Glimpses of World History

by Jawaharlal Nehru

  The old mark, having become perfectly useless for any purpose, was then abolished, and a new currency, the “rentenmark”, was introduced. There was no inflation with this, and it was worth its value in gold. So Germany, after making a clean sweep of her lower middle classes, returned again to a stable currency.

  Germany’s financial troubles led to important international consequences. There was a default in paying reparations to the Allies. These reparations were being divided up between these Allied Powers, the biggest share going to France. Russia was not taking any part of them; in fact she renounced any claim that she might have had. When the German default occurred, France and Belgium took military possession of the Ruhr area in Germany. The Allies were already in possession of the Rhineland under the Versailles Treaty. In January 1923 an additional area was occupied by the French and Belgians (England refused to join in this undertaking). This Ruhr area adjoins the Rhineland and contains rich coalfields and factories. The French wanted to pay themselves by taking possession of the coal and other articles produced. But here a difficulty presented itself. The German Government decided to oppose the French occupation by passive resistance, and they called upon the mine-owners and workers of the Ruhr to stop work and not help the French in any way. They further helped these mine-owners and industrialists by paying them millions of marks for the losses caused to them. After nine or ten months, which were very expensive both for the French and the Germans, the German Government withdrew passive resistance and began co-operating with the French in working the mines and factories in the area. In 1925 the French and Belgians left the Ruhr.

  German passive resistance had broken down in the Ruhr, but it had demonstrated that the reparations question must again be considered and more reasonable figures of payments fixed. So conferences and commissions followed each other in quick succession, and fresh plans were evolved one after another. There was the Dawes Plan in 1924, and five years later, in 1929, the Young Plan, and three years later, in 1932, it was practically acknowledged by all concerned that no further payments could be made for reparations, and the whole idea was scrapped.

  For these few years from 1924 Germany made regular payments of reparations. But how was this done when Germany had no money and was not solvent? Simply by borrowing from the United States of America. The Allies (England, France, Italy, etc.) owed money to America, the money they had borrowed in war-time; Germany owed money to the Allies as reparations. So America lent money to Germany, and Germany could pay the Allies, so that the Allies might in their turn pay America. It was a very pretty arrangement, and everybody seemed to be satisfied! Indeed, there was no other way of getting payments. Of course the whole round of borrowings and lendings depended on one little thing— America continuing to lend money to Germany. If this stopped, the whole arrangement collapsed.

  These lendings and borrowings did not mean actual payments in hard cash; they were all paper transactions. America credited a certain sum to Germany, Germany transferred this to the Allies, and the Allies re-transferred it to America. The actual money did not move at all, only a number of book entries were made. Why did America go on lending to impoverished countries which could not even pay the interest on previous debts? America did so to help them to carry on somehow and prevent them from going bankrupt, for America feared the collapse of Europe, which, apart from other bad consequences, would have meant the end of the whole debt due to America. So, like a prudent creditor, America kept her debtors alive and functioning. But after some years America got rather tired of this policy of continuous lending and put an end to it. Immediately the whole structure of reparations and debts came down with a crash and there were defaults, and all the nations of Europe and America fell into a morass.

  Reparations were thus a problem which shadowed Europe for over a dozen years after the war. And at the same time there was the question of war debts—that is, the debts of countries other than Germany. As I told you in a letter dealing with the World War, England and France financed the war in the early days and lent money to their smaller allies; then France’s resources were exhausted and she could lend no more. England, however, continued lending. Later England collapsed financially and could lend no more. Only the United States could do so, and they lent generously and with advantage to themselves, to England, France, and other Allies. Thus at the end of the war some countries owed money to France. Many were the debtors of England; and all Allied countries owed large sums to America. America was the only country that owed money to no other country. It was then a great creditor nation. It had taken up England’s old position and become the money-lender to the world. Some figures will perhaps make this clearer. Before the war America was a debtor nation owing three thousand million dollars to other countries. By the time the war had ended, this debt had been wiped off, and instead, America had advanced huge sums of money. In 1926 America was a creditor nation to the tune of twenty-five thousand million dollars.

  These war debts were a tremendous burden on the debtor countries, England, France, Italy, etc., as the debts were all official debts for which the governments were responsible. They tried to get special favourable terms from America, and some concessions were obtained, but still the burden continued. So long as Germany paid reparations, these payments (which were really American credits) were transferred to America by the debtor countries. But when reparations became irregular or stopped coming, it became very difficult to pay the debts. The European debtor countries tried to connect reparations and war debts; they said that both must be considered together, and if one stopped the other must automatically stop also. America, however, refused to connect the two. She said that she had lent money and she wanted it back, quite apart from the question of reparations from Germany, which stood upon a separate footing. This attitude of America was very much resented in Europe, and hard things were said of her. She was Shylock and wanted her pound of flesh, it was said. It was stated, in France especially, that the money borrowed from America had been spent in a common undertaking, the war, and therefore should not be looked upon as an ordinary debt. The Americans, on the other hand, were greatly disgusted with the after-war rivalries and intrigues in Europe. They saw France and England and Italy continue to spend vast sums on their armies and navies, and even lend money to some of the smaller countries for arming. If these countries of Europe had so much money for armaments, why should they, the Americans, let them off their debts? If they did so, probably this money would also be thrown into armaments. So argued America, and she stuck to her claims on the debts.

  As with the reparations, it was difficult enough to pay the war debts anyhow. International debts can either be paid in gold or in goods or services (like transport, shipping and many other services). It was impossible to pay these huge sums in gold; there was not enough gold to be had. And payment in goods and services became almost impossible also, both for reparations and debts, as America and the European countries set up huge tariff barriers which kept out foreign goods. This created an impossible situation, and was the real difficulty. And yet no country was prepared to lower the tariff barriers or take goods in payment for the sum due to it, as this meant injury to the home industries. It was a curious and vicious circle.

  Europe was not the only continent which owed money to the United States of America. American bankers and businessmen invested enormous sums of money in Canada and in Latin America (that is, South and Central America and Mexico). These Latin American countries were greatly impressed during the World War with the power of modern industry and machinery. So they concentrated on industrial development, and money, of which there was an abundance in the United States, poured in from the north. They borrowed so much that they could hardly pay the interest on it. Dictators appeared everywhere, and so long as the borrowing went on, it was well, just as it was well so long as America went on lending to Germany. When the lending to Latin America stopped, there was a crash there, as in Europe.

  To give you some idea of American investments
and how they grew rapidly in Latin America, I shall give you two figures. In 1926 these investments amounted to four and a quarter thousand million dollars. Three years later in 1929 they amounted to over five and a half thousand millions.

  So America in these post-war years was undoubtedly the banker of the world; rich, prosperous, and bursting with wealth. She dominated the world, and her people looked upon Europe, and much more so on Asia, rather contemptuously as old and quarrelsome continents in their dotage. Try to form some idea of American wealth in those peak days of prosperity in the nineteen-twenties. In the fifteen years from 1912 to 1927 the total national wealth of America went up from $187,239,000,000 to $400,000,000,000. The population in 1927 was about 117 millions, and the wealth per head of population was $3428. Progress has been so rapid that these figures are changing from year to year. In a previous letter when comparing the national incomes of India and other countries I gave a much lower figure for America. That was for annual income, not wealth, and it was probably for an earlier year. The figure for 1927 given above is based on a statement made in November 1926 by President Coolidge of America.

  Some other figures may interest you. They are all for 1927. The number of families in the United States was 27,000,000. They owned 15,923,000 electrically-lighted homes, and 17,780,000 telephones were in use. There were 19,237,171 motor cars in use, and this figure was 81 per cent of the world total. America produced 87 per cent of the world’s automobiles, 71 per cent of the world’s petroleum, and 43 per cent of the world’s coal. And yet the population of the United States was only 6 per cent of the world’s population. The general standard was thus very high, and yet it was not as high as it might have been, for wealth was concentrated in the hands of a few thousand millionaires and multimillionaires. This “Big Business” ruled the country. They chose the President, they made the laws, and often enough they broke the laws. There was tremendous corruption in this Big Business, but the American people did not mind so long as there was general prosperity.

  I have given you these figures of American prosperity in the 1920s partly to show you to what heights modern industrial civilization has taken a country as compared with backward, non-industrial countries like India and China, and partly to contrast this prosperity with the subsequent crisis and collapse in America, about which I shall tell you later.

  This crisis was to come later. Right up to 1929 America seemed to have escaped the ills of suffering Europe and Asia. The defeated Powers were in a very bad way. I have told you something about Germany’s misery. Most of the small countries of central Europe, and especially Austria, were in an even worse state. Austria also suffered from inflation, and so did Poland, and both had to change their currencies.

  But this trouble was not confined to the defeated countries. Even the victorious countries were gradually involved in it. It had always been known that to be a debtor was not a good thing. A new and strange realization now came: that it was not a good thing either to be a creditor! For the victorious Powers, to whom Germany owed reparations, got into great difficulties because of these reparations, and the very act of receiving them got them into further trouble. Of this I must tell you in my next letter.

  173

  The Strange Behaviour of Money

  June 16, 1933

  One of the most remarkable characteristics of the post-war period is the strange behaviour of money. Before the war, money in each country had a more or less fixed value. Each country had its own currency, such as the rupee in India, the pound in England, the dollar in America, the franc in France, the mark in Germany, the rouble in Russia, the lira in Italy, and so on; and these currencies bore a steady relation to each other. They were connected to each other by what is called the international gold standard—that is, each currency had a definite gold value. Within the boundaries of each country its own currency was good enough, but not so outside. The connecting link between two currencies was gold, and international payments or settlements were thus made in gold. So long as the currencies had fixed gold values, they could not vary much, as gold is a fairly stable metal so far as value is concerned.

  War-time necessities, however, made the warring governments leave this gold standard, and thus made their currencies cheaper. There was a measure of inflation. This was helpful in carrying on business, but it upset the international relations of currencies. During the war the world was divided up into two huge camps, the Allied camp and the German camp, and within each camp there was co-operation and co-ordination, and everything was subordinated to the war. Difficulties arose after the war, and the changing economic conditions and the mutual distrusts of nations resulted in the extraordinary behaviour of different currencies. The whole money system of today is largely based on credit; a banknote and a cheque are both promises to pay which are accepted as good money. Credit depends on confidence, and when confidence goes, credit goes with it. This is one of the reasons why the money system misbehaved so much during the post-war years, as the troubled conditions of Europe had shaken all confidence. The modern world is inter-dependent, each part is intimately connected with the other and there are ever so many international activities. This means that the troubles of one country have their immediate reactions in other countries. If the German mark falls or a German bank fails, the people of London and Paris and New York may be put out by it in many ways.

  Because of these and other reasons, which I shall not trouble you with, currency or money difficulties arose in nearly all countries, and the more advanced the country industrially, the greater often was the difficulty. For industrial advance meant a highly complicated and delicate international structure. Obviously a backward and isolated place like Tibet would not be affected by the behaviour of the mark or pound. But the fall in the value of the dollar might immediately upset Japan.

  Then again, in each industrial country the interests of various groups were different. Thus some wanted cheap money and inflation (not, of course, a limitless inflation such as had taken place in Germany), while some wanted the exact opposite, deflation—that is, a high gold value of money. For instance, the creditors, the bankers and the like were in favour of a high money value, as they were owed money; the debtors naturally wanted cheaper money to pay their debts. The industrialists and manufacturers were in favour of cheap money, as they were usually the debtors of the bankers and, more important still, this encouraged the sale of their goods abroad. Cheaper British money would mean that the price of British goods would be less as compared to German or American or other foreign goods in the foreign market, and this would result in an advantage to British industrialists and a greater sale of their goods. So you will notice that different groups pulled different ways, the principal tug-of-war being between the industrialists and the bankers. I am trying to put this as simply as I can. As a matter of fact there were many complicating factors.

  Both in France and Italy there was inflation, and the franc and lira fell in value. The old value of the franc used to be about 25 to the pound sterling (as the British pound is called). This fell to 275 to the pound. Later it was fixed at about 120 to the pound.

  After the war when America stopped helping England, the pound fell in value a little. England was then faced by a difficulty. Was she to accept this natural fall in the value of the pound and fix the pound at this new value? This would have helped industry by cheapening goods, but it would have caused loss to the bankers and creditors. More important still, it would have put an end to London’s position as the financial centre of the world. New York would then step into this position, and borrowers would go there instead of coming to London. The alternative was to force up the pound to its original value. This would raise the prestige of the pound and London would continue its financial leadership. But industry would suffer and, as the event proved, many other undesirable things would happen.

  The British Government chose the latter course in 1925 and raised the pound to its former gold value. Thus they sacrificed to some extent their industry to t
heir bankers. The real issue before them was a more important one still, for it vitally affected the continuance of their empire. If London lost the financial headship of the world, the various parts of the Empire would not look to it for leadership or help, and the Empire would gradually melt away. So that this question became one of imperial policy, and this wider imperialism won at the cost of British industry and immediate domestic interests. It was in this same way, you may remember, that imperial considerations induced Britain to encourage the industrialization of India after the war, even at some cost to Lancashire and British industry.

  Thus a brave attempt was made by Britain to keep leadership and empire, but it was an attempt which proved most costly and it was foredoomed to failure. The British Government, or any other government, could not control the inevitable developments of economic destiny. The pound had regained its ancient prestige for a while, but at the cost of a growing paralysis of industry. Unemployment grew, and the coal industry was especially hard hit. The deflation of the pound (as this process of raising its gold value is called) was largely responsible for this. There were other reasons also. Some German coal had been received in payment for reparations, and this meant that less British coal was required, which resulted in greater unemployment in the coal-mines. Thus the creditor and victor countries came to realize that it was not an unmixed blessing to receive a tribute of this kind from the defeated country. The British coal industry was also very badly organized. It was split up into hundreds of small companies, and could not easily compete with the larger and better organized groups on the Continent and in America.

  As the coal industry went from bad to worse, the mine-owners decided to reduce the wages of their workers. This was fiercely resented by the miners, and they had the support of the workers in other industries. The whole labour movement in Britain got ready to fight on behalf of the miners, and a “Council of Action” was formed. Previous to this a powerful “triple alliance” had been formed between the three great trade unions, the miners, the railway workers, and the transport workers, which comprised millions of well-organized and trained workers. This aggressive attitude of the working class rather frightened the government, and they postponed the crisis by giving a subsidy to the mine-owners to enable them to continue the old scale of wages for another year. An inquiry commission was also appointed. But nothing came of all this, and next year in 1926 the crisis came again when the mine-owners wanted to reduce wages. This time the government were ready for the fight with labour; they had made every preparation for it during the past months.