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Packaging Industrialization and Selling It: State-Guaranteed Export Financing and Nationalist...
Transcript of Packaging Industrialization and Selling It: State-Guaranteed Export Financing and Nationalist...
Fertik, “Packaging Industrialization”,
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Packaging Industrialization and Selling It:
State-Guaranteed Export Financing and Nationalist Industrialization, 1920-1940
Paper for the History Project “Institutions, Credit, and the State” Conference
Ted Fertik*
September, 2014
In the eyes of contemporaries and of historians, what characterizes the international
economy of the interwar period is above all its distance from the international economy of the
years before 1914.1 The rise of protectionism in the 1920s and its effects on the volume of world
trade; the collapse of the Gold Standard and competitive devaluations in the 1930s; the
generalized sense that another war was likely and the consequent need for economic policies
geared towards national defense: all of these developments could be and frequently were
grouped under the heading of “economic nationalism”.2 In the parlance of contemporary
scholars, for whom it has become axiomatic that the pre-war period was a precocious era of
globalization, the second Thirty Years War was the 20th century’s moment of “de-globalization”
* Ph.D. Candidate, History Department, Yale University. Thanks to Adam Tooze, Naomi Lamoreaux, Tim Guinnane, Grey Anderson, and Gabe Winant for many helpful brainstorming conversations. All mistakes – and they are surely legion – are the author’s. 1 The most famous statement from the interwar period is J. M. Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace & Howe, 1920). The most important recently scholarly statements are Kevin H O’Rourke and Jeffrey G Williamson, Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy (Cambridge, Mass: MIT Press, 1999); Michael D. Bordo, Alan M. Taylor, and Jeffrey G. Williamson, eds., Globalization in Historical Perspective (Chicago: University of Chicago Press, 2003); Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (New York: Oxford University Press, 1996). 2 For representative contemporary reflections, see the views collected in Joseph M. Pavloff, Prosperity; Economic Nationalism or Internationalism (New York: Foreign Policy Association, 1929). For the most thoughtful recent reflection on the varieties of interwar economic nationalism in relation to the world economy, see Henryk Szlajfer, Economic Nationalism and Globalization: Lessons from Latin America and Central Europe (Brill Academic Pub, 2013).
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or “globalization backlash”, when globalization’s losers mobilized politically to root out the
institutional foundations of 19th century international society. While capturing a certain truth
(world trade did shrink; the international capital market did collapse; immigration barriers did
increase), this schema has always had an element of implausibility. Were the economic policies
of the 1920s and 1930s really “anti-global”? Were even arch-nationalist leaders really seeking to
sever their economic ties to other parts of the world?
Then and now, the term “autarky” has been trotted out to serve as a catchall for the
impulse motivating the making of economic policy across the world between the wars. This is a
distorting caricature. Much closer to the truth is the sentiment captured in a speech of the
Brazilian president Getulio Vargas, who, at the groundbreaking of the state-owned steel mill that
bears his name, articulated a desire for his country to cease to be a “semicolonial agrarian
country, importer of manufactures and exporter of raw materials,” and become one “able to meet
the exigencies of an autonomous industrial life”.3 Present also at this ceremony were the
American engineers who had designed and supervised construction of the mill and officials of
the U.S. government lending agency that had financed it; the plant and machinery inside the mill
had been built in American factories. This configuration was not accidental nor even awkward.
Indeed it was by design. The “industrialization of agrarian countries”4 was not a revolt against
the international economy, but an effort on the part of those countries to negotiate a different
relationship to it – one that would guarantee their sovereignty, rather than threaten it; one which,
in keeping with the promise of the Fourteen Points (if not their intention!) would entitle them to
3 Vargas at Volta Redonda in 1943, quoted in Morris Llewellyn Cooke, Brazil on the March: A Study in International Cooperation (New York: McGraw-Hill, 1944), 55–56. 4 Wilhelm Röpke, International Economic Disintegration (W. Hodge and Company, Limited, 1942).
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an equal membership in the society of nations.5 For countries experiencing a shortage of capital
and technical expertise, and an absence of capital goods industries, industrialization was not an
ambition that could be realized without cooperation from the advanced capitalist countries.
Countries like China, Turkey, and Brazil not only required this cooperation, they fully expected
they would get it, and on favorable terms. The title of Sun Yat-sen’s sprawling 1920 manifesto –
“The International Development of China” – sums up the spirit animating these projects.
It is common to assume that the advanced capitalist countries must have been opposed to
these developments. Not only did industrialization in non-industrial countries hold out the
prospect of the loss of the “core’s” oligopoly on advanced industrial technology, it also looked
like the potential loss of significant export markets through a process of import substitution.
Voices opposed to these projects did exist. If opponents were unable to prevent programs of
international cooperation, they were far from powerless to shape them. Furthermore, in a
moment when much of the commodity producing world was either in or on the brink of default
on its sovereign debt, proposals for extending long-term credit on favorable terms smacked of
financial extravagance; those who were in the habit of preaching deflation in response to
economic crisis saw in proposals for industrialization abroad nothing but the fiscal incontinence
they were determined to stanch at home. But the opponents consistently lost the argument.
Instead, national economic units formed of heavy industrial concerns, engineers, and national
5 The desire for industrialization was thus an element of a “condition of globality” confronting everyone in the world, because of the fact that the world had already been effectively globalized. Every part of the world already had ties to the rest of the world strong enough that developments in one part of the world affected the rest of it. On the trajectory of the global condition generally, see Charles Bright and Michael Geyer, “Benchmarks of Globalization: The Global Condition, 1850-2010,” in A Companion to World History, ed. Douglas Northrup (Chichester: Wiley-Blackwell, 2012). On the global dynamics of contestation between those societies in a position to impose order on the rest of the world and those who struggled for autonomy within those ordering projects, see Charles Bright and Michael Geyer, “Regimes of World Order: Global Integration and the Production of Difference in Twentieth Century World History,” in Interactions: Transregional Perspectives on World History, ed. Jerry H. Bentley, Renate Bridenthal, and Anand A. Yang (Honolulu: University of Hawai’i Press, 2005).
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governments actively competed with each other to supply countries bent on nationalist
industrialization with a package of official loans, first-rate technical advising, and specialized
capital goods at competitive prices. This paper attempts to explain why.
The focus here is on integrated iron and steel works, which were an indispensible
component of every single industrialization program of the interwar period. Incredibly large and
technically complex installations, they were uniformly beyond the reach of even organized
combinations of domestic capital and state apparatuses in developing countries. Given the tight
connection between metallurgy and raw materials, modern steel production was also a focal
point for arguments about “have” and “have-not” countries in the interwar period, as leadership
in this strategic industry – and therefore in industrial might generally – appeared closely tied to
the accidents of which societies happened to be sitting on top of large quantities of coking coal.
But by the interwar period a combination of declining costs for transporting fuels and
breakthroughs in the utilization of lower grade raw materials meant that steel production was
increasingly capable of being done anywhere in the world. Thus making steel in places far from
its traditional heartlands was an increasingly viable economic proposition by the 1920s and
1930s, and it looked that way both to political, business, and military leaders in developing
countries, and to industrialists and officials in the core countries.
What follows is an attempt to sketch the dynamics by which countries set on paths of
statist, nationalist industrialization secured the resources they needed from abroad to inaugurate
their national steel industries. The first section looks at the origins and subsequent evolution of
the institutional apparatuses that were assembled in Britain, Germany and the U.S. to facilitate
the sort of international economic cooperation that industrializing countries were seeking. The
second section traces the negotiations between China, Turkey, and Brazil and the three
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industrialized countries over the terms of the latter’s support for the development of modern steel
industries in the former. The focus in the paper – dictated by the sources I have so far assembled
– is on the rich countries. It should be clear from what follows that the focus in no way implies
that it was the rich countries that were calling all of the shots. The evidence suggests that power
political considerations were also close to the fore: the U.S., Britain, and Germany were most
interested in extending official credit for industrialization projects to countries they considered in
some way strategic. But it is equally clear that programs of international economic cooperation
were strategic in a different sense. Officials, businessmen, and observers all thought that they
were witnessing a sea change in international economic relations. This transformation was in part
a result of a worldwide surge in nationalist sentiment. It was also occasioned by technological
shifts that made it easier and cheaper to produce a variety of goods far from raw materials and
supplies of skilled labor. The consequence of this shift, however, was a growing conviction that
prosperity for the industrialized countries would in the future increasingly depend on their
supplying the industrializing countries with the capital goods necessary for industrialization in
the rest of the world.
I. “Staatliche Exportkreditversicherung”
The First World War was massively disruptive to the international economy. In the
course of attempting to stitch back together what the war had rent, international economic actors,
especially exporters, encountered a novel set of problems. Before the war exporters had
purchased, for a premium, insurance policies from private insurers that protected them against
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the particular risks associated with selling goods overseas, especially risks tied to shipping.6
Exporters who sold their goods on credit – as many did – had also been able to insure themselves
against the risk of non-payment by their foreign buyers, a risk that was calculated on the basis of
the creditworthiness of the purchaser. After the war, private insurance companies declined to
reenter this market, on the grounds that political conditions in many importing countries had
elevated the risk of non-payment beyond the level that insurance companies could profitably
price. For many exporters, the unavailability of such an insurance policy rendered them unable to
accept foreign orders, especially large ones on long credit terms.
Had economic conditions been otherwise normal, governments might have felt that this
was a problem they could ignore. This was of course not the case, and after the war many
countries felt immense pressure to bolster domestic employment through whatever means they
could mobilize. In 1919 the U.K. government became the first to establish a public system of
export credit insurance as a comparatively low-cost way to stimulate the export trade. Politicians
considered it a business-like program, designed to correct a market failure. They intended for it
to provide guarantees to reputable exporters selling to otherwise creditworthy borrowers. Given
the range of options available for stimulating exports, official credit guarantees were far less
likely to elevate international antagonisms than, say, a devaluation.
Over the course of the 1920s, in cooperation with U.K. exporters, the British officials in
charge of what became the Export Credits Guarantee Department developed a range of products
designed to meet specific business needs. The ECGD had a mandatory advisory board that
consisted of “businessmen and bankers”, and this board had to approve any guarantees that the
Department extended. The basic concept was that, for a premium, His Majesty’s Government 6 Of course, it was actually the importer who paid this cost, reflected in the notion of “C.I.F. – cost + insurance + freight.”
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would, under specific conditions, pledge to pay the exporter (or the exporter’s bank) up to 60%
of the value of defaulted payments. Although not without opponents, who disliked the
possibilities for official favoritism inherent to such a body, the ECGD continually had its
mandate renewed, and its balance sheet increased. It appears never to have lost money for the
government.
In the 1930s the officials in charge of the ECGD, who interfaced regularly with British
Chambers of Commerce both at home and abroad, commercial secretaries, and exporters
themselves, began to note the increasing prevalence of what they called “public works” contracts
in export markets. These ranged from ports and railroads to electrical installations and steel
works. They were, in other words, the component parts of national economic plans. U.K.
exporters, in turn, began to organize themselves into consortia to compete for these “really large
contracts”.7 The ECGD for its part noted that British firms were not especially competitive in
their bids for these contracts, especially compared to the Germans. Though the Brits might
attribute German success to all manner of nefarious deeds, they were aware that there were a
number of obstacles to British success that were under their control. Among these was the
determination of the Treasury, representing creditor interests, to use British influence to press
debtor countries to resume or continue payments on their sovereign debt as a condition for the
extension of any official credits. Increasingly, officials in the Foreign Office, the Department of
Overseas Trade, and the ECGD concluded that the future of British exports lay with capital
goods producers, since the will to import substitution in much of the world meant that
Manchester cottons (for example) would soon lose their customers. Sympathizing with the
myriad conditions beyond the control of developing countries – particularly the collapse in 7 “Development of British interests in China”, reporting a conversation with Charles Mitchell of Dorman, Long & Co. May 20, 1932. FO 371/16226, F4077/1309/10.
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commodity prices that had done so much to weaken their foreign exchange positions – British
officials recognized that in their determination to pursue their industrialization programs,
countries like Turkey would find another willing international partner if the British chose to stay
out. They concluded that they should base their assessment of the credit risk not on the status of
countries’ sovereign debt or commercial arrears, but on the likelihood that the regime in question
would persist, and the existence of a strong national interest on the part of the developing
countries in keeping faith with their international partners, so as to win further favorable
treatment in future negotiations.
The German system of governmental export credit insurance had a more complex
institutional development, in part because of the seismic shocks to the German banking system
during the Depression. Of the three countries in question, in the 1920s Germany felt the need to
export most acutely, given the high levels of imports on which German industry was dependent,
and the need to run a trade surplus in order to generate currency for reparations payments. State
support for exports was thus given more freely in Germany than in the U.K. or the U.S. From
1926 the German government, acting through the Economic Ministry, authorized the Hermes
Kreditversicherung AG and the Frankfurter Allgemeine Versicherung AG to assume guarantees
“in the name of the Reich” of the risk of non-payment on export sales to governments and
publicly-owned businesses. A year previous the German government had decided to grant
enormous guarantees to German exporters for sales to the Soviet Union.8 In 1928, Krupp
approached the Economics Ministry to inform them that it was forming consortia along with the
8 Rolf-Dieter Müller, Das Tor Zur Weltmacht: Die Bedeutung Der Sowjetunion Für Die Deutsche Wirtschafts- Und Rüstungspolitik Zwischen Den Weltkriegen, Wehrwissenschaftliche Forschungen. Abteilung Militärgeschichtliche Studien 32 (Boppard am Rhein: H. Boldt, 1984); Manfred Pohl, Geschäft Und Politik: Deutsch-Russisch/sowjetische Wirtschaftsbeziehungen (Mainz: v. Hase & Koehler Verlag, 1988); Peter Danylow and Ulrich S. Soénius, eds., Otto Wolff: Ein Unternehmen zwischen Wirtschaft und Politik (München: Siedler Verlag, 2005).
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Vereinigte Stahlwerke and Otto Wolff for sales of railway equipment and other large orders to
government-owned businesses in a number of export markets.9 By 1930, the Frankfurt insurer
had gone bankrupt, and Hermes had been largely nationalized. Both the Reich and German
exporters found this public-private partnership too limiting for the scale of deals they were
contemplating. Provisions were made for a standardized guarantee contract under the auspices of
the Deutsche Revisions- und Treuhand A.G. (DRT), a state-owned auditing firm.10 The contract
covered all sales contracts with “foreign states and foreign public bodies” (ausländische Staaten
und ausländische öffentliche Körperschaften) or “government business” (Regierungsgeschäfte)
for short, provided the sale was for RM 5 million (approx. $2 million) or more, or had a credit
term of two years or more.11 The German government recognized special risks associated with
these sorts of deals, in particular the ever-present possibility that foreign governments could, by
law or by fiat, simply decide not to pay.12 The Reich constituted an intergovernmental committee
– the Export-Garantie-Auschuss für Regierungsgeschäfte – consisting of high-ranking officials
from the Economic and Finance ministries, the DRT, the nationalized Dresdner Bank, and,
typically, officials from the Foreign Office responsible for the countries in question. The
committee met monthly to consider requests from German firms for guarantees. It was very well
aware that some of the biggest future business would be in sales not just of machinery and
equipment, but contracts for the design and erection of entire plants.
Like the British, but more so, the German state apparatus for supplying capital goods to
industrializing countries concerned itself as little as possible with that country’s overall credit 9 Krupp Abteilung Ost to Dr. Heintze, Reichswirtschaftsministerium. Nov. 12, 1928. R3101/18897. 10 Joachim Christopeit, Hermes-Deckungen: Inhalt Und Funktion, Stellung Im System Der Exportförderung, Wirtschaftspolitische Bedeutung Mit Rechtsvergleichender Bewertung (München: C. H. Beck, 1968). 11 Hermes continued to offer guarantees for foreign government contracts smaller than this, but the total amounts guaranteed were considerably smaller. 12 Ernst Hellmut Vits, “Ausfuhrförderung Durch Staatliche Exportgarantien in Deutschland Und Anderen Ländern,” Bank-Archiv: Zeitschrift Für Bank- Und Börsenwesen 24 (1934): 201–4.
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position. Instead it focused on the quality of security on offer from the foreign government for
the deal in question. Where the Germans felt that the security was good – including where
repayment could be linked to the barter arrangements that the Nazi regime established with so
many of its foreign customers and suppliers – they were liberal in extending guarantees to their
exporters. Unlike the British, whose law prohibited the use of the export credits apparatus for
arms sales, the German government actively used the same facilities for the sale of military
equipment13, and once the war began these sales dominated the work of the Export-Garantie-
Ausschuss. In the context of debates around the extent to which Nazi Germany was a command
economy, the supply of export credit guarantees lends weight to the view that in many regards
the Nazi regime chose to rely on subsidies and inducements rather than force in order to align the
incentives of German industry with the regime’s overall goals.14 If anything, it is clear that
German firms required no motivation from the Reich to pursue the large contracts that overseas
government business offered in the 1930s. But because such contracts were competitive, German
industry actively sought assistance from the German government in order to offer the best
possible terms to their foreign customers. It was generally the view of both the British and the
Americans that the German apparatus was by far the most highly developed. Whether this was
because liberal scruples about state support for industry were weaker in Germany, or because
through the Depression the German government had acquired such large ownership stakes in key
German industrial concerns, or because the need to promote exports was felt most powerfully in
Germany, the result was close working relationships between Germany’s largest industrial firms
and the German state in the field of large-scale capital goods exports.
13 C. M. Leitz, “Arms Exports from the Third Reich, 1933-1939: The Example of Krupp,” The Economic History Review, 51, no. 1 (Feb., 1998): 133–54. 14 Christoph Buchheim and Jonas Scherner, “The Role of Private Property in the Nazi Economy: The Case of Industry,” The Journal of Economic History 66, no. 2 (June 1, 2006): 390–416.
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The Export-Import Bank of the United States was established in 1934 with the initial
purpose of matching the export credit insurance that European governments since World War I
had been offering to their manufacturers.15 The first instantiation of the Bank was designed to
facilitate American exports to the Soviet Union. But the utility of the device for general business
purposes was quickly recognized, and, under the supervision of the ubiquitous Jesse Jones, in
1936 Congress gave a newly chartered bank wide latitude in providing insurance and granting
credits to foreign buyers of American goods. Export credit was sold to the Congress on grounds
intelligible to Wisconsin school analysts of American foreign economic relations: American
producers needed foreign markets to prosper; foreign competitors were using cutthroat methods
to undersell American producers in those markets; American producers should be able to count
on their government doing everything in its power to defend their access to those markets.16 In
the context of the Depression and New Deal recovery programs, ExIm – after a short stint under
Roosevelt’s ultra-protectionist foreign trade adviser George Peek – was of a piece with the
various “state capitalist” business promotion devices of Jesse Jones’s Reconstruction Finance
Corporation, in which it was housed until the 1940s.17 From 1935 ExIm was given a new
director, Warren Lee Pierson, who supported pairing the bank’s export-promotion mandate with
support for developmentalist programs in recipient countries.
15 Stella K. Margold, Export Credit Insurance in Europe Today: A Study of the Sixteen European Export Credit Insurance Systems for the Formulation of a Pattern for an Entirely Government Operated or Partially Government Controlled Plan (Washington, D.C: GPO, 1934). 16 Lloyd C Gardner, Economic Aspects of New Deal Diplomacy (Madison: University of Wisconsin Press, 1964). 17 For the RFC and “state capitalism”, see James Stuart Olson, Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-1940 (Princeton, N.J: Princeton University Press, 1988). Also Jordan A. Schwarz, The New Dealers: Power Politics in the Age of Roosevelt, (New York: Knopf, 1993). On ExIm’s early connection to the more nationalist-isolationist side of New Deal foreign economic policy, and its role in the “Peek-Hull” debates, see Frederick C Adams, Economic Diplomacy: The Export-Import Bank and American Foreign Policy, 1934-1939 (Columbia: University of Missouri Press, 1976). Also Stephan Haggard, “The Institutional Foundations of Hegemony: Explaining the Reciprocal Trade Agreements Act of 1934,” International Organization 42, no. 1 (Jan. 1, 1988): 91–119, esp. pp. 113-117.
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ExIm had numerous differences from its British and German counterparts. The German
need to export in order to generate foreign exchange for required imports was altogether absent
from the U.S. context. Exports in general made up such a small percentage of U.S. national
income – trifling in comparison to Britain or Germany – that proposals to revive the U.S.
economy through export promotion were always borderline ridiculous.18 Furthermore
agricultural commodities still loomed massively in total U.S. exports, whereas they were almost
completely absent in the commodity composition of German and British foreign sales. The
domestic orientation of U.S. recovery policy was shared by the domestic orientation of U.S.
capital goods producers – especially steelmakers – whose efforts to develop foreign markets
were often lackluster, content as they were with the tariff-protected domestic market.19 ExIm was
further constrained by historic ties between Wall Street and the U.S. State Department, which
gave U.S. foreign economic policy a distinctly pro-creditor bias. In contrast, Germany, which in
the 1920s became the world’s biggest debtor, had little in the way of creditor interests to defend
in overseas markets. The U.S. State Department consistently constrained the ambitions of ExIm
officers and their allies in the Treasury Department, arguing that official U.S. loans to foreign
governments would eliminate any incentive for those governments to negotiate agreements for
the resumption of debt service on their defaulted bonds.20 Lastly the U.S. export promotion
program had to face down a U.S. Congress genetically inclined to favor producer interests,
18 Michael R. Adamson, “‘Must We Overlook All Impairment of Our Interests?’ Debating the Foreign Aid Role of the Export-Import Bank, 1934–41,” Diplomatic History 29, no. 4 (September 1, 2005): 601, doi:10.1111/j.1467-7709.2005.00508.x. 19 Mary A. Yeager, “Trade Protection as an International Commodity: The Case of Steel,” The Journal of Economic History 40, no. 1 (Mar., 1980): 33–42; Richard A. Lauderbaugh, “Business, Labor, and Foreign Policy: U.S. Steel, the International Steel Cartel, and Recognition of the Steel Workers Organizing Committee,” Politics & Society 6, no. 4 (Dec., 1976): 433–57. Digest of Ford, Bacon & Davis Report No. 200, Jun. 21, 1938, pp. 4-5. Box 46, Edward Reilly Stettinius Jr. Papers, 1918-1949, MSS 2723, Small Special Collections Library, Charlottesville, Virginia. 20 Michael R. Adamson, “The Failure of the Foreign Bondholders Protective Council Experiment, 1934-1940,” The Business History Review 76, no. 3 (October 1, 2002): 490, doi:10.2307/4127796; Adamson, ““Must We Overlook All Impairment of Our Interests?,” 604–605.
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which could not but see in support for industrial development programs abroad a threat to the
existing export markets of domestic producers – small as they may have been.
Nevertheless by 1940 ExIm officials and their allies – capital goods producers21, New
Deal internationalists – had succeeded in overcoming opposition to the bank engaging in the sort
of cooperative development projects that the British and the Germans had pioneered in the
1930s. Ultimately it was Nazi aggression that turned the tide, as American policymakers feared
that German barter agreements would induce various states in the Americas into closer economic
and ultimately political relations with Germany. But geopolitics was not the only consideration.
The chartering of the ExIm Bank happened at the same moment as a fundamental shift in the
foreign economic policy of the Roosevelt administration was beginning. As Thomas Ferguson
documented in his classic article, by 1934 the Roosevelt administration had begun a move away
from emphatically economically nationalist policies of the early New Deal and toward
international economic liberalization and multilateralism, beginning with the push for the
Reciprocal Trade Agreements Act in 1934.22 Much of the initiative for this shift came from “new
liberal” policy intellectuals, especially Adolf Berle in the State Department and Harry Dexter
White at Treasury, who increasingly pushed for a more pro-active, explicitly anti-imperialist
foreign economic policy. Berle was of course the pathbreaking co-author of The Modern
21 In the records of the Export-Import Bank one occasionally finds statements of this sort in support of the Bank’s facilities from the high echelons of American capitalism: “World trade today is in theory and in fact largely a competition between governments rather than individuals.” Eugene P. Thomas, Westinghouse Air Brake Co. to National Foreign Trade Council, Jun. 21, 1939. USNA RG 59, 1930-1939. Box 5154, Folder 4. 22 Thomas Ferguson, “From Normalcy to New Deal: Industrial Structure, Party Competition, and American Public Policy in the Great Depression,” International Organization 38, no. 1 (Jan., 1984): 41–94. For the purposes of this paper it is not important whether we accept Ferguson’s argument that it was the new influence of multinational firms within the Democratic party coalition that triggered the shift. On how the RTAA actually enabled the executive branch to take some degree of control over the tariff-setting process, see Judith Goldstein and Robert Gulotty, “America and Trade Liberalization: The Limits of Institutional Reform” in International Organization, forthcoming. See also Jeff Frieden, “Sectoral Conflict and Foreign Economic Policy, 1914-1940,” International Organization 42, no. 1 (Jan., 1988): 59–90.
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Corporation and Private Property, the fundamental text for all arguments about the socialization
of capital via the public corporation.23 He and White both believed that the world had entered a
new era in financial history, in which private capital could no longer be depended on to supply
the whole of the world’s investment needs. Instead, public investment – at a national and at an
international level – would be required to make up the shortfall.24 Rather than a sign of
capitalism’s decadence, this was instead an opportunity to imbue investment with a public
purpose, namely improving standards of living, and, in the hemispheric context, supporting “the
steady and continued development of the other American countries”.25
These then were the arrangements that the British, German, and American governments
and large exporters developed over the course of the 1920s and 1930s to facilitate the export of
capital goods and to create the conditions for international cooperation in the industrialization of
agrarian countries. The remainder of the essay is devoted to the negotiations between these
different national assemblages and the Chinese, Turkish, and Brazilian governments. Each of
these countries had been on the subordinate end of a relationship to the rich countries that they
called “imperialism”, even as none had been the formal possession of an imperial power. All in
the interwar period sought to forge a new type of economic relationship with the advanced
23 See Howard Brick, Transcending Capitalism: Visions of a New Society in Modern American Thought (Ithaca: Cornell University Press, 2006), 73–82. 24 See e.g. his testimony before the Temporary National Economic Committee in 1939, entitled “A Banking System for Capital and Capital Credit”, printed in Adolf A. Berle, Jr., New Directions in the New World (New York: Harper & Brothers, 1940). 25 Adolf A. Berle, “The Economic Interests of the United States in Inter-American Relations”, Department of State Bulletin No. 105 (Jun. 28, 1941), p. 760. Berle was the crucial American figure in the development of plans for an Inter-American Bank, which, if it had not been blocked in Congress, would have been the first financial institution of which governments – not central banks – were the shareholders. In this regard it was to have been genuinely multinational. And, as Eric Helleiner has demonstrated, economic development and specifically industrialization of the poorer Latin American countries was a core motivation for the creation of such a bank. See Eric Helleiner, The Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order (Ithaca: Cornell University Press, 2014), Ch. 2.
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capitalist countries. They would not accept any arrangement that appeared to compromise or
undermine their national sovereignty. All three countries were overwhelmingly agrarian, and all
considered industrialization to be the best possible guarantee of their sovereignty and national
autonomy. In their modern histories none of these three countries had been colonized nor had
they been firmly within one imperial power’s sphere of influence. But Atatürk’s Turkey had had
to wage an enormous struggle to secure the international recognition of its sovereignty in 1923.
China had experienced revolutionary conditions – largely the result of popular rebellion against
the Middle Kingdom’s increasing subservience to foreign powers – since the turn of the century.
And in 1930 Brazilians had overthrown their republican government in no small part because
young military officers felt that the dominance of the coffee planting elite was maintaining the
country in a position of dependence on foreign capital. For each country the possibility of
economic dependence leading to political subordination was ever present. Vigilance against it
was an existential need. The biggest threat to their sovereignty was a consortium of the capitalist
powers in a Kautskian ultra-imperialism. The greatest bulwark of that sovereignty was
competition between the capitalist powers for access to their markets – as long as the “gunboat”
option was ruled out. In the interwar period, it was the latter that prevailed.
II. International Aid for Nationalist Steel Projects
China
German industry began a concerted push to expand its exports to China beginning in
1930, with the formation of a China Study Commission by the Reichsverband der deutscher
Industrie, the peak association of German industrialists. Individuals representing the full range of
German exporters spent several months in China meeting with officials and businessmen and
Fertik, “Packaging Industrialization”,
16
investigating avenues for economic cooperation. Noting the quickening desire for
industrialization, and the Chinese desire for international economic relations with countries who
were committed to the preservation of Chinese sovereignty, the commission saw enormous
potential. It also saw considerable risks, particularly given the limited control that Chiang Kai-
shek’s government exerted in many parts of the country.26 Views within the Guomindang
differed as to the best course of industrial development, and particularly over the roles of the
Chinese state and foreign capital in economic development, but with the Japanese conquest of
Manchuria in 1931, the debate shifted decisively in favor of Chiang Kai-shek and his allies, who
saw national defense as the key desideratum, prioritizing therefore heavy industry, and requiring
large amounts of foreign capital and technical expertise.27 Germany was Chiang’s preferred
trading partner, and it was the German Gutehoffnungshütte steel and engineering concern (GHH)
that positioned itself as the most serious bidder for a project to build a modern, integrated iron
and steel works near Nanjing and develop the coal and iron resources of the Yangzi valley to
supply it.
For the GHH this steel project represented a potentially enormous contract, one that its
officers estimated could give work for years to several thousand of its employees. For German
industry as a whole it could serve as the entering wedge for a German export offensive in China.
For the Chinese it held out the possibility of the rapid development of steelmaking capacity –
easily converted to munitions manufacture – with the assistance of a world-renowned firm whose
only interest was to deliver the works and win a strong position for future bids. It was also an 26 Reichsverbandes der deutschen Industrie, Bericht der China-Studienkommission (Berlin, 1930); William C. Kirby, Germany and Republican China (Stanford, Calif: Stanford University Press, 1984), chap. 2. 27 This debate is the principal subject of Margherita Zanasi, Saving the Nation: Economic Modernity in Republican China (Chicago: University of Chicago Press, 2006). On the various manifestations of a developmentalist mindset in Republican China, see William Kirby, “Engineering China: Birth of the Developmental State, 1928-1937,” in Becoming Chinese: Passages to Modernity and beyond, ed. Wen-Hsin Yeh, Studies on China 23 (Berkeley ; London: University of California Press, 2000), 137–60, http://site.ebrary.com/lib/yale/Doc?id=10058852.
Fertik, “Packaging Industrialization”,
17
early test for the expanded apparatus of German export credit insurance, the Export-Garantie-
Ausschuss für Regierungsgeschäfte. As mentioned above, this committee was empowered to
award guarantees of up to 70% of the value of sales contracts to foreign governments, and by
1932 it had already done so to the tune of tens of millions of Reichsmarks.
The negotiations were complicated from the start by the dire financial straits of the
Nanjing regime. Its budget was twice the size of its revenues; with the loss of Manchuria went
most of its industrial capacity and railroad lines and the source – through sales of ores and
manufactured goods to Japan and agricultural products elsewhere – of much of the Chinese
state’s foreign exchange. As always with large sales made on credit spread out over several
years, the risk that the buyer, once delivery had been taken, would simply stop paying, was very
high. That risk was higher still when the buyer was a foreign government, and one for which the
use of force to compel payment was simply out of the question. Vits of the DRT summed up
German officialdom’s reasoning:
On top of the internal political difficulties comes the external political conflict with Manchuria. Finally the Communist threat is not to be underestimated. For all of these reasons the ability to pay of the Nanking regime must be placed in doubt. Furthermore the intention to pay cannot always be considered good. It is therefore advisable to grant Reich's guarantees only for such business for which first class security is pledged. In such cases it can certainly be decided to grant Reich guarantees, [and] in particular efforts must be assured to prevent a complete loss of the Chinese market.28 First class security was indeed the sticking point, since the Chinese were offering nothing
of the sort. An initial proposal to secure Chinese treasury notes with customs revenue was
overruled by the Chinese finance ministry, which had determined that it would never again
pledge customs revenue for debt service, except in the case of national defense (apparently in the
eyes of T. V. Soong, China’s Columbia-educated finance minister, the steel mill did not qualify).
28 Vits memorandum, “Reichsbürgschaften für Lieferungsgeschäfte nach China.” Oct. 25, 1932. BABL R3101/18980.
Fertik, “Packaging Industrialization”,
18
Instead the Chinese would only agree to issue seven year treasury notes, countersigned by the
Bank of China – essentially, the full faith and credit of the Chinese state. Private bankers close to
the Reich considered such pledges all but worthless. Paul Reusch of the GHH, who, as chair of
the Northwest Group of the Association of German Iron and Steel Industrialists from 1924-1930,
was one of the most powerful figures in all of Weimar Germany, personally appealed to German
officials to secure financing for the deal, warning that “it is to be expected with certainty that this
order will go to England” if the German authorities did not arrange to guarantee the credit.29
German industrialists wanted the German regime to develop facilities for China similar to those
that the Reich had so successfully employed in financing exports to Russia since 1925. But
unlike China, the Soviet Union had “credit to lose”. Unlike the Guomingdang, the Communist
Party of the Soviet Union was indeed “Herr im Hause.”30
Ultimately a guarantee from the German government for this particular project was not
forthcoming. But by 1936, once barter agreements had been struck exchanging Chinese primary
products – especially strategic ores for rearmament like tungsten and antimony – for German
manufactured products, railway construction and complete plants, German exports to China,
backed by export credit guarantees from the German Reich, boomed.31 As in so many parts of
the world, the combination of worldwide economic recovery, a massive armaments boom, and
Germany’s desperate need for foreign exchange relaxed the financial constraints facing
governments. Industrialists and government planners could then overrule bankers and
29 Reusch to Professor Dr. Warmbold (Reichswirtschaftsministerium). Aug. 1, 1932. BABL R3101/18980. 30 Rhodewald (German advisor to the Bank of China) to Ritscher (Dresdner Bank). Nov. 25, 1932. BABL R3101/18980. 31 Kirby, Germany and Republican China; Udo Ratenhof, Die Chinapolitik des Deutschen Reiches 1871 Bis 1945: Wirtschaft, Rüstung, Militär (Boppard am Rhein: Boldt, 1987), 418–423.
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19
government finance ministers, as investment in the name of national defense trumped austerity in
the name of fiscal probity.
China in the interwar period was only a partially sovereign country, and in fact there were
a number of competing power centers, which, if they were not vying for control of the whole of
China, nevertheless were making bids for a sort of regional federated sovereignty. One of the
strongest of these competing power centers was the southern province of Guangdong, whose
ruler Chen Jitang had his own military forces under his direct command. To go with his
independent military strength – the most obvious coordinate of sovereignty – he decided to
couple independent industrial strength. Reflecting again the tight connection between steel and
sovereignty, the Three Year Plan for the industrial development of Guangdong included
construction of a modern, integrated iron and steel works.32
In 1933 the Guangdong regional government hired the American steel engineering firm
of Arthur McKee & Co. to investigate the possibility of constructing a modern iron and steel
works in the province. William Haven, McKee’s vice president for international business, had
designed and overseen construction of the gargantuan works at Magnitogorsk, centerpiece of the
USSR’s first Five Year Plan, and he commanded the trust of the Guangdong government. Haven
undertook surveys of the neighboring coal and iron ore deposits, and made rough estimates of
potential markets for the mill’s products, and concluded that - especially given Chinese tariff
32 C. Y. W. Meng, “Canton’s Three-Year Industrial Plan” The China Weekly Review, Jan. 6, 1934, p. 238. ProQuest Historical Newspapers: Chinese Newspapers Collection (1832-1953). See Alfred H. Y. Lin, “Building and Funding a Warlord Regime: The Experience of Chen Jitang in Guangdong, 1929-1936,” Modern China 28, no. 2 (Apr., 2002): 177–212.There is reason to believe that investment in industrial development in Guangdong between 1929 and 1936 was greater in magnitude than the Central Government’s, which has lately been credited with establishing much of China’s state-owned industrial economy prior to the creation of the PRC in 1949. Emily M. Hill, Smokeless Sugar: The Death of a Provincial Bureaucrat and the Construction of China’s National Economy (Vancouver: UBC Press, 2010), 9–10; Morris L. Bian, The Making of the State Enterprise System in Modern China: The Dynamics of Institutional Change (Cambridge, Mass: Harvard University Press, 2005).
Fertik, “Packaging Industrialization”,
20
autonomy since 192933 - a profitable works could easily be constructed in the province. Reports
from many quarters concurred that the Cantonese were interested in the project not just for its
contribution to regional industrialization, but also for the ease with which such a facility could be
converted to munitions manufacture. Given the escalating Communist insurgency, the looming
possibility of civil war, and the unabating threat of Japanese commercial penetration backed by
military means, the Cantonese government saw a modern steel works as an instrument of
regional-cum-national defense.34
The provincial authorities wished to obtain equipment, technical expertise, and financing
from foreign firms and governments, and they invited British, American, and German firms or
consortia to tender bids. British officials assumed that one of the German firms, whose
government’s facilities for extending long term credit to overseas borrowers they considered
highly developed, would win the contract. On political grounds the local authorities appeared to
favor British or Anglo-American firms. Two British consortia – one led by the multinational H.
A. Brassert & Co35, the other by Ashmore, Benson & Pease, a British engineering outfit – bid for
33 Hill, Smokeless Sugar, 3. 34 The connection between steel and sovereignty can again be seen in a discussion between Chen Jitang and other top Cantonese officials and the British minister in China. The British noted that the Cantonese were “not anxious to pull down the Central government, but they were opposed to the action of the Central Government in favour of . . . Japan . . . Another instance of the lack of good faith shewn by the Central Government was their failure to complete the Anti-Communist campaign. Apparently the existence of the Communist menace gave them an excuse for not showing a bold front to Japan.” Immediately after this discussion of raison d’êtat, the conversation moved to whether the British government would support the steel mill. “Relations between Canton and Nanking governments, etc.” FO 371/19307, F1071/427/10. 35 There is not space in this paper to discuss the career of Hermann Brassert, but it was a remarkable one. He was born in the U.K., studied metallurgy in Germany, cut his teeth in the 1890s supervising the blast furnaces of Carnegie’s Edgar Thomson works, and was credited with developing the techniques that enabled the successful smelting of the famous Mesabi ores. After World War I he established himself as a consulting engineer, and in addition to work for American clients, he was hired by the British government to propose a plan for the reorganization of the entire British steel industry. American bankers enlisted him to consult on the advisability of major American loans to the German steel industry. After his tenure working for the U.K. government he established a permanent presence in the U.K., whose company, although bearing the same name as its American affiliate, operated independently. In 1936 he was hired by Hermann Göring himself – it was reported that they were second cousins – to design and oversee construction of the Reichswerke Hermann Göring, the gargantuan project at
Fertik, “Packaging Industrialization”,
21
the project, along with two American (McKee, Fraser & Chalmers) and two German groups
(Krupp and DEMAG). The two British groups along with McKee made the final cut, and the
Cantonese authorities indicated that they would welcome cooperation between the groups. As
with GHH’s efforts to win government backing for their contract with the Nanjing government,
financing was the only difficult aspect of the deal, and the poor quality of the security on offer
was the sticking point. For a project valued at £2 million, the regional authorities initially would
only offer payment out of future profits, “which . . . is nothing more than a promise to pay.”36
Furthermore, the Cantonese were cagey in response to British insistence on approval from the
Nanjing authorities for the project. The British were unsure why, given their general support for
Chiang Kai-shek’s government, they should finance a project “which might one day quite
possibly be turned to military use against Nanking”.37 The British continually drew attention to
the “unsatisfactory political situation”, by which they meant the high probability that the current
regime in Guangzhou would not last, and that the obligations incurred in financing the steel mill
would be repudiated.38 Knowing that neither the contracting firms nor private banks (the British-
owned Hong Kong & Shanghai Bank was keen on the proposal and willing to participate
financially) would be willing to bear all of the risks on their own, the Brassert-led consortium
thought it necessary to obtain official British backing through the ECGD. And yet despite the the center of the Nazi autarky drive; in turn Brassert established a Berlin office as well. In the 1930s his firm could be found in connection with iron and steel projects in at least 15 countries. 36 Commercial Secretary, Hong Kong to the DOT, reporting a conversation with Lund. Mar. 22, 1934. FO 371/18145, F2853/2346/10. 37 FO to ECGD, Nov. 3, 1934. FO 371/18146, F6562/2346/10. 38 In contemplating this possibility, Lund had informed the British that “the site of the iron-works was within easy range of a foreign gunboat”. His interlocutor replied that “any thought of security of this nature should be eliminated from consideration as physical enforcement of rights was most likely to be a boomerang disastrous to all foreign interests.” Lund conversation with British commercial secretary at Hong Kong, Mar. 22, 1934. FO 371/18146, F2853/2346/10. Lund also had conversations with Japanese businessmen, who resented being excluded from the proposal. He wondered aloud whether Japanese participation might not increase the security of the project, as Japan would “endeavour to safeguard any anything in which it had an interest.” Pelham (British Trade Commissioner in Hong Kong) to Beale (Commercial Counsellor in Shanghai), reporting a conversation with Lund. May 1, 1934. FO 371/18146, F4810/2346/10.
Fertik, “Packaging Industrialization”,
22
patent shakiness of the proposal, British officials were determined to stay in the field, since
Haven was reporting that the new American Export-Import Bank was eager to offer the Chinese
financing on favorable terms.39 The British spoke of the “advertisement value” of such a project;
they appreciated the determination of the regional government to press ahead with its
industrialization schemes, and saw the likelihood of large contracts in the future going to
whichever nation’s firms supplied the desired steel mill. The British interest in the project
coincided with the ECGD’s focus beginning in 1934 on the export of capital goods as a field of
large and increasing importance to British manufacturing.40
At the end of 1934, the British authorities remained unsatisfied with the security on offer,
and declined to extend official credit guarantees. But with the American firms failing to obtain
financing from their government as well, the Brassert consortium, represented by Knut Lund, a
Norwegian engineer of many years’ experience in China, pressed on with its negotiations.41 By
1935 Lund had obtained concessions from the authorities in the form of agreement to a dual
administration of the plant on which the creditors would be represented directly, a larger initial
payment, a new and more detailed survey of the raw materials and the plant siting, and the
possibility of exiting the deal should the new survey turn up discouraging results or should the
political outlook deteriorate. In April 1936 Lund signed a contract with the provincial authorities
39 American documents show that the Export-Import Bank, whose Vice-President at the time was a veteran of the Soviet Five Year Plan and an enthusiast for industrial planning, was keen on the proposal, especially as it faced pressure from the Cleveland Chamber of Commerce. But the U.S. State Department was adamant about not extending new credits to the Chinese when numerous existing commercial accounts were in arrears. American officials affected hurt at the apparent lack of gratitude shown by the Chinese for the American defense of the Open Door. In more materialist terms, exports being so much smaller as a percentage of U.S. national income than in Britain or Germany, U.S. export promotion had not reached a remotely comparable intensity to that of its European competitors. 40 “A Short History of the Export Credits Guarantee Department”, pp. 8-11. ECG 5/2. 41 Lund was in fact the China hand for the firm Perin & Marshall, an American steel engineering firm that had been active in Asia at least since Charles Page Perin went to undertake surveys and consult for the Tata steel works in India in 1906. I have not found any documents explaining why Lund’s American principals did not attempt to compete for this bid.
Fertik, “Packaging Industrialization”,
23
reflecting these terms on behalf of Brassert & Co. Technical experts from the U.K. arrived
shortly thereafter to begin the new and more detailed survey. No financial commitment from
U.K. authorities was yet forthcoming, but they encouraged Brassert & Co. to continue their
efforts and left open the possibility of credit guarantees if and when conditions improved.
Negotiations did not stop when Chiang forcibly removed Chen Jitang in 1936. Remarkably,
efforts continued even after the Japanese invaded mainland China in the summer of 1937.
Japanese bombs were being dropped on Cantonese factories as the British experts were
conducting their surveys. In fact, the new Cantonese authorities came to recognize that British
losses in Shanghai and the Yangzi Valley increased the potential importance of southern China
to the future of British access to Chinese markets. Employing Lund as their trusted intermediary,
the military officials running Guangdong began to formulate proposals for Sino-British
cooperation in the development of mines and industry in Guangdong province. Evincing a
willingness to depart from the statist principles that had guided their industrialization efforts
earlier in the decade, Cantonese officials now suggested establishing a company under Chinese
law that would have a 51% Chinese participation and a 49% British and Hong Kong
participation, which would take over all existing government-owned factories, finance
construction of the iron and steel works, and underwrite the development of coal mines.
Cantonese authorities alerted the British that "the industrialization of this province will come in
great momentum in the very near future. Whoever sees the opportunity and takes part in it will
reap the profit himself and at the same time be doing his part to make this world a better world to
live in."42 The British view was that this volta-face from the policy of boycotting all British
goods of a decade before was a play to increase British capital’s stake in southern China in the 42 Y. C. Koo (Kwangtung [Guangdong] Provincial Bank to Blunt, (British Consul-General at Canton), Feb. 25, 1938. FO 371/22156, F3716/2796/10.
Fertik, “Packaging Industrialization”,
24
hope that this would increase Britain’s willingness to defend southern China against Japanese
invasion.43 Chiang Kai-Shek himself, who previously had been content to temporize, presumably
because he thought the Guangdong steel project would compete with the steel works he still
hoped to build near Nanjing, now instructed the Cantonese authorities to speed construction
along.44 The British repeatedly encouraged Lund to continue these discussions, and made official
pledges of diplomatic support, but were clear that the government would make no financial
commitments until political and military conditions improved, and that support from the British
military for private investments was out of the question.
Lund and the British authorities were in complete agreement that on the other side of the
war, which must at some point end, rapid industrial growth in China was a near certainty. Of
course with war and Japanese occupation continuing until 1945, construction on the steel works
never began. But already in 1943 Lund was conferring with British officials about
comprehensive plans for the postwar development of the coal, iron and steel industries in China,
and the possibility of enormous contracts going to British firms. Though the 1930s attempts to
enlist foreign participation in the nationalist development of a modern Chinese steel industry had
failed, it had been the weakness of the political nation, not foreign opposition and not any
inherent backwardness of the economic nation that had precluded its success.
Turkey
If China had been the true epicenter of global inter-imperialist competition before World
War I, the (partial) stabilization of which was indeed the great innovation of America’s turn-of-
the-century ascendancy, Turkey was more classically a zone of European great power politics. 43 [need to track down this reference] 44 Lund to Blunt, Mar. 18, 1938. FO 371/22156, F3717/2796/10.
Fertik, “Packaging Industrialization”,
25
Yet the end of World War I and the recognition of the sovereignty of the Turkish Republic at
Lausanne in 1923 left Britain with a new preeminence in the region that significantly reduced the
possibility of Great Power conflict over the Middle East.45 At the same time historic ties between
Turkey and Germany remained strong, and German exporters continued to look on Turkey as
one of their most important export markets and one they were at serious risk of losing were they
not to mount a concerted offensive.
Since at least the early 19th century Ottoman officials had realized that the empire’s
economic backwardness relative to the European powers was issuing in a profound military
disadvantage, ultimately imperiling the sovereignty of the Empire. The dependency of
concessions and foreign debt supervision was a humiliation that Turkey’s postwar nationalist
leadership was determined to purge. When the postwar civil strife between Turks and Greeks led
to the exodus of much of Turkey’s capitalist class – and with them much of the country’s capital
– the Kemalist leadership could see no alternative to a large state involvement in economic life.
Although in the 1920s they focused their energies on agricultural modernization, the Depression
cleared the way for grander visions of industrial modernity. The makeshifts of the 1920s
morphed into the official ideology of the 1930s – “étatism” – and into a determination to
accelerate industrialization through all available means, encouraged not least by the collapse in
Turkey’s terms of trade and the concomitant evaporation of the country’s ability to import
manufactured goods.46 The Turks secured early support in 1932 with an $8 million gold dollar
45 John Darwin, “An Undeclared Empire: The British in the Middle East, 1918-39,” Journal of Imperial and Commonwealth History 27, no. 2 (May 1999): 159–76; Yücel Güçlü, “Turco-British Relations on the Eve of the Second World War,” Middle Eastern Studies 39, no. 4 (October 1, 2003): 159–205. 46 Erik Jan Zürcher and ebrary, Inc, Turkey a Modern History, 3rd ed (London ; New York: I.B. Tauris, 2004), 197, http://site.ebrary.com/lib/yale/Doc?id=10133094; Caroline E. Arnold, “In the Service of Industrialization: Etatism, Social Services and the Construction of Industrial Labour Forces in Turkey (1930–50),” Middle Eastern Studies 48, no. 3 (May 2012): 363–85; Mustafa Türkeş, “A Patriotic Leftist Development-Strategy Proposal in Turkey in the 1930s: The Case of the Kadro (Cadre) Movement,” International Journal of Middle East Studies 33, no. 1 (February
Fertik, “Packaging Industrialization”,
26
loan from the Soviet Union to finance principally the purchase of textile machinery. But the first
Turkish Five Year Plan embraced also railroads, ports, coal mines, chemicals, and electrical
power, as well as iron and steel. The Turkish state founded development banks to finance and in
some cases manage new industrial enterprises, and it sought about winning foreign financial and
technical support for its nationalist ambitions. In later years the project would be ridiculed for its
poor siting (it was far from markets and from raw materials), for its gigantism, and for the poor
quality of its management. But in 1932 when the Turks began serious conversations with
German firms about contracting for the construction of an iron and steel mill at Karabük, they
viewed it as a significant step forward for the Turkish economy
The first national unit to bid for the project was a German consortium headed by Krupp.
For the entire 19th century and through World War I Krupp had been the major supplier of
munitions to the Ottoman military, not to mention a major exporter of steel for projects such as
the Baghdad Railway. Beginning in 1926, groups of German firms had begun to compete for
large contracts from the Turkish state, mostly in the arena of railway construction. The first
contract was awarded in 1927 to a consortium led by the construction firm Julius Berger Tiefbau,
followed by very large contracts to Krupp-led consortia in 1930 and again in 1934. The consortia
included many of the major firms of German heavy industry and engineering, and the contracts
received Reich guarantees through the Export-Garantie-Ausschuss and the DRT. Krupp in
particular was determined to win back this former sphere of influence for its firm in particular
and German industry in general. In 1932, already active in railway construction, Krupp began
discussions with officials in Turkey about the possibility of constructing a large, integrated iron
and steel works, in line with the Five Year Plan. Krupp sent its own experts to investigate and 2001): 91–114; Osman Okyar, “The Concept of Étatism,” The Economic Journal 75, no. 297 (March 1, 1965): 98–111, doi:10.2307/2229238.
Fertik, “Packaging Industrialization”,
27
reported favorably on raw material supplies and the economic viability of the project. Krupp
officials told the RWM that an iron and steel industry for Turkey represented “a very interesting
project for German industry, since it can be expected that such an installation, which will first be
laid out on a small scale but later expanded and built out, entails orders for additional
installations and facilities, which will naturally fall to German firms.”47 The Export-Garantie-
Ausschuss appears to have rejected Krupp’s initial proposal largely because the scale of
guarantees that the Reich had already extended to Krupp-led consortia in Turkey was running up
against an overall limit on Turkish guarantees that the Reich had imposed on itself. The steel
works project, initially valued at RM 18 million, would have come on top of over RM 95 million
(approx. $38 million) that had already been extended.48 In the event, Krupp did sign a contract in
1934 for T£ 20 million (approx. $16 million), T£ 11 million of which was for railway equipment,
and the remainder for the iron and steel works. But the Turkish government decided to open the
latter project to competition, seemingly keen to invite British proposals. Overall, however,
German industry viewed Turkish industrialization as a major domain of future orders for its
exporters.49 And although German political influence in the Middle East was simply too small in
comparison to Britain’s to bring Turkey into an alliance with Hitler’s regime, nevertheless the
scale of German exports – capital goods and arms – quite probably was responsible for Turkish
neutrality until the very end of the war. The enormous amounts of deliveries to Turkey
guaranteed by the German state strongly indicates both the importance of the Turkish market for
47 Fried. Krupp AG Abteilung Ost to the Reichswirtschaftsministerium, Dec. 21, 1934. BABL R2/17334. 48 N.B. I am waiting on documents from the Bundesarchiv that give exact amounts. This sum is calculated on the basis of a report from 1932 listing RM 55 million in deliveries already guaranteed, combined with RM 40 million that were guaranteed as part of a second Krupp railway construction contract negotiated in 1934. “Niderschrift der Sitzung des Export-Garantie-Ausschuss für Regierungsgeschäfte”, Dec. 5, 1932. BABL R3101/19299. 49 Reinhard Hüber, Deutschland und der Wirtschaftsaufbau des Vorderen Orients (Türkei, Ägypten, Iran, Irak, Syrien-Libanon, Palästina) (Stuttgart: F. Enke, 1938). Ter-Nedden (RWM), “Ausführungen über die Türkei”, Oct. 28, 1938. BABL R2/17226.
Fertik, “Packaging Industrialization”,
28
German exports, and the creditworthiness of the Turkish state – which is to say, the likelihood
that Turkey would remain politically and economically sovereign, well into the future.50
Meanwhile, competition was intensifying for all contracts related to the Turkish
industrialization drive. Groups of British firms had begun looking for contracts as early as 1930,
and the British Foreign Office closely monitored the activities of German firms in Turkey. For a
time the Turkish government, anxious to husband scarce foreign exchange, was only awarding
Five Year Plan contracts to countries with which it had a clearing agreement. British exporters
encouraged their own government to conclude such a treaty, in order that they might compete for
the large orders that were steadily issuing from the Turkish state banks.51 British firms felt that
they were facing an uphill battle, since “whereas our continental competitors approached [the
Turkish government] as a compact engineering-cum-financial group, United Kingdom firms
merely wasted their time by going out to Turkey before constructive financial proposals have
been settled even in principle.”52 British engineering firms were eager to interest themselves in
Turkish proposals, but the question of financing was, as ever, paramount. British firms were not
in a position to extend long-term credits themselves (as their German competitors, with
guarantees from the German Reich, appeared prepared to do), but would instead require
financing from the City of London. City bankers, in turn, would require good security from the
Turkish government before they would consent to extend such long-term credits, especially
given Turkey’s severe shortage of foreign exchange, which would limit its ability to remit
50 British officials held a similar view: “whatever may be thought of the financial and economic measures of the present Turkish régime, that régime is most unlikely to collapse politically, and, unless it collapses politically, it is almost bound to succeed in building up a state which in a few years will be a much more valuable friend, and incidentally a much more valuable customer (though possibly a different kind of customer), than the Turkey of today.” Foreign Office position on the Turkish steel works, Mar. 17, 1936. FO 371/20070, E1457/23/44. 51 Board of Trade to Metropolitan-Vickers Electrical Export Co., Jan. 9, 1935. FO 371/19031, E244/25/44. 52 Record of Interview at the Board of Trade with Commander W. R. Gilbert, head of the Metropolitan-Vickers mission to Turkey. Jan. 9, 1935. FO 371/19031, E244/25/44.
Fertik, “Packaging Industrialization”,
29
payment for British equipment in Sterling.53 On these grounds German industry was at a
considerable competitive advantage. As a British official explained,
the [German] manufacturers get paid in cash by discounting the Turkish bonds with the Consortium of German banks & it is the latter . . . which bear the risk . . . Since the 1931-1932 reorganization of German banking system, the German government has acquired a virtually controlling interest in the banks, & the banks, in turn have long had a controlling interest in the German iron and steel industry. The situation is therefore that the German government is acquiring a dominant interest in the industrialization of Turkey & it is willing to pay the price for it, in view of the political considerations involved & the immediate economic benefit of finding employment for her industrial workers.54 A combine of British government and industry began to organize itself to compete for the
Turkish iron and steel contract in early 1936. British officials had concluded that the
participation of the Export Credit Guarantee Department would be necessary – not just to
provide a guarantee but in fact to issue a loan to the Turkish government for the purchase of
equipment, since British banks had apparently no appetite for the risk. Given the congenital
conservatism of the British Treasury, and what they felt was the likelihood of a Turkish default
on the Ottoman debt, British officials considered it necessary to undertake a detailed survey of
Turkish finances before they could extend such an official credit.55 Although the Payments
Agreement concluded in 1935 was meant for “normal trade” between the two countries, British
officialdom saw in Turkey’s statist industrialization the end of “normal trade,” and pointed to “a
risk that if we do not manage to get hold of this key order for the Turkish iron and steel works,
and, so far as may be possible, for other capital goods which may be needed by Turkey, we may .
. . find ourselves, in a few years, faced with a loss of the market for consumption goods and
without any footing at all in the market for capital goods”.56 The British were leery of sending a
financial mission to Turkey for fear it might signal the possibility of raising a private loan in 53 “Visit to Turkey of representative of Metropolitan Vickers”, Feb. 1, 1935. FO 371/19031, E840/25/44. 54 “Contracts for Public Works in Turkey”, Mar. 29, 1935. FO 371/19031, E2200/25/44. 55 “Financial Situation in Turkey.” Jan. 13, 1936. FO 371/20070, E245/23/44. 56 Ibid.
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London. Meanwhile if they could not figure out a way to extend credits to the Turkish regime
they “shall be doing nothing to prevent a default on the Ottoman Public Debt, and . . . leaving the
commercial field open to our competitors with unfortunate political results”.57 Indeed, British
officials realized that,
if we miss the opportunity of getting the steel works contract, it will certainly go to Krupps. We know that the Germans are prepared to make almost any sacrifice in order to re-establish their economic – and probably now their ultimate political – influence in the Middle East. They have been making a great drive in Persia with considerable success. They are now within an ace of obtaining a large railway contract in northern Iraq. If they secure this steel works contract in Turkey too, it will materially help them to consolidate their position throughout the Middle East, and we may well have cause to regret, not only economically but politically, the passive attitude which will have made us lose this opportunity.58
While the question of British financing hung in the balance, as observers waited to see if
the Turks would make payments on the next coupon of the Ottoman debt due in late May, the
Turkish government had opened conversations with the U.K. branch of the H. A. Brassert & Co.
engineering firm for a contract totaling roughly £2.5 million (approx. $12 million). Not wishing
to overburden the existing Anglo-Turkish payments agreement with a raft of new imports into
Turkey unmatched by any corresponding increase in Turkish exports to the U.K., and finding the
Turks unwilling to pledge another revenue stream (e.g. oil royalties owed them by the
Government of Iraq from a 1926 agreement) as security, U.K authorities began looking for more
creative means of assuring that their exporters would get paid. Sensitive to the bureaucratic
57 “Financial situation in Turkey.” Jan. 16, 1936. FO 371/20070, E254/23/44. 58 Ibid. The U.K. government was divided on the steel works question between on the one hand the Treasury, interested to protect U.K. bondholders and the Board of Trade, looking to the market for “Manchester piecegoods”, and on the other side the FO, who were monitoring the German economic-cum-political advance in the Middle East, and the ECGD and the Department of Overseas Trade, which were convinced that the Turks – and many other countries – would soon render themselves self-sufficient in consumer goods, meaning that the future for British exports must lie with capital goods producers. The departments in favor of industrial credits to Turkey could also count on the support of Service Departments represented in the Committee of Imperial Defense’s Sub-Committee on Industrial Intelligence, who considered Turkish friendship essential to British goals in the eastern Mediterranean, and who also saw the iron and steel works as fundamental to any Turkish re-armament program, thus positioning Britain well to secure contracts for Turkish military as well as industrial investments. “Turkish financial situation: iron and steel works contract”, Mar. 19, 1936. FO 371/20070, E1583/23/44.
Fertik, “Packaging Industrialization”,
31
obstacles to their goals, the Turkish Ministry of National Economy, likely in consultation with
Brassert & Co., crafted a proposal for a concerted effort to increase British imports of strategic
minerals from Turkey, through sale of which the Turkish government would receive sterling that
could in turn be transferred to British exporters.59 This would be done through creation of an
“Anglo-Turkish Comptoir” outside of the existing payments agreement. This comptoir would be
overseen directly by Brassert & Co. and would have the right to direct sales of certain Turkish
products – especially strategic minerals like copper, chrome, molybdenum, and manganese – to
the U.K. Brassert & Co. was essentially committing itself to find buyers for these minerals; the
British government, through the ECGD, was in turn assuming the risk that Brasserts would fail
to line up any customers.60 The ECGD was favorable towards this proposal, although it
stipulated that the mines whose output would be sold through the comptoir need be under the
supervision of British engineers. For its willingness to provide a credit against the sale of these
raw materials, it insisted that provision be made for sale of these raw materials to other markets,
in case there were no buyers in the U.K. It estimated that the order would provide direct
employment of British labor amounting to 10,000 man years, and double that in indirect
employment. It saw further advantages in that Britain was at the time considered behind its
German and American competitors in the technique of steel plant construction, and such an order
might help it catch up. Further it would provide the British with a captive supply of strategic
minerals, and the Turks with a reserve of sterling, which could in turn only further stimulate
British employment. Both the ECGD and the DOT feared that if they failed to secure this order,
59 “Financial position in Turkey; iron and steel works project.” Mar. 7, 1936. FO 371/20070, E254/23/44. 60 Ibid.
Fertik, “Packaging Industrialization”,
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Turkey would increasingly become a German sphere of influence – technically, economically,
and perhaps even politically.61
Even with favorable pronouncement from the Committee on Imperial Defense – the high
temple of British grand strategy – still the Chancellor of the Exchequer would not consent to a
£2.5 million credit for Turkey, on the rather obtuse grounds (given the elaborate comptoir
arrangement surrounding the proposal, and the repeated assurances from knowledgeable British
sources that the Turkish government was entirely solvent, just lacking in foreign exchange) that
the Turks should not be redirecting export earnings away from meeting their obligations to
bondholders and commercial creditors.62 In fact the will to overrule pure creditor interests was
strong. According to the Foreign Office, “the transactions now under consideration have
considerable political importance, and should be considered from the point of view of British
interests as a whole rather than from the interests of the Ottoman Public Debt Council.”63 The
Treasury did consent to an ECGD proposal to send a team of experts to Turkey to make a study
of Turkish “exportabilities” so as to determine just to what extent Turkish exports to the U.K.
could be increased. Against economizing proposals by the Board of Trade, who thought that the
British Commercial Secretary in Turkey should conduct the investigation, the departments
advocating support for the steel works (FO, DOT, ECGD) insisted that Brasserts, as the agency
that had already had discussions with British firms about their capacity to absorb additional
Turkish exports of raw materials, be dispatched for the purpose, even if it meant incurring an up-
front expense and making a preliminary commitment to the Turkish government that a British
61 “Financial situation in Turkey: Iron and Steel Works Contract” (ECGD and BOT memos on the subject), Mar. 18, 1936. FO 371/20070, E1457/23/44. 62 “Financial situation in Turkey: Iron and Steel Works Contract” (Waley, Treasury to Nixon, ECGD), Mar. 23, 1936. FO 371/20071, E1589/23/44. 63 “Export credits for Turkish steel works order,” Jan. 6, 1936. FO 371/20081, E76/39/44.
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government credit would indeed issue from a favorable inquiry.64 In the event, Somerville Smith
of the ECGD and Mackenzie of Brassert & Co. traveled to Turkey in early June to meet with
officials of the Ministry of National Economy, the Sumer Bank, the Mining administration, and
the Ministry of Finance. Several engineers stayed on for longer to make detailed studies of the
mines that would be attached to the Comptoir. The Comptoir itself was no simple matter, as the
French had their own Turkish Comptoir for sales in France towards repayment of the Ottoman
Debt, and were jealous that the new British organization might infringe on their payments; the
Germans meanwhile through their barter arrangements with the Turks had taken control of
something like 50% of Turkish exports, the proceeds from which the Turks could only use to buy
German goods. Eager as the British were to secure their steel works contract, they maintained the
solidarity of creditors, assuring the French that any wrong done to French bondholders would be
viewed every bit as severely in London as if British nationals had been the victims of
mistreatment. In the event, the British mission examined every single exportable commodity in
Turkey, ranging from timber to figs to molybdenum, and concluded that there was in fact a
tremendous capacity to increase exports and generate sufficient foreign exchange earnings to be
able to pay off the steel works credit in a few years. Under these conditions the British
investigators considered it advantageous that the Turkish government either owned, or was likely
soon to own, all of the mines in question, since this enabled them to dispose of the metals mined
as they saw fit.65 In essence, the Turkish and British governments were joining together to
organize Turkey’s domestic economy and its foreign trade in such a way that would create a
64 “Proposed investigation of Turkish exportabilities to United Kingdom.” Apr. 27, 1936. FO 371/20071 E2340/23/44. 65 H. Somerville Smith, “Report on Turkish Finances” Aug. 8, 1936. FO 371/20072, E5065/23/44.
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34
lasting partnership between Turkish industrialization and British capital goods production. Any
scruples about state intervention in economic life were dispensed with summarily.
The security of the project having been settled through the comptoir arrangement, there
remained the question of the interest rate on the official loan. This was a matter of pride on both
sides of the negotiations. For their part the Turks demanded of the British terms no worse than
the 5.5 % that Krupp – backed by the German government – was offering. The British
meanwhile fretted that anything less than 6.5 % would lead other countries that had received
official credits from the ECGD to protest. It is an indication of the international power dynamics
of the moment that the Turks bargained the Brits down to a number – 5.5 % – below what British
officials had instructed their negotiators was the absolute lowest they could offer.66 It is also a
reflection of Turkish officials’ strong desire to use British participation in the steel works to
balance out the large German presence in Turkish industrialization that they ultimately accepted
a proposal with financial terms that were slightly less generous than Krupp had offered.
The comptoir agreement was finally signed in late September, making possible final
negotiations on the steel plant itself. At the 11th hour Brasserts shocked the ECGD by asking that
the size of the British orders be increased from £2 million to £3 million, and that instead of the
ECGD guaranteeing 60% of the risk, as had initially been proposed, they assume the entirety of
the risk of non-payment, since British manufacturers were so busy with home orders that they
were only willing to undertake large foreign sales if they bore no risk on the transactions at all.67
On Nov. 17th, a week before the Sumer Bank was scheduled to announce the awarding of the
66 See the exchange of telegrams between Somerville Smith in Ankara and Nixon (both ECGD) in London around June 19th, 1936. FO 371/20082, E3643/39/44 and E3676/39/44. See also Nixon to Rendel (FO), Oct. 8, 1936, describing just how generous a financial deal he felt the ECGD had extended to the Turkish government. FO 371/20082, E6395/39/44. 67 Record of conversation between Baggallay (FO) and Somerville Smith (ECGD), Oct. 28, 1936. FO 371/20082, E6772/39/44.
Fertik, “Packaging Industrialization”,
35
contract, the Turkish Ministry of National Economy suddenly informed Brassert & Co. that if
they did not reduce their price by £400,000 and agree to an interest rate of 5.5 %, the contract
would be awarded to Krupp. British officials attributed the abrupt switch to a recent visit to
Turkey by Schacht, “and to the fact that under his influence Krupps are out to get the contract at
an un-commercial price.”68 The ECGD responded by slashing the insurance premium that
Brasserts was to pay to them, enabling a reduction in the overall price of £250,000. They would
not agree to an interest rate lower than 6%, although they did hold out the possibility that the rate
could be lowered in two years time. The power of the Turkish negotiating position was, however,
such that even after they had agreed to forfeit most of the premium for the 100% credit guarantee
they were offering to Brasserts, still the Brits had to plead with their counterparts that “if they
persist in demanding an additional reduction they must realize that in effect they are asking for a
cash gift from the [British] Treasury.”69 After making clear that at last they could lower their
price no further, the Turkish Ministry of National Economy accepted a proposal from Brassert &
Co. for a total price of £2,745,000 at 5.5 % interest.70 The contract was signed – after some last-
minute panic in London – on Dec. 2, 1936. Mackenzie, the Brasserts director who led the
negotiations with the Turkish government, declared proudly that the contract represented
“England’s first act of co-operation in Turkey’s industrial plan. In the near future you will see
the happy results of the great confidence which Atatürk’s Turkey has inspired in the world of
68 Record of FO conversation with Somerville Smith, Nov. 19, 1936. FO 371/20082, E7262/39/44. 69 Sir Percy Loraine, U.K. ambassador to Turkey, to FO, Nov. 21, 1936. FO 371/20082, E7290/39/44. 70 N.B. In fact the Turkish government accepted this offer over one identical in total cost, but with a different coupon rate (£2,690,000 at 6%). Clearly the Turkish government attached enormous amounts of prestige to the interest rate they were paying to foreign contractors for long-term credit – the Brits referred to Turkish “amour propre.” I do not yet have direct evidence to substantiate this claim, but I strongly suspect that this attitude is an expression of anti-imperialist politics. Imperialism for countries like Turkey was in part the experience of being charged high rates of interest for long-term borrowing, when countries higher up in the global credit hierarchy constructed in the financial capitals of Europe could borrow at much lower rates. See the truly brilliant exposition, based on the archives of the Credit Lyonnais, in Marc Flandreau and Frédéric Zumer, The Making of Global Finance 1880-1913, Development Centre Studies (Paris: OECD, 2004).
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36
English capital and industry.” It was “the first time the British Government and the City had
guaranteed and financed an enterprise in Turkey. There was no need . . . to stress the financial
consequences for both countries.”71
Brazil
Since the mid-19th century, Brazil had been steadily incorporated into the international
economy. As the world’s largest producer of coffee, foreign capital, especially British, had
poured into Brazil to finance the construction of railways and other public utilities in order to
facilitate the outward flow of coffee and the inward flow of European manufactured goods.
Throughout the Republican period a coffee planting aristocracy (Brazil was unique among South
American countries in having spent most of the 19th century under monarchical rule; its planters
thus all carried titles of nobility) had dominated the country’s political life, and, in the eyes of
nationalists then and nationalist historiography since, maintained the country in a position of
dependence on foreign capital. In 1910, an international congress of geologists declared to the
world that Brazil possessed an unsurpassed quantity of the highest grade iron ore, and from that
moment schemes to link the exploitation of Brazil’s iron ore to a Brazilian steel industry
proliferated. Before the war these schemes involved concessions to Brazilian businessmen, but
none of them had the capital necessary to move more than a trifling quantity of ore, since the ore
was situated in the interior of Minas Gerais, with only a small, narrow-gauge railway to transport
it to the coast. Success would require massive amounts of capital to build a railway with much
higher capacity across difficult terrain. Brazil’s paltry supplies of coking coal, located in an
71 Sir P. Loraine to the FO, Dec. 4, 1936, quoting local paper “Ulus” of Dec. 3. FO 371/20082, E7695/39/44.
Fertik, “Packaging Industrialization”,
37
entirely different part of the country from the ore and from the major markets of Rio de Janeiro
and São Paulo, constrained the prospects for a domestic steel industry.
Serious efforts to pursue the iron and steel project began in 1919, when a group of British
capitalists hired the American Percival Farquhar to negotiate a concession from the Federal and
Minas Gerais governments and to raise investment capital in New York. Before the war Farquhar
had been the largest capitalist in Brazil, constructing a massive paper empire of railways, ports,
and timber properties. Price declines in 1915 had ruined him, and his Brazil Railway Company
suffered a spectacular bankruptcy. To Brazilians he was the epitome of “Yankee imperialism”.
Large and influential constituencies opposed his efforts to develop the iron and steel industries
from the moment he began.
Farquhar’s woefully unsuccessful attempts to make his scheme come off have been
detailed many times over. Their only significance here is that because of Farquhar, for Brazilians
the question of a national steel industry was even more charged with nationalist sentiment than
the Turkish or Chinese cases. At the same time, perhaps because it faced less existential threats
to its status as a sovereign nation, and because of a relatively thriving capitalism and capitalist
class especially in São Paulo, Brazil under Getulio Vargas moved more cautiously toward an
embrace of statist industrialization in the 1930s. But the crisis of primary producers in the 1930s
hit Brazil as hard as any country in the world. Coffee prices collapsed and Brazil went into
default on nearly all of its considerable sovereign debt. Throughout the 1930s relations between
Brazil and both the U.S. and the U.K. – the country’s two largest international creditors – were
seriously strained. Meanwhile Brazil produced commodities, especially cotton, that were
attractive to Nazi Germany, and thanks to clearing agreements Germany catapulted ahead of both
countries to become Brazil’s largest trading partner by 1935. The rise of German influence in
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this large South American country, with a significant German population, an organized fascist
movement and a president who professed admiration for Mussolini and Salazar troubled
American policymakers. Increasingly the U.S. government demonstrated a willingness to woo
Brazil away from Germany. It found that favorable settlement of Brazil’s sovereign debt and
official credits for developmental projects were the principal domains within which the
Brazilians wished to negotiate. More than anything else, Vargas’s government wanted its steel
mill, and he did everything he could to persuade the U.S. government that the political
allegiances of his country would go to whichever country was willing to supply it with one on
competitive terms.
Until the Estado Novo coup in 1937, when Vargas, with the aid of senior military leaders,
officially established himself as dictator and introduced a constitution modeled off of Salazar’s
Portugal, progress on the steel project was limited to several rounds of investigation. In 1937,
three different German firms – Krupp, DEMAG (backed by the Vereinigte Stahlwerke, which
had a controlling interest in the firm) and the GHH – all became interested in the Brazilian
proposal, a project whose value they estimated to be the enormous sum of RM 200 million
(approx. $80 million).72 Krupp was a major supplier of arms to the Brazilian military and
maintained an active presence in the Brazilian capital. The military in turn was the strongest
72 In fact the Vereinigte Stahlwerke and its predecessor firms had been interested in developing Brazilian iron ore and in building a steel works in Brazil since 1924, when they established a joint venture they called “Brasiliana”, with possession of important sources of iron ore. After World War II these holdings became the basis for a major iron ore mining firm, Ferteco, but the evidence I have so far found does not suggest that before the war the Vestag was especially energetic in attempting to develop this business. [cite to Vestag files] Farquhar maintained active contacts especially with Fritz Thyssen of the Vereinigte Stahlwerke throughout the 1930s, continually hoping that the German desire for Brazilian ore would be great enough to move German firms to finance his development scheme. Although he was able to secure forward contracts for delivery, he was not able to pry investment capital loose from the German concern.
Fertik, “Packaging Industrialization”,
39
advocate of closer ties with Germany.73 Between 1936 and 1938 one of Krupp’s most senior
officers, Friedrich von Bülow, was stationed full time in Brazil to negotiate with the Brazilian
military and government.74 Von Bülow maintained an especially active relationship with Olava
Egídio de Sousa Aranha, co-founder of the major domestic concern Monteiro-Aranha, and
cousin of Oswaldo Aranha, Vargas’s pro-American foreign minister. Unlike his cousin, Olavo
favored closer ties with Germany, and actively worked official and unofficial channels to win
support for the Krupp proposal.75 Although Krupp’s German competitors anticipated financing
the Brazilian project through the Dresdner Bank with guarantees from the Reich, Krupp
proposed a more direct means of payment. They would extend no loan, but would instead barter
the German machinery and equipment for additional deliveries of Brazilian ore, coffee, and
cotton, German demand for which was essentially unlimited.76
It is certainly possible to view Krupp as an instrument of German foreign policy, or even
an author of it (many contemporaries, including the U.S. and German governments, essentially
did). However, not only do documents confirm that Krupp was entirely able to make up its own
mind about which international opportunities it pursued, they also confirm that even in the period
of Nazism greatest ascendancy, political considerations did not necessarily trump economic
ones. In 1937 I.G. Farbenindustrie, the largest corporation in Germany, sent a senior
representative on a year-long tour of Latin America, during which time he met with nearly one
73 Frank D McCann, The Brazilian-American Alliance, 1937-1945 (Princeton, N.J.: Princeton University Press, 1974). 74 From 1932 to 1936 von Bülow was Krupp’s Berlin representative and personal assistant to Gustav Krupp von Bohlen und Halbach. After 1938 he ran the Gruson works armaments factory in Magdeburg. Later he was the senior Krupp officer in charge of military procurement. He was one of the 12 Krupp directors tried at Nuremberg, and served 12 years in prison. 75 Some of the scope of Monteiro-Aranha’s business relationships can be seen in the Schroders Archive, as both the British and U.S. branches of the J. Henry Schröder & Co. worked closely with Monteiro-Aranha. See especially Box SH-000082, Doc 30. “Correspondence, 1930 to 1940, JHSBC, Dr. Olavo Egydio de S. Aranha Jr, Brazil, Argentina, Coffee, 1930s.” 76 [citation from the von Bülow files in the Krupp archive]
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40
thousand different individuals, ranging from local businessmen and elected officials to
international bankers, close to 200 of whom were Brazilian. In his nearly 200 page report back to
his board, he could barely contain his enthusiasm for the will to industrialization on the part of
all sectors of Latin American life. It is worth quoting at length:
One can speak of a new and modern epoch of the colonial – or better colonization – problem in a time of a tendency towards nationalization and industrialization. It is evident that in the long run all countries and colonies strive for independence. The presently existing relationship between mother country to colony will develop more and more in the direction of the relationship England has developed to its Dominions. That is, the mother country must be an ally and not an exploiter. Carrying the analogy to the young independent countries, which today display a powerful momentum in every way, it would mean that – viewed in the long term – the country that most secures its political and economic influence will be the one that has been most active as an ally in the development of existing opportunities.77
It seems likely, then, that even in the late 1930s Krupp’s – and German industry’s in general –
pursuit of foreign opportunities was linked to a long-term view of growth sectors in the world
economy, and the importance of securing a foothold in those sectors early.
Brazil used the Krupp offer as a bargaining chip with the United States from 1937 on.
Although Marcelo de Paiva Abreu is almost certainly right to argue that the United States would
never have permitted a loss of its commercial and political ascendancy in Brazil to Nazi
Germany78, nevertheless American policymakers responded as though such a threat was real.
American determination to keep Brazil close in what policymakers increasingly felt was a likely
international conflict with Germany corresponded, as discussed above, with a pronounced shift
in the nature of American thinking about foreign economic policy. Even as Brazil entered a
second round of default in 1937, reneging on agreements signed just two years prior, the
77 Dr. Max Ilgner (IG Farbenindustrie) "Die Exportförderung im Rahmen des Vierjahresplanes, angefertigt auf Grund von Erfahrungen aus der Exportförderungs-Praxis und von Beobachtungen auf den ausländischen Märkten." BABL R3101/33441. 78 Marcelo de Paiva Abreu, “Anglo-Brazilian Economic Relations and the Consolidation of American Pre-Eminence in Brazil, 1930-1945,” in Latin America, Economic Imperialism, and the State: The Political Economy of the External Connection from Independence to the Present, ed. Christopher Abel and Colin M. Lewis (London ; Dover, NH: Athlone, 1985), 379–93.
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41
Treasury and increasingly even the State Department concerned themselves more with trade,
investment, and developmental aid, and less with making bondholders whole.79 The Export-
Import Bank was their vehicle. In 1938 ExIm financed a large purchase of railway equipment for
one of Brazil’s state-owned railways. And in 1939, with encouragement from the State
Department, the United States Steel Corporation sent a top-level mission to Brazil to study the
possibility of constructing an integrated iron and steel works.
The Greenwood commission reported extremely favorably on conditions in Brazil,
including even the quality of Brazilian coal, so long assumed to be insufficient for the economic
smelting of pig iron.80 In early 1940, however, going against the urgings of its own experts and
consultants, U.S. Steel’s finance committee decided not to pursue the opportunity presented to it
– to build and have a majority stake in the new steel works – even with probable support from
ExIm. It seems that the American firm both respected and feared the nationalist spirit that was
driving the Brazilian project forward. U.S. Steel’s directors felt there was no assurance that once
completed the mill would not be nationalized. They were unimpressed by Brazil’s record as a
debtor. And they were unpersuaded that building a steel mill in Brazil would not cost the firm an
important export market.81 A link between U.S. corporate capital and Brazilian industrialization
proved too difficult to forge at this juncture.
79 Adamson, “The Failure of the Foreign Bondholders Protective Council Experiment, 1934-1940”. On the growing influence of the Harry White/Adolf Berle view of the world in U.S. policymaking circles in the late 1930s, see Eric Helleiner, Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order (Ithaca, NY: Cornell University Press, 2014). 80 William C. Burdett to Secretary of State, “Project for Steel Mill near Rio de Janeiro, Brazil.” Oct. 20, 1939. SDCDF 832.6511/32, NACP. 81 U.S. Steel’s internal debate over whether or not to participate in the Brazilian steel works is revealed in extraordinary detail in a special report that several company experts prepared in late December, 1939. “Proposed Participation by the Corporation in the Brazilian Steel Industry,” Dec. 29, 1939. 227-12: “United States Steel Corporation, 1939”, Thomas W. Lamont Collection, Harvard Baker Library Historical Collections. Some of Lamont’s views are laid out in Lamont to Voorhees (U.S. Steel Finance Committee), Jan. 4th, 1940. 227-13, “United States Steel Corporation, 1940”. TWLC.
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42
The U.S. government stepped rapidly into the breach. By mid-1940 the U.S. was making
clear to Brazilian authorities that it was prepared to extend an official loan to the Brazilian
government of $20 million for the purchase of steelmaking equipment; that it would select top
quality American engineers to design the works, oversee construction, and train Brazilian
engineers (in the U.S. and on site); and that it would do so on incredibly favorable terms.
American consulting engineers eagerly solicited the State Department and ExIm for the
business.82 Each time the negotiations hit a stumbling block, the American ambassador would
frantically wire that Krupp’s officers were beating down Vargas’s door to sweeten their offer.83
He stressed that at that moment the steel mill was the single most important matter in diplomatic
relations between the two countries.
After a debate in Congress over whether to increase the authority of the Export-Import
Bank to enable it to make this sort of loan, in September 1940 the deal was signed, providing for
a loan on five years’ term at only 4%. Construction began the next year, and the President
Vargas Works were inaugurated in 1943, a rapid timeline made possible by U.S. official
decisions to raise the export priority level of the necessary equipment to a par with requirements
for the war effort. For the Vargas government, solving “our national steel problem” was an
enormous public relations success. For the Americans it was a “practical demonstration of the
Good Neighbor policy.” And while it is easy to attribute the whole matter to power political
concerns, in fact without the conviction on the part of the business actors that industrialization in
countries like Brazil was a certainty, and that large orders would go in the future to whichever 82 Hermann Brassert himself called on the State Department, as did representatives of McKee & Co and Ford, Bacon & Davis, the firm U.S. Steel had hired in the 1930s to oversee a sweeping reorganization of its business, and whose advice to pursue business in Brazil and other developing countries it had ignored. U.S. officials ultimately chose McKee, finding Brassert’s political loyalties to be dubious. 83 John D Wirth, The Politics of Brazilian Development 1930-1954 (Stanford, Ca: Stanford Univ. Press, 1970), chap. 3; Oliver J. Dinius, Brazil’s Steel City: Developmentalism, Strategic Power, and Industrial Relations in Volta Redonda, 1941-1964 (Stanford, Calif: Stanford University Press, 2010), chap. 1.
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43
country supplied the necessary inputs for that process, it is difficult to see how any of these deals
would have been struck. As with the British in Turkey, but even more so, since Brazil was in fact
one of the world’s most egregious defaulters on its sovereign debt in the 1930s84, the U.S.
government and capital goods exporters had to overcome the opposition of creditor interests and
their representatives in government in order to finance a project like the Brazilian steel works.
Like in Britain, but more so, American officials had to defeat an entrenched protectionist lobby
in Congress in order to enter into cooperative projects with Latin American governments that
stood a real chance of hurting the foreign sales of American producers, even if they were likely
to increase the sales of other products.85
Of the four projects considered here, two were actually built. Britain successfully won a
steel works contract for its exporters with Turkey; the U.S. warded off German advances with a
winning offer for Brazil. Neither the Chinese Central Government nor the Cantonese regional
government could persuade potential partners in the U.S., Britain, or China that there was any
real likelihood of being repaid. Because of strong competition between national units, the
Brazilian and Turkish governments were both able to secure deals on incredibly favorable terms.
In both cases the newly founded industries belonged to the government, with foreigners having
84 Marcelo De Paiva Abreu, “Brazil as a Debtor, 1824–1931,” The Economic History Review 59, no. 4 (Nov., 2006): 765–87, doi:10.1111/j.1468-0289.2006.00359.x; Eichengreen, Barry and Richard Portes, “Debt and Default in the 1930s: Causes and Consequences,” European Economic Review 30 (1986): 599–640; Barry Eichengreen, “Historical Research on International Lending and Debt,” Journal of Economic Perspectives 5, no. 2 (Spring 1991): 149–69. 85 That the U.S. planned to aid the industrialization of Latin America was major bone of contention for Republican protectionists. Said one member of Congress, “Jesse Jones . . . states . . . that the primary purpose of this bill is to industrialize South America. South America at the present time imports many of its manufactured products from the United States[.] . . . I deplore the fact that this Congress might by the enactment of this bill destroy one of the largest markets for manufactured goods, by taking our taxpayers’ money to industrialize practically the only market we may have left after the wars in Europe and Asia are a matter of history.” Congressional Record–House, Aug. 20, 1940, p. 10615.
Fertik, “Packaging Industrialization”,
44
no claim on profits. In both cases the interest rates were low and the credit terms were long. The
Turkish government had to set up an elaborate payments arrangement to deal with a shortage of
sterling, but in no way did this appear as a threat to Turkish sovereignty. Turkey had to commit
to buying all of its equipment from Britain, and Brazil had to do the same with the U.S.
Important positions for foreign technicians were insisted upon – but only for the first few years
of operations, where in any event there were no qualified domestic technicians to begin with.
Both deals were unmitigated successes in international economic relations for both regimes.
Throughout much of the 20th century it has been assumed that competition for markets in
peripheral countries is a formula for subordinating those countries to the imperialist core. It can
be this, but this paper is meant to show that it can be the exact opposite as well. The factors
determining which type of relationship prevails are myriad86, but what appears to have been most
important in the interwar period is whether the sovereignty of the peripheral country was firmly
enough established that the possibility for overt political subordination was off the table, and
whether that country’s regime had enough directive power over its domestic economy to be a
credible partner in capital accumulation. The Chinese viewed the interest of Japan, which openly
sought the destruction of Chinese sovereignty, in Chinese economic development as an
imperialist threat. They saw British, German, and American interest – all countries that were
committed to Chinese sovereignty – as a bulwark in the cause of an integral China. Brazilians
feared Yankee imperialism, but the combination of a German counterweight to American
economic penetration and what Brazilians saw as the good faith of Roosevelt’s Good Neighbor
policy meant that cooperative relations were possible with the U.S. as well. In Turkey as well the
86 For a discussion of how what from one angle looks like economic imperialism can from another look like international support for national sovereignty, see Adam Tooze and Martin Ivanov, “Disciplining the ‘Black Sheep of the Balkans’: Financial Supervision and Sovereignty in Bulgaria, 1902-38,” Economic History Review 64, no. 1 (2011): 30–51.
Fertik, “Packaging Industrialization”,
45
German economic presence served as a balance to British imperial designs in the region, and this
was enough to enable cooperative relations between Britain and Turkey in Turkey’s industrial
development. And although Germany failed to win any of the contracts studied in this paper, its
state apparatus for encouraging the export of capital goods secured contracts with developing
countries totaling several hundred million Reichsmarks. In an earlier historical moment,
nationalistic self-assertion on the part of peripheral countries might have simply meant being cut
off from the world economy, for better or for worse. In the interwar period, when the world had
already been so effectively globalized, and when actors across the world became convinced that
the major incipient development in international economic life was the industrialization of
agrarian countries, the nationalistic self-assertion of newly developing countries was greeted
with proposals for the forging of even tighter international economic relations.