History of the World/History of the World (Bureau Development, Inc.)(1992).BIN/dp/0080/00804.txt

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$Pretitle{}
$Title{Civilizations Past And Present
Economic Disasters}
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$Author{Wallbank;Taylor;Bailkey;Jewsbury;Lewis;Hackett}
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$Subject{states
world
war
united
economic
german
germany
debts
reparations
billion}
$Date{1992}
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Title:       Civilizations Past And Present
Book:        Chapter 31: The Eclipse Of The Democracies
Author:      Wallbank;Taylor;Bailkey;Jewsbury;Lewis;Hackett
Date:        1992

Economic Disasters

Economic Crises And Political Retreat, 1918-1939

Introduction

     World War I, the war that was to make the world "safe for democracy,"
left a legacy of physical damage, economic disruption, and doubt that
endangered the hard-won liberal victories of the nineteenth century. The
twenty years between the first and second global wars was a perilous time for
democracy. The horrible costs of the war made the victory a hollow one for the
European victors, and after the initial taste for revenge had been satisfied,
revulsion for war became widespread. The economic dislocation caused by
inflation and depression sapped the strength of the middle classes, the
traditional supporters of democracy. The certainty and belief in progress that
had helped fuel Europe's dominance in the nineteenth century was replaced by
doubt and cynicism. ^1

[Footnote 1: E. H. Carr, The Twenty Years' Crisis (New York: Harper & Row,
1964), p. 224.]

Economic Disasters

     One of the most serious problems facing the survivors of World War I was
the confused and desperate situation of the European economy. Much of the
direct and indirect cost of the war had been covered by borrowing, and now the
bills had come due in a world unable to pay them. The lasting results of the
war touched many areas. The conflict altered world trading patterns, reduced
shipping, and weakened Europe's former economic dominance. The various peace
treaties multiplied the number of European boundaries, which soon became
obstacles to the flow of goods, especially in the successor states of the
Habsburg monarchy and in Poland.

The Costs Of The War

     It is impossible to give a true accounting of the costs of any war,
because there is no way to calculate the contributions that might have been
made by those killed in battle. From 2 to 3 million Russians died, and more
perished in the civil war. Among the other major participants, almost 2
million Germans, over 1.5 million French, close to a million English, a
half-million Italians, 1.2 million from Austria-Hungary, and 325,000 from
Turkey died in battle. These figures do not count the wounded whose lives may
have been shortened as a result of their injuries. Put another way, the young
paid the highest price; it is estimated that Germany and France each lost over
15 percent of its young men.

     Estimates of the financial drain of the war range between $250 billion
and $300 billion, figuring the dollar at its early 1920s level. These figures
do not bring home the depth of the war's impact on trade, shipping, and
monetary stability. Belgium, for example, lost over 300,000 houses and
thousands of factories, and 15,000 square miles of northeastern France were in
ruins.

     There is no balance sheet or set of figures to measure the psychological
expense of the conflict. How does one calculate the cost of taking 75 million
men who were mobilized away from their jobs and their homes? How can the
mental carnage inflicted on the participants be measured?

     Political institutions felt the effects of the war in different ways. The
German, Habsburg, Russian, and Ottoman empires crumbled and disappeared from
the historical stage. Replacing them were uncertain republics or
dictatorships. Those colonial empires that remained were weakened and
indigenous nationalist movements made substantial progress. Rail and
communications lines had to be reconfigured to reflect the interests of newly
created states.

     The roots of the economic problems that plagued Europe after the war -
agricultural overproduction, bureaucratic regulations, and protectionism -
could be seen before 1914. Compounding these factors were the traditional
challenges encountered in shifting from a wartime to a peacetime economy -
especially that of demobilizing millions of soldiers and bringing them back
into the labor market.

The Debt Problem

     A radical change had taken place during the war in Europe's economic
relationship with the United States. In 1914 the United States had been a
debtor nation, mostly to Europe, for the amount of $3.75 billion. The war
totally reversed this situation. The United States lent billions of dollars
and sold tons of supplies to the Allies. British blockades kept the United
States from being able to deal with the Germans, blocking further profits, but
by 1919 Europeans owed the United States more than $10 billion. This
tremendous debt posed what economists call a transfer problem. The
international obligations could be paid only by the actual transfer of gold or
by the sale of goods.

     To complicate the picture, Allied powers in Europe had also lent each
other funds, with the British acting as the chief banker, lending more than
1.7 billion. When their credit dried up, they turned to the United States for
financial help. Even though Britain owed huge sums to U.S. financiers, it
remained a net creditor of $4 billion because of its own European debtors.
France, on the other hand, stood as a net debtor of $3.5 billion. In addition
to war debts, the French government suffered greatly when the Bolsheviks
renounced the tsarist debt of some 12 billion francs - one quarter of France's
foreign holdings.

     Some of the Allies argued that the inter-Allied debts were political,
that all of them had, in effect, been poured into a common pool for victory.
These people wondered how France's contribution in the lives of its young men
could be figured into the equation in terms of francs, dollars, or pounds.
They proposed that, with victory, all debts should be cancelled. The United
States, which had gone to Paris with a conciliatory spirit toward Germany in
the treaty negotiations, changed its tune when dollars and cents were
involved. This attitude was best expressed in a remark attributed to Calvin
Coolidge, who expected full repayment, when he said: "They hired the money,
didn't they?" ^2 Beneath the extremes of these positions was understandable
motives of getting out of paying a huge debt. The German side resorted to
financial mismanagement. In the first three years after the war, the German
government, in a policy of deliberate inflation, spent much more than its
income. This policy was masked by "floating debts ... in other words, by the
printing press." ^3

[Footnote 2: T. Harry Williams, Richard N. Current, and Frank Friedel, A
History of the United States Since 1865 (New York: Alfred A. Knopf, 1960), p.
426.]

[Footnote 3: A. J. Ryder, Twentieth Century Germany: From Bismarck to Brandt
(New York: Columbia Univ. Press, 1973), p. 216.]

     The situation became so serious in the summer of 1922 that Great Britain
proposed that it collect no more from its debtors - Allied and German alike -
than the United States collected from Britain itself. Such statesmanship was
prompted by the fact that London had gained what it wanted from the peace
settlement: Germany's navy was destroyed; Germany's merchant ships were
transferred as reparations; Germany's empire was gone. No more could be
squeezed out. Britain saw that Germany would not be able to meet its
reparations payments, and without them, the payments of the inter-Allied
debts, especially debts owed to the United States, would be extremely
difficult, if not impossible, to make.

     Although the United States insisted that there was no connection between
the inter-Allied debts and German reparations, negotiations were carried on,
and debt payment plans were set up with thirteen nations. No reductions were
made in principal, but in every case the interest rate was radically
decreased. The total amount owed came to more than $22 billion.

     Germany's debt problem was complicated by the additional problem of
reparations. Although reparations constituted a drain of major proportions on
the German economy, they were far more significant as a political factor.

     The German government's calculated inflationary policies contributed far
more to the economic disaster that occurred in 1923 than did reparations.
Between May and September 1921 the value of the German mark fell some 80
percent. A year and a half later, after Germany defaulted on some payments,
French troops, supported by Belgian and Italian contingents, marched into the
rich industrial district of the Ruhr, undeterred by American and British
objections. This shortsighted French move contributed nothing to the solution
of Europe's problems and indeed played into the hands of radical German
politicians.

     Encouraged by the Berlin government, German workers defied the French
army and went on strike, many ending up in jail. The French toyed for a while
with the idea of establishing a separate state in the Rhineland to act as a
buffer between Germany and France. Chaotic conditions in the Ruhr encouraged
the catastrophic inflation of the German currency to make up for the loss of
exports and to support the striking workers. The French, in return, gained
very little benefit from the occupation.

Inflation And Stabilization

     All European nations encountered a rocky path as they attempted to gain
equilibrium after the war. Britain had minimal price increases and returned to
prewar levels within two years after the signing of the Versailles treaty. On
the continent, price and monetary stability came less easily. Only
Czechoslovakia seemed to have its economic affairs well in hand.

     France did not stabilize its currency until 1926, when the franc was
worth fifty to the dollar (as contrasted to five to the dollar in 1914). In
Austria prices rose to 14,000 times their prewar level until stability of
sorts came in 1922. Hungary's prices went to 23,000 times prewar level, but
this increase is dwarfed by Poland's (2.5 million times prewar level) and
Russia's (4 billion times prewar level).

     But Germany served as the laboratory of the horrible impact of inflation
on society. Germany's prices went up a trillion times (a thousand billion)
what they were in 1914. The German mark had been worth four to the dollar in
prewar times. At its weakest point in November 1923, after the French
occupation of the Ruhr, the German mark reached the exchange rate of 4.2
trillion to the dollar. During the worst part of the inflation, the Reichsbank
had 150 firms using 2000 presses running day and night to print Reichnotes. To
get out of their dilemma, the Germans made an effective transition to a more
stable currency by simply forgetting the old one. ^4

[Footnote 4: David S. Landes, The Unbound Prometheus (Cambridge: Cambridge
Univ. Press, 1969), pp. 361-362. Gustav Stolper, Karl Hauser, and Knut
Borchardt, The German Economy: 1870 to the Present, trans. Toni Stolper (New
York: Harcourt Brace Jovanovich, 1967), p. 83.]

     The millions of middle-class Germans, small property owners who would be
the hoped-for base of the new Weimar Republic, found themselves caught in the
wage-price squeeze. Prices for the necessities of life rose far faster than
did income or savings. As mothers wheeled baby carriages full of money to
bakeries to buy bread, fathers watched a lifetime of savings dwindle to
insignificance. Pensioners on fixed incomes suffered doubly under this crisis.
The bourgeoisie, the historical basis for liberal politics throughout Europe,
suffered blows more devastating than those of war, for inflation stole not
only the value of their labor, but the worth of their savings and insurance.

     Where the middle classes and liberal traditions were strong, democracy
could weather the storm. But in central Europe, especially in Germany where
the inflation was the worst, the cause of future totalitarianism received an
immense boost. Alan Bullock, a biographer of Adolf Hitler, has written that
"the result of inflation was to undermine the foundations of German society in
a way which neither the war nor the revolution of 1918, nor the Treaty of
Versailles had ever done." ^5

[Footnote 5: Alan Bullock, Hitler, A Study in Tyranny (New York: Torchbooks,
1964), p. 91.]

Temporary Improvements

     After 1923 the liberal application of U.S. funds brought some calm to the
economic storm. Business was more difficult to conduct because protectionism
became more and more the dominant trait of international trade. Autarky, the
goal of gaining total economic self-sufficiency and freedom from reliance on
any other nation increasingly became the unstated policy of many governments.

     Nonetheless, production soon reached 1913 levels, currencies began to
stabilize by mid-decade, and the French finally recalled their troops from the
Ruhr. Most significantly, in September 1924 a commission under the leadership
of U.S. banker Charles Dawes formulated a more liberal reparations policy in
order to get the entire repayment cycle back into motion. Dawes' plan,
replaced in 1929 by the Young plan (named for its principal formulator, U.S.
businessman Owen Young), reduced installments and extended them over a longer
period. A loan of $200 million, mostly from the United States, was floated to
aid German recovery. The Berlin government resumed payments to the Allies, and
the Allies paid their debt installments to the United States - which in effect
received its own money back again.

     Prosperity of a sort returned to Europe. As long as the circular flow of
cash from the United States to Germany to the Allies to the United States
continued, the international monetary system functioned. The moment the cycle
broke down, the world economy headed for the rocks of depression. One economic
historian has written:

          In 1924-31 Germany drew some one thousand million pounds
          from abroad and the irony was that Germany, in fact, received
          far more in loans, including loans to enable her to pay interest
          on earlier loans than she paid out in reparations, thus gaining
          in the circular flow and re-equipping her industries and her
          public utilities with American funds in the processes in the
          1920s before repudiating her debts in the 1930s. ^6

[Footnote 6: Sidney Pollard, European Economic Integration, 1815-1970 (New
York: Harcourt Brace Jovanovich, 1974), p. 138.]

     The system broke down in 1928 and 1929 when U.S. and British creditors
needed their capital for investments in their own countries. Extensions on
loans, readily granted a year earlier were refused. Even before the U.S. stock
market crash on October 29, 1929, disaster was on the horizon.

     Few people in America could admit such a possibility during the decade,
however. The United States had become the commercial center of the world, and
its policies were central to the world's financial health. The United States
still had an internal market in the 1920s with a seemingly inexhaustible
appetite for new products such as radios, refrigerators, electrical
appliances, and automobiles. This expansion, based on consumer goods and
supported by a seemingly limitless supply of natural resources, gave the
impression of solid and endless growth.

     Tragically, the contradictions of the postwar economic structure were
making themselves felt. The cornerstones of pre-1914 prosperity - multilateral
trade, the gold standard, interchangeable currencies - were crumbling. The
policies of autarky, with their high tariff barriers to protect home products
against foreign competition, worked against international economic health.
Ironically, the United States led the way toward higher tariffs, and other
nations quickly retaliated. American foreign trade seriously declined, and the
volume of world trade decreased.

     There were other danger signals. Europe suffered a population decline.
There were 22 million fewer people in the 1920s in the western part of the
continent than had been expected. ^7 The decrease in internal markets affected
trade, as did the higher external barriers. Around the globe, the agricultural
sector suffered from declining prices during the 1920s. At the same time that
farmers received less for their products, they had to pay more to live - a
condition that afflicted peasants in Europe and Asia and farmers and ranchers
in the United States.

[Footnote 7: Landes, The Unbound Prometheus, p. 365.]

     In the hopes of reaching an expanding market, many food raisers around
the world borrowed money to expand production at the beginning of the decade.
Many farmers went bankrupt as they could not keep up with payments on their
debts. The food surplus benefitted consumers, but across the world
agricultural interests suffered. Tariff barriers prevented foodstuffs from
circulating to the countries where hunger existed. By the end of the decade,
people in the Orient were starving, while wheat farmers in Whitman County,
Washington, dumped their grain into the Snake River and coffee growers in
Brazil saw their product burned to fuel steam locomotives. The countryside
preceded the cities into the economic tragedy. ^8

[Footnote 8: Pollard, European Economic Integration, 1815-1970, pp. 140-142.]

The Great Crash

     Because of America's central position in the world economy, any
development, positive or negative, on Wall Street reverberated across the
globe. The United States, with roughly 3 percent of the world's population,
produced 46 percent of the globe's industrial output. The country was
ill-equipped to use its new-found power. Its financial life in the 1920s was
dominated by the activities of daring and sometimes unscrupulous speculators
who made the arena of high finance a precarious and exciting world of its own.
This world, however, was not dominated by businessmen pursuing long-term
stability. Their blind rush for profit led to America's crash, which in turn
sparked a world disaster. ^9

[Footnote 9: William R. Keylor, The Twentieth Century World (Oxford: Oxford
Univ. Press, 1984), p. 133.]

     Even before the stock market crash, Wall Street had been showing signs of
distress such as capital shortfalls, overly large inventories, and
agricultural bankruptcies. But nothing prepared financiers for the disaster
that struck on October 29, 1929 - Black Thursday. By noon, Wall Street was
caught in a momentum of chaotic fear. The initial hemorrhage of stock values
stopped by the end of the trading session, but the damage was done.

     John Kenneth Galbraith has written: "On the whole, the great stock market
crash can be much more readily explained than the depression that followed
it." ^10 Overspeculation, loose controls, dishonest investors, and a loss of
confidence in the "ever-upward" market trend can be identified as causes for
the crash. Further causes can be traced to the inequitable distribution of
wealth, with the farmers and workers left outwhile the top 3 percent grew
incredibly rich and irresponsible. Industrial overexpansion was fueled by
speculators buying stock on the margin, with insufficient cash backing for the
investments. In addition, the government's hands-off policies permitted
massive abuses to take place unchecked.

[Footnote 10: John Kenneth Galbraith, The Great Crash 1929 (Boston: Houghton
Mifflin Co., 1961), p. 173.]

     The international impact of the crash can be explained by the involvement
of investors and bankers from a number of countries in the U.S. market, the
interdependent world economic structure, the peculiar Allied debt and
reparations structure, the growing agricultural crisis, and the inadequate
banking systems of the world.

     Some economic historians believe that the cycle of highs and lows hit a
particularly vicious low point in 1929. Crashes had occurred before, but never
with such widespread repercussions over such a long period of time. In the
United States, stock prices declined one-third overall within a few weeks,
wiping out fortunes, shattering confidence in business, and destroying
consumer demand. The disaster spread worldwide as American interests demanded
payment on foreign loans and imports decreased. The Kredit-Anstalt of Vienna
did not have enough money to fill demands for funds from French banks and
failed in 1931. This set in motion a domino-like banking crisis throughout
Europe. Forecasts by Washington politicians and New York financiers that the
worst was over and that the world economy was fundamentally sound after a
"technical readjustment" convinced nobody. There would be no easy recovery.

The World Depression

     By 1932 the value of industrial shares had fallen close to 60 percent on
the New York and Berlin markets. Unemployment doubled in Germany, and 25
percent of the labor force was out of work in the United States. In nation
after nations, industry declined, prices fell, banks collapsed, and economies
stagnated. In the western democracies the depression contributed even more to
the feelings of uneasiness that had existed since 1918. In other countries,
the tendency to seek authoritarian solutions became even more pronounced.
Throughout the world people suffered from lowered standards of living,
unemployment, hunger, and fear of the future.

     The middle classes on the continent, which had suffered from inflation
during the 1920s, became caught in a whiplash effect during the depression.
Adherence to old liberal principles collapsed in the face of economic
insecurity, and state control of the economies increased. Governments raised
tariffs to restrict imports and used command economies, an expedient usually
reserved for wartime. As conditions deteriorated, fear caused most governments
to look no farther than their own boundaries. Under the competing systems of
autarky, each nation tried to increase exports and decrease imports.

     After almost a century of free trade, modified by a comparative few
protective duties levied during and after World War I, Great Britain finally
enacted a high tariff in 1932 with provisions to protect members of its
empire. In the United States the Hawley-Smoot Act of 1930 increased the value
added duty to 50 percent on a wide variety of agricultural and manufactured
imports.

     Another technique to increase exports at the expense of others was to
depreciate a nation's currency - reduce the value of its money. When Japan
depreciated the yen, for example, U.S. dollar or British pound could buy more
Japanese goods. In effect, lowering the yen reduced the price of Japanese
exports. In most cases, however, devaluation brought only a temporary trade
advantage. Other nations could play the same game, as the United States did in
1934 when it reduced the amount of gold backing for the dollar by 40 percent,
thus going off the gold standard.

     The debt problem that grew out of the war worsened during the depression.
In 1931, U.S. president Herbert Hoover gained a one-year moratorium on all
intergovernmental debts. The next year at the Lausanne Conference, German
reparations payments were practically canceled in the hope that the United
States would make corresponding concessions in reducing war debts. The
Americans, for a variety of domestic financial and political reasons, refused
to concede that there was a logical connection between reparations and war
debts. As the depression deepened, the debtors could not continue their
payments. France refused outright in 1932; Germany after 1933 completely
stopped paying reparations; Britain and four other nations made token payments
for a time and then stopped entirely in 1934. Only Finland continued to meet
its schedule of payments.

     Individual families had as many, or more, problems in paying their bills
as did the governments of the world. Factories closed down and laid off their
workers. Harvests rotted in the fields as the price of wheat fell to its
lowest figure in 300 years. The lives of the cacao grower in the African Gold
Coast, the coffee grower in Brazil, and the plantation worker in the Dutch
East Indies were as affected as those of the factory worker in Pittsburgh,
Lille, or Frankfurt.

     The 1929 crash occurred in an economic framework still suffering from the
dislocations of World War I. It began a downturn in the world economy that
would not end until the world armed for another global conflict. Whether the
depression ended because of World War II or whether the world would have
eventually come out of the low part of the cycle is a question that will
always be debated. The weaknesses in American stock market operations were by
and large addressed in a series of reforms.

     From the major banks to the soup lines in villages, the depression had
profound implications for politics. The combination of inflation and
depression threatened representative government. Unemployed and starving
masses were tempted to turn to dictators who promised jobs and bread. The
hardships of economic stability, even in those countries where the democratic
tradition was strongest, led to a massive increase in state participation in
the daily life of the individual.