Iran’s Crisis of Legitimacy
An Embattled Regime Faces Mass Protests—and an Ailing Supreme Leader
NOTHING in recent history has so strikingly emphasized the need for international coöperation in the economic field as the business depression which now for over two years has weighed down upon the world. The central banks have taken the lead in devising emergency measures to prevent the collapse of currencies, and the Bank for International Settlements offers great possibilities for permanent financial collaboration. But the coöperative spirit which dire necessity has forced the governments of the great lending nations to display in the field of international finance finds as yet no counterpart in a field of coördinate importance, that of international trade. On the contrary, instead of inducing coöperation in commercial relations the depression has revived nationalism in its most aggressive form. Tendencies toward lowering tariff barriers have been stifled. Tariffs have been raised, new duties imposed, obnoxious restrictions revived and new devices invented for hampering the flow of goods from one country to another. And thus the depression has been deepened and prolonged. For tariffs are not only results of the depression; they are also among its causes.
The collapse in international trade during the past two years finds no parallel in the annals of modern business. For the fiscal year 1931 the export trade of 54 countries, representing over 90 percent of the world's total, was valued at 20.3 billions of dollars. For 1930 the value was 27.8 billions, and for 1929 it was 30.3 billions. In the two years the United States suffered a loss of 2.3 billions in its exports, amounting to 43 percent of their 1928-29 value. Eleven other important trading nations saw their sales cut more than one-fourth. Taking the world as a whole, the fall in exports (setting aside purely statistical differences) implies a corresponding and equal change in imports.
The disappearance of 10 billion dollars' worth of exports and an equal value of import trade in a period of two years has more significance than can easily be comprehended. Taken on a value basis alone, the shrinkage in money turnover meant ruin to a host of private business firms; it was responsible also for a falling-off in customs revenues that embarrassed many governments. But it is in relation to balances of payments that changes in the values of exports and imports find their chief, one might almost say their tragic, significance. In these days of international borrowing and lending there are debtor countries in all parts of the world depending on a surplus in the value of merchandise exports over imports to provide the foreign exchange necessary for periodical interest payments. Their exports are chiefly foodstuffs and raw materials, commodities whose prices were first affected by the crisis. The result has been a drastic shrinkage in their trade balances. Six countries -- Argentina, Australia, Brazil, Canada, Chile and India -- had a combined trade balance of 274 million dollars on the credit side in the first quarter of 1928; their balance was 51 millions in the first quarter of 1931 but it was on the debit side. The resulting unfavorable rates of exchange, with exports of gold, were responsible for still further declines in export prices.
The quantitative changes in foreign trade owing to the worldwide decline in prices have not been as great as the value figures seem to indicate. Estimates for the United States, based on official statistics, place the quantitative loss in imports in the fiscal years from 1929 to 1931 at 19 percent and in exports at 31 percent. A recent League of Nations publication, "Course and Phases of the World Economic Depression," shows the changes in the volume of exports and imports of fifteen nations. Thirteen of the fifteen imported a smaller quantity of goods in 1930 than in 1929, and ten showed losses in exports. The losses in import trade ranged from 1 to 19 percent and in export trade from 3 to 18 percent. These figures are confirmed by the comparison of weights of merchandise imported and exported. Six countries -- Germany, France, Italy, Czechoslovakia, Japan and Brazil -- imported 89,938,000 tons of merchandise in 1929 and 76,214,000 tons in 1931; their exports in 1929 weighed 62,233,000 tons and in 1931 only 52,976,000 tons. It is this decline in actual volume of goods moving across national frontiers which the student of international trade finds of most significance. And it is in this respect that the present disturbance is unique. Previous business crises have indeed been accompanied by violent changes in the values of exports and imports but such changes were chiefly the reflection of falling prices; the quantities exchanged fluctuated little. Professor Wagemann has shown that during the depression of the nineties of the past century the volume of world trade dropped below the long-time trend by only 7 percent, and in 1907 by about the same amount. Estimates on a similar basis for the first quarter of 1931 show a decline in volume of no less than 20 percent.
The meaning of what has happened can hardly be grasped from the mere statistical record. We need to visualize the enormously complex territorial division of labor or regional specialization which has been built up during the past century on the basis of continually expanding international trade. Notwithstanding protective tariffs, war and other impediments, foreign trade has grown from decade to decade, becoming an increasingly powerful factor in raising mankind's standard of living. Only because of an increasing volume of exchange with the newer communities of the Americas, Australia and Africa have the industrial nations bordering the North Atlantic been able to maintain and raise their standard of living in the face of rapidly increasing population. The whole economic organization of countries like Great Britain, Germany, Belgium and Italy is predicated on the continuance and expansion of export and import trade. Most of the main groups of German industries depend on export trade for from 10 to 50 percent of their sales. The important group of chemical, iron, engineering and electro-chemical industries, for example, sell from 10 to 20 percent abroad. About 25 percent of the total industrial output of Great Britain is exported. For countries in such circumstances, and even for the United States which exports only 10 percent of its production, a continued decline of foreign markets must necessitate a wholesale readjustment of industries with higher costs of production and a lower standard of living for the mass of the population. It means nothing less than a return toward self-sufficient economy, reversing the trend of industrial progress during the last century.
What has been the connection between trade restrictions[i] and the depression? An intelligent answer to this question can be made only after a survey of the course of commercial policy in the years immediately preceding and during the depression. The years 1925 to 1929 cover a period of rapid industrial recovery the world over, but particularly in Europe. Rationalization was lowering costs in both industry and agriculture, currencies were stabilized, and the economic balance between Europe and the rest of the world was being rapidly restored. International trade increased more rapidly than production. With increasing prosperity the demand for foreign products rose and there was a marked expansion in the trade in manufactured goods. It was only natural that better economic conditions should bring a movement toward more liberal commercial policies. The competitive struggle became somewhat less bitter and the long-time view of the advantages of freer trade gained greater recognition. It became increasingly evident that the multitude of restrictions which had been imposed upon foreign commerce by the necessities of war, and continued by the exaggerated nationalism of the post-war years, were hampering rather than helping the new expansion of business.
The hope of lowering tariffs and doing away with restrictions inspired the World Economic Conference of May-June 1927. Although the Conference was merely a deliberative body, the vigorous language of its pronouncements strengthened the position of statesmen and others the world over who were working for more liberal commercial policies. Its declaration that "the time has come to put an end to the increase in tariffs and to move in the opposite direction" became the battlecry of tariff reform. Attempts to turn the tariff program of the Conference into action began in October 1927 when an international conference assembled to discuss the abolition of restrictions and prohibitions on imports and exports. Their deliberations resulted in a multilateral treaty which was signed by the representatives of 19 nations. In it they undertook to abolish, subject to certain reservations, all restrictions and prohibitions of an economic character and to refrain in the future from the use of these obnoxious instruments of commercial policy. It should be explained at once that customs duties, whether protective or for revenue purposes, were specifically excluded from the treaty. It referred only to embargoes, licensing systems, the fixing of quotas and other super-protective devices. The treaty was signed by the United States and it was later ratified by our Senate. But it has never gone into effect. The necessary number of ratifications were made, but some of these were conditional upon the ratification by specified states. Finally, in June 1930 the success of the treaty hinged upon the action of a single state, Poland. Her decision not to ratify deprived the agreement of binding force. Nevertheless, seven countries, the United States among them, agreed to abide by its terms.[ii]
A second objective set by the World Economic Conference was the stabilization of tariffs -- the prevention of sudden and frequent revisions. For a year or two it appeared that this objective was in a fair way to be attained. Dr. Henry Chalmers found that in Europe the number of general tariff revisions decreased from 10 in 1927 to 5 in 1928 and to 2 in 1929. But meanwhile a good deal of instability had appeared in one part of the tariff field, that relating to agricultural products. Not only in the United States, but in Europe and practically all over the world, agriculture had experienced even more difficulty than industry in adjusting itself to post-war conditions. The mechanization of agriculture in Canada and the United States and the cheapening of ocean transportation intensified the competition of western cereals in the markets of Europe. In response to the demands for government aid, tariff duties were raised and a wide variety of other devices, new and old, were put into effect to enable domestic producers better to meet foreign competition. Requirements that millers use a specified proportion of domestic rye or wheat in milling flour were introduced, import quotas for cereals were fixed, and in a number of countries the trade in grain was made a government monopoly.
As the result largely of the renewed interest in agricultural protection the general level of European tariffs at the end of 1929 was slightly higher than it had been in May 1927 when the World Economic Conference assembled. The desire to check what threatened to be a renewed general upward movement in tariffs produced a number of schemes for "concerted economic action." Under the auspices of the League of Nations the so-called Tariff Truce Conference convened in February 1930. Its sponsors hoped to get agreement among an important group of countries not to raise customs duties during a period of one or two years, not to impose any new duties of a protective nature, and not to create any new impediments to trade. The conference was not successful. The treaty which finally emerged from its deliberations was weak and ambiguous and failed to arouse interest or support. No agreement could be reached as to the date when it should become effective and it still remains in suspense.
For Europe's change in attitude on tariff matters in 1930 the threat of the new American tariff must bear a large share of responsibility. During eighteen months European and Latin American business men had watched the tortuous progress of the Hawley Bill and the Smoot Bill through our Congress. As duties on industrial as well as agricultural products were raised one after another to new record heights they saw the best market in the world being closed to their goods. In the face of this monumental event, their efforts to reduce European tariff barriers seemed hardly worth while. In a former issue of FOREIGN AFFAIRS the present writer described how Europe received the Smoot-Hawley Tariff.[iii] In spite of official denials it is clear that many of the foreign tariff revisions of 1930 were in the nature of reprisals. Six general tariff revisions occurred in Europe alone in 1930 with the general trend of rates upward. There was a general unsettlement of import duties and all but two of the governments of continental Europe made some changes in specified items during the year. The great majority of the new European duties were higher than the old. Renewed tariff activity was also evident among the Latin-American republics, at least five of which overhauled their schedules with the result that a majority of the new duties were higher than those which they replaced. In the British Empire, Australia made marked increases in her import duties, reinforced by restrictions and prohibitions; and an extensive upward revision was carried through in New Zealand. In Canada two successive general revisions of the tariff raised duties to new high levels. In both Canada and New Zealand the margin of British preference was increased.
In addition to the desire to hit back at the Americans, the downward turn of the business cycle was a powerful influence in reversing European tariff sentiment in 1930 and in giving momentum to the movement to raise barriers. As the depression spread and deepened, business conditions rather than American policy became the determining factor. In Western Europe, as in the United States, agriculture demanded protection from the violent decline in world prices of foodstuffs and agricultural raw materials. In the food-exporting countries also, for example in Australia and South America, the price decline inspired tariff revision. But in their case it was not the farmer who was to be helped by higher import duties, but the budget and the trade balance. The abandonment by England of the gold standard in September 1931 introduced a new occasion for raising tariffs, i.e., protection against exchange dumping. British India, Canada, the Scandinavian countries, Finland and Japan all followed England's example before the close of the year, and with each addition to the ranks of countries "off gold" the volume of trade restrictions increased. Moreover, countries still clinging nominally to gold imposed controls on dealings in foreign exchange which have added immensely to the difficulties of exporters and importers.
The year 1931 will stand out in economic history as the great year of protectionism. In January there was a general upward revision of tariffs by China, followed during the succeeding months by Chile, Canada, Paraguay, Estonia, Argentina and British India in about the order named. Seven in all, and all upward revisions. In addition a number of countries, including Mexico, Italy, China and the Union of South Africa, imposed flat surtaxes on existing duties which amounted to general upward revisions. A similar result was accomplished by Uruguay in requiring that 25 percent of all duties should be paid in gold; by Brazil in revising, several months in succession, the official ratio of paper to gold values; and by Australia when that country revised its method of converting foreign currencies for duty purposes. Including these, the number of general upward revisions is raised to fourteen. The crowning event of the year was the announcement in November that Great Britain had abandoned its traditional free trade policy. On November 25 the Board of Trade, pending the introduction of a general tariff bill, imposed emergency duties of 50 percent ad valorem on a long list of commodities.
Special or partial tariff revisions during 1931 ran well into the hundreds. Practically every important trading nation made some change in its import tariff, and increases in rates predominated over decreases in the ratio of 4 to 1. In Europe, the tariff tinkers of France, Italy, Germany, Poland and the Irish Free State were particularly active. All South American and Central American countries raised individual items; the tariffs of Argentina, Mexico and Cuba were in a continual turmoil. In the United States the President, with the help of his reorganized Tariff Commission, made 22 changes in rates of duty, 15 downward and 7 upward.
More disturbing in their immediate effects on international trade were the restrictions and prohibitions which were revised with new vigor. Excluding sanitary measures and others obviously imposed for non-economic purposes, we find that no less than 22 countries had recourse in 1931 to these, the most drastic of all protective measures. Among European countries France was the leader in the employment of import restrictions. Some of the commodities which in 1931 might be imported into France only by license were coal, coke, lumber, sugar, dairy products, meats and fish. Poland also made liberal use of import restrictions. She fixed quotas on imports from the United States of soap, oranges, motorcycles, canned fish and canned pineapple at a certain weight of each commodity for each quarter of the year. The Baltic states extended their restrictions on trade in cereals and Sweden went so far as to declare the grain trade a government monopoly. Persia joined Soviet Russia in making all foreign trade a government monopoly. Embargoes on certain Russian products were declared by Canada, and Australia extended her embargo on sugar for five years. The smaller countries, not to be outdone, announced new restrictions; for example, Iceland restricted imports of canned goods and Tunis of fertilizers. Salvador, at the request of the printers' union in that country, prohibited the importation of linotype and similar machines for a period of five years as a measure to relieve unemployment.
Some restrictions were removed. Several countries producing raw materials for foreign markets reduced export duties as a means of offsetting the influence of falling prices. Mexico and Rumania, in particular, made substantial progress in freeing their export trade from restrictions. But from the world viewpoint their efforts were offset to a considerable extent by new export restrictions of Nigeria on tin, of Japan on rice, and of the Dutch East Indies on sugar.
Where will it all end? Obviously the nations have been led into the tariff orgy of the past two years by a wild spirit of sauve qui peut. Each has been determined to ward off disaster from its own producers and its own finances by any means possible. And none was hindered by the knowledge that the inevitable result of such a policy, when relentlessly pursued by eighty or ninety sovereign states, is to drive world prices still lower, to reduce still further the volume of international exchanges, to swell the ranks of the unemployed in industrial centers, and to add to the prevailing financial confusion. For it is one of the plainest lessons from the experience of recent years that, far from being a cure, tariffs are to be numbered among the active causes of our present disaster. The instability in the world prices of crude foodstuffs and agricultural raw materials, which was one of the first signs of the approaching crisis, was in large part caused by the increasing obstacles which tariffs and import restrictions placed in the way of international trade in these commodities. Not only European critics but also some of the keenest observers in our own country hold the American policy of high protection responsible for the extraordinary accumulation of gold in the United States in the years 1922 to 1929, and for the frenzy of speculation and its aftermath.
If protective tariffs were in reality a cure for business crises, they would long ago have had a chance to demonstrate their efficacy. Yet study of the business annals of the years before the war shows that protectionist Germany and Russia were no more immune from periods of business recession than was free-trade England or The Netherlands.[iv] As a matter of fact the free-trade countries came off somewhat better than their protectionist neighbors. And in the United States, with its consistent record of high and increasing tariffs, business and financial crises were more frequent than in any other country.
But now new defenders of the tariff have arisen. The tariff is to be made an instrument of national economic planning. We are told to look at Russia, the only country of importance with a greater trade in 1931 than in 1929. What we are suffering from, it is said, is not too much tariff but not enough tariff. The worldwide depression is used as a vivid illustration of the dangers of international economic interdependence, and we have held up before us the merits of a self-contained and isolated state.
It is undeniably true that the specialization in manufacturing of Belgium, the United Kingdom and Germany exposes them to the danger of fluctuations in demand in any of their far-flung markets, and to the danger of uncontrollable variations in prices and supplies of the food and raw materials which they draw from remote sources. And it is true also that there are self-contained villages in the interior of China that have not yet heard of the depression and may never hear of it. The distance which separates such communities from the centers of trade and finance, and the difficulties of communication and transportation, cut them off more effectively than any tariff could from depression. But they are also cut off from prosperity and from all the civilizing influences of foreign trade. It is quite true that should the United States choose commercial isolation her industrial system would no longer be in danger of shocks from without. Business crises in foreign countries would no longer affect us. But no tariff wall can protect us from shocks from within, and these might even be the more disastrous because of the very fact of isolation. For foreign trade often acts as a safety-valve for domestic business. More than once an impending crisis in the United States has been warded off by a favorable turn in export trade, and more than once a period of depression has been shortened by the same beneficent influence.
But even if immunity from business crises were to be purchased by commercial isolation, could we afford it? Would not the cost be too high? Consider first that any further curtailment in our imports would be certain to affect our exports. Are we prepared in the interests of self-sufficiency to sacrifice the profits of hundreds of thousands of our cotton planters, tobacco planters and wheat growers, and the growers of the millions of bushels of corn which eventually, in the form of pork products, find their way to foreign markets? And where, if we are to carry self-sufficiency to its logical conclusion, are our makers of automobile tires to find 500,000 tons of rubber each year, our canneries their tin, and our farmers their binder twine? But even assuming that the necessary vast readjustments in industries and occupations could be carried through successfully -- that is, without too great a decline in our standard of living -- what would be the effect on our financial position?
If this depression has proved anything it is that international trade and international finance are fundamentally inseparable. We can shut off the flow of goods, but if we do we shall at the same time dam the outflowing stream of capital exports and the inward flow of interest from our foreign debtors, and of capital repayments. One cannot but admire the single-mindedness of those who, understanding these facts, still demand isolation. But for most of us the abandonment of 18 billions of commercial obligations, to say nothing of war debts, is too great a price to pay for the doubtful benefits of commercial isolation.
If not isolation, what then? Are we on the horns of a dilemma? Perhaps not. There is a way out, the way of concerted action, of international economic coöperation. At present this may seem a romantic dream. But when prosperity begins to return the nations, in small groups or in large, will meet to grapple again with the problem of trade restrictions and tariff barriers. The United States has everything to gain and nothing to lose by joining in a concerted effort to remove restrictions and prohibitions on imports and exports. For thus far we have made no use of these weapons to protect our home markets, and it is undeniable that restrictions imposed by foreign countries greatly handicap our exporters and threaten our supplies of important raw materials.
We shall probably continue to regard our import duties as a domestic question. To predict the date when on our own initiative we shall carry through a downward tariff revision would be foolhardy. For here we have to reckon not only with the opposition of protected industries but also with the dead weight of tradition, supported often by ignorance and superstition. But the business crisis of 1929 may mark the opening of a new era in American commercial policy. It is a principle so familiar as to be almost axiomatic that economic policies, even those which at a given moment appear most inflexible, are eventually responsive to changes in economic conditions. Such adjustments are not immediate; some lag must be expected. For example, our policy of restricting immigration followed several decades after the disappearance of the frontier and the exhaustion of free land. The epochal change in our recent history is our transition from a debtor nation to the world's greatest creditor. Sooner or later this change must bring a modification of our exaggerated protectionism. The process of change, slow as it may be, will be hastened by the events of 1929-1932. One of the compensations of disasters is that they jolt us out of our ruts of thought and action and hasten many an incipient reform.
[i] Including not only protective tariffs but all kinds of public and quasi-public interferences with export and import trade.
[ii] While negotiations on the main treaty were in progress, trade in hides, skins and bones was actually freed from prohibitions and restrictions by a treaty of 17 states effective October 1929.
[iii] See "The New American Tariff: Europe's Answer," FOREIGN AFFAIRS, October 1930.
[iv] See "Business Annals," by Willard L. Thorp and H. E. Thorp, National Bureau of Economic Research, New York, 1926.