THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Thursday, July 14, 2016

Future Schacht, IV: War Financing

After the Great War, as World War I was called before 1939, the Allies were bent on revenge.  The war had begun over the issue of Serbian interference in the internal affairs of Austria, the assassination of Archduke Francis Ferdinand, heir to the Austrian throne with Serbian aid and complicity, and the subsequent refusal of Serbia to make reparations . . . which would, admittedly, have involved a virtual takeover of the country by Austria.
Franz Joseph of Austria-Hungary
Other combatants had immediately been drawn into the war because of treaty obligations.  Russia, the immense but sleepy empire, just beginning to settle down after the social and political chaos caused by its loss to Japan in 1905 (and certainly in no condition to fight another war) considered itself Serbia’s protector.  Germany had traditional ties with Austria, although, in light of the activities of Prussia throughout the nineteenth century, relations were not the friendliest.
Bound by an intricate network of treaties, both public and secret, within hours of the Russian order for mobilization, France and Great Britain declared war on Austria and Germany.  On the other side, Germany, Turkey and Austria returned the somewhat dubious compliment.  Each side thought that it could win in a matter of weeks, and, in spite of the mounting lists of dead and wounded unparalleled in history, continued to retain that belief throughout four years of war.
The United States eventually came into the war over the issue of unrestricted submarine warfare.  England regarded Belgium as a traditional ward.  She naturally viewed the German implementation of its “Schlieffen Plan,” which required the invasion of neutral Belgium in order to bypass French defenses and take Paris quickly, as a crime to be answered with a moral crusade.  Less than thirty years later, however, England was to threaten to invade equally neutral Ireland to acquire the use of Irish seaports.  The British government was only held back by the outrage such an act would have inspired in the United States, a necessary ally.
Kaiser Charles I/IV of Austria-Hungary
Most of the participants in the war became involved on the basis of principle, but continued in order to exact revenge.  Even Woodrow Wilson, who had cautioned everyone about the possibility of getting caught up in the frenzy, fell victim to war hysteria, refusing peace overtures from the new Austrian Emperor, Charles I/IV, and rudely rejecting mediation offers by Pope Benedict XV.
The result was that the Armistice, presumed simply to be the first step in restoring the pre-war status quo, became the prelude to the looting of Germany and Austria in revenge.  This completed economic devastation of Central Europe following fundamental errors made by the Reich in financing the war effort. 
To begin, the government made the decision to finance the war on debt instead of raising taxes.  This vastly increased the money supply backed by nothing more than the government’s promise to pay.  As Hjalmar Schacht explained,
One of Germany’s most far-reaching errors in the First World War was her mistaken fiscal policy.  She endeavored to meet the colossal costs of the war by an appeal to the self-sacrificing spirit of the people.
“I gave my gold for iron” was the slogan for the surrender of gold ornaments and jewelry.  “Invest in War Loan” ran the appeal to the patriotic sense of duty of all classes.  Issue after issue of War Loan was offered for subscription and transformed the greater part of German private fortunes into paper claims on the state.  Our enemies, especially Britain, took another line.  They met the cost of the war with taxes aimed primarily at those industries and groups to whom the war spelled prosperity.  Britain’s policy of taxation proved socially more equitable than Germany’s policy of war loans, which lost their value after the war was over and proved a bitter disappointment to the self-sacrificing investors.[1]
"The Old Wizard," Hjalmar Schacht
Creating “investments” that relied on the government’s promise to pay instead of the private sector’s ability to produce had a disastrous side-effect.  Just as today when gamblers on Wall Street are able to make enormous fortunes by dealing in the massive amounts of money created by the huge increase in government debt and taking advantage of the wild fluctuations on the secondary market without producing marketable goods and services, the German financial system took a heavy hit from speculators during the war.  As Schacht related,
The general distress and misery of the war years paved the way for a complete reconstruction of Germany’s social system.  In vain the banks did all they could to maintain the monetary system on lines which experience had shown to be commercially sound, decent and therefore socially acceptable.  The influence of the banks on the general economy declined in proportion as war profiteering began to flourish. . . . [W]ar profiteers . . . had a free hand.  To have friends at court among the appropriate military authorities meant, for shrewd speculators, an opportunity to effect large deliveries at enormous profits.
It wasn’t so much the big business firms that went in for profiteering, but predominantly the traders, the new-rich, the grabbers, sharks, the something-for-nothing type.  Anyone who had proved himself capable of building up and maintaining an industry, with all its economic fluctuations, even in peacetime, is less interested in colossal wartime profits than the good-for-nothings who image they can make their pile during the turbulent years of war.[2]
Kaiser Wilhelm II of Germany
The results were only to be expected: financial ruin for individuals, organizations, and the country as a whole, and widespread despair.  As Schacht recalled a conversation he had during the war with one of Germany’s leading businessmen in 1916,
Among the many serious businessmen who gave of their best may be cited Albert Ballin.  When I went to see him in his Hamburg office in 1916 and read the firm’s proud motto, My Field is the World, we were both inclined to wonder whether this motto would live up to its implication.  Ballin was confident.  He relied, as I myself did, on the common-sense economic outlook which would prevail, even if the war should not end in a decisive German victory.
Albert Ballin
“You’ll see, Herr Schacht, the businessman’s sound judgment will win through.  The wartime mania for destruction can be combatted only by general economic co-operation.  In wartime, feelings of hatred and revenge are rampant.  But when the ordeal is over, businessmen will once again be able to have their way.  Politicians can’t be so crazy as to perpetuate the miseries of war.”
Ballin was mistaken in his belief.  The politicians were crazy: businessmen never had a chance to speak their minds.  Ballin never got over his self-delusion.  A patriotic German Jew, he asked nothing better than that German achievement should contribute in economic co-operation with other countries to the advancement of the human race.  When he realized that his hopes were in vain he took his own life.[3]

[1] Hjalmar Horace Greeley Schacht, Confessions of “The Old Wizard.” Boston, Massachusetts: Houghton Mifflin Company, 1956, 131-132.
[2] Ibid.
[3] Ibid., 132-133.