The Deluge
Page 44
I
The inflation that followed the war in Germany is of course legendary. Poland and Austria were to suffer a similar fate. But until 1920 inflation was a generic experience of all the combatant and non-combatant states across the world. In Europe and Asia demand surged. Prices rose everywhere, with all but the United States having abandoned the gold standard. The relative value of currencies gives some measure of the dislocation. Relative to the dollar, by February 1920 sterling had fallen to as little as $3.40 to the pound, as compared to its pre-war parity of $4.92. The French franc collapsed from the supported rate of 5.45 francs to the dollar during the war to as little as 17.08 francs to the dollar at the end of April 1920.4 The Italian lire plunged, driving up import prices and stoking inflation. In Asia, a huge surge in Chinese and Indian purchasing combined in 1919 to drive world silver prices to record levels. This resulted in a depreciation of the yen relative to its two major regional trading partners and a surge in Japanese exports.5 These fluctuations were the expression of loose financial policy as governments continued to spend on post-war reconstruction, without taking the painful fiscal medicine.
This was perhaps most notable in Japan, which emerged as one of the real victors of the war, undamaged but with its status and economic capacity hugely increased. Prime Minister Hara’s government was determined to capitalize on this boom. The era of so-called Taisho democracy was born on a wave of inflation and generous government spending. The budget projected a near doubling of government spending in the post-war years. The centrepiece of this splurge was an 800 million yen infrastructure programme for Japan’s railways. Road building and school construction were other favourites of the conservative Seiyukai bloc. But the largest single increase was in military spending, propelled upward by the costs of the Siberian intervention and gigantic new naval plans.6
In France, at the other end of the spectrum from Japan in terms of war damage, inflation was also fuelled by reconstruction. The regular budget was balanced. But hanging over France was the huge deficit on the extraordinary expenditure account. Spending billions on the devastated areas helped to prevent a surge in unemployment as the army was demobilized. And in the first instance French bondholders showed themselves willing to subscribe truly remarkable amounts of money for the reconstruction.7 The Bank of France was accommodating.8 But how long could this be sustained?
As the inflationary boom gathered pace the anxiety caused by a surging cost of living was palpable. Rising prices threatened real wages and drove workers into the ranks of the trade unions. In 1919 and 1920 the French government was confronted with huge May Day strikes and threats of a general strike. In Italy the summer of 1919 ushered in a Biennio Rosso. On 30 August 1919 the Japanese Trade Union Congress was born under the sign of international progressivism. ‘The world is changing and it is moving progressively forward, leaving only Japan behind,’ the Japanese unionists declaimed.9 Along with the eight-hour day, they demanded universal manhood suffrage, repeal of repressive police laws and democratization of education. Within a matter of months, the Hara government was deploying military police to deal with strikes in Tokyo and even at the Yawata works, the prestigious, state-owned birthplace of Japan’s steel industry.10 The sense of crisis was compounded in February 1920 by feverish parliamentary manoeuvring and popular mobilization in support of universal suffrage. No wonder that the conservative elder statesman Yamagata Aritomo opined: ‘I am constantly and greatly apprehensive’ of the ‘confusion’ and ‘ferment’ of ‘chaos’ that may result from the ‘present difficulties in society caused by price rises’.11
In Britain too there was intense anxiety. Though Lloyd George’s government enjoyed a huge majority in Parliament, this poorly reflected the actual balance of opinion in the country and was dangerously at odds with the extraordinary escalation of class conflict that threatened to destroy once and for all Britain’s self-image as a peaceable kingdom. Following the alarming disorder in London and Glasgow over the winter of 1918–19, between 1919 and 1921 more days were lost in strikes in Britain than in revolutionary Germany or in Italy. This militancy in turn stoked a groundswell of bourgeois resentment toward the ‘privileges’ being conceded to the working class. As John Maynard Keynes advised the Treasury in February 1920, ‘a continuance of inflationism and high prices will not only depress the exchanges but by their effect on prices will strike at the whole basis of contract, of security, and of the capitalist system generally’.12 Meanwhile, Chancellor Austen Chamberlain fretted over the blackmail of the financial markets as week by week the Treasury struggled to refinance its floating debt.13 The answer was clear. To restore order there must be a return to financial orthodoxy (Fig. 3).
Figure 3. The Great Deflation (Logarithmic vertical scale; 1913 = 100)
Ahead of America, it was Japan that led the world into deflation in the spring of 1920. In February the long rise in silver prices reversed. Within a matter of months on Asian markets the price of gold in terms of silver doubled. By inverting the movement of 1919 this impelled a drastic appreciation of the yen relative to China’s silver-backed currency. With export orders plunging, on 15 March 1920 the Tokyo stock market crashed.14 Rice and silk prices plunged. Almost 170 Japanese banks faced panic-stricken runs on their accounts. By June 1920, the Tokyo stock exchange had fallen by 60 per cent against its post-war peak. By comparison with Japan, in the UK the deflationary adjustment was more clearly policy-induced. Already on 15 December 1919 Chamberlain had solemnly announced to the House of Commons that the long-term aim of British policy was the restoration of the pre-war gold parity of sterling. This was not the idle pursuit of prestige, or knee-jerk monetary conservatism, but a policy to uphold the good credit of the British Empire. Once parity was restored, the creditors to whom Britain owed billions of pounds would be repaid in currency worth the same in dollars as it was before the war. Those who had been willing to lend in sterling – both at home and across the empire – would suffer no greater loss as a result of the war than those who had chosen to invest in US Treasury bonds. The question was, what price would Britain have to pay, to uphold this claim to joint leadership in world finance? To enable a return to the pre-war exchange rate against the dollar, the British price level would have to be brought into line with that in the United States. In December 1919, UK prices stood at 240 relative to 1914, as compared to an index of 190 in the US. Though this implied a severe drop in UK prices, so long as prices in America remained elevated, Treasury officials judged the adjustment to be ‘reasonably within reach’.15
The problem was that the US did not stay ‘within reach’. As gold drained out of the US in early 1920, London had feared that the Fed might respond with an excessive deflationary squeeze. Their fears were more than realized. As American prices plummeted, the challenge of restoring sterling to its pre-war parity became ever more daunting. Britain not only had to close the gap between British and American wartime inflation. It now had to match the American deflation as well. In April 1920 the Bank of England followed the Federal Reserve in hiking interest rates and the budget brought in large tax increases on higher incomes and a spending cut of 30 per cent, leaving a 12 per cent surplus for debt repayment.16 Prices plunged, interest rates increased, but nominal wages remained stubbornly high. Producers faced a ruinous surge in real costs, whilst debtors were plunged into negative equity. Bankruptcies followed en masse. By the autumn of 1920 the British economy was in free fall. Repeatedly, the Bank of England pleaded with the Federal Reserve to loosen its grip on the US economy. But the Fed refused. With specie surging back into America, instead of easing the pressure the Fed ‘sterilized’ the gold inflow, refusing to allow American credit to expand, resorting to accounting tricks to disguise the ample gold cover. Meanwhile, the situation in Britain reached such a pitch that the UK Treasury seriously considered the possibility of dumping its remaining gold reserve on New York, so as to shame the Fed into expanding the American money supply.17
The consequences of this deflation for the politics of post-war recovery in Britain were drastic. The ambitious plans for social expenditure, public housing and education reform promised in 1919 were consigned to the wastepaper basket. The disillusionment of the progressives with Lloyd George was complete. Between July 1920 and July 1921 unemployment amongst trade union members shot from 1 per cent to 23.1 per cent (Fig. 4). The balance of power in industrial relations had reversed. On 15 April 1921 Downing Street called out army and navy units to face down the last and most dramatic threat of a Triple Alliance strike.18 Eleven battalions of infantry and three cavalry regiments, backed up by tanks, were readied for use in London.19 But with the solidarity between the three most powerful unions disintegrating, the strike wave was broken. In 1922, with unemployment still close to 20 per cent, barely more than half a million workers were involved in industrial action, 80 per cent less than in 1919. There were those who wanted to press the deflationary ‘counter-revolution’ to its logical conclusion. Amongst Treasury officials there was talk of slashing pensions and cutting unemployment benefit to the ‘barest minimum needed to prevent starvation’. But Chancellor Austen Chamberlain demurred. In the wake of the Great War the state could not deny its citizens a right to adequate support.20 Given the levels of unemployment, the budgetary consequences of this new notion of entitlement were formidable. Whereas before the war, total social services expenditure had never exceeded 4.7 per cent of GDP, the figure rose steadily throughout the 1920s to almost double by 1930.
Figure 4. The ‘Urshock’ of the British Interwar: The First Spike in UK Unemployment, 1920–21
The United States, Britain and Japan were the worst affected by the crisis, but deflation was a global phenomenon. Even in Germany, in the wake of the Kapp putsch, in the summer of 1920 prices actually began to fall, raising both hopes of a return to economic normality and fear of a credit-crunch and British levels of unemployment. The question was how far to push this reversal? Given the scale of their financial problems and the pain of deflation, France, Italy and Japan opted for stabilization rather than a punishing attempt to restore pre-war parities. In France the Bloc national government acquired a black reputation on the left for breaking two attempts in May 1919 and May 1920 to launch general strikes. The French Chamber of Deputies of 1919, filled with grim-faced veterans, superficially confirmed Wilsonian stereotypes. The American ambassador, Hugh Campbell Wallace, reported to the State Department that ‘disappointment concerning America and the reported revival of German militarism, which is laid at America’s door, have produced a distinct nationalist and militarist reaction’.21 But Alexandre Millerand, who took over as Prime Minister in a botched manoeuvre that was supposed to result in Clemenceau’s elevation to the presidency but instead resulted in his retirement, was no reactionary. He had served as the leader of the Socialist Party faction in parliament until 1899, when in the wake of the Dreyfus battle he took the decision to join the left-wing coalition cabinet that styled itself the Government of Republican Defence.22 This willingness to engage in pragmatic reform earned him the hatred of the doctrinaires who had seized control of the French Socialist Party after 1904.
Taking office as Prime Minister in January 1920, Millerand conducted not a wholesale deflation but a limited monetary stabilization. Taxes were raised. Regular budgeted expenditure was contained, and Wilsonian accusations of French militarism to the contrary, this included military spending as well. Compared to the pre-war years, the manpower of the French Army was cut from 944,000 to 872,000 in 1920 and as little as 732,000 by 1922.23 The Bank de France stopped the uncontrolled expansion of the money supply and inflation slowed to a halt. From a low of 17.08 to the dollar in April 1920, the franc recovered to 12.48 in December 1921.24 But with reconstruction of the devastated regions the top propriety, Millerand never attempted a wholesale and sweeping roll-back of government spending. In Italy, where the labour unrest was amongst the most threatening in western Europe, Francesco Nitti’s precipitate attempt to cut the bread subsidy cost him the premiership in June 1920.25 It was not until 1921, with world commodity prices collapsing, that a new government headed by Giovanni Giolitti dared to eliminate the expensive subsidy.
In Japan, where the crisis had begun, there were conservatives who might have wished for a complete ‘liquidation’. But the Bank of Japan judged it impossible to reverse the boom completely. An American or British-style deflation would have jeopardized much of the wartime industrial growth that had been fuelled by large-scale bank lending.26 Instead, on 27 April 1920 a bank syndicate was formed to provide support to the stock market. In December 1920 an Imperial Silk Filiature company was established to buy up and freeze surplus silk stocks. In April 1921, to provide long-term stability for the rice-farming peasantry the Hara government put in place a comprehensive system of government purchasing and import regulation.
In the event, the refusal of these large economies to follow the UK and the US into wholesale deflation acted as a stabilizing force in the world economy.27 One of the things that helped to make the worldwide crisis of 1920–21 less prolonged and severe than the 1929–33 recession was precisely that it was not uniform in its impact. But the fact that it was not experienced in the same way across the world economy was in itself significant. It made manifest the way in which the reconstruction of the world economy after World War I organized a new hierarchy. At the bottom were the basket cases en route to hyperinflation, the likes of Poland, Austria and Germany. They became wards of the ‘money doctors’ and international stabilization regimes, examples of a new form of diminished sovereignty.28 At the top were the US and the UK, willing and able to carry through a headlong monetary contraction, reversing the monetary effects of the war. In the twilight between these extremes the majority of the world’s states – France, Italy and Japan amongst them – were forced to settle for half-hearted stabilization. They avoided the worst of either hyperinflationary excess or bludgeoning deflation, but did so at the price of accepting a humbling second-tier position in the reconstituted economic order.
II
The net effect of the deflation that unfolded after 1920 was to tame the drama of post-war politics. Above all it broke the onrush of the labour movement. As unemployment surged and prices fell the momentum ebbed away from the trade unions. But its implications both domestic and international were more comprehensive than merely the crushing of the left. The deflation worked to contain the right as well. Whilst revolutionaries and paramilitaries traded blows on street corners, picket lines and in meeting halls, deflation acted as a force for strategic demobilization not only across the world but on both sides of the political divide. By the autumn of 1920, in the US Congress loud voices were calling for President Wilson’s dramatic naval plans to be consigned to the dustbin of history along with the League of Nations. And given the pressures of deflation these calls were eagerly echoed in Britain as well as Japan.
Since the nineteenth century, Japanese advocates of imperial adventurism had always been able to count on popular patriotic enthusiasm. The huge surge in exports and foreign earnings during the war had added financial heft to the force of the Japanese military. By the end of 1919 the current account surplus accumulated since 1915 stood at 3 billion yen. Japan was now a net international creditor. And there were loud voices in Hara’s Seiyukai government determined to continue this ‘positive policy’ into the post-war era. Japan must seize its chance to consolidate its escape from British tutelage and establish itself as the exclusive regional hegemon. But the conditions of 1914–18 were clearly exceptional. And the impact on Japan’s domestic politics of the spectacular inflationary boom was deeply troubling. Amidst escalating food prices, the lack of enthusiasm for the army’s intervention in Siberia was unmistakable. Reflecting on the anniversary of the rice riots in the autumn of 1919, the newspaper Osaka Asahi Shimbun editorialized: ‘it is a fact that the attitude of the majority of our people is completely different from
their attitude when they have met with so-called hardships in the past. Up to the present when the state had resorted to military force abroad . . . the Japanese people have set aside their own needs and waxed wildly enthusiastic for the state . . . now, however, while the authorities are clamouring about the great crisis overseas, the people are not asking “what will become of the country?”; they have risen to cry out “what will become of us?”’ Despite the surge in national power, the majority of the people had ‘fallen into circumstances too straitened to hope for honour or for glory’.29
With their policy of deflation Britain
and America once more changed the rules of the game. In May 1921, Takahashi Korekijo, one of the Seiyukai’s most aggressive advocates of growth, summarized the position in a top-secret memo. At Versailles, Japan had been recognized as a major power. But, so far, its claim to significance had rested on its military force. This was a fleeting advantage. The enduring foundation of power was economic. With their determination to restore the gold standard, America and Britain were reaffirming their leadership in the world economy. For Japan to adopt a deflationary policy would cut short the boom, but if wages and prices were not forced down, Japan’s exporters would soon find themselves struggling to compete. As the balance of payments deteriorated, Japan would once more slide into dependence on foreign credits. The only way to make Japan a permanent member of the great-power club was to establish a platform for long-lasting economic prosperity on the basis of a truly harmonious relationship with China. But this required the definitive abandonment of militarist adventurism.30 Whilst Takahashi and the Seiyukai tolerated the army’s interventionist ambition, amongst the opposition parties the anti-militarist consensus was overwhelming. In July 1921 the rump of pre-war liberalism, the Kokuminto Party, adopted the slogan that Japan should exchange militarism for industrialism.31 In November of that year, on behalf of the liberal wing of the main opposition party, the Kenseikai, Ozaki Yukio launched an impassioned nationwide campaign against the ruinous costs of military spending. His pleas and those of tens of thousands of petitioners would be answered.32 From a high of 65.4 per cent of government spending in 1922, defence expenditure was cut to less than 40 per cent between 1923 and 1927.33