Lecture eight: The 1920s—the road to depression and fascism
7 October 2005
The following is the third part of the lecture “The 1920s—the road to depression and fascism.” It was delivered by Nick Beams, the national secretary of the Socialist Equality Party of Australia and a member of the WSWS Editorial Board, at the Socialist Equality Party/WSWS summer school held August 14 to August 20, 2005, in Ann Arbor, Michigan. The lecture will be presented in five parts.
This is the eighth lecture given at the school. The first, entitled “The Russian Revolution and the unresolved historical problems of the 20th century” was posted in four parts, from August 29 to September 1. The second, “Marxism versus revisionism on the eve of the twentieth century,” was posted in three parts on September 2, 4 and 5. The third, “The origins of Bolshevism and What Is To Be Done?” was posted in seven parts from September 6 to September 13. The fourth, “Marxism, history and the science of perspective,” was posted in six parts from September 14 to September 20. These lectures were authored by World Socialist Web Site Editorial Board Chairman David North.
The fifth lecture, “World War I: The breakdown of capitalism,” was delivered by Nick Beams, the national secretary of the Socialist Equality Party of Australia and a member of the WSWS Editorial Board. It was posted in five parts, from September 21 to September 26. The sixth, “Socialism in one country or permanent revolution” was delivered by Bill Van Auken and posted in three parts, from September 27 to September 29. The seventh, “Marxism, art and the Soviet debate over ‘proletarian culture,’ ” was given by David Walsh, the arts editor of the World Socialist Web Site, and posted in four parts from September 30 to October 4. The ninth, “The rise of fascism in Germany and the collapse of the Communist International,” was delivered by Peter Schwarz, the secretary of the International Committee of the Fourth International and a member of the WSWS Editorial Board, and posted in three parts from October 11-13.
Postwar economic impasse
Historical analyses of the political economy of the 1920s generally begin with a discussion of the impact of the war and its economic aftermath. This was the approach adopted by contemporary observers, to whom it appeared that the growing problems of the 1920s were the result of the devastation of the war that had so disrupted the equilibrium of the world economy.
From our vantage point, the problem with this approach, however, immediately becomes apparent once we compare the period following World War I and the post-World War II period. In the first case, we find a decade of highly unstable recovery, punctuated by a series of sharp recessions and economic crises, finally leading to the deepest depression in the history of world capitalism and the most barbaric regime ever seen—Nazism in Germany. In the second case, notwithstanding the far greater destruction of capital goods and infrastructure, we find that 10 years after the war’s end, world capitalism is enjoying the greatest boom in its history.
Rather than examining the impact of the war on the capitalist economy, it is necessary to approach the question the other way around. That is, to examine how the long-term shifts and changes in the capitalist economy gave rise to the war and the economic developments that followed it. This is not to suggest either that war was simply a product of economic processes, or that it, in turn, had no impact on the underlying economy. Indeed, the war, and above all the political reconstruction of Europe undertaken through the Versailles Treaty, had far-reaching economic effects. But the war was not the cause of the crises that beset the European and eventually the world economy. Rather, it exacerbated already-developing economic tendencies.
In his analysis of this question, Trotsky pointed to the relationship between the curve of capitalist development, taken as a whole, and the eruption of the war.
“Beginning with 1913,” he wrote in a report to the Fourth Congress of the Communist International, “the development of capitalism, of its productive forces, came to a halt one year before the outbreak of the war because the productive forces ran up against the limits fixed for them by capitalist property and the capitalist forms of appropriation. The market was split up, competition was brought to its intensest pitch, and henceforward capitalist countries could seek to eliminate one another from the market only by mechanical means. It is not the war that put a stop to the development of productive forces in Europe, but rather the war itself arose from the impossibility for the productive forces to develop further in Europe under the conditions of capitalist management.” 
Economic growth in capitalist Europe was slower in the period between the wars than at any other time in the twentieth century. In the period 1913-1950, gross domestic product per capita of 15 Western European economies increased by an average of 0.5 percent per year compared with 1.4 percent in the period 1890-1914 and 4.0 percent in the period 1950-1973.
The problem that confronted the economies of Western Europe in the 1920s was not so much the destruction of industrial capacity, but rather finding markets for the increased capacity of industry, which had expanded in the course of the war. For example, world ship-building capacity had almost doubled since 1914; iron and steel capacity in Britain and Central Europe was 50 percent higher in the mid-1920s than it had been before the war. Yet, these industries experienced continuously depressed conditions. At the same time, Germany, which had been a leader in the production of chemicals in the pre-war period, found that its export markets had been halved as a result of increased production by the Allies.
The eruption of war in Europe in 1914 signified that the productive forces had come into conflict with the nation-state system. The aggressive character of German imperialism represented the drive by the most dynamic section of European capital to reorganise the old continent to create the conditions for its expansion. The Versailles Treaty, however, did nothing to resolve the underlying problems of capitalist development that had given rise to the war. Rather, it exacerbated them. Indeed, according to the assessment of one historian of this period, “it can...be argued that the immediate consequences of more than four years of hostilities were less important than the immediate postwar settlement in determining the longer-term future of Europe.” 
The post-war resettlements involved the biggest exercise in reshaping European political geography ever undertaken. But this process deepened all the problems. There was a separation of areas that had formed a single economic unit. Germany lost 6.5 million people and 13 percent of its land area. Upper Silesia was lost, and the link between the coal of the Ruhr and the iron ore of Lorraine was broken.
The number of economic units in Europe within which productive factors could move without restriction increased from 20 to 27. The integrated economy of the Austro-Hungarian economy was broken up and parcelled out among seven states. Five new nations were carved out of the western borderlands of Russia. There were now 27 separate currencies in Europe instead of 14 before the war, and an additional 12,500 miles of frontiers. Many of the borders separated factories from their raw materials, farms from their markets, ironworks from coalfields.
Summarising this process, the historian William Keylor noted: “Unlike the national unification process of Western Europe in the nineteenth century, which enlarged economic units and increased productivity, the nation-building in Eastern Europe after the First World War reduced the size of existing economic units and thereby decreased the efficiency that has traditionally resulted from economies of scale.” 
Apart from the redrawn boundaries, the most contentious issue arising from the Versailles Treaty was the decision to impose war reparations on Germany. Article 231 of the treaty, the infamous “war-guilt” clause, stated: “The Allied and Associated Governments affirm, as Germany accepts, the responsibility of Germany and her Allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of a war imposed upon them by the aggression of Germany and her Allies.”
The issue of reparations has often been presented as a consequence of France’s drive to inflict maximum economic damage on Germany. But France acted no differently than the other capitalist great powers, including the United States, which were all seeking to establish the best position for themselves in the post-war world. If they had different responses to particular questions, it was because they had different interests to pursue.
The position of the French president, Clemenceau, as Keynes pointed out, was entirely logical for someone “who took the view that European civil war is to be regarded as a normal, or at least a recurrent state of affairs for the future, and that the sort of conflicts between organised great powers which have occupied the past hundred years will also engage the next.” Any concessions to Germany based on fair and equal treatment would only have the effect of “shortening the interval of Germany’s recovery and hastening the day when she will once again hurl at France her greater numbers and her superior resources and technical skill.” Hence, the policy of France was aimed at cutting German territory, reducing its population and, above all, reducing its economic strength in order to try to remedy the inequality of strength between the two main rivals for European hegemony.
If Britain was willing to sometimes adopt a more conciliatory approach—notwithstanding the pledges made in the “khaki election” of December 1918, in which Lloyd George had pledged to squeeze Germany hard “until the pips squeak”—it was because her aims were served by the destruction of the German fleet and the handing over of her colonies. With the position of the Empire secure, Britain was anxious to ensure the revival of the Germany economy, which was a valuable export market.
The position of the United States was guided by its determination to capitalise on its newly established economic dominance, and, consequently, it refused all suggestions that inter-Allied debts, in particular those to the US, be wiped out or reduced, in order to lessen German war reparations.
Following US entry into the war, an official US Treasury bulletin issued in late April 1917 stated that in placing a portion of American wealth at the disposal of the European Allies, the United States government was not only helping them, but “lessening the work and danger and suffering of our own men in bringing the war to an early close.” With America not in a position to be able to put soldiers into battle until a year after the declaration of war, the European powers regarded the loans as, in a sense, a payment for men placed on the battlefield. They considered that they were fighting as proxies for the US, at least after April 1917, and should not have to repay loans in pursuit of this objective. That was not the view of the US Treasury. It took the position in December 1918, and maintained it right through the 1920s, that there was no connection between inter-Allied debts and German reparations. The Allies would have to pay up regardless of what Germany could pay.
When the leading industrialist, Walther Rathenau, proposed that Germany take over the Allied war debt to the United States, equivalent to about 44 billion gold marks, in lieu of reparations, the Americans would not agree, insisting that there was no connection between reparations and war debts. The US was reluctant to effect the transfer, fearing that Germany’s ability to pay was less than that of France, Britain and the other allies. It would have been a bad business deal to swap a claim on the victorious allies for a mortgage on an insolvent and defeated Germany.
There was a complex web of debts. Germany had 11 creditors. The US received payments from 16 debtors. Britain collected debts from 17 countries and France from 10. Small countries such as Hungary, Bulgaria, Rumania and Czechoslovakia had as many as 9 or 10 creditors each.
No fewer than 28 countries were involved in war debt relations. Five were debtors only, 10 were creditors only, and 13 both debtors and creditors. Ten were net debtors and 18 were net creditors. Of the $28 billion in inter-Allied debts, the US government was owed $12 billion, some $4.7 billion by Britain. Britain, in turn, was owed $11 billion by its European allies. Some $3.6 billion was owed by Russia, which was uncollectible after the revolution.
Before the peace talks began, the French government made an official request in a letter to US Treasury Secretary Carter Glass on January 15, 1919, calling for the debt question to be made part of the peace settlement, and to be resolved simultaneously.
Glass replied that the US was not in support of debt payments being discussed in Paris in conjunction with the Peace Conference. The effect of this decision was to ensure that the Allies, and France in particular, would press for the maximum reparations from Germany. In the event, an amount for reparations was not included in the treaty, but was left to a War Reparations Commission that was to issue a report in May 1921.
In February 1920, the British government proposed a general cancellation of war debts, pointing out that “the existence of a vast mass of inter-government indebtedness not only involves very grave political dangers, but also forms at the present time a most serious obstacle to the recuperation of the world and particularly Continental Europe from the immense strain and suffering caused by the war.” 
The official reply from US Treasury Secretary David F. Houston made clear that the US was determined to enforce its claims. Rejecting the assertion that debt cancellation would aid economic recovery of Europe and the world in general, Houston insisted that debt cancellation “does not touch matters out of which the present financial and economic difficulties of Europe chiefly grow.” 
He then proceeded to deliver a lecture on the virtues of the free market and sound government finance. “The relief from present ills, in so far as it can be obtained,” he wrote, “is primarily within the control of the debtor governments and peoples themselves. Most of the debtor countries have not levied taxes sufficient to enable them to balance their budgets, nor have they taken any energetic and adequate measures to reduce their expenditures to meet their income. Too little progress has been made in disarmament. No appreciable progress has been made in deflating excessive issues of currency or in stabilising the currencies at new levels, but in Continental Europe there has been a constant increase in note issues. Private initiative has not been restored. Unnecessary and unwise economic barriers still exist. Instead of setting trade and commerce free by appropriate steps there appear to be concerted efforts to obtain from the most needy discriminatory advantages and exclusive concessions. There is not yet apparent any disposition on the part of Europe to make a prompt and reasonable definite settlement of the reparation claims against Germany or to adopt policies which will set Germany and Austria free to make their necessary contribution to the economic rehabilitation of Europe.” 
Moreover, Houston continued, the cancellation proposal “does not involve mutual sacrifices on the part of the nations concerned; it simply involves a contribution mainly from the United States.” While the US had not sought or received any substantial benefits from the wars, the Allies “although having suffered greatly in loss of lives and property have, under the terms of the treaty of peace and otherwise, acquired very considerable accessions of territories, populations, economic and other advantages. It would, therefore, seem that if a full account were taken of these and of the whole situation there would be no desire or reason to call upon the government of this country for further contributions.” 
The Reparations Commission delivered its report on May 5, 1921. It fixed German reparations at 130 billion gold marks, around $33 billion. So far as the Allies were concerned, they would now set out to extract payments from Germany that would then be used to repay their loans to the United States.
“What a curious spectacle!” Churchill was to remark in a speech some four months later. “The great...nations of the civilised world...all hoping to get enormous sums out of each other or out of Germany. In fact, you might say that debt collecting has become our principal industry....” 
One of the motivations for the establishment of this system was the underlying crisis of post-war finances. According to one calculation, the total cost of the war was $260 billion, representing “about six and half times the sum of all the national debt accumulated in the world from about the end of the eighteenth century up to the eve of the First World War.” 
Taking all the belligerent powers together, some 80 percent of the excess of wartime spending over the levels reached in the last three years of peace was financed by borrowing. Much of this was financed through bank credit. This method of finance was chosen by the belligerents in the belief that they would be able to make the loser pay.
Churchill’s half-joking remark that debt collection had become “our principal industry” points to the underlying problem confronting post-war capitalist Europe—the inability to establish a new foundation for economic expansion.
In his criticism of the Versailles Treaty, Keynes had pointed to the importance of the German economy for the whole of continental Europe. But for France, German economic growth was a threat, not a benefit. Economic expansion on the European continent had become a struggle of each against all—a struggle in which debt collection formed a component part. There seemed to be no way out on the international arena.
To be continued
 Leon Trotsky, First Five Years of the Comintern, Volume 2, p. 306.
 Aldcroft, Studies in the Interwar European Economy, p. 1.
 William Keylor, The Twentieth Century World, pp. 96-97.
 Harold Moulton and Leo Pasvolsky, War Debts and Reparations, p. 61.
 Moulton, op. cit., p. 63.
 Ibid, p. 63.
 Ibid, p. 64.
 Cited in David Felix, Walther Rathenau and the Weimar Republic, pp. 110-111.
 See Paul Kennedy, Rise and Fall of the Great Powers (New York, 1989), p. 279.