NONE of the long and apparently interminable series of international conferences that have met since the war—with the exception of the Peace Conference itself—has been charged with more vital importance or anticipated with more hopefulness, not unmixed with anxiety, than the World Economic Conference which is to meet in London this year. This is due to the now almost universal recognition of the fact that the economic crisis cannot be solved, and can hardly even be palliated, by the action of individual governments. It has now been abundantly proved that independent action, unless very wisely conceived and studied in its reaction upon other countries, is likely to deepen the general depression, and that any benefits which accrue to an individual nation are at best only relative. In short, there has rarely been a clearer case of a vicious circle, or one on a larger scale.

Nearly every government in the world, for example, has tried to protect its national economy by a restriction of its imports. The more countries take such action, the stronger is the inducement for others to do so; and the more futile it becomes for all together, since every nation's imports are some other nation's exports. The process is obviously a suicidal one; yet none of the countries caught in the circle dares singly to step outside it for fear of becoming a dumping ground for other countries' exports, without being able to expand its own. For this reason, the progressive decline in the trade and production of the world can only be halted by coöperative agreement between the nations. To achieve this not only in commercial matters, but in financial and monetary policy also, is the task of the Conference.

It is to be hoped that the idea of a common aim will inspire the work of the Conference when it meets. In previous meetings, whether primarily of a financial or a political nature, the task has too often been to effect a compromise between objectives which were mutually irreconcilable. That ought not to be the case in London. Some countries, it is true, attach more importance than others to the stabilization of currencies now off the gold standard, others emphasize the need for a reduction of tariffs or the removal of quotas and exchange restrictions. But the true interests of the conferring parties are not divergent; they are virtually identical. No country in the world has an interest in the maintenance of barriers to trade or in perpetuating a state of instability in the world's international financial system, and consequently no country should be in a position to exact a price for its concurrence. To speak of the Conference in terms of bargains to be struck or concessions to be exacted is to make a profound and dangerous mistake.


Before the Conference can meet with any prospect of a satisfactory outcome, two prerequisite conditions must be attained. The first is a slackening of political tension. If the Conference is to be a success, every government will need not only courage, but a considerable trust in the good faith of others. A great deal can be done along these lines by purely European action without external assistance. Serious attempts are being made to find peaceful solutions to some of the current controversies, notably those between France and Italy and between France and Germany, and any success will be immediately reflected in the Disarmament Conference. The attitude of the American Government has also for some time past been increasingly helpful. In this connection the declarations made by Mr. Stimson in January and August of last year, which indicated a cautious approach to a promise of consultation, have been gratefully noted, particularly in view of the difficulties facing any American administration which wishes to define the attitude of the United States towards possible future wars. The Economic Conference need not wait for the final solution of the problems of disarmament and security; but if in a few months' time a definite advance towards solution seems more possible than it does at present, the resultant improvement in the political atmosphere will make it possible to thaw out some of the distrust which is now paralyzing the commerce and industry of the world.

The other condition precedent is a final solution of the problem of the war debts. Expert opinion, by no means entirely European in its composition, has for long been unanimous on this point. The Committee of Experts under the Young Plan, which met at Basel in December 1931, placed the question of inter-governmental payments—including both reparations and war debts—in the forefront of their recommendations, and largely as a result of this report reparations were provisionally settled and the debts of the European nations to each other suspended at Lausanne last summer. Since the end of the Lausanne Conference, the board of the Bank for International Settlements has recorded a similar opinion from the point of view of monetary reconstruction, while the Preparatory Commission of Experts for the World Economic Conference have stated in their report that "until there is such a settlement, or the definite prospect of such a settlement, these debts will remain an insuperable barrier to economic and financial reconstruction."

It will be observed that the Commission regards this problem as a "condition precedent" rather than as a positive step towards recovery. This does not mean that an agreement would in itself have no effect on the economic situation. On the contrary, it would be welcomed throughout the world as a convincing demonstration of American goodwill and of the determination of the United States to coöperate in the tasks of reconstruction. Indeed, the clearing from the path of so troublesome and obdurate a problem might well be expected, like the agreement of Lausanne last summer, to give an upward impetus to confidence and to the price-level.

But let us not harbor any illusions. Whatever view we may take of the rôle played by the attempt to collect these vast governmental debts in causing the original disequilibrium which brought on the slump, it is now quite obvious that the depression, once started, has developed on a scale out of all proportion to the amounts involved in the debts. It is estimated, for example, that the annual national income of the United States must have shrunk by at least 30 billion dollars since 1929—an amount three times as great as the whole capital value of the original debts and one hundred times the amount of one annuity. The value of the total foreign trade of the United States in 1932 was only a fraction over 30 percent of its 1929 value. Customs receipts alone have fallen in three years by an amount roughly equal to the scheduled debt annuities for 1933. As a result of declines of this order, reproduced in greater or less measure in every country of the world, the complexity and magnitude of the general problem facing the world are now immensely beyond those of the war debts alone. In these circumstances, even the complete cancellation of the debts would not set us again on the upward slope.

But a solution of the question is the first step; for if an attempt were now made to resume the payments, the psychological effect on the mentality of the whole world and the direct effect upon the foreign exchanges and money markets would inevitably be such as to give the world a fresh push down hill. From any such further deterioration the United States in general stands to lose as much as any other country, and if it occurs the actual monetary loss to the American treasury would far exceed the annuities which could be collected. On the other hand, no nation is in a position to say what policy it can pursue either in the monetary or the commercial field so long as the question remains unsettled.

It would not be appropriate to discuss here the possible details of a settlement, as negotiations between the United States and some of the debtor countries may be in progress when this article appears. On the other hand, these negotiations are more likely to succeed if each nation understands the other's point of view. It may therefore be helpful to indicate briefly some aspects of British opinion towards the problem.

In the British view, the war debts cannot be made the subject of a bargain. In the first place, revision is not asked in our interests alone; and any relief will be passed on to our own debtors. But an even more fundamental objection is that the proposed steps to be taken by Great Britain as a quid pro quo depend on a whole series of international considerations. It has now been suggested, for instance, that remission of the British war debt might be exchanged for the stabilization of the pound sterling. But remission of the debt would not by itself make it possible to stabilize sterling. The last British payment to the American treasury (with the exception of that made in December last) was made several months before the pound began to depreciate, and even if the debts were entirely cancelled, the causes which brought about that depreciation would still remain, unless world conditions radically changed.

A similar argument applies to the suggestion that the debts should be remitted in return for tariff concessions which would enable the debtors to increase their purchases of American goods. The fact is that inability to make the payments has not arisen because the debtor nations have been buying too little from America, but because America has been buying too little from the debtors. The only tariff barrier a lowering of which has any relevance to the problem of the war debts is that of the United States itself.

There is, moreover, another aspect of the debt question which must be mentioned because of its bearing on procedure and on the kind of discussions that may take place in the next few months. The debtor countries make no complaint if the United States insists on negotiating separately with each of them on debts, which are regarded at Washington as business transactions, juridically unconnected either with reparations or with war-loan obligations between the debtors themselves. But it is unreasonable to expect Europe to share this American viewpoint; and Britain, with her obligations under the League Covenant and as a signatory of the Treaty of Versailles, must inevitably look at the matter from the angle of a European Power. Practically and politically, reparations and war debts are inseparable factors in a single problem touching deeply international relationships and involving every European country—including Germany—which stands in the position either of debtor or debtor-creditor on war account.

The feeling is very widespread in Great Britain that it would be inequitable that a country which lent more to its associates for war purposes than it borrowed should be called upon in a final settlement not merely to collect from its own taxpayers, but to transfer abroad, a net sum out of its own resources. But, if we do not do this and if we attempt to collect from Europe whatever we may have to pay to America, we should in fact be fixing in our negotiations at Washington the scale of the demands which we would subsequently have to make on France and Italy. It would obviously be unreasonable for us to do this without consultation with those countries, particularly having regard to the fact that their ability to meet their debt to us must to some extent depend on what they themselves agree to pay to the United States. In other words, though negotiations may be conducted separately, there can be no final settlement until all the chief items in the account have been settled.

This does not mean that the European debtors have created a "united front" to bargain with the United States. Indeed, the action taken last December shows that each of us retains our liberty of independent action. It is merely a recognition of the fact that these payments are inevitably linked together both economically and politically, and explains why the British Cabinet and Parliament would be unlikely to ratify any settlement the general lines of which might be worked out in the Anglo-American negotiations, until the final balance sheet of all these inter-governmental debts has been drawn up and the way thus paved for the larger tasks of the World Conference.


The main work of the Economic Conference falls under one or other of two main heads, viz., the restoration of order in monetary and financial matters, and the liberation of international trade from the restrictions which are throttling it. The annotated agenda drawn up by the Preparatory Commission places the financial questions ahead of the commercial questions. But they have clearly stated that this order is one of convenience only and does not signify priority either in time or importance. Indeed, it is of the utmost importance to stress the particularly vital character of the second group of questions. The monetary mechanism of the world has broken down as a result of the depression, and the breakdown has intensified the crisis and caused it to spread throughout the whole economic world. But in the last analysis finance must be the servant of trade and production and not their master. A sound financial system is a condition of economic expansion, but it can do little to create it. In attempting to restore the economic activity of the world we must not repeat the mistake made ten years ago of trying to reëstablish an international financial system without first making certain that the economic background is such that the world is free to develop as an economic unit. An international financial system and economic nationalism are mutually incompatible. If, therefore, on the financial side, a full restoration of the gold standard is to be possible, action on the economic side must go much further than a mere restoration of the status quo of 1929; indeed, what is needed is nothing less than a reversal of the whole trend of tariff policy since the war. The magnitude and vital necessity of this task constitute it the major problem before the Conference.

The two sides of the Conference's work, however, cannot be kept in watertight compartments. They are interlocking, and the solution of one set of problems is dependent on the solution of the other. An illustration of this can be drawn from the controversy which has arisen over the stabilization of the pound sterling. The representatives of the gold countries urge that it will be impossible to modify their trade policy as long as sterling is fluctuating in value. The countries that are off gold, on the other hand, declare that it will be impossible to stabilize their currencies and fix new parities of exchange between them and the gold countries until a very large measure of freedom of movement of goods and capital has been restored. The impasse thus created can only be overcome if the two problems are dealt with together. Similarly it would be very difficult to remove the exchange restrictions and import quotas imposed by many states of Central Europe and South America until capital is ready once more to flow into these countries; but new capital will not be attracted if the exports of debtor countries are so obstructed that they cannot earn the foreign exchange needed to meet the service and repayment even of existing debts. Here again the two sides of the problem must be handled together.

Each of the two main divisions of the agenda contains a number of separate but interlocking problems, the chief of which have been set out in the Report of the Preparatory Commission in the following list of topics for discussion.

1.~ Monetary and Financial Luestions:

a.~ Monetary and credit policy

b.~ Prices

c.~ Resumption of the movement of capital.

2.~ Economic Luestions:

a.~ Restrictions on international trade

b.~ Tariff and treaty policy

c.~ Organization of production and trade.

This is an extensive and comprehensive program, and it would be unreasonable to hope for a complete and simultaneous solution of all the points involved within the few weeks or months which the Conference will have at its disposal. But as the Experts themselves point out, the attack will have to be made on a broad front and progress will have to be made in each sector if it is to be made at all. "It will not," they say, "be possible to make substantial progress by piecemeal measures. A policy of 'nibbling' will not solve this crisis."

If this view of the method of approach is correct, it may be observed parenthetically that there is clearly no case for a "bargain" by which resumption of the gold standard by Great Britain would be exchanged for a general reduction of tariffs. It is true that public opinion in Great Britain is not at all happy about a return to gold; but this attitude arises out of the circumstances which developed in September 1931 and is not likely to be maintained if appropriate safeguards can be worked out in connection with stabilization on a new gold basis. Many of the most vital interests of Great Britain—her foreign trade and shipping, her banking and insurance profits, her invested capital—are dependent upon international economic stability, and no country would suffer more if the world were to embark upon another period of competitive currency depreciation. If the gold standard, as the Experts assumed, is the only possible international standard, and if the gold standard can be made to work properly, a return of Great Britain to gold will confer at least as great benefits on her as on the rest of the world.

The converse of the argument is equally true: an all-round reduction of tariffs would benefit the gold countries equally with Great Britain. It is consequently a mistake to speak of sacrifices to be made and inducements to be offered, of bargains and diplomatic victories. The Conference can only be a success if it is made an opportunity for coöperation, rather than a field for bargaining.


On the financial side of the agenda the prospects of agreement have been greatly improved by the second session of the Preparatory Commission. It is, for instance, a considerable step forward that unanimous agreement was reached on the desirability of a policy of cheap money and abundant credit in those countries whose currencies are not under immediate strain. This unanimity encourages hopes that the monetary and banking policies pursued for nearly a year in London and New York will be backed up by similar action in other financial centers. There has also been a great advance towards agreement on the technical reforms of the gold standard which will be necessary if it is to be generally resumed, and an agreement on what constitute the "rules of the gold standard game" is in sight.

The removal of controls and restrictions will present some difficulties. The countries which have imposed these restrictions are in the main not only debtor countries, but countries which will need to borrow again. That is to say, not only do they depend upon having an export surplus to pay the interest on their past borrowings, but they also find their own savings inadequate to meet their capital requirements. Consequently, when they found it difficult to dispose of their products and impossible to raise further loans, and when, in addition, their creditors began to demand the repayment of such of their loans as were terminable at short notice, the foundations of their national economies were endangered. The debts of these countries are, in the main, expressed in terms of foreign currencies or gold and become an added burden if their currency depreciates. They therefore have taken steps to restrict imports and to impose such restrictions on the purchase of foreign currencies that the withdrawal of capital and, in some cases, even the payment of current interest, has been made impossible.

Since these restrictions were not imposed in a spirit of wilful malevolence, but to counter a serious and still continuing threat to the economic life of the countries in question, it is useless to propose their removal unless the difficulties which they were intended to meet are also removed. But these difficulties are the fall in world trade, the cessation of international lending and the calling in of short-term loans. The restrictions themselves contribute to the decline of trade and thus frustrate the debtors' hopes of creating an export surplus, while creditor countries can hardly be expected to resume lending—even if they can be persuaded to refrain from demanding repayment of loans already made—so long as they are unable to receive the interest on their past loans. Moreover, even after the restrictions have been removed, some considerable time will inevitably elapse before the private capitalist in the creditor countries will have recovered sufficient confidence to resume lending.

Both halves of the problem are therefore dependent on each other; for the necessary simultaneous solution of them special remedial action will probably require to be concerted. Given reasonable assurances that sane fiscal policies will be pursued and mistaken conceptions of "economic nationalism" abandoned, the governments or the central banks of the creditor countries might well undertake the burden of providing the capital essential for reconstruction and currency stability until the confidence of the individual investor revives. The recent loan to Austria, guaranteed by a number of European governments, has set a precedent, and a number of plans for organizing assistance of this sort have been suggested for the consideration of the Conference. Granted goodwill and a little courage, this aspect of the problem is by no means impossible of solution.


Progress in the financial field is, however, dependent upon parallel and even greater advances being made in the sphere of commerce. Not only is the latter question the more fundamental of the two; it is also in many respects the more difficult. The problems of an international monetary system have been under discussion for some years, and the debate has enabled a considerable measure both of clarity and of agreement to emerge. But it is doubtful whether public opinion in any country realizes what a radical reversal of commercial policy is necessary if the program of international recovery is to go forward. As a result, there is little agreement upon the plan of attack on the tariffs and restrictions which have succeeded in bringing the world to its present sorry state.

The most obvious suggestion is that some universal formula should be evolved by which every tariff rate should be equally reduced. This plan runs up against many of the difficulties which are hampering the application of a similar idea to the world's armaments. The apparent necessity of protective tariffs is greater in some countries than in others. Moreover, some countries have very much higher tariffs than others and it would be unreasonable to expect the comparatively "disarmed" countries to undertake the same reductions as those whose tariffs bristle with prohibitive rates. It is not impossible that progress could be made along these lines, but, like the Preparatory Commission, I am impressed with the difficulties. It is doubtful whether the world is ready for any plan of reduction which would be both drastic and sweeping. Moreover, the pace of any universal reduction would necessarily be dictated by the snail's gait of the most reluctant nation.

Attention has consequently been turned to the idea of reductions by bilateral and reciprocal agreements. For example, the possibility of a British-American reciprocal agreement has recently been canvassed in several quarters. Here, too, an analysis of the possibilities reveals some of the difficulties and demonstrates the limited nature of the reductions likely to be achieved in this way.

One of the first difficulties lies in the fact that in recent years Great Britain has been buying more than five times as much from the United States as the United States has been buying from her. In such conditions, a strictly reciprocal exchange of concessions could not go very far. It is true that the tariffs recently imposed by Great Britain have restricted the import of American goods, and, subject to the provisions of our agreements with the Dominions, some concessions could be made by reducing or removing our duties. But the margin for concession is not extensive.

The position as it is left by the Ottawa agreements is that the list of commodities is virtually divided into four sections. Firstly, there is still a considerable free list, and in these commodities, many of which (e.g. cotton) are of great importance for American farmers, the United States already enjoys full and unrestricted access to the British market. No concessions are possible here. Oil products should also be included with the free commodities, for the duty is passed on to the consumer and does not discriminate against American products. Secondly, there are certain special duties—chiefly on dairy produce—which were imposed as a result of the Ottawa Conference, and cannot be reduced without the consent of the Dominions. America is not much interested in these. On a third schedule we have undertaken to maintain a 10 percent preference in favor of the Dominions for five years, and as the present duty on most of these commodities is no more than the guaranteed minimum of 10 percent, there is little room again here for concessions to America. But these two categories, in regard to which undertakings have been given to the Dominions, are comparatively small; and there still remains a fourth list of commodities subject to duties which we are free to reduce. It is in this fourth division that concessions could be made. But when allowance has been made for the commodities which are excluded from this "concessionable" area, either because they are already duty-free or because of the Ottawa commitments, the field over which concessions could be made by Great Britain to the United States is not large. Indeed, even if the Ottawa commitments were abandoned, the advantages that Great Britain could offer to America would still be very limited by reason of the comparatively low level of our duties. If we take 1930 as a basis of calculation, we find that out of total imports from the United States of £153,497,000 in that year, goods amounting to £76,732,000 have become subject to the taxes imposed in the past year by our present Government. Of this total, £46,077,000 are subject to a 10 percent duty, £20,658,000 to 20 percent or less, and only £9,997,000 to more than 20 percent. This is in very striking contrast to the impact of the American tariff on British goods. Thanks to the fact that cotton is still "free" and was imported in rather larger quantities last autumn than in the previous year, the proportion of our total imports coming from the United States has been virtually unchanged in recent months compared with the situation before our present tariff came into effect -- though the total from all sources has, of course, shrunk with the trade depression.

There is, however, a way in which Britain's buying power can be increased very greatly, and that is by a substantial reduction of the tariffs imposed by America and other high protectionist countries on her exports. Ever since the war Great Britain has never had less than one to one-and-a-half million unemployed, the larger proportion of whom are normally employed in our export trades. If these potential consumers of American goods could be set to work on goods for export, there would be a considerable rise in American exports both of finished goods and of materials for production. More than one pound out of every eight spent by Great Britain on imports goes to the United States. A comparatively slight increase in British prosperity would, therefore, bring more benefits to America than the complete disappearance of British import duties.

A study of the facts in this and similar cases will, I think, lead inevitably to the conclusion (which is, indeed, confirmed by the experience of the past ten years) that bilateral bargains within the framework of an intensely protectionist world cannot produce benefits at all commensurate with those which would follow from the adoption of an entirely different outlook. The present tariff system cannot be patched and amended; the nations can find a revival of prosperity only in a policy which would be not only more liberal, but very considerably more liberal, than that which prevailed in the twenties.

This is a change which, though vital and urgently necessary, cannot be achieved in a day. A determined attempt must be made to accomplish it, but we must not be without some alternative. What is to be done if all the nations of the world are unwilling to abandon the cherished ideas of high protectionism? The answer surely is that those nations to whom the revival of at least some measure of international trade is vital should make their own arrangments without waiting for the world-wide adoption of freer trade. But as things stand at present, they are seriously hampered by the operation of the "most-favored-nation" clause contained in most commercial treaties. The clause was devised for a world in which protective duties were the exception rather than the rule and prohibitive duties virtually unknown. In the present state of affairs it is in danger of becoming a hindrance to progress. For instance, it is impossible for two nations to agree on free trade between themselves without extending the privilege of free imports to every country with which they have commercial treaties. Apart from extreme cases such as this, a country which is disposed to reduce its tariff on imports from another country in the interests of more economic production and trade will hesitate to do so if it must extend the same concession to every other country, even to those which maintain prohibitive duties against its exports. The most-favored-nation clause was, in its origin, a means of spreading as widely as possible the benefits of tariff reductions. As it operates today, it tends to stabilize the status quo and to prevent any reductions whatever being made.

The position thus created is so anomalous that it cannot last. There are several groups of countries which are already prepared to liberalize their trade relations with each other, and it is unlikely that they will for long be deterred from doing so by the existence of the most-favored-nation clause. Ever since the war, Americans who have represented their country at world conferences have pointed to the benefits which would flow from a United States of Europe modelled on the United States of America. Any attempt to move in this direction would inevitably involve, at first at all events, a system of preferences which would contravene the most-favored-nation clauses of the commercial treaties between them and other nations. Would the United States impede a movement so clearly recommended by American precept and example, by insisting on most-favored-nation rights?

The most promising field for a reduction of tariff barriers is in regional agreements for the creation of low-tariff areas, the markets of which would be open to those, and only those, who would give equal privileges in their own markets in return. It should not be impossible and it is certainly desirable for the Conference to devise means whereby the most-favored-nation clause would not apply to agreements of this nature. For if an attempt is made to insist on a rigid maintenance of the clause, there is considerable danger that it may disappear by the haphazard process of expiry or denunciation of existing treaties, and without any attempt having been made to forge an alternative principle. If this happens, the way is opened to an infinity of hard bargaining, a crop of tariff wars and ill-feeling, and, at the end, confusion worse confounded. It would therefore be the path of wisdom for the Economic Conference not to attempt to maintain the clause in its existing rigid form, but to accept as a fact its unsuitability for present conditions and attempt to work out an alternative and more flexible plan for preventing the possible abuses of discrimination. This is not the place to enter upon a discussion of such a formula. But if the Conference is to achieve any success in the reduction of tariffs—and without such a success discussion of monetary and financial questions will be nugatory—it will have to devise a means by which nations who regard each other's trade not as an evil to be attacked and destroyed but as the necessary complement of their own prosperity will be able to act effectively without waiting until the whole world is of the same mind.


To conclude. The real task before the statesmen participating in the forthcoming Conference is to decide whether the future of the world is to take shape along the lines of "closed" national economies, dominated by aims and conceptions of self-sufficiency, or of an economic internationalism such as that to which we were tending in the days before the war. If the first alternative be chosen, there is little to be gained by attempting to patch up an international monetary mechanism, for the foundations necessary to its support would have permanently crumbled. Should wiser counsels prevail, however, should the nations agree that only in recognition of mutual interdependence is it possible to achieve individual advantage, then the problem becomes one to whose solution Great Britain no less than the United States will be desirous of making the fullest possible contribution. If the Conference elicits evidence of a spirit of international goodwill, and if reasonable assurances are given that governments will not again yield to pressure from selfish national interests, place unforeseen obstacles in the way of world commerce, or prevent gold fulfilling its proper functions as a means of automatically correcting maladjustments in the normal equilibrium of international trade, Britain, I am convinced, will not be behindhand in undertaking, without excessive insistence on guarantees, to vest sterling with the maximum stability immediately attainable as a preparatory step to the general restoration of a reformed gold standard.

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  • SIR WALTER LAYTON, Editor of The Economist, London; until recently British member of the Preparatory Commission of Experts for the World Economic Conference
  • More By Walter Layton