During the last three years and a half the political economy of Germany
and her allies has strongly resembled that in vogue among certain South
Sea Islanders, who are supposed to make a living by taking in one
another's washing. The same money has been making the rounds on one of
the oddest economic whirligigs mankind has so far seen.
The war has been carried on by means of funds derived mostly from war
loans. By means of them Germany has so far raised, roughly,
$19,800,000,000, and Austria-Hungary $8,600,000,000, making a total of
$28,400,000,000. In addition to that the two countries have spent on the
war about $2,300,000,000 derived from other sources--taxation,
indemnities levied in occupied territories, and property here and there
confiscated.
Within my scope, however, lie only the war loans.
The interest on the German war loans so far made amounts to $762,000,000
per year. To the German public debts the loans have added $293 per
capita, or $1,082 for each producer in a population which the war has
reduced to about 67,500,000 fit individuals. Each wage-earner in Germany
will in the future carry a tax burden which in addition to all other
moneys needed by the government will be weighted every year by $43.28
interest on the present war loans.
Austria-Hungary's load of interest on war loans will amount to
$344,000,000 annually. The burden is $204 per capita, or $816 for each
wage-earner, out of a population which war losses have cut down to about
42,200,000. The annual interest each Austro-Hungarian breadwinner will
have to pay on the war loans is $32.64, and in addition he must provide
the revenues which his governments will need to operate.
This means, of course, that the cry for bread will be heard long after
the guns thunder no more. It must be borne in mind that the average
yearly income of the wage-earner was a scant $460 in Germany, and $390
in Austria-Hungary. The war loan interest so far in sight will
constitute about 9.3 per cent. and 8.2 per cent. respectively--no small
burden when it is considered that all other revenues needed by the
government must be added to this.
But the bitter cup of economic losses due to the war is by no means full
with these figures. The Germans have so far lost, killed in action and
dead of wounds, fully 1,500,000 able-bodied producers, and have at this
time to care for about 900,000 men, of whom one half is totally
incapacitated and the other half partly so. The Austro-Hungarian
figures are 650,000 men dead, and 380,000 totally or partly crippled. In
other words, Germany has lost 2,300,000 able-bodied men, and
Austria-Hungary 1,030,000. It may well be said that those dead can no
longer figure in the economic scheme, because they consume no longer. On
the other hand, each of these men had another twenty years of useful
life before him. This long period of production has now been lost, and
two decades must elapse before the Central states will again have as
many producers as they had in 1914. Their propagation has also been
lost, though, with the women as strong numerically as before, this loss
will probably have been made good within ten years.
Before treating further of the effects of war loans and their influence
upon the body politic, I will examine here how these loans were made, in
what manner they were applied, and what the system of economy was to
which the transaction gave birth.
The figures I have cited may well suggest the question:
How was it possible under such conditions to make war loans?
The superficial reply to that would be:
By raising the money in the country--inducing the people to subscribe to
the loans.
The reply has no value, since it does not disclose how the necessary
money was made available. The funds invested in the war loans were a
part of the national capital, not a portion of the national wealth, the
term wealth standing for the natural resources of a community. But
capital is the surplus of production, and production results only from
applying labor to natural resources; for instance, by tilling the soil,
mining coal and ore, and engaging in the conversion of the less useful
into the more useful, as is done in industry. A surplus of production is
possible only, however, when consumption falls below production, for
that which is left over of the thing produced makes the surplus. This
surplus is capital.
Incomplete figures which I was able to gather in 1916 showed that before
the war the average wage-earner of Central Europe had produced and
consumed in a ratio of 55 against 48, so far as the scale of pay and
cost-of-living showed. The difference of 7 points represented the amount
of money he could save if he wanted to do that. The 7 points, then, were
the actual increase in the national capital.
In the winter of 1916-17 the figures had undergone a remarkable change.
Wages had been increased to 70 points, while the cost of food had risen
to 115 points as against 48 formerly. In other words, while the
wage-earner was getting 15 points more for his labor, he was paying 67
points more for his food and the necessities of life. The place of the 7
positives in capital production had been taken by 45 negatives, which
meant that the national capital of Central Europe had fallen below
static, the point where neither increase nor reduction takes place, by
38 points. The national capital had been decreased 38 per cent.,
therefore. That much of all present and former surplus production of the
two states had been used up in the pursuit of the war.
Governments deem it a safe policy to issue in times of financial stress
three times as much paper currency as they have bullion in the vaults.
One million in gold makes three millions in paper with that formula.
This had been done in Germany and Austria-Hungary to quite an extent by
the end of 1916. For every million of gold in the vaults there was a
million of _bona fide_ paper money. That was well enough. The currency
system of the United States adheres to that principle in times of peace
even. But upon the same million of metal there had been heaped other
paper currency which carried the promise of the government that on the
given date it would be redeemed for gold or its equivalent. This method
of national finance is known as inflation. It was this inflation that
caused the wage-earner to show in his own little budget a deficit of 38
points.
Why the government should have inflated its currency in that manner is
not so difficult to understand as it may seem. From its own point of
view, the wage-earner had to be lashed into greater effort if the moneys
needed for the war were to be available and if the food and material
consumed by the army were to be produced. The more the consumer had to
pay for what he required to sustain life the harder he had to work. His
deficit of 38 points was the yoke under which he labored for the army
in the field, which was consuming without producing anything. These 38
points were only 17 points less than the 55 which had represented his
income before the war--in round terms every two wage-earners in Central
Europe were supporting in food, clothing, munition, and ammunition a
soldier at the front. It could not be otherwise since two political
aggregates having then approximately, with the women included,
twenty-five million wage-earners, were keeping under arms about ten
million soldiers, and were meanwhile providing the heavy profits made by
the war purveyors.
Though the 38 points were a deficit, the producer-consumer was not
allowed to look at them in that manner. It was his task to cover this
deficit. This he did by paying more for his food and necessities,
through a channel which the inflated currency had filled with water in
the familiar stock-jobbing phrase. The middlemen who owned the barges in
the channel were taxed by the government on their war profits, but
enough was left them to preserve interest in the scheme of war economy,
a friendly act which the middlemen reciprocated by generous
subscriptions to the war loans.
The first, second, and third war loans in Central Europe were subscribed
to with much, though later dwindling, enthusiasm. Patriotism had a great
deal to do with their success. Real money was required by the
government, moreover. Bank accounts, government securities, sound
commercial paper, and savings deposits were turned over. The loans made
later were devoid of many of these features. Those who bought war-loan
certificates did so because it was necessary for one reason or another,
and many of the war bonds obtained in the first loans were converted.
The war and all that pertained to it was now entirely a matter of
business with those who could subscribe. The poor were tired of any
aspect of war.
The government could not prevent their being tired, but it could see to
it that indirectly the masses supported the war policy, no matter what
they thought. That was not difficult. The high cost of living took from
the producer-consumer what the government needed, and there is no system
of discipline that is quite so efficacious as keeping a man's nose to
the grindstone.
Sleek bankers used to inform me that there was much prosperity in the
country. There was from their point of view. The margin between the
wages paid the producer and the prices asked of the consumer was great
enough to satisfy the interested parties, government and middleman
alike. The war loans had hardly been closed when a good share of them
was again in circulation. The whirligig of war economy was spinning
lustily, and there was no danger of things going wrong so long as the
producer-consumer was kept well in hand.
How the war loans made the rounds is quite interesting. It is the
closest approach to perpetual motion I have come across.
Since the Central states could buy in foreign countries only by means of
special trade agreements that called for an exchange in commodities
rather than for the medium of exchange, the money raised by the war
loans remained within the realm. Much of it went to makers of arms and
ammunition, of course. In their case a million marks--I am using this
small amount as a unit only--would lead to the following results: To the
manufacturer would go 60 per cent. of the total and to labor 40.
Subdivided these shares paid for raw material, plant investment,
operation expenses, and profits so large that the government could
impose a tax of 75 per cent. without making it impossible for the
manufacturer to subscribe to the next loan. Labor, on the other hand,
found itself barely able to sustain life, and if a few marks were saved
by some, little or nothing could be bought for them. The man who was
earning 70 marks a week, instead of 55, was paying for his food and
necessities 115 instead of 48 marks--an economic incongruity at first
glance, but perfectly feasible so long as those affected could be
induced to live on about 85 per cent. of the ration needed to properly
nourish the body, and had given up entirely the comforts of life. That
scheme left him hope for better times as the only comfort. No matter how
often the money of the war loans rushed through his hands, none of it
ever stuck to them.
Before long it was plain that in this fashion the Central Powers could
keep up the war forever. Their financial standing in foreign countries
need not worry them so long as they could not buy commodities in them.
To be sure, the public debt was increasing rapidly, but the very people
to whom the government owed money were responsible for that money. If
bankruptcy came to the state they would be the losers, and that
responsibility increased as their wealth increased. Capital and
government became a co-operative organization, and both of them
exploited the producer-consumer, by giving him as little for his labor
as he would take and charging him as much for the necessities of life as
he would stand for--and that was much. When now and then it seemed
necessary to placate the producer-consumer, he would be told that in the
interest of the Fatherland the government was compelled to do what it
did. But the necessity for this came not often. The small man was
generally overjoyed when the government was able to announce that the
war loan had been a success or had been over-subscribed. That is all he
wanted to know, so long as he was not required to go to the front. The
success of the war loan meant that he would have work--and live to see
the end of a war which everybody claimed had been forced upon the state.
It is certain that the Central states governments would have been
bankrupt long ago had they been able to buy in the foreign market _ad
libitum_, though in that case the foreign trade connections would have
also seen to it that war loans were made to the Germans and
Austro-Hungarians. There is no doubt at all that a Germany permitted to
buy abroad would have later been less able to organize herself as
efficiently economically as she did when her financial strength was
still unimpaired for internal purposes. To this extent the swift descent
of the British blockade is one of the gravest errors booked on the debit
side of the Entente's politico-military ledger. Absolutely nothing was
gained in a military sense by shutting the import door of the Central
states. Far-seeing statesmen would have allowed Germany to import all
she wanted and would then have seen to it that her exports were kept to
a minimum, so far as the shortage of man-power in the country did not
automatically bring about that result.
As it was, the Central states supplanted and substituted right and left,
made new uses of their own natural resources, and fitted themselves for
the long siege at a time when doing that was still easy. The British
blockade, if applied in the winter of 1915-16, would have had effects it
could not hope to attain in the winter of 1914-15, when almost any
rational being knew that to starve out the Central states was not to be
thought of. The Central states would have continued to live very much as
before, and by the end of 1915 the governments would have been obliged
to shut down on imports of food for the civilian population if the gold
reserve was not to be exhausted completely, as would have been the case
if exports could not balance imports to any extent. Production and
consumption would then not have been as well organized as they were
under the auspices of the premature blockade, and the downfall for which
the Entente has until now vainly hoped, and which will remain the
greatest _spes fallax_ of all time, would then have surely come. That
bolt was shot too soon by Great Britain.
Though the Central governments were fully aware of this, as
some of their officials admitted to me, they had no reason to bring
this to the attention of their publics or the world. The British
_Aushungerungspolitik_--policy of starvation--was the most potent
argument the Central governments had to present to their war-tired
people. What the German air raids on London accomplished in promoting
the British war spirit the blockade of the Central states effected in
the German Empire and Austria-Hungary. In a war of such dimensions it
was foolish to thus drive the governed into the arms of their governors.
The financial condition of the Central European states to-day is as
sound as that of the Entente states. That would not be true if any great
share of the Central European war loans had been raised in foreign
countries. But, as I have shown, this was not done.
That the war debt is great is a fact. The government's creditors are all
in the country, however, and if need be it can set against them the
tax-tired multitude. For that there will be no necessity. The
depreciation of the currency has automatically reduced by as much as 25
per cent. on an average all state indebtedness, in so far as capital is
a lien against the community's natural resources and labor. But of this
more will be said at the proper time.
Early in the summer of 1917 the German and Austro-Hungarian governments
were occupied with the question to what extent it would be possible to
lighten the burden of the taxpayer. Nothing came of it for the reason
that finally it was concluded that the time for financial reorganization
was not yet come. Inflated money and high prices would still have to be
used to keep the producer at maximum effort and prevent his consuming
more than could be permitted.
But the methods of financial reorganization, or we may call it
reconstruction, that were discussed are none the less interesting. They
involved a reduction of the interest which the government has to pay on
war loans, as well as a lightening of the war-loan burden. It was
tentatively proposed to either cut into half the rate of interest or to
reduce by one-half the principal.
One would think that the Central European bankers would oppose such a
step. They did not, however. For the sake of pre-war loans and
investments, these men must favor a rehabilitation of the currency, and
nothing would do that as effectively as a reduction of the war debt. The
mark and crown buy to-day from one-third to one-half what they bought in
1914. With the war debt cut down to one-half they would buy from 60 to
75 per cent. what they bought in that year. As a measure of
socio-economic justice, if there be such a thing, the reconstruction
proposed would appeal to all who invested money before the outbreak of
the war. These people put up money at the rate of 100, while the
interest they are getting to-day is worth from 33 to 50. The man who in
1914 invested 100,000 marks would indeed get back 100,000 marks. The
trouble is that the mark has depreciated in purchasing power, so that
his capital has shrunk to 33,000 or 50,000 marks, as the case may be.
War does not only mortgage the future of a nation, but it also has the
knack of tearing down the past.
Tired of hotel life, I had made up my mind in Vienna to find private
quarters. In the end I found what I wanted. I ought to have been
satisfied with my lodging, seeing that it was the comfortable home of
the widow of a former professor of the Vienna university.
I never experienced such mixed feelings in my life as when I discussed
terms with the woman. She was a person of breeding and tact and
considerable false pride. How much did I want to pay? She did not know
what she ought to ask. She had never rented rooms before.
We arrived at an understanding. I moved into the well-furnished flat and
the old lady into her kitchen, where she lived and cooked and slept,
together with a parrot, until I turned over to her the bedroom and
occupied the couch in the parlor.
Before the war the woman had fared better. She was getting a small
pension and had a little capital. The income had been large enough to
give her a servant. When I moved in, the servant was gone long ago, and
I suspect that since then there had been days when the old lady did not
have enough to eat. Still, she was getting the same pension and her
little capital was bringing the same interest. The difficulty was that
the income bought but a third of what it had formerly secured.
There were thousands of such cases, involving pensioners, widows, and
orphans. In their case the world had not only stood still, but it had
actually gone backward. The inflated currency left them stranded, and
the worst of it was that taxes were growing with every day. The
government was levying tribute on the basis of the inflated money. These
people had to pay it with coin that was 100 so far as they were
concerned.
Real-estate owners were in no better position. The moratorium prevented
them from increasing rents, which step had to be taken in the interest
of the families of the men at the front. Taxes kept growing, however,
and when the income from rent houses was all a person had there was
nothing to do but stint. With the currency as low as it was, nobody
cared to sell real property of course. It was nothing unusual to see the
small rent-house owner act as his own janitor.
While the war loans and government contracts were making some immensely
rich, thousands of the middle class were being beggared. But there is
nothing extraordinary in this. The socio-economic structure may be
likened to a container that holds the national wealth. For purposes of
its own the government had watered the contents of the bucket and now
all had to take from it the thinned gruel. That thousands of aged men
and women had to suffer from this could make little impression on
governments that were sacrificing daily the lives and health of
able-bodied producers on the battle-fields--one of whom was of greater
economic value to the state than a dozen of those who were content to
spend their life on small incomes without working.