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8/14/2019 Reformers and Investors: Crisis and Confidence during the Depression.
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Reformers and Investors: Crisis and Confidence during the Depression.Research in Political Economy, Vol. 17, 1999.
Steve SnowWagner College
Note: This is a pre-publication version of the final, published article.
Two moderate leftist governments came to power during the Great Depression with
comparable economic agendas, yet they met with quite different fates, largely due to
investors attitudes. Capital flight and disinvestment plagued the French Popular Front
(1936-1938) from the moment of its election, which as a result was forced to give way to
rightist cabinets that repealed its reforms and suppressed the labor movement. The Swedish
Social Democrats (1932-36), on the other hand, enjoyed increased investment confidence
and ultimately built a welfare state that other affluent democracies can only aspire to.
Based on an inductive analysis of both cases, this paper seeks to explain the reasons for the
levels of confidence so important to both administrations fortunes. The behavior of French
and Swedish owners of capital demonstrates that during the rule of leftist governments, not
all capital strikes result from radical policies; it also indicates how investment confidence
can hold steady.1 These lessons are quite relevant to the current, neo-liberal era.
Investors and business, sometimes correctly, suspect leftist governments of putting
other concerns ahead of theirs. They dread a wide range of political dynamics and policies,
from a more militant working class to drastic redistribution of income, property and land.
On occasion, they engage in capital flight, and it would be helpful to understand why and
under which circumstances. If owners of capital sell the currency, send the proceeds out of
the country, and refuse to invest, an economic crisis can ensue that subverts the
governments political fortunes. Extreme instances of this dynamic, such as Allendes
Unidad Popularin Chile, are the subject of most analyses of this subject, which tend to
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sense of crisis seems to be crucial in electing a government willing and able to undertake
meaningful changes (cf. Oksenberg and Dickson, 1991).
Once elected, new problems face leftist politicians. Perhaps the most serious is
maintaining investors goodwill. As long as investment decisions are free... the ultimate
political sanction is non-investment, or the threat of it (Offe 1984, 244). It is important to
discover, therefore, if and how the governing left can obviate this danger. Perhaps crisis
acts not only as a window of opportunity in the political world, but also in the realm of
economics? Block (1977) argues the threat of disinvestment is reduced during abnormal
economic conditions. Workers demands are usually constrained by politicians need to
maintain normal investment patterns, but some circumstances, such as depressions, wartime,
or post-war reconstruction, reduce investors importance and at the same time increase the
intensity of pressure from below (Block 1977, 25-27). As does Miliband (1969, 1973),
Block argues labors direct action is the key to successful reforms, and is aided by periods
of crisis, which offer important opportunities. There is, in fact, good reason to believe that
these two factors have operated to the benefit of leftist governments. Blocks explanation
seems aimed at the New Deal in the US, but also can be applied productively to the post-
war Labour administrations of 1945-51 in Great Britain. Yet it was painfully obvious that
the power of business to foil reforms was alive and well in France during the Depression;
one cannot explain Swedens success, therefore, in avoiding disinvestment by reference to
Blocks thesis. A more widely applicable account of the causes of capital flight and the
maintenance of investment confidence, therefore, would be advantageous.
According to Pontusson (1993, 552), reformers are punished when they violate the
systemic interests of capital, as did Swedish reformers in the 1920s who sought to
increase inheritance taxation. Pontusson is less than clear, however, as to capitals specific
interests, and apparently takes capitalist resistance as evidence that they have been violated.
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There may be room for disagreement on the relevance of inheritance taxation for the
systemic interests of capital [in Sweden, but] it is clear that organized business perceived
and responded politically to this threat (1993, 571). This reasoning is not convincing. If
one contends thatx is the cause of business opposition, evidence that business opposition
exists does not argue for the explanatory importance ofx. More systematic accounts of
what triggers an investment strike usually emphasize strictly economic factors, and focus on
policies pursued by the extreme left. According to a widely held view, economicand
eventually politicalcrises flow from radical policies, which threaten the very institution of
private profit. Under such circumstances, rational capitalists will not invest (Przeworski
1985, 45; cf. Lindblom 1977, Kolm 1979). This argument is parsimonious and persuasive,
although its applicability is limited due to neglect of the political factors that influence
investors evaluations. In Przeworskis analysis of the transition to socialism, for example,
pressures for a significant improvement of material conditions erupt from various social
groups, forcing the government to grant them economic concessions. Policies won in this
manner reduce profits, antagonize investors and cause economic and political crisis
(Przeworski 1985, 44-45). It is clear, however, that owners of capital react to theprocess
of labor militance and direct action, not only to their practical results. Disinvestment
commences as dramatic social turbulence begins, and does not await a final translation into
radical politics. In his discussion of the dynamics of leftist reformism, as well, Przeworski
(1985, Ch. 5) equates popular pressures with the end of profits, and does not fully explore
the importance of political events. A class compromise, according to Przeworskis
formalized representation of the bargaining between labor and capital, signifies that workers
consent to the institution of private profit, and in return capitalists pledge a specific rate of
wage increases and investment. Under the conditions of a compromise, labor militance
causes zero or negative profits (1985, 182-3). Crucially, the conditions governing the
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causes. The former is a worry about stability, and the latter a fear for the existence of
profit. A government agenda that moves steadily leftward may eventually become
revolutionary, but investors under the moderate left rarely fear root-and-branch revolution.
Instead, investorsas during the Popular Frontdirect their suspicions to the far-left and
the workers, both of whom can push around government policy. In Sweden, there were no
such causes for alarm.
2.0 Investors and Reformers in France and Sweden: the short term
Drastic and crippling capital flight commenced when the Popular Front was elected;
Sweden saw no post-electoral decrease in business confidence. If we examine only
economic variables, this appears profoundly puzzling, as both governments programs were
quite similar. Both were proto-Keynesian prescriptions for ameliorating the Depressions
effects. The Popular Front proposed to stimulate the economy by raising the purchasing
power of consumers, improving unemployment benefits and old-age pensions, increasing
spending on public-works projects, abolishing the deflationary budget cuts of the previous
government, and reducing the working week with no loss in pay. Similarly, the Social
Democrats planned to revive consumption and maintain the price level by subventions to
assist the unemployed, price supports for agriculture, and increasing (by sixty-six times!)
public-works spending. The SAP proposed deficit financing to pay for these measures,
along with raising direct and indirect taxes, and doubling inheritance levies.3
In the elections of 18 September 1932, the Social Democrats won enough seats to
form a minority government. Judging from the value of the currency and the stockmarket
(Figure 1), however, investors were unconcerned.4
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100
105
110
115
April2
9=100
4/29
5/276/28
SAP/Agrarian coalition
announced: 27 May
Figure 1. Stockholm Stock Index: 29 April--28 June 1933.(Source: Svenska Dagbladet)
Likely as not, they correctly predicted that the SAP, while able to govern, would not have
enough votes to pass its legislation. In May 1933, however, came a shocking development
that caused a sea-change in Swedish politics: the conservative Agrarian Party, despite
having no history of parliamentary cooperation with the left, promised to support the Social
Democrats in exchange for agricultural price subsidies.
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75
85
95
105
4/14/24
5/146/13 7/1
Strikes begin: 14 May
Evacuations of plants begins:
13 June
First ballot: 25 April
Figure 2. Index of the Paris stockmarket: April--July 1936.(Source: The Wall Street Journal)
The agreement between the Agrarian and Social Democratic parties was proclaimed
on 27 May 1933. Despite the surprise announcement, which meant that the Crisis Program
was soon to become law, investors remained calm (Figure 2). In fact, stock prices and the
value of the krona actually increased slightly: from 12 May to 26 May, for example, the
stockmarket gained 3.2%; yet in the following fortnightfrom 26 May to 7 Junethe
market rose 9.5%. The number of krona notes in circulation, which would have increased
upon hoarding, was unaffected (Economist, various issues), and the monthly index of
Swedish industrial shares was also quite stable: from February to August 1933, the index
was 50, 52, 59, 66, 65, 63, 65 (Statistical Year-book of the League of Nations [SYLN]
1934/5, 246). The absence of a negative reaction from the markets is especially surprising
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because the Social Democrats had publicized the dramatic break from economic orthodoxy
their crisis program entailed.5 The reaction of the French markets to a leftist administration
able to pass its program was quite different.
2
4.5
7
Francsa
bovecurrentrate
4/74/25
5/226/13
7/2
Figure 3. Three month forward rate of Francs per Pound:Discount over spot rate April--July 1936 (Source: The Economist)
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53
57
61
65
billionsoffrancs
3/65/15 6/12
7/24
Figure 4. Gold holdings of the Bank of France.3 March to 24 July 1936 (Source: The Economist)
In a classic sign of capital flight, after the first round of French elections on 25 April
1936, the number of franc notes in circulation rose dramaticallyan increase, in fact, larger
than any of 1935 or 1936as notes were exchanged for gold and other currencies
(Economist, various issues). The Paris stock market quickly fell by 20% (Figure 3), and
within five months it had dropped more than 32% (SYLN1936/7, 250); the three-month
forward rate of the franc against the pound more than doubled, attesting to doubts
regarding the future value of the currency (Figure 3); and the Bank of France lost 10 million
francs worth of gold (Figure 4), as it redeemed notes.
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What explains investors dramatically different reactions in France and Sweden?
One possibility is that the Swedish markets (perhaps even the Swedes themselves?) were of
a different, more tranquil sort than the French. By this explanation, the data above are
simply products of two essentially different and incomparable marketsone staid, the other
volatilenot indicators of different responses by the investment communities. In the six
months immediately preceding the respective elections, however, the French stock market
was in fact markedly calmer than the Swedish. In the so-called Krueger Crash of March
1932, for example, within four weeks the exchange rate against the pound fell more than
7%; the Swedish index of industrial shares plummeted nearly 35% in the following four
months (SYLN, 1934/5, 246; Thomas 1936, 199). The French index of industrial shares, on
the other hand, were quite stable in the 7 months before the Popular Fronts election (SYLN
1936/7, 250). Given their demonstrated potential for volatility, therefore, it is all the more
striking that Swedish markets were not disrupted by the announcement of May 1933, which
made clear that the government was able to implement its heterodox program.
Simmons offers an excellent explanation for the massive scale of French
disinvestment after the 1936 elections; she does not, however, shed light on why Swedens
experience was so very different. She investigates why some states during the inter-war
years met gold standard requirements of currency stability and relatively free trade, while
others devalued and erected trade barriers. French owners of capital, according to
Simmons, were apprehensive because of labor unrest and fears of inflationthe presence of
a left-wing government magnified both factorsand predicted the Popular Front would be
forced to devalue the franc. In other words, given the circumstances, the government was
not seen as trustworthy to manage the currency. For nations on the gold standard, the
central question is whether the governments commitment to price stability is credible to
market participants (1994, 55). Simmons identifies four variables that influence such
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investor appraisals: regime type (democratic or authoritarian); policymakers preferences
(leftist, conservative, etc.); time horizon (stable or unstable governments); institutional
monetary constraints (independence of central bank, e.g.); and degree of labor unrest (1994,
56-63). Simmons analyzes nations on the gold standard, yet her analysis must hold, at least
to some degree, for those on other monetary regimes as well. After all, not only nations on
the gold standard faced market participants who feared inflation and a depreciating
currency. Employing Simmons analysis to Sweden, investors should have had similar
concerns to those of their French colleagues, albeit to a lesser extent, about the incoming
Social Democrats. Both Sweden and France were democratic states controlled by stable
leftist governments.6 Where they differed, first and most clearly, was in the strike rate; this
was unquestionably an important explanatory factor, as I discuss below. Another difference
is to be found in the central banks degree of independence: Simmons argues the Swedish
Riksbank was slightly more amenable to political pressure that the Bank of France (1994,
299-304), and that a more politically malleable monetary authority tends to make investors
predict inflation. This was, therefore, a cause for Swedish investorsskepticism of price
stability under the SAP.
Not that they needed more reasons to predict increasing prices. After Sweden went
off the gold standard in September 1931, there were widespread fears of an inflationary
reaction and dangerous fluctuations in the kronas value (Thomas 1936, 185, 187). In
light of these dangers, after the fall from gold Swedish monetary authorities declared they
would attempt to use a weekly price-level index to maintain the internal purchasing power
of the currency. It is, however, one thing to make an official declaration of policy and
quite another to be able to carry it out effectively... the public must have complete faith in
the banks intentions and its capacity to fulfill them (Thomas 1936, 192). Using an index
to maintain domestic purchasing power proved to be a reasonable policy, but it was untried
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and its announcement was unlikely to have completely mollified Swedish investors. Further,
the SAP declared that deflation, not inflation, was Swedish business primary problem, and
sought to raise prices to benefit producers (Thomas 1936, 201; Gaitskell 1939, 104). In
sum, when the SAP was elected, only a year after Swedens departure from the stability of
gold, owners of capital saw a relatively pliable central bank, a government committed to
deficit financing, and one which declared it saw no danger in a little inflation. It is
surprising, therefore, even taking account of Simmons explanation, that Swedish investors
seemed so sanguine about future monetary stability. And inflation was not the only worry.
One did not have to read between the lines of the Crisis Program to figure out that
budget deficits were on the way. The Social Democrats loudly proclaimed their proposed
break with economic orthodoxy by financing public works programs through borrowing
(Arndt 1963, 210; Thomas 1936, 208). The Popular Front was more cautious during their
electoral campaign, and felt constrained to argue, rather implausibly, that only Socialists
could restore balanced budgets (Jackson 1988, 163). One might suspect that the reason
investors did not take alarm at the Social Democrats frankness was because Swedes were
used to budgetary shenanigans; perhaps French owners of capital sent their funds abroad so
quickly because the Popular Front threatened to damage a sterling French tradition of
balanced budgets. In fact, both nations had fiddled the budgetary books, but France was by
far the worse offender. Occasionally, Swedish governments resorted to statistical sleights of
hand: in the financial years 1931-2 and 1932-3, for example, 165 million kronor were taken
from accumulated funds to achieve an ostensible balanced budget (Thomas 1936, 235).
Instead of dipping into savings, however, French governments borrowed heavily. For the
years 1932-1935, annual budget deficits drove up the national debt from 265 billion to 333
billion francs (Arndt 1963, 139-40; see also Shirer 1969, 153-4). Economic orthodoxy in
both nations declared balanced budgets asine qua non of a healthy economy; the Swedes
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simply came much closer to achieving them. Before the Crisis Program was passed, the
principles of Swedish economic policy were simple and orthodox: ...borrowing for
unremunerative objects was not allowed (Wilson 1939, 67). Accordingly, in response to
Social Democratic plans of deficit spending, economists, bankers and the bourgeois parties
predicted all sorts of catastrophes, especially inflation (Odhner 1988, 191). Opponents of
the crisis policy predicted interest rates would rise, the states finances would be
undermined by increased debt, and confidence in the business community would be lost
(Wigforss 1938, 30; see also Uhr 1977, 107-110). This didnt happen, even though the SAP
borrowed heavily. In 1932, for example, loans were 11% of total expenditure; for the years
of 1933 and 1934, however, it was between 27% and 29% (Wilson 1939, 69). In the event,
although direct comparisons are difficult, budget deficits under the SAP and Popular Front
were roughly comparable, both increasing by perhaps 25% (Kalecki 1938, 37-8; Wigforss
1938, 34). The unbalanced books in France were by no means a break with past practice
if anyone should have been shocked at the deficit spending, it was the Swedesand both
nations deficits were roughly similar in size. In terms of explaining the disparate levels of
business confidence, in short, we should look elsewhere.
In his investigation of The Economic Lessons of the Nineteen-Thirties, Arndt
advances some tentative hypotheses regarding the puzzling maintenance of confidence
under the Swedish Social Democratic governments. First, Arndt (1963, 219) asserts that
in Sweden both State intervention and social reform were already before 1932 an accepted
tradition. He does not elaborate on this point, but one could imagine that a nation with a
strong record of successful social reform would not be threatened by another major
legislative effort in that regard. But Swedish and French reformist achievements were not
that different. Before the election of the Front, France certainly had only limited
accomplishments in the field of social welfare. Yet the French had passed compulsory
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Sickness Insurance in 1930, Pension Insurance in 1910 and 1930, and Unemployment
Insurance in 1914 (Flora and Alber 1981, 59). In Sweden, surprisingly enough, the record
was no grander. Esping-Andersen, in fact, argues that part of the success of SAP
governance in the 1930s can be traced not to a cumulation of reformist legislation but rather
the absence of previous reforms. The veritable legislative tabula rasa allowed the SAP the
freedom to construct social programs in accordance with their own principles, instead of
being forced to operate within the confines of existing laws and regulations. Upon the
Social Democrats assumption of power, previous governments had legislated only work
accident and pension insurance (the latter not having matured, most pensioners had to rely
on poor relief). In short, until the 1930s Sweden was an international laggard in social
security development. The massive social need that emerged with the economic crisis
confronted a wasteland of social protection (Esping-Andersen 1988, 40, 44).
Arndt (1963, 219) also conjectures that the openness and clarity with which the
Swedish government from the beginning explained its policy may have had something to do
with maintaining confidence. Without question, the Social Democrats offered a coherent,
clear platform in the 1932 elections. In the 1928 campaign, by contrast, the SAP leaders
appeared to disagree on the issues of socialization and inheritance taxation (Tingsten 1973,
273ff). Their imprecision on these delicate subjects hurt the party, as the bourgeois
opposition did not squander the opportunity to frighten voters by capitalizing on the
vagueness of the SAP plan (Tilton 1979, 508). By 1932 the party had, in the words of one
of its leaders, learned it should not go to the electorate only with an idea or a line, but also
with a well formulated practical proposal for the realisation of this idea (Tingsten 1973,
289). Here Arndt makes an important point: investors seek stability and predictability, and
react against vagueness and imprecisionespecially by leftist parties. It is important to
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analyze, therefore, those factors that cause owners of capital to believe that a reformist
agenda may not be as stable as it seems.
Finally, Arndt briefly points to the French social cleavage between left and right,
worker and owner, as compared to the absence of sharp class cleavages in Sweden (1963,
141, 219). Sweden was indeed not as divided along class lines as was France, which
Stanley Hoffman describes as being in the 1930s two armed camps (quoted in Wolfe
1969, 175). Further, it is not uncommon for observers to trace the success of Social
Democracy to, as Schumpeter (1962, 325) phrased it, Swedens exceptionally well-
balanced social structure. Accounts of Scandinavian tranquility are often overdone,
however. It is important to remember, for example, that in the 1920s and early 1930s the
Swedes had strike and lockout rates that were the highest in the world (mark 1988, 73),
and employers frequently employed the blacklist to weed out union organizers (Thomas
1936, 167). Note also that one close observer describes the Swedish social structure in the
early 20th century as a class system with an extraordinary concentration of capital within a
tiny clique of wealthy families (Esping-Andersen 1988, 40). We can see Arndts central
point, however, when comparing Swedish and French political parties ideologies. On the
right, the conservative and rightist parties of the French Chamber were often linked to
extreme nationalism and anti-Semitism (Mazgaj 1986; Irvine 1986);7 in Sweden, by
contrast, the bourgeois parties were more similar to that of the more forward looking of
the British Conservatives (Arneson 1939, 56). On the left, in France the Communist party
was hugely influential and the Socialists were split between reformers and those who called
for revolution; in Sweden, the parties to the left of the SAP were a laughing stock for
their continual quarrels and irrelevance (Parker 1939, 49). Further, the Riksdags legislative
rules denied the Communists and Independent Socialists any places in the powerful
parliamentary committees.8 The absence of a far-left party in the Swedish government, and
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the riven, fractious and influential political factions to the French reformers left, both figure
prominently in my explanation for investors behavior. Arndt, in sum, helps point the way to
a consideration of the importance of agenda stability, as well as revolutionary parties and
groups, to any convincing explanation of the levels of confidence in each case. In addition,
as Simmons notes, we must consider the effects of labor militance, which had such a clear
impact in the immediate post-electoral period in France.
French investors reacted briskly to the ebb and flow of strikes after the Fronts
election, as they did throughout its rule. Capital flight began quickly after the ballot of 25
April (Figures 3 and 4). In Figure 3, the stock index and forward rate of the franc indicate
investors striking pessimism immediately after the elections.9 It got worse, though, on 14
May, when began the largest strike movement in the history of the Third Republic. Starting
as isolated sit-down strikes, late in the week of 14 May they began to spread widely, and,
most threatening, often involved workers taking over their factories (see Danos and Gibelin,
1986). The militance reached its peak on 11 June; by 13 June the number of strikes had
begun to decline, and the workers began to leave the factories. The strike wave was mostly
over by 26 June, when the government announced that the number of strikers had declined
by a million to 165,000 (Colton 1966, 155). Strike rates clearly influenced indicators of
confidence during this period. Notice in Figure 3 that after the steep drop following the
election, disinvestment appears to have lessened before the worst of the strikes,
approximately from 7-22 May. At this point, apparently, investors already had decided on
their bets regarding financial life under the Popular Front. The strike movement made them
revise their calculations, and the forward rates and stock prices only began to recover on 13
June, after workers began to leave the factories they had occupied. The weekly and
monthly data in Figure 4, with something of a lag, tell the same tale. 10 The weekly
statements of the Bank of France detailing its gold holdings indicated a dramatic drop in
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confidence after the poll of 25 April, a brief recovery beginning on 15 May, followed by a
further slide that did not right itself until after 13 June. Similarly, the monthly index of
French industrial shares (Figure 4), taking account of the reporting lag, indicates a fall in
April, which began to even out in July. These data strongly suggest that the strikes strongly
shaped investors reactions to the Popular Front. Indeed, one wonders if the strikes had not
occurred in late May, perhaps the brief upturn in the markets would have continued, greatly
lessening the disinvestment and thereby changing the financial complexion of the Popular
Fronts rule. In fact, investors repeated their sharply negative reaction to strikes throughout
the life of the Popular Front, but not because the militance brought about socialism or
eliminated profits. The central and more mundane concerns of French business were of the
power of the strikers to disrupt production schedules, act collectively to demand reforms,
and thereby propel the government leftward.
Investors feared not only the effects of labor militance, but also the influence of the
more extremist elements of the Popular Front, an electoral alliance composed (from left to
right) of the Communists, Socialists and Radical Socialists. It was a motley and often
incompatible group, only brought together by deflation, Soviet foreign policy and right-
wing violence in the streets. The Socialists, for example, rejected the Communists as tools
of Moscow and the Radical Socialists as proto-fascists; the Communists, for their part,
yelled social fascists at Socialists, and only allied with the Radical Socialists on orders
from the Soviets. Confusingly, party labels meant little when it came to policy: on certain
issues, some Radical Socialists were to the left of a Socialist faction or two, and a group of
Socialists were quite pro-Communist (Weber 1994, 148-9).
Most voters and investors did know, however, that it was the Communists who
called for a dictatorship of the proletariat. Alarmingly, the election returns of 25 April and 3
May brought that party a stunning increase in support, raising their total seats from ten to
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seventy-two; the Socialists went from ninety-seven to 147 seats, the Radical Socialists were
the electoral losers, going from 159 to 106 seats (Jackson 1988, 8). From the start,
therefore, observers associated the government with increased political power for the far
left, whose parties made clear that they had only temporarily abandoned their distinctive
objectives. The Communists, for example, had proposed a capital levy, and the Socialists
the forty-hour weekboth of which were eliminated from the final Popular Front program
in an attempt to mollify the middle-classes. Many observers questioned, however, whether
these policies would reappear if the opportunity arose, and this is precisely what occurred
with the forty-hour week. The politicians at the leftist end of the alliance certainly did not
help assuage such fears. Communist leader Maurice Thorez, for example, in spite of his
later attempts to restrain strikers enthusiasm, called the Popular Front
a government permitting the preparation of the total assumption ofpower by the working class; in short, a government that would bethe preface to armed insurrection (quoted in Tiersky 1974, 72).
Among the Socialists as well, an influential splinter rejected Blums reformism. Marcel
Pivert, for example, called for nationalization of the countrys key industries, and after the
election declared it was the hour of Frances social revolutioneverything is possible.
Jean Zyromski, leader of the pro-Communist Socialists, announced that he spurned the idea
of a government wishing simply to manage to interests of bourgeois society. It proved
exceedingly difficult, in the words of the Socialist Party newspaper, to please Pivert and
Zyromski on the one hand and the countrys investors on the other (quotes in Colton 1966,
131-32).
In sharp contrast to the French Socialists, the Swedish Social Democrats by 1932
had healed their split between reformists and revolutionaries, and they governed with the
votes of the conservative Agrarians, whose influence swamped that of the few weak
Communists and Independent Socialists. Stung by assertions that it was beholden to radical
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leftists, the SAP had learned an important lesson during the 1920s. Because of electoral
cooperation with the Swedish Communist party in the Cossack election of 1928,
opponents linked the Social Democrats to Russian Communists, putting up posters that
warned of impending Bolshevism in Sweden (Odhner 1988, 189n; Tingsten 1973, 272-3).
In response to the effectiveness of this attack and their defeat in the election, the SAP took
measures to eliminate factions and disassociate the party from their more radical political
colleagues. According to Schullerqvist (1992), there were three essential steps. First, the
party specifically repudiated the Communiststhey had refrained from criticism in the 1928
election. Second, a splintered leadership directing various factions was replaced by
moderates monolithic control. Radical SAP members were defeated in elections for
internal party positions, and subsequently forced to toe the temperate party line. Finally, the
SAP-affiliated Confederation of Trade Unions purged Communists and other leftists from
its constituent unions. In short, opportunities decreased for Communists and Syndicalists
to exert influence on the party, and moderates gained firm control, then unified a labor
movement with competing centers of power (Schllerqvist 1992, 288-9 andpassim). As a
result, by 1932 there were few party members or union leaders who could frighten investors
by demanding social transformation instead of reform. The revolutionary parties were no
scarier.
The Communists and Independent Socialists were protean and powerless. One
could say that the Communists were marginalized after the election of 1932 when the SAP
refused to govern with them (Esping-Andersen 1985, 87), but they, with the Independent
Socialists, were already firmly on the margins of Swedish politics: out of 230 seats in the
lower house of the Riksdag, in 1932 the Communists won only 2, and the Socialists only 6
(Arneson 1939, 55). There was, therefore, little possibility of the far-left radicalizing the
reformist agenda. On the contrary, the Social Democrats relied on the conservative
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Agrarians support, and it was clear that these political partners would veto any radical
policies (Tilton 1974, 568-9). On the parliamentary level, therefore, there was little to
cause concern. Combined with the SAPs novel and assertive policy towards labor,
Swedish owners of capital had few reasons to disinvest.
3.0Reformers and Investors in France and Sweden: the long term.
In terms of investment behavior, the immediate post-electoral period in both nations
was similar to the succeeding years. Even after Blums fall from power, investors deeply
mistrusted the succeeding Popular Front administrations, and only began to bring money
home and increase production after November 1938, seven months after conservatives took
over the government. The monthly index of industrial shares, for example, was in March
1938 still below its level of February 1936 (SYLN1935/6, 258; 1937/8, 254) Throughout
the tenure of the SAP, on the other hand, private enterprise responded readily to the
stimulus imparted by the State (Arndt 1963, 219; see also Thomas 1936, 234 and Gaitskell
1939, 106). From 1933 to 1936, for example, the Swedish index of industrial shares soared
82%; savings bank deposits and savings certificates also rose steadily (SYLN1939/40, 227,
238). Analysts have put forward several factors to account for the economic success of
Swedish Social Democracy in the 1930s. These factors were by no means absent in France,
however, and thus cannot offer an explanation for the failure of similar policies there.
Luck played a role. The SAP came to power at the worst point of the Depression,
just when the economy was touching bottom, and therefore the party was able to take
political credit for prosperitys return. In addition, the Social Democrats benefited from a
depreciated krona without taking the political blame for the fall from the gold standard. In
comparison, the Popular Front had the bad fortune to come to power just as the slight
economic revival petered out that had begun in 1935 (Ehrman 1947, 153). Further, Blum
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was forced to devalue the franc after three months in office, contributing to the widespread
impression that leftist politicians could not be trusted to manage the currency. All did not
depend on destiny, however. French investors could have helped pull the economy out of
depression had they been more receptive to the Popular Fronts reflationary stimulus, and
had they taken the boost provided by the Fronts two devaluations.
The krona depreciated by roughly 30% after going off gold in 1931, and this clearly
contributed to Swedens financial recovery under the SAP by making exports more
competitive (Gaitskell 1939, 97; Thomas 1936, 234). Ironically, much of the resulting
export revenue came from Nazi Germany, whose rearmament campaign had an enormous
appetite for Swedish iron ore and timber (Esping-Andersen 1988, 44; for statistics see
Gaitskell 1939, 105). German militarism had a similar, if less positive, effect on France. To
meet the Nazi threat, the French were forced to spend much more on arms than they could
afford. This certainly abetted production, however, and eventually buoyed the French
economyafter the fall of the Popular Front, however (Jackson, 1988 187-188). When the
Socialists were in power, on the other hand, the armament industries found excuses to
keep their production down despite lucrative contracts from the government (Shirer 1969,
306). The devaluations did little to dispel this pervasive attitude.
Taking a step that was years overdue, the Front first devalued the franc by roughly
25% in September 1936. This led to a brief upturn in French economic fortunes, and a rise
in the stockmarket, but capital flight continued. In the six months following devaluation,
for example, gold losses totaled 7 billion francs. These capital exports, in turn, completely
defeated the reflationary policy of the Blum government (Arndt 1963, 144). Regulations
accompanying the devaluation discouraged immediate repatriation of capital: to prevent
windfall profits, owners of capital were forced to trade in their holdings at the old
exchange rate, or pay a penalty equal to the difference. This policy was abandoned and free
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trade in gold re-established in March 1937, and those who were penalized or had received
only the pre-devaluation rate were compensated for the difference. This new policy,
however, only temporarily attracted funds from abroad and soon money began again to
drain from the country (Jackson 1988, 181-2).
In February 1937, Blum declared a pause: no further reforms would be
implemented, and nothing would be done that might undermine the confidence of the
business community (Wolfe 1951,152). By June, however, the money markets were
seized by a panic, leading to the fall of the Blum government (Jackson, 1988 181). The
Radical-Socialist leader Chautemps formed another Popular Front government, which also
was unable to win the confidence of investors. This would be quite surprising, if we viewed
investment behavior as driven only by economic criteria. Chautemps tried hard to win back
confidence: his government devalued the franc again, balanced the budget, and abandoned
the Popular Fronts program. Blum, in fact, was alarmed by his successors priorities.11
While the second devaluation led to a brief boom that enticed home some capital, this also
was only temporary (Jackson, 1988 184-85). Fatally for his chances of restoring
confidence, Chautemps and his Finance Minister insisted on publicly defending the gains of
Matignon (Wolfe 1951, 173). Only one week after the Chautemps government took power,
a strike was settled only by extending the 40 hour week to the restaurant and hotel workers,
and a fresh wave of sit-down strikes occurred in the fall and winter of 1937, and (Colton
1966, 290). The continued pause did not sufficiently address the concerns of business
and owners of capital, who were reluctant to invest, or indeed to place any confidence in
the government, until labour discipline, as they saw it, had been imposed and the symbol of
their defeat [the Matignon Accords] had disappeared (Jackson 1985, 207). The second
Popular Front governments tolerant attitude towards strikes and the reforms of Matignon
meant investment would not be forthcoming. In short, political considerations were at least
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as important to French investors as economic factors such as a cheapened franc. After the
devaluations of 1936-38, the franc had lost more than half its value (Weber 1994, 165),
making exports much more competitive. Yet what stands out in this period is the amazing
refusal of the French business community to be stimulated by higher prices at home and by
the potential improvement in export markets (Wolfe 1969, 174). The undervalued krona
offered an advantage to Swedish industry as well, but most importantly, Swedish industry
tookadvantage.
The reforms the French workers gained at Matignonmost notably, the forty-hour
weekmakes it tempting to argue that there is a key difference between the Swedish and
French cases: the French reforms hurt owners of capital, and the Swedish reforms did not.
This assertion has some plausibility considering that wage increases in France led to
inflation. We must separate, however, the profound hostility to the reforms from their
putatively negative economic effects. The better part of this hostility was a result of the
political circumstances under which the Popular Front program was radicalized. To end the
strikes of May-June 1936, French business agreed at Matignon to the right of labor to
organize, collective bargaining, sharp wage increases, paid vacations, and the forty-hour
week. Pushed hard by the massive strike waves and worker occupations, Blum declared the
law was imposed on me by the circumstances in which I took over the government
(quoted in Colton 1966, 168). Matignon represented, therefore, a fundamental
radicalization of the original Popular Front program, which mentioned neither paid holidays
nor collective bargaining, nor gave a specific figure in its pledge to reduce the working
week. Even so, the restrictions of the forty-hour week, wage increases and inflation did not
add up to decreased profits for French business.
As did the Swedish Social Democrats, Blum recognized that the problem of the
French economy during the depression was low prices, not inflation. Accordingly,
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therefore, industry profited greatly from the Blum Experiment, as it was able to take
advantage of reflation. From 1936 to 1938 prices increased sharply in France, and although
this added to the already widespread doubts concerning the stability of the franc, business
benefited tremendously in real terms. From April 1936 to April 1937, Kalecki (1938, 34-5)
estimates that big industrialists enjoyed a 60% increase in purchasing power. Ehrmann
(1941, 156) notes that the net profits of 122 undertakings in various branches rose by an
average of 36% in 1936-37, and according to Sauvy (1984, 2:315), business revenues
increased 11% (in constant francs) in 1937. The entrepreneurial classes were,
paradoxically, the chief beneficiaries of the Matignon reforms (Wolfe 1951, 204). By the
same token, while the application of the forty-hour week was unduly inflexible, the law
doesnt seem to have drastically restrained French factory owners. In November 1938, for
example, 8% of all workers employed in large establishments worked for more than 40
hours; by February 1939, after the elimination of the forty hour week, the figure had only
risen to 19% (Ehrmann 1947, 92-3). Even in June 1939, the work-week would only
fluctuate between 41 and 42 hours (Weber 1994, 165). Yet while French profits went up,
investment did not.
Employers did object strongly to the forty-hour week, but certainly not because it
reduced profits, and less to the effects of the law on production than to it as a symbol of a
new dispensation on the shopfloor (Jackson 1988, 183). The forty-hour week was a
central symbol of the Popular Front precisely because it was achieved through working-
class direct action. From investors and business point of view, Matignon was the worst of
both worlds. Not only was it the badge of a profound radicalization of policy, but it also
failed to limit strike rates in the long term. Compared to the period from 1932-1935, for
example, during the rule of the Popular Front (1936-1938) the average number of industrial
disputes increased by 56 times, and the average number of workers involved per dispute by
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ten times (Mitchell 1975, 179).12 This labor militance did not quickly fade when
conservatives took power in the spring of 1938, much to investors disappointment.
The capital strike that greeted the Popular Fronts election is justly famous. The
return of confidence, however, is little known but quite instructive as to investors
motivations. The Socialists departure from government was not enough to satisfy owners
of capital; neither was the third devaluation in less than two years. Confidence improved
after the severe defeat of the left in the Senate elections of October 1938, and after the
dissolution of the Popular Front, but investors only brought their money home when the
labor movement had been thoroughly squashed. When in April 1938 Daladier formed the
first cabinet since the elections of 1936 devoid of Socialists, and which even lacked left-
wing Radical Socialist representation, confidence increased sharply but temporarily (Times
[London],12 April). In the following three weeks, the stockmarket gained nearly 20%
(Wall Street Journal, various issues). The forward rates on the franc reflected the same
trend, averaging roughly a 30% fall (Economist, various issues), albeit for a shorter period
due to perceptive rumors of another devaluation, which occurred on 4 May. Yet even this
third devaluation and the expulsion of the Socialists from the government could not bring
back confidence in the long term: the stockmarket had slid back down by September 1938.
Continuing strikes were the central problem. When Daladier formed his government in
April, the Times correspondent paraphrased the comment of one French Deputy:
confidence would return only when it was known both in France and abroad that methods
really had been changedthat there were to be no more stay-in strikes (Times [London], 7
April 1938). This occurred only in the fall of 1938, when, in a definite move to the right,
Senate elections resulted in a complete defeat for the Socialists, the Popular Front was
formally dissolved, and the labor movement crushed. The elections of September led to the
defeat of Socialist candidates in 96 of 97 contested seats; even the left-wing of the Radical-
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Socialist Party lost ground to conservatives (Times [London], 24 October). The death of
the Popular Front itself finally came on 30 October at the Radical-Socialist Congress, when
the party broke relations with the Communists. Stock prices did begin to rise following
these events. It was the crackdown on labor, however, that had the strongest effect on
business confidence. With the political tide obviously running out for the left, which had
not even a tenuous connection to power after the end of the Popular Front, there remained
only the insolent workers.
In mid-November, a set of decree laws promulgated by the Finance Minister
Reynaud reduced overtime rates, re-instituted the six-day week, and removed most of the
restrictions on working hours. When the main union confederation (CGT) protested this
virtual repeal of the forty-hour week by calling a general strike on 30 November 1938, the
right welcomed this opportunity to crush the unions (Ehrmann 1947, 116): for the first time
since 1936, the government unhesitatingly used wholesale force against strikers (Colton
1951, 139; see also Jackson 1988, 111-12).13 It was a clear and humiliating defeat for the
workers. This inspired investors: in the three days after the attack on the unions, capital
inflows were estimated at $50,000,000 (Hargrove, 1938b).14 The strikes failure, and the
ensuing government repression of workers, destroyed the labor movements power: from
January 1939 to the beginning of the war there were no recorded strikes in France. As a
result, confidence returned, despite the severe international tensions. From March to
October 1938, the stock market fell by 6.5%, yet from October 1938 to May 1939, the
market gained by more than 15% (SYLN1938/9, 249; 1939/40, 227); bond prices also
increased sharply in the month after the failed strike (Economist, 24 December 1938). The
surge in confidence was to some degree a response to the substance of the decree-laws.
Reynauds policies, for example, did prune the (ordinary) budget, mostly by raising taxes.
Their effect, however, seemed to be of mainly political, not economic, importance. The
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government was still faced with the same economic problems, but the symbol of the Popular
Front was eliminated, the left was out of power, and the labor movement was emasculated
(Times [London], 15 November 1938). Leon Jouhaux, the leader of the CGT, cogently
summed up Reynauds message to capitalists: You can bring back your money, for we have
mastered the working class (quoted in Hargrove, 1938).
The climate of industrial relations could not have been more different in Sweden.
The SAP oversaw a decrease in strike rates and instituted labor market policies that effected
centralized control over unions, thereby reducing the likelihood of wildcat militance. The
Social Democrats further pleased business by the institution of highly centralized, supra-
industrial bargaining that acted to level wages, not maximize them. Peak-level bargaining
allowed more predictability for employers, in part by denying workers the ability to press
advantages they might enjoy in certain industries. Its implementation was caused by a
conjunction of several factors flowing from a severe strike in the construction industry
during 1933-34 (Swenson 1989; 1991). First, the employers federation threatened
widespread lockouts if the Social Democrats and its union confederation could not control
such wildcat strikes. Second, while the Agrarians had agreed to support the government in
return for farm-product price supports, in January 1934 the Farmers also demanded an end
to the construction strike that had been going on since April; in fact, the leader of the
Agrarian party made his partys support for the Crisis Program conditional on the
willingness of the striking unions to take account of the economic situation (Swenson
1989, 46). Finally, in light of pressure from employers and parliamentary allies, the Social
Democrats themselves were willing to intervene in the strike to prevent lockout-related
strife and save their reformist agenda. In the end, due to pressure from the SAP-affiliated
union federation, the construction workers accepted a settlement that amounted to a clear
defeat: the agreement included piece-rate reductions of 12-15%, and eliminated the
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construction workers right to conduct decentralized strikes and negotiate regarding new
production techniques (Swenson 1989, 42-49; see also mark 1988, 72-73). In sum, this
extraordinary intervention against the construction unions saved the Social Democratic
government and its crisis program (Swenson 1989, 49). The defeat of a wildcat strike led
in part by Communist firebrands (mark 1988, 72; Swenson 1989, 48) doubtless also
reassured investors that the radicals to the left of the government would get no special
favors. In the end, the building strike marked a new stage in the behavior of Swedish
unions. The time-honored pattern of automatic political support for striking workers
abruptly changed, and the unions had to realize the economic effect of their wage policy as
far as society was concerned (Carlson 1969, 38-9). The SAP, by taking the side of
employers in the strike and implementing peak-level bargaining, proved that the government
and its allies would be friendly to business and willing to act against the labor movement.
Perhaps most reassuringly, after 1933 the government presided over dramatically decreased
industrial conflict. Compared to the period from 1930-32, the four years from 1933 to
1936 saw a decrease in the average number of industrial disputes (-52.7%), average number
of workers involved per dispute (-55%) and average number of days lost (-39.7%) (Mitchell
1975, 177-78). In Sweden it was governments control of labor militancenot direct
action by the working classthat paved the way for successful reforms. Effective popular
pressure in France led to concessions by the government and employers, but it also served
to antagonize investors and business, with disastrous results.
4.0 Conclusion
Economic factors cannot adequately explain investors reactions to the Popular
Front and SAP governments; political dynamics were decisive. French business refused to
invest largely because of labors historic, galling victory at Matignona drastic
radicalization of the Popular Fronts agendabut also because of continuing strikes, and
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deep hostility to the governments more radical elements. One can see the importance of
these factors in the circumstances that led to a return of confidence in France, and the
ineffectiveness in enticing capital home of purely economic measures such as devaluation.
Investors had few causes for worry in Sweden, where Social Democrats proved that they
were willing to act against the interests of the working class when necessary, and presided
over a decrease in strike rates. In addition, the SAP proved malleable in the face of business
pressure, was willing and able to cooperate with conservative political allies, and brushed
off the weak and marginalized parties to its left, thereby obviating fears of radicalization.
Overall, it is clear that these political circumstances in both nations had crucial
consequences for business confidence.
Swedish and French reformers experiences during the Depression offer several
insights. Leftist governments are subject to a drop in business confidence not only when
they institute radical policies, but also when they allow their agenda to move to the left.
Declarations of moderation do not prevent disinvestment when owners of capital fear
radicalization and associate the government with the extreme left and the militant working
classes. Reformism can best succeed when the moderates govern with those to their right,
without those to their left, and when they can demonstrate an ability to resist or reduce the
demands of labor. This helps explain why successful reformism has so embittered and
disappointed more traditional socialists.
This paper has focused on events of the 1930s, but the analysis is relevant to
contemporary policymaking. In what might be termed the post-Keynesian era, recently
there has been a powerful international trend toward neo-liberal economic policies, which
has resulted in a greatly increased volatility of international capital movements. As a result,
the power of individual investors to limit and often frustrate political programs is at its
zenith. Such institutional changes perhaps pose an insuperable barrier for radical leftist
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programs; indeed, it is tempting to argue that globalization has foreclosed all dramatic
economic options for the left. As in the years before governmental intervention in the
economy was widely accepted, today it is crucial to understand the causes of private
investment patterns and the political limits they impose.
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1A earlier version of this article was presented at the New York State Political Science
Association 52nd Annual Conference, Albany, New York May 8-9 1998. For their comments and
criticisms, I thank anonymous reviewers, Margaret Levi, Richard Sherman, Cheryl Wheeler, and
especially John Keeler.
In another paper I explore these issues with reference to the reformist governments of the first
two years of the Spanish Second Republic (1931-33).
2 For a comparative analysis of the political dynamics ofUnidad Popularand the Spanish
Popular Front, see Snow (1998).
3 The figures on public-works spending are from Heclo (1974,102).
While the economic plans were strikingly similar, the Popular Front was more specific than the
SAP as to its plans regarding nationalizations. To effect increased control over rearmament, the Popular
Front proposed the nationalization of war industries. In Sweden, although the SAP referred to
nationalization as the partys greatest and most essential task, there were no specific proposals in the
1932 platform (Bergstrm 1988, 142). During the campaign of 1932, however, this did not prevent
political opponents of the SAP from warning of an attempt at confiscation of private property more
diligently thought out than had been the case in 1928, the previous election (Tingsten 1973, 309).
4 The election of September 1932 had no apparent impact on a daily or weekly level, but the
monthly Index of Swedish industrial shares did decrease for several months thereafter. If this drop was
in response to the SAPs strong electoral showing in September, however, it stands to reason that one
would have seen a bigger shock to the markets when in May 1933 the Social Democrats gained a strong
parliamentary majority for their policies. (I calculated the daily stock indexes by equally weighting all
stocks quoted in Svenska Dagbladet[Stockholm stockmarket] and The Wall Street Journal[Paris
stockmarket] and determined their average percentage change during the relevant period. This index is
an indicator of each markets general response to specific events, not an instrument to measure their
precise movements. The monthly Index of industrial shares for each nation is from SYLN, various
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issues)
5 Apparently, however, some Swedish commercial banks evinced their displeasure with the Crisis
Program by raising interest rates in early 1933. The Riksbank quickly overcame this resistance by
negotiating with the banks and buying securities (Gaitskell 1939, 104; Thomas 1936, 209-10).
6 Blums Popular Front fell from power after a year in office, and while this was a much shorter
term than that of the SAP, it is investors reactions during that year that I seek to explain. During that
brief period, that is, investors could not know how long the government would rule.
7 In an ominous manifestation of French right-wing extremism, Shirer (1969, 324) recalls
hearing in Paris at this time a remark that became almost a chant: Better Hitler than Blum.
8 A party has to garner at a minimum 1/15 of the votes of the chamber in order to win a seat on
even the largest committee in the Riksdag, a threshold which none of the extremist parties met (Rustow
1955, 182)
9 The forward rate against the franc, as an indicator of business confidence, moves in the
opposite direction from stock prices. That is, as the forward rate increased, investors bet that the franc
would decrease in value. Instead of averaging the low and high quotes, for each day I took the low
quotation of the forward rate.
10 The weekly and monthly data in Figure 4, by their nature, do not indicate the strikes impact on
confidence as clearly as the daily data in Figure 3. This is because the first value that completely reflects
a particular dates events occurs in the next weeks or months number. The monthly data, for example,
show the fall that followed the elections as beginning in May instead of April, and the end of the
markets deep slide as beginning in August instead of July; they cannot indicate the temporary upsurge
of late May.
11 Blum complained the Chautemps government undertook an economic and political
programme contrary to that which I had practised...[I] proclaimed the need for a pause. But a pause
was not a reversal... to the policy of budget balancing (quoted in Jackson 1988, 184)
8/14/2019 Reformers and Investors: Crisis and Confidence during the Depression.
38/38
12 The number of days lost due to strikes in France from in the years 1936-1938 is not available.
13 Quoting Goethe, The Economist(3 December 1938) stated Daladier's attitude to the unions
this week has been a clear case of Und bist du nicht willig, so brauch ich Gewalt (And if you are
not willing, then I will use force).
14 Due to the heavy drain on Londons gold by the return of capital to France, during the first
week of December, for the first time in seven years, the Bank of England was forced to increase the
issue of notes secured only by government obligations instead of by gold (Korsmeyer, 1938). See also
the statistics in Weber (1994, 178-9).