Following the Great Depression and the disintegration of the Gold Standard at the beginning of the 1930s, the world economy's multilateral trade system was replaced by a small number of regional trade blocs based upon bilateral trade agreements. This system was indisputably less efficient than a multilateral trade system would have been - the 1930s was the only decade since the industrial revolution for which world GDP has grown faster than world trade.

Currency Blocs emerged due to asymmetric means by which individual countries dealt with their idiosyncratic experiences of the Great Depression.

The Sterling Area

The first and largest bloc was the Sterling area, consisting of Great Britain and her colonies, dominions and protectorates, as well as Scandinavia and Argentina, which can be regarded as falling within the UK's sphere of influence during the period. All these countries left the Gold Standard at around the same time or before the UK in 1931. Like the UK, they devalued their currencies instead of introducing currency controls. Scandinavian countries in particular had been keeping their currency reserves in Sterling assets, and so had little choice but to follow Britain when she devalue or else face a large fall in the value of their reserve assets. Argentina, which was a major debtor to the UK, was able to negotiate a highly profitable trade agreement with Britain, whereby it gave preferential access to British manufactures to its home market, and in return Britain took more of its agricultural products and slashed the value of Argentina’s debts.

Such agreements as this were only possible during the 1930s because of the collapse of multilateral trade, accompanied by a universal increase in tariffs and quota restrictions. For the first time in a hundred years the UK abandoned its policy of free trade. By raising tariffs first to 10% and then up to 50% on request of the industry in question, she was able to arm twist her trading partners into lowering their own barriers to trade through bilateral agreements. The British government attempted to encourage Argentina to raise tariffs against the United States to further strengthen the UK's competitive position, but to no avail.

The Gold Bloc

In stark contrast to the pragmatic Sterling Bloc was the Gold Bloc, the last remnants of the Gold Standard after 1933. It consisted of France, Italy, Belgium, the Netherlands and Switzerland, and all their colonies. These countries were unable to trade with the rest of the world because of their overvalued currencies. Instead they used high tariffs and quota restrictions to protect their markets from competition from non-gold bloc countries, so they could only trade with each other. They were also forced to maintain high interest rates to prevent loss of their gold reserves. Their combined markets were too small to make their currency area efficient, particularly after Italy introduced currency controls in 1934, partially detaching itself from the trade bloc, and so Gold Bloc experienced the worst economic performance of all groupings.

The Yen Bloc

The Yen Bloc were those countries and territories which relied upon trade with Japan and her colonies. Japan had joined the Gold Standard at the worst possible time, December 1930, after the Depression had already begun. She left the Gold Standard a year later, December 1931 in the chaos that followed Britain’s devaluation. Japan's devaluation, once it happened, was far greater than that of any other major industrial country. It became Japan's policy to respond to the World Depression by boosting exports through forcing the Yen to stay at an extremely low level.

The result of this was that Japan was one of only two countries in the world which during the 1930s experienced greater growth in foreign trade than growth of Gross National Production. Unemployment remained low, the recession was mild, and the recovery was strong. However, the human cost was heavy. In order to compete on world markets wages were squeezed, and the collapse of demand for silk left millions of farmers heavily indebted. Industrial growth was being achieved through squeezing agriculture. Farming became more efficient by shedding labour, primarily women and children to work for slave wages in urban factories.

However, as Japan was pursuing military expansion in China, which required heavy spending upon armaments, it soon came to the attention of the countries rulers that their economic policy, labour intensive export led growth, was incompatible with their foreign policy, military conquest and imperialist expansion. The former required a low exchange rate to maximise exports. The later required a high exchange rate to allow the military to import as many raw materials as possible to build as many weapons as possible. The former involved putting the nations labour to work in the export industry, and was incompatible with the latter, which required putting young men in uniform and everyone else to work supporting them in agriculture and arms factories. However, such was the strength of Japan's Military-Industrial complex, that when her Prime Minister pointed this out, he was assassinated.

Other countries in the Yen block included many European colonies, in the far east and elsewhere. Although European Colonial powers attempted to prevent their colonies from trading with Japan, the economic pressures such were that there was little they could do. European industry specialised in high cost, high quality manufactures, which their underdeveloped colonies could not afford, and most of Europe was in a deep recession and so could not buy what their colonies produced. Japan specialised in low cost, low quality manufactures, exactly what Europe’s low income colonies demanded, and unlike Europe, Japan was booming and high demand for the raw materials they produced. So the 1930s saw a high level of import penetration of South East Asia, India and Africa by Japanese exports, at the expense of the European powers which controlled them.

The Nazi Bloc

The Nazi party in Germany grew dramatically from the onset of the Great Depression. At first existing powers cooperated to keep them out of Government, and then for a short period attempted to control them governing in coalition. But by 1933, through violence and intimidation the Nazi party had complete control of the Germany government and Adolph Hitler the absolute ruler.

Hitler therefore came to power at the lowest point of the World Depression. Germany’s economy had gone into recession early, before America’s and her problems were exacerbated by the Gold Standard and the powerlessness of the government due to treaty requirements preventing her from borrowing money. Although many countries, like the USA and Britain initially responded to the Great Depression by raising taxes and cutting spending, Germany did so to a much greater extent, and with far more zeal, than any other country. This was not because the German government wanted to, but because it had to. The government was unable to borrow and so could not balance its budget by any other means. The state was, quite literally, bankrupt.

Therefore government weakness was a strong factor behind the collapse of the German economy during the depression, and through the principle means by which Hitler was able to come to power. By this time Roosevelt had come to power and the world economy was recovering. The German economy would recover on its own, all Hitler had to do was avoid doing anything stupid which would prevent natural recovery taking place. Indeed, Hitler did not waste his historical opportunity, but pursued some policies which genuinely speeded economic policy. His government printed money to fund a large budget deficit, which boosted demand and increased employment. Wages were fixed at unnaturally low depression levels, so as the economy recovered firms made large profits which flowed through into high investment. There was massive public investment into roads, which had been very poor in Germany in the 1920s, and their improvement stimulated the growth of a very successful automobile industry. Unemployment disappeared and Germany became the fastest growing economy in the world during the 1933-39 period.

However, this growth was first and foremost merely a recovery. There was very little growth in Total Factor Productivity, i.e. no improvement in production techniques. The principle reason for this was that trade did not recover. The Weimar government had put in place currency controls to prevent capital flight and protect the gold standard, but the Nazis made these far more stringent to the point where the exchange rate was almost irrelevant, and most trade managed by the government. Germany was isolated from world markets and consumer goods were increasingly uncompetitive. Furthermore, from 1937 Germany began rearming, and so much of the new production was of weapons which contributed nothing to living standards. By 1939, Germany’s GDP was 150% of its 1929 level, but National Income, which excludes weapons and some other kinds of government expenditure, was only 100% of its 1929 level – i.e. in a decade living standards had not improved.

The Nazi trading bloc consisted of those countries which were dependant upon Nazi Germany for trade, and included much of Central and Eastern Europe. World prices for agricultural products, especially those grown in a temperate climate, was extremely low. When the Nazi’s came to power, they froze the bank balances of foreign firms, and only agreed to unfreeze them if those countries continued to trade with Germany. This was equivalent to expropriating a permanent loan from the countries concerned. Trade agreements were made with countries of Eastern Europe such as Estonia, Latvia, Bulgaria, Greece, Yugoslavia, Romania, Czechoslovakia and Turkey. These countries benefited from attaining higher prices for their products than they would have got selling them on world markets, but in return had to spend their export earnings upon German exports, which were often of a poorer quality than those that could be bought from other European countries or the USA.

It is believed that Germany was, in signing these agreements, attempting to buy political power in its neighbours. However, not all allied with Germany once the war started. Greece and Serbia in particular fought bitterly against the Nazis when they invaded. Such agreements should therefore be seen as a necessity for Germany, a result of the way in which she attempted to manage her economy, rather than a way of extending political control which failed to materialise.

The Rest of the World

The two unmentioned major powers at the time, the United States and the Soviet Union, were both economically isolated from the rest of the world during this period. For the United States this was because she was both too productive and too protected, she had raised tariffs from a very high level to an even higher one in 1929. Since so few countries could export anything to the USA, they used tariffs and quotas to avoid importing anything from the USA. The only exceptions were a few tropical countries like Brazil which were able to sell America coffee or another specialised product. The USSR, on the other hand, had stopped trading for political reasons, with the exception of selling some grain on world markets to import capital machinery for her industrialisation programme.

The collapse of the multilateral world trading system into a system of often hostile trading blocs was a serious impediment to international cooperation in the 1930s. By 1936, with France's departure from the Gold Standard, the first small steps were taken towards the creation of new multilateral world trading system, as Britain, France and the USA agreed to begin mutually lowering tariffs, but this was too late to prevent the Second World War, as three major industrial powers already had governments bent upon world conquest. Not until after the war would the world fully recover from the effects of the Great Depression.

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