The relentless revolution: a history of capitalism (44 page)

The United States had the most powerful economy; its industrial production represented more than 40 percent of the world’s output and twice as much as that of Germany and Great Britain combined.
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It could have stepped in as the new guardian of stability but didn’t, preferring to act as the Lone Ranger. It protected its domestic markets by raising tariffs to an all-time high and refused to use its wealth to steady currency fluctuations. High American tariffs made it hard for France, Britain, and Germany to pay their war debts because they couldn’t sell their goods. At the same time, American banks wouldn’t lend more to these countries either.

For many nations, including Chile, Mexico, Spain, India, Brazil, and Japan, the collapse of their export markets proved to be the proverbial “blessing in disguise.” But not before their purchasing power had fallen more than 50 percent below the levels of 1929. With no foreign exchange reserves to pay for manufactured goods, these countries began making the things that they had earlier imported. In this widespread “import substitution,” dozens of small industrial enterprises sprang up. India expanded its output of cement and other processed goods. The Brazilian government bought and destroyed coffee to relieve the glut it was suffering. More important, the government poured money into industry. By the end of the decade Brazilian manufacturers were making 90 percent of the country’s cloth, clothing, leather goods, and furniture. Japan became nearly self-sufficient in textiles, railroad equipment, and electrical machinery, all of which it had previously paid for with profits from silk exports.
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On top of all these structural and transient problems, most political leaders, including socialists, held to their belief in balanced budgets with a tenacity that matched their conviction that the earth circled the sun. Extending unemployment benefits might actually have stimulated the economy and certainly would have helped those out of work, but instead governments cut benefits to balance their budgets. Jobs were so scarce that many families moved back to the country, even though farmers were laden down with redundant wheat, corn, and cotton harvests. In statements that bring knowing smiles to our lips, lots of experts expressed the fear that the age of invention and expansion had come to an end. Some critics hailed the Depression as a reproof to a materialistic age. It posed, they said, an opportunity to return to the simple way of life that had prevailed before the invention of the steam engine.

The severity, universality, and duration of the Great Depression disproved the contention that the economy had its own means for righting itself. The unwillingness of the United States to demonstrate the enlightened self-interest of a leader willing to take a few hits for the benefit of long-term recovery disappointed. The Depression also exposed the need for mechanisms to stabilize currencies, credit, and the flow of goods. The major players—Great Britain, France, Belgium, the Netherlands, Sweden, the United States, and for a while Germany and Italy—began to recognize the importance of political action to improve the market mechanisms in which their economies were now tightly entangled. They signaled this new awareness with studies, commissions, and conferences, many of them, like the World Economic Congress, ending without concrete results. The wish to cooperate existed, but it wasn’t strong enough to overcome the dominance of national priorities.

Theories about the workings of the economy enter the history of capitalism by way of policy makers. They offer analyses that can be used to predict outcomes, which then become critical in deciding how to achieve desired effects. Policy makers are very much like stage managers. They don’t write the plays, make the props, or act the parts, but like stage managers, they can determine how smoothly the show goes on. Waiting in the wings as the Depression reached tragic dimensions was a novel economic script. Reexamining the fundamentals of economic reasoning, Britain’s John Maynard Keynes recommended that the governments stop balancing budgets and begin spending money, going into debt, if necessary, to “prime the pump” of their economies.

Not only did Keynes challenge the assumption that national budgets needed to be balanced, but he also took aim at the postulate of economics that said that buying and spending in the market would maintain a positive equilibrium with optimal employment. Not so, Keynes explained. A new equilibrium had not taken place as predicted when unemployment drove down wages. Manufacturers had not been lured to start producing again. Nor would they invest, Keynes insisted, because if times were sufficiently bad, people had a “liquidity preference.” That is, they preferred to save, so money wasn’t invested, goods and services weren’t produced, and laborers were thrown out of work. This of course is exactly what was happening in the 1930s when he was writing his grand theoretical tome.
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To counter this development, Keynes recommended that government provide jobs through new programs. This would make good the deficit in private employment and help restore confidence in the economy, the most precious commodity of all.

The New Deal in the United States started to follow this prescription. Welfare legislation had been much more common in Europe than in the United States with its traditional partiality to individual liberty and self-help. In his famous “first hundred days,” President Franklin Delano Roosevelt shepherded through Congress laws giving direct relief to the jobless. Next came funding for work projects, later incorporated into the Works Progress Administration and the Public Works Administration, which built everything from aircraft carriers to schools, bridges, and roads. Millions entered the government’s payroll, constructing post offices, public art, and conservation projects.

The major effort to coordinate industrial policies, the National Recovery Act, ran afoul of one of the strongest and most distinctive American values, the commitment to freedom over social planning, to individual rights over the general welfare. Two kosher butchers had been fined and jailed for so-called destructive price cutting. Fighting this verdict all the way to the Supreme Court, the Schechter brothers won a unanimous decision that the industrial code embedded in the NRA legislation was unconstitutional. Blocked by this decision, Roosevelt tried to increase the size of the Supreme Court, enabling him to make congenial appointments. Americans didn’t like tampering with their Supreme Court either, and he backed down. After the Court declared parts of the National Recovery Act unconstitutional, Congress extracted the sections dealing with labor and put them in the Wagner Labor Act of 1937, which greatly enhanced opportunities for successful union negotiations with employers. Quickly unionized nonagricultural labor accounted for 36 percent of the work force, its highest level ever.

Probably the most successful New Deal program was the Civilian Conservation Corps, which gave jobs for six months to two years to young men between the ages of eighteen and twenty-three who promised to give most of their pay to their families. Working principally on federal land, the CCC helped the Bureau of Reclamation fight soil erosion with seeding and terracing, the National Park Service build campgrounds and picnic sites, and the U.S. Forest Service protect timber from fire, disease, and insects. The government had to borrow to fund these programs, thus upsetting the goal of balancing the federal budget, but the classical economists’ conviction that the market would balance itself no longer convinced the public, which rewarded Roosevelt with four elected terms as president. Still, as is frequently the case with new ideas, leaders hedged their bets. The old budget-balancing orthodoxy reasserted itself. After his landslide victory in 1936, Roosevelt raised taxes and cut spending, and as Keynes had predicted, unemployment went up again. An international crisis then took over. When war broke out in Europe, the United States girded its loins to help Great Britain. Government spending reached levels high enough to bring the nation out of the Depression.
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If the causes of the Great Depression elude experts, it’s because there are too many of them interacting in hidden ways. This underlines the point that in a free market economy, though some people have much more power than others, no one is in charge. All the material aspects of the economy—available capital, plant capacity, fiscal instruments, transportation, and communication systems—rely on personal and institutional choices. More perplexing, not only do the individuals making decisions have different cultural values, but their attitudes will vary according to whether they were old enough to have lived through the last depression at the end of the nineteenth century or have just entered the world of commerce. The economy is not so impenetrable that governments can’t pass measures to prevent a rerun of the latest downturn, but an unforeseen development is usually in the offing.

Lingering Grievances from World War I

As it sadly turned out, the worst consequence of the First World War was not economic but political. The day after the inauguration of Roosevelt in March 1933, Adolf Hitler received full power to govern Germany by decree. The experiences of the 1930s tarnished the reputation of liberal democracies with their representative legislatures and civil rights, free markets and personal political freedoms. Hitler’s success, as did Mussolini’s, fed on the discontent that accompanied the tanking economies of the postwar period. Ambitious in his plans for Germany, which after all had been the second-largest economy before World War I, Hitler spent massively to provide jobs as he rearmed Germany in defiance of the Versailles Peace Treaty. Like Mussolini, whom he admired, he used the minions in his Nazi Party to suppress unions and all independent political institutions like newspapers. Hitler too had uniformed followers whose enthusiasm he sustained with military parades and giant convocations, where he harangued them for hours on end. He stoked his countrymen’s rage at their treatment after the First World War and played on their anti-Semitic prejudices with a horrendous campaign to rid the world of Jews and their culture.

Hitler had unilaterally abrogated many of the terms of the treaty that ended World War I. He seized Austria and Czechoslovakia, but it was not until he invaded Poland in September 1939 that Britain and France woke up to the threat that he posed and declared war. They now faced Hitler’s strategy of lightning war, which exploited all of the technologies of mobility—airplanes, tanks, and motorized infantry. He succeeded famously in the first year, polishing off Poland in concert with his new ally the Soviet Union, and then invaded Denmark, Norway, Belgium, the Netherlands, and France. By the end of 1940 Britain was confronting Germany alone, saved from invasion by the Royal Air Force working with the new radar and antiaircraft defenses. After Germany forced the evacuation of all English forces from the Continent in June 1940, most of Europe was his. The British turned to defending the Suez Canal and India while the United States began tooling up to send them material support. This decision gave Britain something of a breather.

Fresh from victory over France, Germany invaded Russia a year later. Hitler’s expectation of another quick victory got ground down by the unexpected ferocity of the Russian defenders of their homeland. They successfully blunted the German offensive and threw the invaders on the defensive. Both Russia and Germany suffered horrific losses. While Russia didn’t definitively defeat Germany, it delivered the crippling blow that tilted the war in the Allies’ favor. Britain and the United States pounded German factories and the civilian population from the air, cutting their productivity and diverting precious German resources to defending against these attacks. With improved navigational aids the Royal Air Force could switch to bombing at night. After a steady stream of aviation improvements, the United States turned out the first intercontinental bomber, the Boeing B-29, nicknamed the Superfortress. By the summer of 1944, when the Allies were ready to take the war back to France, the Americans had mobilized all the D-day units for a fully mechanized invasion, the largest in world history.
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When Japan entered World War II, as an ally of Hitler’s Germany and Mussolini’s Italy, it had already been pursuing for almost a decade an aggressive campaign under the rubric of the Greater East Asia Co-Prosperity Sphere. The “Co” in the title was illusory; this was a program to bring its neighbors under the control of imperial Japan. One wag turned Rudyard Kipling’s famous line about the white man’s burden upside down when he said that Japan would now relieve the white man of his burden. Japanese opinion makers cultivated the idea that as descendants of the sun goddess the Japanese had the moral purity and cultural superiority to lead Asia out of the quagmire Western powers had made. While some Japanese intellectuals responded to the promise of replacing Western imperialists with a pan-Asian community of nations, the government’s goals were more concrete and exploitative, focusing upon garnering the raw materials that Japan lacked and monopolizing Asian markets.

The brutality of the Japanese Army squelched any possibility for genuine cooperation. After achieving a protectorate of Manchuria in 1933, Japan moved into Inner Mongolia and China proper. There Japanese forces met those of Chiang Kai-shek, who, despite cooperation from the country’s Communists and help from the United States, failed to halt their advance. While pacifying China, Japan moved into Indochina and points west and south. American opposition to these acts took the form of an embargo of scrap steel and oil, providing a motive for Japan’s attack on Pearl Harbor four years later. Western snubs, like its unwillingness to include a racial equality clause in the League of Nations Covenant and the immigration exclusions in the United States and Australia, kept alive the anger that fueled much of Japan’s expansion. The outbreak of full-scale war had the effect of stifling a nascent domestic opposition movement against the Japanese military’s dominance in foreign policy.
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