Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

Germany begged for relief on her reparations payments, but her creditors were reluctant to act unless they obtained similar relief on their war-debt payments to the United States. The United States had an understandable reluctance to become the end of a chain of repudiation, and insisted that there was no connection between war debts and reparations (which was true) and that the European countries should be able to pay war debts if they could find money for armaments (which was not true). When Secretary of the Treasury Mellon, who was in Europe, reported to President Hoover that unless relief was given to Germany immediately on her public obligations, the whole financial system of the country would collapse with very great loss to holders of private claims against Germany, the President suggested a moratorium on intergovernmental debts for one year. Specifically, America offered to postpone all payments owed to it for the year following July 1, 1931, if its debtors would extend the same privilege to their debtors.

Acceptance of this plan by the many nations concerned was delayed until the middle of July by French efforts to protect the payments on commercialized reparations and to secure political concessions in return for accepting the moratorium. It sought a renunciation of the Austro-German customs union, suspension of building on the second pocket battleship, acceptance by Germany of her eastern frontiers, and restrictions on training of “private” military organizations in Germany. These demands were rejected by the United States, Britain, and Germany, but during the delay the German crisis became more acute. The Reichsbank had its worst run on July 7th; on the following day the North German Wool Company failed with a loss of 200 million marks; this pulled down the Schroder Bank (with a loss of 24 million marks to the city of Bremen where its office was) and the Darmstadter Bank (one of Germany’s “Big Four Banks”) which lost 20 million in the Wool Company. Except for a credit of 400 million marks from the Bank for International Settlements and a “standstill agreement” to renew all short-term debts as they came due, Germany obtained little assistance. Several committees of international bankers discussed the problem, but the crisis became worse, and spread to London.

By November 1931 all the European Powers except France and her supporters were determined to end reparations. At the Lausanne Conference of June 1932 German reparations were cut to a total of only 3 billion marks, but the agreement was never ratified because of the refusal of the United States Congress to cut war debts equally drastically. Technically this meant that the Young Plan was still in force, but no real effort was made to restore it and, in 1933, Hitler repudiated all reparations. By that date, reparations, which had poisoned international relations for so many years, were being swallowed up in other, more terrible, problems.

Before we turn to the background of these other problems, we should say a few words about the question of how much was paid in reparations or if any reparations were ever paid at all. The question arose because of a dispute regarding the value of the reparations paid before the Dawes Plan of 1924. From 1924 to 1931 the Germans paid about 10.5 billion marks. For the period before 1924 the German estimate of reparations paid is 56,577 billion marks, while the Allied estimate is 10,426 billion. Since the German estimate covers everything that could possibly be put in, including the value of the naval vessels they themselves scuttled in 1918, it cannot be accepted; a fair estimate would be about 30 billion marks for the period before 1924 or about 40 billion marks for reparations as a whole.

It is sometimes argued that the Germans really paid nothing on reparations, since they borrowed abroad just as much as they ever paid on reparations and that these loans were never paid. This is not quite true, since the total of foreign loans was less than 19 billion marks, while the Allies’ own estimate of total reparations paid was over 21 billion marks. However, it is quite true that after 1924 Germany borrowed more than it paid in reparations, and thus the real payments on these obligations were all made before 1924. Moreover, the foreign loans which Germany borrowed could never have been made but for the existence of the reparations system. Since these loans greatly strengthened Germany by rebuilding its industrial plant, the burden of reparations as a whole on Germany’s economic system was very slight.

VII FINANCE, COMMERCIAL POLICY, AND BUSINESS ACTIVITY, 1897-1947

Reflation and Inflation, 1897-1925;

The Period of Stabilization, 1922-1930

The Period of Deflation, 1927-1936

Reflation and Inflation, 1933-1947

Reflation and Inflation, 1897-1925

We have already seen that valiant efforts were made in the period 1919-1929 to build up an international political order quite different from that which had existed in the nineteenth century. On the basis of the old order of sovereignty and international law, men attempted, without complete conviction of purpose, to build a new international order of collective security. We have seen that this effort was a failure. The causes of this failure are to be found, to some degree, in the fact that these statesmen had built the new order in a far from perfect fashion, with inadequate understanding, improper plans, poor materials, and faulty tools. But the failure can be attributed to a much greater degree to the fact that the resulting political structure was exposed to the stress of an economic storm which few had foreseen. Collective security was destroyed by the world economic depression more than by any other single cause. The economic depression made possible the rise to power of Hitler, and this made possible the aggressions of Italy and Japan and made Britain adopt the policy of appeasement. For these reasons, 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, commerce, and business activity, of industrial organization, and of agriculture. The first three of these will be considered in this chapter from the beginning of the twentieth century to the establishment of the pluralist economy about 1947.

The whole of this half-century may be divided into six subdivisions, as follows:

1. Reflation, 1897-1914

Inflation, 1914-1925

Stabilization, 1922-1930

Deflation, 1927-1936

Reflation, 1933-1939

Inflation, 1939-1947

These periods have different dates in different countries, and thus overlap if we take the widest periods to include all important countries. But in spite of the difference in dates, these periods occurred in almost every country and in the same order. It should also be pointed out that these periods were interrupted by haphazard secondary movements. Of these secondary movements, the chief were the depression of 1921-1922 and the recession of 1937-1938, both periods of deflation and declining economic activity.

Prices had been rising slowly from about 1897 because of the increased output of gold from South Africa and Alaska, thus alleviating the depressed conditions and agricultural distress which had prevailed, to the benefit of financial capitalists, from 1873. The outbreak of war in 1914 showed these financial capitalists at their worst, narrow in outlook, ignorant, and selfish, while proclaiming, as usual, their total devotion to the social good. They generally agreed that the 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 role of money on the part of the very persons who were reputed to be experts on the subject. Wars, as events have proved since, are not fought with gold or even with money, but by the proper organization of real resources.