by Dr. Carroll Quigley 
ISBN 0913022-14-4
Page 411
     The German thirst for the coziness of a totalitarian way of life 
is the key to German national character. Decision, which requires the 
evaluation of alternatives, drives man to individualism, self-reliance 
and rationalism, all hateful qualities to Germanism. 
Page 413
     They wanted a cozy society which would so absorb the individual 
in its structure that he would never need to make significant 
decisions for himself. Held within a framework of known, satisfying 
personal relationships, such an individual would be safe because he 
would be surrounded by fellows equally satisfied with their own 
positions, each feeling important from his membership in the greater 
Page 414
     The German abhors the need to make decisions. He feels it 
necessary to proclaim his position by verbal loudness which may seem 
boastful to outsiders. 
Page 415
     Germans are ill-at-ease with equality, democracy, individualism, 
freedom, and other features of modern life. Their neurological systems 
were a consequence of the coziness of German childhood, which, 
contrary to popular impression, was not a condition of misery and 
personal cruelty (as it often is in England) but a warm, affectionate 
and externally disciplined situation of secure relationships. 
     The Englishman is disciplined from within so that he takes his 
self-discipline, embedded in his neurological system, with him 
wherever he goes. The Englishman is the most socialized of Europeans, 
as the Frenchman is the most civilized, the Italian most completely 
gregarious, or the Spaniard most completely individualistic. But the 
German, by seeking external discipline, shows his unconscious desire 
to recapture the externally disciplined world of his childhood. With 
such discipline he may be the best behaved of citizens, but without 
it, he may be a beast. 
     He sees no need to make any effort to see anything from any point 
of view other than his own. The consequence is a most damaging 
inability to do this. His union, his neighborhood are the best and all 
others may be denigrated. His myopic or narrow-angled vision of the 
universe must be universalized. 
Page 417
     The precarious structure left by Bismarck was not managed but 
merely hidden from public view by a facade of nationalistic, 
anti foreign, anti-Semitic, imperialistic, and chauvinistic propaganda 
of which the emperor was the center. 
     The monarchy represented the body, which was supported by four 
legs: the army, the landlords, the bureaucracy and the industrialists. 
The revolution of 1918 was not really a revolution at all because it 
removed the monarchy but it left the quartet of legs. 
Page 426
     The German inflation, which was a great benefit to the Quartet, 
destroyed the economic position of the middle classes and lower middle 
classes and permanently alienated them from the republic. 
Page 427
     The Nationalist Party built up a pervasive propaganda campaign to 
show that all Germany's problems were caused by the democratic and 
laboring groups, by the internationalists, and by the Jews. 
Page 428
     The Centre and Left shared this nationalistic poison sufficiently 
to abstain from any effort to give the German people the true story of 
Germany's responsibility for the war and for her own hardships. Thus 
the Right was able to spread its own story of the war, that Germany 
had been overcome by a "stab in the back" from "the three 
Internationals": the "Gold" International of the Jews, the "Red" 
International of the Socialists, and the "Black" International of the 
Catholics, an unholy triple alliance which was symbolized in the gold, 
red, and black flag of the Weimar Republic. Every effort was made to 
divert popular animosity at the defeat of 1918 and the Versailles 
settlement from those who were really responsible to the democratic 
and republican groups. At the same time, German animosity against 
economic exploitation was directed away from the landlords and 
industrialists by racist doctrines which blamed all such problems on 
bad Jewish international bankers and department store owners.
Page 429
     The Nazi drive to build up a mass following was kept alive by the 
financial contributions of the Quartet. The Nazis were financed by the 
Black Reichswehr from 1919-1923, then this support ceased but was 
compensated for by the support of the industrialists, who financed the 
Nazis from Hitler's exit from prison in 1924 to the end of 1932. 
     The destruction of the Weimar Republic has five stages:
1) Bruning: March 24 1930 - May 30 1932
2) Von Papen: May 31 1932 - November 14 1932
3) Schleicher: December 2 1932 - January 28 1933
4) Hitler: January 30 1933 - March 5 1933 
5) Gleichschaltung: March 6 1933 - August 2 1934
     When the economic crisis began in 1929, Germany had a democratic 
government of the Center and Social Democratic parties. The crisis 
resulted in a decrease in tax receipts and a parallel increase in 
demands for government welfare services. This brought to a head the 
latent dispute over orthodox and unorthodox financing of a depression. 
Big business and big finance were determined to place the burden of 
the depression on the working classes by forcing the government to 
adopt a policy of deflation - that is, by wage reductions and 
curtailment of government expenditures. The Social Democrats wavered 
in their attitude but in general were opposed to this policy. Schacht, 
as president of the Reichsbank, was able to force the Socialist Rudolf 
Hilferding out of the position of minister of finance by refusing bank 
credit to the government until this was done. 
     In March 1930, the Center broke the coalition on the issue of 
reduction of unemployment benefits, the Socialists were thrown out of 
the government, and Heinrich Bruning, leader of the Center Party, came 
in as chancellor. Because he did not have a majority, he had to put 
the deflationary policy into effect by the use of presidential decree. 
This marked the end of the Weimar Republic. 
     The Socialists permitted Bruning to remain in office by refusing 
to vote on a motion of no confidence. Left in office, Bruning 
continued the deflationary policy by decrees.
Page 431
     Bruning's policy of deflation was a disaster. The suffering of 
the people was terrible with almost eight million unemployed out of 
twenty-five million employable. 
Page 433
     President Hindenburg had no liking for any unorthodox economic 
     The Quartet, especially the industrialists, decided that Hitler 
had learned a lesson and could safely be put into office as the 
figurehead of a Right government because he was growing weaker. The 
whole deal was arranged by Papen and was sealed in an agreement made 
at the home of Cologne banker Baron Kurt Von Schroder in 1933. 
     Adolf Hitler's life had been a succession of failures, the seven 
years 1907-1914 being passed as a social derelict in Vienna and 
Munich. There he had become a fanatical Pan-German anti-semite, 
attributing his own failures to the "intrigues of international 
Page 434
     During the Great War, he was an excellent soldier always 
volunteering for the most dangerous tasks. Although he was decorated 
with the Iron Cross first class in 1918, he was never promoted beyond 
Private First Class. His regiment of 3,500 suffered 3,260 killed and 
Hitler himself was wounded twice. 
     After the war, he stayed with the army and eventually became a 
political spy for the Reichswehr. In the course of spying on the 
numerous political groups, Hitler became fascinated by the rantings of 
Gottfried Feder against the "interest slavery of the Jews." 
     Hitler joined the National Socialist German Worker's Party which 
drew up a Twenty-five Point Program.
Page 435
     These included:
4) all Jews and other aliens eliminated;
5) all unearned incomes to be abolished;
6) to punish all war profiteers and usurers with death.
Page 446
     Prices were set at a level sufficient to give a profit to most 
participants and quotas were based on assessments estimated by the 
farmers themselves. The autarky program gave them a stable market for 
the products, shielding them from the vicissitudes which they had 
suffered under liberalism with its unstable markets and fluctuating 
prices. The prices fixed under Nazism were not high but were adequate, 
especially in combination with other advantages. 
     Payments for interest and taxes were both reduced. 
     All farms of over family size were made secure in possession of 
their owner's family, with no possibility of alienation, by increasing 
the use of entail on great estates and by the Hereditary Farms Act for 
lesser units. 
Page 447
     A law of December 28, 1939 stated, what had always been 
understood, that in his civil service work a party member was not 
subject to party orders but only to the orders of the civil service 
Page 448
     There was a statutory provision which made it illegal for members 
of the armed services to be simultaneously members of the party. 
Page 452
     Maximum wage rates were set in June 1938. In return for 
exploitation of labor, the worker received certain compensations 
of which the chief was the fact that he was no longer threatened with 
the danger of mass unemployment. Increased economic activity went to 
nonconsumers' goods. 
Page 454
     The threat to industry from depression was eliminated. 
Page 463
     It is the Government that controls the House of Commons. This 
control is exercised through the Cabinet's control of the political 
machinery. This power over the party machinery is exercised through 
control of party funds and of nominations to constituencies. The fact 
party candidates are named by an inner clique is of tremendous 
importance and is the key to the control which the inner clique 
exercises over the House of Commons, yet it is rarely mentioned in 
books on the English political system. The party control is almost 
completely centralized in the hands of a largely self-perpetuating 
inner clique which has power of approval over all candidates. Cabinet 
can force the majority by using party discipline to pass bills. 
Page 464
     Britain can be divided into two groups, the "classes" and the 
"masses." The "classes" were the ones who had leisure. This meant that 
they had property and income and did not need to work for a living; 
they obtained an education in a separate and expensive system; they 
married within their own class; they had a distinctive accent; and 
they had a distinctive attitude based on the training provided in the 
special educational system of the "classes." 
Page 465
     This educational system was based on three great negatives:
a) education must not be vocational, not aimed at assisting one to 
make a living;
b) education is not aimed directly at creating or training 
c) education is not aimed at finding the "Truth." 
     It is aimed at developing a moral outlook, a respect for 
traditions, qualities of leadership and cooperation, and that ability 
for cooperation in competition summed up in the English idea of 
"sport" and "playing the game." Because of the restricted numbers of 
the upper class, these attitudes applied chiefly to one another, and 
did not necessarily apply to foreigners or even to the masses. They 
applied to people who "belonged" and not to all human beings. 
Page 469
     House members are expected to vote as their party whips tell them 
to and are not expected to understand the contents of the bills for 
which they are voting. Legislation originates in the meetings of the 
clique of the party, acting as first chamber. If accepted by the 
Cabinet, it passes the House of Commons almost automatically. This 
situation is sometimes called "Cabinet dictatorship." 
Page 470
     There have been restrictions on democracy in Britain almost all 
based on one criterion, the possession of wealth. Britain, until 1945, 
was the world's greatest plutocracy. 
     In political life, local government had a restricted suffrage. 
Elected members were unpaid thus restricting these posts to those who 
had leisure (that is, wealth). 
Page 471
     Members of Parliament were, for years, restricted to the well-to-
do by the fact that Members were unpaid. In 1938, each candidate must 
post a deposit of #150 amounting to more than the total annual income 
of about three-quarters of all English families which is forfeited if 
he does not receive over one-eighth of the total vote. As a result of 
these monetary barriers, the overwhelming mass of Englishmen could not 
participate actively in politics unless they could find an outside 
source of funds. 
     Until 1915, the two parties represented the same social class, 
the small group known as "society." Both Conservatives and Liberals 
were controlled by the same small clique consisting of no more than 
half-a-dozen chief families, their relatives and allies. 
Page 472
     At the beginning of the 20th century, the inner clique of the 
Conservative Party was made up almost completely of the Cecil family 
and their relatives. 
     This is quite different from the US where both major parties are 
middle-class parties and where geographic, religious and traditional 
influences are more important than class influences in determining 
party membership. 
Page 474
     In eight years (1931-1939) thirteen directors of the "Big Five 
Banks" and two directors of the Bank of England were raised to the 
peerage by the Conservative government. Of ninety peers created, 
thirty five were directors of insurance companies. In 1935, Walter 
Runciman, as president of the Board of Trade, introduced a bill to 
grant a subsidy of #2 million to tramp merchant vessels and gave 
#92,000 to his father's company in which he held 21,000 shares. There 
is relatively little objection to activities of this kind in England.
Page 475
     The Labour Party arose because of the discovery by the masses of 
the people that their vote did not avail them much so long as the only 
choice of candidates was "Which of two rich people will you choose?"
Page 476
     The radio, the second most important instrument of publicity, is 
sometimes run very unfairly. In the election of 1931, the government 
allowed 15 period on the BBC for political campaigning, it took 11, 
gave 3 to Labour and 1 to the Liberals.
Page 478
     France is in sharp contrast where the amount of education by a 
student is limited only by his ability and willingness to work; and 
positions of importance in the civil service, the professions, and 
even business are available to those who do best in the system. In 
Britain, it is based largely on the ability to pay. 
Page 479
     For admission to the bar in England, a man had to be a member of 
one of the four Inns of Court. These are private clubs to which 
admission was by nomination with large admission fees. Sons of wage 
earners formed less than 1% of the admissions and members of the bar 
are almost entirely from the well-to-do classes. Since judges are 
appointed exclusively from barristers, the judicial system has also 
been monopolized by the upper classes. Obtaining justice has been 
complex, slow and above all, expensive. As a result, only the fairly 
well-to-do can defend their rights in a civil suit and if the less 
well-to-do go to court at all, they find themselves in an atmosphere 
completely dominated by members of the upper classes. Accordingly, the 
ordinary Englishman avoids litigation even when he has right on his 
Page 483
     The 1909 Liberal budget was aimed directly at Conservative 
supporters by its taxation of unearned incomes, especially from landed 
properties. Its rejection by the House of Lords was denounced by 
Asquith as a breach of the constitution which gave control over money 
bills to the House of Commons. The Lords refused to yield until 
Asquith threatened to create enough new peers to carry his bill. This 
bill provided that the Lords could not veto a money bill and could not 
prevent any other bill from becoming law if it was passed in three 
sessions of the Commons over a period of at least two years. 
Page 485
     Liberal Lloyd George's effort to deflate prices after the Great 
War in order to go back onto the gold standard was fatal to prosperity 
and domestic order. Unemployment and strikes increased. 
     The Conservatives prevented any realistic attack on these 
problems and passed the Emergency Power Act of 1920 which for the 
first time gave a peace-time government the right to proclaim a state 
of siege (as was done in 1920, 1921, 1926). 
Page 486
     In 1924, Winston Churchill, as chancellor of the Exchequer, 
carried out a stabilization policy which put England on the gold 
standard. This policy of deflation drove Britain into an economic 
depression and a period of labour conflict and the policy was so 
bungled in its execution that Britain was doomed to semi-depressions 
for almost a decade, to financial subjugation to France until 1931 and 
was driven closer to domestic rebellion than she had been at any time 
since the Chartist movement of 1848. 
     The deflation of 1926 hit the mines with special impact since 
prices could only be cut if wages were cut. The government invoked the 
Emergency Powers Act and the Trade Unions Congress ordered a General 
Strike but soon ended it leaving the striking miners to shift for 
themselves. The miners stayed out for six months and then began to 
drift back to work to escape starvation. 
Page 489
     In 1931, the Macmillan Committee reported that the whole 
financial structure was unsound and should be remedied by a managed 
currency, controlled by the Bank of England. The crisis revealed the 
incapacity of the Labour Party and the power of the bankers. Labour 
members had no understanding of economics. Snowden, the economic 
expert" of the Cabinet, had financial views about the same as Montagu 
Norman of the Bank of England. 
Page 490
     As for the bankers, they were in control throughout the crisis. 
While publicly they insisted on a balanced budget, privately, they 
refused to accept balancing by taxation and insisted on balancing by 
cuts in relief payments. Working in close cooperation with American 
bankers, they were in a position to overthrow any government which was 
not willing to crush them completely. While they refused cooperation 
to the Labour government, they were able to obtain a loan of #80 
million from the US and France for the National Government when it 
was only four days old. 
     The National government at once attacked the financial crisis 
with a typical bankers' weapon: deflation. It offered a budget 
including higher taxes and drastic cuts in unemployment benefits and 
public salaries. Riots, protests, and mutiny in the navy were the 
     The domestic program of the National Government was to curtail 
the personal freedom of individuals. On this, there was no real 
protest for the Labour opposition had a program which, in fact if not 
in theory, tended in the same direction. 
Page 491
     The police of London were reorganized in 1933 to destroy their 
obvious sympathy with the working classes by restricting all ranks 
above inspector to persons with an upper-class education.
     A severe Incitement to Disaffection Act in 1934 threatened to 
destroy the personal freedoms built up over centuries by making 
police searches of homes less restricted and making the simple 
possession of material likely to disaffect the armed forces a crime. 
For the first time in three generations, personal freedom and civil 
rights were restricted in time of peace. The Prevention of Violence 
Act of 1939 empowered a secretary of state to arrest without warrant 
and to deport without trial. 
Page 492
     Neville Chamberlain was chiefly responsible for the National 
government's fiscal policies. For the first time in almost a century, 
there was an increase in the proportion of total tax paid by the 
working class. For the first time since 1846, there was a tax on food. 
There was a reversal in the trend to more education for the people. 
The budget was kept balanced by at a considerable price in human 
suffering and in wastage of Britain's irreplaceable human resources. 
Hundreds of thousands had been unemployed for years and had their 
moral fiber completely destroyed by years of living on inadequate 
dole. The capitalists of these areas were supported either by 
government subsidy or were bought out by cartels and trade 
associations from funds assessed on the more active members of the 
     Chamberlain's Derating Act of 1929 exempted industry from payment 
of three quarters of its taxes while many unemployed were allowed to 
Page 497
     The economic system itself has become organized for expansion and 
if it does not expand, it tends to collapse. The basic reason for this 
maladjustment is that investment has become an essential part of the 
system and if investment falls off, consumers have insufficient 
incomes to buy the consumers' goods which are being produced in 
another part of the system because part of the flow of purchasing 
power created by the production of goods was diverted from purchasing 
goods it had produced into savings, and all the goods produced could 
not be sold until those savings came back into the market by being 
Page 498
     If the groups in society who control the savings which are 
necessary for progress are the same vested interests who benefit by 
the existing way of doing things, they are in a position to defend 
these vested interests and prevent progress merely by preventing the 
use of surpluses to finance new inventions. The 20th century's 
economic crisis was a situation of this type. 
Page 499
     The element of secrecy is one of the outstanding features of 
English business and financial life. The inner circle of English 
financial life remains a matter of "whom one knows," rather than "what 
one knows." Jobs are still obtained by family, marriage, or school 
connections and important positions are given to men who have no 
training, experience or knowledge to qualify them. 
Page 500
     At the core of English financial life have been seventeen private 
firms of "merchant bankers" with a total of less than a hundred active 
partners including Baring Brothers, N.M. Rothschild, J. Henry 
Schroder, Morgan Grenfell, Hambros and Lazard Brothers. These merchant 
bankers had a dominant position with the Bank of England and, 
strangely enough, still have retained some of this, despite the 
nationalization of the Bank by the Labour government in 1946. 
Page 501
     Financial capitalism was marked not only by a growing financial 
control of industry but also by an increasing concentration of this 
control and by an increasing banking control of government. 
     The control of the Bank of England over business was exercised 
indirectly through the joint-stock banks. This growth of a "money 
trust" led to an investigation. A bill was drawn up to prevent further 
concentration but was withdrawn when the bankers made a "gentlemen's 
agreement" to ask Treasury permission for future amalgamations. 
Page 502
     In 1931, financiers led by Montagu Norman and J.P. Morgan forced 
the resignation of the British Labour government. But the handwriting 
was already on the wall. The deflationary financial policy of the 
bankers had alienated politicians and industrialists and driven 
monopolist trade unions to form a united front against the bankers. 
Labour and industry were united in opposition to continuance to the 
bankers' economic policy with its low prices and high unemployment. 
The decisive factor which caused the end of financial capitalism in 
Britain was the revolt of the British fleet in 1931 and not the 
abandonment of gold six days later. The mutiny made it clear that the 
policy of deflations must be ended. As a result, no effort was made to 
defend the gold standard. 
Page 503
     The Coal Mines Act of 1930 allowed the National Shipbuilders 
Security to buy up and destroy shipyards. By 1934, one quarter of 
Britain's shipbuilding capacity had been eliminated. The Purchase 
Finance Company was set up to buy up and destroy flour mills. By 1933, 
over one-sixth of the flour mills in England had been eliminated. 
Page 507
     In Germany, capital was scarce when industrialism arrived and 
industry found itself dependent upon banks almost at once. The chief 
credit banks floated securities for industry by granting credit to the 
firm, taking securities in return. These securities were slowly sold 
to the public with the bank retaining enough stock to give it control 
and appointing its men as directors to give that control final form. 
     The importance of interlocking directorships can be seen from the 
fact that the same Dresdner Bank had its directors on the boards of 
over two hundred industrial concerns in 1913. 
     This banking control of industry was made even closer since most 
investors left their securities on deposit with the banks which voted 
all this stock for directorships and other control measures, unless 
the stock-owners expressly forbade it. The banks also voted the stock 
left as collateral for loans and all stock bought on margin. 
Page 509
     The control of German financial capitalism rested in the credit 
banks. It was largely beyond the control of the government and rested 
in private hands. Of the hundreds of German credit banks, the eight 
so-called "Great Banks" were the masters of the German economy from 
1865 to 1915 and controlled 74% of the capital assets of all 421 
Page 512
     I.G. Farbenindustrie made many individual cartel agreements with 
Du Pont and other American corporations.
Page 514
     In France, Britain and the US, the war played a significant role 
in demonstrating conclusively that economic stagnation and 
underemployment of resources were not necessary and could be avoided 
if the financial system were subordinated to the economic system. In 
Germany, this was not necessary since the Nazis had already made this 
discovery in the 1930s. 
     Thus a surplus of labor, low wages, experience in unorthodox 
financial operations and an immense task to be done all contributed to 
the German revival. 
Page 515
     With the founding of the Bank of France in 1800, financial power 
was in the hands of about ten or fifteen banking houses whose 
founders, in most cases, had come from Switzerland. These bankers, all 
Protestant, were deeply involved in the agitations leading up to the 
French Revolution. When it got out of the hand, they were the chief 
forces behind the rise of Napoleon. As a reward for this support, 
Napoleon gave these bankers a monopoly over French financial life by 
giving them control of the new Bank of France. 
Page 516
     By 1811, most of these bankers had gone over to the opposition 
and survived the change in regime in 1815. As a result, the Protestant 
bankers who had controlled financial life under the First Empire were 
still the main figures on the board of regents of the Bank of France 
until 1936. The chief names were Mirabaud, Mallet, Neuflize, and 
     In the course of the nineteenth century, a second group was added 
to French banking circles. This second group, largely Jewish, was also 
non-French origin, the majority Germanic (like Rothschild, Heine, 
Fould, Stern and Worms). A rivalry soon grew up between the older 
Protestant bankers and the newer Jewish bankers, largely along 
political rather than religious lines which grew confused as some of 
the Jewish group gave up their religion and moved over to the 
Protestant group. 
     The leadership of the Protestant group was exercised by Mirabaud, 
the leadership of the Jewish group was held by Rothschild. These two 
wings were so close that Mirabaud and Rothschild together dominated 
the whole financial system and frequently cooperated together even 
when their groups as a whole were in competition. 
     After 1838, this simple picture was complicated by the slow rise 
of a third group of bankers who were Catholics which soon split into 
two halves and joined the other two groups. 
Page 517
     The rivalry of these two great powers fills the pages of French 
history in the period 1884-1940. It paralyzed the French political 
system and economic system preventing economic recovery from the 
depression in 1935-1940. 
     From 1880-1925, the private bankers continued to exist and grow 
in power. They were at first chiefly interested in government 
obligations and the greatest bankers, like Mirabaud and Rothschild, 
had intimate connections with governments and weak connections with 
the economic life of the country. 
Page 518
     To finance railroads, the small savings of many were gathered and 
made available to the private banker to direct wherever he thought 
fitting. Thus the private banker became a manager of other persons' 
funds rather than lender of his own. The private banker became much 
more influential and much less noticeable. He now controlled billions 
where he formerly controlled millions and he did it unobtrusively, 
acting from the background, concealed from public view. The public did 
not notice that the names of private bankers and their agents still 
graced the list of directors of new financial enterprises. 
Page 520
     The centre of the French economic system in the 20th century was 
not to be found, as some have believed, in the Bank of France, but, 
instead, resided in a group of almost unknown institutions - the 
private banks. There were over a hundred of these private banks and 
two (Rothschild and Mirabaud) were more powerful than all the others 
combined. These private banks acted as the High Command of the French 
economic system. Their stock was closely held in the hands of about 
forty families. They were the same private banks which had set up the 
Bank of France divided into a group of seven Jewish banks, a group of 
seven Protestant banks and a group of five Catholic banks. The various 
groups continued to cooperate in the management of the Bank of France 
which was controlled until 1936, as it had been in 1813, by the 
handful of private banks which created it. 
Page 521
     The state was influenced by the Treasury's need for funds from 
the Bank of France. 
     These investment banks supplied long-term capital to industry and 
took stock and directorships in return. In 1931, Paribas held 
the securities of 357 corporations and its own directors and top 
managers held 180 directorships in 120 of the more important of these. 
Page 522
     The Jewish bankers were allied to Standard Oil and Rockefeller 
while the Catholic-Protestant bankers were allied to Royal Dutch Shell 
and Deterding. 
Page 524
     In 1936, there were about 800 important firms. Of these 800, the 
Paribas bloc controlled almost 400 and the Union-Comite bloc about 
Page 525
     The whole Paribas system in the 20th century was headed by Baron 
Edouard de Rothschild with the chief center of operation in the Banque 
de Paris which controlled communications companies such as Havas. 
Havas was a great monopolistic news agency. It could, and did, 
suppress or spread both news and advertising. It received secret 
subsidies from the government for almost a century. The monopoly on 
distribution of periodicals and books could be used to kill papers 
which were regarded as objectionable. 
     After 1937, the Paribas bloc was badly split by the controversy 
over orthodox and unorthodox financial methods for dealing with 
depression. The Rothschild desire to form an alliance with Russia and 
adopt a policy of resistance to Hitler, continuing orthodox financial 
policies, collapsed from its own internal contradictions, their own 
lack of faith in it, and the pressure of Great Britain. 
Page 528
     The three prewar blocs have played no significant role in France 
since 1945 although Rene Mayer, active head of the Rothschild family 
interests was minister of finance in the early postwar government. 
Later in 1962, De Gaulle made the director of the Rothschild bank, 
George Pompidou, prime minister. 
Page 529
     By the 1880s, the techniques of financial capitalism reached 
levels of corruption which were never approached in Europe. This 
corruption sought to cheat the ordinary investor by flotations and 
manipulations of securities for the benefit of insiders. The 
practitioners of these dishonesties were as socially acceptable as 
their wealth entitled them to be without animadversions on how that 
wealth was obtained. 
Page 530
     Corrupt techniques associated with the names Daniel Drew and Jay 
Gould were also practiced by Morgan and others who became respectable 
from longer sustained success. 
     Any reform of Wall Street practices came from pressure from the 
farming West and was long delayed by the close alliance of Wall Street 
with the two major political parties. By 1900, the influence of Morgan 
in the Republican party was dominant, his chief rivalry coming from 
Rockefeller of Ohio. 
     From 1880 to 1930, financial capitalism approximated a feudal 
structure in which two great powers, centered in New York, dominated a 
number of lesser powers. No description of this structure as it 
existed in the 1920s can be given in a brief compass, since it 
infiltrated all aspects of American life and especially all branches 
of economic life. 
     At the center were a group of less than dozen investment banks 
which were still unincorporated partnerships at the height of their 
powers. These included J.P. Morgan, the Rockefeller family, Kuhn, 
Loeb, Dillon, Read, Brown Brothers and Harriman, and others. Each of 
these was linked in organizational or personal relationships with 
various banks, insurance companies, railroads, utilities and 
industrial firms. The result was to form a number of webs of economic 
     J.P. Morgan worked in close relationship with a group of banks 
and insurance companies. The whole nexus dominated a network of 
business firms which included at least one-sixth of the two hundred 
largest non-financial corporations. 
Page 531
     The Rockefeller group, investing only its own profits, functioned 
as a capitalist unit in close cooperation with Morgan and controlled 
over half the assets of the oil industry. 
Page 532
     The economic power represented by these figures is almost beyond 
imagination to grasp. Morgan and Rockefeller together frequently 
dominated the national Republican Party while Morgan occasionally had 
extensive influence in the national Democratic Party. These two were 
also powerful on the state level, especially Morgan in New York 
and Rockefeller in Ohio. Mellon was a power in Pennsylvania and Du 
Pont in Delaware. 
     In the 1920s, this system of economic and political power formed 
a hierarchy headed by the Morgan interests and played a principal role 
both in political and business life. Morgan, operating on the 
international level in cooperation with his allies abroad, especially 
in England, influenced the events of history to a degree which cannot 
be specified in detail but which certainly was tremendous. The 
deflationary financial policies on which these bankers insisted were 
laying the foundations of the economic collapse into general social 
disaster by 1940. Unemployment which had reached 13 million persons in 
1933 was still at 10 million in 1940
Page 533
     The deflationary policies of the bankers were acceptable to heavy 
industry chiefly because it was not unionized. With assembly-line 
techniques financed by the bankers and unorganized labor, the 
employers could rearrange, curtail, or terminate labor without notice 
on a daily basis and could thus reduce labor costs to meet falls in 
prices from bankers' deflation.
     The fact that reductions in wages and large lay-offs also reduced 
the volume of purchasing power as a whole, to the injury of the groups 
selling consumers' goods, was ignored by the makers of heavy 
producers' goods. In this way, farmers and other segments of the 
society were injured by the deflationary policies of the bankers and 
by the employment policies of heavy industry, closely allied to the 
     When these policies became unbearable in the depression of 1929-
1933, these other interest blocs deserted the Republican party which 
remained subservient to high finance and heavy industry. The shift of 
the farm bloc to the Democratic Party in 1932 resulted in the election 
of Franklin D. Roosevelt and the New Deal. 
Page 534
     The New Deal's actions against finance did not represent any 
victory for unorthodox financing, the real key to either monopoly 
capitalism or to a managed pluralist society. The reason for this was 
that the New Deal was fundamentally orthodox in its ideas on the 
nature of money. Roosevelt was quite willing to unbalance the budget 
and to spend in a depression in an unorthodox fashion because he had 
grasped the idea that lack of purchasing power was the cause of the 
lack of demand which made unsold goods and unemployment, but he had no 
idea of the causes of the depression and had quite orthodox ideas on 
the nature of money. As a result, his administration treated the 
symptoms rather than the causes of the depression and, while spending 
unorthodoxly to treat these symptoms, did so with money borrowed from 
the banks in the accepted fashion. The New Deal allowed bankers to 
create the money, borrowed it from the banks,and spent it. This meant 
that the New Deal ran up the national debt to the credit of the banks, 
and spent money in such a limited fashion that no drastic re-
employment of idle resources was possible. 
     One of the most significant facts about the New Deal was its 
orthodoxy on money. For the whole 12 years he was in the White House, 
Roosevelt had statutory power to issue fiat money in the form of 
greenbacks printed by the government without recourse to the banks. 
This authority was never used. As a result of such orthodoxy, the 
depression's symptoms of idle resources were overcome only when the 
emergency of the war in 1942 made it possible to justify a limitless 
increase in the national debt by limitless borrowing from private 
persons and the banks. But the whole episode showed a failure to grasp 
the nature of money and the function of the monetary system, of which 
considerable traces remained in the postwar period. 
Page 535
     One reason for the New Deal's readiness to continue with an 
orthodox theory of the nature of money, along with an unorthodox 
practice in its use, arose from the failure of the Roosevelt 
administration to recognize the nature of the economic crisis itself. 
This failure can be seen in Roosevelt's theory of "pump priming." He 
sincerely believed, as did his Secretary of the Treasury, that there 
was nothing structurally wrong with the economy, that it was 
temporarily stalled, and would keep going of its own powers if it 
could be restarted...
     The inadequacy of this theory of the depression was shown in 1937 
when the New Deal, after four years of pump priming and a victorious 
election in 1936, stopped its spending. Instead of taking off, the 
economy collapsed in the steepest recession in history. The New Deal 
had to resume its treatment of symptoms but now without hope that the 
spending program could ever be ended, a hopeless prospect since the  
administration lacked the knowledge of how to reform the system or 
even how to escape from borrowing bank credit with its mounting public  
debt, and the administration lacked the courage to adopt the really 
large-scale spending necessary to give full employment of resources. 
The administration was saved from this impasse by the need for the 
rearmament program followed by the war. Since 1947 the Cold War and 
the space program have allowed the same situation to continue, so that 
even today, prosperity is not the result of a properly organized 
economic system but of government spending, and any drastic reduction 
in such spending would give rise to an acute depression. 
Page 540
     There are a number of important elements in the economic 
situation of the 20th century. 
     8. The increasing disparity in the distribution of income is the 
most controversial and least well-established characteristic of the 
system. It would appear that the disparity in national income has been 
getting wider. 
     In the US, the richest one-fifth receive 46% of the income in 
1910, 51% in 1929 and 48% in 1937. In the same three years, the share 
of the poorest one-fifth fell from 8% to 5.4% to 3.6%
     If instead of one-fifth, we examine the richest and poorest one-
tenth, in 1910 the ratio was 10, in 1929 it was 21.7, in 1937, it was 
34.4. This means that the rich were getting richer relatively and 
probably absolutely while the poor were getting poorer both relatively 
and absolutely. 
Page 542
     The progressives who insisted that the lack of investment was 
caused by lack of consumer purchasing power were correct. But the 
conservatives who insisted that the lack of investment was caused by 
lack of confidence were also correct. Each was looking at the opposite 
side of a single continuous cycle:
a) purchasing power creates demand for goods;
b) demand for goods creates confidence in the minds of investors;
c) confidence creates new investment;
d) new investment creates purchasing power which then creates demand.
     It would appear that the economic factors alone affected the 
distribution of incomes in the direction of increasing disparity. 
Page 543
     In Germany, Hitler's 1934 adoption of an unorthodox financial 
policy which raised the standards of living of the lower-income levels 
even more drastically (by shifting them from unemployment with incomes 
close to nothing into wage-earning positions in industry) was not 
acceptable to the high-income classes because it stopped the threat of 
revolution by the discontented masses and because it was obviously of 
long-run benefit to them. This long-run benefit began to appear when 
capacity employment of capital and labor was achieved in 1937. 
Page 546
     In the modern economic community, the sum total of goods and 
services appearing in the market is at one and the same time the 
income of the community and the aggregate cost of producing goods and 
services in question. Aggregate costs, aggregate incomes and aggregate 
prices are the same since they are merely opposite sides  of the 
identical expenditures. 
     The purchasing power available in the community is equal to 
income minus savings. If there are any savings, the available 
purchasing power will be less than the aggregate prices being asked 
for the products for sale and the amount of the savings. Thus, all the 
goods and services produced cannot be sold as long as savings are held 
back. In order for al the goods to be sold, it is necessary for the 
savings to reappear in the market as purchasing power. The 
disequilibrium between purchasing power and prices which are created 
by the act of saving is restored completely by the act of investment, 
and all the goods can be sold at the prices asked. But whenever 
investment is less than savings, the available supply of purchasing 
power is inadequate by the same amount to by the goods being offered. 
This margin by which purchasing power is inadequate because of an 
excess of savings over investment may be called the "deflationary 
gap."This "deflationary gap" is the key to the twentieth century 
economic crisis and one of the three central cores of the whole 
tragedy of the century. 
Page 547
     The deflationary gap arising from a failure of investment to 
reach the level of savings can be closed either by lowering the supply 
of goods to the level of available purchasing power or by raising the 
supply of purchasing power to a level able to absorb the existing 
supply of goods, or a combination of both. The first solution will 
give a stabilized economy on a low level of activity; the second will 
give a stabilized economy on a high level of activity. Left to itself, 
the economic system under modern conditions would adopt the former 
procedure working as follows: The deflationary gap will result in 
falling prices, declining economic activity and rising unemployment. 
This will result in a fall in national income resulting in an even 
more rapid decline in the volume of savings. This decline continues 
until the volume of savings reaches the level of investment at which 
point the fall is arrested and the economy becomes stabilized at a low 
     This process did not work itself out in any industrial country 
during the great depression because the disparity in national income 
was so great that a considerable portion of the population would have 
been driven to zero incomes and absolute want before savings of the 
richer segment fell to the level of investment. Under such conditions, 
the masses of population would have been driven to revolution and the 
stabilization, if reached, would have been on a level so low that a 
considerable portion of the population would have been in absolute 
want. Because of this, governments took steps to arrest the course of 
the depression before their citizens were driven to desperation. 
     The methods used to deal with the depression and close the 
deflationary gap were all reducible to two fundamental types:
a) those which destroy goods, and
b) those which produce goods which do not enter the market. 
     The destruction of goods will close the deflationary gap by 
reducing the supply of unsold goods through lowering the supply of 
goods to the level of the supply of purchasing power. It is not 
generally realized that this method is one of the chief ways in which 
the gap is closed in a normal business cycle where goods are destroyed 
by the simple expedient of not producing the goods which the system is 
capable of producing. The failure to use full level of 1929 output 
represented a loss of $100 billion in the US, Britain and Germany 
alone. This loss was equivalent to the destruction of such goods. 
Destruction of goods by failure to gather the harvest is a common 
phenomenon under modern conditions. When a farmer leaves his crop 
unharvested because the price is too low to cover the expense of 
harvesting, he is destroying the goods. Outright destruction of goods 
already produced is not common and occurred for the first time as a 
method of combating depression in the years 1930-1934. During this 
period, stores of coffee, sugar, and bananas were destroyed, corn was 
plowed under, and young livestock was slaughtered to reduce the supply 
on the market. The destruction of goods in warfare is another example 
of this method of overcoming deflationary conditions in the economic 
Page 548
     The second method of filling the deflationary gap, namely, by 
producing goods which do not enter the market, accomplishes its 
purpose by providing purchasing power in the market, since the costs 
of production of such goods do enter the market as purchasing power, 
while the goods themselves do not drain funds from the system if they 
are not offered for sale. New investment was the usual way in which 
this was accomplished in the normal business cycle but it is not the 
normal way of filling the gap under modern conditions of depression. 
We have already seen the growing reluctance to invest and the unlikely 
chance that the purchasing power necessary for prosperity will be 
provided by a constant stream of private investment. It this is so, 
the funds for producing goods which do not enter the market must be 
sought in a program of public spending. 
     Any program of public spending at once runs into the problems of 
inflation and public debt. These are the same two problems mentioned 
in connection with the efforts of government to pay for the First 
World War. The methods of paying for a depression are exactly the same 
as the methods of paying for a war, except that the combination of 
methods used may be somewhat different because the goals are somewhat 
different. In financing a war, we should seek to achieve a method 
which will provide a maximum of output with a minimum of inflation and 
public debt. In dealing with a depression, since a chief aim is to 
close the deflationary gap, the goal will be to provide a maximum of 
output with a necessary degree of inflation and a minimum of public 
debt. Thus the use of fiat money is more justifiable in financing a 
depression than in financing a war. Moreover the selling of bonds to 
private persons in wartime might well be aimed at the lower-income 
groups in order to reduce consumption and release facilities for war 
production, while in a depression (where low consumption is the chief 
problem) such sales of bonds to finance public spending would have to 
be aimed at the savings of the upper-income groups. 
     These ideas on the role of government spending in combating 
depression have been formally organized into the "theory of the 
compensatory economy." This theory advocates that government spending 
and fiscal policies be organized so that they work exactly contrary to 
the business cycle, with lower taxes and larger spending in 
deflationary period and higher taxes with reduced spending in a boom 
period, the fiscal deficits of the down cycle being counterbalanced in 
the national budget by the surpluses of the up cycle. 
Page 549
     This compensatory economy has not been applied with much success 
in any European country except Sweden. In a democratic country, it 
would take the control of taxing and spending away from the elected 
representatives of the people and place this precious "power of the 
purse" at the control of the automatic processes of the business cycle 
as interpreted by bureaucratic (and representative) experts. Moreover, 
all these programs of deficit spending are in jeopardy in a country 
with a private banking system. In such a system, the creation of money 
(or credit) is usually reserved for the private banking institutions 
and is deprecated as a government action. The argument that the 
creation of finds by the government is bad while creation of funds by 
the banks is salutary is very persuasive in a system based on 
traditional laissez faire and in which the usual avenues of 
communications (such as newspapers and radio) are under private, or 
even banker, control. 
     Public spending as a method of counteracting depression can vary 
very greatly in character, depending on the purposes of the spending. 
Spending for destruction of goods or for restriction of output, as 
under the New Deal agricultural program, cannot be justified easily 
in a democratic country with freedom of communications because it 
obviously results in a decline in national income and living 
     Spending for non-productive monuments is somewhat easier to 
justify but is hardly a long-run solution. 
     Spending for investment in productive equipment (like the 
Tennessee Valley Authority Dam) is obviously the best solution since 
it leads to an increase in national wealth and standards of living and 
is a long-run solution but it marks a permanent departure from a 
system of private capitalism and can be easily attacked in a country 
with a capitalistic ideology and a private banking system. 
     Spending on armaments and national defence is the last method of 
fighting depression and is the one most readily and most widely 
adopted in the twentieth century. 
     A program of public expenditure on armaments is a method for 
filling the deflationary gap and overcoming depression because it adds 
purchasing power to the market without drawing it out again later 
(since the armaments, once produced, are not put up for sale). From an 
economic point of view, this method of combating depression is not 
much different from the method listed earlier under destruction of 
goods, for, in this case also, economic resources are diverted from 
constructive activities or idleness to production for destruction. The 
appeal of this method for coping with the problem of depression does 
not rest on economic grounds at all, for, on such grounds, there is 
no justification. It's appeal is rather to be found on other, 
especially political, grounds. 
Page 550
     The adoption of rearmament as a method of combating depression 
does not have to be conscious. The country which adopts it may 
honestly feel that it is adopting the policy for good reasons, that it 
is threatened by aggression, and that a program of re-armament is 
necessary for political protection. It is very rare for a country 
consciously to adopt a program of aggression, for, in most wars, both 
sides are convinced that their actions are defensive. It is almost 
equally rare for a country to adopt a policy of re-armament as a 
solution for depression. If a country adopts re-armament because of 
fear of another's arms and these last are the result of efforts to 
fill a deflationary gap, it can also be said that the re-armament of 
the former has a basic economic cause. 
     In the 20th century, the vested interests usually sought to 
prevent the reform of the economic system (a reform whose need was 
made evident by the long-drawn-out depression) by adopting an economic 
program whose chief element was the effort to fill the deflationary 
gap by re-armament. 
     The economic disasters of two wars, a world depression, and the 
post-war fluctuations showed clearly by 1960 that a new economic 
organization of society was both needed and available. The laissez-
faire competitive system had destroyed itself and almost destroyed 
civilization as well by its inability to distribute the goods it could 
produce. The system of monopoly capitalism had helped in this 
Page 551
     The almost simultaneous failure of laissez-faire, Fascism, and of 
Communism to satisfy the growing popular demand both for rising 
standards of living and for spiritual liberty had forced the mid-20th 
century to seek some new economic organization. 
     Underdeveloped peoples have been struck by the conflicting claims 
of the two great super-Powers.. The former offered the goods the new 
peoples wanted (rising standards of living and freedom) while the 
latter seemed to offer methods of getting these goods (by state 
accumulation of capital, government direction of resources) which 
might tend to smother these goals. The net result has been a 
convergence toward a common, if remote, system of the future whose 
ultimate nature is not yet clear but which we might call the 
"pluralist economy."
Page 559
     The structure of collective security was destroyed completely 
under the assaults of Japan, Italy and Germany who were attacking the 
whole nineteenth century way of life and some of the most fundamental 
attributes of Western Civilization itself. They were in revolt against 
democracy, against the parliamentary system, against laissez-faire and 
the liberal outlook, against nationalism (although in the name of 
nationalism), against humanitarianism, against science and against all 
respect for human dignity and human decency. It was recruited from the 
dregs of society. 
Page 560
     During the nineteenth century, goals were completely lost or were 
reduced to the most primitive level of obtaining more power and more 
wealth. But the constant acquisition of power or wealth, like a 
narcotic for which the need grows as its use increases without in any 
way satisfying the user, left man's "higher" nature unsatisfied. 
Page 561
     Germany could have made no aggression without the acquiescence 
and even in some cases the actual encouragement of the "satisfied" 
Powers, especially Britain. 
     The similarity between Germany and Japan was striking: each had a 
completely cartelized industry, a militaristic tradition, a hard-
working population which respected authority and loved order, a facade 
of parliamentary constitutionalism which barely concealed the reality 
of power wielded by an alliance of army, landlords, and industry. 
Page 562
     The steady rise in tariffs against Japanese manufactured goods 
after 1897 led by America served to increase the difficulties of 
Japan's position. The world depression and the financial crisis hit 
Japan a terrible blow. Under this impact, the reactionary and 
aggressive forces were able to solidify their control and embark on 
that adventure of aggression and destruction that ultimately led to 
the disasters of 1945. 
Page 563
     Separate from the armed forces were the forces of monopoly 
capitalism, the eight great economic complexes controlled as family 
units knows as "zaibatsu" which controlled 75% of the nation's wealth. 
By 1930, the militarists and zaibatsu came together in their last 
fateful alliance.
Page 569
     Japan's unfavorable balance of trade was reflected in a heavy 
outflow of gold in 1937-1938. It was clear that Japan was losing its 
financial and commercial ability to buy necessary materials of foreign 
origin. The steps taken by America, Australia, and others to restrict 
export of strategic or military materials to Japan made this problem 
even more acute. The attack on China had been intended to remedy this 
situation by removing the Chinese boycott on Japanese goods.
Page 570
     Under the pressure of the growing reluctance of neutral countries 
to supply Japan with necessary strategic goods, the most vital being 
petroleum products and rubber, it seemed that the occupation of the 
Dutch Indies and Malaya could do much to alleviate these shortages but 
which would lead to an American war on Japan. They decided to attack 
the United States first. 
Page 571
     In 1922, the Fascists came to power in a parliamentary system; in 
1925 it was replaced by a political dictatorship while the economic 
system remained that of orthodox financial capitalism; in 1927 an 
orthodox and restrictive stabilization of the lira on the 
international gold standard led to such depressed economic conditions 
that Mussolini adopted a much more active foreign policy; in 1934 
Italy replaced orthodox economic measures by a totalitarian economy 
functioning beneath a fraudulent corporate facade. 
     Italy was dissatisfied over its lack of colonial gains at 
Versailles and the refusal of the League to accede to Tittoni's 
request for a redistribution of the world's resources in accordance 
with population needs made in 1920. 
     In a series of agreements with Austria and Hungary known as the 
"Rome Protocols," the Austrian government under Engelbert Dollfuss 
destroyed the democratic institutions of Austria, wiped out all 
Socialist and working-class organizations, and established a one-party 
dictatorial corporate state at Mussolini's behest in 1934. Hitler took 
advantage of this to attempt a Nazi coup in Austria, murdering 
Dollfuss in July 1934 but he was prevented by the quick mobilization 
of Italian troops on the Brenner frontier and a stern warning from 
Page 572
     Hitler's ascension to office in Germany in 1933 found French 
foreign policy paralyzed by British opposition to any efforts to 
support collective security or to enforce German observation of its 
treaty obligations by force. As a result, a suggestion from Poland in 
1933 for joint armed intervention in Germany to remove Hitler from 
office was rejected by France. Poland at once made an non-aggression 
pact with Germany and extended a previous one with the Soviet Union. 
     In 1934, France under Jean Louis Bathou, began to adopt a more 
active policy against Hitler seeking to encircle Germany by bringing 
the Soviet Union and Italy into a revived alignment of France, Poland, 
the Little Entente, Greece and Turkey. 
Page 573
     France's Laval was convinced that Italy could be brought into the 
anti-German front only if its long-standing grievances and unfulfilled 
ambitions in Africa could be met. Accordingly, he gave Mussolini 7% of 
the stock in the Djibouti-Addis Ababa Railway, a stretch of desert 
114,000 square miles in extent but containing only a few hundred 
persons (sixty-two according to Mussolini) on the border of Libya, a 
small wedge of territory between French Somaliland and Italian 
Eritrea, and the right to ask for concessions throughout Ethiopia. 
     While Laval insisted that he had made no agreement which 
jeopardized Ethiopia's independence or territorial integrity, he made 
it equally clear that Italian support against Germany was more 
important than the integrity of Ethiopia in his eyes. France had been 
Ethiopia's only friend and had brought it into the League of Nations. 
Italy had been prevented from conquering Ethiopia in 1896 only by a 
decisive defeat of her invading forces at the hands of the Ethiopians 
themselves, while in 1925, Britain and Italy had cut her up into 
economic spheres by an agreement which was annulled by a French appeal 
to the League. Laval's renunciation of France's traditional support of 
Ethiopian independence brought Italy, Britain and France into 
agreement on this issue. 
Page 574
     This point of view was not shared by public opinion in these 
three countries. Stanley Baldwin (party leader and prime minister) 
erected one of the most astonishing examples of British "dual" policy 
in the appeasement period. While publicly supporting collective 
security and sanctions against Italian aggression, the government 
privately negotiated to destroy the League and to yield Ethiopia to 
Italy. They were completely successful in this secret policy. 
     The Italian invaders had no real fear of British military 
sanctions when they put a major part of their forces in the Red Sea 
separated from home by the British-controlled Suez canal. The British 
government's position was clearly stated in a secret report by Sir 
John Maffey which declared that Italian control of Ethiopia would be a 
"matter of indifference" to Britain. This opinion was shared by the 
French government too. 
     Unfortunately, public opinion was insisting on collective 
sanctions against the aggressor. To meet this demand, both governments 
engaged in a public policy of unenforced or partially enforced 
sanctions at wide variance with their real intentions. 
     Foreign Secretary Samuel Hoare delivered a smashing speech to 
support sanctions against Italy. The day previously he and Anthony 
Eden had secretly agreed with Pierre Laval to impose only partial 
economic sanctions avoiding all actions such as blockade of the Suez 
Page 575
     A number of governments including Belgium, Czechoslovakia, France 
and Britain had stopped all exports of munitions to Ethiopia as early 
as May 1935 although Ethiopia's appeal to the League for help had been 
made on March 17th while the Italian attack did not come until 
October. The net result was that Ethiopia was left defenceless and her 
appeal to the US for support was at once rejected. 
     Hoare's speech evoked such applause from the British public that 
Baldwin decided to hold a general election on that issue. Accordingly, 
with ringing pledge to support collective security, the National 
government won an amazing victory and stayed in power until the next 
general election ten years later (1945).
     Although Article 16 of the League Covenant bound the signers to 
break off all trade with an aggressor, France and Britain combined to 
keep their economic sanctions partial and ineffective. The imposition 
of oil sanctions was put off again and again until the conquest of 
Ethiopia was complete. The refusal to establish this sanction resulted 
from a joint British-French refusal on the grounds that an oil 
sanction would be so effective that Italy would be compelled to break 
of its was with Ethiopia and would, in desperation, make war on 
Britain and France. This, at least, was the amazing logic offered by 
the British government later. 
Page 576
     Hoare and Laval worked out a secret deal which would have given 
Italy outright about one-sixth of Ethiopia. When news of this deal was 
broken to the public, there was a roar of protest on the grounds 
that this violated the election pledge made but a month previously. To 
save his government, Baldwin had to sacrifice Hoare who resigned on 
December 19 but returned to Cabinet on June 5 as soon as Ethiopia was 
decently buried. Laval fell from office and was succeeded by Pierre 
Flandin who pursued the same policy. 
     Ethiopia was conquered on May 2 1936. Sanctions were removed in 
the next two months just as they were beginning to take effect. The 
consequences of the Ethiopian fiasco were of the greatest importance.  
The Conservative Party in England was entrenched in office for a 
decade during which it carried out its policy of appeasement and waged 
the resulting war. The US passed a "Neutrality Act" which encouraged 
aggression, at the outbreak of war, by cutting off supplies to both 
sides, to the aggressor who had armed at his leisure and to the victim 
as yet unarmed. Above all, it destroyed French efforts to encircle 
Page 577
     The remilitarization of the Rhineland in violation of the 
Versailles Treaty was the most important result of the Ethiopian 
Page 578
     In order to destroy the French and Soviet alliances with 
Czechoslovakia, Britain and Germany sought to encircle France and the 
Soviet Union in order to dissuade France from honoring its alliances 
with either Czechoslovakia or the Soviet Union and France, finding 
itself encircled, dishonored its alliance with Czechoslovakia when it 
came due in 1938. 
Page 579
     The British attitude towards eastern Europe was made perfectly 
clear when Sir John Simon demanded arms equality for Germany. Adding 
to the encirclement of France was the Anglo-German Naval Agreement of 
June 1935. 
Page 580
     Parallel with the encirclement of France went the encirclement of 
the Soviet Union known as the anti-Comintern Pact, the union of 
Germany and Japan against Communism. 
     The last encirclement was that against Czechoslovakia. Hungary 
and Germany were both opposed to Czechoslovakia as an "artificial" 
creation of the Versailles Conference. The Polish-German agreement of 
1934 opened a campaign until the Polish invasion in 1938. 
     An analysis of the motivations of Britain in 1938-1939 is bound 
to be difficult because the motives of government were clearly not the 
same as the motives of the people and in no country has secrecy and 
anonymity been carried so has been been so well preserved as in 
Britain. In general, motives become vaguer and less secret as we move 
our attention from the innermost circles of the government outward. As 
if we were looking at the layers of an onion, we may discern four 
points of view: 
1) the anti-Bolsheviks at the center;
2) the "three-bloc-world" supporters close to the center;
3) the supporters of "appeasement" and
4) the "peace at any price" group in peripheral position. 
Page 581
     The chief figures in the anti-Bolshevik group were Lord 
Curzon, Lord D'Abernon and General Smuts. They did what they could to 
destroy reparations and permit German re-armament. 
     This point of view was supported by the second group, the Round 
Table Group, and came later to be called the Clivenden Set which 
included Lord Milner, Lord Brand (managing director of Lazard 
Brothers, international bankers). This group wielded great influence 
because it controlled the Rhodes Trust and dominated the Royal 
Institute of International Affairs. They sought to contain the Soviet 
Union rather than destroy it as the anti-Bolsheviks wanted. They 
advocated a secret alliance of Britain with the German military 
leaders against the Soviet. 
Page 583
     Abandoning Austria, Czechoslovakia and the Polish Corridor to 
Germany was the aim of both the anti-Bolsheviks and the "three-bloc" 
Page 584
     From August 1935 to March 1939, the government built upon the 
fears of the "peace at any price" group by steadily exaggerating 
Germany's armed might and belittling their own, by calculated 
indiscretions like the statement that there were no real anti-aircraft 
guns in London, by constant hammering at the danger of air attack 
without warning, by building ostentatious and quite useless air-raid 
trenches in the streets and parks of London, and by insisting through 
daily warnings that everyone must be fitted with a gas mask 
immediately (although the danger of a gas attack was nil). In this 
way, the government put London into a panic in 1938 and by this panic, 
Chamberlain was able to get the people to accept the destruction of 
Czechoslovakia. Since he could not openly appeal on the anti-
Bolshevik basis, he had to adopt the expedient of pretending to  
resist (in order to satisfy the British public) while really 
continuing to make every possible concession to Hitler which would 
bring Germany to a common frontier with the Soviet Union. 
Page 585
     Chamberlain's motives were not really bad ones; he wanted peace 
so he could devote Britain's limited resources to social welfare; but 
he was narrow and totally ignorant of the realities of power, 
convinced that international politics could be conducted in terms of  
secret deals, as business was, and he was quite ruthless in carrying 
out his aims, especially in his readiness to sacrifice non-English 
persons who, in his eyes, did not count.  
Page 587
     From the invasion of the Arabs in 711 to their final ejection in 
1492, Spanish life has been dominated by the struggle against foreign 
intruders. As a result of more than a thousand years of such 
struggles, almost all elements of Spanish society have developed a 
fanatical intolerance, an uncompromising individualism, and a fatal 
belief that physical force is a solution to all problems, however 
Page 588
     The war of 1898, by depriving Spain of much of its empire, left 
its over-sized army with little to do and with a reduced area on which 
to batten. Like a vampire octopus, the Spanish Army settled down to 
drain the life-blood of Spain and, above all, Morocco. This brought 
the army officers into alignment with conservative forces consisting 
of the Church (upper clergy), the landlords, and the monarchists. The 
forces of the proletariat discontent consisted of the urban workers 
and the much larger mass of exploited peasants. 
Page 591
     In 1923, while most of Spain was suffering from malnutrition, 
most of the land was untilled and the owners refused to use irrigation 
facilities which had built by government. As a result, agricultural 
yields were the poorest in western Europe. While 15 men owned about a 
million acres and 15,000 men owned about the of all taxed land, almost 
2 million owned the other half, frequently in plots too small for 
subsistence. About 2 million more, who were completely landless, 
worked 10 to 14 hours a day for about 2.5 pesetas (35 cents) a day for 
only six months in the year and paid exorbitant rents without any 
security of tenure.
     In the Church, while the ordinary priests share the poverty and 
tribulations of the people, the upper clergy were closely allied with 
government and supported by an annual grant. They had seats in the 
upper chamber, control of  education, censorship, marriage. In 
consequence of this alliance of the upper clergy with government and 
the forces of reaction, all animosities built against the latter came 
to be directed against the former also. Although the people remained 
universally and profoundly catholic, they also became incredibly 
anticlerical reflected in the proclivity for burning churches. 
     All these groups, landlords, officers, upper clergy, and 
monarchists, were interest groups seeking to utilize Spain for their 
own power and profit. 
Page 592
     Alfonso XIII ordered municipal elections but in 46 out of 50 
provincial capitals, the anti-monarchial forces were victorious. 
Alfonso fled to France on April 14, 1931. 
     The republicans at once began to organize their victory, electing 
a Constituent Assembly in June and establishing an ultramodern uni-
cameral, parliamentary government with universal suffrage, separation 
of Church and State, secularization of education, local autonomy for 
separatist areas and power to socialize the great estates or the 
public utilities. 
     The republic lasted only five years before Civil War began in 
1936 after being challenged constantly from the Right and the extreme 
Left. Because of shifting governments, the liberal program which was 
enacted into law in 1931 was annulled or unenforced. 
Page 593
     In an effort to reduce illiteracy (over 45% in 1930), the 
republic created thousands of new schools and new teachers, raised 
teachers' salaries, founded over a thousand libraries. 
     Army officers were reduced with the surplus being retired on full 
pay. The republican officers tended to retire, the monarchists to stay 
     To assist the peasants and workers, mixed juries were established 
to hear rural rent disputes, importation of labor for wage-breaking 
purposes was forbidden; and credit was provided for peasants to 
obtain land, seed, or fertilizers on favorable terms. Customarily 
uncultivated lands were expropriated with compensation to provide 
farms for a new class of peasant proprietors. 
     Most of these reforms went into effect only partially. Few of the 
abandoned estates could be expropriated because of the lack of money 
for compensation. 
Page 594
     The conservative groups reacted violently. Three plots began to 
be formed against the new republic, the one monarchist led by Sotelo 
in parliament and by Goicoechea behind the scenes; the second a 
parliamentary alliance of landlords and clericals under Robles; and 
the last a conspiracy of officers under Generals Barrera and Sanjurjo. 
     In the meantime, the monarchist conspiracy was organized by 
former King Alfonso from abroad. Goicoechea performed his task with 
great skill under the eyes of a government which refused to take 
preventative action because of its own liberal and legalistic 
scruples. He organized an alliance of the officers, the Carlists, and 
his own Alfonsist party. Four men from these three groups then signed 
an agreement with Mussolini in 1934 who promised arms, money, 
diplomatic support and 1.5 million pesetas, 10,000 rifles,10,000 
grenades, and 200 machine guns. In return, the signers promised to 
sign a joint export policy with Italy. 
Page 595
     The Robles coalition of Right parties with the clerical party and 
agrarian party of landlords was able to replace the Left Republican 
Azana by the Right Republican Lerroux as prime minister. It then 
called new elections, won victory and revoked many of the 1931 reforms 
while allowing most of the rest to go unenforced and restored 
expropriated estates. 
     This led to a violent agitation which burst into open revolt in 
the two separatist centers of the Basque country and Catalonia. The 
uprising in Asturias spearheaded by anarchist miners hurling dynamite 
from slings, lasted for nine days. The government used the Foreign 
Legion and Moors, brought to Morocco by sea, and crushed the rebels 
without mercy. The latter suffered at 5,000 casualties. After the 
uprising, 25,000 suspects were thrown into prison. 
     The uprising of October 1934, although crushed, split the 
oligarchy. The demands of the army, monarchists and the biggest 
landlords for a ruthless dictatorship alarmed the leaders of the 
Church and president of the republic Zamora. Robles as minister of war 
encouraged reactionary control of the army and even put General Franco 
in as his undersecretary of war. 
Page 596
     For the 1936 elections, the parties of the Left formed the 
Popular Front with a published program promising a full restoration of 
the constitution, amnesty for political crimes committed after 1933, 
civil liberties, an independent judiciary, minimum wages, protection 
for tenants, reform of taxation, credit, banking. It repudiated the 
Socialist program for nationalization of the land, the banks, and 
     While all the Popular Front parties would support the government, 
only the bourgeois parties would hold seats in the Cabinet while the 
workers parties such as the Socialists would remain outside. 
     The Popular Front captured 266 of 473 seats while the Right had 
153, the Center 54, CEDA 96, Socialists 87, Republic Left 81, 
Communists 14.
     The defeated forces of the Right refused to accept the election 
results and tried to persuade Valladeres to hand over the government 
to General Franco. That was rebuffed. On Feb. 20, the conspirators met 
and decided the time was not yet ripe. The new government heard of 
this meeting and transferred Franco to the Canary Islands. The day 
before he left Madrid, Franco met with the chief conspirators and they 
completed their plans for a military revolt but fixed no date. 
     In the meantime, provocation, assassination, and retaliation grew 
steadily with the verbal encouragement of the Right. Property was 
seized or destroyed and churches were burned on all sides. The mob 
retaliated by assaults on monarchists and by burning churches.
Page 597
     Italian Air Force planes were painted over and went into action 
in support of the revolt which was a failure when the navy remained 
loyal because the crews overthrew their officers; the Air Force 
remained loyal; the army revolted with much of the police but were 
overcome. At the first news of the revolt, the people, led by labor 
unions, demanded arms. Because arms were lacking, orders were sent at 
once to France. The recognized government in Madrid had the right to 
buy arms abroad and was even bound to do so by treaty with France. 
     As a result of the failure of the revolt, the generals found 
themselves isolated in several different parts of Spain with no mass 
popular support. 
Page 598
     The rebels held the extreme northwest, the north and the south as  
well as Morocco and the islands. They had the unlimited support of 
Italy and Portugal and tentative support from Germany. 
     The French suggested an agreement not to intervene in Spain since 
it was clear that if there was no intervention, the Spanish government 
could suppress the rebels. Britain accept the French offer at once but 
efforts to get Portugal, Italy, Germany and Russia into the agreement 
were difficult because Portugal and Italy were both helping the 
rebels. By August, all six Powers had agreed. 
     Efforts to establish some kind of supervision were rejected by 
the rebels and by Portugal while Britain refused to permit any 
restrictions to be placed on war material going to Portugal at the 
very moment when it was putting all kinds of pressure on France to 
restrict any flow of supplies to the recognized government of Spain. 
Portugal had delayed joining the agreement until it would hurt the 
Loyalist forces more than the rebels. Even then, there was no 
intention of observing the agreements.
Page 599
     France did little to help the Madrid government while Britain was 
positively hostile to it. Both governments stopped all shipments of 
war material to Spain. By its insistence on enforcing non-intervention 
against the Loyalists, while ignoring the systematic and large-scale 
evasions of the agreement in behalf of the rebels, Britain was neither 
fair nor neutral, and had to engage in large-scale violations of 
international law. Britain refuse to permit any restrictions to be 
placed on war material going to Portugal (to the rebels). It refused 
to allow the Loyalist Spanish Navy to blockade the seaports held by 
the rebels, and took immediate action against efforts by the Madrid 
government to interfere with any kind of shipments to rebel areas, 
while wholesale assaults by the rebels on British and other neutral 
ships going to Loyalist areas drew little more than feeble protests 
from Britain. 
     Britain was clearly seeking a rebel victory and instead of trying 
to enforce nonintervention, was actively supporting the rebel blockade 
of Loyalist Spain when the British Navy began, in 1937, to intercept 
British ships headed for Loyalist ports and on some pretext, or simply 
by force, made them go elsewhere. 
     The rebel forces were fewer than the Loyalists but were 
eventually successful because of their great superiority in artillery, 
aviation, and tanks as a result of the one-sided enforcement of the 
non-intervention agreement. 
Page 600
     The failure of Franco to capture Madrid led to a joint Italian-
German meeting where it was decided to recognize the Franco government 
and withdraw their recognition from Madrid on Nov. 18, 1936. Japan 
recognized the Franco regime in December.
     As a result, Franco received the full support of the aggressor 
states while the Loyalist government was obstructed in every way by 
the "peace-loving" Powers. Italy sent 100,000 men and suffered 50,000 
casualties, Germany sent 20,000 men. On the other side, the Loyalists 
were cut off from foreign supplies almost at once because of the 
embargoes of the Great Powers and obtained only limited amounts, 
chiefly from Mexico, Russia and the US until the Non-intervention 
agreement cut these off. On Jan. 18, 1937, the American Neutrality Act 
was revised to apply to civil as well as international wars and was 
invoked against Spain immediately but unofficial pressure from the 
American government prevented such exports to Spain even earlier. 
     The Madrid government made violent protests against the Axis 
intervention both before the Non-intervention Committee in London and 
before the League of Nations. These were denied by the Axis Powers. An 
investigation of these charges was made under Soviet pressure but the 
Committee reported that these charges were unproved. Anthony Eden went 
so far to say that so far as non-intervention was concerned, "there 
were other governments more to blame tan either Germany or Italy." 
Page 601
     Soviet intervention began Oct 7,1936, three and a half years 
after Italian intervention and almost three months after both Italian 
and German units were fighting with the rebels. The Third 
International recruited volunteers throughout the world to fight in 
Spain. This Soviet intervention in support of the Madrid government at 
a time when it could find support almost nowhere else served to 
increase Communist influence in the government very greatly. 
Page 602
     The Italian submarine fleet was waiting for Russian shipping in 
the Mediterranean and did not hesitate to sink it in the last few 
months of 1936. 
     Although the evidence for Axis intervention in Spain was 
overwhelming and was admitted by the Powers themselves early in 1937, 
the British refused to admit it and refused to modify the non-
intervention policy. Britain's attitude was so devious that it can 
hardly be untangled although the results were clear enough. The real 
sympathy of the London government clearly favored the rebels although 
it had to conceal the fact from public opinion since this opinion 
favored the Loyalists over Franco by 57% to 7% according to a 1938 
opinion poll.
Page 603
     On December 18, 1936, Eden admitted that the government had 
exaggerated the danger of war four months earlier to get the non-
intervention agreement accepted, and when Britain wanted to use force 
to achieve its aims, as it did in the piracy of Italian submarines in 
1937, it did so without risk of war. The non-intervention agreement, 
as practiced, was neither an aid to peace nor an example of 
neutrality, but was clearly enforced in such a way as to give aid to 
the rebels and place all possible obstacles in the way of the Loyalist 
government suppressing the rebellion. 
     The attitude of the British government could not be admitted 
publicly and every effort was made to picture the actions of the Non-
intervention Committee as one of even-handed neutrality. In fact, it 
was used to throw dust in the eyes of the world, especially the 
British public. For months, the meaningless debates of this committee 
were reported in detail to the world and charges, countercharges, 
proposals, counterproposals, investigations and inconclusive 
conclusions were offered to the a confused world, thus successfully 
increasing its confusion. While debating and quibbling on about issues 
like belligerence, patrols, volunteers, etc., before the Committee in 
London, the Franco forces, with their foreign contingents, slowly 
crushed the Loyalist forces. 
Page 604
     The Loyalist forces surrendered on March 28th 1939. England and 
France had recognized the Franco government on February 17 and the 
Axis troops were evacuated from Spain after a triumphal march through 
Madrid in June. 
     When the war ended, much of Spain was wrecked, at least 450,000 
Spaniards had been killed and an unpopular military dictatorship had 
been imposed as a result of the actions of non-Spanish forces. At 
least 400,000 Spaniards were in prison and large numbers were hungry 
and destitute. Germany recognized this problem and tried to get France 
to follow a path of conciliation, humanitarian reform, and social, 
agricultural, and economic reform. This advice was rejected, with the 
result that Spain has remained weak, apathetic, war-weary, and 
discontented ever since. 

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