediately
and tried to mobilize support from other European capitals, but to no
avail. Even in these dire straits, the political flaws in the interwar order
intervened. Before the French would assist in stanching the effects of
the failure of the Creditanstalt, leading French politicians insisted that
Austria renounce a planned customs union with Germany; the Belgians
and Italians supported the French. 27
The problem soon became familiar. Depositors would not keep
money in banks in danger of closing, so a run on the banks developed at
the first sign of difficulties. As a nation’s banks threatened to collapse,
people scrambled to get their money out of the country; nobody wanted
to leave funds in a financial system in the process of disintegration. No.
amount of austerity and no interest rate increases would attract money
back to the currency of a country in the throes of a bank panic, and
rurpors that the currency would be taken off gold and devalued accelerated the rush to cash in stocks, bonds, and money for gold or a reliable
currency. The vicious circle fed on itself, as expectations of a devaluation
could cause a bank panic, while bank panics triggered devaluations. The
GLOBAL CAPITALISM
I 184
interrelated banking and currency crises so crippled credit markets that
lending virtually ceased, and even businesses that might have wanted to
expand had no way to borrow the money to do so.
Within a week of the Creditanstalt failure in May 1931, bank runs
spread from Austria to neighboring Hungary. Within a month they
reached Germany. Investors got money out of the banks, out of questionable national currencies, into gold or dollars, as soon as possible, and
so these interconnected economies pulled one another down. President
Hoover attempted to help hold off disaster by proposing on June 20,
1931, to allow war debtors to suspend payments on their obligations
to the U.S. government for a year. Still, savers all over central Europe
were gripped by the fear that bank failures would strike the continent’s
leading economy and force Germany off gold. They were right. Again,
attempts to gather support from the French and British were complicated by political hostilities. Before the French would help the Germans
deal with the financial crisis, they insisted on further reparations payments and disarmament. But these political maneuverings took far more
time than the Germans had.
In July 1931 the German government closed its banks and suspended
the convertibility of the currency into gold and foreign exchange. The
exchange rate was kept officially steady, but it was now virtually impossible to exchange the German currency for gold, dollars, sterling, or
anything other than German goods. 28 The German decision excited
more fears, which soon turned to the financial cornerstone of Europe,
the United Kingdom.
Over the late summer, as the pound sterling was sold off by worried investors, the British government struggled to support the pound
without austerity. In late August the Labour government collapsed
and was replaced by a National Government, also headed by Ramsay
MacDonald but now with substantial Conservative support. Almost
immediately the new government took sterling off gold, devaluing it for
the first time in peacetime since the gold parity was established by Sir
Isaac Newton in 1717.
The pound fell by nearly one-third against the dollar in a couple of
months, from its historical $4.86 to $3.25. As sterling dropped, a host of
other countries followed Britain off gold: the Scandinavian and Baltic
states with close ties to the British market, then Japan, then much of
Latin America. Most of these countries also imposed substantial barriers to trade. Britain abandoned nearly a century of free trade; in
February 1932 the National Government imposed tariff protection,
THE ESTABLfSllED ORDER COLLAPSES
I 185
then negotiated special preferences for the empire and a few favored
trading partners. After decades resisting protectionism, the United
Kingdom established an imperial bloc that shared preferential trade
relations and a sterling bloc that shared depreciated currencies. Trade
with the rest of the world fell precipitously, but exports to the sterling
area-the empire, the Nordic and Baltic countries, Argentina, and
a few others-rose from 50 to 60 percent of Britain’s total exports.29
Other imperial powers tightened economic ties with their colonies, and
in 1931 Japan expanded its colonial area by occupying and annexing
Manchuria in northern China.
By the end of 1932 effectively only two groups of countries were left on
gold: the United States, and a French-centered gold bloc that included
Belgium, Luxembourg, the Netherlands, Italy, and Switzerland. The
remaining gold countries faced strong competitive pressures in both
their own and third markets, as the depreciations made British,
Japanese, and o!her goods much cheaper. And the tariff barriers
imposed in the European empires, Japan’s expanding imperial sphere,
the United States, and Latin Americc!- reduced trading possibilities still
further.
Government use of currencies as competitive weapons threw additional uncertainties into the international financial and monetary order.
The “butter war” between New Zealand and Denmark was symptomatic. The two countries were Great Britain’s principal suppliers of butter, which was in turn the principal export of each nation. Early in 1930
the government of New Zealand devalued its currency by about 5 percent against the pound sterling, which gave its exporters a cost advantage over Danish producers. The . Danes hoped that by following the
British devaluation of September 1931, they would redress the balance,
but the New Zealanders also followed the British pound downward. In
September 1932 the Danes deval