Great Depression, Washington vs. Versailles Systems

Notes from Gilbert Ziebura, 1984

West 11th Street, New York City

July 5, 1998

R L Norman

Jmkeynes@Secularstagnation.com

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This review was written in July 1998, just as the Internet boom was getting started. It is more relevant today, as protection of American jobs is becoming a major 2004 campaign issue. Yet, the importance of maintaining American jobs cannot be seen apart from the likely results of each piece of protectionist legislation. I am strongly in favor of looking after American jobs, but if this trend leads into a new Smoot Hawley tariff wall, this would be worse. Ziebura’s book emphasized how the American protectionism of the early 1930s basically shut out the exports of both Japan and Germany and helped contribute to the rise of fascism in both countries. Global war soon resulted from this loss of democracy. Global war cannot be the end result of whatever job protection measures we enact for American labor in 2005. Ultimately, America is going to have to find a way to feed, clothe and shelter its people, irrespective of their status in the paid labor economy. That is the lesson of an Internet-driven economy.

R.L. Norman, Jr.

March 8, 2004

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Gilbert Ziebura, World Economy and World Politics, 1924-1931: From Reconstruction to Collapse. New York: Berg & St. Martin's Press, 1990. [originally published as Weltwirtschaft und Weltpolitik 1924 bis 1931. Zwischen Rekonstruktion und Zusammenbruch, Frankfurt am Main: Suhrkamp Verlag, 1984, translated by Bruce Little.

The early 1980s were extremely destabilizing to the international economy. Very serious damage was done to the entire world financial structure by the supply-side model pushed by Ronald Reagan. Perhaps the most eloquent testimony to these problems was made by David Stockman, the primary agent of the day to day financial management during the first four or five years of the Reagan presidency. Without going into great detail as to all the causes and implications of Reagan's policies, one of the worst effects was that interest rates in America moved upward sharply as the American federal deficit jumped upward. Between roughly 1980 and 1983, home mortgages moved well above ten percent and some credit card rates exceeded twenty percent. Housing starts in America crashed downward and car sales were threatened as well. A flood of foreign capital poured into America seeking these high interest rates, keeping America afloat but decapitalizing large parts of the rest of the world economy. The new French government under socialist administration was almost sunk by the American economic policies. It was this financial strain in Europe which helped frame a book comparing early 1980s capitalism with the 1920s. The last three pages of the book made it clear that the comparison of the two crises was not precise.1

The general argument of the book was that the global system which developed out of World War l depended upon the United States acting as a financial 'hinge' between Southeast Asia and Europe, what Ziebura called the Washington System and the Versailles System respectively. A major contention of the book was that America was attempting to displace Great Britain as the preeminent or hegemonic world power during the 1920s. In order to accomplish this goal, America needed 'special partners' in both areas, Japan in the Washington System and Germany in the Versailles System. Basically, America had to be able to lend money to Germany2 and to be able to import from Japan, particularly raw silk.3 There were of course other problems with both Japan and Germany, and other problems with other countries in both 'systems' especially with France, Great Britain and China, but overall America had to try to keep Germany and Japan financially stable through stimulating their economies as noted. The long boom in America during the 1920s allowed both 'systems' to move forward:

The global system of states that arose after the First World War exhibited a political and strategic structure which was incompatible in many ways with the structure of the world economy. This was one of the major reasons for the mounting instability of the world system.4

This contention of rivalry between Great Britain and America is hardly unique with Ziebura. Seemingly the degree of contention between the two countries is itself a source of contention among academic political scientists and historians.5 Whatever the relationship between America and Great Britain in the 1920s, the 1940s and 1950s saw America displace Britain as the major power in the West and the 1980s saw the Soviet Union be displaced as the only other claimant to world power.

If the book has a weakness, it seems to be in that Immanuel Wallerstein's concept of the world system plays too central a role, and that this tended to influence the author to sometimes see a 'connection' between countries and/or events which was either much weaker or non-existent. Sometimes, the chaos of events simply overtakes history, irrespective of what the world 'system' wishes. I should add that I am criticizing Wallerstein not because he depends upon a Marxist framework, but because he implies too much political cohesion or predictability from Marx's economic analysis. Also, Wallerstein's analysis does not seem to take into account the long wave approach to capitalist development. Ziebura also took note of the other problems with Wallerstein's world 'system' view.6 Ziebura noted how similarly the two 'systems' had evolved after

World War l:

1. a difficult incubation period before 1923-4, during which the United States played a much more active political and strategic role in south-east Asia than in Europe;

2. a socalled 'stabilisation' phase till the onset of the Great Depression;

3. and finally a period of progressive disintegration after 1930-1 during which America's special partners became her bitterest enemies.7

However, taking these criticism's of Ziebura's view of the two regional 'systems' into account, ultimately, America would run out of money with which to either buy Japanese goods or to loan to Germany. The crash of 1929 permanently derailed both 'systems', leaving both Japan and Germany as competitors of America.

The central problem of the book was whether or not America's economic elites were willing and/or capable of fulfilling the role of pre-eminent world financial and political power which they had attempted to take from Great Britain during the 1920s. The clear implication is no, both during the 1920s as well as the time of the book's publication in Germany, 1984.

The Fordist system tended to increase total production in America, but did not tend to increase wages proportionately. It also tended to produce more 'capital goods', that is, increasing amount of machinery for use in producing more consumer goods, in proportion to the actual output of those consumer goods.8 The ultimate effect of course is that even more consumer goods can be produced- but without greater total wages, an even greater imbalance between total production and total consumption was bound to occur.

According to the general time frames of the long wave model, the 1920s should have been a time of downturn, yet in fact they were a time of great prosperity, even though no new labor-based innovations were coming online. Instead, the whole production process was evolving towards a Fordist model.9 The role of electricity in this shift was not as prominent as the general shift to the Fordist model of production. This may not compare well with other views on the long waves in the 1920s. The book states that the great change in productivity and total production10, without either comparative increases in total wages or decrease in prices. In fact, some prices actually rose during the 1920s.

What seems to have floated this system for so long was the rapid increase in consumer debt.11 After a recession in 1927, the government loosened the money supply which restored economic growth but which also fueled a speculative boom on Wall Street. The net effect of the boom was to send large amounts of money swirling around among the very rich. Soon the speculative boom dried up the foreign investment necessary for Europe and especially Germany. The crash in October 1929 collapsed the stock market, lowered the need of American's for Japanese silk and ended the ability to send large amounts of capital to Germany.

The concluding paragraph: to book noted that the Depression was not ended by any normal fiscal or monetary policies, but massive war was required, funded by massive debt:

One should remember that the economic and political crisis of the 1930s was never overcome by government policies of any ilk. The world economy headed downward again in 1937-8, especially in the United States. The revisionist powers of Germany and Japan sought to solve their mounting problems through rearmament and military expansion, and the democratic countries of the west were forced to increase their arms expenditures as well. But this did nothing to vanquish the Depression. The sombre conclusion from those years is that it took the Second World War to overcome the global economic and political crisis and to pave the way for the expansionary phase of the 1950s and 1960s. At the same time, the war set the stage for new international conflicts between East and West and North and South.12

1Gilbert Ziebura, World Economy and World Politics, 1924-1931: From Reconstruction to Collapse. New York: Berg & St. Martin's Press, 1990, [originally published as Weltwirtschaft und Weltpolitik 1924 bis 1931. Zwischen Rekonstruktion und Zusammenbruch, Frankfurt am Main: Suhrkamp Verlag, 1984, translated by Bruce Little.], p. 172-174.

2Ziebura, 1990, p. 53, 54.

3Ziebura, 1990, p. 129-131. Between 1925 and 1929, Japan sent 42.5 % of her total exports to the United States, again principally raw silk for use in luxury goods. Once the American economy fell into depression, the need for large amounts of raw silk also fell.

4Gilbert Ziebura, 1990, p. 24-27.

5Gilbert Ziebura, 1990, p. 26-27. As in the rest of the book, numerous footnotes lace the text.

6Gilbert Ziebura, 1990, p. 20-23.

7Gilbert Ziebura, 1990, p. 27.

8Ziebura, 1990, p. 45.

9Ziebura, 1990, P. 47.

10Ziebura, 1990, p. 47.

11Ziebura, 1990, p. 49.

12Ziebura, 1990, p. 174.