Economic Recovery in Great Britain and the United States

The regular luncheon meeting of The Empire Club was held on Thursday, March 15, 1934, with Mr. H. Carl Goldenberg, M.A., B.C.L., of Montreal as the Guest Speaker.

MAJOR BAXTER: Gentlemen, the subject of our guest speaker's address today is one of the most vital topics ever laid before this Club. Economic recovery is a burning question, not with one nation but with practically the en tire civilized world and all their people. Whether it was the stunning expenditure of the last War, the fevered over-production of manufacturers, or merely a natural cycle, does not count with the man in the street today. All he knows is that since the fateful days of 1929 he has seen his margin of security vanish employment at a premium and his comfort and happiness menaced by prolonged depression.

Now, however there is a brightening in the horizon. We in Canada are already experiencing an upturn in industry and employment. Only the other day our newspapers brightened our breakfast tables with news of a boom in the Maritimes-and this morning I saw a robin on the top of Casa Loma. (Laughter.) Government reports are equally encouraging as to business conditions generally, showing rising indices and strengthening trade. Over to the east of us Great Britain, burdened as she is by taxation and debts, is feeling the firm ground again beneath her feet and her people, resilient as ever, are looking to the future with brighter hope and courage. To the south of us the United States, led by a great experimenter is working out its own salvation.

Before calling on our guest speaker, I would like to pay a tribute to his attainments. Mr. Goldenberg has many academic honours to his credit. In addition he is Sessional Lecturer in Economics at McGill and Lecturer in economics under the Montreal Board of Trade. When he is not doing this, he tells me he practices law.

Mr. Goldenberg was Chairman of the round table on "Trade, Tariffs and Preferences" at the Liberal Summer Conference, where he had such distinguished pupils as the Right Honourable MacKenzie King. He was also on the secretariat of the British Commonwealth Relations Conference at Toronto in 1933. Thus he is right at home with a subject on which most of us, in regard to its deeper aspects, are merely laymen.

I have much pleasure in introducing Mr. Carl Goldenberg.

MR. CARL. GOLDENBERG: Mr. Chairman and Gentlemen: Your Chairman's kind references to myself and to my subject remind me of the story of the judge who was refusing to allow a lady to withdraw a charge of non-support she had laid against her husband. "But, my Lord," she pleaded, "if you imprison him I shall lose my source of income. Let God be his judge, my Lord." "No, madame," replied his Lordship, "this is too serious a matter. I must look into this myself." (Laughter.)

I must confess that in attempting to estimate the effects of the economic policies of Great Britain and the United States in the past few years, I, too, have often come to the conclusion that "the Lord only knows"; but your Chairman has decreed that this afternoon I must look into the subject myself and I shall attempt to do so.

Let us recall briefly the background of current economic events. In the latter part of the nineteenth century and in the earlier years of the twentieth, the world order was one of comparative economic internationalism. There were tariffs and other restrictions, of course; it would be a false pretence to claim, proudly or otherwise, that our, age invented tariffs and trade restrictions. Nevertheless, in those years international trade followed fairly well.' established channels and the changes from year to year, were relatively small. The more advanced and industrialized European nations were in a position to dispose of their surplus products in more backward countries, and also to invest their surplus capital to aid in the growth and development of these countries.

In this way England built up her large staple industries and her investments abroad. For some time, as a matter of fact, England had a virtual monopoly of foreign trade. The greater efficiency of production of her industries gave her an advantage over others. Naturally, she began to specialize in certain particular industries and concentrated upon textiles, metals, coal and chemicals. Consequently, England became dependent to a tremendous extent on her exports of a comparatively narrow range of commodities. As a matter of fact, among raw materials, coal is the only really important export of Great Britain. The great bulk of her export trade is done in manufactured goods. But, as the years passed by, the more backward countries of the world became less backward; they became industrialized; they began to offer a smaller market for the surplus products of the more advanced nations. New manufacturing industries were established in other states and they began to offer serious competition to the older industries of Great Britain. There began a great rivalry for markets, particularly between Great Britain and Germany in the years preceding the War. Then came the World War.

The World War gave a great impetus to further industrialization. The industrial machine of many countries grew with the abnormal demands of the war period, and when the War terminated the industrial machine remained. It produced, it continued producing, and it wanted to produce more and more.

The Great War had one other effect. It changed the economic impact of America. We must recall that up to 1913, the United States was a great debtor nation. It now became the world's great creditor nation and at the same time it became a competitor for export markets.

Then came the Peace. The Treaty of Versailles carved new states out of the old European Empires. Nationalism was the dominant political and economic force in these new states. They sought greater power and greater independence through economic self-sufficiency. Agricultural states sought to become industrialized. The home market was to be preserved for home industry. Imports were to be warded off like invasions.

The world, at the end of the War, therefore, was a far different world from that of 1914. Industrialization had advanced rapidly, and was making rapid strides in the

Far East, in Japan. Nations dependent on export trade were no longer secure. In particular, the foundations upon which Great Britain's industries had been erected were threatened. In consequence, some of England's export industries are now not in their fourth but in their fourteenth year of depression.

We recall that the termination of the War was followed, respectively, by a short-lived boom, a slump and a period of recovery which set in in 1924. Production was increasing and a large volume of international trade was supported principally by American loans to Europe. Yet, during that period, Great Britain continued to experience a large volume of unemployment, particularly in her export trades. The too precipitate return to the gold standard in 1925 aggravated the difficulty. Sterling was overvalued in terms of gold and therefore created a further hindrance to export industries. England„ therefore, could not share in the wild optimism of the United States.

The American boom of those years concealed the fact that during this period the purchasing power of the American farmer was relatively declining; that workers were coming into the city where work was not available; that the increased production of the American industries was made possible by mechanization and rationalization at the expense of labour. Rationalization means economy of labour.

In other words, America was increasing her output at a rate far exceeding the purchasing power of the masses to consume that output. But, the American is a born speculator. He would not reason. Hence, the stock market boom; hence, the withdrawal of American loans from Europe; hence, the attraction of European liquid funds to Wall Street. The effect on Europe was disastrous. There came the Wall Street crash with its repercussions throughout the world. The crisis set in; it gathered momentum; it destroyed world confidence and finally, disrupted world currencies. In September, 1931, Great Britain suspended the gold standard. Political and economic upheavals followed in vastly different parts of the world.

The excess of optimism of the American citizen gave way to an excess of pessimism. The Englishman, of a more equable temper and more accustomed to hard times, remained calm. But as the depression continued, it became apparent that the situation in the United States was far more complex and more serious than the situation in Great Britain. And it is in the light of these differences that we must consider the economic policies of the two nations.

It is well to recall, first, that Great Britain was far better equipped to meet the consequences and the terrors of a prolonged depression. If a workingman lost his job and exhausted his savings in the United States, he remained with only two alternatives: first, recourse to private charity; the second, starvation.

In striking contrast to this state of affairs is the relative security of the British worker. In 1911, the British Parliament had introduced a scheme of unemployment insurance. That scheme has been gradually extended and it now covers sixteen million persons, about four-fifths of all those gainfully employed and virtually all the wage earners of the country. The system has stood the test of more than twenty years and also the test of a period of rapidly increasingly unemployment. The certainty of receiving a minimum weekly sum has maintained the spending power of the British worker and has served to stabilize British industry. Whereas unemployment and the consequent dependence upon private charity in the United States means an almost total curtailment of expenditures by the unemployed American citizen and a consequent shutting down of plants and an increase in unemployment, British industry was always assured of a minimum home market. Hence, the importance of the British unemployment insurance scheme in preserving the morale of the working classes and in assuring a certain stability to industry.

When, owing to the painful increase in unemployment, the British unemployment insurance scheme could not be maintained on an actuarial basis, Great Britain, extended the existing machinery for administering the necessary relief to the unemployed.

In the United States, delay and suffering was inevitable. They had to administer relief but they also had to create the machinery which did not exist. In England they could avail themselves of the machinery created by the unemployment insurance system.

I do not mean to convey the impression that the unemployed in England are or were in receipt of a large or adequate relief. But the fact remains that the English worker was afforded a minimum of security and, therefore, English industry was afforded a minimum of security. It has rightly been said that with his unemployment insurance, his health insurance and his old age pension, the British worker would not trade his security for any American wage, however high it may be. Unemployment insurance is, then, an integral part of England's industrial organization. It has enabled England to withstand the shock of the industrial crisis with greater resistance than the more powerful United States. Let us recall, furthermore, as Professor T. E. Gregory of the University of London has pointed out, that the fall of prices in the United States led directly to three distinct, though associated, groups of difficulties. The first was unemployment on a vast scale. This was the industrial problem. The second was the plight of the farmer who was being ground to powder between the upper millstone of falling prices and the lower millstone of mortgage indebtedness. This was and is the American agricultural problem. The third problem was the effect of the agricultural and industrial distress upon the banking situation and upon governmental finance. This constitutes the financial problem.

While Great Britain is familiar with unemployment on a large scale and is also familiar with the problem of unbalanced budgets, she has no agricultural problem parallel to that of the United States. Fortunately, also, England's banking system is different and, therefore, she did not have to face a banking crisis similar to that of March 1933 in the United States. We recall that the banks in that country were closed over a certain period of time.

Hence, the peculiar characteristics of the American economic experiment are attributable in large part to the greater seriousness and complexity of the economic crisis m the United States.

What did the Roosevelt administration undertake as a solution for the industrial problem? The administration formulated the NIRA. The NIRA is founded upon the realization that the American industrial machine is based upon mass production; that mass production is dependent upon mass consumption and that there cannot be mass consumption so long as a large part of the population is living on a mere subsistence basis.

Professor Rexford Tugwell, the Assistant Secretary of Agriculture, has written, "We have been led in bitter times to see that unless the agricultural, the labour and the office worker groups in America, who comprise in all America the great body of our consumers, unless these are 'provided with buying power, our whole economic structure falls into idleness and ruin." Hence, the success of the NIRA is dependent upon increased purchasing power and increased consumption.

The Act seeks to accomplish this, first, by reducing the working hours per week, and thereby forcing the employment of more workers; secondly, by raising the wages of the lowest paid workers and thereby increasing their purchasing power; thirdly, by encouraging the organization of the workers into effective unions, thereby promoting efforts to raise their standards of living; and, lastly, by bringing order into industry through the abolition of unfair competition and the introduction of an element of economic planning. Every industry is called upon to produce a code, regulating competition within the industry.

The evils of child labour and the sweat-shops are to be abolished. The President is given the power to license businesses in order to secure adherence to the Act, in the event that codes are violated.

Having regard to the fact that Americans are presumed to be "rugged individualists," one can describe the NIRA as nothing but a revolutionary measure. To the extent that President Roosevelt seeks to carry out a program of social reform it is not, certainly not, revolutionary to an Englishman. President Roosevelt seeks to enforce the recognition of trade unions, but England legalized trade unions in 1871, and we know they are a very powerful force in the nation.

President Roosevelt seeks to abolish the evils of child labour, but the first Act passed by the Parliament at Westminster limiting the hours of labour of children was passed in 1819, and was extended to women in 1844. Finally, he seeks to enforce a minimum wage. England established trade boards in 1909 and enforced a minimum wage in certain industries. In addition, Great Britain has introduced schemes for unemployment insurance, old age pensions and health insurance.

But I do not make these statements because I want to detract from the merits of what President Roosevelt has done and is doing. If he has accomplished nothing else, he has made the American citizen think in terms of social welfare. He has introduced new social concepts in the United States, and to my mind that alone justifies his great experiment.

President Roosevelt is now being attacked by men who originally supported his efforts. I think there is some justification for saying that, though some of the big business men admit that Roosevelt saved the country, they are beginning to fear he won't give it back to them. That is why they are opposing him.

I think that there is also justification for the statement that the captains of industry in the United States are willing to allow the government to own„ control and administer any industry, so long as it is an industry which does not pay dividends. As soon as it begins producing dividends the government must relax its hold.

In order to sustain the revival of business and the volume of employment the government has appropriated about three billion, three hundred million dollars for public works. With the N.I.R.A., this is the government's solution, or attempt at a solution, of the industrial problem.

As for the agricultural problem, the administration formulated the Agricultural Adjustment Act whereby it undertakes to subsidize restriction of output. The Secretary of Agriculture levies a processing tax on certain agricultural products, and pays a bounty out of the proceeds to farmers and other producers as compensation for reduced acreage.

It is hoped by this means to restore to the farmer his average real purchasing power of the period from 1909 to 1914. Whether the scheme is justified or not, and I have a great deal of hesitation about it, I must say that it has greatly increased the income of the American farmer and the American cotton grower and has thereby prevented a real farmers' revolt.

The Agricultural Adjusment Act also provides for inflationary measures and authorizes the devaluation of the dollar by fifty per cent.

The Banking problem has led to legislation disassociating banks from their security affiliates-a system which had resulted in many abuses. A system of insurance of bank deposits has also been introduced, as well as the drastic Securities Act regulating the issuing and marketing of securities.

Finally, the Administration indulged in monetary experiments aiming to restore the price level of 1926. It is hoped that the rise in prices will diminish the burden of indebtedness. With the same end in view, farm and home mortgages have been refinanced at lower rates of interest.

This, in summary, is the Roosevelt Recovery Programme. It has necessitated the creation of a large number of new governmental organizations. It has been accompanied by noise and theatricals in order to retain the support of the public. It has definitely improved the nation's psychology and has developed a feeling of confidence and optimism. This is invaluable for recovery.

Have President Roosevelt's efforts been justified? In judging them, we must remember that they constitute an experiment. The United States was faced with a desperate situation in March, 1933, and the legislation which I have outlined is the result. Orthodox economists regard the experiments as a violation of all fundamental economic laws. The classical economic theory of a depression is that it is self-limiting. It is caused by overproduction which is naturally followed by declining industrial activity, unemployment and bankruptcy. "Gradually", says the classical economist, "the surplus of commodities will be consumed because of the necessity of replacements and renewals. Through the law of supply and demand„ recovery will take place-somewhere, sometime, an effective demand for goods is going to appear." But there is a limit to human patience. The interval between collapse and recovery may be too long. Furthermore, the situation today is different from that of previous depressions.

Where is this new effective demand to come from? We escaped from past depressions through expanding foreign markets, or an increasing population at home, or the heavy demands of some new industry, like the automobile industry in the first decade of this century. None of these exist today; hence, the United States is trying to build up a larger domestic market through an increase of purchasing power at home.

The NIRA is not above criticism. It seeks to accomplish three things simultaneously: a rise in prices, a rise in wages, and an increase in production. If the rise in prices exceeds the rise in wages, the real purchasing power of the worker is going to decline. Also a reduction of the hours of labour with higher rates of wages may encourage the further mechanization of industry. Lastly, the financing of the programme will mean a heavy addition to the national debt. But even if the debt rises to thirty-two billion dollars, let us remember that it will be about equal to the debt of Great Britain and will be distributed amongst a population two and a half times as large as that of Great Britain.

In the meantime, there is no doubt that recovery in the United States has set in. The New York Times index of industrial activity shows a gain of thirty per cent as compared with a year ago. Employment in manufacturing industries has increased by about twenty-five percent over the level of March, 1933, and payrolls were forty-eight percent higher.

To what extent gains are real and to what extent they may be attributed solely to extraordinary governmental expenditures is a matter of argument. There is little doubt that the principal stimulus has come from the spending of government money.

Now, while recovery in the United States did not set in until April, 1933, recovery in England appears to have begun in the middle of 1932. We remember that in 1931, Great Britain departed from her classical policy of free trade and adopted a protective tariff in order to readjust the international balance of payments. The unfavourable balance of trade in England was, of course, not a new thing but a great decline in commodity exports had taken place also in other exports. So England adopted a protective tariff as an emergency measure. That has had important consequences.

It is notable that the depression did not strike the British productive system in the same way that it struck the American productive system. The British home market has shown„ throughout the depression, an astonishing power of resistance, and the present recovery in Britain is confined to the home market. While there was an increase in industrial production in 1933, the volume of exports did not increase to a notable extent over 1932; therefore, the increased production must have been consumed at home.

While Britain's basic industries are still depressed her secondary industries - automobiles, food products, electrical appliances-are experiencing a period of expansion. Economic activity is being transferred, to some extent from the alder staple industries to the newer secondary industries. By far the larger part of the trade expansion has been occasioned by the recent tariff, but we must remember that a tariff is a burden on export trade and Britain's national economy is dependent on foreign trade. Only a limited prosperity can be built on the hoarse market alone. The likelihood of reviving foreign markets in a world of economic nationalism is, unfortunately, remote. I fear that the British cotton, coal, iron and steel industries may have to be reconciled with operating at a fraction of their capacity.

In Great Britain as in the United States there is now a movement for industrial re-organization. It is not as all-inclusive as the provisions of the NIRA but we know that in 1930 the British Parliament passed a Coal Mines Act, aiming to regulate and facilitate the production, supply and sale of coal. A Commission was set up to further the re-organization of the industry.

The steel industry is now being re-organized through the creation of a central body and subsidiary organizations empowered to control manufacturing and marketing activities. In other words, free competition in England is giving way to regulation. The Agricultural Marketing Act is a very radical piece of legislation and gives the Minister of Agriculture a close supervision over the quantities of certain commodities produced. Government intervention; appears more frequently and compulsory legislation may shortly be introduced.

While England's policy is not spectacular in the sense that the United States policy is spectacular, I believe it is wrong to refer to it as a policy of "statesmanlike inaction." It is not a policy of inaction. Great Britain, in some respect, is re-organizing her industry like the United States is doing, and we should also remember that Great Britain has been more successful than the United States in reducing the burden of debt through loan conversions.

It appears that Great Britain has suffered less and recovered more rapidly than any other country from the destruction of the last three years. To what extent the recovery will go - having regard to her export industries -it is difficult to predict, but it is true that England's recovery has been more marked.

I have spoken at somewhat great length of England and the United States. Let me ask a final question: What is the outlook for Canada in this world of economic nationalism? Let us recall for a moment the economic structure of our country. We have a small home market for about ten and a half million people. The industrialized provinces of Eastern Canada are dependent upon the purchasing power of the domestic market and upon foreign markets for the absorption of their output. Our agricultural provinces in Western Canada, with a potential production and an actual production far exceeding the power of the home market to consume the output, are, therefore, principally concerned with export trade.

Hence, with a far smaller home market and less variety of natural resources than the United States, our Canadian national economy is dependent upon the marketing of our exportable surpluses. We normally export over thirty per cent of our net annual national production and about two thirds of our exports consists of primary products - products of the farm, the mine and the forest. As a debtor nation we were able until recent years, to balance our national budget by the export of our agricultural pro ducts, but the situation has radically changed. There has been a terrific and disproportionate fall in the prices of raw commodities. Foreign countries, whether justifiably or not, are encouraging native agriculture by means of tariffs, exchange restrictions, subsidies and quotas.

The consequences have been a drastic fall in the value of raw commodity exports. Our home market has, there fore, been restricted still further. In addition, we must bear in mind the fact that the United States - our principal customer and the country with which it is most natural for us to trade - the United States is now engaged in an experiment in comparative self-sufficiency. This bond is bound to affect our exports. We must not overlook the foreign implications of the American recovery program

If we are to meet the problems created by a declining world trade Canada cannot afford to pursue a policy of drift. Canada must deliberately seek to expand both the domestic and foreign markets for her products. The domestic market can be expanded by raising the purchasing power of the Canadian consumer, even as President Roosevelt is seeking to raise the purchasing power of the American consumer. It requires co-operation between the federal and provincial authorities. I can not be convinced that such co-operation is impossible. In the matter of foreign trade it appears to me that the old order, for the moment at least, is dead and must give way to a new order. It is giving way to a new order of controlled and negotiated trade. Foreign countries will agree to buy Canadian products if Canada is prepared to buy their products. We must be prepared to import if we are going to dispose of our exportable surpluses. In other words, trade should be reciprocal.

We must follow the policy which President Roosevelt enunciated in a message to Congress, as follows: "All of us are seeking the restoration of commerce in ways which will preclude the building up of large favourable trade balances by any one nation at the expense of trade debts on the part of other nations." Of course, it is for the United States to learn this lesson first.

As far as the immediate future is concerned it appears to me that world trade and Canada's part in world trade can only be revived by reciprocal trade treaties between nations or groups of nations. These treaties should regalate exports and imports, in order to afford a relative certainty as to markets to agricultural and other producers who must export commodities. And I have hopes that there may yet emerge a regulated international trade out of the chaos and anarchy of the present.

In conclusion, I feel that economic recovery has set in but we know only too well that it has not gone far. To a large extent it is artificial. There are still an appalling number of unemployed. International trade is still very restricted. Worst of all, economic nationalism is still rampant. I am convinced, while the recovery may continue, there will be no real recovery until there has been a revival of international economic co-operation.

I thank you. (Prolonged Applause).

MAJOR BAXTER: Mr. Goldenberg, it is a pleasant privilege to thank you for the very fine address you have given us today. As I said previously, recovery is a matter which is on the lips and in the hearts of every citizen and we are all looking forward to a return of that security, comfort and prosperity which we so carelessly took for granted in 1928.

It has been my privilege within the past week to witness visible evidences throughout the southern United States of the return of prosperity. Building, particularly in the playgrounds of Florida, is very active. Accommodation is very limited. Throughout the whole of a trip throughout the United States, actual evidence of the cleanup accomplished by the employment of vast numbers of men under the C. W. A. is visible. If the backyards have been cleaned up, the next job is the suburbs and that applies not only to the States, but to Canada.

You have given an impartial and objective view of this recovery and we trust that the future will abundantly confirm your views. (Applause).