The War of the World: History's Age of Hatred

by Niall Ferguson

  PART II

  Empire-States

  6

  The Plan

  I know all too well that great plans, great ideas and great interests take precedence over everything, and I know it would be petty of me to place the question of my own person on a par with the universal-historical tasks resting, first and foremost, on your shoulders.

  Nikolai Bukharin in his last letter to Stalin

  We shake your hand, beloved father,

  For the happiness you have given us.

  You are a vital ray of the sun

  And now the peasant is well fed

  The warrior is strong in battle.

  Poem addressed to Stalin by the workers

  of the South Ossetian Autonomous Oblast

  We shall destroy such enemies, be he an old Bolshevik or not, we will destroy his kin, his family.

  Toast proposed by Stalin

  FROM JAZZ TO BLUES

  In the immediate aftermath of the First World War, most of the world danced to an American rhythm. A victorious latecomer to the war, the United States was the unquestioned winner of the peace. Despite legal restrictions like the prohibition of alcohol introduced in 1920 and the older system of racial segregation, America stood for new freedoms in economic, social and political life. Nothing captured the ambivalent quality of the new freedom better than jazz, a music born in the black communities of the Mississippi delta, transported by black migration to the industrial cities of the Mid-West and North-East, and transformed on Broadway into mood music for a decade-long global party. As F. Scott Fitzgerald suggested in his novel The Great Gatsby, this flight into hedonism suited everyone: not only those who had suffered during the war and wanted to forget it, but also those who only visited the trenches as post-war tourists and invented their own war stories out of guilt or vanity. Cinema and short skirts, cocktails and convertible cars, speakeasies and chain-smoked cigarettes: New York, Chicago and Los Angeles offered all these pleasures and more. But the American mood of post-war hedonism was as contagious as the influenza before it. The once austere Prussian capital, Berlin, was transformed into ‘Chicago on the Spree’. In Tokyo, too, the 1920s were the eroguro age – ero for erotic, guro for grotesque; at night the Ginza district seethed with American sounds and styles.

  Shanghai, above all, was a garden of earthly delights: ‘Nothing more intensely living can be imagined,’ enthused the English author Aldous Huxley, who succumbed to nearly every temptation it had to offer. The Viennese-born film director Josef von Sternberg – whose oeuvre in the 1920s included Underworld, Street of Sin and The Dragnet, and who would later make Marlene Dietrich a star with The Blue Angel and Shanghai Express – was at once fascinated and appalled by the city’s Great World Centre, a veritable cornucopia of consumption:

  On the first floor were gambling tables, singsong girls, magicians, pick pockets, slot machines, fireworks, birdcages, fans, stick incense, acrobats, and ginger. One flight up were the restaurants, a dozen barbers, and earwax extractors. The third floor had jugglers, herb medicines, ice cream parlors, photographers, a new bevy of girls, their high-collared gowns slit to reveal their hips… and, under the heading of novelty, several rows of exposed toilets.

  The trumpeter Buck Clayton and his Harlem Gentlemen were among the American bands who played the Canidrome Ballroom, the self-styled ‘Rendezvous of Shanghai’s elite’. Among that elite’s most debauched members was a young man named Chiang Kai-shek, who married his second wife (bigamously) in the Great Eastern Hotel in the Wing On department store building. (On their honeymoon he introduced her to his first wife and to gonorrhoea.) Just a few years later he married again, this time the wealthy, Wellesley-educated heiress Soong Meiling. A thousand people attended the reception in the rose-bedecked Majestic Hotel. The date was December 1, 1927, just a few days after the tenth anniversary of the Russian Revolution, and the party was, regrettably, marred when a crowd of down-at-heel Russian émigrés pelted the Soviet consulate with sticks and stones.

  December 1927 was also the month Louis Armstrong and the Hot Five recorded ‘Got No Blues’ and ‘Hotter than That’. The good times were indeed rolling; between 1921 and 1929 the US economy grew at an average annual rate of 6 per cent. Yet they rolled mainly for a wealthy elite. By 1928 nearly 20 per cent of total US income was being earned by the top 1 per cent of taxpayers, and more than 3 per cent by the top 0.01 per cent. A staggering 40 per cent of American wealth was in the hands of the top 1 per cent of households, and more than 10 per cent of it belonged to just 0.01 per cent. This partly reflected the unprecedented rise in stock prices between 1919 and 1929. Between August 1921 and August 1929 the Dow Jones Industrial index increased by a factor of 4.4. Other prices, however, had not risen so far. Some were already falling. For those fortunate enough not to be fighting it, the First World War had been a two-fold boon. The temporary diversion of so much European production into the business of destruction had allowed Asian and American producers to expand mightily, but they could not wholly compensate for the disruption caused by the war. It was a global seller’s market. At the same time, the inflationary financing of the war, as governments printed money to pay for their deficits, pushed up world prices. The spot price of wheat in the Chicago market – a reasonably good proxy for traded primary commodity prices – hit roughly treble its pre-war average in 1917 and again in 1920. The twin stimuli of dearth and currency depreciation ended thereafter, and a global recession in 1920–21 saw steep declines in the prices of primary products and manufactures. Thereafter, they barely recovered. The price of wheat peaked in February 1925 at 182 cents a bushel (compared with 294 cents in May 1920) and by May 1929 it was down to 102 cents. Similar forces were driving down the world prices of other key commodities like iron and steel. This deflation was the overture to the Great Depression. In the 1920s it meant poverty for farmers, but easy living for those who received the profits of industry and finance.

  The Depression was an economic catastrophe unmatched before or since. It was signalled by a collapse in American asset prices. On October 29, 1929 – ‘Black Tuesday’ – the Dow Jones Industrial index fell by nearly 12 per cent, one of the steepest one-day declines in its history. The market had in fact begun to slide after September 3; by November 13 it had fallen by nearly 50 per cent. This signified a slump in the confidence of investors in the future profitability of US corporations, magnified by panic selling on the part of speculators who had been trading on margin (in effect, with borrowed money). The subsequent rally, which lasted until April 1930, proved illusory. From then until July 1932 the market slid inexorably downwards. At its nadir on July 8, 1932 stock prices had fallen to just 11 per cent of their 1929 maximum. With the exception of 1914, the stock market had never seen such volatility, and nothing remotely like it has happened since.

  The symptoms of the Depression were much easier to discern than its causes. Between 1929 and 1933 American gross national product fell by nearly half in nominal terms, or 30 per cent when allowance is made for the simultaneous decline in prices. The first sector to be severely affected was construction; by 1930, however, the collapse in activity had spread to agriculture, manufacturing and finance. Investment imploded; so did exports. This crisis of capitalism was not confined to the United States; it was a global phenomenon, as Figure 6.1 makes clear. The combined output of the world’s seven biggest economies declined by close to 20 per cent between 1929 and 1932. But there were significant national and, indeed, regional differences in the timing and severity of the Depression. The United States was not the first to suffer, partly because monetary tightening there initially affected other countries by luring short-term capital back to New York, and partly because other central banks were restricting credit for reasons of their own. Argentina, Australia, Brazil, Canada, Germany and Poland all turned down sooner. But only two countries suffered such severe contractions as the United States. One was Germany, where construction had peaked as early as 1927. The other was Austria.

 
It was the phenomenon of industrial unemployment that shocked contemporaries most. ‘Next to war,’ remarked The Times in an editorial ten years after the nadir of the downturn, ‘unemployment has been the most widespread, the most insidious, and the most corroding malady of our generation: it is the specific social disease of Western civilisation in our time.’ As a percentage of the civilian labour force, unemployment in the United States rose from 3.2 per cent on the eve of the Depression to a peak of 25 per cent in 1933. It remained above 15 per cent for the remainder of the decade. In Germany, which used a somewhat different definition, unemployment exceeded 50 per cent of trade union members in 1932. Yet just as painful for many people was the collapse in prices, which ruined countless farmers all over the world, or the failure of thousands of banks, which took the savings of depositors down with them. Indeed, it was the disintegration of the American banking system, more than anything else, that deepened and prolonged the crisis. Between 1929 and 1933, around 10,000 of the United States’ 25,000 banks closed their doors. There were also major banking crises in Austria and Germany, as well as in France and Switzerland. Figure 6.1 shows that more countries were affected by severe deflation than by severe reductions in output. This tends to confirm the view that the Depression was partly a consequence of a global financial crunch, with banking crises in some countries, currency crises in others and both kinds of crisis in an unlucky few.

  Contemporaries struggled to explain what had gone wrong with capitalism. The American President, Herbert Hoover, was no uncritical believer in laissez-faire economics. During the 1920s, he had expressed his support for export promotion, collective bargaining, agricultural cooperatives and business ‘conferences’ as ways of tackling economic problems. In Hoover’s eyes, however, there were limits to what government could do. The Depression was a ‘worldwide’ phenomenon due to ‘overproduction of… raw materials’ and ‘over-speculation’; the ensuing ‘retribution’ was similar in its character to what had happened in 1920 and 1921. The country’s ‘fundamental assets’, he argued, were ‘unimpaired’. All that was needed was for the Federal Reserve to continue to supply ‘ample… credit at low rates of interest’, while maintaining the dollar’s price in terms of gold; for the government to expand public works, though without unbalancing the budget; and for the necessary ‘savings in production costs’ to be

  Figure 6.1 Output and prices: cumulative changes, 1929-1932

  shared between ‘labor, capital and the consumer’. Hoover also backed an increase in the numerous tariffs that had long protected American producers of food, textiles and other basic products from foreign competition. Unfortunately, none of this sufficed to counter the plunge in economic confidence. On the contrary, the policy made matters worse. By refusing to relax monetary policy, the Federal Reserve failed disastrously to avert waves of bank closures in 1930 and 1931, actually raising its discount rate in October 1931; the attempt to run a balanced budget meanwhile prevented any kind of counter-cyclical fiscal stimulus; and the protectionist Smoot-Hawley trade bill enacted in June 1930, though it did not radically increase tariff rates, nevertheless dealt a blow to financial confidence. The German economy had to swallow an equally lethal policy brew of interest rate hikes, tax increases, spending cuts and protection.

  There were without question structural imbalances in the global economy that condemned traditional policy responses to failure. The downward pressure on prices of commodities and manufactures was a matter of international supply and demand more than policy. The war had burdened America’s principal trading partners with hard-currency debts – reparations in the case of Germany – which they could only service by exporting to the United States or to one another. The increased power of trade unions had made labour markets more rigid than before the war, so that falls in prices and profits did not translate into lower wages but into factory closures and unemployment.* In his inaugural address on March 4, 1933 Hoover’s successor Franklin Roosevelt offered a better diagnosis when he identified ‘fear itself – nameless, unreasoning, unjustified terror’ – as the root cause of the Depression. Expectations of investors had taken a severe battering; it would be years before their spirits recovered. Yet the measures Roosevelt proposed on becoming president proved little more effectual than Hoover’s. Roosevelt wanted to raise agricultural prices and to cut government spending, an unpromising combination at the best of times; the majority of his schemes merely tended to increase the power of the federal government by demanding stricter supervision on banks, national planning for public utilities and centralized control over relief efforts. The resulting jobs for bureaucrats made only a modest dent in the unemployment numbers. The policy changes that made the most difference were ones generally forced on governments. In 1931 more than forty countries had been on the gold standard; by 1937 virtually none were. Both the United Kingdom and then the United States, the two anchors of the international monetary system, were forced to float their currencies, allowing their central banks to focus on lowering domestic interest rates without worrying about how changes in their gold reserves or capital flows would affect the exchange rate. At the same time, government deficits rose, as a result of increased public spending and collapsing revenues; this happened well in advance of the breakthrough in economic theory represented by Keynes’s General Theory of Employment, Interest and Money (1936), though only two countries ran deficits sufficiently large to provide an economic stimulus.

  Currency devaluations stimulated recovery in two ways: allowing nominal interest rates to fall and, so long as people began to anticipate less deflation and perhaps even inflation, reducing real interest rates and real wages. Employing people began to look as if it might become profitable again – though the rate of recovery was not closely correlated to movements in real wages, suggesting that other inhibitions were at work, especially in the United States. Unfortunately the paroxysm of protectionism that by now had swept the world, persuading even the British to abandon free trade, meant that looser monetary and fiscal policies could do little to stimulate trade. Globalization was over; flows of goods were constrained by import duties, flows of capital by exchange controls and other devices, flows of labour by new restrictions on immigration. Indeed, Keynes came to believe that economic recovery could be sustained only in a more or less closed economy that aimed at autarky. As he remarked casually in the preface to the German edition of his book, ‘The theory of output as a whole… is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.’

  Keynes’s choice of word was revealing. Although the term owed its origins to Italian fascism,* the first truly totalitarian regime had been in existence for more than a decade when the Depression struck. By crippling the American colossus for a decade and laying waste to its trading partners and debtors, the economic crisis seemed to vindicate the Soviet model. For, if Marxism-Leninism stood for anything, it was the prediction that capitalism would collapse under the weight of its own contradictions. Now it seemed to be doing precisely that. Understandably, the more the American dream turned to night mare, the more people were attracted to the Russian alternative of a planned economy – insulated from the vagaries of the market, yet capable of feats of construction every bit as awesome as the skyscrapers of New York or the mass-produced cars of Henry Ford. All the totalitarian state asked in return was complete control of every aspect of life. Only in your dreams were you free from its intrusion, and even there the omnipresent demigod figure of the Leader was liable to intrude. The justification for this abolition of individual freedom was equality: from each according to his abilities, to each according to his needs, as the slogan put it. The aim was not just rapid industrialization; it was the ‘liquidation’ of the bourgeoisie and other property-owning classes.

  Yet, as George Orwell would later observe, on the Soviet ‘Animal Farm’ some animals turned out to b
e more equal than others. It did not take long for a ‘new class’ (as the dissident Yugoslav Milovan Djilas later called it) to spring up, composed of the elite functionaries of the totalitarian state. Their control over every aspect of economic life and their freedom from any kind of independent scrutiny or popular accountability made it easy to justify and pay for a whole range of Party privileges; the nomenklatura were also in position to enrich themselves unofficially through peculation and corruption. There was another catch. The planned economy had an insatiable appetite not only for workers but also for raw materials. These the Soviet Union had inherited in copious quantities from the Tsarist Empire. But other countries that adopted the totalitarian model were less well endowed. In Germany and Japan, the planned economy set a very different political tempo from the swinging syncopation of the jazz age. By the mid-1930s people there were no longer dancing; they were marching.

  FELLOW TRAVELLERS

  In the summer of 1931, in his seventy-fifth year, the playwright George Bernard Shaw paid a nine-day visit to the Soviet Union. What he saw – or thought he saw – was a workers’ paradise under construction. Among the sites he inspected was that of the projected Moscow– Volga Canal. The canal was intended to link the Soviet capital with the Volga River, not only to facilitate river traffic but also to supplement the rapidly expanding city’s water supply. In stark contrast to the dole queues of the West, the site would soon be swarming with workers. Here was a symbol of the apparently realizable dream of state socialism, and Western visitors like Shaw reacted ecstatically. They had seen the future, and – compared with an apparently defunct capitalist system – it seemed to work.