TRAGEDY AND HOPE Chapters V-VIII by Dr. Carroll Quigley ISBN 0913022-14-4
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.
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.
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.
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.
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