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Ernest Bevin and G.D.H.Cole


The plain man may be forgiven if he finds himself bewildered by the events of the past few months. Even before the present crisis began, the situation was absurd enough. The whole world was involved in a trade depression, by far the worst in living memory, the cause of which no one seemed to know—or at least no two persons to agree upon. We were all being urged to economize and to consume less; and yet at the same time the world’s chief trouble seemed to be overproduction. How diminished consumption could possibly be a remedy for over-production no one was able to explain. But in all the industrial countries the cry was going up that wages must come down, and less be spent on "doles" and social services as the one way of restoring prosperity. Manufacturers were turning off hands and reducing output; and there were wild plans for destroying the surplus stocks of wheat and cotton and other agricultural products, in the hope of raising their prices. The world, in the opinion of business men, seemed to be cursed with abundance; and scarcity was being made a god.

All this was mad enough; but there was even worse to come. In the early summer Germany, under the double pressure of the demand for impossible Reparations and for interest on capital borrowed from abroad, threatened to default and came very near to total financial collapse. A German collapse would have involved disastrous consequences for the financiers of New York and London; and both the United States and Great Britain hastened to the rescue. Mr. Hoover put forward his plan for a moratorium on War Debts and Reparations, in order to afford a breathing-space; and the British and other bankers made or extended special loans to the Germans in order to help them to tide over the emergency. By these means, German default and probably German revolution as well were prevented for the moment. But nothing was done to cure the trouble, or to stop its recurrence as soon as the effect of the emergency measures had worn off.

Moreover, the British bankers, in their lending to Germany, had long been making use of money that was not their own. The sums they lent to the Germans were in effect borrowed from French and American financiers, on terms which allowed these financiers to recall them whenever they chose. On the other hand, Germany was in no position to repay at short notice, or, indeed, at all, without a satisfactory settlement of the entire reparations problem. Our bankers, therefore, had taken the heavy risk of lending for a long period money which they had only borrowed on short period terms. This meant that the French or Americans could at any time, by asking for their money back, put the British financiers into a very difficult situation.

At the same time, in consequence of the world slump, Great Britain had serious troubles of her own. Her exports had fallen heavily in quantity, and were still falling; and increased unemployment and reduced profits were both diminishing the revenue from taxation and increasing the national expenditure. The British budget thus ceased to balance; and money had to be borrowed by the State to meet its current spendings.

The fall in the export trade would have had far more serious immediate consequences had it not been for the very sharp fall in the prices of the goods imported into this country. But, in fact, the prices of wheat and other imported foodstuffs and raw materials fell so much that, although we were importing no less than a year before, we were able to pay for our imports with far less of our own goods, because their prices had fallen a good deal less. What is called the ‘Visible adverse balance of trade"—that is, the difference between what we receive for our exports and what we have to pay for our imports—was no larger in 1931 than it had been in previous years. On the "balance of trade" we were, despite the fall in exports, no worse off than before. Manifestly, then, the fall in our export trade is not the cause of the present crisis.


Always, however, Great Britain imports far more goods than she can pay for with the goods she exports. She is able to do this, because she has other resources with which to pay for the extra imports. She has large masses of capital invested overseas, on which the borrowers pay her annual interest or dividends. She is a great carrying nation, and the profits of her shipping go to pay for a further part of her imports. And she does a large part of the world’s financial business in trade bills, insurances and the like, and uses the profits made in these transactions to pay for yet more of her imports. Indeed, in normal years, when the total balance is struck, it is found that, despite the excess of imports over exports, Great Britain, after paying for all she imports, has still a large sum due to her from the rest of the world. A small part of this sum she may receive in gold; but most of it she does not receive, but re-invests overseas as capital which will earn more dividends in the future, and thus swell the total sum due to British capitalists from foreigners all over the world, or from citizens of other Empire countries.

Now, these large annual payments from overseas on which Great Britain so largely relies are broadly of two kinds. Some of them are fixed payments in money—such as interest on Government loans or foreign railway bonds, while others are a variable share in the profits of enterprises carried on overseas, such as dividends on rubber, tea, or oil shares, or on the ordinary stocks of railways or manufacturing concerns. When world trade is bad, obviously the latter will fall off, because the businesses in which the money is invested will only pay lower dividends, or none at all. Thus, in the past year most rubber companies have made heavy losses. There will accordingly be less income available from this source to pay for British imports or to re-invest overseas.

The same applies to the earnings of British shipping, which will obviously tend to fall off in times of trade depression, when many ships are laid up, and freight rates reduced in order to get traffic.

The same does not apply to those overseas investments on which interest is payable at a fixed rate. Indeed, to some extent the truth about them is quite the opposite. Our debtors are under contract to pay us the fixed interest on these loans whether they are making profits or not, and whatever happens to prices. In a depression, as prices fall, the fixed money payments mean that they have to pay their debts with a greatly increased quantity of the goods they produce, so that the burden upon the debtors becomes much heavier.

So far, nearly all of them (except Chile and to a small extent Brazil) have gone on paying. But they have paid with ever-increasing difficulty, as in the well-known case of Australia; and there is no reason to suppose that most of them will, or can, go on paying much longer. If the present world depression lasts, there is danger of widespread defaults by the debtor countries; and this would mean, from the standpoint of Great Britain, the loss of income on which we rely in order to pay for our imports. The outlook in India, China, Australia and many other countries makes defaults inevitable in the near future unless there is a recovery of trade and prices.

Meanwhile, although defaults have not yet taken place on a large scale, there has been a big reduction in our national income both from shipping and from overseas investments carrying a variable dividend; and the effect of these decreases has been to turn us for the time being into a country with an adverse balance. There is, moreover, every reason to believe that our receipts in dividends from overseas and our shipping earnings will fall still more in the near future, thus increasing the adverse balance against us, unless we either reduce our imports or increase our exports, or both.

This does not mean in the least that we are a bankrupt country. Foreigners owe us more—many times more—than we owe them; for we have the huge mass of our existing foreign investments to fall back on in case of need. We can, in the last resort, sell some of these investments to overseas buyers to balance the account.

The present time, however, is a very bad one for trying to sell our investments; for, on account of the world slump, the prices of most of them have fallen heavily. We can sell in the last resort, but only at a serious loss.

There is, then, at present a cause in the state of our international balance of payments for some uneasiness. But there is nothing in the amount of our adverse balance that could not, under normal conditions, be met with perfect ease by selling some of our securities abroad, or that, even under the present abnormal conditions, suffices by itself to explain the crisis. Our adverse balance of international payments is a factor in the situation; but it is only a factor of secondary importance. For the real causes of the present crisis it is necessary to look elsewhere.


Where, then, are we to look? In order to explain the real trouble we must go back to what was said earlier about the position of Germany. The Germans, by the terms of the Versailles Treaty, were put in an impossible economic position. They lost a large slice of their territory and population, and of their resources in coal and iron, as well as the whole of their mercantile marine. Their productive system had been thrown right out of gear during the war, and needed complete reconstruction at heavy capital cost. They needed to import foodstuffs to feed their people, and raw materials for their industries. And at the same time they were sentenced to pay huge sums in Reparations to the victorious Allies.

How could they pay? Only by exporting more goods than they imported, for they had no stock of gold and no foreign investments to pay with. But it was not easy for a country which needed to import large quantities of foodstuffs and raw materials to create a surplus of exports over imports, even if other countries had been willing to buy their goods. And, in fact, many other countries built up high tariff walls which helped to exclude German manufactures.

The Germans soon saw that there was only one conceivable way of carrying out the obligations thrust upon them—a complete reconstruction of their industries which would enable them to produce so cheaply as to be able to force their manufactures into foreign markets even over high tariff walls, coupled with a low standard of life for the German worker in order to reduce imports and keep down the costs of production. But they had no capital resources of their own with which to carry out this gigantic reconstruction of industry.

Nevertheless, they set to work. The long-term capital for rebuilding their industries they borrowed from America, and the short-term credit for financing their trade chiefly from America and Great Britain. With the aid of this borrowed money, and of a low standard of living, they achieved wonders in reorganizing their industries and forcing their goods upon the world market, incidentally keeping down by their intense competition the standard of living of the workers in other countries. But, of course, they had to pay interest— and high interest, too, because of their precarious position—on all the capital they borrowed from abroad; and the burden of this interest was added to the already top-heavy burden of Reparations due to the Allies.

All the same, someone will say, Reparations have been paid. Yes, but they have never been paid out of any real surplus available to pay them. The Germans have borrowed from abroad a great deal more than they have paid in Reparations. In sober truth, the Americans, and to a less extent the British, have lent the Germans the money with which to pay the Reparations which are then paid back to the Americans as interest on Europe’s debts to them. The whole affair is a vicious circle—it would be mere farce if it were not tragedy as well.

This absurd state of affairs went on, without absolute breakdown, as long as the Americans went on pouring capital into Germany. But in 1928 came the American speculative boom, and in 1929 the world slump. During the boom, Americans found it more profitable to use their money in speculating at home than to lend it to the Germans, even at high interest; and the volume of American loans to Germany rapidly fell off. This upset the equilibrium of the German economic system; and, when the world slump came, the Americans were not at all disposed to go on lending to a Germany that seemed on the brink of financial collapse, and perhaps revolution.

To a substantial degree, the British financiers stepped into the breach. They were not in a position to lend on anything like the scale on which the Americans had been lending before; but British policy was directed to preventing the collapse of Germany in order to avert European revolution and check the growth of French supremacy in Europe. There was, accordingly, a strong political motive behind the British loans.

But there was an economic motive as well, especially during the world slump; for our bankers found themselves with large sums left on their hands which on account of the slump in trade capitalists left in the banks in preference to locking them up in long-term investments in Great Britain. The Germans, in their need, were prepared to pay high interest even for short-term loans that would help them to tide over their troubles; and the British financiers plunged heavily, in order to earn this high interest on the money in their hands.

But, despite these loans, the position in Germany grew more and more desperate as the world depression deepened. Indeed, each fresh loan only intensified the difficulties for the future, and in postponing the evil day, made it more evil still. But for the Hoover moratorium and the granting and extension of emergency credits to the Germans by the great Central Banks, total collapse would have been unavoidable some months ago; and even now Germany is barely tiding over, and collapse is still certain unless far more fundamental remedies are applied during the next few months. Germany’s whole financial structure is utterly insecure; and, if she falls, she will bring down a good deal more with her, and quite possibly plunge a large part of Europe into revolution.

In order to prevent this, and to safeguard the large sums they had already in Germany, our financiers went on renewing their loans to the Germans. As we saw, they did this to a great extent, not with British money, but with money belonging to French and American financiers which its owners had deposited in London because they found they could earn better interest on it, or keep it safer, there than in Paris or New York. It suited the British financier to have this borrowed money, if he could use it to earn in Berlin higher interest than he paid for it—as long as Berlin went on paying. But he ran two risks—the risk of a German default, and the risk that the French or the Americans might recall their money at short notice, whereas it would be impossible for him to get back quickly what he had lent to the Germans.

Clearly, the more we lent to the Germans, the more our fortunes became involved with theirs. And the more desperate the position of Germany became, the more likely were those who had money on deposit or in short-term holdings in London to doubt its security, and to ask for it back. Our heavy plunge in lending money to the Germans was one, though by no means the only, cause of the loss of confidence in the security of money in London. A no less powerful cause was the Americans’ loss of confidence in themselves, which made them take alarm at Germany’s growing troubles, and scramble to recall and realize loans and investments which they had made in Europe.


For the United States were themselves passing through an economic crisis a good deal worse in its immediate effects than our own. In particular, the American banks, which had invested huge sums in American securities during the boom, found their resources disappearing as stock prices fell and fell in consequence of the depression. Many of them became virtually insolvent; and then followed a scramble to realize their liquid resources. This involved a hasty calling in of sums which they had to their credit in British and German banks, or had been using in the London money market. In other words, the British financiers were called upon suddenly to repay their American creditors, at a time when it was out of the question for them to collect the sums owing to them by their German, Australian, South American, and other debtors.

In these circumstances, there were only two ways in which the repayment could be made - by shipping gold to America or by selling British-owned securities to the American capitalists. The second course, in view of the panic stock prices ruling on the American stock exchanges, would have meant heavy losses, even apart from the fact that it could not have been done without compelling the British owners of the securities in question to hand them over to the Government or the Bank of England for sale. This was not done; and large quantities of gold began to flow to the United States, until it became plain that, unless the flow was stopped, before long the entire British gold reserve was likely to disappear.

It was at this point that the political crisis was added to the economic. Faced with the threatened loss of gold, the late British Government, in conjunction with the Bank of England, set out to borrow large sums of money from France and America in order to offset the withdrawals. At first, such borrowings were successfully arranged. But the flood of American withdrawals continued, and the credits secured were soon exhausted, and the outflow of gold resumed. The British Government set out to borrow yet more, this time from America, which was now the chief cause of the trouble, though Holland, which was heavily involved in Germany, was a secondary cause, and was also draining gold from London on a considerable scale.

The renewed request for a loan from America led directly to the political crisis and the fall of the Labour Government. For the Government was told that it could have the loans it wanted only on certain conditions. One of these was that the Budget should be balanced, so as to remove the need for further Government borrowing to meet current expenditure. The other was that the method of balancing the Budget should include a drastic cut in the amount of unemployment benefit, and a drastic revision of the conditions on which the benefit was granted. The majority of the Labour Cabinet, while they were prepared to agree to balance the Budget in their own way, refused to accept this financial dictation on a political issue, or to agree to a reduction in the amount of benefit. Upon their refusal, the Prime Minister handed in the resignation of the Government, and proceeded himself to organise a Coalition with the Tories and Liberals, into which he carried only a tiny handful of "Labour" supporters. The Labour Party, under Mr. Henderson’s leadership, resumed its place as the official Opposition.

It should be observed in passing that, while it is clear the Labour Government fell as a result of financial dictation, it is still far from clear whence this dictation really came. It has been denied by the American bankers that they imposed any condition other than the balancing of the Budget, or insisted that unemployment benefits should be cut down. But it is certain that most of the members of the Labour Cabinet understood from those of their number who met the representatives of the Bank of England—which acted as intermediary in the negotiations—that both conditions had been imposed. Here is a matter that badly needs clearing up. Did the financial dictation that caused the fall of the Labour Government come from the American, or did it really come from the British, financiers? Did British finance use the Americans as an instrument to bring down the Labour Government? And what part did the Bank of England play in the affair?

The "National" Government was formed with the clear and explicit object of yielding to the demands of the financiers, by balancing the Budget and economising on the unemployed, and of borrowing enough money from America to save the position of London as a financial centre and keep the gold standard intact. Yet within a week, although it had borrowed £80,000,000 from America on most onerous terms, confidence in London was at a lower ebb than ever. There was a still greater rush to withdraw funds from Great Britain; and it became clear that the new credits would soon be exhausted. Within a few weeks of its formation, the "National" Government, created with the one great object of keeping Great Britain on the gold standard, itself abrogated that standard, by prohibiting the export of gold.

The means proposed by the "National" Government to keep us on the gold standard were, indeed, in the event a factor in causing its suspension. The proposed cuts in the salaries of teachers and the wages of Civil Servants and others produced widespread discontent. The reductions in unemployment benefit and the threat to deprive hundreds of thousands of the workless of the means of life created an ugly temper of resentment throughout the industrial districts. The attacks on the pay of the fighting services aroused such feeling that trouble burst out openly at Invergordon and elsewhere; and the continental press was filled with rumours of impending riot and revolt that caused a further stampede away from the pound. Moreover, the enforcement of certain of these cuts—against the teachers for example—in flat breach of solemn contracts into which the State had entered seemed so clearly the act of a Government reduced to panic and despair that other countries naturally took our situation to be very much worse that it actually was. The newspapers did their level best to swell the panic, and thus undermined confidence still more. Indeed, the loss of confidence in British credit was far more the result of the insane behaviour of our newspapers and politicians than of anything really wrong with Great Britain’s economic position. The newspapers and the National Government—those’ ardent defenders of the gold standard—were the chief agents in compelling its abandonment. But, before we go on to study further this Gilbertian situation, we must say something about what the gold standard is, and what our departure from it involves.