A Patriot's History of the Modern World

by Larry Schweikart

  Decline, Famine, Murder

  America’s economic decline strongly affected Europe. Combined, the world’s largest economies (including the United States, Britain, and western Europe) fell by about one fifth between 1929 and 1932. Because the United States was so much larger in its GDP, the magnitude of its drop-off seemed even bigger. Yet even during the absolute worst crisis of capitalism in history, the unemployment rate peaked at 25 percent, meaning that fully three quarters of the working population still had jobs. Whereas the pain was real and deep for some sectors, the realities of depression in the United States were not nearly as harmful as the realities of “recovery” in the Soviet Union. There, communism’s murderous policies resulted in one citizen killed for every twenty tons of steel produced.5 Other Soviet “successes” included the Volga–White Sea Canal and Ural River projects, which consumed (literally) thousands of slave-labor victims.

  Nowhere was the Soviet interpretation of “fixing the economy” more on display than in the agriculture sector. Stalin forced private farmers into collectivization, requiring them to give up private land to the government, with the intent of increasing production—but also of imposing his will on the recalcitrant kulaks (literally, the “grasping hands”), private farmers who owned more than eight acres of land.6

  In 1929 Stalin boasted, “In some three years’ time, our country will have become one of the richest granaries, if not the richest, in the whole world.”7 Instead, food production fell by one third compared with precollectivization levels. There were droughts and bad weather in 1931 and 1932 to be sure, but most of the farmers simply resisted by producing less, hiding stores, and killing livestock when their crops were confiscated by the government to be shipped elsewhere. The government retaliated by crushing the kulaks as a class, with Stalin decreeing they “must be smashed in open battle.” At least two million kulaks were deported to gulags, forced labor camps throughout the Soviet Union, but those were the “official,” untrustworthy numbers, heavily doctored by Party officials. Writer Aleksandr Solzhenitsyn estimated the number at 60 million—probably an exaggeration. Either way, the murderous Soviet regime arrested and executed kulaks with horrifying efficiency, and Stalin grew even more heavy-handed, decreeing that withholding so much as one ear of wheat from the state was punishable by ten years in prison or death.

  Although collectivism began on a reduced scale in 1927 and accelerated in 1929, when the Central Committee instituted its winter 1929 collectivization offensive, only about 1 percent of Russian farmland was collectivized. By 1931 the collectivization blitz was in full swing. A famine, due to depletion of food supplies, officially started in 1932, and the effects, forced or not, were devastating. Vasily Grossman, a Soviet writer who toured the rural villages, reported: “People had swollen faces and legs and stomachs…and now they ate anything at all. They caught mice, rats, sparrows, ants, earthworms. They ground up bones into flour, and did the same thing with leather and shoe soles; they cut up old skins and furs to make noodles of a kind and they cooked glue.”8 When British journalist Malcolm Muggeridge visited Ukraine in 1933 without the permission of the Soviet authorities, he wrote that Communist Party officials “had gone over the country like a swarm of locusts and taken away everything edible; they had shot and exiled thousands of peasants, sometimes whole villages; they had reduced some of the most fertile land in the world to a melancholy desert.”9 One villager reported, “The people daily died in dozens. The bodies of the dead lay in all the villages, along the roads and in the fields. Special brigades were formed in the villages to bury the dead but they were too weak to collect all the corpses and these were devoured by dogs…. The gravedigger of today might be a corpse tomorrow.”10 To Stalin, this was not starvation of the kulak class. It was “building socialism.”

  Stalin and his cronies were meticulous in concealing the famine from outsiders. Screened and herded to carefully controlled sites, foreign delegations to the USSR were often prevented from seeing poverty and starvation. Sir John Maynard, a member of Parliament, went through Ukraine and reported that he “did not witness those phenomena [of starving people, or of] crowds of beggars and emaciated children [at] the river ports and railway stations, which are normally associated with serious famine,” leading him to conclude that Russia’s famine was “in no way comparable to the great famines [of other times].”11

  Many Western writers, sympathetic to communism and eager to tout the success of the Soviet model, utterly ignored the devastation and human suffering. Walter Duranty of The New York Times, a notorious Communist sympathizer who led the Times’s charge in supporting Stalin, traveled through the USSR, where he wrote a column in March 1933 entitled “Russians Hungry, But Not Starving.”12 Literary figures such as George Bernard Shaw used their considerable clout with liberal elites in the United States to gain widespread approval of Soviet collectivism. Shaw, a lifelong member of the British Fabian Society, a pro-Communist group, spoke of the gulag in 1931 as a benign collective whose large population did not want to leave. Denouncing all reports of starvation, he sympathetically described the unfortunate commissar who shot disobedient workers. Shaw advocated killing those who could not justify their existence through their labor and later defended Stalin’s purges during the Great Terror. American journalist Lincoln Steffens also defended Stalinist tactics, stating during the height of the starvation earlier during the Russian Civil War, “I have been over into the future, and it works.” At least, it worked for those who did the shooting.

  Most Western media refused to acknowledge the reality of starvation, even when the Italian consul in Kiev reported a “growing commerce in human meat,” and state authorities put up posters saying “EATING DEAD CHILDREN IS BARBARISM.”13 Stalin maintained the mirage of plenty, increasing grain exports to pretend no problem existed and refusing aid offered by foreign governments.14 A senior Ukrainian Communist official grimly concluded, “a ruthless struggle is going on between the peasantry and our regime. It’s a struggle to the death…. but the collective farm system is here to stay. We’ve won the war.”15

  Only twenty Americans and Europeans visited the USSR during the famine years and provided estimates of the famine deaths, ranging from 1 million (Ralph Barnes) to 5 million (Archbishop of Canterbury) to 10 million (Richard Sallet), with the average estimate placed at 5.5 million. These estimates were universally and grossly low. Robert Conquest, author of The Harvest of Sorrow, estimated that 10 to 12 million died, but the actual number easily could have eclipsed 20 million, since the Soviet population in 1939 was lower than expected by a stunning 30 million. In any case, Stalin had become the greatest domestic mass murderer in history, not to be eclipsed until Mao Zedong later in the century.

  The death toll from the famine was catastrophic, and by 1934, Stalin realized he was losing the “war” by failing to increase production, even after exterminating most of the kulaks. That year, driven by the realities of a stagnant economy, he reduced state confiscations and allowed households to keep small plots on which they could grow food for themselves. This concession to microcapitalism echoed Lenin’s admission that prices worked and effectively ended the forced hunger. It was those small plots, not the collective farms, that sustained the Soviet Union throughout the next fifty years. A grim Soviet-era joke ran: “How do you deal with mice in the Kremlin? Put up a sign saying ‘collective farm.’ Half will starve, and the other half will run away.’ ”16

  American Farms Fail and Take the Banks with Them

  Certainly the United States and Europe experienced none of the mass murder employed by Stalin, but both struggled desperately with extensive, widespread industrial unemployment and hardships in the agricultural sector, especially in the United States. While it is a gross exaggeration to say that farm lobbies in America triggered the Great Depression and in Germany brought down the Weimar Republic (thus paving the way for Hitler), in each case the inordinate political influence of agricultural interests produced policies that threw the world into mayhem
, whether in the form of higher agricultural tariffs in Germany’s case, or “price parity” programs and the confiscation of privately owned gold in the United States. Since the postwar price plunge, American farmers had been decimated as practically the only sector of the economy to experience hardships in the Roaring Twenties. At the end of the war, massive amounts of new farming took place in Canada, Australia, and the United States: Canadian wheat acreage increased from just under 10 million in 1909 to 22.1 million in 1921–25, while U.S. farming increased by 18 million acres in that period.17 Then, as overproduction naturally followed, the farmers paid dearly. Between 1926 and 1930, farm foreclosure rates per thousand owner-operated farms (politically designated as “family farms” to allow politicians to posture in defense of America’s families and the nation’s root culture) hit shocking levels: 70 percent in South Dakota, 58 percent in North Dakota, 50 percent in Oklahoma, and 42 percent in Arizona and Colorado.18

  From the presidencies of Calvin Coolidge through Dwight Eisenhower, Congress was powerless to resist pressures for “parity” (that is, guaranteeing American farmers prices for their products so their income’s purchasing power was what it had been during 1910–14, when farm and urban incomes were allegedly more or less equivalent) or other legislative tricks that could supposedly boost farm income and rescue the agricultural sector. McNary-Haugenism, a plan devised in 1924 by Republicans Charles McNary and Gilbert Haugen and supported by Agriculture Secretary Henry Wallace, would have created a federal agency to purchase farm surpluses and sell them overseas. Coolidge wisely vetoed the act four times, but farm lobbyists found sufficient support within the government to insert dozens of agriculture clauses in the far more destructive Smoot-Hawley Tariff of 1930.

  Later, under Roosevelt’s New Deal policies, farm subsides became permanently enshrined in the system of federal giveaways under various schemes such as guaranteeing 90 percent of parity, requiring and limiting federal planting allocations (such as with peanuts or tobacco), thereby criminalizing the growing of food without owning an allocation or permit from the federal government, and the “Soil Bank” (which paid farmers to move agricultural land out of cultivation to reduce production). Most of those programs continue today, and some became the basis for nonagricultural policy meddling, such as ethanol subsidies touted as energy conservation measures.

  Bleeding from the agricultural wound soon spread into the banking system, a development that went almost entirely unnoticed by all but the unfortunate depositors of small-town banks who suddenly found them closed. Most financial institutions west of the Mississippi were local, often capitalized with as little as $5,000, serving only small farm or mining communities.19 Some 80 percent of Kansas’s banks chartered between 1920 and 1929 had less than $25,000 capital. Bankers usually came from the ranks of general store owners or merchants, who had previously provided credit at their businesses and operated with an on-site safe for cash, before finally constructing a formal banking building. State regulations were lax and state bank examiners often came through only once a year to hastily examine the books, although bankers and customers tended to police themselves with some success. Not only was the banker himself usually well known in the town (and his finances generally a matter of public knowledge), but the building was a solid asset, and the loans were to neighbors who could be carried for a few months if necessary. There was enough competition to keep the banks efficient, but not so much as to force them to operate on razor-thin margins. Hence, the only real danger was one that threatened all of the bank’s assets simultaneously, such as a drought or disease (pinkeye among cattle, for example), or a drastic plunge in international prices. Unfortunately, that was precisely what occurred.

  Western and southern banks in particular were ravaged during the 1920s by these factors, especially the weather. The upper tier of the West, for example, was hit in the mid-1920s with severely cold weather. Ranchers lost entire herds, and bankers found their books frozen shut.20 In sixteen western states, the total number of banks fell from 8,092 in 1920 to 4,036 in 1932, and Montana alone saw 214 banks fail between 1920 and 1926, bankrupted by 11,000 vacated farms and stricken by the highest levels of bankruptcies in the nation.21 Arizona lost 38 of its 86 banks from 1920 to 1929.22 Something as seemingly unimportant as a boxing match involving Jack Dempsey, labeled a sure thing by local investors, took down a Great Falls, Montana, bank when overflow crowds turned into mobs and, Woodstock-style, took over the seating without paying.23

  Southern states likewise saw a drastic contraction in the farm sector. In 1920, South Carolina’s farms had a value of $813 per farm, yet only two years later, value had fallen 54 percent (even though total acreage fell only by 8 percent).24 The South was afflicted by a different malady, a massive infestation of the boll weevil that ended Sea Island cotton production among other widespread damage. Linked to farm failure, the number of banks in South Carolina dropped steadily—26 closed in 1927, 17 in 1928, 15 in 1929, along with 30 mergers and consolidations. From 1920 to 1936, South Carolina lost almost 8 percent of its banking institutions.25

  Despite the various reasons, the result was the same and almost every southern and western state saw its local banks drift into insolvency. Even the South’s strong branch banking system, which diversified risk away from a bad economy in a single town or strip of towns, was helpless when the main crops of an entire state were pummeled. Who was at fault? Greedy bankers? Lax regulators? Droughts and insects? In fact, most bank failures of the 1920s were due in large part to insurance schemes developed by the states—anticipating the FDIC under Franklin Roosevelt—which ostensibly provided an umbrella of security for the financial institutions. States with compulsory deposit insurance, in fact, proved the most susceptible to banking weakness, precisely because owners and bank managers did not feel the need to diversify their loan portfolios or develop branch banking, a much safer alternative which was often prohibited anyway by states to force banks to be more local in orientation.26

  By 1930, the closure of thousands of smaller banks, which scarcely drew the attention of a low-level vice president in New York, was eating away at the money supply. A slow, steady decline relative to goods, services, and productivity ensued. Free-market critics (and even a few otherwise erstwhile supporters, such as British historian Paul Johnson) have looked at the boom on Wall Street and projected that onto the American monetary base. In fact, manufacturing and productivity outpaced money growth throughout the twenties, creating the deflationary paradigm of “too many goods chasing too few dollars.” From 1921 to 1929, nominal GNP grew by more than 6 percent a year, consistently faster than the money supply.27 Instead of lubricating the entrepreneurial growth with money, the Fed was restrictive at best, and deflationary at worst.

  Another factor in the mix was the gold standard. All developed nations in the 1920s played by the rules of the gold standard, whereby trade balances were settled by transfers of gold (usually these were just accounting gymnastics, but occasionally actual bullion was moved). According to the great economist Milton Friedman, the process worked when a nation whose exports fell below the imports of another nation’s goods had to make up the difference in gold, whereupon the nation with the trade deficit would see its gold reserves fall. That, in turn, would lead to more restrictive credit in that nation, followed by fewer loans to businesses, and eventually, more unemployment. On the other end of the equation, the nation receiving the gold expanded its money supply based on the new reserves, loaned more to businesses, and saw unemployment fall. However, once the economy heated up, prices would rise in the nation receiving gold while the trade-deficit nation would see prices fall—and thus the teeter-totter of prices would cause consumers to change their habits, and the process would slowly reverse. The key was the response of the governments, which had to allow domestic unemployment to rise (with a negative trade imbalance) or prices to rise (with an inflow of gold). However, governments proved unwilling (or incapable) to let business cycles adjust themselves without in
terfering.

  Under the American system of fractional reserve banking, wherein a bank’s capitalization was but a small fraction of its assets and offsetting liabilities, the physical money actually in circulation was leveraged through lending out the remainder of the funds. Each little western bank that failed “destroyed” money through a reversal of the money multiplier, in which a dollar deposited yielded several times its amount in dollars “created” through new loans. Now, dollars being withdrawn or walled up inside closed institutions were lost, along with all the “other” dollars they would have “created.” When a bank actually failed, not only did the bank lose its capital and the depositors their money, but all the loans that would have normally been supported by those funds also disappeared.

  Following the lead of the most famous (but not always right) economic voice of the age, John Maynard Keynes, virtually every major banker, chancellor of the exchequer, finance minister, and treasury secretary in the West was an interventionist (that is, one who actively sought to affect financial markets by injecting or removing cash through government operations). Certainly the central bankers favored activist monetary policy: that, after all, was the message delivered by America’s leading banker, J. P. Morgan, Sr., almost two decades before, when he explained after the Panic of 1907 that he and his syndicates could no longer be counted on to rescue the country’s banking system. Certainly, the American Bankers Association had approved such a position with its support of the Federal Reserve Act, but beyond that, a broad international network of leading financial lights agreed with the proposition that government (or, in the case of the Fed, a private corporation not subject to government oversights but which shared profits with the government) had to stabilize the economy through monetary and fiscal policy. Émile Moreau, governor of the Bank of France, British economist A. J. Balfour, Kuhn Loeb partner Otto Kahn, Hjalmar Schacht of the Reichsbank, the Bank of England’s Montagu Norman, Paul Warburg of Kuhn Loeb and the Warburg banking interests in Hamburg, Lionel Rothschild, the managing partner of N M Rothschild & Sons, and, of course, the governor of the New York Federal Reserve Bank, Benjamin Strong, were all disciples of the stabilization school.