"No Solid Prosperity Until Many Tariffs Have Been Substantially Reduced," Slichter Warns

Asking "Must we have another lesson in the Interdependence of nations, must we go through another depression...before our business leaders realize that we cannot add to the world's disaster without including Injury upon ourselves?", S. H. Slichter, professor of Business Economics, presents in the latest issue of "Current History" a point of view on the tariff question opposed to that of Dean W. B. Donham '08, and of Senator Reed smooth.

"When the Wiggin Committee of the Rank for International Settlements on August 19 told the world that tariffs should be lowered, it was simply repeating advice which had been given many lines during recent years. On April 21, 1931, a similar recommendation was made by General W. W. Atterbury, the learner Republican National Committee man from the protections stronghold of Pennsylvania. But the advice has been little heeded, in part because the man in the street does not clearly understand how and why rising tariffs have been undermining his prosperity.

German Harbors Congested

"Tariffs, of course, are not the only reason why a large part of the world during the last two years was driven off the gold standard, why the harbors of Germany were congested during the Summer of 1931 with vessels that could not be unloaded because there was no means of payment or why wheat sold for the lowest price in several centuries. Nevertheless, the trade barriers that have been raised during recent years have had much to do with all these matters.

Must Reduce Tariffs

"They have been a major influence in making the world vulnerable to depression and in intensifying the slump when it came. Prosperity, it is safe to say, will not be established on a reasonably solid foundation until there have been substantial reductions in many tariffs.

Ralse Barriers Rapidly

"In few periods in the world's history were tariff barriers raised more rapidly than in the years immediately preceding the present depression. Between 1925 and 1929, there were thirty-three general revisions or substantial tariff changes, nearly all increases, among the twenty-six countries of Europe, and seventeen among the twenty republics of Latin America. In 1927 and 1928 Australia, Canada, and New Zealand made broad tariff revisions, generally upward. Several Asiatic countries achieved the right to make their own tariffs and promptly released their duties--Siam in 1927, China and Persia in 1928. When prosperity collapsed, the increase in duties continued at an accelerated rate.

America Advance

"The advance in the American tariff in June, 1930, was followed during the next eleven months by more or less general upward tariff revision in twenty five countries. In two principal ways these rising tariffs have undermined the world's prosperity--first, by misdirecting the investment of capital and thus prolonging and aggravating many maladjustments which had grown up during the war between the supply of commodities and the demand for them; second, by preventing trade from adjusting itself to the new international debtor-creditor relationships created by the war and the peace treaties.

Prolong Maladjustments

"It is easy to see why rising tariffs have prolonged and accentuated many of the war-time maladjustments between supply and demand. When the world is divided by trade barriers, a new duty or an increase in an old one may lead an industry to expand behind the tariff, despite the fact that the demand for its output at a profitable price does not equal the productive capacity already in existence, but located in other countries. Maladjustments thus aggravated by tariffs, did not directly precipitate the collapse of prosperity but they did weaken the economic position of many countries and reduce their ability to resist depression. Moreover, when the slump came, the prices of the over-produced commodities fell more precipitously than most prices, diminishing the purchasing power of many countries and causing the depression to go from bad to worse.

Violent Shifts

"Few people realize how violent were the shift in international debtor-creditor relationships produced by the war and the pence treaties. Within less than ten years the United States was changed from the largest debtor nation in the world to the second largest creditor nation and Germany from the second largest creditor nation to the largest debtor nation. In addition, there were great increases in the foreign obligations and great decreases in the foreign holdings of many European countries and substantial increases in the foreign debts throughout Latin America and Australasia.

"Must be Paid in Goods"

"Every one knows that in the long run interest and dividends on international investments must be paid in goods. Consequently, the new debtor-creditor relationships required extensive changes in the flow of goods between nations. For example, they required that Germany which for many years had an excess of imports, suddenly develop a large excess of exports, and that the United States, which for fifty years had had an excess of exports, promptly develop a large excess of imports.

"But in a world of steadily rising trade barriers Germany has been unable to build up a large surplus of exports. Failure to obtain sufficient exchange from the sale of goods to pay reparations and interest on the foreign debt has kept credit in Germany scarce and interest rates high. High interest rates attracted enough money to Germany until 1931 to enable her to meet her old obligations by incurring new ones. Unfortunately, however, a large part of Germany's new credits were short-term funds.

A Vulnerable Position

"Naturally, this large short-term indebtness placed Germany in an exceedingly vulnerable position. Any condition which threatened withdrawal of foreign funds produced a recession in German business, because it limited the ability of German enterprises to obtain credit with which to buy goods. Once a recession started, it was likely to go from bad to worse, because its very existence provoked further withdrawals of foreign funds and prevented the sale abroad of long-term German securities.

Flight From the Mark

"This weakness in the German situation manifested itself in the Spring of 1929, when fear of the failure of the Young Plan negotiations created a flight from the mark; again, in the Fall of 1930, when the results of the elections caused another flight, and, finally, in the Summer of 1931, when even the moratorium failed to avert an acute financial arises which paralyzed German business. Certainly the inability of Germany to develop a large export surplus must be regarded as a major factor in precipitating the depression in 1929 and in intensifying the depression in the Fall of 1930 and the Summer of 1931.

Our Ever-rising Tariff

"The high and ever-rising American tariff has prevented us from developing an excess of imports. Indeed, so high have been our duties that for many years over 95 per cent of the manufactured articles consumed in the United States have been domestic products. Not only were rates raised in 21921 and again in 1922, but whenever a commodity began to flow over the tariff will in appreciable quantities the Tariff Commission was disposed to recommend that the President use his authority under the so-called "flexible" clause to increase the duty.

"Of the thirty seven changes made in the rates, of 1922 under this provision, thirty-two were increases. As a result, our excess of exports over imports, instead of shrinking, as our new position of a creditor nation required, actually grew from $719,000,000 in 1922 to nearly $842,000,000 in 1929.

Drew Gold Away

"This failure to develop an excess of imports caused no acute difficulty while loans abroad continued in sufficient volume. But the export surplus was bound to draw gold to the United States in large quantities if, for any reason, the purchase of foreign securities should be seriously curtailed. Trouble started in 1929, when speculation in stocks destroyed the American in stocks destroyed the American market for foreign bonds. Gold began to enter the United States in great began to enter the United States in great volume--our net imports of gold in 1929 were about $120,000,000 causing in other countries a credit stringency which was a major factor in precipitating the depression.

"The depression itself and the political unrest which accompanied it in many countries made American investors still more averse to foreign bonds and reduced the net American export of long-term capital in 1930 to one-third that of 1928. Consequently, when in 1930 one country after another was being forced off the gold standard, the United States, which already possessed a huge surplus of gold, drew about $278,000,000 more from the rest of the world.

"The high tariff was not the only reason why by the end of 1930 Australia and most of the South American countries had definitely abandoned the gold standard. There were other important causes--excessive and unwise borrowing during the boom period, the inability of these countries to raise new loans, the collapse in the prices of wheat, wool, coffee, tin and other commodities. But the American tariff, by restricting the ability of the world to pay us with goods instead of gold, was a major factor in forcing a large part of the world off the gold standard and in accentuating the depreciation of many foreign currencies.

Depreciated Currencies

"The depreciation of foreign currencies, in turn, has been a principal reason why the depression has been so much longer and more sever than any one anticipated. Depreciated currencies have made exports cheap in terms of foreign currencies and thus have increased the downward trend of world prices; in addition, foreign goods have become expensive to countries with depreciated currencies, and thus their ability to buy from the rest of the world has been reduced.

"Incredible Economic Folly"

"Especial attention should be given to the American tariff of June, 1930--an act of almost incredible economic folly. Unlike some recent foreign tariff changes, revision of our tariff was not needed either to protect our exchanges from depreciation or to guard our gold sup plies from depletion. On the contrary, the tariff law was passed when we possessed approximately 40 per cent of the world's monetary gold and when, as has been said, we were attracting large additional amounts.

"Reckless Borrowing"

"During the boom which preceded the depression, many countries borrowed abroad on a large and even reckless scale. When prices collapsed, these countries experienced great difficulty in meeting their foreign obligations and were compelled, in order to conserve their gold supply and to limit the depreciation of their currencies, to restrict their imports and to control the export of gold.

Argentina, Australia, Brazil

"Even six months before our tariff became law, Argentina, Australia and Brazil took extraordinary steps to control the export of gold. The desperate plight of many debtor countries plainly required that every possible aid should be given them to preserve their credit and to meet their obligations by selling goods rather than by exporting gold. This was desirable not only on account of the debtors themselves but of the world as a whole, since depreciation in some currencies tended to pull down the general price level and to intensify the depression throughout the world.

Smoot-Hawley Tariff

"In the face of these facts Congress passed the Smoot-Hawley tariff. Duties were raised or new ones imposed on commodities whose import value in 1928 was $1,133,000,000, while duties were removed or reduced on articles of import whose total value in 1928 was $214,000,000. This amounted to a demand on our part that the world pay us less in goods and more in gold, despite the huge hoard which we already possessed, the weakness in many currencies and the dire need of debtor nations for a better opportunity to sell goods.

"Although the United States, after working for years to re-establish the gold standard through the world, did not deliberately seek to undo its work and to accentuate the depreciation of many currencies, such was the net result of our tariff. If the drastic decline in interest rates here and the premium on dollar exchange had not produced during 1930 a record-breaking export of short-term funds from the United States, our pull upon the world's gold supply would have been far more disastrous.

Revive Investment

"If prosperity is to be fully restored one of the things to be done is to stimulate the demand for labor and goods by reviving investment on a large scale. This, in turn, requires not only political stability in the countries which seek capital but also moderation in tariffs--particularly those of the lending countries--in order that the flow of trade may adjust itself to the distribution of international investments and that nations may borrow without jeopardizing the stability of their currencies. Of particular importance is moderation in our own tariff policy.

"Time was when the United States could practice extreme protection with no disastrous consequences to itself or the rest of the world. This is no longer possible. We are now the second largest creditor nation in the world; adherence to our traditional, policy means that we shall attract gold in great volume and jeopardize the gold standard in many countries whenever we fall to lend abroad on a large scale. A few people mistakenly believe that our recent heavy gold losses indicate that our pull upon the world's gold supply has ceased. But these losses are only temporary and have been largely due to the conversion of foreign bank balances and bill holdings here into gold. The effect is to strengthen rather than to effect our creditor position, which is the basis of our pull on the world's gold. Consequently, we must either develop an import balance or exert a disastrous attraction upon the world's gold supply whenever we fail to lend abroad on a large scale.

Intensify Future Depressions

Every depression is bound temporarily to diminish our lending; a continuation of our present tariff policy will mean that we shall intensify future depressions, an we have the present one, by attracting gold which the rest of the world can ill afford to lose and by menacing the stability of many weak currencies. In addition, we shall retard the revival of business, because the countries which have been forced off the gold standard or which have had the stability of their currencies seriously threatened, will, even after the revival is under way, not easily obtain credit to but goods from the rest of the world.

Outlook Not Bright

"The outlook for a general reduction in tariffs, either our own or of other countries, is not bright. The League of Nations has failed to effect even a temporary tariff truce. The best hope appears to lie in the method of reciprocal agreements--either bilateral, as in the case of the recent agreement between Australia and Canada, or possibly multilateral--by which reductions are given in exchange for reductions.

"The method is not without its difficulties and dangers. Duties may possibly be raised for bargaining purposes, while some concessions may be prevented because the most-favored-nation treaties require that a concession to one country be extended to all countries enjoying most-favored-nation treatment. The method, however, has the important advantages of offering nations which are willing to open their doors an opportunity to have doors opened to them in return. On at least two occasions--after the Copden-Chevalier treaty in 1860 and the Caprivi treaties in the early '09's--reciprocal agreements have led to substantial reductions in the world's tariffs.

Reduce Tariffs By Agreement

Of the three leading industrial nations the United States is best above to initiate a movement to reduce tariffs by agreement. Great Britain, absorbed by her present emergency, is turning, for the time being at least, in the direction of protection. Germany can do little, because France more than once has made it plain that she will use her political and financial power to veto attempts by Germany to secure markets through lower tariffs. If there any prospect that the United States will abandon its philosophy of extreme protectionism? Perhaps it is unreasonable to expect most voters to see the connection between commercial policies and their pocketbooks.

"Our tariff policy, however, has been molded, in the main, not by the masses of the voters but by a relatively small number of business leaders. Is it unreasonable to expect these men to perceive that extreme protection practiced by a large creditor nation works very differential from the same policy pursued by a debtor nation?

"Champion Moderate Duties"

"Sooner or later are they not bound to see that prosperity for the United States and the rest of the world will not be promoted by our hoarding gold and threatening our debtors with ruin whenever there is a general depression? It and when business men understand this, we may expect many of our politicians to abandon their support of extreme protection and become the champions of moderate duties.

"Another Object Lesson"

"How long will business men require to discover--the effects of our present policy? This is a question of great practical importance. Will the experience of the present depression be sufficient? Or must we have another object lesson in the interdependence of nations, must we go through another depression, intensified and prolonged by our pull on the world's gold supply, before our business leaders realize that we cannot add to the world's disaster without inflicting injury upon ourselves?