The Banker-Engendered Deflationary Crisis Became a Chief Cause of World War II

The historical importance of the banker-engendered deflationary crisis of 1927-1940 can hardly be overestimated.
It gave a blow to democracy and to the parliamentary system which the later triumphs of these in World War II and the postwar world were unable to repair fully.
It gave an impetus to aggression by those nations where parliamentary government collapsed, and thus became a chief cause of World War II.
It so hampered the Powers which remained democratic by its orthodox economic theories that these were unable to rearm for defense, with the consequence that World War II was unduly prolonged by the early defeats of the democratic states.

The bankers' formula for treating a depression was by clinging to the gold standard, by raising interest rates and seeking deflation, and by insisting on a reduction of public spending, a fiscal surplus, or at least a balanced budget.
These ideas were rejected totally, on a point-by-point basis, by the unorthodox economists (somewhat mistakenly called "Keynesian").
The bankers' formula sought to encourage economic recovery by "restoring confidence in the value of money," that is,their own confidence in what was the primary concern of bankers.
This formula had worked in the past only when it had, more or less incidentally, reduced costs (especially wages) faster than wholesale prices so that businessmen regained confidence, not in the value of money but in the possibility of profits.
The unorthodox theorists sought to achieve this latter more quickly and more directly by restoring purchasing power, and thus prices, by increasing, instead of reducing, the money supply and by placing it in the
hands of potential consumers rather in the banks or in the hands of investors....
For about fifty years the centralized control made possible by the financial system had been used to develop monopolistic tendencies in industry.
These had been furthered by the growth of large combinations, by the formation of cartels and trade associations between units of enterprise, and by the increase of those less tangible restrictions on competition known as imperfect and monopolistic competition.
As a result, competition had been declining, control of the market had been increasing, and self-financing by industrial units had been growing.
This last development made it possible for industry once more to free itself from financial control as it had been in the owner-management period which preceded financial capitalism.
As armaments production grew, the standard of living improved because of the fact that the chief obstacle in the way of an improving standard of living—that is, lack of consumers'purchasing power, was remedied by the fact that armament manufacture supplied such purchasing power in the market without turning into the market any equivalent in goods which would use up purchasing power.
The recovery from depression after 1933 did not result in any marked reduction in the restrictions and controls which the depression had brought to commercial and financial activity.
The chief example of such imprisoned capital was the property of the Jews in Germany, amounting to over lo billion marks.
For these and other reasons tariffs, quotas, subsidies, exchange controls, and government manipulations of the market continued.
In sharp contrast to the United States in its attitude toward the problem of international trade was Nazi Germany.
This and other countries were seeking "independence" (that is, political goals in the economic sphere), and they rejected "dependence" even if it did
include a higher standard of living.
They frequently rejected the argument that autarky was necessarily injurious to the standard of living or to international trade, because by
"autarky" they did not mean self-sufficiency in all things, but self-sufficiency in necessities.
The theory was that each Great Power, in order to enjoy full sovereignty, must adopt a policy of autarky.
Since no power, however great, could be self-sufficient within its own national boundaries, it must extend this sphere of autarky to include its weaker neighbors, and this sphere would have political as well as economic implications, since it was unthinkable that any Great Power should permit its lesser neighbors to endanger it by suddenly cutting off its supplies or markets.
The increase in economic nationalism was based on the fact that the nation was the only social unit capable of action in the emergency resulting from the depression. And men were demanding action.
For this the only available agency was the national state.
The economic nationalism which arose from the need to act in a crisis—and to act unilaterally because of the lack of any organ able to act multilaterally was intensified after the breakdown in finance and economics of 1931-1933 by several developments.
In the first place, it was increased by the discovery, by Germany in 1932, by Italy in 1934, by Japan in 1936, and by the United States in 1938,
that deflation could be prevented by rearming.
Economic nationalism was increased, and internationalism reduced, by the
great increase in political insecurity, since the preservation of an international economic organization involved entrusting one's economic fate, to some degree, to the hands of another.
Economic nationalism was increased in the name of autarky,security, economic mobilization, and so on.
Self-sufficiency, even if it involved a lower standard of living, was held preferable to international division of labor, on the grounds that political security was more important than a high— and insecure—standard of living.

Taken from Tragedy and Hope Carrol Quigley