TRAGEDY AND HOPE Chapters V-VIII
by Dr. Carroll Quigley
ISBN 0913022-14-4
CONTENTS
V. THE FIRST WORLD WAR
VI. THE VERSAILLES SYSTEM AND RETURN TO NORMALCY 1919-1929
VII. FINANCE, COMMERCIAL POLICY AND BUSINESS ACTIVITY 1897-1947
VIII. INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE
CHAPTER V: THE FIRST WORLD WAR
THE GROWTH OF INTERNATIONAL TENSIONS 1871-1914
Page 249
Four chief reasons have been given for the intervention of the
United States in World War I.
1) to secure "freedom of the seas" from German submarine attacks;
2)British propaganda;
3) a conspiracy by international bankers and munitions manufacturers
either to protect their loans to the Entente Powers or their wartime
profits from sales to these Powers;
4) Balance of Power principles to prevent Great Britain from being
defeated by Germany
Page 250
The fact that German submarines were acting in retaliation for
the illegal British blockades of the continent of Europe and British
violations of international law and neutral rights on the high seas.
Britain was close to defeat in April 1917 and on that basis the
United States entered the war. The unconscious assumption by American
leaders that an Entente victory was inevitable was at the bottom of
their failure to enforce the same rules of neutrality and
international law against Britain as against Germany. They constantly
assumed that British violations of these rules could be compensated
with monetary damages while German violations of these rules
must be resisted by force if necessary. Since they could not admit
this unconscious assumption or publicly defend the legitimate basis of
international power politics on which it rested, they finally went to
war on an excuse which was legally weak, "the assertion of a right to
protect belligerent ships on which Americans saw fit to travel and the
treatment of armed belligerent merchantmen as peaceful vessels. Both
assumptions were contrary to reason and to settled law and no other
professed neutral advanced them."
The Germans at first tried to use the established rules of
international law regarding destruction of merchant vessels. This
proved so dangerous because the British instructions to merchant ships
to attack submarines. American protests reached a peak when the
Lusitania was sunk in 1915. The Lusitania was a British merchant
vessel constructed as an auxiliary cruiser carrying a cargo of 2,400
cases of rifle cartridges and 1250 cases of shrapnel with orders to
attack German submarines whenever possible. The incompetence of the
acting captain contributed to the heavy loss of life as did also a
mysterious second explosion after the German torpedo struck. The
captain was on course he had orders to avoid; he was running at
reduced speed, he had an inexperienced crew; the portholes had been
left open; the lifeboats had not been swung out; and no lifeboat
drills had been held.
Page 251
The propaganda agencies of the Entente Powers made full use of
the occasion. The Times of London announced that 80% were citizens of
the US (actually 15.6%); the British manufactured and distributed a
medal which they pretended had been awarded to the submarine crew by
the German government; a French paper published a picture of the
crowds in Berlin at the outbreak of war in 1914 as a picture of
Germans "rejoicing" at the news of the sinking of the Lusitania.
The US protested violently against the submarine warfare while
brushing aside German arguments based on the British blockade. It was
so irreconcilable in these protests that Germany sent Wilson a note
which promised that "in the future merchant vessels within and without
the war zone shall not be sunk without warning and without
safeguarding human lives unless these ships try to escape or offer
resistance. In return, the German government hoped that the US would
put pressure on Britain to follow the established rules of
international law in regard to blockade and freedom of the sea. Wilson
refused to do so. It became clear to the Germans that they would be
starved into defeat unless they could defeat Britain first by
unrestricted submarine warfare. Since they were aware this would
probably bring the US into the war against them, they made another
effort to negotiate peace before resorting to it. It was rejected by
the Entente Powers on Dec. 27 and unrestricted submarine attacks were
resumed. Wilson broke off diplomatic relations and the Congress
declared war on April 3, 1917.
Page 252
Britain was unwilling to accept any peace which would leave
Germany supreme on the continent or in a position to resume the
commercial, naval, and colonial rivalry which had existed before 1914.
Page 253
The Vatican, working through Cardinal Pacelli (later Pope Pius
XII) sought a negotiated peace.
On Oct 5, a German note to Wilson asked for an armistice based on
the basis of the Fourteen Points which promised the end of secret
diplomacy, freedom of the seas; freedom of commerce; disarmament; a
fair settlement of colonial claims, with the interests of the native
peoples receiving equal weight with the titles of the Imperialist
Powers; the evacuation of Russia, the evacuation and restoration
of Belgium, the evacuation of France and the restoration of her
Alsace-Lorraine as in 1870.
Page 254
The Entente Supreme War Council refused to accept the Fourteen
Points as the basis for peace until Colonel House threatened that the
US would make a separate peace with Germany.
Page 255
Wilson had clearly promised that the peace treaty would be
negotiated and based on the Fourteen Points but the Treaty of
Versailles was imposed without negotiation and the Fourteen Points
fared very poorly in its provisions. The subsequent claim of the
German militarists that the German Army was never defeated but was
"stabbed in the back" by the home front through a combination of
international Catholics, international Jews, and international
Socialists have no merit whatever.
On all fronts, almost 13 million men in the various armed forces
died and the war destroyed over $400 billion in property at a time
when the value of every object in France and Belgium was not worth
over $75 billion.
Page 256
In July 1914, the military men were confident that a decision
would be reached in six months. This belief was supported by the
financial experts who, while greatly underestimating the cost of
fighting, were confident financial resources would be exhausted in six
months. By financial resources, they meant "gold reserves." These were
clearly limited; all the Great Powers were on the gold standard.
However each country suspended the gold standard at the outbreak of
war. This removed the automatic limitation on the supply of paper
money. The each country proceeded to pay for the war by borrowing from
the banks. The banks created the money which they lent my merely
giving the government a deposit of any size against which the
government could draw checks. The banks were no longer limited in the
amount of credit they could create because they no longer had to pay
out gold for checks on demand. This the creation of money in the form
of credit by the banks was limited only by the demands of its
borrowers. Naturally, as governments borrowed to pay for their needs,
private businesses borrowed to be able to fill the
government's orders. The percentage of outstanding bank notes covered
by gold reserves steadily fell and the percentage of bank credit
covered by either gold or bank notes fell even further.
Naturally, when the supply of money was increased in this fashion
faster than the supply of goods, prices rose because a larger supply
of money was competing for a smaller supply of goods. People received
money for making capital goods, consumer goods and munitions but they
could spend their money only to buy consumer goods. The problem of
public debt became steadily worse because governments were financing
such a large part of their activities by bank credit. Public debts
rose by 1000 percent.
Page 259
Governments began to regulate imports and exports to ensure that
necessary materials stayed in the country and did not go to enemy
states. This led to the British blockade of Europe.
Page 251
The results of the blockade were devastating. Continued for
nine months after the armistice, it caused the deaths of 800,000
persons, reparations took 108,000 horses, 205,000 cattle, 426,000
sheep and 240,000 fowl.
Page 262
Countries engaged in a variety of activities designed to
regulate the flow of information which involved censorship, propaganda
and curtailment of civil liberties.
Page 263
The War Propaganda Bureau was able to control almost all
information going to the American press.
The Censorship and Propaganda bureaus worked together. The former
concealed all stories of Entente violations of the laws of war or of
the rules of humanity while the Propaganda Bureau widely publicized
the violations and crudities of the Central Powers. The German
violation of Belgian neutrality was constantly bewailed,while nothing
was said of the Entente violation of Greek neutrality. A great deal
was made of the Austrian ultimatum to Serbia while the Russian
mobilization which had precipitated the war was hardly mentioned. In
the Central Powers a great deal was made of the Entente encirclement
while nothing was said of the Kaiser's demands for "a place in the
sun" of the High Command's refusal to renounce annexation of any part
of Belgium.
Manufacture of outright lies by propaganda agencies was
infrequent and the desired picture of the enemy was built up by a
process of selection and distortion of evidence until, by 1918,many in
the West regarded the Germans as bloodthirsty and sadistic militarists
while the Germans regarded the Russians as "subhuman monsters." A
great deal was made, especially by the British, of "atrocity"
propaganda; stories of German mutilation of bodies, violation of
women, cutting off a children's hands, desecration of churches, and
crucifixions of Belgians were widely believed in the West by 1916. In
1917, Henry Carter is created a story that the Germans were cooking
human bodies to extract glycerine and produced pictures to prove it.
Again, photographs of mutilated bodies in a Russian anti-Semitic
outrage in 1905 were circulated as pictures of Belgians in 1915. There
were several reasons for the use of such atrocity stories:
a) to build up the fighting spirit of the mass army;
b) to stiffen civilian morale;
c) to encourage enlistments;
d) to increase subscriptions for war bonds;
e) to justify one's own breaches of international law;
f) to destroy the chances of negotiating peace or to justify a severe
final peace;
g) to win the support of the neutrals.
The relative innocence and credulity of the average person who
was not yet immunized to propaganda assaults through mediums of mass
communication in 1914 made the use of such stories relatively
effective. But the discovery in the period after 1919 that they had
been hoaxed gave rise to a skepticism toward all government
communications which was especially noticeable in the Second World
War.
CHAPTER VI: THE VERSAILLES SYSTEM AND THE RETURN TO NORMALCY 1919-1929
THE PEACE SETTLEMENTS 1919-1923
Page 267
The criticisms of the peace settlements was as ardent from the
victors as from the vanquished aimed at the terms which were neither
unfair nor ruthless. The causes of the discontent rested on the
procedures which were used rather than the terms themselves. Above
all, there was discontent at the contrast between the procedures which
were used and the procedures which pretended to be used, as well as
between the high-minded principles which were supposed to be applied
and those which really were applied.
Page 268
When it became clear that they were to be imposed rather than
negotiated, that the Fourteen Points had been lost in the confusion,
that the terms had been reached by a process of secret negotiations
from which the smaller nations had been excluded, there was a
revulsion against the treaties. By 1929, most of the Western World had
feelings of guilt and shame whenever they thought of the Versailles
Treaty. In England, the same groups, often the same people, who had
made the wartime propaganda and the peace settlements were loudest in
their complaint that the latter had fallen far below the ideals of the
former while all the while their real aims were to use power politics
to the benefit of Britain.
The peace settlements were made by an organization which was
chaotic and by a procedure which was fraudulent. None of this was
deliberate. It arose rather from weakness and ignorance, from a
failure to decide on what principles it would be based.
Page 269
Since the Germans had been promised the right to negotiate, it
became clear that the terms could not first be made the subject of
public compromise. Unfortunately, by the time the victorious Great
Powers realized all this and decided to make the terms by secret
negotiations among themselves, invitations had already been sent to
all the victorious powers to come to the conference. As a solution to
this embarrassing situation, the peace treaty was made on two levels.
On one level, in the full glare of publicity, the Inter-Allied
Conference became the Plenary Peace
Conference and with the considerable fanfare, did nothing. ON
the other level, the Great Powers worked out their peace terms in
secret and when they were ready, imposed them simultaneously on the
conference and on the Germans. This had not been intended. It was not
clear to anyone just what was being done.
Page 271
At all these meetings, as at the Peace Conference itself, the
political leaders were assisted by groups of experts and interested
persons. Many of the experts were members associates of the
international banking fraternity. In every case but one, where a
committee of experts submitted a unanimous report, the Supreme Council
accepted its recommendation. The one case where a report was not
accepted was concerned with the Polish corridor, the same issue which
led to the Second World War where the experts were much harsher on
Germany than the final decision of the politicians.
Page 272
The German delegation offered to accept the disarmament
sections and reparations if the Allies would withdraw any statement
that Germany had, alone, caused the war and would re-admit Germany to
the world's markets.
Page 273
The Allies answer accused the Germans of sole guilt in causing
the war and of inhuman practices during it. The Germans voted to sign
if the articles on war guilt and war criminals could be struck from
the treaty.. When the Allies refused these concessions, the Catholic
Center Party voted 64-14 not to sign. The High Command of the German
army ordered the Cabinet to sign. The Treaty of Versailles was signed
by all the delegations except the Chinese in protest against the
disposition of the prewar German concessions in Shantung.
Page 274
No progress was possible in Hungary without some solution of the
agrarian question and the peasant discontent arising from
monopolization of the land.
The French Ministry of Foreign Affairs (acting on behalf of
France's greatest industrialist, Eugene Schneider) made a deal with
the Hungarians that if they would sign the Treaty of Trianon and give
Schneider control of the Hungarian state railways, the port of
Budapest and the Hungarian General Credit Bank, France would
eventually make Hungary one of the mainstays of its anti-German bloc
in Eastern Europe and, at the proper time, obtain a drastic revision
of the Treaty of Trianon. Paleologue received his reward from
Schneider. He was made director of Schneider's personal holding
company.
The Treaty of Sevres with Turkey was never signed because of the
scandal caused by the Bolsheviki publication of the secret treaties
regarding the Ottoman Empire, since these treaties contrasted so
sharply with the expressed war aims of the Allies.
The British felt that richer prospects were to be obtained from
the Turkish sultan. In particular, the French were prepared to support
the claims of Standard Oil to such concessions while the British were
prepared to support Royal Dutch Shell.
Page 277
The chief territorial disputes arose over the Polish corridor.
France's Foch wanted to give all of East Prussia to Poland. Instead,
the experts gave Poland access to the sea by severing East Prussia
from the rest of Germany by creating a Polish corridor in the valley
of the Vistula. However, the city of Danzig was clearly a German city
and Lloyd George refused to give it to POland. Instead, it was a made
a free city under the protection of the League of Nations.
Page 279
The most violent controversies arose in regard to the boundaries
of Poland. Of these, only that with Germany was set by the Treaty of
Versailles. The Poles refused to accept their other frontiers and by
1920 were at war with Lithuania over Vilna, with Russia over the
eastern border, with the Ukrainians over Galaicia, and with
Czechoslovakia over Teschen.
Page 280
These territorial disputes are of importance because they
continued to lacerate relationships between neighboring states until
well into the period of World War II. There were 1,000,000 Germans
living in Poland, 550,000 in Hungary, 3,100,000 in Czechoslovakia,
about 700,000 in Romania, 500,000 in Yugoslavia and 250,000 in Italy.
To protect these minorities, the Allied Powers forced the new states
to sign treaties grating a certain minimum political rights guaranteed
by the League of Nations with no power to enforce observation of them.
Page 282
The French were torn between a desire to obtain as large a
fraction as possible of Germany's payments and a desire to pile on
Germany such a crushing burden of indebtedness that Germany would be
ruined beyond the point where it could threaten French security again.
A compromise originally suggested by John Foster Dulles was
adopted by which Germany was forced to admit an unlimited,
theoretical obligation to pay but was actually bound to pay for only
a limited list of ten categories of obligations with pensions being
larger than the preceding nine categories together. All reparations
were wiped out in the financial debacle of 1931-1932.
Page 283
Britain had obtained all her chief ambitions. The German navy was
at the bottom of Scapa Flow scuttled by the the Germans themselves;
the German merchant fleet was scattered, captured, destroyed; the
German colonial rivalry was ended and its areas occupied; the German
commercial rivalry was crippled by the loss of its patents and
industrial techniques, the destruction of all its commercial outlets
and banking connections throughout the world, and the loss of its
rapidly growing prewar markets. France on the other hand, had not
obtained the one thing it wanted: security.
SECURITY 1919-1935
Page 287
The British governments of the Right began to follow a double
policy: a public policy in which they spoke loudly in support of the
foreign policy of the Left; and a secret policy in which they
supported the foreign policy of the Right. Thus the stated policy was
based on support of the League of Nations and of disarmament yet the
real policy was quite different. While openly supporting Naval
disarmament, Britain signed a secret agreement with France which
blocked disarmament and signed an agreement with Germany which
released her from her naval disarmament in 1935. After 1935, the
contrast between the public and secret policy became so sharp that
Lord Halifax called it "dyarchy."
Page 289
The British Right forced France to give away every advantage
which it held over Germany. Germany was allowed to rearm in 1935,
allowed to remilitarize the Rhineland in 1936. Finally, when all had
been lost, public opinion forced the British government to abandon the
Right's policy of appeasement and adopt the old French policy of
resistance made on a poor issue (Poland 1939)
In France, as in Britain, there appeared a double policy. While
France continued to talk of collective security, this was largely for
public consumption for in fact she had no policy independent of
Britain's policy of appeasement.
Page 290
War was not outlawed but merely subjected to certain procedural
delays in making it, nor were peaceful procedures for settling
international disputes made compulsory.
The Covenant had been worded by a skillful British lawyer, Civil
Hurst, who filled it with loopholes cleverly concealed under a mass
of impressive verbiage so that no state's freedom of action was
vitally restricted.
Page 293
The Locarno Pacts, which were presented at the time throughout
the English-speaking world as a sensational contribution to the peace
and stability of Europe, really formed the background for the events
of 1938 when Czechoslovakia was destroyed at Munich. When the
guarantee of Locarno became due in 1936, Britain dishonored its
agreement, the Rhine was remilitarized and the way was open for
Germany to move eastward.
Poland protested violently at the refusal to guarantee her
frontiers.
Page 294
France agreed to an extension of a multilateral agreement by
which all countries could renounce the use of war as an instrument of
national policy. The British government reserved certain areas,
notably the Middle East, where it wished to be able to wage wars which
could not be termed self-defence in a strict sense. The US also made
reservation preserving its right to make war under the Monroe
doctrine. The net result was that only aggressive war was to be
renounced. The Kellogg-Briand Pact took one of the first steps toward
destroying the legal distinction between war and peace, since the
Powers, having renounced the use of war, began towage wars without
declaring them as was done by Japan in China in 1937, by Italy in
Spain in 1936 and by everyone in Korea in 1950.
Page 296
The outlawry of war was relatively meaningless without some
sanctions that could compel the use of peaceful methods. Efforts in
this direction were nullified by Britain.
DISARMAMENT 1919-1935
Page 303
Disarmament suggestions of the Soviet representative, Litvinoff,
providing for immediate and complete disarmament of every country, was
denounced by all. A substitute draft provided that the most heavily
armed states would disarm by 50%, the less heavily-armed by 31% and
the lightly armed by 25%, and the disarmed by 0%. That all tanks,
planes, gas and heavy artillery be completely prohibited was also
rejected without discussion and Litvinoff was beseeched to show a more
"constructive spirit."
Page 305
Once it was recognized that security was in acute danger,
financial considerations were ruthlessly subordinated to rearmament
giving rise to an economic boom which showed clearly what might have
been achieved earlier if financial consideration had been subordinated
to the world's economic and social needs earlier; such action would
have provided prosperity and rising standards of living which might
have made rearming unnecessary.
JCT: How true.
REPARATIONS 1919-1932
Page 305
The preliminary payments were supposed to amount to a total of 20
billion marks by May 1921. Although the Entente Powers contended
that only 8 billion had been paid,the whole matter was dropped when
the Germans were presented with a total reparations bill of 132
billion marks. Under pressure, Germany accepted this bill and gave the
victors bonds of indebtedness. Of these, 82 billion were set aside and
forgotten. Germany was to pay the other 50 billion at 2.5 billion a
year in interest and .5 billion a year to reduce the total debt.
JCT: It would only take 200 years to pay off a total of 500
billion in interest and 50 billion in principal.
Page 306
Germany could only pay if two conditions prevailed:
a) if it had a budgetary surplus and
b) if it sold abroad more than it bought abroad.
Since neither of these conditions generally existed in the period
1921-1931, Germany could not, in fact, pay reparations.
The failure to obtain a budgetary surplus was solely the
responsibility of the government which refused to reduce its own
expenditures or the standards of living off its own people or to tax
them sufficiently heavily. The failure to obtain a favorable balance
of trade because foreign creditors refused to allow a free flow of
German goods into their own countries. Thus creditors were unwilling
to accept payment in the only way in which payments could honestly be
made, that is, by accepting German goods and services.
JCT: Notice they wanted money and not the goods they could buy
with it.
Germany could have paid in real goods and services if the
creditors had been willing to accept such goods and services. The
government made up the deficits by borrowing from the Reichsbank. The
result was an acute inflation which was not injurious to the
influential groups though it was generally ruinous to the middle
classes and thus encouraged extremist elements.
Page 307
On Jan 9,1923, the Reparations Committee voted 3 to 1 (Britain
opposing France, Belgium and Italy) that Germany was in default.
Armed forces of the three nations began to occupy the Ruhr two
days later. Germany declared a general strike in the area, ceased all
reparation payments, and adopted a program of passive resistance, the
government supporting the strikers by printing more paper money.
The area occupied was no more than 60 miles long by 30 miles wide
but contained 10% of Germany's population and produced 80% of
Germany's coal, iron and steel and 70% of her freight traffic. Almost
150,000 Germans were deported.
Page 308
A compromise was reached by which Germany accepted the Dawes Plan
for reparations and the Ruhr was evacuated. The Dawes Plan was largely
a J.P. Morgan production drawn up by an international committee of
financial experts presided over by American banker Charles Dawes.
Germany paid reparations for five years (1924-1929) and owed more at
the end than it had owed at the beginning. It is worthy of note that
this system was set up by the international bankers and that the
subsequent lending of other people's money to Germany was very
profitable to these bankers.
Using these American loans, Germany's industry was largely
rebuilt to make it the second best in the world and to pay
reparations.
Page 309
By these loans Germany's creditors were able to pay their war
debts to England without sending goods or services. Foreign exchange
went to Germany as loans, back to Italy, Belgium, France and Britain
as reparations and finally back to the US as payments on war debts. In
that period, Germany paid 10.5 billion marks in reparations but
borrowed 18.6 billion abroad. Nothing was settled by all this but the
international bankers sat in heaven under a rain of fees and
commissions.
Page 310
The Dawes Plan was replaced by the Young Plan, named after the
American Owen Young (a Morgan agent). A new private bank called the
Bank for International Settlements was established in Switzerland.
Owned by the chief central banks of the world and holding accounts for
each of them, "a Central Bankers' Bank," it allowed payments to be
made by merely shifting credits from one country's account to another
on the books of the bank.
The Young Plan lasted for less than 18 months. The crash of the
New York stock market in 1929 marked the end of the decade of
reconstruction and ended the American loans to Germany.
Germans and others had begun a "flight from the mark" which
created a great drain on the German gold reserve. As it dwindled, the
volume of money and credit erected on that reserve had to be reduced
by raising the interest rate. Prices fell because of the reduced money
supply so that it became almost impossible for the banks to sell
collateral to obtain funds to meet the growing demand for money.
JCT: Here he thinks loans are savings and has forgotten that he
had earlier told us it was new credit.
Page 311
On May 8, 1931, the largest Austrian bank, the Credit-Anstalt (a
Rothschild institution) which controlled 70% of Austria's industry,
announced a $140 million schillings loss. The true loss was over a
billion and the bank had been insolvent for years. The Rothschilds and
the Austrian government gave the Credit-Anstalt 160 million to cover
the loss but public confidence had been destroyed. A run began on the
bank. To meet this run,the Austrian banks called in all the funds they
had in German banks. The German banks began to collapse. These latter
began to call in all their funds in London. The London banks began to
fall and gold flowed outward. On Sept.21, England was forced off the
gold standard. The Reichsbank lost 200 million marks of its gold
reserve in the first week of June and a billion in the second. The
discount rate was raised step by step to 15% without stopping the loss
of reserves but destroying the activities of the German industrial
system almost completely.
Germany begged for relief on her reparations payments but her
creditors were reluctant unless they obtained similar relief on the
war-debt payments to the US. The President suggested a moratorium for
one year if its debtors would extend the same privilege to their
debtors.
Page 312
At the June 1932 Lausanne Conference, German reparations were cut
to a total of only 3 billion marks but the agreement was never
ratified because of the refusal of the US Congress to cut war debts
equally drastically. In 1933, Hitler repudiated all reparations.
CHAPTER VII: FINANCE, COMMERCIAL POLICY, AND BUSINESS POLICY 1897-1947
REFLATION AND INFLATION 1897-1925
page 315
A real understanding of the economic history of twentieth century
Europe is imperative to any understanding of the events of the period.
Such an understanding will require a study of the history of finance.
Page 316
The outbreak of war in 1914 showed these financial capitalists in
their worst, narrow in outlook, ignorant and selfish, while
proclaiming, as usual, their total devotion to the social good. They
generally agreed that war could not go on for more than six to ten
months because of the "limited financial resources" of the
belligerents (by which they meant gold reserves).This idea reveals the
fundamental misunderstanding of the nature and of money on the part of
the very persons who were reputed to be experts on the subject. Wars
are not fought with gold or even with money but by proper organization
of real resources.
The attitudes of bakers were revealed most clearly in England,
where every move was dictated by efforts to protect their own position
and to profit from it rather than by considerations of
economic mobilization for war or the welfare of the British people.
War found the British banking system insolvent in the sense that its
funds, created by the banking system for profit and rented out to the
economic system to permit it to operate, could not be covered by the
existing volume of gold reserves or collateral which could be
liquidated rapidly. Accordingly,the bankers secretly devised a scheme
by which their obligations could be met by fiat money (so-called
Treasury Notes), but as soon as the crisis was over, they ten insisted
that the government must pay for the war without recourse to fiat
money (which was always damned by the bankers as immoral) but by
taxation and by borrowing at high interest rates from the bankers. The
decision to use Treasury Notes to fulfill the bankers' liabilities was
made on July 25, 1915 by Sir John Bradbury. the first Treasury Notes
were run off the presses at Waterloo and Sons on July 28th. It was
announced that the Treasury Notes, instead of gold, would be used for
bank payments. The discount rate was raised at the Bank of England
from 3% to 10% to prevent inflation, a figure taken merely because the
traditional rule of the bank stated that a 10% bank rate would draw
gold out of the ground itself.
Page 317
At the outbreak of war, most of the belligerent countries
suspended gold payments and accepted their bankers' advice that the
proper way to pay for the war was by a combination of bank loans and
taxation of consumption. The governments paid for the war by taxation,
by fiat money, by borrowing from banks (which created credit for the
purpose) and by borrowing from the people by selling them war bonds.
Each of these methods had a different effect upon the two
consequences of the war: inflation and public debt.
a) Taxation gives no inflation and no debt.
b) Fiat money gives inflation and no debt.
c) Bank credit gives inflation and debt.
d) Sales of bonds give no inflation but give debt.
It would appear from this table that the best way to pay for the
war would be by taxation and the worst way would be by bank credit.
Probably the best way to finance war is a combination of the four
methods.
Page 318
In the period 1914-1918, the various belligerents used a mixture
of these four methods but it was a mixture dictated by expediency and
false theories so that at the end of the war all countries found
themselves with both public debts and inflation.
While the prices in most countries rose 200 to 300 percent and
public debts rose 1000%, the financial leaders tried to keep up the
pretense that the money was as valuable as it had ever been. For this
reason, they did not openly abandon the gold standard. Instead, they
suspended certain attributes of the gold standard. In most countries,
payments in gold and export of gold were suspended but every effort
was made to keep gold reserves up to a respectable percentage of
notes. These attributes were achieved in some cases by deceptive
methods. In Britain, the gold reserves against notes fell from 52% to
18% in the month of July 1914; then the situation was concealed,
partly by moving assets of local banks into the Bank of England and
using them as reserves for both, partly by issuing a new kind of notes
(Currency Notes) which had no real reserve and little gold backing.
Page 320
As soon as the war was over, governments began to turn their
attention to restoring the prewar financial system. Since the
essential element was believed to be the gold standard, this movement
was called "stabilization."
Productive capacity in both agriculture and industry had been
increased by the artificial demand of the war period to a degree far
beyond the ability of normal domestic demand to buy the products.
JCT: But not to eat them.
The backwards areas had increased their outputs of raw materials
and food so greatly that the total could hardly have been sold.
JCT: But no eaten.
The result was as situation where all countries were eager to
sell and reluctant to buy. The only sensible solution to this problem
of excessive productive capacity would have been a substantial rise in
domestic standards of living but this would have required a
fundamental reapportionment of the national income so that claims to
this product of the excess capacity would go to those masses eager to
consume, rather than continue to go to the minority desiring to save.
Such reform was rejected by the ruling groups in both "advanced" and
"backwards" countries so that this solution was reached only to a
small degree in a relatively few countries (chiefly US and Germany in
1925-1929).
Page 324
The powers of financial capitalism had another far-reaching
aim, nothing less than to create a world system of financial control
in private hands able to dominate the political system of each country
and the economy of the world as a whole. This system was to be
controlled in a feudalist fashion by the central banks of the world
acting in concert, by secret agreements arrived at in frequent private
meetings and conferences. The apex of the system was to be the Bank
for International Settlements in Basle, Switzerland, a private bank
owned and controlled by the world's central banks which were
themselves private corporations. Each central bank sought to dominate
its government by its ability to control Treasury loans, to manipulate
foreign exchanges, to influence the level of economic activity in the
country, and to influence cooperative politicians by subsequent
economic rewards in the business world.
In each country, the power of the central bank rested largely on
its control of credit and money supply. In the world as a whole the
power of the central bankers rested very largely on their control
of loans and the gold flows. They made agreements on all the major
financial problems of the world, as well as on many of the
economic and political problems, especially in reference to loans,
payments, and the economic future of the chief areas of the globe.
The Bank of International Settlements, B.I.S. is generally
regarded as the apex of the structure of financial capitalism whose
remote origins go back to the creation of the Bank of England in 1694.
Page 325
It was set up to be the world cartel of every-growing national
financial powers by assembling the nominal heads of these national
financial centers.
The commander in Chief of the world system of banking control was
Montagu Norman, Governor of the Bank of England, who was built up by
the private bankers to a position where he was regarded as an oracle
in all matters of government and business. In government, the power of
the Bank of England was a considerable restriction on political action
as early as 1819 but an effort to break this power by a modification
of the bank's charter in1844 failed. In 1852, Gladstone, then
chancellor of the Exchequer and later Prime Minister, declared,
"The hinge of the whole situation was this: the government itself was
not to be a substantive power in matters of Finance, but was to leave
the Money Power supreme and unquestioned."
This power of the Bank of England was admitted in 1924 by
Reginald McKenna, who had been Chancellor of the Exchequer, when he,
as Chairman, told the stockholders of the Midland bank, "I am afraid
the ordinary citizen will not like to be told that the banks can, and
do, create money. And they who control the credit of a nation direct
the policy if Governments and hold in the hollow of their hands the
destiny of the people." In that same year, Sir Drummond Fraser, vice-
president of the Institute of Bankers stated, "The Governor must be
the autocrat who dictates the terms upon which alone the Government
can obtain borrowed money." On Sep. 26, 1921,
Vincent Vickers, director of the bank, the Financial Times wrote,
"Half a dozen meant the top of the Big Five Banks could upset the
whole fabric of government by refraining from renewing Treasury
Bills."
Page 326
Norman had no use for governments and feared democracy. Both
of these seemed to him to be threats to private banking and thus to
all that was proper and precious to human life. He viewed his life as
a kind of cloak-and-dagger struggle with the forces of unsound money
which were in league with anarchy and Communism. When he rebuilt the
Bank of England,he constructed it as a fortress prepared to defend
itself against any popular revolt. For much of his life, he
rushed about the world under the assumed name of "Professor Skinner."
Norman had a devoted colleague in Benjamin Strong, the first
governor of the Federal Reserve Bank of New York. Strong owed his
career to the favor of the Morgan bank.
In the 1920s, they were determined to use the financial power of
Britain and the US to force all the major countries of the world to go
on the gold standard and to operate it through central banks free from
all political control, with all questions of international finance to
be settled by agreements by such central banks without interference
from governments.
Page 327
It must not be felt that these heads of the world's chief
central banks were themselves substantive powers in world finance.
They were not. Rather, they were the technicians and agents of the
dominant investment bankers of their own countries, who had raised
them up and were perfectly capable of throwing them down. The
substantive financial powers of the world were in the hands of
investment bankers (also called "international" or "merchant" bankers)
who remained largely behind the scenes in their own unincorporated
private banks.
These formed system of international cooperation and national
dominance which was more private,more powerful, and more secret tan
that of their agents in the central banks. This dominance of
investment bankers was based on their control over the flows of credit
and investment funds in their own countries and throughout the world.
They could dominate the financial and industrial systems of their own
countries by their influence over the flow of current funds through
bank loans,the discount rate,the rediscounting of commercial debts;
they could dominate governments by their control over current
government loans and the play of the international exchanges.
Almost all of this power was exercised by the personal influence
and prestige men who had demonstrated their ability in the past to
bring off successful financial coups, to keep their word, to remain
cool in a crisis, and to share their winning opportunities with their
associates.
In this system, the Rothschilds had been preeminent during much
of the nineteenth century, but, at the end of that century, they were
being replaced by J.P. Morgan in New York.
At the present stage, we must follow the efforts of the central
bankers to compel the world to return to the gold standard of 1914.
Page 328
The problem of public debts arose from the fact that as money
(credit) was created, it was usually made in such a way that it was
not in the control of the state but was in the control of private
financial institutions which demanded real wealth at some future date
for the creation of claims on wealth in the present. The problem of
public debt could have been met in one or more of several fashions:
a) by increasing the amount of real wealth...
b) by devaluation...
c) by repudiation...
d) by taxation...
e) by the issuance of fiat money and the payment of the debt by such
money.
Page 329
Efforts to pay the public debt by fiat money would have made the
inflation problem worse.
Orthodox theory rejected fiat money as solutions to the problem.
Page 332
In Britain, the currency notes which had been used to supplement
bank notes were retired and credit was curtailed by raising the
discount rate to panic level. The results were horrible. Business
activity fell drastically and unemployment rose to well over a million
and a half. The outcome was a great wave of strikes and industrial
unrest.
Page 333
To maintain the gold reserve at all, it was necessary to keep
the discount rate at a level so high (4.5% or more) that business
activity was discouraged. As a result of this financial policy,
Britain found herself faced with deflation and depression for the
whole period of 1920-1923. The number of unemployed averaged about
1.75 millions for each of the thirteen years of 1921-1932 and reached
3 million in 1931.
Belgium, France and Italy, accepted orthodox financial ideas and
tried to deflate in 1920-1921 but after the depression which resulted,
they gave up the task.
Page 334
The Dawes Plan provided the gold reserves which served to protect
Germany from the accepted principles of orthodox finance.
Page 336
Financial capitalism had little interest in goods at all, but was
concerned entirely with claims on wealth - stocks, bonds, mortgages,
insurance, proxies, interest rates, and such. It built railroads in
order to sell securities, not to transport goods. Corporations were
built upon corporations in the form of holding companies so that
securities were issued in huge quantities bringing profitable fees and
commissions to financial capitalists without any increase in economic
production whatever. Indeed, these financial capitalists discovered
that they could not only make killings out of the issuing of such
securities,they could also make killings out of the bankruptcy of such
corporations through the fees and commissions of reorganization. A
very pleasant cycle of flotation, bankruptcy, flotation, bankruptcy
began to be practiced by these financial capitalists. The more
excessive the flotation, the greater the profits and the more imminent
the bankruptcy. The more frequent the bankruptcy, the greater the
profits of reorganization and the sooner the opportunity of another
excessive flotation.
Page 337
The growth of financial capitalism made possible a centralization
of world economic control and a use of this power for the direct
benefit of financiers and the indirect injury of all other economic
groups. Financial control could be exercised only imperfectly through
credit control and interlocking directorates.
Page 338
The real key rested on the control of money flows which were held
by investment bankers in 1900.
THE PERIOD OF DEFLATION, 1927-1936
Page 339
After 1929, deflation reached a degree which could be called
acute. In the first part of this period (1921-1925), the dangerous
economic implications of deflation were concealed by a structure of
self-deception which pretended that a great period of economic
progress would be inaugurated as soon as the task of stabilization had
been accomplished. This psychological optimism was completely
unwarranted by the economic facts. After 1925, when deflation became
more deep-rooted and economic conditions worsened, the danger from
these conditions was concealed by a continuation of unwarranted
optimism.
THE CRASH OF 1929
Page 342
When France stabilized the franc at a level at which it was
devalued, the Bank of France sold francs in return for foreign
exchange. The francs were created as credit in France thus giving an
inflationary effect.
Page 343
The financial results of the stock market book in the U
S was credit diverted from production to speculation and increasing
amounts of funds being drained from the economic system into the stock
market where they circulated around and around, building up prices
of securities.
Page 344
Early in 1929, the board of governors of the Federal Reserve
System became alarmed at the stock market speculations draining credit
from industrial production. To curtail this, they called upon member
banks to reduce their loans on stock collateral to reduce the amount
of credit available for speculation. Instead, the available credit
went more and more to speculation and decreasingly to productive
business. Call money rates in New York which had reached 7% at the end
of 1928 were at 13% by June 1929.
Page 346
To restore confidence among the wealthy (who were causing the
panic) an effort was made to balance the budget by cutting public
expenditures drastically. This, by reducing purchasing power, had
injurious effects on business activity and increased unrest among the
masses of the people.
Page 350
Washington left gold in 1933 voluntarily in order to follow an
unorthodox financial program of inflation.
Page 351
The Thomas Amendment to the Agricultural Adjustment Act (1933)
gave the president the power to devaluate the dollar up to 50%, to
issue up to $3 billion fiat money,and to engage on an extensive
program of public spending.
Page 352
The economies of the different countries were so intertwined with
one another that any policy of self-interest on the part of one would
be sure to injure others in the short run and the country in the
long run. The international and domestic economic systems had
developed to the point where the customary methods of thought and
procedure in regard to them were obsolete.
page 353
As a result of the crisis, regardless of the nature of its
primary impact, all countries began to pursue policies of economic
nationalism. This spread rapidly as a result of imitation and
retaliation.
Page 355
The Bank of France raised its discount rate from 2.5% to 6% in
1935 with depressing economic results. In this way, the strain on gold
was relieved at the cost of increased depression. The Right discovered
that it could veto any actions of the Left government merely by
exporting capital from France.
Page 356
The franc passed through a series of depreciations and partial
devaluations which benefited no one except the speculators and left
France torn for years by industrial unrest and class struggles. The
government was subjected to systematic blackmail by the well-to-do
of the country because of the ability of these persons to prevent
social reform, public spending, arming, or any policy of decision by
selling francs.
Page 357
The historical importance of the banker-engendered deflationary
crisis of 1927-1940 can hardly be overestimated. It gave a blow to
democracy and to the parliamentary system and thus became a chief
cause of World War II. It so hampered the Powers which remained
democratic by its orthodox economic theories that these were unable to
rearm for defence. It gave rise to a conflict between the theorists of
orthodox and unorthodox financial methods.
The bankers' formula for treating a depression was by clinging to
the gold standard, by raising interest rates and seeking deflation,
and by insisting on a reduction in public spending, a fiscal surplus
or at least a balanced budget.
These ideas were rejected totally, on a point by point basis, by
the unorthodox economists, (somewhat mistakenly called Keynesian). The
bankers' formula sought to encourage economic recovery by "restoring
confidence in the value of money," that is, their own confidence in
what was the primary concern of bankers.
The unorthodox theorists sought to restore purchasing power by
increasing, instead of reducing, the money supply and by placing it in
the hands of potential consumers rather than in the banks or in the
hands of investors.
page 358
The whole relationship of money and resources remained a puzzle
to many and was still a subject of debate in the 1950s but at least a
great victory had been won by man in his control of his own destiny
when the myths of orthodox financial theory were finally challenged in
the 1930s.
REFLATION AND INFLATION 1933-1947
Page 360
Except for Germany and Russia, most countries in the latter half
of 1937 experienced sharp recession.
Page 361
As a result of the failure of most countries (excepting Germany
and Russia) to achieve full utilization of resources, it was possible
to devote increasing percentages of resources to armaments without
suffering any decline in the standards of living.
Page 366
It was discovered by Germany in 1932, by Italy in 1934, by Japan
in 1936 and by the United States in 1938 that deflation could be
prevented by rearming.
Page 368
Britain made barter agreements with various countries, including
one direct swap of rubber for wheat with the US.
Page 369
The period of reflation after 1933 was caused by increases in
public spending on armaments. In most countries,the transition from
reflation to inflation did not occur until after they had entered the
war. Germany was the chief exception and possibly also Italy and
Russia, since all of these were making fairly full utilization of
their resources. In France and the other countries overrun by
Germany, such full mobilization of resources was not achieved before
they were defeated.
Page 370
The use of orthodox financing in the First World War had left a
terrible burden of intergovernmental debts and ill-feeling...
Page 371
The Post Second World War economy was entirely different in
character from that of the 1920s following the First World War. This
was most notable in the absence of a post-war depression which was
widely expected but which did not arrive because there was no effort
to stabilize on a gold standard. The major difference was the eclipse
of the bankers who have been largely reduced in status from the
masters to the servants of the economic system. This has been brought
about by the new concern with real economic factors instead of with
financial counters, as previously. As part of this program, there has
been a great reduction in the economic role of gold.
CHAPTER VIII: INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE
Page 375
Industrialism, especially in its early years, brought with it
social and economic conditions which were admittedly horrible. Human
beings were brought together around factories to form great new cities
which were sordid and unsanitary. In many cases, these persons were
reduced to conditions of animality, which shock the imagination.
Crowded together in want and disease, with no leisure and no security,
completely dependent on weekly wage which was less than a pittance,
they worked twelve to fifteen hours a day for six days in the week
among dusty and dangerous machines with no protection against
inevitable accidents, disease, or old age, and returned at night to
crowded rooms without adequate food and lacking light, fresh air,
heat, pure water, or sanitation. These conditions have been described
for us in the writings of novelists such as Dickens in England, Hugo
or Zola in France.
Page 376
The Socialist movement was a reaction against these deplorable
conditions to the working masses. It has been customary to divide this
movement into two parts at the year 1848, the publication of the
Communist Manifesto of Karl Marx. This work began with the ominous
sentence, "A specter is haunting Europe - the specter of Communism,"
and ended with the trumpet blast "Workers of the world, unite."
In general, the former division believed that man was innately
good and that all coercive power was bad, with public authority the
worst form of such coercive power. All the world's evils, according to
the anarchists, arose because man's innate goodness was corrupted and
distorted by coercive power. The remedy, they felt, was to destroy the
state. The simplest way to destroy the state would be to assassinate
the chief of the state to ignite a wholesale uprising of oppressed
humanity.
Page 377
Syndicalism was a somewhat more realistic and later version of
anarchism. It was equally determined to abolish all public authority.
The state would be destroyed by a general strike and replaced by a
flexible federation of free associations of workers.
The second group of radical social theorists wished to widen the
power and scope of governments by giving them a dominant role in
economic life. The group divided into0 two chief schools: The
Socialists and the Communists.
Page 378
From Ricardo, Marx derived the theory that the value of economic
goods was based on the amount of labor put into them.
Page 379
Marx built up a complicated theory which believed that all
history is the history of class struggles.
The money which the bourgeoisie took from the proletariat in the
economic system made it possible for them to dominate the political
system, including the police and the army. From such exploitation, the
bourgeoisie would become richer and richer and fewer and fewer in
numbers and acquire ownership of all property in the society while the
proletariat would become poorer and poorer and more and more numerous
and be driven closer and closer to desperation. Eventually, the latter
would rise up and take over.
Page 381
In fact, what occurred was could be pictured as cooperative
effort by unionized workers and monopolized industry to exploit
unorganized consumers by raising prices higher and higher, quite
contrary to the expectations of Marx. Where he had expected
impoverishment of the masses and concentration of ownership with
gradual elimination of the middle classes, there occurred instead
rising standards of living, dispersal of ownership , a relative
decrease in the numbers of laborers, and a great increase in the
middle classes. Due to income and inheritance taxes, the rich became
poorer and poorer, relatively speaking.
THE BOLSHEVIK REVOLUTION TO 1924
Page 385
The new government forced the abdication of the czar. The more
radical Socialists had been released from prison or had been returned
from exile (in some cases, such as Lenin, by German assistance)
JCT: And Rockefeller and Mackenzie King.
Page 386
Lenin campaigned to replace the Provisional Government with a
system of Soviets and to adopt an immediate program of peace and land
distribution. The Bolshevik group seized the centers of government in
St. Petersburg and within 24 hours, issued a series of decrees which
abolished the Provisional government, ordered the end of the war with
Germany and the distribution of large land holdings to the peasants.
Page 387
By 1920 industrial production in general was about 13% of the
1913 figure. At the same time, paper money was printed so freely to
pay for the costs of war, civil war, and the operation of the
government that prices rose rapidly and the ruble became almost
worthless.
The secret police (Cheka) systematically murdered all real or
potential opponents.
Page 388
Various outsider Powers also intervened in the Russian chaos.
An allied expeditionary force invaded northern Russia from Murmansk
and Archangel, while a force of Japanese and another of Americans
landed at Vladivostok and pushed westward for hundreds of miles. The
British seized the oil fields of the Caspian region (late 1918) while
the French occupied parts of the Ukraine about Odessa (March 1919).
By 1920, Russia was in complete confusion. Poland invaded Russia
occupying much of the Ukraine.
Page 389
As part of this system, not only were all agricultural crops
considered to be government property but all private trade and
commerce were also forbidden; the banks were nationalized while all
industrial plants of over five workers and all craft enterprises of
over ten workers were nationalized. This culminated in peasant
uprisings and urban riots. Within a week, peasant requisitioning was
abandoned in favor of a "New Economic Policy" of free commercial
activity in agriculture and other commodities, with the
re-establishment of the profit motive and of private ownership in
small industries and in small landholding.
Page 395
The Bolsheviks insisted that the distribution of income in a
capitalistic society would become so inequitable that the masses of
the people would not obtain sufficient income to buy the goods being
produced by the industrial plants. As such unsold goods accumulated
with decreasing profits and deepening depression, there would be a
shift toward the production of armaments to provide profits and
produce goods which could be sold and there would be an increasingly
aggressive foreign policy in order to obtain markets for unsold goods
in backward and undeveloped countries. Such aggressive imperialism
would inevitably make Russia a target of aggression in order to
prevent a successful Communist system there from becoming an
attractive model for the discontented proletariat in capitalistic
countries.
Page 396
Communism in Russia alone required that the country must be
industrialized with breakneck speed and must emphasize heavy industry
and armaments rather than rising standards of living. This meant that
goods produced by the peasants must be taken from them by political
duress, without any economic return, and that the ultimate in
authoritarian terror must be used to prevent the peasants from reducing
their level of production. It was necessary to crush all kinds of
foreign espionage, resistance to the Bolshevik state, independent
thought, or public discontent.
Page 397
Stalin forced the peasants off their land. In the space of six
weeks, (Feb-Mar 1930) collective farms increased from 59,400 with 4.4
million families to 110,200 farms with 14.3 million families. All
peasants who resisted were treated with violence; their property was
confiscated, they were beaten or sent into exile in remote areas; many
were killed. This process, known as "the liquidation of the kulaks"
affected five million kulak families. Rather than give up their
animals, many peasants killed them. The number of cattle was reduced
from 30.7 million in 1928 to 19.6 million in 1933. The planting
season of 1930 was entirely disrupted. Three million peasants
starved in 1931-1933. Stalin told Churchill that 12 million died in
this reorganization of agriculture.
Page 401
The privileged rulers and their favorites had the best of
everything obtained, however at a terrible price, at the cost of
complete insecurity for even the highest party officials were under
constant surveillance and would be inevitably purged to exile or
death.
The growth of inequality was embodied in law. All restrictions on
maximum salaries were removed. Special stores were established where
the privileged could obtain scarce goods at low prices; restaurants
with different menus were set up in industrial plants for different
levels of employees; housing discrimination became steadily wider.
Page 402
As public discontent and social tensions grew, the use of spying,
purges, torture and murder increased out of all proportion. Every wave
of discontent resulted in new waves of police activity. Hundreds of
thousands were killed while millions were arrested and exiled to
Siberia or put into huge slave-labor camps. Estimates vary from two
million as high as twenty million.
Page 403
For every leader who was publicly eliminated, thousands were
eliminated in secret. By 1939, all the leaders of Bolshivism had been
driven from public life and most had died violent deaths.
There were two networks of secret-police spies, unknown to each
other, one serving the special department of the factory while the
other reported to a high level of the secret police outside.
Page 404
Whenever the secret police needed more money it could sweep large
numbers of persons, without trial or notice, into its wage deduction
system or into its labor camps to be hired out. It would seem that the
secret police were the real rulers of Russia. This was true except at
the very top where Stalin could always liquidate the head by having
him arrested by his second in command in return for Stalin's promise
to promote the arrester to the top position. In this way, the chiefs
of the secret police were successively eliminated.
Send a comment to John Turmel
Home