by Karl Polanyi
Politically, the Treaties harbored a fatal contradiction. Unilateral permanent disarmament of the defeated nations forestalled any reconstruction of the balance-of-power system, since power is an indispensable requisite of such a system. In vain did Geneva look toward the restoration of such a system in an enlarged and improved Concert of Europe called the League of Nations; in vain were facilities for consultation and joint action provided in the Covenant of the League, for the essential precondition of independent power units was now lacking. The League could never be really established; neither Article 16 on the enforcement of Treaties, nor Article 19 on their peaceful revision was ever implemented. The only viable solution of the burning problem of peace—the restoration of the balance-of-power system—was thus completely out of reach; so much so that the true aim of the most constructive statesmen of the twenties was not even understood by the public, which continued to exist in an almost indescribable state of confusion. Faced by the appalling fact of the disarmament of one group of nations, while the other group remained armed—a situation which precluded any constructive step toward the organization of peace—the emotional attitude prevailed that the League was in some mysterious way the guarantor of an era of peace which needed only frequent verbal encouragement to become permanent. In America there was a widespread idea that if only America had joined the League, matters would have turned out quite differently. No better proof than this could be adduced for the lack of understanding of the organic weaknesses of the so-called postwar system—so-called, because, if words have a meaning, Europe was now without any political system whatever. A bare status quo such as this can last only as long as the physical exhaustion of the parties lasts; no wonder that a return to the nineteenth-century system appeared as the only way out. In the meantime the League Council might have at least functioned as a kind of European directorium, very much as the Concert of Europe did at its zenith, but for the fatal unanimity rule which set up the obstreperous small state as the arbiter of world peace. The absurd device of the permanent disarmament of the defeated countries ruled out any constructive solution. The only alternative to this disastrous condition of affairs was the establishment of an international order endowed with an organized power which would transcend national sovereignty. Such a course, however, was entirely beyond the horizon of the time. No country in Europe, not to mention the United States, would have submitted to such a system.
Economically, the policy of Geneva was much more consistent in pressing for the restoration of world economy as a second line of defence for peace. For even a successfully reestablished balance-of-power system would have worked for peace only if the international monetary system was restored. In the absence of stable exchanges and freedom of trade the governments of the various nations, as in the past, would regard peace as a minor interest, for which they would strive only as long as it did not interfere with any of their major interests. First among the statesmen of the time, Woodrow Wilson appears to have realized the interdependence of peace and trade, not only as a guarantee of trade, but also of peace. No wonder that the League persistently strove to reconstruct the international currency and credit organization as the only possible safeguard of peace among sovereign states, and that the world relied as never before on haute finance, now represented by J. P. Morgan instead of N. M. Rothschild.
According to the standards of the nineteenth century the first postwar decade appeared as a revolutionary era; in the light of our own recent experience it was precisely the opposite. The intent of that decade was deeply conservative and expressed the almost universal conviction that only the reestablishment of the pre-1914 system, “this time on solid foundations,” could restore peace and prosperity. Indeed, it was out of the failure of this effort to return to the past that the transformation of the thirties sprang. Spectacular though the revolutions and counterrevolutions of the postwar decade were, they represented either mere mechanical reactions to military defeat or, at most, a reenacting of the familiar liberal and constitutionalist drama of Western civilization on the Central and Eastern European scene; it was only in the thirties that entirely new elements entered the pattern of Western history.
With the exception of Russia, the Central and Eastern European upheavals of 1917–20 in spite of their scenario were merely roundabout ways of recasting the régimes that had succumbed on the battlefields. When the counterrevolutionary smoke dissolved, the political systems in Budapest, Vienna, and Berlin were found to be not very different from what they had been before the war. This was true, roughly, of Finland, the Baltic States, Poland, Austria, Hungary, Bulgaria, and even Italy and Germany, up to the middle of the twenties. In some countries a great advance was made in national freedom and land reform—achievements which had been common to Western Europe since 1789. Russia, in this respect, formed no exception. The tendency of the times was simply to establish (or reestablish) the system commonly associated with the ideals of the English, the American, and the French revolutions. Not only Hindenburg and Wilson, but also Lenin and Trotsky were, in this broad sense, in the line of Western tradition.
In the early thirties, change set in with abruptness. Its landmarks were the abandonment of the gold standard by Great Britain; the Five-Year Plans in Russia; the launching of the New Deal; the National Socialist Revolution in Germany; the collapse of the League in favor of autarchist empires. While at the end of the Great War nineteenth-century ideals were paramount, and their influence dominated the following decade, by 1940 every vestige of the international system had disappeared and, apart from a few enclaves, the nations were living in an entirely new international setting.
The root cause of the crisis, we submit, was the threatening collapse of the international economic system. It had only haltingly functioned since the turn of the century, and the Great War and the Treaties had wrecked it finally. This became apparent in the twenties when there was hardly an internal crisis in Europe that did not reach its climax on an issue of foreign economy. Students of politics now grouped the various countries, not according to continents, but according to the degree of their adherence to a sound currency. Russia had astonished the world by the destruction of the rouble, the value of which was reduced to nothing by the simple means of inflation. Germany repeated this desperate feat in order to give the lie to the Treaty; the expropriation of the rentier class, which followed in its wake, laid the foundation for the Nazi revolution. The prestige of Geneva rested on its success in helping Austria and Hungary to restore their currencies, and Vienna became the Mecca of liberal economists on account of a brilliantly successful operation on Austria’s krone which the patient, unfortunately, did not survive. In Bulgaria, Greece, Finland, Latvia, Lithuania, Estonia, Poland, and Romania the restoration of the currency provided counterrevolution with a claim to power. In Belgium, France, and England the Left was thrown out of office in the name of sound monetary standards. An almost unbroken sequence of currency crises linked the indigent Balkans with the affluent United States through the elastic band of an international credit system, which transmitted the strain of the imperfectly restored currencies, first, from Eastern Europe to Western Europe, then from Western Europe to the United States. Ultimately, the United States itself was engulfed by the effects of the premature stabilization of European currencies. The final breakdown had begun.
The first shock occurred within the national spheres. Some currencies, such as the Russian, the German, the Austrian, the Hungarian, were wiped out within a year. Apart from the unprecedented rate of change in the value of currencies, there was the circumstance that this change happened in a completely monetarized economy. A cellular process was introduced into human society, the effects of which were outside the range of experience. Internally and externally alike, dwindling currencies spelled disruption. Nations found themselves separated from their neighbors, as by a chasm, while at the same time the various strata of the population were affected in entirely different and often opposite ways. The intellectual middle class was l
iterally pauperized; financial sharks heaped up revolting fortunes. A factor of incalculable integrating and disintegrating force had entered the scene.
“Flight of capital” was a new thing. Neither in 1848, nor in 1866, nor even in 1871 was such an event recorded. And yet, its vital role in the overthrow of the liberal governments of France in 1925, and again in 1938, as well as in the development of a fascist movement in Germany in 1930, was patent.
Currency had become the pivot of national politics. Under a modern money economy nobody could fail to experience daily the shrinking or expanding of the financial yardstick; populations became currency-conscious; the effect of inflation on real income was discounted in advance by the masses; men and women everywhere appeared to regard stable money as the supreme need of human society. But such awareness was inseparable from the recognition that the foundations of the currency might depend upon political factors outside the national boundaries. Thus the social bouleversement which shook confidence in the inherent stability of the monetary medium shattered also the naïve concept of financial sovereignty in an interdependent economy. Henceforth, internal crises associated with the currency would tend to raise grave external issues.
Belief in the gold standard was the faith of the age. With some it was a naïve, with some a critical, with others a satanistic creed implying acceptance in the flesh and rejection in the spirit. Yet the belief itself was the same, namely, that banknotes have value because they represent gold. Whether the gold itself has value for the reason that it embodies labor, as the socialists held, or for the reason that it is useful and scarce, as the orthodox doctrine ran, made for once no difference. The war between heaven and hell ignored the money issue, leaving capitalists and socialists miraculously united. Where Ricardo and Marx were at one, the nineteenth century knew not doubt. Bismarck and Lassalle, John Stuart Mill and Henry George, Philip Snowden and Calvin Coolidge, Mises and Trotsky equally accepted the faith. Karl Marx had gone to great pains to show up Proudhon’s utopian labor notes (which were to replace currency) as based on self-delusion; and Das Kapital implied the commodity theory of money, in its Ricardian form. The Russian Bolshevik Sokolnikoff was the first postwar statesman to restore the value of his country’s currency in terms of gold; the German Social Democrat Hilferding imperilled his party by his staunch advocacy of sound currency principles; the Austrian Social Democrat Otto Bauer supported the monetary principles underlying the restoration of the krone attempted by his bitter opponent, Seipel; the English Socialist, Philip Snowden, turned against Labour when he believed the pound sterling not to be safe at their hands; and the Duce had the gold value of the lira at 90 carved in stone, and pledged himself to die in its defense. It would be hard to find any divergence between utterances of Hoover and Lenin, Churchill and Mussolini, on this point. Indeed, the essentiality of the gold standard to the functioning of the international economic system of the time was the one and only tenet common to men of all nations and all classes, religious denominations, and social philosophies. It was the invisible reality to which the will to live could cling, when mankind braced itself to the task of restoring its crumbling existence.
The effort, which failed, was the most comprehensive the world had ever seen. The stabilization of the all-but-destroyed currencies in Austria, Hungary, Bulgaria, Finland, Romania, or Greece was not only an act of faith on the part of these small and weak countries, which literally starved themselves to reach the golden shores, but it also put their powerful and wealthy sponsors—the Western European victors—to a severe test. As long as the currencies of the victors fluctuated, the strain did not become apparent; they continued to lend abroad as before the war and thereby helped to maintain the economies of the defeated nations. But when Great Britain and France reverted to gold, the burden on their stabilized exchanges began to tell. Eventually, a silent concern for the safety of the pound entered into the position of the leading gold country, the United States. This preoccupation which spanned the Atlantic brought America unexpectedly into the danger zone. The point seems technical, but must be clearly understood. American support of the pound sterling in 1927 implied low rates of interest in New York in order to avert big movements of capital from London to New York. The Federal Reserve Board accordingly promised the Bank of England to keep its rate low; but presently America herself was in need of high rates as her own price system began to be perilously inflated (this fact was obscured by the existence of a stable price level, maintained in spite of tremendously diminished costs). When the usual swing of the pendulum after seven years of prosperity brought on the long overdue slump in 1929, matters were immeasurably aggravated by the existing state of cryptoinflation. Debtors, emaciated by deflation, lived to see the inflated creditor collapse. It was a portent. America, by an instinctive gesture of liberation, went off gold in 1933, and the last vestige of the traditional world economy vanished. Although hardly anybody discerned the deeper meaning of the event at the time, history almost at once reversed its trend.
For over a decade the restoration of the gold standard had been the symbol of world solidarity. Innumerable conferences from Brussels to Spa and Geneva, from London to Locarno and Lausanne met in order to achieve the political preconditions of stable currencies. The League of Nations itself had been supplemented by the International Labour Office partly in order to equalize conditions of competition among the nations so that trade might be liberated without danger to standards of living. Currency was at the heart of the campaigns launched by Wall Street to overcome the transfer problem and, first, to commercialize, then to mobilize reparations; Geneva acted as the sponsor of a process of rehabilitation in which the combined pressure of the City of London and of the neoclassical monetary purists of Vienna was put into the service of the gold standard; every international endeavor was ultimately directed to this end, while national governments, as a rule, accommodated their policies to the need of safeguarding the currency, particularly those policies which were concerned with foreign trade, loans, banking, and exchange. Although everybody agreed that stable currencies ultimately depended upon the freeing of trade, all except dogmatic free traders knew that measures had to be taken immediately which would inevitably restrict foreign trade and foreign payments. Import quotas, moratoria and standstill agreements, clearing systems and bilateral trade treaties, barter arrangements, embargoes on capital exports, foreign trade control, and exchange equalization funds developed in most countries to meet the same set of circumstances. Yet the incubus of self-sufficiency haunted the steps taken in protection of the currency. While the intent was the freeing of trade, the effect was its strangulation. Instead of gaining access to the markets of the world, the governments, by their own acts, were barring their countries from any international nexus, and ever-increasing sacrifices were needed to keep even a trickle of trade flowing. The frantic efforts to protect the external value of the currency as a medium of foreign trade drove the peoples, against their will, into an autarchized economy. The whole arsenal of restrictive measures, which formed a radical departure from traditional economics, was actually the outcome of conservative free trade purposes.
This trend was abruptly reversed with the final fall of the gold standard. The sacrifices that had been made to restore it had now to be made over again so that we might live without it. The same institutions which were designed to constrict life and trade in order to maintain a system of stable currencies were now used to adjust industrial life to the permanent absence of such a system. Perhaps that is why the mechanical and technological structure of modern industry survived the impact of the collapse of the gold standard. For in the struggle to retain it, the world had been unconsciously preparing for the kind of efforts and the type of organizations necessary to adapt itself to its loss. Yet the intent was now the opposite; in the countries that had suffered most during the long-drawn fight for the unattainable, titanic forces were released on the rebound. Neither the League of Nations nor international haute finance outlasted the gold st
andard; with its disappearance both the organized peace interest of the League and its chief instruments of enforcement—the Rothschilds and Morgans—vanished from politics. The snapping of the golden thread was the signal for a world revolution.
But the failure of the gold standard did hardly more than set the date of an event which was too big to have been caused by it. No less than a complete destruction of the national institutions of nineteenth-century society accompanied the crisis in a great part of the world, and everywhere these institutions were changed and re-formed almost out of recognition. The liberal state was in many countries replaced by totalitarian dictatorships, and the central institution of the century—production based on free markets—was superseded by new forms of economy. While great nations recast the very mould of their thought and hurled themselves into wars to enslave the world in the name of unheard-of conceptions of the nature of the universe, even greater nations rushed to the defence of freedom which acquired an equally unheard-of meaning at their hands. The failure of the international system, though it triggered the transformation, could certainly not have accounted for its depth and content. Even though we may know why that which happened happened suddenly, we may still be in the dark about why it happened at all.
It was not by accident that the transformation was accompanied by wars on an unprecedented scale. History was geared to social change; the fate of nations was linked to their role in an institutional transformation. Such a symbiosis is in the nature of things; though national groups and social institutions have origin of their own, they tend to hitch on to one another in their struggle for survival. A famous instance of such a symbiosis linked capitalism and the seaboard nations of the Atlantic. The Commercial Revolution, so closely connected with the rise of capitalism, became the vehicle to power for Portugal, Spain, Holland, France, England, and the United States, each of them benefiting from the chances offered by that broad and deep-seated movement, while, on the other hand, capitalism itself was spreading over the planet through the instrumentality of these rising Powers.