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

Unfortunately, this postwar inflation, which could have accomplished much good (by increasing output of real wealth) was wasted (by increasing prices of existing goods) and had evil results (by destroying capital accumulations and savings, and overturning economic class lines). This failure was caused by the fact that the inflation, though unwanted everywhere, was uncontrolled because few persons in positions of power had the courage to take the steps necessary to curtail it. In the defeated and revolutionary countries (Russia, Poland, Hungary, Austria, and Germany), the inflation went so far that the former monetary units became valueless, and ceased to exist. In a second group of countries (like France, Belgium, and Italy), the value of the monetary unit was so reduced that it became a different thing, although the same name was still used. In a third group of countries (Britain, the United States, and Japan), the situation was kept under control.

As far as Europe was concerned, the intensity of the inflation increased as one moved geographically from west to east. Of the three groups of countries above, the second (moderate inflation) group was the most fortunate. In the first (extreme inflation) group the inflation wiped out all public debts, all savings, and all claims on wealth, since the monetary unit became valueless. In the moderate-inflation group, the burden of the public debt was reduced, and private debts and savings were reduced by the same proportion. In the United States and Britain the effort to fight inflation took the form of a deliberate movement toward deflation. This preserved savings but increased the burden of the public debt and gave economic depression.

The Period of Stabilization, 1922-1930

As soon as the war was finished, governments began to turn their attention to the problem of restoring the prewar financial system. Since the essential element in that system was believed to be the gold standard with its stable exchanges, this movement was called “stabilization.” Because of their eagerness to restore the prewar financial situation, the “experts” closed their eyes to the tremendous changes which had resulted from the war. These changes were so great in production, in commerce, and in financial habits that any effort to restore the prewar conditions or even stabilize on the gold standard was impossible and inadvisable. Instead of seeking a financial system adapted to the new economic and commercial world which had emerged from the war, the experts tried to ignore this world, and established a financial system which looked, superficially, as much like the prewar system as possible. This system, however, was not the prewar system. Neither was it adapted to the new economic conditions. When the experts began to have vague glimmerings of this last fact, they did not begin to modify their goals, but insisted on the same goals, and voiced incantations and exhortations against the existing conditions which made the attainment of their goals impossible.

These changed economic conditions could not be controlled or exorcised by incantations. They were basically not results of the war at all, but normal outcomes of the economic development of the world in the nineteenth century. All that the war had done was to speed up the rate of this development. The economic changes which in 1925 made it so difficult to restore the financial system of 1914 were already discernible in 1890 and clearly evident by 1910.

The chief item in these changes was the decline of Britain. What had happened was that the Industrial Revolution was spreading beyond Britain to Europe and the United States and by 1910 to South America and Asia. As a result, these areas became less dependent on Britain for manufactured goods, less eager to sell their raw materials and food products to her, and became her competitors both in selling to and in buying from those colonial areas to which industrialism had not yet spread. By 1914 Britain’s supremacy as financial center, as commercial market, as creditor, and as merchant shipper was being threatened. A less obvious threat arose from long-run shifts in demand—shifts from the products of heavy industry to the products of more highly specialized branches of production (like chemicals), from cereals to fruits and dairy products, from cotton and wool to silk and rayon, from leather to rubber, and so on. These changes presented Britain with a fundamental choice—either to yield her supremacy in the world or reform her industrial and commercial system to cope with the new conditions. The latter was difficult because Britain had allowed her industrial system to become lopsided under the influence of free trade and international division of labor. Over half the employed persons in Britain were engaged in the manufacture of textiles and ferrous metals. Textiles accounted for over one-third of her exports, and textiles, along with iron and steel, for over one-half. At the same time, newer industrial nations (Germany, the United States, and Japan) were growing rapidly with industrial systems better adapted to the trend of the times; and these were also cutting deeply into Britain’s supremacy in merchant shipping.

At this critical stage in Britain’s development, the World War occurred. This had a double result as far as this subject is concerned. It forced Britain to postpone indefinitely any reform of her industrial system to adjust it to more modern trends; and it speeded up the development of these trends so that what might have occurred in twenty years was done instead in five. In the period 1910-1920, Britain’s merchant fleet fell by 6 percent in number of vessels, while that of the United States went up 57 percent, that of Japan up 130 percent, and that of the Netherlands up 58 percent. Her position as the world’s greatest creditor was lost to the United States, and a large quantity of good foreign credits was replaced by a smaller amount of poorer risks. In addition, she became a debtor to the United States to the amount of over $4 billion. The change in the positions of the two countries can be summarized briefly. The war changed the position of the United States in respect to the rest of the world from that of a debtor owing about $3 billion to that of a creditor owed $4 billion. This does not include intergovernmental debts of about $10 billion owed to the United States as a result of the war. At the same time, Britain’s position changed from a creditor owed about $18 billion to a creditor owed about $13.5 billion. In addition, Britain was owed about $8 billion in war debts from her Allies and an unknown sum in reparations from Germany, and owed to the United States war debts of well over $4 billion. Most of these war debts and reparations were sharply reduced after 1920, but the net result for Britain was a drastic change in her position in respect to the United States.

The basic economic organization of the world was modified in other ways. As a result of the war, the old organization of relatively free commerce among countries specializing in different types of production was replaced by a situation in which a larger number of countries sought economic self-sufficiency by placing restrictions on commerce. In addition, 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 of that capacity. And, finally, the more backward areas of Europe and the world had been industrialized to a great degree and were unwilling to fall back to a position in which they would obtain industrial products from Britain, Germany, or the United States in return for their raw materials and food. This refusal was made more painful for both sides by the fact that these backward areas had increased their outputs of raw materials and food so greatly that the total could hardly have been sold even if they had been willing to buy all their industrial products from their prewar sources. These prewar sources in turn had increased their industrial capacity so greatly that the product could hardly have been sold if they had been able to recapture entirely all their prewar markets. The result was a situation where all countries were eager to sell and reluctant to buy, and sought to achieve these mutually irreconcilable ends by setting up subsidies and bounties on exports, tariffs, and restrictions on imports, with disastrous results on world trade. 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 the 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 a reform was rejected by the ruling groups in both “advanced” and “backward” countries, so that this solution was reached only to a relatively small degree in a relatively few countries (chiefly the United States and Germany in the period 1925-1929).