Monetary Regime Transition – a Hypothesis – Part II
This post is a continuation from part I, which can be found at the following link:
Message 20281952
... to expand on a thesis suggested here:
Message 20277691
Continuing with excerpts from Carroll Quigley's Tragedy and Hope - A History of the World in our Time ...
Global Economic & Monetary Regime in Transition – WWI
The First World War was a catastrophe of such magnitude that, even today, the imagination has some difficulty grasping it. In the year 1916, in two battles (Verdun and the Somme) casualties of over 1,700,000 were suffered by both sides. … On all fronts in the whole war almost 13,000,000 men in the various armed forces died from wounds and disease. It has been estimated by the Carnegie Endowment for International Peace that the war destroyed over $400,000,000,000 of property at a time when the value of every object in France and Belgium was not worth over $75,000,000,000.
Obviously, expenditures of men and wealth at rates like these required a tremendous mobilization of resources throughout the world, and could not fail to have far-reaching effects on the patterns of thought and modes of action of peoples forced to undergo such a strain. Some states were destroyed or permanently crippled. There were profound modifications in finance, in economic life, in social relations, in intellectual outlook, and in emotional patterns. Nevertheless, two facts should be recognized. The war brought nothing really new into the world; rather it sped up processes of change which had being going on for a considerable period and would have continued anyway, with the result that changes which would have taken place over a period of thirty or even fifty years in peacetime were brought about in five years during the war. Also, the changes were much greater in objective facts and in the organization of society than they were in men’s ideas of these facts or organization. It was as if the changes were too rapid for men’s minds to accept them, or what was more likely, that men, seeing the great changes which were occurring on all sides, recognized them, but assumed that they were merely temporary wartime aberrations, and that, when peace came, they would pass away and everyone could go back to the slow, pleasant world of 1913. This point of view, which dominated the thinking of the 1920’s, was widespread and very dangerous. In their efforts to go back to 1913, men refused to recognize that the wartime changes were more or less permanent, and, instead of trying to solve the problems arising from these changes, set up a false façade of pretense [my comment – i.e. “non-reality”], painted to look like 1913, to cover up the great changes which had taken place. The, by acting as if this façade were reality [my comment: oh oh, here’s trouble …] and by neglecting the maladjusted reality which was moving beneath it, the people of the 1920’s drifted in a hectic world of unreality until the world depression of 1929-1935, and then the international crises which followed, tore away the façade and showed the horrible, long-neglected reality beneath it.
WWI – Credit Expansion & Currency Debasement
… each country suspended the gold standard at the outbreak of war. This removed the automatic limitation on the supply of paper money. Then each country proceeded to pay for the war by borrowing from the banks. The banks created the money which they lent by merely giving the government a deposit of any size against which the government could draw checks. The banks were no longer limited in the amount of credit they could create because they no longer had to pay out gold for checks on demand. Thus the creation of money in the form of credit by the banks was limited only by the demands of its borrowers. Naturally, as governments borrowed to pay for their needs, private businesses borrowed in order to be able to fill the government’s orders. The gold which could no longer be demanded merely rested in vaults …
Naturally, when the supply of money was increased in this fashion faster than the supply of goods, prices rose because a larger supply of money was competing for a smaller supply of goods. This effect was made worse by the fact that the supply of goods tended to be reduced by wartime destruction. … Since governments tried to reduce the supply of consumers’ goods while increasing the supply of the other two products [i.e. capital goods and munitions], the problem of rising prices (inflation) became acute]. At the same time the problem of public debt became steadily worse because governments were financing such a large part of their activities by bank credit. These two problems, inflation and public debt, continued to grow, even after the fighting stopped, because of the continued disruption of economic life and the need to pay for past activities. Only in the period 1920-1925 did these two stop increasing in most countries, and they remained a problem long after that.
… Since the middle classes of European society, with their bank savings, checking deposits, mortgages, insurance, and bond holdings, were the creditor class, they were injured and even ruined by the wartime inflation. In Germany, Poland, Hungary, and Russia, where the inflation went so far that the monetary unit became valueless by 1924, the middles classes were largely destroyed, and their members were driven to desperation or at least to an almost psychopathic hatred of the form of government or the social class that they believed to be responsible for their plight. Since the last stages of inflation which dealt the fatal blow to the middle classes occurred after the war rather than during it (in 1923 in Germany), this hatred was directed against the parliamentary government which were functioning after 1918 rather than against the monarchial governments which functioned in 1914-1918. In France and Italy, where the inflation went so far that the franc or lire was reduced permanently to one-fifth its prewar value, the hatred of the injured middle class was directed against the parliamentary regime which had functioned both during and after the war and against the working class which they felt had profited by their misfortunes. These tings were not true in Britain or the United States, where the inflation was brought under control and the monetary unit restored to most of its prewar value. Even in these countries, prices rose by 200 to 300 percent, while public debts rose about 1,000 percent.
The economic effects of the war were more complicated. Resources of all kinds, including land, labor, and raw materials, had to be diverted from peacetime purposes to wartime production … Before the war, the allotment of resources to production had been made by the automatic processes of the price system …
... to be continued.
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