During World
War I, both sides had been reluctant to finance the war by raising taxes. Consequently, the only option for financing
was to sell government debt. In France,
for example, no new taxes were imposed until 1916, and the war debt reached
astronomical proportions. As early as
December 1914, the French government had an outstanding floating debt of over
US $750 million. In November 1915, the
French government floated its first long term debt — in the amount of US $3
billion.
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| Lloyd George: Hang the Kaiser, stick Germany, and partition Ireland. |
In spite of the
huge burden of debt, the currencies on either side could have recovered, given
the chance. The problem was that they
were not given the chance. The most
serious problem with recovery was that an easy solution seemed ready to
hand: Why should the “victorious” Allies
trouble themselves with the pain and austerity of restoring their currencies
and retiring their respective war debts, when Germany and Austria-Hungary could
be charged with indemnities that would pay for the whole cost of the war? This attitude was epitomized in the British “Khaki
Election” of December 14, 1918. Lloyd
George’s campaign theme was, “Hang the Kaiser and let Germany pay the cost of
the war.” This appealed to the people of
Britain, France, Belgium and Italy.
Tired of war, they wanted to lay the blame on someone, and were out for
revenge. If any politicians saw the
danger, they remained silent.
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| J.M. Keynes: ignored the one time he was right. |
To his credit,
the economist John Maynard Keynes saw the danger, and warned against it. In his book, The Economic Consequences of the Peace (1919), he detailed the
problems with the reparations program as proposed. For once exercising common sense, he pointed
out that it was economic nonsense to require huge reparations payments, while,
at the same time, removing the means that would make payment possible. The fact that the amount of the reparations
could not be paid in the time given even with a fully functional peace time
economy was also emphasized. Ironically,
Keynes, whose programs and policies were to be taken as gospel by later
generations of politicians when they could do the most damage, was ignored when
he could have done the most good.
Making the
reparations payments would have required annual installments by Germany and
Austria-Hungary totaling about six times the annual debt burden of the
relatively untouched United States.
Economists who pointed out the impossibility of making the required
payments were regarded as “defeatists.”
The politicians had promised their constituents huge payments and a free
ride, and were reluctant to reverse themselves, even in the face of
reality. This created a national "entitlement mentality," which resulted in people not rebuilding out of their own resources, but expecting the reparations to do the trick. When the demanded payments
could not be generated, the restoration of the Allied currencies, which had
been tied to the anticipated stream of wealth, faltered. Depreciation set in, and proceeded to such a
point that recovery to pre-war levels was impossible even if the proper
measures had finally been put into place.
It was not
until the late 1920s that the Allies faced reality. The members of the Latin Monetary Union were
particularly hard hit. The Union was
forced to dissolve, as was, for similar reasons, the Scandinavian Monetary
Union. France was forced to create a new
currency, based on a Franc of 3.9 cents.
Belgium put a new currency, the “Belga” of five Belgian Francs into
place, worth 13 cents (making the revalued Belgian Franc worth 2.6 cents). Italy’s new Lira was worth 5.2 cents. All of these were down from their pre-war
Union valuation of 19.3 cents.
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