THAT every belligerent country was suffering from some degree of real inflation at the end of the War is not open to doubt . Every country had put forth its utmost effort, and its utmost effort had scarcely sufficed to keep the people fed and the armies supplied . The spur of more and still more issues of credit had been applied even after the peak of possible production had been reached .
But the end of the War brought a complete transformation . If consumable goods were still scarce, the means of producing them had now been multiplied a thousandfold, for no further supplies of guns and shells and the like were needed for the armies . The Money power, therefore, encouraged production, which would have the effect of replenishing stocks and so restoring value to the credits issued in such profusion during the War . The result was the "boom" of 1919 and 1920, during which industry displayed an immense power of recuperation . The fields were now grown white towards the harvest . It remained only to restrict credit (make money scarce) in order to bring down the prices of the newly created goods and so to restore to Money the whole, and more, of its lost purchasing power .
"In the first year of peace," wrote Lord Milner, "there was a general clamour for intensified production . All those engaged in production work, capitalists and workmen alike, were incessantly exhorted to redouble their efforts, in order to make good 'the losses of the War .'
"And, as a matter of fact, fresh capital was freely poured into some branches of manufacturing industry, which were already more than sufficiently equipped to deal with a considerable increase of demand . But presently the demand fell off, first in one trade and then in another . . . .
"I am weary of the endless jeremiads of the Press, and the solemn lectures of so many public men about our alleged poverty as a nation the huge destruction of wealth caused by the War, the immense burden of debt, the danger of national bankruptcy, and the necessity of drawing in our horns in every direction, of painfully husbanding our diminished resources and of no longer 'throwing a sprat,' even in the hope of 'catching a herring . ' . . . Not contraction but expansion should be the watchword ; not mere economy but the development of new sources of wealth ."
Had Lord Milner been alive today he might have read these words in the British Reply to America on War Debts :
"But Reparations and War Debts represent expenditure on destruction . Fertile fields were rendered barren and populous cities a shattered ruin . Such expenditure, instead of producing a slow and steady accumulation of wealth, destroyed in a few hours the stored-up riches of the past . Like the shells on which they were largely spent, these loans were blown to pieces . They have produced nothing to repay them . . . ."
This is all excellent example of the confusion of thought which is so widely prevalent today . The truth, of course, is that the War Loans were distributed, as all loans must be, in the form of wages, salaries, dividends, or profits . The Government bought the products of this enterprise and consumed them in defending this country against the greatest danger by which it has ever been threatened . It would be too much, certainly, to expect of International Money that it should detect any special value in the salvation of England ; but Englishmen might, perhaps, have supposed that His Majesty's Government would display a higher understanding . If a loan is made for the growing of tobacco the product will go up in smoke, like the shells . Why has no Government expressed its regret at this "unproductive" expenditure ?
Lord Milner had played a chief part in that leadership which enabled Britain and her allies to win the War . He was at a loss to understand why a people fresh from immortal victory should hesitate to show courage in the ways of peace . He was to learn that the English people is not a free agent . The excellent merit of his writing lies in the fact that he was situated in the centre of affairs and was able, therefore, to take informed views .
"The reason commonly given," he wrote, "to justify the descent from such high hopes to such paltry achievement is the great dissipation of national resources due to the War . The War, so runs the argument, left this country greatly impoverished . It is true that, immediately after its conclusion, there was a great boom in trade, that wages and profits continued high, and that there was a keen demand for labour . But this apparent prosperity was really delusive . It was due to 'inflation,' concealing the true state of affairs . Sooner or later the losses of the War were bound to make themselves felt . We had been wasting our capital, and though this waste might be temporarily concealed by the great rise in prices which made our national wealth, though really diminished, look larger it was certain in the end to restrict enterprise and diminish employment .
"By those who hold this view the present depression (1922) is regarded as inevitable . . . . This is the popularly accepted theory, blessed too by 'orthodox' economists . Another theory is that depression and unemployment in Great Britain are due to the failure of effective demand for British goods in certain foreign countries with which, before the War, we did a considerable trade .
"It is evident that (these theories) weaken rather than support one another . For if it be the case that we are unable to reach our former level of production for want of capital, it matters less that the demand for our products is also in some measure reduced ."
Lord Milner might have added that the idea that the loans made by bankers (that is to say, the money they create) are provided out of savings was finally killed by the War, when the credits provided exceeded the total savings of mankind . The Money power continues to talk as if savings provided it with the money which it lends, but this is merely to hide the fact that it itself creates that money out of nothing . In the first Addendum to the MacMillan Report on Finance it is stated :
"The theory that there is in any sense a fixed loan fund available to finance investment which is in all circumstances fully employed, or that the amount of the savings of the public always exactly corresponds to the volume of the new investment, is, we think, mistaken . . . . We gathered from the evidence of Sir R. Hopkins that it would be a mistake to attribute this view to the Treasury at the present time ."
The real object of the Money power, as has been said, was to reap, in the usual way, the harvest created by the boom namely, by a slump . And this object was achieved so successfully that in 1922 as in 1822 prosperity had vanished and producers were flinging their goods on the market below cost-price or rushing them into foreign markets . Bankruptcy marched through the land hand in hand with unemployment . The confusion wrought in the public mind is thus described by Lord Milner :
"Let us try to picture the impression which his experiences are likely to have left on the mind of any fairly intelligent workman a man, say, good at his own job, but with only so much information about the general affairs of the world as he could gather from the steady perusal of his daily paper .
"For months and months after the close of the War, he had it dinned into his ears that the world was suffering from a shortage of goods, and he was overwhelmed with exhortations to him and the men of his class not to spare themselves, but to work with intensified energy to make up the deficiency . There, he was vehemently assured, was their duty to their country and the world and at the same time the one sure road to the improvement of their own condition . Such was the unanimous appeal made to him by all the highest authorities in the world of industry and finance . And he obeyed it to the best of his ability, but only to find, a year or two later, that the warehouses of his employers were choked with goods which they could not sell and that his services were no longer required .
"And then, when, stung by disappointment, he began to probe for himself into the causes of this strange contradiction, he was told that there had, unfortunately, been a mistake, that the activity to which he had been so fervently exhorted to contribute was 'feverish,' that he ought to have known, we ought all to have known, that after the War there was bound to be a big slump because 'the pool of Capital had been depleted,' and we had no money for making things and nobody else had any money for buying them . And yet, at the same time, he read in his paper that in Germany, where presumably the 'pool of Capital' was equally depleted, there was still intense industrial activity and next to no unemployment .
"More than that, he knew that the Germans were still sending their wares into this country, which despite its lamentable impoverishment was apparently still rich enough to afford the best market in the world for every kind of foreign goods . But then the Germans, so he was assured, were only able to do this owing to their wicked and idiotic action in debasing their currency, which enabled them to under-sell us not only in our own country but everywhere else . This manuvre of theirs might, however, possibly still be defeated if he and his fellows would only accept, for an indefinite period, such a reduction of wages as would enable the British manufacturer once more to compete with the German on something like equal terms . And this very depressing prospect certainly grew no brighter when he came to look at the figures for himself, for he could not help seeing that even if his wages were cut down almost to zero, it was still not evident that British goods could be produced as cheaply as German .
"And yet he was assured that any other remedy was unthinkable . And this he mournfully accepted, for had he not been taught from his childhood, and were not all the best-educated of his fellows agreed, that it was a sign of mental imbecility and almost of moral depravity not always to 'buy in the cheapest market,' or to do anything which could by any possibility give the slightest advantage to the British producer in his competition with the foreigner ? That position, I say, he accepted, and yet it seemed to him rather hard that, as the price of victory, the victors should be condemned to perpetual indigence . . . ."
In 1922 the Coalition Government, which in its bewilderment and anxiety at the spectacle of ruin had submitted humbly to the policy of deflation, and the consequent sabotage of all its vaunted schemes of "Reconstruction," including the "Homes for Heroes," was replaced by a Conservative Government under Mr. Bonar Law . The new Government was favourable to Tariff Reform and Empire Free Trade . The Liberal Party, broken during the War, was hastily reconstituted in order to fight the "threat to Free Trade ." The result was the defeat of Mr. Baldwin who had succeeded Mr. Bonar Law in 1923, and the first Labour Government under Mr. Ramsay MacDonald . Liberalism had saved Free Trade, but had not succeeded in saving itself . The Money power had to set against a Socialist Party flushed with triumph and committed irrevocably to the "dole" and Social Reform, respite from the horror of a protected British market .
Of Socialism, as such, Money was not afraid . Financiers prefer Governments with unlimited resources to private borrowers who may conceivably default, and have always therefore been partial to the idea of State enterprise and trading provided that they can exert control over it . The experience of Russia, where a whole nation has been enslaved in order to pay very high rates to the financiers who are supplying the material of the Five-Year Plan, has amply proved that Money has little to fear from the destruction of the Capitalist System of individual production . (The Capitalist System, on the contrary, as has been seen, is usually an enemy of the Money power .) Bolshevism having destroyed Monarchy and loyalty in Russia, was compelled to rely, like Robespierre, on greed on the one hand and naked fear on the other these being the only alternatives to the law of love . The Socialistic idea of the a Commonwealth would probably lead to a similar result, tempered no doubt by the character of the people concerned . For when gain is avowed as the object, fear is already on the threshold, even though many years may elapse before that threshold is actually crossed . Money has been militant in the past and may easily assume a military form in the days that lie ahead .
The fall of the first Labour Government and the return to office of Mr. Baldwin effected very little change . But Mr. Baldwin was now pledged to refrain from touching Free Trade and was, in addition, subject to criticisms which had not formerly been passed on him . These were advanced by the left wing of his party, become exceedingly strong . In 1925 the Government decided to return to the gold standard at the old parity . It was a move of very great importance, because the French, Belgian, and Italian currencies were not yet "stabilized" on gold, while in Germany the "stability" of the new gold currency, which replaced the debased mark, had only been maintained by a drastic rationing of credit by the Central Bank in 1924 . The future of Indian exchange was not yet determined, and the Federal Reserve System of America had only recently begun to develop in a deliberate way its system of open-market operations . The situation in America from this time onwards is the key to the policy of Money .
"America had freed herself from indebtedness to Europe during the War," says the MacMillan Report ; "and thereafter it appeared that the tide had definitely turned and that the United States, having undergone the transition from a largely agricultural to a predominantly manufacturing country, was about to repeat the history of Great Britain and to emerge as an exporter of capital upon a vast scale . For some years after the end of the War, indeed, the growth of American capital exports was the indispensable means of recovery of economic conditions in the rest of the world . Issues of long-period securities in the United States reached their maximum in the four years 1925-1928, during which period the net amount offered on long-period account aggregated $4,789,000,000 or nearly 1,000,000,000 an amount twice as large as the volume of long-period capital issues (£482,000,000) floated in London during the same period . . . . (American investments) had striking effects upon the areas Central and South America and Central Europe where the investments were chiefly made ."
In other words, an immense power of lending had become vested in the hands of Americans at a moment when the conditions in America were very far indeed from being favourable to the operations of lenders . Lenders, as has been shown above, demand the power to invest their money wherever they choose and also the power to prevent the money which, by their investments abroad, they have taken from the home market, being restored to that market by anybody else . In effect, as has been seen, these are demands for the strict operation of the gold standard by a powerful Central Bank and for Free Trade . For to repeat if trade is not free the recipients of loans cannot pay in goods the interest due on them, while, on the other hand, tariffs afford such protection to the home market that manufacturers are able to keep the prices of their goods well above world prices and so to defy the efforts of Money to compel them to produce as cheaply as their neighbours in other countries .
The Money power in America, therefore, was forced to conduct its operations through London, where a free market for goods existed and where, therefore, debtors could sell their goods for gold, preparatory to forwarding the gold so received to New York .
The objection to this system is that the quantity of gold is limited . That objection was increased enormously in weight by the fact that War Debts had to be paid to America in gold . There was not enough gold in the world to pay both War Debts and the interests on ordinary debts unless America kept sending out gold as fast as she received it unless, that is to say, she put gold at the disposal of foreign Governments . As has been seen, she adopted this course .
But even so, payment of interests on these loans to foreign Governments, added to payment of interests on commercial loans, added to payment of War Debt interests, so swelled the tide of gold flowing towards New York as to threaten the rest of the world with a gold famine . The Money power therefore began to agitate for a reduction of tariffs so that foreign goods might be received into American ports . At once the powerful American manufacturers took fright . They exerted their influence and there occurred a clash between finance and production that is to say, between lenders and borrowers .
This is the real cause of the world slump, and deserves therefore the closest possible attention . As has been said, it is the aim of the Money power to lend always at the highest possible rate of interest consistent with security . In order to accomplish this the Money power must be free to move its commodity, gold, about the world when and how it chooses . The sin of the American producers in the eyes of Money was that they were preventing gold from being moved out of America (or, in the language of finance, from being "redistributed" throughout the world) . In other words and this is the important point they were preventing gold (very large quantities of it, too) from earning interest for its owners .
An owner of gold will not lend it to a market where prices are high and money therefore is cheap when he can lend it to a market where prices are low and money is dear ; he likes, so to speak, to get the best value for his money . American prices were exceptionally high and consequently American owners of gold did not want to invest in the American market . They wanted to invest outside of America in foreign countries .
But an owner of gold will not lend it to a foreign country unless he is sure that that foreign country can pay him interest either in gold or with goods . If there is so little gold left in foreign countries that their power to pay in gold the interest on loans made to them no longer exists and if, at the same time, goods are being refused entry into the country where the lender is situated, then, sooner or later, lending will cease .
If lending ceases the owners of gold lose their usury . Not only so, but if the amount of gold thus immobilized or rendered sterile is very large, the smooth operation of the gold standard in other countries is seriously hampered . The Money power likes gold to be scarce ; it does not like gold to be so very scarce that the prices of all goods fall below the cost of production, with the result that every Government becomes bankrupt because nobody can earn a profit on which to pay taxes . A gold famine of that sort is apt to lead to awkward questions about the necessity for gold and to inquiries about ways of doing without it .
Because of the tremendous flow of gold into America occasioned by the payments of War Debts and because of America's refusal (expressed in her tariff) to admit foreign goods, half the gold of the world was earning much less (merely bankers' interest) than it might have earned, while the gold standard was falling into disrepute in every other country in the world because every other country was suffering from gold starvation .
The Money power therefore throughout the whole world set itself the task of fighting the battle of the American owners of gold that is to say, the task of breaking the power of the American producers of goods as the necessary preliminary to getting the American tariff wall lowered . It was worldwide Usury against the American industrial "bosses ."
It soon became clear that the American industrial "bosses" and their workpeople would offer a much stouter resistance to the Money power than that power was accustomed to encounter in any European country . The idea, for example, that the policy of protection should be abandoned in order to allow the debtors of American finance to pay in goods the interest on their loans was rejected with violence by American manufacturers, who asked if it was proposed to ruin them and their work people by forcing them to compete with cheap European labour . That, of course, was exactly what the Money power did propose . American manufacturers, on the other hand, were not averse from an expansion of foreign lending by American owners of money, because loans, as has been seen, are usually taken out by those receiving them in the form of goods . The pressure thus exerted on industry to export more at cheaper rates in order to maintain the ordinary balance of trade between imports and exports was not so welcome . (As has been pointed out above, goods exported by a country, and paid for out of loans raised in that country, do not pay for imports into that country . They constitute, as it were, a free gift . Consequently if imports are to be paid for with exports, the total of exports has to be increased by the amount of the goods bought by the borrowing countries with the loans made to them, and this usually entails a considerable reduction in the prices of the goods .)
The American manufacturers were willing and anxious to export as much as possible, but they were not willing to lower the buying power of the home market (by cutting wages) in order to do so . They were asked by the Money power how they proposed, if they refused to reduce wages, to export cheaply enough both to supply the demands for goods of the foreign recipients of loans and to pay with goods for the goods being imported into America . "If you refuse to produce more cheaply," the argument ran, " you will be unable to sell abroad enough goods to square the balance between imports and exports, and it will consequently be necessary to export gold in order to square the account . The effect of an export of gold will be a reduction of money and loans that is to say, of buying power in the home market ."
This, as has been seen, is the old demand of the Money power that money which has been invested abroad shall not be replaced in the home market . It was a demand for price reductions and wage reductions in America and so for a reduction of American buying power . It was further a demand for the reduction of tariffs, for if wages and prices fall very far, the demand for freer imports becomes more insistent . Thus the way would be opened to the borrowers of American money to pay in goods the interests on their loans . This is the old demand that money shall be free to find its level .
The American manufacturers, however, were not at all willing to listen to the voice of Money . They exerted the utmost possible pressure on their Government to maintain the tariff walls ; behind these walls they contrived to keep the prices of their goods at such a level that they could recover their costs in the home market and so be free to "dump" goods at prices even below the world prices . The immense quantities of goods required to meet these demands were supplied by intensive methods of mass production, by schemes of "rationalization," and by amalgamations of so formidable a character that the banking system could not easily resist them . The buying power of the home market was, further, raised by such devices as the hire-purchase system .
This was a direct and dangerous challenge of usury by borrowers . It meant, as has been emphasized, that lending abroad must cease, seeing that no foreign borrower could pay in goods across the tariff wall the interest on the loans made to him . It meant, therefore, that money, being no longer free to find its level, would inevitably be invested in the home market .
Meanwhile, as has been seen, the tide of gold flowed ever faster and faster towards New York . Gold began to heap up in the Central Banks . The Money power did not know how to lend it abroad, but was as determined as ever, if possible, to avoid lending it at home and so further increasing prices in the home market . The gold therefore remained in the bank's vaults . That is to say, it was hoarded as if it had never been taken from the bowels of the earth .
This was a deliberate policy, approved in the special circumstances by the Money power of the whole world . The Money power was well aware that America is a great agricultural country and that American farmers depend on their sales abroad of wheat, cotton, tobacco, and other products . A fall in world prices would necessarily, it was seen, hit these farmers hard and so reduce their power to buy from the manufacturers, who, in turn, would be compelled to reduce their prices and cut their wages . The policy of hoarding, in other words, was directed to the same object as had been the policy of lending to foreign countries . It was designed to compel American producers to produce more cheaply (that is to say, to compel American borrowers to pay higher rates of interest on the advances made to them), so that the power of these producers might be diminished and their resistance therefore to tariff reductions broken . In this way it was hoped that the American owners of gold would be enabled to lend abroad with the assurance that their debtors would be able to pay interest in the only way open to them namely, by sending their goods to the American market .
The policy of hoarding succeeded very well . As gold was withdrawn from the Central Banks of Europe to pay debts to America, these Central Banks (in accordance with the rules of their offices withdrew money from circulation . As money was withdrawn from circulation bank loans to agriculture and industry were called up in the proportion of $10 loan to $1 money . Country after country was emptied of buying power, prices fell and wages were cut .
The American farmer felt the force of this hurricane, for he was far less well protected than the American manufacturer . He, too, had to cut his prices in order to sell his goods . Wheat fell ; cotton fell . The farmers ceased to be able to buy on the old scale from the manufacturers and the manufacturers in their turn began to suffer .
This was the position in 1927. At that time, however the American farmers and manufacturers were still an exceedingly powerful and influential body. They brought such pressure to bear on the Government and the Banking System that the policy of hoarding had to be abandoned and, in spite of all the objections to it, a new policy of lending abroad embarked upon.
It was a conspicuous victory of production over usury. The Money power found itself once more in the position it had occupied in England so often in the Nineteenth Century before its powers of resistance had been sufficiently well organized to render both agriculture and industry defenceless against its demands.
"Broadly speaking," says the MacMillan Report in language of admirable restraint, "the United States continued throughout the post-War period to gain gold until by the middle of May 1927 the gold stock of the U.S.A. reached its maximum figure of $4,700,000,000. It had been the avowed policy of the Federal Reserve Authorities to regard this gold stock as a trust fund . . . the policy of gold sterilization was the objective expression of this point of view. In 1927 the moment seemed to have arrived when the exigencies of the local credit situation coincided with the necessities of the outside world. In the autumn of 1927 the Reserve System encouraged low money rates in the New York market and thereby stimulated a boom in international securities.
"Gold flowed out, and by June 1928 the United States had lost $600,000,000 of gold. . . . Easy credit conditions . . . had generated a period of world prosperity which inter alia enabled Great Britain to recover to some extent from the direct effects of the return to the gold standard and the industrial troubles which had followed upon it."
The resistance offered by the American producers had naturally caused great anxiety to the Money power throughout the rest of the world, by whom its true significance as a deadly threat and challenge was clearly understood. London, for instance, had not lacked profit from the position thrust upon her of broker between American lenders and Central European and South American debtors, but she was far from approving of the manner in which many of the American loans had been made and foresaw endless difficulties with debtors who had been enabled to obtain money too easily and in too large amount.
London meanwhile was suffering severely from the fall in prices.
"The return to gold in 1925," says the MacMillan Report, "required the reduction of sterling prices and consequently of money costs of production (i.e., wages) to an extent which is variously estimated. At any rate the actual situation which was disclosed in the years following the return to gold marks that step as the beginning of a new series of difficulties for our trade and industry. Whatever the disequilibrium between costs and prices which still existed in 1924, it was seriously accentuated by the adjustment of sterling prices to gold prices. If gold prices had continued to rise, as they had been rising just previously, these difficulties would have largely vanished ; as it was gold prices fell and the hopes then entertained in that respect were disappointed."
Among the penalties paid by Englishmen had been the General Strike and the Coal Stoppage. Happily, as has been said, the victory of the American manufacturers over the policy of hoarding brought some relief to the world's, and so to English, agriculture and industry.
The American manufacturers now for the time being had everything their own way. Their farmers began to buy from them again, as foreign lending was still difficult in view of the tariff and as hoarding had been put out of court, the owners of money were more or less compelled to invest in the home market. The American home market therefore became suddenly possessed of so great a volume of buying power as had not before been witnessed in human history. Prices and wages leaped up and the fruits of labour and science became suddenly available to millions of men and women. The rest of the world, writhing in the strong grip of Usury and beginning to suffer again from lack of gold, could scarcely believe its eyes. Here was the "golden age" about which men had dreamed from the beginning of time. The event is thus described in the MacMillan Report.
"The credit situation in the United States was now to change, and to change disastrously in its reactions upon the rest of the world. In the first place cheap money in the United States strengthened the tendency, already present in spite of a relative ebb of business in 1927, to a rise in the price of common stocks. From 1925 to 1928 building and other construction in the United States was on an unprecedented scale, reaching the colossal aggregate of $38,000,000,000 for the four years together (or about 100,000,000 a month), which was double the value of the construction in the four years 1919 to 1922. The putting into circulation of this enormous volume of purchasing power, which was not directly associated with any corresponding increase in the production of immediately consumable goods, caused a huge growth of business profits which culminated in 1928 and 1929.
"At the same time the market-value of securities increased in an even greater proportion than profits, the process of the appreciation of securities being greatly assisted, apart altogether from the influence exerted by cheap money and business prosperity, by the belief that a 'new era' had dawned in the United States due to mass production and rising money wages. The difficulty of determining what was a reasonable basis for capitalizing the yield of securities made it possible for securities to sell at thirty to forty years' purchase, or even more, without upsetting public opinion, and they did in fact sell at such values.
"With such glittering chances of stock appreciation before their eyes, it is not surprising that it began to be more and more difficult to float international loans in New York or to sell bonds to American investors, nor that the prices of already existing bond issues should decline. To the bullish bond market of 1924-1927 had succeeded the bullish stock-market of 1928-1929."
Now, normally, of course, this tremendous increase of buying power in the home market ought by the rules of the gold standard to have caused the complete destruction of the American export trade and an outflow of gold to pay for imports. But, as has been seen, the American manufacturer thanks to his tariff had found a way of recovering his costs in the home market and so of being able to dump his goods abroad at competitive prices. The export trade, therefore, remained intact, while lending abroad was as difficult as ever. In these circumstances, far from gold being lost, gold was gained. The prizes being won daily on Wall Street were so tempting that foreign owners of gold began to gamble on a great scale in American shares.
As soon as these people bought shares, of course, they ceased to be owners of gold. Their gold went to America, nevertheless, to swell the tide of gold flowing to that country. Thus the Money power in the rest of the world saw its commodity disappearing in larger and still larger quantities behind the American tariff wall, where it was earning all too little (it was cheap money which began and sustained the boom). The Money power therefore redoubled its efforts to inflict defeat on the industrial "bosses" and their "new era."
There was one fatal weakness in that "new era" namely, the fact that the gold standard had been reestablished throughout Europe and the world. In its effect on the rest of the world the American boom was, as has been seen, a huge hoarding of gold. The rest of the world experienced, once again, restriction of credit (occasioned by lack of gold) and falling prices. Seeing that the buying power of American farmers is essential to the prosperity of American manufacturers, and that American farmers have to sell at world prices, the boom was bound to bring about its own destruction as soon as the world prices of wheat and cotton fell far enough to rob the American farmer of his buying power.
This fall occurred in the summer of 1929 while the boom was still going on. It occurred, therefore, in spite of the increased American demand, occasioned by the boom, which increased demand naturally affected the rest of the world to some extent. As soon as world prices of agricultural products began to fall the pressure everywhere being exerted by the Money power to bring the American producers to heel began to become effective.
"From the very beginning of the more spectacular stage of the boom," says the MacMillan Report, "the Federal Reserve Authorities watched the situation with misgiving. By three successive stages in 1928 the New York Reserve rate was raised from three and a half per cent., to which figure it had been reduced in August 1927, to five per cent. in July 1928 and, at the same time, in an effort to get control of the market, securities held by the Reserve System were sold upon a large scale. . . . These (and other) actions of the Reserve Bank operations prevented credit from expanding by more than the amount required to offset gold movements, but could not cope with other elements in the situation. . . . There was . . . drawn into the vortex of American speculation a mass of short money, not only from non-banking agencies in the United States but from European countries as well. . . . Between June 23, 1928, and January 11, 1929, the gold stock rose by $7,000,000 ; between that date and October 25, 1929, it increased by a further $282,000,000. . . .
"The effort to stop the boom in the United States . . . led everywhere to a policy of dear money, almost at the moment when economic conditions were becoming ripe for a policy of cheaper money."
The American producers now found themselves face to face with a shrinking buying power and began, of necessity, to cut their prices. As they cut, profits shrank and the visions of the "new era" were dissipated. In the autumn of 1929 the great crash on Wall Street announced to the world that the Money power had inflicted a heavy defeat upon its enemies.
The defeat was not, however, from Money's point of view, nearly heavy enough. Not the ruin of speculators and stockbrokers was the object, but the final breaking of the power of the industrialists and the destruction of their tariff wall that stubborn obstacle to the free movements of gold. In spite of the crash and the terror and disillusionment which followed it, the producers in America were still strong enough to offer an effective resistance to any tampering with their tariff.
That they did well to resist none who realizes what they were fighting for can doubt. Many hard things have been spoken (usually by the friends of Money) against the leaders of American industry. But these men, after all, are the captains of the production by which their fellow countrymen live. If they are unable to distribute their goods, the life of America necessarily comes to a standstill ; factories must be closed, millions of humble men and women must be flung to the wolves of destitution. The cause of the industrialists was the cause of humanity.
Had they possessed a leader of clear sight the demand would instantly have been formulated by them for a degree of protection for farmers equal to the degree of protection given to themselves. Farm products would then have been sold at a profit once more and the farmer would have regained his buying power.
Unhappily the industrialists were not less solidly wedded to the gain-system than their enemies the bankers. They were anxious to see the farmers regain their buying power ; but they were not willing that buying power should be regained at their expense. They did not want the price of food to rise any higher, because that must have meant a corresponding rise of the wages paid by themselves. There was, therefore, no support by industrialists for the farmers' demand for a high tariff wall. The Money power was relieved of the dreadful anxiety that America might escape out of its clutches by a policy of economic nationalism.
After the crash on Wall Street there was nothing for the Money power in America to do but to begin hoarding again, for in the disturbed state of the world nobody had the slightest wish to make any more loans. Gold, therefore, continued to flow to New York, and prices throughout the world continued to fall, with the result that manufacturers were compelled to reduce wages, discharge employees and even, in many cases, go out of business. Everywhere profits disappeared as unemployment increased. Taxes could not be paid and national budgets failed to balance.
But the spectacle of this universal ruin did not deflect the Money power from its object of effecting a release of the gold held imprisoned in America. American and European owners of gold were of one mind on this subject. French owners of gold who, in their own country, were passing through a similar experience, were very specially concerned.
France, thanks to the policy of M. Poincaré, had erected high tariff walls to protect her industries and agriculture and had in consequence and by reason of Reparation payments, like America, gained large quantities of gold, no less an amount, indeed, than a quarter of the world's supply (£500,000,000). French farmers and industrialists, like their American brethren, were determined that protection should not be taken away from them and, in this, had the support of their Government, which, for national reasons, was glad to see a substantial stock of gold held in Paris. The French Money power, like the American Money power, was averse from lending to a ruined world and consequently hoarded its gold, in the manner of the American Money power.
French prices in the world's markets were very low because M. Poincaré had taken the precaution, when France returned to gold, to link the franc to a quantity of gold of lower buying power than the actual buying power of the franc itself. (For example, whereas one franc bought a dozen eggs in France, the owner of that franc could only change it for an amount of gold capable of buying nine eggs in the world's markets. A Frenchman could therefore afford to sell twelve eggs in the world's markets as against, say, an Englishman's nine eggs.) Consequently the French export trade was less affected at first by the fall in world prices than the export trade of any other country. But a large part of the French export trade consists of articles of luxury for example, wines, silk, women's dresses, perfumes and face-powders, and the tourist traffic. The increasing poverty of the world naturally hit these luxury trades very hard and robbed the people conducting them of their buying power. The continued fall in world prices, again, gradually deprived the French of the advantage given to them by M. Poincaré. (The value of gold, due to its scarcity, had increased so much that the amount of gold represented by one franc now bought twelve instead of nine eggs and seemed likely soon to be able to buy many more.) France, therefore, saw the buying power of her home market threatened as seriously as the buying power of the American home market was being threatened. Like the American producers, the French producers in these circumstances clung with desperation to their tariffs.
Meanwhile the French Government viewed the course of events with the liveliest anxiety. It was concerned chiefly with the security of France against Germany, which, as it believed, depended on the French army, navy and air force. If France became involved in the universal ruin how could she hope to maintain her fighting forces ? In these circumstances Reparations, the financial penalties imposed on Germany by the Peace Treaties, assumed paramount importance in French eyes.
But the Money power, as was well known in Paris, was anxious to get rid of the Reparations and War Debts which had played a chief part in bringing about the flow of gold into Paris and New York. The French Government therefore adopted a hostile attitude towards the policy of the Money power, which it accused of being pro-German. The French Government at the same time complained bitterly about the financial support which, in its view, Berlin had received from New York and London. What, it was asked, was to happen to France if the financial blizzard struck her at the moment when Germany was actually being helped on to her feet again ?
Thus into the strife between usury and production was imported the strife between nations. The French attitude towards England became exceedingly disturbing and the anxiety occasioned by it spread far beyond the confines of the City of London.
This is the explanation of much in the history of the second Labour administration which, otherwise, is inexplicable. Labour became associated with Liberalism. It declared itself in favour of Free Trade and turned a deaf ear to the demands of the more extreme groups among its own members. At the same time it used its utmost endeavours to save the system of Unemployment Insurance. The Conservatives lent support to these endeavours while, at the same time, attacking Free Trade and urging the importance of Empire Preference.
London, meanwhile, was struggling to counteract the effects upon itself of the stubborn resistance of the American manufacturers and French Nationalists to the demands of the Money power. It was obvious that the abandonment of the gold standard by England offered the surest and quickest way of escape from a position which, even in 1930, was daily growing more difficult, for, by abandoning gold, England would release herself from the strangulation of falling gold prices and would, at the same time, rid herself and her producers of the added burden of debts and costs imposed on her by these falling prices.
But against these evident advantages of the abandonment of gold was the glaring disadvantage, from the point of view of Money, that the gold standard would be greatly discredited in the world's eyes at a moment when quite enough discredit was falling upon it. If London abandoned gold, would anybody adhere to it ? Usury was haunted by frightful visions of a world getting along very well without its gold of a world, that is, in which men would be able to exchange their products and enjoy the fruits of their labour. Again, what would be the effect on the minds of the large number of foreigners who had lent money on short-term to the London market if they lost, say, a quarter of their possessions by the deliberate act of the borrowers ? Add to this a general belief that gold was necessary to salvation.
All idea of abandoning gold was put away, and as every mind the writer's not excepted was befogged by the accepted monetary doctrine, British producers continued to feel the full force of the hurricane. Production slowed town, since prices had fallen well below costs of production ; unemployment and bankruptcy increased ; receipts from taxes fell. And this was the experience of every country in the world because, everywhere, prices continued to be reckoned in the swiftly vanishing gold. By the middle of 1931 America was again in possession of nearly half of the total gold stock of the universe (£1,000,000,000), while France's stock, as has been said, represented half of the remainder (£500,000,000). A world glutted with goods was left to rub along with one quarter of its accustomed means of exchanging and so of consuming them.
Country after country now began to abandon the gold standard that is to say, to break the rule that gold of fixed amount must be given in exchange for currency upon demand. It became apparent to many observers that if all countries were to adopt this course and then boldly to supply themselves (by printing it) with the amounts of money necessary to the exchange of their goods, the crisis would immediately determine. But so constant and clamorous was the propaganda maintained by the Money power in favour of its commodity, gold, that the mass of mankind remained convinced that such a course must lead straight to ruin. Consequently the march to ruin continued with ever-increasing speed. Debtor nations sank to destitution under the weight of their debts, and the great creditor nations England, America, and France saw their industries and their agriculture fall and beheld their cities thronged with unemployed men and women, figures of tragedy and despair.
These great creditor nations are all governed by Parliaments. But none of their Governments understood what was happening clearly enough to dare seriously to challenge the Money power in the name of the men, women, and children on whom it was laying afflictions of the heaviest kind. Government, on the contrary, in each case adopted, quite sincerely, an attitude which suggested that humanity was face to face with some natural calamity, a visitation of God against which no effort of man could possibly avail. A suffering world was told that its afflictions proved how impossible it was for any nation to live to itself (this, of course, is tragically true where the gold standard operates) and how necessary, therefore, it had become to place international before national considerations. The word inflation was freely made use of to describe the period in America (the boom) when a free exchange of goods had brought comfort and happiness to the whole people. This period, it was now suggested, was a time of riotous living, a time in consequence of which America ought to feel ashamed. Americans, it was added, might properly rejoice that they had been delivered from such "fictitious prosperity" and set once more on the sure foundations of poverty and unemployment.
Nor did the American producers themselves venture to challenge this doctrine of Usury. Their world was falling about their ears and they seem to have felt that nobody was to blame. If they clung desperately to their tariffs, that was in obedience to an instinct which they scarcely tried to justify. Not one of them questioned the advantage of the gold standard or of that "sound finance" which was the sole cause of their ruin. It does not seem to have occurred to one of them that had the gold standard not existed, and had ordinary common sense been exercised in the issue of loans, there would have been no "slump" either in America itself or in the world outside of America, for the simple reason that an increase of American buying power would not, in that case, have entailed a contraction of the buying power of the rest of the world. The men, indeed, who were fighting so stubbornly to retain the tariff, which protected their industries and their workpeople, were showing an equal determination in demanding payment in gold of War Debts. Such is the confusion wrought in men's minds by the gain-system.
The Money power alone in this confusion knew what it wanted and understood what had happened. It abated nothing of its demands and remained in implacable hostility both to the American tariff and to the Treaty of Versailles. Without in the least sympathizing with Germany, it espoused her cause for the reason that her cause had become that of the gold standard and of Usury. Without hating France, it abused and misrepresented her because her well-founded fears of Germany threatened to hinder the speedy accomplishment of its own purpose to redistribute the gold stock of the world and so make secure once more its stranglehold on production.
It is only when this object is clearly understood that it is possible to account for the movements of popular feeling in many lands against America and France, but especially against France, which characterized the early months of 1931. These movements were the result of an intensive propaganda which was designed to represent the Money power as the champion of a world being devoured by the American Shylock and of a Germany doomed to writhe for ever under the iron heel of France. Englishmen and Americans were invited to hate the French ; Englishmen and Frenchmen to hate the Americans. It was represented that while the miser in New York glutted himself with gold, the Moloch in Paris was opening his jaws to devour the helpless German people.
The plan as is now quite clear was to arouse enough sympathy for Germany in America to touch President Hoover's heart and so induce him to declare a moratorium of debt, and to excite enough fear of Germany in France to cause the French Government to acquiesce in that moratorium. For, as it was argued, once the flow of gold to New York, which the payments of War Debts occasioned, was stopped, the relatively high prices of goods still prevailing in America might hinder her from exporting her goods and so compel her to pay for her imports with her gold. Thus, in spite of her tariffs, gold would begin to flow out. Sooner or later the outflow of gold would compel manufacturers to lower their prices to the world level.
This plan of the Money power very nearly succeeded. So eloquent and moving were the appeals made on behalf of Germany that President Hoover duly declared his moratorium. But the French Government was less easily persuaded. France haggled over the Hoover moratorium. At the same time she made it clear that if British policy was not kept in line with her own policy, she would call up immediately the large stocks of gold which she held in the Bank of England. That threat was terrible in the ears of Englishmen, for the world slump had dried up all England's resources by making nearly all her debtors bankrupt. Was England about to be driven off the gold standard by a " run " on the Bank ?
The whole population of this country viewed the possibility with dismay. So great a calamity, it was resolved by the country as a whole, must at all costs be avoided even at the cast of appearing to submit British foreign policy to the dictates of France by asking for a loan of gold. Credits were arranged with France and America.