TRAGEDY AND HOPE Chapters V-VIII
by Dr. Carroll Quigley
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
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;
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
Countries engaged in a variety of activities designed to
regulate the flow of information which involved censorship, propaganda
and curtailment of civil liberties.
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
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
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
CHAPTER VI: THE VERSAILLES SYSTEM AND THE RETURN TO NORMALCY 1919-1929
THE PEACE SETTLEMENTS 1919-1923
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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."
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.
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
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
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.
The outlawry of war was relatively meaningless without some
sanctions that could compel the use of peaceful methods. Efforts in
this direction were nullified by Britain.
Disarmament 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
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.
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.
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.
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.
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.
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
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
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.
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
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
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.
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.
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
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.
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.
The backwards areas had increased their outputs of raw materials
and food so greatly that the total could hardly have been sold.
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
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.
It was set up to be the world cartel of every-growing national
financial powers by assembling the nominal heads of these national
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
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
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
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
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.
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
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.
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
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.
The Dawes Plan provided the gold reserves which served to protect
Germany from the accepted principles of orthodox finance.
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
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.
The real key rested on the control of money flows which were held
by investment bankers in 1900.
THE PERIOD OF DEFLATION, 1927-1936
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
THE CRASH OF 1929
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
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
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.
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.
Washington left gold in 1933 voluntarily in order to follow an
unorthodox financial program of inflation.
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.
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.
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
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.
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
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.
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
REFLATION AND INFLATION 1933-1947
Except for Germany and Russia, most countries in the latter half
of 1937 experienced sharp recession.
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.
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.
Britain made barter agreements with various countries, including
one direct swap of rubber for wheat with the US.
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.
The use of orthodox financing in the First World War had left a
terrible burden of intergovernmental debts and ill-feeling...
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
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.
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
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.
From Ricardo, Marx derived the theory that the value of economic
goods was based on the amount of labor put into them.
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.
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
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)
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.
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
The secret police (Cheka) systematically murdered all real or
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.
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.
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
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
THE NAZI REGIME 1933-1934
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
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.
4) all Jews and other aliens eliminated;
5) all unearned incomes to be abolished;
6) to punish all war profiteers and usurers with death.
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
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
There was a statutory provision which made it illegal for members
of the armed services to be simultaneously members of the party.
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
The threat to industry from depression was eliminated.
CHAPTER X: BRITAIN: THE BACKGROUND TO APPEASEMENT, 1900-1939
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.
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."
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.
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."
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).
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.
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
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.
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?"
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.
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.
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
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.
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).
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.
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.
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.
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.
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
CHAPTER XI: CHANGING ECONOMIC PATTERNS
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
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.
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.
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.
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.
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.
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.
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.
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
I.G. Farbenindustrie made many individual cartel agreements with
Du Pont and other American corporations.
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.
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.
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
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.
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.
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.
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.
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.
The Jewish bankers were allied to Standard Oil and Rockefeller
while the Catholic-Protestant bankers were allied to Royal Dutch Shell
In 1936, there were about 800 important firms. Of these 800, the
Paribas bloc controlled almost 400 and the Union-Comite bloc about
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.
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.
UNITED STATES OF AMERICA
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.
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.
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.
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
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.
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.
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.
THE ECONOMIC FACTORS
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
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
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.
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.
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
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.
THE RESULTS OF THE ECONOMIC DEPRESSION
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
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.
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.
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 PLURALIST ECONOMY AND WORLD BLOCS
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
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
CHAPTER XII: THE POLICY OF APPEASEMENT 1931-1936
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.
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.
Germany could have made no aggression without the acquiescence
and even in some cases the actual encouragement of the "satisfied"
Powers, especially Britain.
THE JAPANESE ASSAULT, 1931-1941
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.
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.
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
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.
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.
THE ITALIAN ASSAULT, 1934-1936
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
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.
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.
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
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.
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
CIRCLES AND COUNTERCIRCLES, 1935-1939
The remilitarization of the Rhineland in violation of the
Versailles Treaty was the most important result of the Ethiopian
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.
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
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.
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.
Abandoning Austria, Czechoslovakia and the Polish Corridor to
Germany was the aim of both the anti-Bolsheviks and the "three-bloc"
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.
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.
THE SPANISH TRAGEDY, 1931-1939
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
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.
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.
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
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.
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
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.
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
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.
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,
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.
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
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.
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
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
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."
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.
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
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.
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.