In these adjustments there were great differences between Russia and the United States. The latter, a triumphant, capitalist, democratic society, emerged as the leading industrial nation in the world. The former, still struggling with the vestiges of feudalism, leapt into a kind of socialism in an attempt to get to the level of economic development that the United States had already achieved. When the United States completed its first transcontinental railway in 1864, a century after its Revolution, Russia completed its first transcontinental in 1916, almost contemporaneously with its Revolution. Where the United States, by 1930, had excess capacity in automobile production, Russia, by then the Union of Soviet Socialist Republics, was straining to develop sufficient capacity.
Differences not withstanding, the two transcontinental nations faced the same, global technological environment. National policies of development that had made sense in the late nineteenth century were replaced. In both countries, early suggestions of new policy directions and new institutions were evident during the First World War. In both countries there was a kind of `return to normalcy' that lasted from the end of the war through most of the 1920s. Then came the crisis of 1927--28, in the U.S.S.R., and the crash of 1929, in the U.S.A. In consequence, by the mid 1930s, the U.S.A. was finding its way to a new national policy under President Roosevelt's New Deal legislation; and the U.S.S.R. was testing a new national policy in Joseph Stalin's Second Five Year Plan. In both countries, the new policies were rooted in macroeconomic models of economic activity. In the U.S.A., the goal was to support the existing economy, and to get it operating at capacity. There was little immediate concern in the public sector for technological progress. In the U.S.S.R. the goal was economic growth based on more advanced techniques than were then in place.
The United Kingdom and the British Empire, despite attempts at adjustment, experienced, respectively, relative and absolute decline.
There was progress. Russia completed its basic railway structure under the Tsars. Between 1897 and 1914, the population of Siberia rose by 75%, the new settlers engaging in wheat and dairy farming. Between 1891 and 1912, capital stock in agriculture rose by 23%. In industry as a whole, it rose by 181%. Most capital goods, however, were imported and paid for by loans, which, in turn, were paid for by exports, 80% to 90% of which were wheat and other raw materials.
During the First World War, Russia became a centrally planned, command economy, as did Germany, and even the United States in some small degree. Following centuries old behavior patterns, Russian peasants, disaffected by a system that offered them little but taxes and conscription, rebelled. Russia's military capability ended in mutiny. In two revolutions, one peaceful, one violent, the Tsarist government and a Provisional Democratic Government were replaced by Bolshevik party rule. Russia became a `communist' state, and withdrew from the war.
Russia was already a command economy when the Communists took power. Their seizing of the `commanding heights' (the banks, oil and coal production, transportation, and iron and steel production) was just a matter of pushing central control further. In some cases, not much further. Existing state monopolies in food, consumers goods, and internationally traded goods were simply taken over. There were some major changes. The Bolsheviks condoned peasant seizures of large agricultural estates. Women were given equality before the law, and the right to abortion. Divorce was granted on demand. All schools were declared co-educational. The eight-hour day was declared standard in manufacturing industries.
It was harder to control realities than to make proclamations. The state apparatus was neither complete nor efficient. Labour unions were given control of factories at a time when no one in the unions knew how to run them. Grain collection in the country side remained on a war basis, that is, the state's share of the harvest was seized, and compensation was worked out later. There was not complete chaos. The government controlled some things, and about half of the economy functioned through illegal markets. Still, there were instances of starvation in the cities. Non-Russian nationalities took their opportunity to rebel, and western European countries and the United States openly supported those opposed to the Communists. Russia was devastated by civil war. So beleaguered, the Bolsheviks were forced to retreat to the boundaries of the old Grand Duchy of Muscovy. From this base, with an army and an economic system, called `War Communism', they repossessed the Russian empire. By 1921, sporadic peasant uprisings, and food strikes in the cities, notwithstanding, the Bolsheviks had won the civil war.
The New Economic Policy was a strategic reversion to market organization. While markets reformed, one-party dictatorship was established. Government revenues were augmented by deliberate inflation, and by re-establishment of a state monopoly in the
production and sale of vodka. The state was sufficiently in control to undertake a successful, comprehensive fifteen-year electrification program. By 1927, the economy was back to pre-war output levels, and again importing producers goods in return for exported grain. In a sense, everything and nothing had changed. The root problem of the economy, as seen by those advising the Communist Party, had not been solved.
It was a simple fact of the Soviet economy that the peasants were as yet not dependent on manufactured goods, in either production or consumption. They had a choice of purchasing or not purchasing manufactured goods. In part, purchases could be delayed, and old equipment made to last longer. In part, neither the techniques of cultivation nor the life style of the peasants was irrevocably mechanized and modernized. In 1922, when manufactured goods were in short supply, and agricultural produce prices were low in terms of manufactured goods, the peasants simply stayed out of the market. In 1925 and 1926, when centrally administered prices dictated a low exchange value for manufactured goods, the peasants entered the market, but there were relatively few manufactured goods to buy. The dilemma was that the manufacturing sector could not produce sufficient goods to remove the surplus from the agricultural sector until the surplus had been removed from agriculture to give manufacturing the capital it needed to produce sufficient goods.
Under these circumstances, the Soviet economy returned to pre-war production levels in the late 1920s. The recovery was achieved using existing capital equipment. Obsolescence, physical and technological, was inevitable. Still, the problem of replacement had not solved. In 1927, a poor crop was accompanied by reduced acreage devoted to grain as peasants shifted into cotton production to evade taxes, low prices, and sporadic grain seizures. In 1928, the Bolsheviks resumed compulsory grain deliveries, with the peasant's surplus being administratively defined. Certainly, the Soviet economy was not depressed in the way that western capitalist economies were to be depressed, but it suffered a crisis of considerable proportions out of which emerged a new national economic policy, the Russian counterpart of the Third National Policy in Canada.
Other elements of the First Five Year Plan targeted development rather than growth. A large portion of new industry was to be located to the east, in the militarily defensible Ural Mountains. Agriculture was to be subjected to a technical and social revolution. It was to be mechanized, tied into the manufacturing sector, and made responsive to the needs of the rest of the economy. All of this was to be achieved with a minimum of imported foreign capital. Given the hostility towards the Soviet system in the information environments of western capitalist countries, and given the slow progress of Communism outside of the Soviet Union, relative autarchy and the corresponding policy of `Socialism in One Country' was virtually forced on the Bolsheviks.
The First and Second Five Year Plans had their successes. Industrial production rose 400% by 1936. The annual growth rate for the whole economy was 10.5%. The portion of output accounted for by small scale industry fell from one third to one sixteenth. Development was appropriate for the Automobile Stage of the Internal Combustion and Electric Dynamo Period. Advances were made particularly in iron and steel production, electrical equipment, tractors, combines, trucks, tanks and machine tools. In 1932, 78% of all new machine tools were imported, in 1937, 10%. Industrial output east of the Urals rose from 11% to 16% of the total. Labour productivity in manufacturing rose 175%.
The Plans also had their failures. Agricultural output remained constant while the population increased by 12%. This was a consequence of the technical and social revolution in the agricultural sector, which took the form of forced collectivization. Twenty five million separate peasant holdings were collectivized into two hundred and fifty thousand state farms. The reorganization was bitterly opposed. Cattle and horses were slaughtered to evade confiscation. It is estimated that five million people died of starvation in the process. Another five million were sent to forced labour camps.
However badly it worked in some respects, the Soviet national policy did work. There was development in the structure of the economy and in its institutions. There was a kind of socialist central planning. Growth occurred through increases in capital and labour in the production process, and through the use of more advanced techniques. With catch-up still the main task, and the focus on building a heavy industry substructure, planning was relatively simple. Dedication to the Revolution was either high or brutally enforced, so that motivation was not a major problem. Weaknesses in the structure of motivation with respect to efficient allocation, invention, and innovation remained relatively unimportant. The result was never completely `socialism in one country', but the Soviet Union was modernized, and became increasingly independent. Its structural dependence on external markets, the ratio of imports plus exports to GNP, fell from 54%, in 1913, to 13%, in 1921, 12%, in 1932, and 03%, in 1937.
Britain lagged in new industries. Developments related to electricity and the internal combustion engine were financed, even in Britain, with a significant increase in German and United States capital. Britain's lagging in the new industries entailed lagging in modern industrial organization. Very large industrial firms, using assembly line techniques, did not appear. Without the new industrial organization, labour unions were a more formidable obstacle to adjustment in Britain. Representing national interests, as opposed to the international interests of capital, the labour unions overwhelmed capital in national political conflict.
British industry, in general, failed to adjust out of its late nineteenth century organization. It tended to display a relatively large number of smaller producers, each with a single plant managed by its owner. There was very little movement toward United States style `scientific management', and product and process development generally emerged from production floor trial and error procedures, rather than R & D departments.
New developments were not large scale. Automobiles, electric engines, chemicals, telephones and radios were produced, but, on the whole, tariffs that seemed to be the basis of concentrated, transcontinental development in the United States, tended to be protective of obsolescent technique and organization in Britain. Tariffs that seemed to protect infant industries in Germany, failed to separate Britain from a commitment to cotton textiles and coal, even when the United States and Japan penetrated its markets for textiles, and coal became technically obsolescent.
Britain simply declined in relation to the transcontinental nation states. Its recovery from the First World War was weak. Unemployment rose in the post-war depression to about 10%, and, typical of a declining region, stayed there. Like the Canadian Maritimes, Britain felt the shock of the 1929 depression less, because it was in partial decline throughout all of the 1920s.
In the face of these problems, despite their evident very long run character, Britain adopted short run counter cyclical policies, that is anti-depression policies, derived from the short run analysis of John Maynard Keynes, and from the social welfare aspirations of the Labour Party. The analytic bases of these policies, and the policies themselves supported the adoption of similar policies in Canada, constituting Canada's Third National Policy.
Changes in the pattern of commodity trade were accompanied by appropriate changes in capital flows. After 1908, capital outflows exceeded inflows. From 1874 to 1890, there were net capital imports of 1.5 billion dollars. From 1896 to 1915, there were net capital exports of 700 million dollars. From 1916 to 1921, there were net capital exports of 14 billion dollars. New York replaced London as the financial capital of the world. Most of the exported capital financed trade, or flowed into the exploitation of primary products in Canada and Mexico.
The United States was less dependent on external trade than other Euro-American nations. Its structural dependence on trade (imports plus exports as a ratio of GNP), having been 13%, in 1834--1843, was 11% in 1913. This compared with 44% for the United Kingdom, 38% for Germany, 30% for Japan and 32% for Canada, in that same year. Changes in its trade position were nonetheless important for United States trade policy and for its national economic policy in general. In 1913, the Underwood-Simmons Tariff significantly lowered the general level of protection for the first time since the Morrill Act of 1861.
Following the war, the United States passed through a `return to normalcy' that was a faint echo of the New Economic Policy in the Soviet Union. For the United States it was a return to unrestrained, free enterprise capitalism. It lasted until the Great Depression of 1929 brought a return to macroeconomic concerns, government regulation, and government support. For the Soviet Union it was a return to pre-war emerging capitalism that lasted until the crisis of 1928, and the command economy of the First Five Year Plan. During the `return to normalcy' the Soviet Union struggled to build up a foundation of heavy industry. The United States branched into consumers goods, particularly consumers capital goods: automobiles, radios, refrigerators, and other electric appliances; though the great shift in this regard was yet to come. Between 1909 and 1918, 9.2% of borrowing in the United States was for consumption. Between 1920 and 1929, it was 10.6%. The shift towards capital intensive consumption, typical of the post Second World War period, if only weakly, had begun.
As in the Soviet Union, the 1920s were a period of growth in the United States, averaging 2% per capita per annum. Labour productivity grew at an annual 5.6%. Capital productivity at 4.3%. In the Soviet Union, growth and development was a catch-up process, relying, largely, on imported technology. In the United States, technological progress was indigenous. It was accommodated in the structure of enterprise, as `in house' research and development became the foundation of long term profitability. Protection from obsolescence, the other side of rapid innovation, dictated the merging of firms with different product lines. Horizontal integration replaced the vertical integration that had characterized industrial organization over the turn of the century. Rapid introduction of new products accentuated the role of advertising, which became an increasingly important element in the marketing divisions of large firms. With the increased size and complexity of the new organizations, management, itself, became a locus of innovation. Time and motion analyses shaped all levels of activity, as anonymous corporate management replaced the great `captains of industry' of the late nineteenth century. Along with these institutional changes came the application of science in the electrification and mechanization of factories producing automobiles, electrical equipment and appliances, synthetic fibers, and industrial, agricultural and consumer chemicals.
In the Soviet Union, the advances of the 1920s were accompanied by a realization that it would be `socialism in one country'. The decline in Soviet external dependence, in the 1930s, was partly a product of world economic depression and the budding of World War II, but it was also a product of a deliberate tendency to autarchy. In the United States, the advances of the 1920s, and, especially, the difficulties of the 1930s, were accompanied by the realization that it was not going to be `capitalism in one country'. World economic depression inhibited any marked increase in United States external trade, before World War II, but the tide had turned. During the 1930s, the United States abandoned comprehensive protectionism in favour of an increasing measure of free trade.
In the United States changing attitudes to external dependence were related to internal structural problems, particularly in industry as well as agriculture. Textile production moved from New England to the southern States, leaving the former region with excess labour and services. Railways suffered competition and relative obsolescence as trucking expanded. Gasoline and hydro electricity had a negative impact on coal mining regions, and the lumber industry and agriculture suffered from over expansion. The difficulties of agriculture, which were severe and politically important, were particularly important in changing attitudes toward external markets.
The First World War created markets that permitted continued expansion in agriculture when, otherwise, there would have been contraction. In part the problem was a hangover from the closing of the geographical frontier. There had been the inevitable mistakes of over expansion, and of ill-planned and mistaken settlement of unsuitable lands. At the same time, application of mechanical energy, in the form of tractors and trucks, and the use of chemical fertilizers, and chemical weed and disease control methods increased productivity and farm size, thereby displacing significant numbers of farmers and farm labourers. When European countries became protectionist, particularly with respect to agriculture, the United States found itself with a severe problem of excess capacity, which it attempted to solve by reopening world markets.
The other side of the United States trade problem was the inability of Europe to earn the exchange necessary for purchase of American products. In 1918, the Webb-Pomerene Act recognized the new position of United States industry by providing for the formation of monopolies in pursuit of foreign markets. The United States sold more than it bought, financing its favourable balance with loans related to the recovery of Europe from the devastations of the War and to subsequent reparations payments. In itself, the arrangement was untenable in the long run, but its problematic nature was acerbated when the United States, in its `return to normalcy', in 1921--22, returned to protectionism. Unable to sell to the United States, and unable to continue borrowing, Europe also turned to protection. Given the problems of the gold standard international payments system, in 1929, protectionism took the form of competitive devaluation of national currencies. The structure of world trade crumbled, leaving the United States with further excess capacity.
The causes of economic depression in the 1930s, considered in a general way, are evident. Why it occurred when it did, is hidden in the complexities of the forces of history. A world economy based on the steam engine, railways and iron ships adjusted to a new technological foundation: internal combustion and the electric dynamo. There were other technological and institutional changes involved, but this was the most fundamental of new sources of pervasive change. The adjustment came during a downturn in economic activity associated with a `normal' business cycle, and it was acerbated by major adjustments in world trade and the international payments system.
The depression in the United States was severe. GNP declined by one third, between 1929 and 1933. At the bottom, in 1933, 25% of the workforce was unemployed. Capital took its beating at the beginning, in 1929, when stock market values, inflated by several years of easy money and baseless speculation, fell to nightmarish levels. In a delayed reaction, between 1929 and 1933, the Federal Reserve Board contracted the money supply by one third. Prices fell, and bankruptcies multiplied.
Legislated response to the situation had an air of desperation. Certainly there was no focus on rational adjustment to technological conditions. In 1933, the National Industrial Recovery Act provided for compulsory factory reopenings. It was declared unconstitutional in 1935. After 1933, the Federal Reserve Board provided for an expanded money supply and lower interest rates, but in the depths of the depression this was not enough to generate recovery-level investment. Both Federal and State governments undertook direct expenditures for relief, that is food and clothing `handouts', and for make-work projects. Some expenditures had long run benefits: the Tenessee Valley Authority developments being an outstanding example. In that project the Tennessee drainage basin was developed with respect to hydroelectric installations, roads and parks. Other expenditures were short run palliatives. Any arrangement to prevent destructive competition and price cutting was supported. Farm price support programs and legislation supporting trade unions were prominent in the New Deal. An aspiration to macroeconomic compensatory fiscal and monetary policies emerged, and the beginnings of a comprehensive social welfare net were put in place. The objections of some notwithstanding, government interference in income distribution, government regulation of certain aspects of market activity, and indirect government control of the general level of economic activity came to be accepted as necessary for the survival of capitalism in the twentieth century.
The Reciprocal Trade Agreements Act (1934) empowered the President to enter free trade agreements with nations offering lower tariffs in return. By 1938, twenty separate agreements had been signed. The Depression accelerated the pace at which the process of continentalization and globalization eroded institutions and policies characteristic of the old, relatively independent, transcontinental United States economy.
The Railway Epoch in Russia, Canada, and the United States was bracketed with centralizing national economic policies. The First National Policy in Canada was similar to late nineteenth century national economic policy in the United States. The Second National Policy in Canada was similar to the first state industrial policy in Russia. The Third National Policy in Canada, the New Deal in the United States, and the First Five Year Plan of the Soviet Union closed the Railway Epoch. In Canada and the United States, the policies of the Nineteen Thirties were designed to support the structures build up in the Railway Epoch and made obsolescent in the Internal Combustion and Electric Dynamo Period. In the Union of Soviet Socialist Republics, the policy of the Nineteen Thirties was designed to catch up to the West in both Railroad and newer internal combustion and electric technologies. Following the Depression and the Second World War, the centralist tendencies of transcontinental national policies in all three countries was eroded by yet another round of technological and institutional change.
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