Another very interesting perspective on the social and economic implications of the 1920's and 1930's is Karl Polanyi's The Great Transformation - the Political and Economic Origins of Our Time, written by Economic Historian Karl Polanyi in 1944. His book can be found at Amazon at the following link:
amazon.com
Polanyi presents the Great Depression as an event embodying the fundamental "breakage" of liberal free market economy of the late nineteenth century. Interestingly, the "Great Transformation" he refers to is none other than the collapse of the gold standard in the early 1930's, which laid bare the problems of the monetary system upon which free market capitalism was based. And in Polanyi's view, it is the fundamental rupture in free-market capitalism that gave rise to alternative economic and social structures - primarily Socialism, Communism, and Fascism.
Significantly, Polyani examines the "social" nature of the liberal capitalist economy, and suggests that the 1930's made it very clear that the economy was not simply a financial and economic system, but deeply an underpinning of the social fabric.
Polyani's views on the "Great Transformation" fit very well with a K-wave type analysis. His analysis provides interesting food for thought as to what social, political, and economic transformations the relative decline of the U.S. & Western Europe as dominant world powers, and the rise of Asia, and in particular China, will bring. Interestingly, Polanyi's comments on Germany being well positioned to perceive the limitations of the Anglo-originated free market economy could well be applied to China and even Middle Eastern powers in contrast to the U.S. for instance today.
The following passages are taken from Chapter 2: "Conservative Twenties, Revolutionary Thirties":
The breakdown of the international gold standards was the invisible link between the disintegration of world economy since the turn of the century and the transformation of a whole civilization in the thirties. Unless the vital importance of this factor is realized, it is not possible to see rightly either the mechanism with railroaded Europe to its doom, or the circumstances which accounted for the astounding fact that the forms and contents of a civilization should rest on so precarious foundations.
The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system; the awful suddenness of the transformation took the world completely by surprise. And yet the gold standard was the only remaining pillar of the traditional world economy; when it broke, the effect was bound to be instantaneous. To liberal economists the gold standard was a purely economic institutions; they refused even to consider it a part of a social mechanism. Thus it happened that the democratic countries were the last to realize the true nature of the catastrophe and the slowest to counter its effects ...
The transformation came on even more abruptly than is usually realized. World War I and the postwar revolutions still formed part of the nineteenth century. The conflict of 1914-1918 merely precipitated and immeasurably aggravated a crisis that it did not create. But the roots of the dilemma could not be discerned at the time; and the horror and devastations of the Great War seemed to the survivors the obvious source of the obstacles to international organization that had so unexpectedly emerged. ... In reality, the postwar obstacles to peace and stability derived from the same sources from with the Great War itself had sprung. The dissolution of the system of world economy which had been in progress since 1900 was responsible for the political tension which exploded in 1914; the outcome of the War and the Treaties had eased that tension superficially by eliminating German competition while aggravating the causes of tensions and thereby vastly increasing the political and economic impediments to peace.
Politicaly, the Treaties harbored a fatal contradiction. Through the unilateral disarmament of the defeated nations they forestalled any reconstruction of the balance-of-power system, since power is an indispensable requisite of such a system. ... Europe was now without any political system whatever. A bare status quo such as this can last only as long as the physical exhaustion of the parties lasts; no wonder a return to the nineteenth century system appeared the only way out.
... The intent of that decade [the 1920's] was deeply conservative and expressed the almost universal conviction that only the reestablishment of the pre-1914 system, "this time on solid foundations," could restore peace and prosperity. Indeed, it was out of this failure of this effort to return to the past that the transformation of the thirties sprang. Spectacular though the revolutions and counter-revolutions of the post-war decade were, they represented either mere mechanical reactions to military defeat, or, at most, a re-enacting of the familiar liberal and constitutionalist drama of Western civilization on the Central and Eastern European scene; it was only in the thirties that entirely new elements entered into the pattern of Western history.
...
In the early thirties, change set in with abruptness. Its landmarks were the abandonment of the gold standard by Great Britain; the Five-Year Plans in Russia; the launching of the New Deal; the National Socialist Revolution in Germany; the collapse of the League [of Nations] in favor of autarchist empires. ...
The root cause of the crisis, we submit, was the threatening collapse of the international economic system. ... This became apparent in the twenties when there was hardly an internal crisis in Europe that did not reach its climax on an issue of external economy. Students of politics now grouped the various countries, not according to continents, but according to the degree of their adherence to a sound currency. Russia had astonished the world by the destruction of the rouble, the value of which was reduced to nothing by the simple means of inflation. Germany repeated this desperate feat in order to give lie to the Treaty; the expropriation of the rentier class, which followed in its wake, laid the foundation for the Nazi revolution. The prestige of Geneva rested on its success in helping Austria and Hungary to restore their currencies, and Vienna became the Mecca of liberal economists on account of a brilliantly successful operation on Austria's krone which the patient, unfortunately, did not survive [hmm, does this not sound not a little like Argentina of recent times?]. In Bulgaria, Greece, Finland, Latvia, Lithuania, Esthonia, Poland, and Roumania the restoration of the currency provided counterrevolution with a claim to power. In Belgium, France, and England the Left was thrown out of office in the name of sound monetary standards. An almost unbroken sequence of currency crises linked the indigent Balkans with the affluent United States through the elastic band of an international credit system, which transmitted the strain of the imperfectly restored currencies, first, from Eastern Europe to Western Europe, then from Western Europe to the United States. Ultimately, the United States itself was engulfed by the effects of the premature stabilization of European currencies. The final breakdown had begun.
The first shock occurred within the national spheres. Some currencies, such as the Russian, the German, the Austrian, the Hungarian, were wiped out within a year. Apart from the unprecedented rate of change in the value of currencies there was the circumstance that this change happened in a completely monetized economy. ... Internally and externally alike, dwindling currencies spelled disruption. ... The intellectual middle class was literally pauperized, financial sharks heaped up revolting fortunes.
"Flight of Capital" was a novum. Neither in 1848, nor in 1866, nor even in 1871 was such an event recorded. And yet, its vital role in the overthrow of the liberal governments of France in 1925, and again in 1938, as well as in the development of fascist movement in Germany in 1930, was patent.
Currency has become the pivot of national politics. Under a modern money economy nobody could fail to experience daily the shrinking or expanding of the financial yardstick; populations became currency-conscious; the effect of inflation on real income was discounted in advance by the masses; men and women everywhere appeared to regard stable money as the supreme need of human society. ...
Belief in the gold standard was the faith of the age. ... the belief was the same, namely, that bank notes have value because they represent gold. Whether gold itself had value for the reason that it embodies labor, as the socialists held, or for the reason that it is useful and scarce, as the orthodox doctrine ran, made for once no difference. The war between heaven and hell ignored the money issue … where Ricardo and Marx were at one, the nineteenth century knew not doubt. Bismarck and Lassale, John Stuart Mill and Henry George, Phillip Snowden and Calvin Coolridge, Mises and Trotsky equally accepted the faith. … It would be hard to find any divergence between utterances of Hoover and Lenin, Churchill and Mussolini, on this point. Indeed, the essentiality of the gold standard to the functioning of the international economic system of the time was the one and only tenet common to men of all nations and all classes, religious determinations, and social philosophies. It was the invisible reality to which the will to live could cling, when mankind braced itself to the task of restoring its crumbling existence.
The effort, which failed, was the most comprehensive the world had ever seen. The stabilization of the all-but-destroyed currencies in Austria, Hungary, Bulgaria, Finland, Romania, or Greece was not only an act of faith on the part of these small and weak countries, which literally starved themselves to reach the golden shores, but it also put their powerful and wealthy sponsors – the Western European victors – to a severe test. As long as the currencies of the victors fluctuated, the strain did not become apparent; they continued to lend abroad as before the War and thereby helped to maintain the economies of the defeated nations. But when Great Britain and France reverted to gold, the burden on their stabilized exchanges began to tell. Eventually, a silent concern for the safety of the pound entered into the position of the leading gold country, the United States. This preoccupation which spanned the Atlantic brought America unexpectedly into the danger zone. This point seems technical, but must be understood. American support of the pound sterling in 1927 implied low rates of interest in New York in order to avert big movements of capital from London to New York. The Federal Reserve Board accordingly promised the Bank of England to keep its rate low; but presently America herself was in need of high rates as her own price system began to be perilously inflated (this in fact was obscured by the existence of a stable price level, maintained in spite of tremendously diminished costs). When the usual swing of the pendulum after seven years of prosperity brought on the long overdue slump in 1929, matters were immeasurably aggravated by the existing state of cryptoinflation. Debtors, emaciated by deflation, lived to see the inflated creditors collapse. It was a portent. America, by an instinctive gesture of liberation, went off gold in 1933, and the last vestige of the traditional world economy vanished. Although hardly anyone discerned the deeper meaning of the event at the time, history almost at once reversed its trend.
For over a decade the restoration of the gold standard had been the symbol of world prosperity. Innumerable conferences from Brussels to Spa and Geneva, from London to Locarno and Lausanne met in order to achieve the political preconditions of stable currencies.
… This trend was abruptly reversed with the final fall of the gold standard. The sacrifices that were made to restore it had now to be made once more in order that we might live without it. The same institutions which were designed to constrict life and trade in order to maintain a system of stable currencies were now used to adjust industrial life to the permanent absence of such a system. … Yet the intent was now the opposite; in the countries that had suffered the most during the long-drawn fight for the unattainable, titanic forces were released on the rebound. … The snapping of the golden thread was the signal for a world revolution.
But the failure of the gold standard did hardly more than set the date of an event which was too big to have been caused by it. No less than a complete destruction of the national institutions of nineteenth century society accompanied the crisis in a great part of the world, and everywhere these institutions were changed and reformed almost out of recognition. The liberal state was in many countries replaced by totalitarian dictatorships, and the central institution of the century – production based on free markets – was superceded by new forms of economy. While great nations recast the very mold of their thought and hurled themselves into wars to enslave the world in the name of unheard-of conceptions of the nature of the universe, even greater nations rushed to the defense of freedom which acquired an equally unheard-of meaning at their hands. The failure of the international system, though it triggered the transformation, could certainly not have accounted for its depth and content. …
It was not by accident that the transformation was accompanied by wars on an unprecedented scale. History was geared to social change; the fate of nations was linked to their role in an institutional transformation. Such a symbiosis is no exception in history; though national groups and social institutions have origins of their own, they tend to hitch on to one another in their struggle for survival. A famous instance of such a symbiosis linked capitalism and the seaboard nations of the Atlantic. The Commercial Revolution, so closely connected with the rise of capitalism, became the vehicle to power for Portugal, Spain, Holland, France, England, and the United States, each of them benefiting from the chances offered by that broad and deep-seated movement, while, on the other hand, capitalism itself was spreading over the planet through the instrumentality of these rising powers.
The law applied also in the reverse. A nation may be handicapped in its struggle for survival by the fact that its institutions, or some of them, belong to a type that happens to be on the down grade – the gold standard in World War II was such an instance of such an antiquated outfit. Countries, on the other hand, which, for reasons of their own, are opposed to the status quo, would be quick to discover the weaknesses of the existing institutional order and to anticipate the creation of institutions better adapted to their interests …
Thus Germany, once defeated, was in the position to recognize the hidden shortcomings of the nineteenth century order, and to employ this knowledge to speed up the destruction of that order. A kind of sinister intellectual superiority accrued to those of her statesmen in the thirties who turned their minds to this task of disruption, which often extended to the development of new methods of finance, trade, war, and social organization …
… It will be easy to see in what manner Germany and Russia, Great Britain and the United States, as power units, were helped or hampered by their relation to this underlying social process. But the same is true of the social process itself: fascism and socialism found a vehicle in the rise of individual Powers which helped to spread their creed. Germany and Russia respectively became the representatives of fascism and socialism in the world at large.
… This leads up to our thesis which still remains to be proven: that the origins of the cataclysm lay in the utopian endeavor of economic liberalism to set up a self-regulating market system. Such a thesis seems to invest that system with almost mythical powers; it implies no less than that the balance of power, the gold standard, and the liberal state, those fundamentals of the civilization of the nineteenth century, were in the last resort, all shaped by one common matrix, the self-regulating market.
… the peculiarity of the civilization the collapse of which we have witnessed was precisely that it rested on economic foundations. Other societies and other civilizations, too, were limited by the material conditions of their existence …All types of societies are limited by economic factors. Nineteenth century civilization alone was economic in a different and distinctive sense, for it chose to base itself on a motive only rarely acknowledged as valid in the history of human societies, and certainly never before raised to the level of a justification of action and behavior in everyday life, namely, gain. The self-regulating market system as uniquely derived from this principle.
The mechanism which the motive of gain set in motion was comparable in effectiveness only to the most violent outburst of religious fervor in history. Within a generation the whole human world was subjected to its undiluted influence. As everybody knows, it grew to maturity in England, in the wake of the Industrial Revolution, during the first half of the nineteenth century. It reached the Continent and America about fifty years later. … For the origins of the cataclysm we must turn to the rise and fall of market economy.
Market society was born in England – yet it was on the Continent that its weakness engendered the most tragic complications. In order to comprehend German fascism, we must revert to Ricardian England. The nineteenth century, as cannot be overemphasized, was England’s century. The Industrial Revolution was an English event. Market economy, free trade, and the gold standard were English inventions. These institutions broke down in the twenties everywhere – in Germany, Italy, or Austria the event was merely more political and dramatic. But whatever the scenery and the temperature of the final episodes, the long-run factors which wrecked that civilization should be studied in the birthplace of the Industrial Revolution, England.
So ends Chapter 2 of Polyani's book. The rest of his book is significantly a discussion of the origins and history of economic liberalism/lassez-faire capitalism, and a history of the 19th century seen through the eyes of economic liberalism, and the social, political, and economic challenges it faced. Later in the book, Polyani discusses the different approaches the U.S. and various Western European nations took to dealing with "the Great Transformation" as it manifested itself in the 1930's.
Interesting reading.
Regards,
Glenn |
