民粹主义：现象

The Populists of the Interwar Period (1920-30s) Before delving into these cases, we want to make clear that the populism of the interwar period came at a time of global debt crises that induced economic depressions, so it is not clear how much of the bad economic conditions of that period were the result of the debt crises and how much they were due to populist policies such as protectionism. As explained in our prior reports, there are a number of similarities between economic conditions now and those in the mid-1930s (e.g., relatively high levels of debt, high levels of central bank debt monetizations, interest rates near zero, large wealth gaps, etc.), though there are also important differences (e.g., this time debt monetizations came quicker, leading to less bad economic conditions, and there is a longer history of democratic institutions). For these reasons, we think that while the populist cases of the 1930s are analogous to those of today, it is likely that those of today will be less extreme. At the same time, we want to emphasize that we are not saying that those populists in office today will follow in the footsteps of those in the 1930s. What we are saying is that it is important to have in mind those cases and the template to see whether or not they do. We identified our populist cases of the 1930s by identifying those who (to use the definition from Wikipedia) adhered to “a political doctrine that proposes that the common people are exploited by a privileged elite, and which seeks to resolve this.” While there are significant differences in the stories of these populists (very different ideologies, contexts, levels of power attained, etc.), they also have a lot in common. To provide more detail on the concepts outlined above: •

By and large, these populists took advantage of the confluence of several characteristics of the times: o Weak economic conditions, which made people disillusioned with the current ruling parties. o An uneven recovery in which the elite was seen as prospering while the common man was struggling. o Political squabbling/ineffectual policy making, preventing the bold action people saw as necessary. o A feeling among a country’s majority that foreigners, or those who didn’t share the same background/ethnicity/religion, were threatening their values and way of life.

•

Where populists achieved some measure of success, they would refuse to join governing coalitions or support government policies, making the gridlock that they campaigned against even worse and preventing policies that would boost the weak economy. This, in turn, tended to increase support for populists. In that way, a rise in populism can be self-reinforcing.

•

And while their political ideologies vary, the 1930s populists shared most of these core beliefs and policy goals: o They aligned themselves with “the people” or “the common man.” o They were anti-establishment and attacked the current ruling interests (government, corporations, wealthy individuals, etc.), calling them elites who were out of touch and had failed the people. o They sought to undermine those elites in favor of others by, for example, advocating wealth redistribution or the nationalization of industry. o They were strongly nationalist and held national unity as a key aim. o They detested the debate and disagreement inherent in democracy, and sought to empower the executive branch, using strong-arm tactics to prevent others from getting in their way and, in more extreme cases, undermining democracy. o They tended to be anti-international, anti-global trade, and anti-immigrant. They often railed against foreign influence in their countries. This often translated to hostility toward other countries, which pushed those countries to embrace political extremes as well.

•

Conflicts between factions became increasingly intense, leading to great obstructionism, crackdowns on opposition and free media, etc. This led to more autocratic leadership. Those that had the weakest norms/shortest history of democratic institutions were quickest to move away from democracy to dictatorship.

1. The US: FDR, Huey Long, and Father Coughlin While populism was a force in the US, and some would say that Roosevelt was a populist of the left—because his policies were both populist and rather extreme at the time (though much less so in retrospect)—we will consider him a ”quasi-populist.” If you are interested in more classic cases, you might skip to the next section to review those in Europe. The Economic Context In the 1930s, the US saw populists emerge on all sides of the political spectrum—Huey Long was an extreme populist of the left, Father Coughlin showed fascist leanings, and FDR was a center/left populist (depending on one’s own perspective). Before we profile them, we will convey the economic/social context of the 1930s. It’s no coincidence that populism emerged then. The Great Depression, beginning late in 1929 and not reaching its bottom until 1933, created extremely painful conditions that drove people to blame establishment politicians and seek answers from outside the political mainstream. Over the last 10 years, much of the developed world has seen the same dynamic—the end of the debt supercycle—play out again (though not as severely). The following charts convey the rough sequence of events. We’ve previously shown you these charts, so we won’t go into much detail again, but in brief, the analogue is as follows: (1) Debt Limits Reached at Bubble Top, Causing the Economy and Markets to Peak (1929 & 2007) (2) Interest Rates Hit Zero amid Depression (1932 & 2008) (3) Money Printing Starts, Kicking off a Beautiful Deleveraging (1933 & 2009) (4) The Stock Market and “Risky Assets” Rally (1933-1936 & 2009-2017) (5) The Economy Improves during a Cyclical Recovery (1933-1936 & 2009-2017) (6) The Central Bank Tightens a Bit, Resulting in a Self-Reinforcing Downturn (1937) 2. Interest Rates Hit Zero amid Depression

1. Debt Limits Reached at Bubble Top Total Debt (%GDP)

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3. Money Printing Starts, Kicking off a Beautiful Deleveraging

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25 35 45 55 65 75 85 95 05 15

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6. The Central Bank Tightens a Bit, Resulting in a Self-Reinforcing Downturn, with Little “Gas in the Tank”

4. The Stock Market and “Risky Assets” Rally, Helping Produce…
5. Cyclical Recovery in the Economy

1925-1940

2003-2017 "Gas in the Tank"

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Roosevelt was inaugurated on March 4, 1933 at the depths of the depression and engineered a large transfer of wealth through money printing, the dollar’s depreciation, big fiscal deficits to fund big spending programs to create jobs, and big debt write-downs (e.g. by revoking “gold clauses” in private contracts, which would have forced debtors to pay in gold instead of depreciated dollars). These were fairly classic moves by populists of the left. While the recovery began in 1933, these charts obscure the fact that conditions remained terrible for years for the average American. Much like today, inequality in the US, both of income and of wealth, rose substantially, peaking in the early 1930s and remaining elevated through much of the decade. Then, the top 10% earned 45% of income (compared to 50% today), and owned 85% of the wealth (higher than the 75% they own today). However, in the 1930s, the unemployment rate was much higher than it is today. Then, like now, crusaders against the wealthy/corporate interests advocated against banks and in favor of wealth redistribution (see our description of Huey Long below). Income Share of Top Decile

Wealth Share of Top Decile 55% 50%

Unemployment Rate 90%

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Populists of the right at the time were xenophobic, as the foreign-born share of the population was relatively high as a result of very high immigration around the turn of the century that was largely shut down by immigration reforms in 1924. Still, immigrants provided a ready scapegoat for domestic problems. For instance, Father Coughlin was an isolationist who attacked Jews, one of the larger immigrant groups at the time. Notably, the foreign-born population is back near early 1900s highs, as a result of steadily increasing immigration over the last few decades (chart on the right shows legal immigration only). Foreign-Born Population (% Total)

Immigration (% Total Population)

16%

1.6% 1.4%

High immigration

14%

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12%

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Spike from Reagan-era amnesty law

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Below we profile three prominent 1930s US populists: Franklin Delano Roosevelt (who we’d consider a ‘quasipopulist’ of the left), Huey Long, and Father Charles Coughlin.

Franklin Delano Roosevelt Rise to Power The depressed economic conditions led Roosevelt to campaign on a “New Deal” to replace Herbert Hoover’s old way of doing things. He promised big changes, and he was elected by the poor and organized labor to make those changes. He won in a landslide in 1932, winning 42 of 48 states and carrying 57% of the national vote. Populists such as Long and Father Coughlin supported Roosevelt’s first bid for president. He embraced populist rhetoric even more so in subsequent elections, emphasizing the struggle between “the American citizen” and the “economic tyranny” of an “industrial dictatorship” and pursuing a number of populist policies. While he did not come from outside of the political establishment (he had been elected as governor of New York as a Democrat, and was the Democrats’ candidate for vice president in 1920), the policies he ultimately implemented were of a populist nature. Key Policies Upon election, Roosevelt immediately devalued the dollar to produce debt relief and implemented sweeping reforms of an unprecedented scale. His New Deal policies sought to tackle the economic depression through a vast expansion of the role of government and support for workers, debtors, and the unemployed. He created Social Security and unemployment insurance; increased financial regulation; created large government programs that directly employed people; and strengthened labor rights. He engineered big debt write-downs that benefited debtors at the expense of creditors, created an agency to aid underwater mortgage borrowers, and created federal agencies to support mortgage lending. He financed his spending programs in part through a significant expansion of the deficit rather than through increased taxation, contributing to the fiscal boost. Unlike some other populists, he sought to lower tariffs and roll back protectionist policies. Protectionism had taken hold in the 1920s in response to the struggles of American farmers faced with high debts and low commodity prices. The push for protectionism became a central issue in the election of 1928 and ultimately resulted in the Smoot-Hawley Tariff in June 1930, which increased tariffs on over 20,000 goods and is widely considered to be the biggest step away from free trade in modern American history. By the time Roosevelt was elected in 1932, the trade wars that resulted from Smoot-Hawley were seen to have hurt the US economy, and Congress authorized Roosevelt to roll back tariffs when other countries agreed to do the same. In the interwar period, Roosevelt was more interventionist in foreign affairs relative to his recent predecessors. While the US remained technically neutral during the 1930s, it greatly expanded its military sales to Allied powers through the “cash and carry” policy in 1939 and later through the Lend-Lease Act in 1941. Roosevelt also aimed to deter Japan’s military expansionism through enacting more restrictive trade policies with Japan. This strengthened the hand of hardliners in Japan, who escalated the conflict. It was Roosevelt’s 1940-41 oil embargo that allowed the Japanese military to take full control of their government’s foreign policy and provided the pressure that spurred Japan’s attack on Pearl Harbor. It was a classic example of how aggressive foreign relations can empower leaders who hold more extreme positions (we cover these events in more detail in the section on Japan). It’s also worth highlighting that by the 1930s, the US had already largely closed itself off to immigrants, so immigration wasn’t a big issue during the Great Depression. In the 1920s, anti-immigrant sentiment led to the passage of the National Origins Act in 1924 (expanded in 1929), which capped the number of immigrants who could enter the US each year, established quotas on immigration for certain regions, and created the Border Patrol to crack down on illegal immigration. Immigration in the 1930s had declined by over 90% compared to its peak in the early 1900s. Over time, Roosevelt expanded his base of support, positioning the Democrats as the “big tent” party, which alienated the more ideological left-wing populists. Additionally, he brought new constituencies into the fold,

including Western progressives, intellectuals, rural farmers, and ethnic minorities (who had typically supported Republicans). Populism-Related Quotes from Roosevelt • • •

•

“The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.” (1933) “The people of the United States have not failed. In their need they have registered a mandate that they want direct, vigorous action. They have asked for discipline and direction under leadership. They have made me the present instrument of their wishes.” (1933) “For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor, other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness. Against economic tyranny such as this, the American citizen could appeal only to the organized power of government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people's mandate to end it.” (1936) “The hours men and women worked, the wages they received, the conditions of their labor—these had passed beyond the control of the people, and were imposed by this new industrial dictatorship. The savings of the average family, the capital of the small business man, the investments set aside for old age—other people's money—these were tools which the new economic royalty used to dig itself in. Those who tilled the soil no longer reaped the rewards which were their right. The small measure of their gains was decreed by men in distant cities.” (1936)

USAsset Markets in the 1920s and 1930s

USA Equity Prices (Indexed to 1920) 350

1929: Stock market crashes in US, marking the start of the Great Depression

300 250

1933: FDR takes US off the gold standard

200 150 100 50 0

1920

1922

1924

1926

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USA Gold Price (Local FX) 40 35 1933: FDR takes US off the gold standard

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USA Long Rates

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1929: Stock market crashes in US, marking the start of the Great Depression

6% 5% 4% 3% 1933: FDR takes US off the gold standard

2% 1% 0%

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1922

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1928

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1934

10

Huey Long, a US Crusader against the Wealthy and Big Corporations Huey Long was the Bernie Sanders of his time—i.e., a classic firebrand populist of the left. He was governor of Louisiana and a US senator (1932-1935) who ran for president, polling 10% nationally, but was assassinated during the primary in 1935 (because of an unrelated Louisiana dispute). He held anti-corporate and anti-Federal Reserve positions and was in favor of radical wealth distribution (for instance, 100% tax on wealth greater than $100 million). Roosevelt called him “one of the two most dangerous men in America“ (the other was General Douglas MacArthur). Rise to Prominence Long was a lawyer early in his career, mostly defending individuals against big businesses, often in workers’ compensation cases. In his first bid for the governorship of Louisiana, he campaigned on economic equality, though he eventually lost. He won his next bid four years later in 1928, railing against the old money New Orleans aristocrats who had dominated state government and corporations like Standard Oil that he believed had undue influence. His self-written campaign song, “Every Man a King” (a phrase borrowed from William Jennings Bryan), captured the essence of his platform. Once in office, Long (according to many accounts) governed with a heavy hand and expanded Louisiana’s welfare programs. Long won a Senate seat in 1932, his first foray into national politics. He initially supported FDR, before deciding to oppose him in 1933 over the New Deal, which Long deemed inadequate. Long wanted to cap income at $1 million and inheritances at $5 million and establish a 30-hour federal workweek. He promoted these beliefs nationwide, and in the early 1930s his grassroots supporters established over 25,000 “Share Our Wealth” clubs. He denounced powerful, wealthy Americans for hoarding the country’s wealth and believed the root cause of the economic pain was unsustainable income inequality. Long’s Share Our Wealth Society sought to redistribute incomes and achieve a minimum standard of living for all via a high inheritance tax and a graduated income tax. When the media was not in his favor, he began his own radio show, characterized by his animated speeches. He regularly had around 25 million listeners—about 1 in 5 Americans. A hallmark of his speeches (many of which were ad-libbed) was listing the failures of the Roosevelt administration, including failing to redistribute wealth, lower unemployment, and curtail debt. Long’s assassination in 1935 ended the hopes of many that he’d become president. Populism-Related Quotes from Long • •

•

“They’ve got a set of Republican waiters on one side and a set of Democratic waiters on the other side, but no matter which set of waiters bring you the dish, the legislative grub is all prepared in the same Wall Street Kitchen.” (1932) "God invited us all to come and eat and drink all we wanted. He smiled on our land and we grew crops of plenty to eat and wear. He showed us in the earth the iron and other things to make everything we wanted. He unfolded to us the secrets of science so that our work might be easy. God called: 'Come to my feast.' Then what happened? Rockefeller, Morgan, and their crowd stepped up and took enough for 120 million people and left only enough for 5 million for all the other 125 million to eat. And so many millions must go hungry and without these good things God gave us unless we call on them to put some of it back." (1934) They say they don't like my methods. Well, I don't like them either. I really don't like to have to do things the way I do. I'd much rather get up before the legislature and say, 'Now this is a good law and it's for the benefit of the people, and I'd like you to vote for it in the interest of the public welfare.' Only I know that laws ain't made that way. You've got to fight fire with fire." (1932)

Father Charles Coughlin, an American Who Espoused Fascist Views Father Charles Coughlin was a classic anti-capitalist populist, sympathetic to fascist leaders in Europe. He was a Roman Catholic priest and one of the first major political radio personalities, with about 30 million listeners at his peak (nearly a quarter of the US population at the time). Though he began as a prominent supporter of FDR and the New Deal, he eventually turned against the president, and his show became increasingly anti-Semitic and sympathetic to the fascist movements that had come to power in Europe. Father Coughlin started broadcasting on the radio in the late 1920s, with his early shows focused on religious topics and Catholic services. In 1930, he gained a national platform, and he began to discuss political topics, expressing strong opposition to both communism and the greed of capitalism. He supported FDR during the 1932 presidential election and the early New Deal, saying “the New Deal is Christ’s deal.” His opposition to the president grew, however, both as Roosevelt distanced himself from Coughlin and as Coughlin found him too supportive of finance. He then founded a political group, the National Union for Social Justice, which supported populist economic policies that would protect workers. As his message became more extreme and the aggression of the fascist states became clear, he lost influence and faced opposition from both the US government and the Catholic Church hierarchy. His radio show was removed from the air waves, and in 1942 the church hierarchy forbade him from further political activity, forcing him to retire from political life until his death in 1979. Populism-Related Quotes from Coughlin •

• •

• • •

"While we sympathize with the Serbian or the Russian, with the Jew in Germany or the Christian in Russia, the major portion of our sympathy is extended to our dispossessed farmer, our disconsolate laborers who are being crushed at this moment while the spirit of internationalism runs rampant in the corridors of the Capitol, hoping to participate in setting the world aright while chaos clamors at our doors." "I have dedicated my life to fight against the heinous rottenness of modern capitalism because it robs the laborer of this world's goods. But blow for blow I shall strike against communism, because it robs us of the next world's happiness." "Oh you poor laborers and farmers, we have tried, time and again, to tell you that there can be no resurrection for America until Congress begins to coin and regulate the value of money. We have endeavored to teach you, time and again, that there can be no coming out of this depression until what you earn goes to sustain your wife and your children." "We shall barter our sovereignty as a free, independent nation or accept the decisions of a World Court as a super-nation to manage our affairs." "Roosevelt has a poor brand of Russian communism…I think it is significant the leaders among the communists of the world never once attacked international bankers. Roosevelt will not touch that subject." “We maintain the principle that there can be no lasting prosperity if free competition exists in industry. Therefore, it is the business of government not only to legislate for a minimum annual wage and maximum working schedule to be observed by industry, but also so to curtail individualism that, if necessary, factories shall be licensed and their output shall be limited.”

Core Europe: Italy/Mussolini, Germany/Hitler, Spain/Franco Next, we profile countries where populist extremists gained power: Italy, Germany, and Spain. In all three of these cases, democracies became dictatorships as a result of the conflicts.

2. Italy: Mussolini Benito Mussolini came to power somewhat earlier than other leaders we profile (1922), and he gained power through force rather than the ballot. But he took advantage of an environment similar to the ones experienced by other populists—social strife, a weak economy, and ineffective leaders—and he also inspired more extreme politics in many of them. Prior to his rise to power, poor economic conditions had led to widespread strikes, factory seizures, and social unrest. Italy’s democratically elected leaders were unable to resolve these problems, as politics had become fragmented and unstable. Mussolini promised to turn the chaos and inefficiencies into order and efficiency—to “make the trains run on time.” And with these promises, Mussolini was able to mobilize a broad set of disaffected Italians and upend Italy’s democracy to take control. Of course, a lot happened from the time he became prime minister in 1922 until he was shot and hanged in 1945. What follows is only a brief review. Economic/Political Background Before World War I, Italy’s economy was still mostly agrarian, and living standards and production capacity lagged behind countries like Germany and the UK. The war made things worse. In the aftermath of the war, Italy experienced a substantial economic downturn and high inflation. Unemployment was high from the weak economy and the demobilization of the army, which left many former soldiers out of work. In prior years, Italians who struggled to find work often emigrated to the US, but newly restrictive US immigration laws ended that path. These conditions contributed to substantial labor unrest. Workers seized factories, occupied land, and went on strike. The democratically elected government failed to resolve these issues. Politics had been especially ineffective and unstable since the 1919 elections, in which the socialists won the most seats for the first time under a new proportional representation system. The socialists were unable to form a governing coalition, and over the next three years Italy quickly cycled through four different prime ministers, none of whom were able to stem the rising social instability. The strikes and occupations carried out by the growing workers’ movement challenged the interests of landowners and businesses and raised fears of communists seizing power. Meanwhile, nationalist sentiment was on the rise, as nationalists (including many out-of-work soldiers) felt that Italy had been treated unfairly in post-World War I territorial settlements. Rise to Power The combination of nationalist resentment and chaotic domestic conditions created a prime opportunity for Mussolini to galvanize the support of disillusioned ex-soldiers and frustrated property holders. Mussolini’s fascism defined itself in opposition to both socialism and the political elite, and promised to restore Italy to its past glory through territorial expansion. He believed that Italy needed “a man who is ruthless and energetic enough to make a clean sweep” and deal with Italy’s social and economic problems, and offered himself as such a man. Along with ex-soldiers, Mussolini also appealed to the frustrations and fears of middle-class Italians and business owners, who had tired of the persistent labor strikes, riots, and general chaos that had characterized socialist rule. For those people, Mussolini’s rousing oratory and promise to restore order made him an acceptable—even desirable—alternative to the status quo. While initially Mussolini sought power through the democratic process, his party did not do well in its first elections. His ultimate path to power relied on political violence. He established a paramilitary force that violently repressed socialist movements, put down labor strikes, and seized de facto control of large parts of Italy, especially the more industrialized north. In 1922, in response to plans for a general strike, his supporters

organized what would later be called the March on Rome. His militia occupied strategic areas of the country, and 30,000 people marched on the capital. The king, fearing a civil war, asked Mussolini to form a government. Initially, Mussolini formed a cabinet within the existing parliamentary structure, governing in coalition with other parties. The initial transfer of power was tolerated by business and political elites. Business elites thought Mussolini wasn’t much of a threat and could be manipulated—after all, his early speeches had a free-market bent. Meanwhile, the king and other politicians thought that Mussolini would operate within the existing political order, rather than overthrowing it. However, Mussolini soon changed electoral laws to favor his supporters and make it easier to obtain a parliamentary majority, bypassed constitutional limits on his power, and manipulated the media to propagate an image of himself as the savior of Italy. Simultaneously, his paramilitary allies continued their campaign of political violence, intimidating or assassinating his detractors. These measures allowed him to achieve a parliamentary majority in the 1924 elections. By 1925, he had largely dismantled Italy’s democratic institutions and created a one-party police state. Key Policies Mussolini’s goal was to turn Italy into a modern industrialized state, shore up its access to strategic resources, and restore its national glory (e.g., through territorial expansion). While his initial economic policies were classically liberal (reducing taxes, cutting subsidies, taking measures to attract foreign capital, privatizations), his economic policies gradually evolved over time to involve more and more control over private industry and eventually direct ownership of much of the productive capacity, bending companies to serve the interest of the state. Mussolini described his policies as “state capitalism,” and by 1934 he claimed that “three-fourths of Italian economy…is in the hands of the state.” To summarize some of his policies: •

Controlling private businesses: Mussolini preferred a “corporatist” approach in which the state would exert heavy control over industry, but actual ownership would initially remain in private hands. To achieve this, he pursued political and bureaucratic control of both labor and industrial organizations, nationalizing trade unions and forcing companies to join government-controlled “employer syndicates” that determined major production/investment decisions in each industry. Later, during the Great Depression, the government directly took over many of Italy’s large companies.

•

Protectionist policies: He enacted high import tariffs and regulations aimed at capping import volumes, spearheaded a failed attempt to make Italy self-sufficient by ramping up grain production (thus reducing agricultural imports) and increasing intra-empire trade as a share of total trade, and enacted capital controls that eventually prevented Italians from investing abroad.

•

Xenophobic policies: After striking an alliance with Nazi Germany, he published a racist manifesto and legally prohibited Jews from participating in the economy and in most forms of public life.

•

The media: Mussolini had the same attitude toward the media as he did toward the rest of the economy: the role of the media was to serve the interests of the Italian fascist state, and the state would intervene to ensure this was the case. In line with this, newspaper editors were appointed by the Fascist party, journalists had to be registered Fascists, and local officials were given the power to suppress publications. Rival political newspapers were banned, and authors who stepped out of line could quickly find their works banned as well. This produced a culture of broad self-censorship, where almost everyone refrained from criticizing the state out of fear of retaliation. Moreover, the central government took a direct hand in deciding what news would and wouldn't be covered by sending out regular directives to editors. These measures transformed the news into an instrument of centrally-directed state propaganda, at first overseen by Mussolini's Press Office and, later, by the newly created Ministry of Popular Culture.

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Centralization of power: He outlawed all other political parties and abolished local autonomy, replacing elected mayors and councils with appointments by the Italian Senate.

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Government stimulus: Mussolini spent on public works, education, and social welfare, including big pushes to modernize infrastructure.

•

Muscular foreign policy: Mussolini sought to partially restore the Roman Empire, through claiming and retaking parts of North Africa and the Balkans. He also directly funded and provided training and support to German and Spanish fascists. Though he was personally dismissive of the Nazi’s racial theories and rhetoric, Mussolini adopted the German expansionist concept of Lebensraum for his own state in justifying his wars in Libya, Ethiopia, and later the Balkans. Italian fascism became the source of inspiration for the other major far-right movements in 1930s Europe.

The Economy, Asset Markets, and Wealth Mussolini’s policies had mixed impacts on the economy and markets. In his first few years in power, the transition from labor unrest to order and the pursuit of free market policies contributed to a recovery in growth and a positive investment climate. Equities did well, rising about 70% in real terms from 1922 to 1924. However, as Mussolini established full dictatorial control in 1925 and began consolidating his power over industry, equities generally fell. That said, his infrastructure programs provided substantial fiscal stimulus, and his social programs established safety nets that proved helpful in the Great Depression. While growth stagnated, the economic contraction in Italy was substantially smaller than in its fellow gold bloc country, France. After Mussolini’s initial ascent to power, there wasn’t much capital flight and little emigration (emigration slowed, while return migration picked up). That said, years later, when the peg came under pressure during the Great Depression, the government began to interfere more significantly in asset markets, imposing capital controls and forcing repatriation of financial assets. Subsequent to the reestablishment of the gold peg, which began in 1926, there was a modest but persistent drain of reserves, which accelerated substantially following the devaluations of the pound and the US dollar in the early 1930s. In response, in 1934, most foreign exchange transactions were banned (with the exception of trade financing and transactions for travel abroad), as was the purchase of foreign securities. Banks and firms were required to sell all their foreign assets to the government, including FX payments received for past trade transactions. In 1936, the government forced all Italians to exchange their foreign securities for Italian treasury bonds, and Italians were “encouraged” to hand over private gold holdings to the government. The forced swap of foreign assets for government debt was used to finance the government’s increased debt issuance related to the occupation of Ethiopia. Populism-Related Quotes from Mussolini • • • •

•

“This is what we propose now to the Treasury: either the property owners expropriate themselves, or we summon the masses of war veterans to march against these obstacles and overthrow them.” (1919) “I declare that henceforth capital and labor shall have equal rights and duties as brothers in the fascist family.” (1937) “If I tried to harness the capitalistic force up to now, it was because it was already active. But when the first resistance occurs, it will be replaced without hesitation by a new, entirely different and more worthy force.” (1937) “We go to battle against the plutocratic and reactionary democracies of the West…This gigantic struggle is nothing other than a phase in the logical development of our revolution; it is the struggle of peoples that are poor but rich in workers against the exploiters who hold on ferociously to the monopoly of all the riches and all the gold of the earth.” (1940) “We are fighting to impose a higher social justice. The others are fighting to maintain the privileges of caste and class. We are proletarian nations that rise up against the plutocrats.” (1945)

Italy: Economic Conditions in the 1920s and 1930s Growth

Growth stabilizes as Mussolini takes power

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Mussolini takes power

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200 Start of corporatism, dictatorship. Begins return to gold standard in 1926.

180 160

Mussolini takes power, prioritizes industrialization, ends strikes

140 120 War stimulus and devaluation

Mussolini takes power War-related

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20

25

16 Bridgewater® Daily Observations 3/22/2017

Italy: Asset Markets in the 1920s and 1930s ITA Equity Prices (Indexed to 1920)

Corporatist policies begin; unions nationalized; increased state control over industry 1930-31: Three of Italy’s major banks become insolvent 1931-1933: Govt Mussolini Mussolini process of bank takes power becomes bailouts, govt holding dictator company acquires US stock troubled assets market crash Period of freeMussolini market policies announces intent to revalue currency and peg to gold

140 120 100 80 60 Lira devalued

40 20 0

1920

1922

1924

1926

1928

1930

1932

1934

ITA Gold Price (Local FX) 800

Mussolini announces intent to revalue currency and peg to gold

700 600

British pound devalued

Mussolini takes power

USD devalued

500 Lira devalued

Mussolini becomes dictator and begins corporatist policies

400 300 200 100 0

1920

1922

1924

1926

1928

1930

1932

1934

ITA Short Rates 12% Mussolini announces intent to revalue currency and peg to gold; beginning of prolonged deflation

1930-31: Three of Italy’s major banks become insolvent

10% 8% 6%

Mussolini takes power

4%

US stock market crash

Mussolini becomes dictator

Lira devalued

2% 0% 1920

1922

1924

1926

1928

1930

1932

1934

17

3. Germany: Hitler We won’t go into detail on all of the terrible things Hitler did when he was in power, as they are well known. We do, however, want to highlight the role of political discord and economic conditions that helped Hitler turn Germany from a democracy into a dictatorship. Economic/Political Background By the early 1930s, Germany had experienced 15 years of extreme economic environments. Germany was barely out of its period of hyperinflation (between 1921 and 1924) before growth started slipping in 1929 and the Great Depression began in 1930. Throughout the economic turmoil, elites were seen to be prospering while others faced the brunt of the economic pain. Through the 1920s, the top 10% earned about 40% of Germany’s income (higher for Germany than at any time since WWII). Unemployment Rate

Income Share of Top Decile 55%

35%

50%

30% 25%

45%

20% 40% 15% 35%

10%

30%

5%

Moderate leaders struggled to govern, and Nazi opposition made the dysfunction worse. In 1928, going into the Great Depression, the government was a weak coalition headed by Germany’s Social Democratic Party (centerleft, it was the largest party but only had about 30% of seats in the Reichstag) and included the National People’s Party (center-right) and Centre Party (Catholic centrists). Prone to squabbling and struggling to govern, the moderates were unable to make the country run well, leading the Nazi and Communist parties to gain popularity as the population became fed up with how things were going for them. The Nazi and Communist parties both gained significantly in the election of 1930. The Nazis became the second-largest party (with 18% of the vote), and the Communists were close behind. In the highly fractured Reichstag, the President Paul von Hindenburg appointed the leader of the fourth-largest party to be chancellor, leading to a minority government that governed by majority decree. It was against this chaotic backdrop that the Nazi Party was able to win the most seats in the subsequent election (1932), and Hitler could eventually seize power. We describe these events in more detail below. Prior to Hitler’s rise, Germany had little control over its foreign policy; it was largely at the mercy of the French and British under the Treaty of Versailles. Germany’s weakened position internationally was seen as intolerable by many Germans—particularly ex-soldiers—which fostered its inclinations toward nationalism and militarism to return Germany’s former glory.

Hitler’s Path to Power Hitler was a disaffected ex-soldier. He was inspired by Mussolini’s paramilitary toppling the Italian government during the 1922 March on Rome. He wrote a letter to Mussolini expressing his admiration for the newly installed dictator and based his failed 1923 Beer Hall Putsch on Mussolini’s coup. Hitler praised Mussolini in his 1925 autobiography, writing: “I conceived the profoundest admiration for the great man south of the Alps, who, full of ardent love for his people, made no pacts with the enemies of Italy, but strove for their annihilation by all ways and means. What will rank Mussolini among the great men of this earth is his determination not to share Italy with the Marxists, but to destroy internationalism and save the fatherland from it.” With the economy weakening and the government at a stalemate, Hitler’s message of economic revival, anticommunism, anti-Semitism, and anti-Treaty of Versailles rhetoric resonated with the desperate German citizenry. In the next presidential election, in April 1932, Hitler got 37% of the vote against von Hindenburg, and the subsequent Reichstag election of July 1932 saw the Nazis again win 37% of the vote, which was enough to be the largest party. Together with the Communists, they had a bit more than half of the Reichstag seats, making a political coalition of mainstream parties impossible. Still, Germany’s government wasn’t yet willing to cede power to one of these extremist parties. Von Hindenburg appointed an obscure mainstream politician, Franz von Papen, chancellor and governed by emergency measure, not seeking parliamentary consent.

Nominal Growth

Nazi Share of Popular Vote 15%

50%

10% 5% 0%

40% Nazis gained popularity

30%

-5%

20%

-10%

Growth contracted

10% -15% 0%

-20% 24

26

28

30

32

34

36

38

40

Dec '24

May '28

Sep '30

Jul '32

Nov '32

Mar '33

The Nazis gained electoral success primarily by drawing in voters who had previously not been active in politics, a coalition largely consisting of rural laborers, formerly mainstream conservatives, and lower-middle class workers. Four million more voters—a nearly 15% increase—joined the electorate in the 1930 federal elections, many to support Hitler. Most of the rest of their support came from taking votes from center-right nationalist parties.

Federal Election Votes (Mln) Conservative

Non-Nazi Votes

Nazi

Total Votes

40 16

Nazis cannibalized conservative support...

...and attracted new voters

35

12 30

8

25

4 0 24

26

28

30

32

34

24

26

28

30

32

34

About half of the workers who joined the party between 1925 and 1932 came from villages with populations under 5,000, primarily Protestant villages. Anecdotes from the time suggest that the Nazis garnered support among lower- to middle-class workers who were mobilized by fears of their way of life being under attack from socialism, trade unions, urban elites who didn’t share their values, big corporations, and market turbulence. Notably, the unemployed (of which there were plenty in the early 1930s) tended to be drawn toward supporting the Communists, who also saw their vote share rise in the period. Without an effective government, economic conditions worsened and Germany descended into chaos. Street violence between the paramilitary wings of the Communist and Nazi parties intensified, and the government wasn’t able to restore order. Hoping to break this impasse, von Hindenburg called another election in November 1932, within months of the prior election. The Nazis actually lost a few seats but still remained the largest party. Eventually, in January 1933, von Hindenburg and the moderates decided to form a coalition government headed by Hitler, with von Papen as vice chancellor. They hoped they could control Hitler by surrounding him with more mainstream cabinet ministers (Nazis got only 3 of 11 cabinet positions), and likewise hoped that his extremist rhetoric from the campaign wouldn’t be how he governed. Hitler generally wasn’t seen as a threat. For instance, a prominent newspaper columnist wrote that it would be “a hopeless misjudgment of our country to believe a dictatorial regime could be forced upon it.” A Jewish newspaper published that the new government wouldn’t “dare touch their constitutional rights.” It didn’t take long for Hitler to seize total control. A month into Hitler’s chancellorship, the Reichstag was set on fire, reportedly by a young Dutch communist. The Nazis seized on the crisis, claiming the burning of the Reichstag presaged an imminent Communist coup. Using legislative precedent to take emergency measures, Hitler demanded “temporary” extraordinary powers from von Hindenburg. He assented, passing the Reichstag Fire Decree, an executive order rescinding the right to assembly, freedom of the press, and habeas corpus. Simultaneously, Hitler led a campaign to imprison thousands of Communists, his primary political opposition. Several days later, the previously scheduled Reichstag election saw the Nazis rise in vote share up to 45%—but even with heavy intimidation of other parties and the recent fire, the Nazis didn’t win the election. Citing national security, Hitler’s cabinet designed the Enabling Act, which provided a four-year window in which they could legislate by decree. Through a combination of intimidation, deal making, twisting parliamentary rules, and imprisoning political opponents, they passed the act, 441-84—well above the two-thirds majority they needed. The votes of the Catholic Centre Party secured the act the remaining votes it needed after Hitler promised to protect the rights of Germany’s Catholics. All in all, it took two months from Hitler being named chancellor to total authoritarian control. Within another three months, all other political parties were outlawed. After gaining political power in 1933, the Nazi Party quickly consolidated its control over the media. They banned all other political parties, which gave them a legal justification to raid opposition party papers and destroy or

repossess their equipment. As for independent publishers, they asserted control through multiple avenues: using market tactics, controlling the labor supply, and ultimately relying on state force. They ran independent papers out of business by getting Nazi sympathizers to flood the market with cheap papers, and then when they were nearly bankrupt, bought competitors using a constellation of holding companies that disguised their ownership. In a push to consolidate labor power, the Nazi Ministry of Propaganda took over the German press guild, forbade entry to political enemies, and outlawed unfavorable press coverage. The ministry also sent detailed guidelines to local and regional papers describing which stories to publish and how to report on them. Those who defied these rules were fired or sent to concentration camps. The Economy, Asset Markets, and Wealth To gather support among industrialists, Hitler presented himself as an alternative to the looming threat of communism. Immediately after becoming chancellor, Hitler invited the wealthiest Germans to a meeting where he made the case that “private enterprise cannot be maintained in a democracy” and that only by supporting him could they protect their property claims. The Nazis inherited a business landscape that was already somewhat centralized. Almost all commercial banks had been nationalized after the crisis in 1932, and many industries were organized into cartels that enabled broad cooperation. To further cement their power, the Nazis took four main steps: • • •

•

Centralize labor power: In May 1933, the SA raided all union offices and forcibly replaced their leadership with Nazi Party members. They were reorganized into a single union, the National Labor Front, which was later given the power to set wages and working hours, as well as blacklist workers. Increase cartelization of industry: In July 1933, the government encouraged industries without cartels to form them. This worked without notable coercion, with the government promoting the benefits of increased efficiency and improved production techniques. Print money and create demand: Hitler began an expansive infrastructure program to create employment—first railways, waterways, and highways, and later rapid military rearmament—financed by money printing and budget deficits. This supported private industry. Equity prices rose more than 15% in both 1933 and 1934. Additionally, through the passage of the German Credit Act in 1934, the government was given broad jurisdiction over all credit institutions, having the authority to set rates, commissions, fees, and other business terms. In this way, the government could provide both funding and demand for production and steer industry in whatever direction it desired. Implement foreign-exchange controls and price controls on raw materials: With strong domestic demand and falling unemployment, the government needed to prevent inflation from overheating as well as manage balance of payments pressures. By March 1934, companies were banned from using raw materials for nonessential purposes, and price caps were implemented. By September, Reichsbank President Hjalmar Schacht created a plan to implement foreign-exchange controls. All flows of goods and foreign currency were closely monitored. Incoming payments were transferred to the Reichsbank or approved commercial banks. Exporters were required to report the value and type of all commodities traded. Importers were required to report every transaction in detail (quantity, price, credit terms, trading partner) to supervisory agencies, which evaluated and approved them. There were severe penalties for noncompliance. These controls were broadly effective, and Germany was able to maintain its currency’s value without raising interest rates, even while other countries devalued. Germany primarily managed its exchange rate by selling reserves.

In addition to these steps, the government defaulted on much of its external obligations by stopping reparation payments in the summer of 1932, and defaulted on its US debts in the summer of 1934. While it didn’t shut down asset markets per se, it did tightly control them and generally had broad legal cover for whatever actions the bureaucracy saw fit to take. Later, closer to the beginning to World War II, Germany did outright nationalize warrelated industries (the main state-owned conglomerate Reichswerke Hermann Göring was probably the largest company in the world at the beginning of WWII).

Capital flight was most widespread among persecuted minorities. Those who attempted to leave Germany with their assets were subject to harsh fines. The Reich Flight Tax was enacted before Hitler took power. It assessed a tax on wealthy individuals who attempted to leave and applied retroactively to those who left years earlier. The Nazis expanded the scope of the tax (raising its rate from 25% initially to 65% in 1934 and over 80% in 1936) and its enforcement mechanism. The tax authority worked in conjunction with the Gestapo to monitor individuals who were considered flight risks and could require citizens to surrender a security deposit if they seemed suspicious. In this way, Jews and other minorities who were able to leave Germany had most of their wealth confiscated. At its peak in 1938, the tax earned the government 340 million Reichsmarks, equivalent to 1% of German GDP. Populism-Related Quotes by Hitler • •

• • •

“I only acknowledge one nobility—that of labor.” (1936) “What matters is to emphasize the fundamental idea in my party's economic program clearly; the idea of authority. I want the authority; I want everyone to keep the property he has acquired for himself according to the principle: 'Benefit to the community precedes benefit to the individual.' But the state should retain supervision and each property owner should consider himself appointed by the state.” (1931) “Whenever I stand up for the German peasant, it is for the sake of the Volk. I have neither ancestral estate nor manor.” (1936) “The main plank in the National Socialist program is to abolish the liberalistic concept of the individual and the Marxist concept of humanity and to substitute therefore the folk community, rooted in the soil and bound together by the bond of its common blood.” (1937) “And numerous people whose families belong to the peasantry and working classes are now filling prominent positions in this National Socialist State.” (1937)

Germany: Asset Markets in the 1920s and 1930s DEU Gold Price (Local FX) 120 Nov 1923: Germany abandons papermark and introduces new currency, helping end hyperinflation

Papermark collapses at the end of WWI and during hyperinflation in 1921-24

Jan 1933: Hitler appointed chancellor; combines stimulus with draconian capital controls

Jun 1931: Germany imposes capital controls

Sep 1939: Outbreak of WWII in Europe

100 80 60 40 20 0

1920

1922

1924

1926

1928

1930

1932

1934

DEU Equity Prices (Indexed to 1925) Sep 1930: Nazi Party makes large gains in federal election

Nov 1923: Germany abandons papermark and introduces new currency, helping end hyperinflation; equity investors suffer large real losses during hyperinflation period

Aug 1924: Dawes Plan enacted, reparations eased, American and British credit extended 1920

1922

1924

1926

Oct 1929: Black Tuesday. American bank capital pulls back, halting the credit-fueled expansion

1928

1930

DEU Long Rates

Papermark collapses at the end of WWI and during hyperinflation in 1922-23

Nov 1923: Germany abandons papermark and introduces new currency, helping end hyperinflation Aug 1924: Dawes Plan enacted, reparations eased, American and British credit extended

160

Mar 1933: Enabling Act passed, cementing Hitler's power

Mar 1938: Nazi Germany annexes Austria

120 100 80

Banking crisis Hitler's stimulus broadly effective

60 40

Jan 1933: Hitler appointed chancellor 1932

1934

20 0

DEU Short Rates 40% 35%

Oct 1929: Black Tuesday. American bank capital pulls back, halting the credit-fueled expansion.

30% 25% 20% Jan 1933: Hitler appointed chancellor; Schacht keeps rates low

Jun 1931: Banking crisis

15% 10% 5% 0%

1920

1922

1924

1926

1928

1930

1932

1934

23

4. Spain, the Spanish Civil War, and Rise of Franco Spain’s story—like those of Italy, Germany, and Japan—is one in which a democratically led government was unable to maintain order in the midst of a conflict between populists of the left and populists of the right. In this case, the conflict was so severe that a civil war began in 1936 during the democracy of the Second Republic between right-wing Nationalists and left-wing Republicans. This is one of those classic cases in which the military took control. Franco was the top general of the Nationalists and assumed power in 1939 when the Nationalists took Madrid. He subsequently governed as a populist. Economic/Political Background To quickly scan the complex timeline (and to give a sense of the chaos), in the 20-year period from 1920 to 1940, Spain shifted between several governments, moving from: • • • • •

A limited and ineffective republic dominated by political elites… To a military dictatorship driven by promises of order and the turning around of the economy (1923)… To a contentious and bitter democracy alternating between left (Republican/socialist) and right (Nationalist/fascist) coalitions (1931)… Which eventually devolved into open violence and civil war (1936)… …And a victory by the fascists, led by Franco (1939).

In broad strokes, ineffective government dominated by elites prompted the populace to support a coup, and when democracy was restored after the coup ended, the left (Republican) and right (Nationalist) coalitions enacted increasingly extreme policies, with little interest in compromise or consensus-building with the other side. This created a feedback loop—as both sides felt increasingly threatened and unable to cooperate, they sought to punish the other party and repeal all of their policies upon taking power. This quickly eroded democratic norms and structures and fed social unrest, eventually culminating in the Spanish Civil War, which led to 40 years of dictatorship under Franco. The Nationalists’ and Franco’s Rise to Power In 1931 a coalition of left-wing Republicans swept the country’s first genuine elections and began the period known as the Second Spanish Republic. Almost immediately after its founding, violence against the clergy (who were monarchists and supporters of the landowning class) increased dramatically, with mobs burning churches across several Spanish cities. Though officially denounced by the government, the Republicans were slow to curb the riots and were seen as complicit in the violence. In addition to this social unrest, the Republicans passed a new constitution that was seen as hostile to landowners (imposing an eight-hour workday, giving tenure and land rights to some farm workers) and the Catholic Church (separation of church and state, removal of special privileges in taxation and other operations). Due to the social unrest and rapid legislative changes, former monarchists, aristocrats, and supporters of the dictatorship quickly coalesced into a right-wing coalition (soon known collectively as the Nationalists) aimed at undoing the Republican reforms. In late 1931, landowners refused to plant crops or hire farm workers, which precipitated strikes and violence in rural areas. The Nationalists won a large victory in the 1933 elections and immediately began to undo most of the Republican reforms. This triggered the “two black years” in Spain—a period during which more than 330 people were assassinated and another 1,500 injured in politically motivated violence. The left became increasingly radical— anarchist movements grew in popularity, and strikes and riots became more frequent. The right increasingly relied on paramilitary and vigilante actions to maintain order. During this time, the Nationalists took aggressive policy actions that were seen as unacceptable by the Republicans, including halving the minimum wage of farm workers and purging the military of Republican members and sympathizers.

The prewar news media mirrored the tense and polarized political situation, with propagandists on both sides publishing fake news articles that caused tensions to rise. On the right, organizations such as the Catholic Association of Propagandists created spurious leaflets and wrote articles that claimed the Republicans were attempting to outlaw religion and confiscate private property. On the left, communist activists published pamphlets that were harshly critical of the military. This combative environment contributed to the growing unrest and turmoil of the prewar period. In 1936, the Republicans won control of the government by a slight majority and began to purge the Nationalists from the military. This precipitated a coup, which quickly transformed into the Spanish Civil War. Unlike other populists of the time, Franco had no political role prior to the military coup that precipitated the Spanish Civil War. At the start of hostilities in 1936, he was one of several generals that coordinated the war efforts for the Nationalists. By 1937, following the deaths of several other leading generals, Franco consolidated power, heading the Nationalist war effort and eventually becoming Spain’s leader after the war. Key Policies • •

•

•

Authoritarianism: Franco banned political opposition and ruled by intimidation. Stringent protectionism: Franco pursued an isolationist economic policy with the goal of creating a Spanish autarky—that is, a state that is entirely self-sufficient and not reliant on external trade or support. Only the state could legally trade with foreigners. There were extremely limited imports and exports. There was complete capital control for outbound and inbound investment. Trading goods on the black market was a crime punishable by death. Nationalization of industry: Industries were nationalized and clustered into vertically integrated syndicates, where wages, working conditions, and employment and production quotas were set by the state. Mediation between owners and workers was controlled by the state. Though never fully implemented, the government also took steps toward collectivizing farmland, and at several points set a mandatory price for agricultural products that producers then had to sell to the government. Spanish nationalism: Franco banned the use of languages other than Spanish in government, schools, advertising, and publications (despite Spain having many minority groups that spoke other languages). He also heavily promoted Spanish culture and suppressed aspects of minority cultures.

The Economy, Asset Markets, and Wealth Capital Flight and Asset Forfeitures in the 1930s After King Alfonso XIII’s ouster in 1931 and the beginning of Spain’s descent into civil war, many monarchists and aristocrats reportedly attempted to move their assets out of Spain, through banks in France or British-owned Gibraltar. Though the capital flight was acknowledged as a problem, attempts to limit it were largely unsuccessful until the last Republican government in 1936, when stricter border controls and searches started to hinder the movement of assets abroad. Then, the government froze bank accounts in many cities to prevent further capital flight. This meant that many households and companies realized large losses in their deposits, as the value of the peseta fell around 60% between 1929 and 1939. During and around the civil war, assets were frequently confiscated. The Republican government issued a call that all Spaniards yield the gold they possessed to the government for financing the war effort. Private lands were frequently appropriated by anarchist communes or the state directly, leading to further contractions in industrial and agricultural output and further spikes in the price of basic goods. Inflation in some Republican-controlled areas was up to 1,500%. The defeat of the Republicans at the end of the Spanish Civil War precipitated a movement of about 500,000 refugees into France. About 280,000 of these refugees were either forcibly or voluntarily repatriated to Spain,

but the rest ended up settling in France or South America, exacerbating labor shortages and contractions in industrial and agricultural output during the beginning of Franco’s rule. Franco Period Franco’s policies—while less overtly hostile to businesses than the late Republican period—did little to increase overall wealth. From 1939 to 1959, the Francoist government pursued an autarkist economic policy that banned all private foreign trade, both imports and exports; all capital inflows and outflows not approved by the government; and mandated that agricultural and industrial products be sold at a fixed price. The lack of impetus for private investment meant that agricultural and industrial output continued to contract during this time—for example, industrial output would only regain its 1936 levels in 1955. While output shrank and the government kept official prices artificially low, a black market for goods flourished. As a result, inflation was high and many basic products were unaffordable for Spanish workers. These early years of Franco’s regime were known as the “Years of Hunger,” and up to 200,000 Spaniards died of starvation immediately following the civil war. In keeping with fascist-corporatist theory, Franco also established “vertical trade unions” that grouped owners and workers into combined unions that were run by the government. Most companies and farms were technically still privately owned entities (though Franco did directly nationalize several defense-related industries, such as armaments, steel production, and shipbuilding); however, the owners had no authority to fire workers, set prices or wages, or negotiate working conditions. As a result, most companies were inefficient and unprofitable, with returns only being realized through government subsidies or from owners selling some of the output on the black market. Franco exercised heavy control over the media during his decades in power. During the civil war, his provisional government passed the Press Law of 1938—a piece of legislation inspired by a similar Italian fascist law that allowed the government to suspend any publication without appeal, and appoint and dismiss journalists and editors from both public and private-owned media. Additionally, all journalists had to register with the government and have their reports submitted to government censors, who would eliminate any information they found unacceptable. The Francoist regime also issued instructions to newspapers and radio stations, telling them to interpret events in a particular way or to avoid coverage of certain subjects. The result of this was little to no political news, beyond a straight recitation of official press releases.

Spain: Asset Markets in the 1920s and 1930s ESP Equity Prices (Indexed to 1920) 1931: King leaves throne. Republican government begins.

180 1936: Civil war begins. Spanish stock exchange closed until 1940.

160 140 120 100 80 60 40 20 0

1920

1922

1924

1926

1928

1930

1932

ESP Gold Price (Local FX) 800 700

1931: King leaves throne. Republican government begins.

1936-39: Outbreak of civil war; high inflation

600 500 400 300 100 0

1920

1922

1924

1926

1928

1930

ESP Long Rates

1932

ESP Short Rates 10%

1931: King leaves throne. Republican government begins.

1936-39: Outbreak of civil war and high inflation

9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

1920

1922

1924

1926

1928

1930

1932

27 Bridgewater® Daily Observations 3/22/2017

5. UK: Oswald Mosley, a British Fascist Like the US, the UK saw the rise of prominent populists from the extremes who didn’t end up gaining much power. Below, we profile the UK’s most prominent fascist, Oswald Mosley. Economic/Political Background The context in which Mosley arose was not dissimilar to what was happening in the US. The economy severely contracted in the Great Depression and faced high (though declining) levels of wealth and income inequality. Many of those who turned to extremist policies in the UK during the 1930s opposed the establishment politicians, who had failed to alleviate the economic pain of the depression. For instance, standard economic thinking of the time called for balanced budgets, and the British government initially cut unemployment benefits rather than incur deficit spending as revenues collapsed and unemployment rose. Overall, many viewed the government’s response to the Great Depression as weak, indecisive, and ineffective. Income Share of Top Decile

Wealth Share of Top Decile 100%

30%

45%

90%

25%

80%

20%

70%

15%

60%

10%

50%

5%

40% 35% 30% 25% 00 20 40 60 80 00 20

Unemployment Rate

50%

40% 00 20 40 60 80 00 20

0% 00

20

40

60

80

00

20

Through the 1920s, fascism in Britain was a fringe movement, with its influence limited to minor demonstrations and petty acts of vandalism by a handful of radical groups. In the 1930s, the ideology gained in popularity as the Great Depression worsened in the UK. To some, the emerging Italian and German autocracies began to look like examples of effective “modern” government in comparison to the UK, with streamlined state control that cut through the bureaucracy. Rise to Prominence While still a member of Parliament in the Labour Party, Mosley was considered a rising star, noted for his bold ideas and brilliant speechmaking. In response to the Great Depression, Mosley authored a far-reaching, 16-page plan to support the economy (called the Mosley Memorandum) in 1930. The memorandum was narrowly defeated by Parliament, though many of his protectionist ideas would be brought back in 1932. Mosley believed the hung Parliament of the time to be too prone to inaction and too slow to respond to the depression. In response, Mosley resigned from the Labour Party and spent two years unsuccessfully leading an opposition political party called the New Party, which failed to win any seats in the 1931 elections. The New Party’s campaign was to “save and rebuild the nation” through protectionism and massive public works. Following his defeat in the 1931 election, the New Party fell apart. Mosley went to Italy, where he met with Mussolini. Though he found the dictator to be “affable but unimpressive,” he was inspired by the economic progress of Italy’s fascist-corporatist model. He believed that the only way to solve the problem of high unemployment was through government intervention to strengthen industry. And he believed that the UK needed an empowered executive and less debate/democracy to be able to respond to the crisis. Mosley’s interest in Italian fascism was great enough that he modeled his violent “blackshirt” supporters directly off of Mussolini’s paramilitary enforcers.

Mosley returned to the UK and founded the British Union of Fascists (BUF) at the end of 1932. In the early days, Mosley spread his message by traveling the country giving speeches. The party’s membership jumped in 1934 after the well-known conservative newspaper, Daily Mail, publicly endorsed the BUF and defended it against media attacks. At its peak, the organization was estimated to have 50,000 card-carrying members. The group’s strongest base of support was in London’s East End, with pockets of strength in industrial northern areas around Manchester, primarily working-class neighborhoods. As one writer described them at the time, “the stereotypical BUF member was a lower-middle-class youngster from South London whose father was a Roman Catholic civil servant.” The group attracted the unemployed and displaced professionals, as well as occupational groups like dairymen, taxi drivers, bakers, and newsagents. It also attracted more violent elements—by 1933, the organization had the “blackshirts,” who attacked hecklers at BUF rallies. Mosley’s star began to wane by the end of 1934, as his violent rallies drew increasing censure from the press, and the Night of the Long Knives in Nazi Germany began to change the British perception of fascism. As he became increasingly isolated from the mainstream, his ideas became more radical and paranoid—he grew more interested in anti-Semitism and began advocating the violent overthrow of the British government. The economic platform that drove his early popularity faded out of his speeches, and he was increasingly seen as the pariah leader of a radical fringe. The BUF was officially banned in 1940, and Mosley was arrested and held in custody until 1945. Key Positions • • • •

Protectionist policies: He supported import controls and an “insulation” of the UK market from the world economy—with an emphasis on shifting away from exports and toward development of the home market. Centralized power: The BUF believed Parliament lacked the capacity for strong leadership. Mosley advocated for a new and powerful six-man executive cabinet authorized to use all of the nation’s resources to fight the economic disaster by bypassing the normal political decision-making process. Anti-foreigner: Mosley was suspicious of the influence of other countries and international organizations and aimed for Britain to be self-sufficient. Drawn toward anti-Semitism. Government stimulus: He supported an increase in government deficit spending on “jobs programs” to lower unemployment and stimulate demand (Keynes and Mosley ran in similar social circles, and Keynes allegedly provided Mosley with feedback on his stimulus plan).

Populism-Related Quotes from Mosley • • • •

“Capitalism is the system by which capital uses the nation for its own purposes. Fascism is the system by which the nation uses capital for its own purposes.” “We challenge the 50-year-old system of free trade which exposes industry in the home market to the chaos of world conditions, such as price fluctuation, dumping, and the competition of sweated labor, which result in the lowering of wages and industrial decay.” Mosley believed that the economic conditions in Britain were “tragic proof that economic life had outgrown our political institutions” and the parliament was too engaged “in detailed debate of every technical measure.” “To grapple with this problem it is necessary to have a revolution in the machinery of government.” He advocated forming “a central organization...operating under the direct control of the Prime Minister and the head of the Civil Service himself.”

UKAsset Markets in the 1920s and 1930s

GBR Equity Prices (Indexed to 1920) 1925: UK returns to the gold standard

140 120 100 80 Sep 1939: Outbreak of WWII in Europe

1931: UK leaves the gold standard

60 40 20 0

1920

1922

1924

1926

1928

1930

1932

1934

GBR Gold Price (Local FX) 10 9 8 1925: UK returns to the gold standard

7 Sep 1939: Outbreak of WWII in Europe

1931: UK leaves the gold standard

6 5 4 3 2 1 0

1920

1922

1924

1926

1928

1930

GBR Long Rates

1932

1934

GBR Short Rates 8% 1931: After sharp tightening, UK leaves the gold standard, allowing monetary easing

1925: UK returns to the gold standard

Sep 1939: Outbreak of WWII in Europe

7% 6% 5% 4% 3% 2% 1% 0%

1920

1922

1924

1926

1928

1930

1932

1934

30

6. Japan and the Rise of Military Rule After WWI, Japan, like much of the developed world, experienced poor economic conditions, political dysfunction and the increasing desire for strong leadership. This led to a shift from a weak democracy to a militaristic dictatorship. This is another case in which the desire for a strong leader to take control led to the military taking control. Many of the dynamics that pushed Japan in this direction are evident in other 1930s cases. Economic/Political Background In the interwar period, Japan’s nascent democracy (its first elections were in 1890) was struggling with big issues—like who should be able to vote, how the economic system should be structured, etc. And more than any other country, Japan struggled with the issue of foreigners, which led to strong xenophobia. Throughout the period, Japanese military was still largely independent and pursued aggressive foreign policy objectives that were often at odds with the civilian government’s wishes. During the 1920s, politics became increasingly fractured and violent. The first postwar prime minister, Hara Takashi, faced weak economic conditions and became unpopular with both sides. The nationalist right accused him of being too lenient with Japan’s colonies and held him responsible for Japan not getting what it wanted out of the Versailles Treaty. The left was angry that he didn’t support universal suffrage (only allowing some taxpayers to vote). In 1921, he was assassinated by a right-wing railroad worker, and in 1923 a Marxist university student attempted to assassinate Prince Regent (and future Emperor) Hirohito. In 1925, the emperor and his cabinet, led by Prime Minister Kato Takaaki, responded to this violence, as well as political demonstrations, with a compromise measure, instituting universal male suffrage while also banning extremist political parties, defined as any association aiming at “the altering of the national identity [kokutai] or the system of private property.” These political reforms didn’t control rising extremism, and political divisions meant that subsequent governments lacked clear mandates and were short-lived, with elections held in 1928, 1930, and 1932. Weaker economic conditions, driven by the Showa Financial Crisis in 1927, further contributed to discontent. Military intervention in politics increased: Prime Minister Tanaka Giichi and his cabinet were forced by the army to resign in 1929, after he objected to the military assassinating a warlord in Manchuria. His successor, Prime Minister Hamaguchi, responded to the Great Depression in Japan by implementing fiscal austerity and returning Japan to the gold standard. The resulting economic downturn, combined with his conciliatory foreign policy, made him unpopular, and he was assassinated in 1931. Meanwhile, anti-foreign sentiment and nationalism continued to grow in response to foreign treaties limiting the size of the Japanese military, as well as restrictions on Japanese migration to the US. Military’s Rise to Power By the end of the 1920s, the combination of economic pain, rising anti-foreigner sentiment, an ineffective political establishment, and rising political violence undermined Japanese democracy and created an atmosphere conducive to the military taking power. The military asserted its power by unilaterally invading Manchuria in 1931 without prior government approval. At the same time, political violence continued to rise. In 1932, ultra-nationalists assassinated Prime Minister Inukai Tsuyoshi, after he opposed the invasion of Manchuria and attempted to rein in the military. They ended up being given very lenient sentences, as they were broadly viewed sympathetically by the public. From then on, it was clear that there was no real check on the military’s influence. The military acted largely independently abroad, insisted on major roles in government, and by 1936 could veto the selection of most cabinet members. Although explicit support for far-right parties remained small (fascist parties received about 5% of the vote in general elections in 1936 and 1937), the mainstream political parties became increasingly powerless and subordinate to military rule. In 1940, the major political parties were merged into the Imperial Rule Assistance Association, effectively creating a one-party state. The most prominent military leader to rise to power in this period was

General Hideki Tojo, who served in the Sino-Japanese War before taking the role of Prime Minister from October 1941 through July 1944. Key Policies As its power grew, the nationalistic government pursued policies to secure resources for the military and expand its empire. Domestically, the government focused on directing the economy toward military production. Since the start of Japan’s industrialization, there had been a limited number of family-controlled, dominant monopoly companies called Zaibatsu, which had tight ties to the government and shifted to military-related production. The military government also maintained Japan’s very high tariffs, which had risen during the 1920s to serve the interests of domestic producers, especially the Zaibatsu. Japan’s military ambition required that it secure the necessary military resources that it lacked domestically, especially oil. A vicious cycle of escalating tensions with Western powers ensued, as aggressive Japanese foreign policy led to Japan’s isolation and trade restrictions imposed by other countries, which in turn increased Japan’s perception of itself as under threat. Below are some of the highlights of the deteriorating relationship over the 1930s: •

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Seizure of Manchuria: In 1931, Japan invaded a part of China and in 1932 established the puppet state of Manchukuo. Japan subsequently pushed for industrial development plans, so that the state could help supply the Japanese military. When the invasion was condemned by the League of Nations, Japan withdrew from the League. US trade restrictions: After Japan went to war against China again in 1937, the US began to place stringent trade restrictions on Japan, including the termination of a commercial treaty in 1939, and blocking the shipment of munitions, airplanes, and other materials to Japan (though oil was not included in this act). Tripartite Pact and Japanese occupation of French Indochina: As trade restrictions increased, Japan bolstered its ties to the European fascist powers. Japan first placed troops in French Indochina in the summer of 1940 and in September signed a formal agreement to station troops there with the French Vichy government. Also in September, Japan signed the Tripartite Pact, an alliance of Germany, Italy, and Japan. US oil embargo: The US continued to increase trade restrictions on Japan, first banning scrap metal exports in late 1940, then freezing Japanese assets and banning oil and gasoline exports in August 1941. This last embargo was especially damaging, meaning 80% of Japanese oil imports were cut off. Attack on Pearl Harbor: Japan attacked the US Pacific Fleet at Pearl Harbor, partly in the hopes of preventing US intervention in the subsequent Japanese seizure of resource-rich territories, such as Indonesia.

In the early 1930s, the military government began to tighten its grip on the media, and over the next decade enacted dozens of new regulations censoring all aspects of it. In 1935, films “insulting the national polity, military, or foreign policy” were banned; in 1937, anything regarding national security and foreign relations was deemed a state secret; in 1941, American and British films were banned from theaters. The final takeover came with the 1938 National Mobilization Law and its 1941 revision, which fully eliminated freedom of the press, blocked new media entrants, forced consolidation among the existing outlets, and mandated all publications to be screened by the government prior to publishing. The number of newspapers fell from about 1,500 to 54 by late 1941. The Economy, Asset Markets, and Wealth Initially, Japan had one of the better economic bounces following the Great Depression because it was one of the early countries to break the peg with gold (yen fell 60% versus gold) and print money. Combined with militaryoriented fiscal spending, it helped produce a strong economic recovery, which led local equity prices to rise about 150% in local currency terms. But Japan’s continued reliance on lots of money printing to finance fiscal spending eventually contributed to continued yen devaluations and accelerating inflation.

At the same time, a combination of high tariffs and strict capital controls led Japan’s economy to become more isolated from the rest of the world. Investors couldn’t take their money out (or in some cases control companies they invested in domestically), especially after the outbreak of war with China in 1937. Additionally, Japan pushed foreign competitors and joint foreign-Japanese partnerships out of the domestic market through a series of new laws that restricted foreign ownership in certain companies and industries. These policies prevented further investment and pressured foreign companies to sell their Japanese operations. As the decade progressed, the government passed increasingly restrictive capital controls until essentially every industry was fully owned and operated by Japanese citizens. To discourage capital outflows, Japan enacted the Capital Outflow Prevention Law in 1932, which gave the government unilateral power to “regulate capital movements between Japan and other countries due to domestic or overseas conditions.” Further legislation in 1932 created more regulations on capital movement. These vaguely worded laws were loosely enforced at the beginning of the decade, but enforcement hardened over time. By 1937, any Japanese citizen or company needed written permission from the Ministry of Finance to purchase imported goods or make an investment overseas. In the same year, the government restricted the export of any and all commodities without the written permission of the Ministry of Finance.

Japan: Asset Markets in the 1920s and 1930s JPN Equity Prices (Indexed to 1920) 1936: Military expands control of government, including assassinating Takahashi

Recession at end of WWI 1930: Japan returns to gold standard

100 80 60

1937: Invasion of China 1927: Showa Financial Crisis

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Dec 1931: Takahashi appointed finance minister and breaks peg to gold 1930

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40 20 0

JPN Gold Price (Local FX) 160 140 1930: Japan returns to gold standard

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Dec 1931: Takahashi appointed finance minister and breaks peg to gold

20 0

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JPN Long Rates

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JPN Short Rates 12%

Easing during recession at end of WWI

Dec 1931: Takahashi appointed finance minister and breaks peg to gold, allowing monetary easing

10% 1936: Military expands control of government, including assassinating Takahashi

8% 6% 4%

1927: Showa Financial Crisis

2% 0% 1920

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