Below you will find excerpts from this 1300page+ masterpiece, a  must read book covering  64 years of world history, that does not waste your time as it is written by the greatest macro-historian of the modern era...  You simply cannot understand the world or yourself until you have read this book.



Tragedy and Hope: A History of the World in Our Time'

TRAGEDY AND HOPE Chapters I-IV
by Dr. Carroll Quigley

ISBN 0913022-14-4

CONTENTS

I. INTRODUCTION: WESTERN CIVILIZATION IN ITS WORLD SETTING

II. WESTERN CIVILIZATION TO 1914

III. THE RUSSIAN EMPIRE TO 1917

IV. THE BUFFER FRINGE

V. THE FIRST WORLD WAR

VI. THE VERSAILLES SYSTEM AND RETURN TO NORMALCY 1919-1929

VII. FINANCE, COMMERCIAL POLICY AND BUSINESS ACTIVITY 1897-1947

VIII. INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE

IX. GERMANY FROM KAISER TO HITLER 1913-1945

X. BRITAIN: THE BACKGROUND TO APPEASEMENT 1900-1939

XI. CHANGING ECONOMIC PATTERNS

XII. THE POLICY OF APPEASEMENT 1931-1936

XIII. THE DISRUPTION OF EUROPE

XIV. WORLD WAR II: THE TIDE OF AGGRESSION 1939-1941

XV. WORLD WAR II: THE EBB OF AGGRESSION 1941-1945

XVI. THE NEW AGE

XVII. NUCLEAR RIVALRY AND COLD WAR, AMERICAN NUCLEAR SUPERIORITY 1950-1957

XVIII. NUCLEAR RIVALRY AND COLD WAR, RACE FOR THE H-BOMB 1950-1957

XIX. THE NEW ERA

XX. TRAGEDY AND HOPE: THE FUTURE IN PERSPECTIVE

CONTENTS

I. INTRODUCTION: WESTERN CIVILIZATION IN ITS WORLD SETTING

II. WESTERN CIVILIZATION TO 1914

III. THE RUSSIAN EMPIRE TO 1917

IV. THE BUFFER FRINGE

Back cover

TRAGEDY AND HOPE is a lively, informed and always readable view
of our not quite One World of today, seen in historical perspective.
Quigley has already shown his command of the kind of historical
perspective seen in the a world like that of Toynbee and Spengler; but
unlike them he does not so much concern himself with projections from
a distant past to a distant future as he does with what must interest
us all much more closely - our own future and that of our immediate
descendants. He uses the insights, but in full awareness of the
limitations of our modern social sciences, and especially those of
economics, sociology, and psychology. Not all readers will agree with
what he sees ahead of us in the near future, nor with what he thinks
we should do about it. But all will find this provocative and
sometimes provoking book a stimulus to profitable reflection.

David Brinton
Inside cover

TRAGEDY AND HOPE shows the years 1895-1950 as a period of
transition from the world dominated by Europe in the nineteenth
century to the world of three blocs in the twentieth century. With
clarity, perspective and cumulative impact, Professor Quigley examines
the nature of that transition through two world wars and a worldwide
economic depression. As an interpretative historian, he tries to show
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each event in the full complexity of its historical context. The
result is a unique work, notable in several ways. It gives a picture
of the world in terms of the influence of different cultures and
outlooks upon each other; it shows, more completely than in any
similar work, the influence of science and technology on human life;
and it explains, with unprecedented clarity, how the intricate
financial and commercial patterns of the West prior to 1914 influenced
the development of today's world.

Carroll Quigley, professor of history at the Foreign Service
School of Georgetown University, formerly taught at Princeton and at
Harvard. He has done research in the archives of France, Italy and
England, and is the author of the widely praised "Evolution of
Civilizations." A member of the editorial board of the monthly Current
History, he is a frequent lecturer and consultant for public and semipublic
agencies. He is a member of the American Association for the
Advancement of Science, the American Anthropological Association, and
the American Economic Association, as well as various historical
associations. He has been lecturer on Russian history at the
Industrial College of the Armed Forces since 1951 and on Africa at the
Brookings Institution since 1961, and has lectured at many other other
places including the U.S. Naval Weapons Laboratory, the Foreign
Service Institute of the State Department, and the Naval College at
Norfolk, Virginia. In 1958, he was a consultant to the Congressional
Select Committee which set up the present national space agency. He
was collaborator in history to the Smithsonian Institution after 1957,
in connection with the establishment of its new Museum of History and
Technology. In the summer of 1964 he went to the Navy Post-Graduate
School, Monterey, California, as a consultant to project Seabed, which
tried to visualize what American weapons systems would be like in
twelve years.

CHAPTER I: INTRODUCTION: WESTERN CIVILIZATION IN ITS WORLD SETTING

Page 3

Each civilization is born in some inexplicable fashion and, after
a slow start, enters a period of vigorous expansion, increasing its
size and power, both internally and at the expense of its neighbors,
until gradually a crisis of organization appears... It becomes
stabilized and eventually stagnant. After a Golden Age of peace and
prosperity, internal crises again arise. At this point, there appears
for the first time, a moral and physical weakness.

Page 5

The passage from the Age of Expansion to the Age of Conflict is
the most complex, most interesting and most critical of all periods of
the life cycle of a civilization. It is marked by four chief
characteristics: it is a period:

a) of declining rate of expansion;

b) of growing tensions and class conflicts;

c) of increasingly frequent and violent imperialist wars;

d) of growing irrationality.

Page 8

When we consider the untold numbers of other societies, simpler
than civilizations, which Western Civilization has destroyed or is now
destroying, the full frightening power of Western Civilization becomes
obvious.
This shift from an Age of Conflict to an Age of Expansion is
marked by a resumption of the investment of capital and the
accumulation of capital on a large scale.
In the new Western civilization, a small number of men, equipped
and trained to fight, received dues and services from the overwhelming
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majority of men who were expected to till the soil. From this
inequitable but effective defensive system emerged an inequitable
distribution of political power and, in turn, an inequitable
distribution of the social economic income. This, in time, resulted in
an accumulation of capital, which, by giving rise to demand for luxury
goods of remote origin, began to shift the whole economic emphasis of
the society from its earlier organization in self-sufficient agrarian
units to commercial interchange, economic specialization, and, a
bourgeois class.

Page 9

At the end of the first period of expansion of Western
Civilization covering the years 970-1270, the organization of society
was becoming a petrified collection of vested interests and entered
the Age of Conflict from 1270-1420.

In the new Age of Expansion, frequently called the period of
commercial capitalism from 1440 to 1680, the real impetus to economic
expansion came from efforts to obtain profits by the interchange of
goods, especially semi-luxury or luxury goods, over long distances. In
time, profits were sought by imposing restrictions on the production
or interchange of goods rather than by encouraging these activities.

Page 10

The social organization of this third Age of Expansion from 1770-
1929 following upon the second Age of Conflict of 1690-1815 might be
called "industrial capitalism." In the last of the nineteenth century,
it began to become a structure of vested interests to which we might
give the name "monopoly capitalism."
We shall undoubtedly get a Universal Empire in which the United
States will rule most of the Western Civilization. This will be
followed, as in other civilizations, by a period of decay and
ultimately, as the civilizations grows weaker, by invasions and the
total destruction of Western culture.

EUROPE'S SHIFT TO THE TWENTIETH CENTURY

Page 24

The belief in the innate goodness of man had its roots in the
eighteenth century when it appeared to many that man was born good and
free but was everywhere distorted, corrupted, and enslaved by bad
institutions and conventions. As Rousseau said, "Man is born free yet
everywhere he is in chains."
Obviously, if man is is innately good and needs but to be freed
from social restrictions, he is capable of tremendous achievements in
this world of time, and does not need to postpone his hopes of
personal salvation into eternity.

Page 25

To the nineteenth century mind, evil, or sin, was a negative
conception. It merely indicated a lack or, at most, a distortion of
good. Any idea of sin or evil as a malignant force opposed to good,
and capable of existing by its own nature, was completely lacking in
the typical nineteenth century mind. The only evil was frustration and
the only sin, repression.

Just as the negative idea of the nature of evil flowed from the
belief that human nature was good, so the idea of liberalism flowed
from the belief that society was bad. For, if society was bad,the
state,which was the organized coercive power of society, was doubly
bad, and if man was good, he should be freed, above all, from the
coercive power of the state.

"No government in business" was commonly called "laissez faire"
and would have left society with little power beyond that required to
prevent the strong from physically oppressing the weak.
This strange, and unexamined, belief held that there really
existed, in the long run, a "community of interests" between the
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members of a society. It maintained that, in the long run, what was
good for one was bad for all. It believed that there did exist a
possible social pattern in which each member would be secure, free and
prosperous.

Page 26

Capitalism was an economic system in which the motivating force
was the desire for private profit as determined in a price system with
the seeking of aggrandization of profits for each individual.
Nationalism served to bind persons of the same nationality
together into a tight, emotionally satisfying, unit. On the other
side, it served to divide persons of different nationalities into
antagonistic groups, often to the injury of their real mutual
political, economic or cultural advantages.
The event which destroyed the pretty dream world of 1919-1929
were the stock market crash, the world depression, the world financial
crisis.

Page 28

The twentieth century came to believe that human nature is, if
not innately bad, at least capable of being very evil. Left to
himself, man falls very easily to the level of the jungle or even
lower and this result can be prevent only by the coercive power of
society. Along with this change from good men and bad society to bad
men and good society has appeared a reaction from optimism to
pessimism. The horrors of Hitler's concentration camps and Stalin's
slave-labor units are chiefly responsible for this change.

CHAPTER II: WESTERN CIVILIZATION TO 1914
WESTERN CIVILIZATION TO 1914

Page 39

The financial capitalist sought profits from the manipulation of
claims on money; and the monopoly capitalist sought profits from
manipulation of the market to make the market price and the amount
sold such that his profits would be maximized.

Page 41

Karl Marx,about 1850, formed his ideas of an inevitable class
struggle in which the groups of owners would become fewer and fewer
and richer and richer while the mass of workers became poorer and
poorer but more and more numerous.
Mass production required less labor. But mass production required
mass consumption.

EUROPEAN ECONOMIC DEVELOPMENT

Page 42

Investments in railroads, steel mills and so on could not be
financed from the profits and private fortunes of individual
proprietors. New instruments for financing industry came into
existence in the form of limited-liability corporations and investment
banks. These were soon in a position to control the chief parts of the
industrial system since they provided the capital to it. This gave
rise to financial capitalism.

Page 43

Great industrial units, working together either directly or
through cartels and trade associations, were in a position to exploit
the majority of the people. The result was a great economic crisis
which soon developed into a struggle for control of the state - the
minority hoping to use the state to defend their privileged position,
the majority hoping to use the state to curtail the power and
privileges of the minority.
Capitalism, because it seems profits as its primary goal, is
never primarily seeking to achieve prosperity, high production, high
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consumption, political power, patriotic improvement, or moral uplift.

Page 44

Goods moved from low-price areas to high-price areas and money
moved from high-price areas to low-price areas because goods were more
valuable where prices were high and money was more valuable where
prices were low.

Thus, clearly, money and goods are not the same thing but are, on
the contrary, exactly opposite things. Most confusion in economic
thinking arises from failure to recognize this fact. Goods are wealth
which you have, while money is a claim on wealth which you do not
have. Thus goods are an asset; money is a debt. If goods are wealth;
money is non-wealth, or negative wealth, or even anti-wealth.

Page 45

In time, some merchants turned their attention from exchange of
goods to the monetary side of the exchange. They became concerned with
the lending of money to merchants to finance their ships and their
activities, advancing money for both, at high interest rates, secured
by claims on ships or goods as collateral for repayment and made it
possible for people to concentrate on one portion of the process and,
by maximizing that portion, to jeopardize the rest.

Page 46

Three parts of the system, production, transfer, and consumption
of goods were concrete and clearly visible so that almost anyone could
grasp them simply examining them while the operations of banking and
finance were concealed, scattered, and abstract so that they appeared
to many to be difficult. To add to this, bankers themselves did
everything they could to make their activities more secret and more
esoteric. Their activities were reflected in mysterious marks in
ledgers which were never opened to the curious outsider.
Changes of prices, whether inflationary or deflationary, have
been major forces in history for the last six centuries at least.

Page 47

Hundreds of years ago, bankers began to specialize, with richer
and more influential ones associated increasingly with foreign trade
and foreign-exchange transactions. Since these were richer and more
cosmopolitan and increasingly concerned with questions of political
significance, such as stability and debasement of currencies, war and
peace, dynastic marriages, and worldwide trading monopolies, they
became financiers and financial advisers of governments. Moreover,
they were always obsessed with the stability of monetary exchanges and
used their power and influence to do two things:

1) to get all money and debts expressed in terms of strictly limited
commodity - ultimately gold; and

2) to get all monetary matters out of the control of governments and
political authority, on the ground that they would be handled better
by private banking interests in terms of such a stable value of gold.

INDUSTRIAL CAPITALISM, 1770-1850

Page 48

Britain's victories had many causes such as its ability to
control the sea and its ability to present itself to the world as the
defender of the freedoms and rights of small nations and of diverse
social and religious groups. Also, financially, England had discovered
the secret of credit and economically, it had embarked on the
Industrial Revolution.

Credit had been known to the Italians and Netherlanders long
before it became one of the instruments of English world supremacy.
Nevertheless, the founding of the Bank of England by William Paterson
and his friends in 1694 is one of the great dates in world history.
For generations, men had sought to avoid the one drawback of gold, its
heaviness, by using pieces of paper to represent specific pieces of
gold. Today, we call such pieces of paper gold certificates which
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entitles its bearer to exchange it for its piece of gold on demand, but
in view of the convenience of paper, only a small fraction of
certificate holders ever did make such demands. It early became clear
that gold need be held on hand only to the amount needed to cover the
fraction of certificates likely to be presented for payment;
accordingly, the rest of the gold could be used for business purposes,
or, what amounts to the same thing, a volume of certificates could be
issued greater than the volume of gold reserved for payment of demands
against them. such an excess volume of paper claims against reserves
we now call bank notes.

In effect, this creation of paper claims greater than the
reserves available means that bankers were creating money out of
nothing. The same thing could be done in another way, not by note issuing
banks but by deposit banks. Deposit bankers discovered that
orders and checks drawn against deposits by depositors and given to
third persons were often not cashed by the latter but were deposited
to their own accounts. Thus there were no actual movements of funds,
and payments were made simply by bookkeeping transactions on the
accounts. Accordingly, it was necessary for the banker to keep on hand
in actual money (gold, certificates and notes) no more than the
fraction of deposits likely to be drawn upon and cashed; the rest
could be used for loans and if these loans were made by creating a
deposit for the borrower, who in turn would draw checks upon it rather
than withdraw it in money, such "created deposits" or loans could also
be covered adequately by retaining reserves to only a fraction of
their value. Such created deposits also were a creation of money out
of nothing, although bankers usually refused to express their actions,
either note issuing or deposit lending, in these terms. William
Paterson, on obtaining the charter of the Bank of England, said "the
Bank hath benefit of interest on all moneys it creates out of
nothing." This is generally admitted today.

This organizational structure for creating means of payment out
of nothing, which we call credit, was not invented by England but was
developed by her to become one of her chief weapons in the victory
over Napoleon in 1815. The emperor, could not see money in any but
concrete terms, and was convinced that his efforts to fight wars on
the basis of "sound money" by avoiding the creation of credit, would
ultimately win him a victory by bankrupting England. He was wrong
although the lesson has had to be relearned by modern financiers in
the twentieth century.

FINANCIAL CAPITALISM 1850-1931

Page 50

The third stage of capitalism is of such overwhelming
significance in the history of the twentieth century, and its
ramifications and influences have been so subterranean and even
occult, that we may be excused if we devote considerate attention to
this organization and methods.

Essentially, what it did was to take the old disorganized and
localized methods of handling money and credit and organize them into
an integrated system, on an international basis, which worked with
incredible and well-oiled facility for many decades. The center of
that system was in London, with major offshoots in New York and Paris
and it has left, as its greatest achievement, an integrated banking
system and a heavily capitalized - if now largely obsolescent -
framework of heavy industry, reflected in railroads, steel mills, coal
mines and electrical utilities.

This system had its center in London for four chief reasons.
First was the great volume of savings in England. Second was England's
oligarchic social structure which provided a very inequitable
distribution of incomes with large surpluses coming to the control of
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a small, energetic upper class. Third was that this upper class was
aristocratic but not noble, quite willing to recruit both money and
ability from lower levels and even from outside the country, welcoming
American heiresses and central-European Jews to its ranks almost as
willingly as it welcomed monied, able and conformist recruits from the
lower classes of Englishmen. Fourth (and by no means last) in
significance was the skill in financial manipulation, especially on
the international scene, which the small group of merchant bankers of
London had acquired.

In time, they brought into their financial network the provincial
banking centers as well as insurance companies to form all of these
into a single financial system on an international scale which
manipulated the quantity and flow of money so that they were able to
influence, if not control, governments on one side and industries on
the other.

The men who did this, looking backward toward the period of
dynastic monarchy in which they had their own roots, aspired to
establish dynasties of international bankers and were at least as
successful at this as were many of the dynastic political rulers. The
greatest of these dynasties, of course, were the descendants of Meyer
Amschel Rothschild (1743-1812) whose male descendants for at least two
generations, generally married first cousins or even nieces.
Rothschild's five sons, established at branches in Vienna, London,
Naples and Paris as well as Frankfort, cooperated together in ways
which other international banking dynasties copied but rarely
excelled.

In concentrating, as we must, on the financial or economic
activities of international bankers, we must not totally ignore their
other attributes. They were cosmopolitan rather than nationalistic;
they were a constant, if weakening, influence for peace, a pattern
established in 1830 and 1840 when the Rothschilds threw their whole
tremendous influence successfully against European wars.
They were usually highly civilized, cultured gentlemen, patrons
of education and of the arts, so that today, colleges, professorships,
opera companies, symphonies, libraries, and museum collections still
reflect their munificence. For these purposes they set a pattern of
endowed foundations which still surround us today.

The names of some of these banking families are familiar to all
of us and should be more so. They include Baring, Lazard, Erlanger,
Warburg, Schroder, Seligman, Speyers, Mirabaud, Mallet, Fould and
above all Rothschild and Morgan. Even after these banking families
became fully involved in domestic industry by the emergence of
financial capitalism, they remained different from ordinary bankers in
distinctive ways:

1) they were cosmopolitan and international;

2) they were close to governments and were particularly concerned with
questions of government debts, including foreign government debts,
even in areas which seemed, at first glance, poor risks, like Egypt,
Persia, Ottoman Turkey, Imperial China and Latin America;

3) their interests were almost exclusively in bonds and very rarely in
goods since they admired "liquidity";

4) they were fanatical devotees of deflation (which they called
"sound" money from its close association with high interest rates and
a high value of money) and of the gold standard;

5) they were almost equally devoted to secrecy and the secret use of
financial influence in political life. These bankers came to be called
"international bankers" and were known as "merchant bankers" in
England, "private bankers" in France and "investment bankers" in the
United States.

Everywhere, they were sharply distinguishable from other, more
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obvious, kinds of banks, such as savings banks or commercial banks.
One of their less obvious characteristics was that they remained
as private unincorporated firms offering no shares, no reports, and
usually no advertising to the public until modern inheritance taxes
made it essential to surround such family wealth with the immortality
of corporate status for tax-avoidance purposes. This persistence as
private firms continued because it ensured the maximum of anonymity
and secrecy to persons of tremendous public power who dreaded public
knowledge of their activities as an evil almost as great as inflation.

Page 53

Firms like Morgan, like others of the international banking
fraternity, constantly operated through corporations and governments,
yet remained itself an obscure private partnership.

The influence of financial capitalism and the international
bankers who created it was exercised both on business and on
governments, but could have neither if it had not been able to
persuade both these to accept two "axioms" of its own ideology. Both
of these were based on the assumption that politicians were too weak
and too subject to temporary public pressures to be trusted with
control of the money system; accordingly, the soundness of money must
be protected in two ways: by basing the value of money on gold and by
allowing bankers to control the money supply. To do this it was
necessary to conceal, even mislead, both governments and people about
the nature of money and its methods of operation.

Page 54

Since it is quite impossible to understand the history of the
twentieth century without some understanding of the role played by
money in domestic affairs and in foreign affairs, as well as the role
played by bankers in economic life and in political life, we must take
a least a glance at each of these four subjects:

DOMESTIC FINANCIAL PRACTICES

In each country, the supply of money took the form of an inverted
pyramid or cone balanced on its point. In the point was the supply of
gold and its equivalent certificates; on the intermediate levels was a
much larger supply of notes; and at the top, with an open and
expandable upper surface, was an even greater supply of deposits. Each
level used the levels below it as its reserves and these lower levels
had smaller quantities of money, they were "sounder."

Notes were issued by "banks of emission" or "banks of issue" and
were secured by reserves of gold or certificates held in some central
reserve. The fraction held in reserve depended upon banking
regulations or statute law. Such banks, even central banks, were
private institutions, owned by shareholders who profited by their
operations.

Deposits on the upper level of the pyramid were called by this
name, with typical bankers' ambiguity, in spite of the fact that they
consisted of two utterly different kinds of relationships:

1) "lodged deposits" which were real claims left by a depositor in a
bank on which a depositor might receive interest; and

2) "created deposits" which were claims created by the bank out of
nothing as loans from the bank to "depositors" who had to pay interest
on them.

Both form part of the money supply. Lodged deposits as a form of
savings are deflationary while created deposits, being an addition to
the money supply, are inflationary.

Page 55

The volume of deposits banks can create, like the amount of notes
they can issue, depends upon the volume of reserves available to pay
whatever fraction of checks are cashed rather than deposited. In the
United States, deposits were traditionally limited to ten times
reserves notes and gold. In Britain it was usually nearer twenty times
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such reserves. In most countries, the central bank was surrounded
closely by the almost invisible private investment banking firms.
These, like the planet Mercury, could hardly be seen in the dazzle
emitted by the central bank, which they, in fact, often dominated. Yet
a lost observer could hardly fail to notice the close private
associations between these private, international bankers and the
central bank itself. In France, in 1936, the Board of the Bank of
France was still dominated by the names of the families who had
originally set it up in 1800.

In England, a somewhat similar situation existed. In a secondary
ring are the "joint stock banks." Outside this secondary ring are the
savings banks, insurance firms, and trust companies.
In France and England the private bankers exercised their powers
through the central bank and had much more influence on the government
and foreign policy and less on industry. In the United States, much
industry was financed by investment bankers directly and the power of
these both on industry and government was very great.

Page 57

The various parts of the pyramid of money were but loosely
related to each other. Much of this looseness arose from the fact that
the controls were compulsive in a deflationary direction and were only
permissive in an inflationary direction. This last point can be seen
in the fact that the supply of gold could be decreased but could
hardly be increased. If an ounce of gold was added to the point of the
pyramid, it could permit an increase in deposits equivalent to $2067
on the uppermost level. If such an ounce of gold were withdrawn from a
fully expanded pyramid of money, this would compel a reduction of
deposits by at least this amount, probably by a refusal to renew
loans.

Throughout modern history, the influence of the gold standard has
been deflationary, because the natural output of gold each year,
except in extraordinary times, has not kept pace with the increase in
the output of goods. Only new supplies of gold or the development of
new kinds of money have saved our civilization over the last couple of
centuries. The three great periods of war ended with an extreme
deflationary crisis (1819, 1873, 1921) as the influential Money Power
persuaded governments to re-establish a deflationary monetary unit
with a high gold content.

The obsession of the Money Power with deflation was partly a
result of their concern with money rather than with goods but was also
founded on other factors, one of which was paradoxical. The paradox
arose from the fact that the basic economic conditions of the
nineteenth century were deflationary, with a monetary system based on
gold and an industrial system pouring out increasing supplies of goods
but in spite of falling prices, the interest rate tended to fall
rather than rise. Moreover, merchant banking continued to emphasize
bonds rather than equity securities (stocks), to favor government
issues rather than private offerings.

Another paradox of banking practice arose from the fact that
bankers, who loved deflation, often acted in an inflationary fashion
from their eagerness to lend money at interest. Since they make money
out of loans, they are eager to increase the amounts of bank credit on
loan. But this is inflationary. The conflict between the deflationary
ideas and inflationary practices of bankers had profound repercussions
on business. The bankers made loans to business so that the volume of
money increased faster than the increase of goods. The result was
inflation. When this became clearly noticeable, the bankers would flee
to notes or specie by curtailing credit and raising discount rates.
This was beneficial to the bankers in the short run (since it allowed
them to foreclose on collateral for loans) but it could be disastrous
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to them in the long run (by forcing the value of the collateral below
the amount of the loans it secured). But such bankers' deflation was
destructive to business and industry in the short run as well as the
long run.

Page 59

The resulting fluctuation in the supply of money, chiefly
deposits, was a prominent aspect of the "business cycle." The quantity
of money could be changed by changing reserve requirements or discount
(interest) rates. Central banks can usually vary the amount of money
in circulation by "open market operations" or by influencing the
discount rates of lesser banks. In open market operations, a central
bank buys or sells government bonds in the open market. If it buys, it
releases money into the economic system; it if sells it reduces the
amount of money in the community. If the Federal Reserve Bank buys, it
pays for these by checks which are soon deposited in a bank. It thus
increases this bank's reserves with the Federal Reserve Bank. Since
banks are permitted to issue loans for several times the value of
their reserves with the FED, such a transaction permits them to issue
loans for a much larger sum.

Central banks can also change the quantity of money by raising
the discount rate which forces the lesser banks to raise their
discount rates; such a raise in interest rates tends to reduce the
demand for credit and thus the amount of deposits (money). Lowering
the discount rate permits an opposite result.

It is noted that the control of the central bank over the credit
policies of local banks are permissive in one direction and compulsive
in the other. They can compel these local banks to curtail credit and
can only permit them to increase credit. This means that they have
control powers against inflation and not deflation - a reflection of
the old banking idea that inflation was bad and deflation was good.

Page 60

The powers of governments over the quantity of money are:

a) control over a central bank;
b) control over public taxation;
c) control over public spending;

Since most central banks have been (technically) private
institutions, this control is frequently based on custom rather than
on law.

Taxation tends to reduce the amount of money in a community and
is usually a deflationary force. Government spending is usually an
inflationary force.

On the whole, in the period up to 1931, bankers, especially the
Money Power controlled by the international investment bankers, were
able to dominate both business and government. They could dominate
business because investment bankers had the ability to supply or
refuse to supply such capital. Thus Rothschild interests came to
dominate many of the railroads of Europe, while Morgan dominated at
least 26,000 miles of American railroads. Such bankers took seats on
the boards of directors of industrial firms, as they had already done
on commercial banks, savings banks, insurance firms, and finance
companies. From these lesser institutions, they funneled capital to
enterprises which yielded control and away from those who resisted.
These firms were controlled through interlocking directorships,
holding companies, and lesser banks.

Page 61

As early as 1909,Walter Rathenau said, "Three hundred men, all of
whom know one another, direct the economic destiny of Europe and
choose their successors from among themselves."

The power of investment bankers over governments rests on the
need of governments to issue short-term treasury bills as well as

 (10 of 129)

long-term government bonds. Just as businessmen go to commercial banks
for current capital advances, so a government has to go to merchant
bankers to tide over the shallow places caused by irregular tax
receipts. As experts in government bonds, the international bankers
provided advice to government officials and, on many occasions, placed
their own members in official posts. This was so widely accepted even
today, that in 1961 a Republican investment banker became Secretary of
the Treasury in a Democratic administration in Washington without
significant comment from any direction.

Naturally, the influence of bankers over governments during the
age of financial capitalism (roughly 1850-1931) was not something
about which anyone talked about freely, but it has been admitted
freely enough by those on the inside, especially in England. In 1842,
Gladstone, chancellor of the Exchequer, declared "The hinge of the
whole situation was this: the government itself was not to be the
substantive power in matters of Finance, but was to leave the Money
Power supreme and unquestioned." On Sept. 26, 1921, the Financial
Times wrote, "Half a dozen men at the top of the Big Five Banks could
upset the whole fabric of government finance by refraining from
renewing Treasury Bills." In 1924, Sir Drummond Fraser, vice-president
of the Institute of Bankers, stated, "The Governor of the Bank of
England must be the autocrat who dictates the terms upon which alone
the Government can obtain borrowed money."

Page 62

In addition to their power over government based on government
financing and personal influence, bankers could steer governments in
ways they wished them to go by other pressures. Since most government
officials felt ignorant of finance, they sought advice from bankers
whom they considered experts in the field. The history of the last
century shows that the advice given to governments by bankers, like
the advice they gave to industrialists, was consistently good for
bankers but was often disastrous for governments, businessmen and the
people generally.

Such advice could be enforced if necessary by manipulation of
exchanges, gold flows, discount rates, and even levels of business
activity. Thus Morgan dominated Cleveland's second administration by
gold withdrawals, and in 1936-13 French foreign exchange manipulators
paralyzed the Popular Front governments. The powers of these
international bankers reached their peak in 1919-1931 when Montagu
Norman and J.P. Morgan dominated not only the financial world but
international relations and other matters as well. On Nov. 11, 1927,
the Wall Street Journal called Mr. Norman "the currency dictator of
Europe." This was admitted by Mr. Norman who said, "I hold the
hegemony of the world."

The conflict of interests between bankers and industrialists has
resulted in the subordination of the bankers (after 1931) to the
latter by the adoption of "unorthodox financial policies" - that is,
financial policies not in accordance with the short-run interests of
the bankers.

THE UNITED STATES TO 1917

Page 71

The civil service reform began in the federal government with the
Pendleton Bill of 1883. As a result, the government was controlled
with varying degrees of completeness by the forces of investment
banking and heavy industry from 1884 to 1933. Popularly known as
"Society," or the "400," they lived a life of dazzling splendor.

Page 72

The structure of financial control created by the tycoons of "Big
Banking" and "Big Business" in the period 1880-1933 was of
extraordinary complexity, one business fief being built upon another,
both being allied with semi-independent associates, the whole rearing
 (11 of 129)

upward into two pinnacles of economic and financial power, of which
one, centered in New York, was headed by J.P. Morgan and Company, and
the other, in Ohio, was headed by the Rockefeller family. When these
two cooperated, as they generally did, they could influence the
economic life of the country to a large degree and could almost
control its political life, at least on the federal level.

The influence of these business leaders was so great that the
Morgan and Rockefeller groups acting together, or even Morgan acting
alone, could have wrecked the economic system of the country merely by
throwing securities on the stock market for sale, and having
precipitated a stock market panic, could then have bought back the
securities they had sold but at a lower price. Naturally, they were
not so foolish as to do this, although Morgan came very close to it in
precipitating the "panic of 1907," but they did not hesitate to wreck
individual corporations, at the expense of holders of common stock, by
driving them to bankruptcy. In this way, Morgan wrecked the New York,
New Haven and Hartford railroad before 1914 and William Rockefeller
wrecked the Chicago, Milwaukee, St. Paul and Pacific Railroad before
1925.

Page 73

The discovery by financial capitalists that they made money out
of issuing and selling securities rather than out of production,
distribution and consumption of goods accordingly led them to the
point where they discovered that the exploiting of an operating
company by excessive issuance of securities or the issuance of bonds
rather than equity securities not only was profitable to them but made
it possible for them to increase their profits by bankruptcy of the
firm, providing fees and commission of reorganization as well as the
opportunity to issue new securities.

When the business interests pushed through the first installment
of the civil service reform in 1881, they expected to control both
political parties equally. Some intended to contribute to both and to
allow an alternation of the two parties in public office in order to
conceal their own influence, inhibit any exhibition of independence by
politicians, and allow the electorate to believe that they were
exercising their own free choice.

The inability of the investment bankers to control the Democratic
Party Convention of 1896 was a result of the agrarian discontent of
the period 1868-1896. This discontent was based very largely on the
monetary tactics of the banking oligarchy. The bankers were wedded to
the gold standard and at the end of the Civil War, persuaded the Grant
administration to curb the postwar inflation and go back on the gold
standard (crash of 1873 and resumption of specie payment in 1875).

Page 74

This gave the bankers a control of the supply of money which they
did not hesitate to use for their own purposes. The bankers'
affection for low prices was not shared by farmers, since each time
prices of farm products went down, the burden of farmers' debts became
greater. As farmers could not reduce their costs or modify their
production plans, the result was a systematic exploitation of the
agrarian sectors of the community by the financial and industrial
sectors. This exploitation took the form of high industrial prices and
discriminatory railroad rates, high interest charges, low farm prices
and very low level of farm services.

Unable to resist by economic weapons, the farmers turned to
political relief. They tried to work on the state political level
through local legislation (so-called Granger Laws) and set up third party
movements (like the Greenback Party of 1878 or the Populist
Party in 1892). By 1896, the capture of the Democratic Party by the
forces of discontent under William Jennings Bryant who was determined
 (12 of 129)

to obtain higher prices by increasing the supply of money on a
bimetallic rather than a gold basis, presented the electorate with an
election on a social and economic issue for the first time in a
generation. Though the forces of high finance were in a state of near
panic, by a mighty effort involving very large-scale spending they
were successful in electing McKinley.

Though the plutocracy were unable to control the Democratic Party
as they controlled the Republican Party, they did not cease their
efforts to control both and in 1904 and 1924, Morgan was able to sit
back with a feeling of satisfaction to watch presidential elections in
which the candidates of both parties were in his sphere of influence.

Page 75

The agrarian discontent, the growth of monopolies, the oppression
of labor, and the excesses of Wall Street financiers made the country
very restless between 1890-1900. All this could have been alleviated
merely by increasing the supply of money sufficiently to raise prices
somewhat, but the financiers were determined to defend the gold
standard no matter what happened.

In looking for some issue to distract public discontent from
domestic issues, what better solution than a crisis in foreign
affairs? Cleveland had stumbled upon this alternative in 1895 when he
stirred up controversy with England over Venezuela. The great
opportunity came with the Cuban revolt against Spain in 1895. While
the "yellow press" roused public opinion, Henry Cabot Lodge and
Theodore Roosevelt plotted how they could best get the United States
into the fracas. They got the excuse they needed when the American
battleship Maine was sunk by a mysterious explosion in Havana Harbor
in 1898. In two months, the United States declared war on Spain to
fight for Cuban independence. The resulting victory revealed the
United States as a world naval power, established it as an imperialist
power with possession of Puerto Rico, Guam, and the Philippines.
America's entrance upon the stage as a world power continued with
the annexation of Hawaii in 1898, the intervention in the Boxer
uprising in 1900, the seizure of the Panama canal in 1903, the
diplomatic intervention in the Russo-Japanese war in 1905, the
military occupation of Nicaragua in 1912, the military intervention in
Mexico in 1916.

Page 76

As an example of the more idealistic impulse we might mention the
creation of various Carnegie foundations to work for universal peace.
As an example of the more practical point of view, we might mention
the founding of "The New Republic," a liberal weekly paper, by an
agent of Morgan financed with Whitney money (1914).

The combined forces of the liberal East and the agrarian West
were able to capture the Presidency under Woodrow Wilson in 1912.
Wilson roused a good deal of popular enthusiasm with his talk of "New
Freedom" and the rights of the underdog, but his program amounted to
little more than an amateur attempt to establish on a federal basis
those reforms which agrarian and labor discontent had been seeking on
a state basis for many years. Wilson was by no means a radical and
there was a good deal of unconscious hypocrisy in many of his
resounding public speeches. His political and administrative reforms
were a good deal more effective than his economic or social reforms.
The establishment of an income tax and the Federal Reserve System
justified the support which Progressives had given to Wilson. Wilson
did much to extend equality of opportunity to wider groups of American
people.

CHAPTER III: THE RUSSIAN EMPIRE TO 1917

 (13 of 129)

Page 88

The abolition of serfdom made it necessary for the landed
nobility to cease to regard the peasants as private property. Peter
the Great (1689-1725) and Catherine the Great (1762-1796) were
supporters of westernization and reform. Paul I (1796-1801) was
reactionary. Alexander I (1801-1825) and Alexander II (1855-1881) were
reformers while Nicholas I (1825-1855) and Nicholas II (1855-1881)
were reactionaries. By 1864, serfdom had been abolished, and a fairly
modern system of law, of justice, and of education had been
established; local government had been somewhat modernized; a fairly
good financial and fiscal system had been established; and an army
based on universal military service (but lacking in equipment) had
been created. On the other hand, the autocracy continued in the hands
of weak men and the freed serfs had no adequate lands.

Page 93

The first Russian railroad opened in 1838 but growth was slow
until 1857. At that time, there were only 663 miles of railroads, but
this figure went up over tenfold by 1871, doubled again by 1881 with
14,000 miles, reached 37,000 by 1901 and 46,000 by 1915.

Page 94

In 1900, Russia had 48% of the total world production of
petroleum products. The State Bank was made a bank of issue in 1897
and was required by law to redeem its notes in gold, thus placing
Russia on the international gold standard.

Page 97

In 1902, a cartel created by a dozen iron and steel firms handled
almost three-fourths of all Russian sales. It was controlled by four
foreign banking groups.

Page 100

Until 1910, Stolypin continued his efforts to combine oppression
with reform, especially agrarian reform. Rural credit banks were
established; various measures were taken to place larger amounts of
land in the hands of the peasants; restrictions of immigration of
peasants, especially to Siberia, were removed; participation in local
government was opened to lower social classes previously excluded;
education, especially technical education, was made more accessible;
and certain provisions for social insurance were enacted into law. He
was assassinated in the presence of the Tsar in 1911.

The fourth duma (1912-1916) was elected by universal suffrage.

CHAPTER IV: THE BUFFER FRINGE

THE NEAR EAST TO 1914

Page 111

The Ottoman Empire was divided into 21 governments and subdivided
into seventy vilayets, each under a pasha. The supreme ruler in
Constantinople was not only sultan (head of the empire) but was also
caliph (defender of the Muslim creed).

Page 121

The Great Powers showed mild approval of the Baghdad Railway
until about 1900. Then, for more than ten years, Russia, Britain and
France showed violent disapproval and did all they could the obstruct
the project. They described the Baghdad Railway as the emerging wedge
of German imperialist aggression seeking to weaken and destroy the
Ottoman Empire and the stakes of the other powers in the area.

Page 122

The Germans were not only favorably inclined toward Turkey; their
conduct seems to have been completely fair in regard the
administration of the railway itself. At a time when the American and
 (14 of 129)

other railways were practicing wholesale discrimination between
customers, the Germans had the same rates and same treatment for all,
including Germans and non-Germans. They worked to make the railroad
efficient and profitable although their income from it was guaranteed
by the Turkish government. In consequence, the Turkish payments to the
railroad steadily declined, and the government was able to share in
its profits to the extent of almost three million francs in 1914.
Moreover, the Germans did not seek to monopolize control of the
railroad, offering to share equally with France and England and
eventually with the other Powers. France accepted this offer in 1899,
but Britain continued to refuse and placed every obstacle in the path
of the project.

When the Ottoman government sought to raise their customs duties
from 11% to 14% in order to continue construction, Britain prevented
this. In order to carry on the project, the Germans sold their
railroad interests in the Balkans and gave the Ottoman building
subsidy of $275,000 a kilometer. In striking contrast, the Russians
demanded arrears of 57 million francs under the Treaty of 1878. The
French, in spite of investments in Turkey, refused to allow Baghdad
Railway securities to be handled on the Paris Stock Exchange.

Page 123

In 1903, Britain made an agreement for a joint German, French,
and British control of the railroad. Within three weeks this agreement
was repudiated because of newspaper protests against it. When the
Turkish government tried to borrow, it was summarily rebuffed in Paris
and London, but obtained the sum unhesitatingly in Berlin. The growth
of German prestige and the decline in favor of the Western Powers at
the sultan's court is not surprising and goes far to explain the
Turkish intervention on the side of the Central powers in the war of
1914-1919.

Britain withdrew her opposition to the Baghdad Railway in return
for promises that:

1) it would not be extended to the Persian Gulf;
2) British capitalists would be given a monopoly on the navigation of
the Euphrates and Tigris rivers and exclusive control over their
irrigation projects;
3) 2 British subjects would be given seats on the Board of directors;
4) Britain would have exclusive control over commercial activities in
Kuwait, the only good port on the upper Persian Gulf;
5) a monopoly over the oil resources given to a new corporation: Royal
Dutch Shell Company in which British held half interest, the Germans
and French a quarter interest each;

THE BRITISH IMPERIAL CRISIS TO 1926

Page 127

In England, the landed class obtained control of the bar and the
bench and were, thus, in a position to judge all disputes about real
property in their favor. Control of the courts and of the Parliament
made it possible for this ruling group to override the rights of
peasants in land, to eject them from the land, to enclose the open
fields of the medieval system, to deprive the cultivators of their
manorial rights and thus reduce them to the condition of landless
rural laborers or tenants.

Page 130

Until 1870, there was no professorships of Fine Arts at Oxford,
but in that year, thanks to a bequest,John Ruskin was named to such a
chair. He hit Oxford like an earthquake, not so much because he talked
about fine arts but because he talked about the empire and England's
downtrodden masses as moral issues. Until the end of the nineteenth
century, the poverty-stricken masses in the cities lived in want,
ignorance and crime much like described by Charles Dickens. Ruskin
spoke to the Oxford undergraduates as members of the privileged ruling
 (15 of 129)

class. He told them that they were the possessors of a magnificent
tradition of education, beauty, rule of law, freedom, decency, and
self-discipline but that this tradition could not be saved and did not
deserve to be saved, unless it could be extended to the lower classes
and to the non-English masses throughout the world. If not extended to
these classes, the minority upper-class would be submerged and the
tradition lost.

Ruskin's message had a sensational impact. His inaugural lecture
was copied out in longhand by one undergraduate, Cecil Rhodes. Rhodes
feverishly exploited the diamond and gold fields of South Africa, rose
to be prime minister of Cape Colony, contributed money to political
parties, controlled parliamentary seats both in England and South
Africa.

With financial support from Lord Rothschild, he was able to
monopolize the diamond mines as De Beers Mines and Gold Fields. In the
mid 1890s, Rhodes had a personal income of a least a million pounds
(then five million dollars) a year which was spent so freely for his
mysterious purposes that he was usually overdrawn on his account.
These purposes centered on his desire to federate the English-speaking
peoples and to bring all the habitable portions of the world under
their control.

Page 131

Among Ruskin's most devoted disciples at Oxford were a group of
intimate friends who devoted the rest of their lives to carrying out
his ideas. They were remarkably successful in these aims.
In 1891, Rhodes organized a secret society with members in a
"Circle of Initiates" and an outer circle known as the "Association of
Helpers" later organized as the Round Table organization.

Page 132

In 1909-1913, they organized semi-secret groups know as Round
Table Groups in the chief British dependencies and the United States.
In 1919, they founded the Royal Institute of International Affairs.
Similar Institutes of International Affairs were established in the
chief British dominions and the United States where it is known as the
Council on Foreign Relations. After 1925, the Institute of Pacific
Relations was set up in twelve Pacific area countries.

Page 133

They were constantly harping on the lessons to be learned from
the failure of the American Revolution and the success of the Canadian
federation of 1867 and hoped to federate the various parts of the
empire and then confederate the whole with the United Kingdom

EGYPT AND THE SUDAN TO 1922

Disraeli's purchase, with Rothschild money, of 176,602 shares of
Suez Canal stock for #3,680,000 from the Khedive of Egypt in 1875 was
motivated by concern for communications with India just as the
acquisition of the Cape of Good Hope in 1814 had resulted from the
same concern.

Page 135

As a result of complex and secret negotiations in which Lord
Rosebery was the chief figure, Britain kept Uganda, Rhodes was made a
privy councilor, Rosebery replaced his father-in-law, Lord Rothschild,
in Rhodes secret group and was made a trustee under Rhodes' next and
last will.

Page 137


By 1895, the Transvaal Republic presented an acute problem. All
political control was in the hands of a rural, backward, Bible reading,
racist minority of Boers while all economic wealth was in the
hands of a violent, aggressive majority of foreigners, (Utlanders)
most of whom lived in Johannesburg. The Utlanders, who were twice as
numerous and owned two thirds of the land and nine-tenths of the
 (16 of 129)

wealth of the country, were prevented from participating in political
life or from becoming citizens (except after 14 years residence) and
were irritated by President Paul Kruger's intriguing to obtain some
kind of German intervention and protection.
At this point, Rhodes made his plans to overthrow Kruger's
government by an uprising in Johannesburg, financed by himself and led
by his brother Frank, followed by an invasion led by Frank Jameson
from Rhodesia. Flora Shaw used The Times to prepare public opinion in
England while others negotiated for the official support necessary.
When the revolt fizzled, Jameson raided anyway and was easily
captured by the Boers. The public officials involved denounced the
plot, loudly proclaimed their surprise at the event, and were able to
whitewash most of the participants in the subsequent parliamentary
inquiry. A telegram from the German Kaiser to Kruger congratulating
him on his success "in preserving the independence of his country,"
was built up by The Times into an example of brazen German
interference in British affairs, and almost eclipsed Jameson's
aggression.

Rhodes was stopped only temporarily. For almost two years, he and
his friends stayed quiet waiting for the storm to blow over. Then they
began to act again. Propaganda, most of it true about the plight of
the Utlanders flooded England from Flora Shaw. Milner was made British
High Commissioner to South Africa; his friend Brett worked his way
into the confidence of the monarchy to become its chief political
advisor. Milner made provocative British troop movements on the Boer
frontiers in spite of the vigorous protests of his commanding general
in South Africa, who had to be removed; and finally, war was
precipitated when Smuts drew up an ultimatum insisting that the
British troop movements cease and when this was rejected by Milner.

Page 138

The Boer War (1899-1902) was one of the most important events in
British imperial history. The ability of 40,000 Boer farmers to hold
off ten times as many British for three years, inflicting a series of
defeats on them over that period, destroyed faith in British power.
Although the Boer republics were defeated and annexed in 1902,
Britain's confidence was so shaken that it made a treaty with Japan
providing that if either became engaged in war with two enemies in the
Far East, the other would come to the rescue. This treaty allowed
Japan to attack Russia in 1904.

Page 138

Milner's group, known as "Milner's Kindergarten" reorganized the
government. By 1914, the Smuts government passed a law excluding
natives from most semi-skilled or skilled work or any high-paying
positions.

Page 139

By the Land Act of 1913, 7% was reserved for purchases by natives
and the other 93% by whites. The wages of natives were about one tenth
of those of whites.

Page 141

These natives lived on inadequate and eroded reserves or in
horrible urban slums and were drastically restricted in movements,
residence, or economic opportunities and had almost no political or
even civil rights. By 1950 in Johannesburg, 90,000 Africans were
crowded into 600 acres of shacks with no sanitation with almost no
running water and denied all opportunity except for animal survival
and reproduction.

Page 142

In 1908, the Milner Round Table group worked a scheme to reserve
the tropical portions of Africa north of the Zambezi river for natives
under such attractive conditions that the blacks south of that river
 (17 of 129)

would be enticed to migrate northward. Its policy would be to found a
Negro dominion in which Blacks could own land, enter professions, and
stand on a footing of equality with Whites. Although this project has
not been achieved, it provides the key to Britain's native policies
from 1917 onward.

Page 143

In 1903, when Milner took over the Boer states, he tried to
follow the policy that native could vote. This was blocked by the
Kindergarten because they considered reconciliation with the Boers to
be more urgent.

In South Africa, the three native protectorates of Swaziland,
Bechuanaland, and Basutoland were retained by the imperial authorities
as areas where native rights were paramount and where tribal forms of
living could be maintained at least partially.

MAKING THE COMMONWEALTH 1910-1926

Page 144

Back in London, they founded the Round Table and met in conclaves
presided over by Milner to decide the fate of the empire. Curtis and
others were sent around the world to organize Round Table groups in
the chief British dependencies to give them, including India and
Ireland, their complete independence.

Page 146

The creation of the Round Table groups was so secretive that,
even today, many close students of the subject are not aware of its
significance.

Page 147

Curtis said, "The task of preparing for freedom the races which
cannot as yet govern themselves is the supreme duty of those who can.
Personally, I regard this challenge to the long unquestioned claim of
the white man to dominate the world as inevitable and wholesome,
especially to ourselves. Our whole race has outgrown the merely
national state and will pass either to a Commonwealth of Nations or
else to an empire of slaves. And the issue of these agonies rests with
us."

EAST AFRICA 1910-1931

Page 149

Publicity for their views on civilizing the natives and training
them for eventual self-government received wide dissemination.

Page 150

By 1950 Kenya had discontented and detribalized blacks working
for low wages on lands owned by whites. It had about two million
blacks and only 3,400 whites in 1910. Forty years later, it had about
4 million blacks and only 30,000 whites. The healthful highlands were
reserved for white ownership as early as 1908. The native reserves had
five times as much land although they had 150 times as many people.
The whites tried to increase the pressure on natives to work on
white farms rather than to seek to make a living on their own lands
within the reserves, by forcing them to pay taxes in cash, by
curtailing the size or quality of the reserves, by restricting
improvements in native agricultural techniques and by personal and
political pressure and compulsion.

The real crux of the controversy before the Mau Mau uprising of
1948-1955 was the problem of self-government; Pointing to South
Africa, the settlers in Kenya demanded self-rule which would allow
them to enforce restrictions on non-whites.

Page 151

From this controversy came a compromise which gave Kenya a
Legislative Council containing representatives of the imperial
government, the white settlers, the Indians, the Arabs, and a white
missionary to represent the blacks. Most were nominated rather than
elected but by 1949, only the official and Negro members were
 (18 of 129)

nominated.

Page 152

As a result of the 1923 continued encroachment of white settlers
on native preserves, the 1930 Native Land Trust Ordinance guaranteed
native reserves but these reserves remained inadequate.

Page 153

Efforts to extend the use of native courts, councils and to train
natives for an administrative service were met with growing suspicion
based on the conviction that the whites were hypocrites who taught a
religion that they did not obey, were traitors to Christ's teachings,
and were using these to control the natives and to betray their
interests under cover of religious ideas which the whites themselves
did not observe in practice.

INDIA TO 1926

Although the East India Company was a commercial firm, it had to
intervene again and again to restore order, replacing one nominal
ruler by another and even taking over the government of those areas
where it was more immediately concerned and to divert to their own
pockets some of the fabulous wealth they saw flowing by. Areas under
rule expanded steadily until by 1858 they covered three-fifths of the
country.

Page 154

In 1857-1858, a sudden, violent insurrection of native forces,
known as the Great Mutiny, resulted in the end of the Mogul empire and
of the East India Company, the British government taking over their
political activities.

Page 157

Numerous legislative enactments sought to improve the conditions
but were counterbalanced... by the growing burden of peasant debt at
onerous terms and at high interest rates. Although slavery was
abolished in 1843, many of the poor were reduced to peonage by
contracting debts at unfair terms and binding themselves and their
heirs to work for their creditors until the debt was paid. Such a debt
could never be paid, in many cases, because the rate at which it was
reduced was left to the creditor and could rarely be questioned by the
illiterate debtor.

Page 158

In spite of India's poverty, there was a considerable volume of
savings arising chiefly from the inequitable distribution of income to
the landlord class and to the moneylenders (if these two groups can be
separated in this way).

Page 161

Hinduism was influenced by Christianity and Islam so that the
revived Hinduism was really a synthesis of these three religions.
Played down was the old and basic Hindu idea of Karma where each would
reappeared again and again in a different physical form and in a
different social status, each difference being a reward or punishment
for the soul's conduct in at it's previous appearance. There was no
real hope of escape from this cycle, except by a gradual improvement
through a long series of successive appearances to the ultimate goal
of complete obliteration of personality (Nirvana) by ultimate mergence
in the soul of the universe (Brahma). This release (moksha) from the
endless cycle of existence could be achieved only by the suppression
of all desire, of all individuality and of all will to live.

IRELAND TO 1939


Page 173

The Cromwellian conquest of Ireland in the seventeenth century
had transferred much Irish land, as plunder of war, to absentee
English landlords. In consequence, high rents, insecure tenure, lack
of improvements and legalized economic exploitation, supported by
 (19 of 129)

English judges and English soldiers, gave rise to violent agrarian
unrest and rural atrocities against English lives and properties.

THE FAR EAST TO WORLD WAR I

THE COLLAPSE OF CHINA TO 1920

Page 176

The destruction of traditional Chinese culture under the impact
of Western Civilization was considerably later than the similar
destruction of Indian culture by Europeans

The upper-most group derived its income as tribute and taxes from
its possession of military and political power the middle group
derived its incomes from sources such as interest on loans, rents from
lands and the profits from commercial enterprises. Although the
peasants were clearly an exploited group, this exploitation was
impersonal and traditional and thus more easily borne.

Page 179

Only in the late nineteenth and early twentieth century did
peasants in China come to regard their positions as so hopeless that
violence became preferable to diligence or conformity. This change
arose from the fact that the impact of Western culture on China did,
in fact, make a peasant's position economically hopeless.

Page 180

Chinese society was too weak to defend itself against the West.
When it tried to do so, as in the Opium Wars of 1840-1861 or in the
Boxer uprising of 1900, such Chinese resistance to European
penetration was crushed by armaments of the Western Powers and all
kinds of concessions to these Powers were imposed on China.
Until 1841, Canton was the only port allowed for foreign imports
and opium was illegal. As a consequence of Chinese destruction of
illegal Indian opium and the commercial exactions of Cantonese
authorities, Britain imposed on China the treaties of Nanking (1842)
and of Tientsin (1858). These forced China to cede Hong Kong to
Britain and to open sixteen ports to foreign trade, to impose a
uniform import tariff of no more than 5%, to pay an indemnity of about
$100 million, to permit foreign legations in Peking, to allow a
British official to act as head of the Chinese customs service, and to
legalize the import of opium. China lost Burma to Britain, Indochina
to France. Also Formosa and the Pescadores to Japan, Macao to
Portugal, Kiaochow to Germany, Liaotung (including Port Arthur) to
Russia, France took Kwangchowan and Britain took Kowloon and
Weihaiwei. Various Powers imposed on China a system of
extraterritorial courts under which foreigners in judicial cases could
not be tried in Chinese courts or under Chinese law.

TRAGEDY AND HOPE Chapters V-VIII
by Dr. Carroll Quigley
ISBN 0913022-14-4

CONTENTS

V. THE FIRST WORLD WAR

VI. THE VERSAILLES SYSTEM AND RETURN TO NORMALCY 1919-1929

VII. FINANCE, COMMERCIAL POLICY AND BUSINESS ACTIVITY 1897-1947

VIII. INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE

CHAPTER V: THE FIRST WORLD WAR

THE GROWTH OF INTERNATIONAL TENSIONS 1871-1914

Page 249
 (20 of 129)

Four chief reasons have been given for the intervention of the
United States in World War I.

1) to secure "freedom of the seas" from German submarine attacks;
2)British propaganda;
3) a conspiracy by international bankers and munitions manufacturers
either to protect their loans to the Entente Powers or their wartime
profits from sales to these Powers;
4) Balance of Power principles to prevent Great Britain from being
defeated by Germany

Page 250

The fact that German submarines were acting in retaliation for
the illegal British blockades of the continent of Europe and British
violations of international law and neutral rights on the high seas.
Britain was close to defeat in April 1917 and on that basis the
United States entered the war. The unconscious assumption by American
leaders that an Entente victory was inevitable was at the bottom of
their failure to enforce the same rules of neutrality and
international law against Britain as against Germany. They constantly
assumed that British violations of these rules could be compensated
with monetary damages while German violations of these rules
must be resisted by force if necessary. Since they could not admit
this unconscious assumption or publicly defend the legitimate basis of
international power politics on which it rested, they finally went to
war on an excuse which was legally weak, "the assertion of a right to
protect belligerent ships on which Americans saw fit to travel and the
treatment of armed belligerent merchantmen as peaceful vessels. Both
assumptions were contrary to reason and to settled law and no other
professed neutral advanced them."

The Germans at first tried to use the established rules of
international law regarding destruction of merchant vessels. This
proved so dangerous because the British instructions to merchant ships
to attack submarines. American protests reached a peak when the
Lusitania was sunk in 1915. The Lusitania was a British merchant
vessel constructed as an auxiliary cruiser carrying a cargo of 2,400
cases of rifle cartridges and 1250 cases of shrapnel with orders to
attack German submarines whenever possible. The incompetence of the
acting captain contributed to the heavy loss of life as did also a
mysterious second explosion after the German torpedo struck. The
captain was on course he had orders to avoid; he was running at
reduced speed, he had an inexperienced crew; the portholes had been
left open; the lifeboats had not been swung out; and no lifeboat
drills had been held.

Page 251

The propaganda agencies of the Entente Powers made full use of
the occasion. The Times of London announced that 80% were citizens of
the US (actually 15.6%); the British manufactured and distributed a
medal which they pretended had been awarded to the submarine crew by
the German government; a French paper published a picture of the
crowds in Berlin at the outbreak of war in 1914 as a picture of
Germans "rejoicing" at the news of the sinking of the Lusitania.
The US protested violently against the submarine warfare while
brushing aside German arguments based on the British blockade. It was
so irreconcilable in these protests that Germany sent Wilson a note
which promised that "in the future merchant vessels within and without
the war zone shall not be sunk without warning and without
safeguarding human lives unless these ships try to escape or offer
resistance. In return, the German government hoped that the US would
put pressure on Britain to follow the established rules of
international law in regard to blockade and freedom of the sea. Wilson
refused to do so. It became clear to the Germans that they would be
starved into defeat unless they could defeat Britain first by
 (21 of 129)

unrestricted submarine warfare. Since they were aware this would
probably bring the US into the war against them, they made another
effort to negotiate peace before resorting to it. It was rejected by
the Entente Powers on Dec. 27 and unrestricted submarine attacks were
resumed. Wilson broke off diplomatic relations and the Congress
declared war on April 3, 1917.

Page 252

Britain was unwilling to accept any peace which would leave
Germany supreme on the continent or in a position to resume the
commercial, naval, and colonial rivalry which had existed before 1914.

Page 253

The Vatican, working through Cardinal Pacelli (later Pope Pius
XII) sought a negotiated peace.

On Oct 5, a German note to Wilson asked for an armistice based on
the basis of the Fourteen Points which promised the end of secret
diplomacy, freedom of the seas; freedom of commerce; disarmament; a
fair settlement of colonial claims, with the interests of the native
peoples receiving equal weight with the titles of the Imperialist
Powers; the evacuation of Russia, the evacuation and restoration
of Belgium, the evacuation of France and the restoration of her
Alsace-Lorraine as in 1870.

Page 254

The Entente Supreme War Council refused to accept the Fourteen
Points as the basis for peace until Colonel House threatened that the
US would make a separate peace with Germany.

Page 255

Wilson had clearly promised that the peace treaty would be
negotiated and based on the Fourteen Points but the Treaty of
Versailles was imposed without negotiation and the Fourteen Points
fared very poorly in its provisions. The subsequent claim of the
German militarists that the German Army was never defeated but was
"stabbed in the back" by the home front through a combination of
international Catholics, international Jews, and international
Socialists have no merit whatever.

On all fronts, almost 13 million men in the various armed forces
died and the war destroyed over $400 billion in property at a time
when the value of every object in France and Belgium was not worth
over $75 billion.

Page 256

In July 1914, the military men were confident that a decision
would be reached in six months. This belief was supported by the
financial experts who, while greatly underestimating the cost of
fighting, were confident financial resources would be exhausted in six
months. By financial resources, they meant "gold reserves." These were
clearly limited; all the Great Powers were on the gold standard.
However each country suspended the gold standard at the outbreak of
war. This removed the automatic limitation on the supply of paper
money. The each country proceeded to pay for the war by borrowing from
the banks. The banks created the money which they lent my merely
giving the government a deposit of any size against which the
government could draw checks. The banks were no longer limited in the
amount of credit they could create because they no longer had to pay
out gold for checks on demand. This the creation of money in the form
of credit by the banks was limited only by the demands of its
borrowers. Naturally, as governments borrowed to pay for their needs,
private businesses borrowed to be able to fill the
government's orders. The percentage of outstanding bank notes covered
by gold reserves steadily fell and the percentage of bank credit
covered by either gold or bank notes fell even further.
Naturally, when the supply of money was increased in this fashion
 (22 of 129)

faster than the supply of goods, prices rose because a larger supply
of money was competing for a smaller supply of goods. People received
money for making capital goods, consumer goods and munitions but they
could spend their money only to buy consumer goods. The problem of
public debt became steadily worse because governments were financing
such a large part of their activities by bank credit. Public debts
rose by 1000 percent.

Page 259

Governments began to regulate imports and exports to ensure that
necessary materials stayed in the country and did not go to enemy
states. This led to the British blockade of Europe.

Page 251

The results of the blockade were devastating. Continued for
nine months after the armistice, it caused the deaths of 800,000
persons, reparations took 108,000 horses, 205,000 cattle, 426,000
sheep and 240,000 fowl.

Page 262

Countries engaged in a variety of activities designed to
regulate the flow of information which involved censorship, propaganda
and curtailment of civil liberties.

Page 263

The War Propaganda Bureau was able to control almost all
information going to the American press.

The Censorship and Propaganda bureaus worked together. The former
concealed all stories of Entente violations of the laws of war or of
the rules of humanity while the Propaganda Bureau widely publicized
the violations and crudities of the Central Powers. The German
violation of Belgian neutrality was constantly bewailed,while nothing
was said of the Entente violation of Greek neutrality. A great deal
was made of the Austrian ultimatum to Serbia while the Russian
mobilization which had precipitated the war was hardly mentioned. In
the Central Powers a great deal was made of the Entente encirclement
while nothing was said of the Kaiser's demands for "a place in the
sun" of the High Command's refusal to renounce annexation of any part
of Belgium.

Manufacture of outright lies by propaganda agencies was
infrequent and the desired picture of the enemy was built up by a
process of selection and distortion of evidence until, by 1918,many in
the West regarded the Germans as bloodthirsty and sadistic militarists
while the Germans regarded the Russians as "subhuman monsters." A
great deal was made, especially by the British, of "atrocity"
propaganda; stories of German mutilation of bodies, violation of
women, cutting off a children's hands, desecration of churches, and
crucifixions of Belgians were widely believed in the West by 1916. In
1917, Henry Carter is created a story that the Germans were cooking
human bodies to extract glycerin and produced pictures to prove it.
Again, photographs of mutilated bodies in a Russian anti-Semitic
outrage in 1905 were circulated as pictures of Belgians in 1915. There
were several reasons for the use of such atrocity stories:

a) to build up the fighting spirit of the mass army;
b) to stiffen civilian morale;
c) to encourage enlistments;
d) to increase subscriptions for war bonds;
e) to justify one's own breaches of international law;
f) to destroy the chances of negotiating peace or to justify a severe
final peace;
g) to win the support of the neutrals.

The relative innocence and credulity of the average person who
was not yet immunized to propaganda assaults through mediums of mass
communication in 1914 made the use of such stories relatively
effective. But the discovery in the period after 1919 that they had
 (23 of 129)

been hoaxed gave rise to a skepticism toward all government
communications which was especially noticeable in the Second World
War.

CHAPTER VI: THE VERSAILLES SYSTEM AND THE RETURN TO NORMALCY 1919-1929
THE PEACE SETTLEMENTS 1919-1923

Page 267

The criticisms of the peace settlements was as ardent from the
victors as from the vanquished aimed at the terms which were neither
unfair nor ruthless. The causes of the discontent rested on the
procedures which were used rather than the terms themselves. Above
all, there was discontent at the contrast between the procedures which
were used and the procedures which pretended to be used, as well as
between the high-minded principles which were supposed to be applied
and those which really were applied.

Page 268

When it became clear that they were to be imposed rather than
negotiated, that the Fourteen Points had been lost in the confusion,
that the terms had been reached by a process of secret negotiations
from which the smaller nations had been excluded, there was a
revulsion against the treaties. By 1929, most of the Western World had
feelings of guilt and shame whenever they thought of the Versailles
Treaty. In England, the same groups, often the same people, who had
made the wartime propaganda and the peace settlements were loudest in
their complaint that the latter had fallen far below the ideals of the
former while all the while their real aims were to use power politics
to the benefit of Britain.

The peace settlements were made by an organization which was
chaotic and by a procedure which was fraudulent. None of this was
deliberate. It arose rather from weakness and ignorance, from a
failure to decide on what principles it would be based.

Page 269

]Since the Germans had been promised the right to negotiate, it
became clear that the terms could not first be made the subject of
public compromise. Unfortunately, by the time the victorious Great
Powers realized all this and decided to make the terms by secret
negotiations among themselves, invitations had already been sent to
all the victorious powers to come to the conference. As a solution to
this embarrassing situation, the peace treaty was made on two levels.
On one level, in the full glare of publicity, the Inter-Allied
Conference became the Plenary Peace

Conference and with the considerable fanfare, did nothing. ON
the other level, the Great Powers worked out their peace terms in
secret and when they were ready, imposed them simultaneously on the
conference and on the Germans. This had not been intended. It was not
clear to anyone just what was being done.

Page 271

At all these meetings, as at the Peace Conference itself, the
political leaders were assisted by groups of experts and interested
persons. Many of the experts were members associates of the
international banking fraternity. In every case but one, where a
committee of experts submitted a unanimous report, the Supreme Council
accepted its recommendation. The one case where a report was not
accepted was concerned with the Polish corridor, the same issue which
led to the Second World War where the experts were much harsher on
Germany than the final decision of the politicians.

Page 272

The German delegation offered to accept the disarmament
sections and reparations if the Allies would withdraw any statement
 (24 of 129)

that Germany had, alone, caused the war and would re-admit Germany to
the world's markets.

Page 273

The Allies answer accused the Germans of sole guilt in causing
the war and of inhuman practices during it. The Germans voted to sign
if the articles on war guilt and war criminals could be struck from
the treaty.. When the Allies refused these concessions, the Catholic
Center Party voted 64-14 not to sign. The High Command of the German
army ordered the Cabinet to sign. The Treaty of Versailles was signed
by all the delegations except the Chinese in protest against the
disposition of the prewar German concessions in Shantung.

Page 274

No progress was possible in Hungary without some solution of the
agrarian question and the peasant discontent arising from
monopolization of the land.

The French Ministry of Foreign Affairs (acting on behalf of
France's greatest industrialist, Eugene Schneider) made a deal with
the Hungarians that if they would sign the Treaty of Trianon and give
Schneider control of the Hungarian state railways, the port of
Budapest and the Hungarian General Credit Bank, France would
eventually make Hungary one of the mainstays of its anti-German bloc
in Eastern Europe and, at the proper time, obtain a drastic revision
of the Treaty of Trianon. Paleologue received his reward from
Schneider. He was made director of Schneider's personal holding
company.

The Treaty of Sevres with Turkey was never signed because of the
scandal caused by the Bolshevik publication of the secret treaties
regarding the Ottoman Empire, since these treaties contrasted so
sharply with the expressed war aims of the Allies.

The British felt that richer prospects were to be obtained from
the Turkish sultan. In particular, the French were prepared to support
the claims of Standard Oil to such concessions while the British were
prepared to support Royal Dutch Shell.

Page 277

The chief territorial disputes arose over the Polish corridor.
France's Foch wanted to give all of East Prussia to Poland. Instead,
the experts gave Poland access to the sea by severing East Prussia
from the rest of Germany by creating a Polish corridor in the valley
of the Vistula. However, the city of Danzig was clearly a German city
and Lloyd George refused to give it to Poland. Instead, it was a made
a free city under the protection of the League of Nations.

Page 279

The most violent controversies arose in regard to the boundaries
of Poland. Of these, only that with Germany was set by the Treaty of
Versailles. The Poles refused to accept their other frontiers and by
1920 were at war with Lithuania over Vilna, with Russia over the
eastern border, with the Ukrainians over Galaicia, and with
Czechoslovakia over Teschen.

Page 280

These territorial disputes are of importance because they
continued to lacerate relationships between neighboring states until
well into the period of World War II. There were 1,000,000 Germans
living in Poland, 550,000 in Hungary, 3,100,000 in Czechoslovakia,
about 700,000 in Romania, 500,000 in Yugoslavia and 250,000 in Italy.
To protect these minorities, the Allied Powers forced the new states
to sign treaties grating a certain minimum political rights guaranteed
by the League of Nations with no power to enforce observation of them.

Page 282

The French were torn between a desire to obtain as large a
fraction as possible of Germany's payments and a desire to pile on
Germany such a crushing burden of indebtedness that Germany would be
 (25 of 129)

ruined beyond the point where it could threaten French security again.
A compromise originally suggested by John Foster Dulles was
adopted by which Germany was forced to admit an unlimited,
theoretical obligation to pay but was actually bound to pay for only
a limited list of ten categories of obligations with pensions being
larger than the preceding nine categories together. All reparations
were wiped out in the financial debacle of 1931-1932.

Page 283

Britain had obtained all her chief ambitions. The German navy was
at the bottom of Scapa Flow scuttled by the the Germans themselves;
the German merchant fleet was scattered, captured, destroyed; the
German colonial rivalry was ended and its areas occupied; the German
commercial rivalry was crippled by the loss of its patents and
industrial techniques, the destruction of all its commercial outlets
and banking connections throughout the world, and the loss of its
rapidly growing prewar markets. France on the other hand, had not
obtained the one thing it wanted: security.

SECURITY 1919-1935

Page 287

The British governments of the Right began to follow a double
policy: a public policy in which they spoke loudly in support of the
foreign policy of the Left; and a secret policy in which they
supported the foreign policy of the Right. Thus the stated policy was
based on support of the League of Nations and of disarmament yet the
real policy was quite different. While openly supporting Naval
disarmament, Britain signed a secret agreement with France which
blocked disarmament and signed an agreement with Germany which
released her from her naval disarmament in 1935. After 1935, the
contrast between the public and secret policy became so sharp that
Lord Halifax called it "dyarchy."

Page 289

The British Right forced France to give away every advantage
which it held over Germany. Germany was allowed to rearm in 1935,
allowed to remilitarize the Rhineland in 1936. Finally, when all had
been lost, public opinion forced the British government to abandon the
Right's policy of appeasement and adopt the old French policy of
resistance made on a poor issue (Poland 1939)
In France, as in Britain, there appeared a double policy. While
France continued to talk of collective security, this was largely for
public consumption for in fact she had no policy independent of
Britain's policy of appeasement.

Page 290

War was not outlawed but merely subjected to certain procedural
delays in making it, nor were peaceful procedures for settling
international disputes made compulsory.
The Covenant had been worded by a skillful British lawyer, Civil
Hurst, who filled it with loopholes cleverly concealed under a mass
of impressive verbiage so that no state's freedom of action was
vitally restricted.

Page 293

The Locarno Pacts, which were presented at the time throughout
the English-speaking world as a sensational contribution to the peace
and stability of Europe, really formed the background for the events
of 1938 when Czechoslovakia was destroyed at Munich. When the
guarantee of Locarno became due in 1936, Britain dishonored its
agreement, the Rhine was remilitarized and the way was open for
Germany to move eastward.

Poland protested violently at the refusal to guarantee her
frontiers.

Page 294

 (26 of 129)

France agreed to an extension of a multilateral agreement by
which all countries could renounce the use of war as an instrument of
national policy. The British government reserved certain areas,
notably the Middle East, where it wished to be able to wage wars which
could not be termed self-defense in a strict sense. The US also made
reservation preserving its right to make war under the Monroe
doctrine. The net result was that only aggressive war was to be
renounced. The Kellogg-Briand Pact took one of the first steps toward
destroying the legal distinction between war and peace, since the
Powers, having renounced the use of war, began towage wars without
declaring them as was done by Japan in China in 1937, by Italy in
Spain in 1936 and by everyone in Korea in 1950.

Page 296

The outlawry of war was relatively meaningless without some
sanctions that could compel the use of peaceful methods. Efforts in
this direction were nullified by Britain.

DISARMAMENT 1919-1935

Page 303

Disarmament suggestions of the Soviet representative, Litvinoff,
providing for immediate and complete disarmament of every country, was
denounced by all. A substitute draft provided that the most heavily
armed states would disarm by 50%, the less heavily-armed by 31% and
the lightly armed by 25%, and the disarmed by 0%. That all tanks,
planes, gas and heavy artillery be completely prohibited was also
rejected without discussion and Litvinoff was beseeched to show a more
"constructive spirit."

Page 305

Once it was recognized that security was in acute danger,
financial considerations were ruthlessly subordinated to rearmament
giving rise to an economic boom which showed clearly what might have
been achieved earlier if financial consideration had been subordinated
to the world's economic and social needs earlier; such action would
have provided prosperity and rising standards of living which might
have made rearming unnecessary.

JCT: How true.

REPARATIONS 1919-1932

Page 305

The preliminary payments were supposed to amount to a total of 20
billion marks by May 1921. Although the Entente Powers contended
that only 8 billion had been paid,the whole matter was dropped when
the Germans were presented with a total reparations bill of 132
billion marks. Under pressure, Germany accepted this bill and gave the
victors bonds of indebtedness. Of these, 82 billion were set aside and
forgotten. Germany was to pay the other 50 billion at 2.5 billion a
year in interest and .5 billion a year to reduce the total debt.

JCT: It would only take 200 years to pay off a total of 500
billion in interest and 50 billion in principal.

Page 306

Germany could only pay if two conditions prevailed:

a) if it had a budgetary surplus and
b) if it sold abroad more than it bought abroad.

Since neither of these conditions generally existed in the period
1921-1931, Germany could not, in fact, pay reparations.
The failure to obtain a budgetary surplus was solely the
responsibility of the government which refused to reduce its own
expenditures or the standards of living off its own people or to tax
them sufficiently heavily. The failure to obtain a favorable balance
of trade because foreign creditors refused to allow a free flow of
German goods into their own countries. Thus creditors were unwilling
to accept payment in the only way in which payments could honestly be
 (27 of 129)

made, that is, by accepting German goods and services.

JCT: Notice they wanted money and not the goods they could buy
with it.

Germany could have paid in real goods and services if the
creditors had been willing to accept such goods and services. The
government made up the deficits by borrowing from the Reichsbank. The
result was an acute inflation which was not injurious to the
influential groups though it was generally ruinous to the middle
classes and thus encouraged extremist elements.

Page 307

On Jan 9,1923, the Reparations Committee voted 3 to 1 (Britain
opposing France, Belgium and Italy) that Germany was in default.
Armed forces of the three nations began to occupy the Ruhr two
days later. Germany declared a general strike in the area, ceased all
reparation payments, and adopted a program of passive resistance, the
government supporting the strikers by printing more paper money.
The area occupied was no more than 60 miles long by 30 miles wide
but contained 10% of Germany's population and produced 80% of
Germany's coal, iron and steel and 70% of her freight traffic. Almost
150,000 Germans were deported.

Page 308

A compromise was reached by which Germany accepted the Dawes Plan
for reparations and the Ruhr was evacuated. The Dawes Plan was largely
a J.P. Morgan production drawn up by an international committee of
financial experts presided over by American banker Charles Dawes.
Germany paid reparations for five years (1924-1929) and owed more at
the end than it had owed at the beginning. It is worthy of note that
this system was set up by the international bankers and that the
subsequent lending of other people's money to Germany was very
profitable to these bankers.

Using these American loans, Germany's industry was largely
rebuilt to make it the second best in the world and to pay
reparations.

Page 309

By these loans Germany's creditors were able to pay their war
debts to England without sending goods or services. Foreign exchange
went to Germany as loans, back to Italy, Belgium, France and Britain
as reparations and finally back to the US as payments on war debts. In
that period, Germany paid 10.5 billion marks in reparations but
borrowed 18.6 billion abroad. Nothing was settled by all this but the
international bankers sat in heaven under a rain of fees and
commissions.

Page 310

The Dawes Plan was replaced by the Young Plan, named after the
American Owen Young (a Morgan agent). A new private bank called the
Bank for International Settlements was established in Switzerland.
Owned by the chief central banks of the world and holding accounts for
each of them, "a Central Bankers' Bank," it allowed payments to be
made by merely shifting credits from one country's account to another
on the books of the bank.

The Young Plan lasted for less than 18 months. The crash of the
New York stock market in 1929 marked the end of the decade of
reconstruction and ended the American loans to Germany.
Germans and others had begun a "flight from the mark" which
created a great drain on the German gold reserve. As it dwindled, the
volume of money and credit erected on that reserve had to be reduced
by raising the interest rate. Prices fell because of the reduced money
supply so that it became almost impossible for the banks to sell
collateral to obtain funds to meet the growing demand for money.

JCT: Here he thinks loans are savings and has forgotten that he
 (28 of 129)

had earlier told us it was new credit.

Page 311

On May 8, 1931, the largest Austrian bank, the Credit-Anstalt (a
Rothschild institution) which controlled 70% of Austria's industry,
announced a $140 million schillings loss. The true loss was over a
billion and the bank had been insolvent for years. The Rothschilds and
the Austrian government gave the Credit-Anstalt 160 million to cover
the loss but public confidence had been destroyed. A run began on the
bank. To meet this run,the Austrian banks called in all the funds they
had in German banks. The German banks began to collapse. These latter
began to call in all their funds in London. The London banks began to
fall and gold flowed outward. On Sept.21, England was forced off the
gold standard. The Reichsbank lost 200 million marks of its gold
reserve in the first week of June and a billion in the second. The
discount rate was raised step by step to 15% without stopping the loss
of reserves but destroying the activities of the German industrial
system almost completely.

Germany begged for relief on her reparations payments but her
creditors were reluctant unless they obtained similar relief on the
war-debt payments to the US. The President suggested a moratorium for
one year if its debtors would extend the same privilege to their
debtors.

Page 312

At the June 1932 Lausanne Conference, German reparations were cut
to a total of only 3 billion marks but the agreement was never
ratified because of the refusal of the US Congress to cut war debts
equally drastically. In 1933, Hitler repudiated all reparations.

CHAPTER VII: FINANCE, COMMERCIAL POLICY, AND BUSINESS POLICY 1897-1947
REFLATION AND INFLATION 1897-1925

page 315

A real understanding of the economic history of twentieth century
Europe is imperative to any understanding of the events of the period.
Such an understanding will require a study of the history of finance.

Page 316

The outbreak of war in 1914 showed these financial capitalists in
their worst, narrow in outlook, ignorant and selfish, while
proclaiming, as usual, their total devotion to the social good. They
generally agreed that war could not go on for more than six to ten
months because of the "limited financial resources" of the
belligerents (by which they meant gold reserves).This idea reveals the
fundamental misunderstanding of the nature and of money on the part of
the very persons who were reputed to be experts on the subject. Wars
are not fought with gold or even with money but by proper organization
of real resources.

The attitudes of bakers were revealed most clearly in England,
where every move was dictated by efforts to protect their own position
and to profit from it rather than by considerations of
economic mobilization for war or the welfare of the British people.
War found the British banking system insolvent in the sense that its
funds, created by the banking system for profit and rented out to the
economic system to permit it to operate, could not be covered by the
existing volume of gold reserves or collateral which could be
liquidated rapidly. Accordingly,the bankers secretly devised a scheme
by which their obligations could be met by fiat money (so-called
Treasury Notes), but as soon as the crisis was over, they ten insisted
that the government must pay for the war without recourse to fiat
money (which was always damned by the bankers as immoral) but by
taxation and by borrowing at high interest rates from the bankers. The
decision to use Treasury Notes to fulfill the bankers' liabilities was
 (29 of 129)

made on July 25, 1915 by Sir John Bradbury. the first Treasury Notes
were run off the presses at Waterloo and Sons on July 28th. It was
announced that the Treasury Notes, instead of gold, would be used for
bank payments. The discount rate was raised at the Bank of England
from 3% to 10% to prevent inflation, a figure taken merely because the
traditional rule of the bank stated that a 10% bank rate would draw
gold out of the ground itself.

Page 317

At the outbreak of war, most of the belligerent countries
suspended gold payments and accepted their bankers' advice that the
proper way to pay for the war was by a combination of bank loans and
taxation of consumption. The governments paid for the war by taxation,
by fiat money, by borrowing from banks (which created credit for the
purpose) and by borrowing from the people by selling them war bonds.
Each of these methods had a different effect upon the two
consequences of the war: inflation and public debt.

a) Taxation gives no inflation and no debt.
b) Fiat money gives inflation and no debt.
c) Bank credit gives inflation and debt.
d) Sales of bonds give no inflation but give debt.

It would appear from this table that the best way to pay for the
war would be by taxation and the worst way would be by bank credit.
Probably the best way to finance war is a combination of the four
methods.

Page 318

In the period 1914-1918, the various belligerents used a mixture
of these four methods but it was a mixture dictated by expediency and
false theories so that at the end of the war all countries found
themselves with both public debts and inflation.

While the prices in most countries rose 200 to 300 percent and
public debts rose 1000%, the financial leaders tried to keep up the
pretense that the money was as valuable as it had ever been. For this
reason, they did not openly abandon the gold standard. Instead, they
suspended certain attributes of the gold standard. In most countries,
payments in gold and export of gold were suspended but every effort
was made to keep gold reserves up to a respectable percentage of
notes. These attributes were achieved in some cases by deceptive
methods. In Britain, the gold reserves against notes fell from 52% to
18% in the month of July 1914; then the situation was concealed,
partly by moving assets of local banks into the Bank of England and
using them as reserves for both, partly by issuing a new kind of notes
(Currency Notes) which had no real reserve and little gold backing.

Page 320

As soon as the war was over, governments began to turn their
attention to restoring the prewar financial system. Since the
essential element was believed to be the gold standard, this movement
was called "stabilization."
Productive capacity in both agriculture and industry had been
increased by the artificial demand of the war period to a degree far
beyond the ability of normal domestic demand to buy the products.

JCT: But not to eat them.

The backwards areas had increased their outputs of raw materials
and food so greatly that the total could hardly have been sold.

JCT: But no eaten.

The result was as situation where all countries were eager to
sell and reluctant to buy. The only sensible solution to this problem
of excessive productive capacity would have been a substantial rise in
domestic standards of living but this would have required a
fundamental reapportionment of the national income so that claims to
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this product of the excess capacity would go to those masses eager to
consume, rather than continue to go to the minority desiring to save.
Such reform was rejected by the ruling groups in both "advanced" and
"backwards" countries so that this solution was reached only to a
small degree in a relatively few countries (chiefly US and Germany in
1925-1929).

Page 324

The powers of financial capitalism had another far-reaching
aim, nothing less than to create a world system of financial control
in private hands able to dominate the political system of each country
and the economy of the world as a whole. This system was to be
controlled in a feudalist fashion by the central banks of the world
acting in concert, by secret agreements arrived at in frequent private
meetings and conferences. The apex of the system was to be the Bank
for International Settlements in Basle, Switzerland, a private bank
owned and controlled by the world's central banks which were
themselves private corporations. Each central bank sought to dominate
its government by its ability to control Treasury loans, to manipulate
foreign exchanges, to influence the level of economic activity in the
country, and to influence cooperative politicians by subsequent
economic rewards in the business world.

In each country, the power of the central bank rested largely on
its control of credit and money supply. In the world as a whole the
power of the central bankers rested very largely on their control
of loans and the gold flows. They made agreements on all the major
financial problems of the world, as well as on many of the
economic and political problems, especially in reference to loans,
payments, and the economic future of the chief areas of the globe.
The Bank of International Settlements, B.I.S. is generally
regarded as the apex of the structure of financial capitalism whose
remote origins go back to the creation of the Bank of England in 1694.

Page 325

It was set up to be the world cartel of every-growing national
financial powers by assembling the nominal heads of these national
financial centers.

The commander in Chief of the world system of banking control was
Montagu Norman, Governor of the Bank of England, who was built up by
the private bankers to a position where he was regarded as an oracle
in all matters of government and business. In government, the power of
the Bank of England was a considerable restriction on political action
as early as 1819 but an effort to break this power by a modification
of the bank's charter in1844 failed. In 1852, Gladstone, then
chancellor of the Exchequer and later Prime Minister, declared,
"The hinge of the whole situation was this: the government itself was
not to be a substantive power in matters of Finance, but was to leave
the Money Power supreme and unquestioned."

This power of the Bank of England was admitted in 1924 by
Reginald McKenna, who had been Chancellor of the Exchequer, when he,
as Chairman, told the stockholders of the Midland bank, "I am afraid
the ordinary citizen will not like to be told that the banks can, and
do, create money. And they who control the credit of a nation direct
the policy if Governments and hold in the hollow of their hands the
destiny of the people." In that same year, Sir Drummond Fraser, vice president
of the Institute of Bankers stated, "The Governor must be
the autocrat who dictates the terms upon which alone the Government
can obtain borrowed money." On Sep. 26, 1921,
Vincent Vickers, director of the bank, the Financial Times wrote,
"Half a dozen meant the top of the Big Five Banks could upset the
whole fabric of government by refraining from renewing Treasury
Bills."
 (31 of 129)

Page 326

Norman had no use for governments and feared democracy. Both
of these seemed to him to be threats to private banking and thus to
all that was proper and precious to human life. He viewed his life as
a kind of cloak-and-dagger struggle with the forces of unsound money
which were in league with anarchy and Communism. When he rebuilt the
Bank of England,he constructed it as a fortress prepared to defend
itself against any popular revolt. For much of his life, he
rushed about the world under the assumed name of "Professor Skinner."
Norman had a devoted colleague in Benjamin Strong, the first
governor of the Federal Reserve Bank of New York. Strong owed his
career to the favor of the Morgan bank.

In the 1920s, they were determined to use the financial power of
Britain and the US to force all the major countries of the world to go
on the gold standard and to operate it through central banks free from
all political control, with all questions of international finance to
be settled by agreements by such central banks without interference
from governments.

Page 327

It must not be felt that these heads of the world's chief
central banks were themselves substantive powers in world finance.
They were not. Rather, they were the technicians and agents of the
dominant investment bankers of their own countries, who had raised
them up and were perfectly capable of throwing them down. The
substantive financial powers of the world were in the hands of
investment bankers (also called "international" or "merchant" bankers)
who remained largely behind the scenes in their own unincorporated
private banks.

These formed system of international cooperation and national
dominance which was more private,more powerful, and more secret tan
that of their agents in the central banks. This dominance of
investment bankers was based on their control over the flows of credit
and investment funds in their own countries and throughout the world.
They could dominate the financial and industrial systems of their own
countries by their influence over the flow of current funds through
bank loans,the discount rate,the rediscounting of commercial debts;
they could dominate governments by their control over current
government loans and the play of the international exchanges.
Almost all of this power was exercised by the personal influence
and prestige men who had demonstrated their ability in the past to
bring off successful financial coups, to keep their word, to remain
cool in a crisis, and to share their winning opportunities with their
associates.
In this system, the Rothschilds had been preeminent during much
of the nineteenth century, but, at the end of that century, they were
being replaced by J.P. Morgan in New York.
At the present stage, we must follow the efforts of the central
bankers to compel the world to return to the gold standard of 1914.
Page 328
The problem of public debts arose from the fact that as money
(credit) was created, it was usually made in such a way that it was
not in the control of the state but was in the control of private
financial institutions which demanded real wealth at some future date
for the creation of claims on wealth in the present. The problem of
public debt could have been met in one or more of several fashions:
a) by increasing the amount of real wealth...
b) by devaluation...
c) by repudiation...
d) by taxation...
e) by the issuance of fiat money and the payment of the debt by such
money.

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Page 329

Efforts to pay the public debt by fiat money would have made the
inflation problem worse.
Orthodox theory rejected fiat money as solutions to the problem.

Page 332

In Britain, the currency notes which had been used to supplement
bank notes were retired and credit was curtailed by raising the
discount rate to panic level. The results were horrible. Business
activity fell drastically and unemployment rose to well over a million
and a half. The outcome was a great wave of strikes and industrial
unrest.

Page 333

To maintain the gold reserve at all, it was necessary to keep
the discount rate at a level so high (4.5% or more) that business
activity was discouraged. As a result of this financial policy,
Britain found herself faced with deflation and depression for the
whole period of 1920-1923. The number of unemployed averaged about
1.75 millions for each of the thirteen years of 1921-1932 and reached
3 million in 1931.

Belgium, France and Italy, accepted orthodox financial ideas and
tried to deflate in 1920-1921 but after the depression which resulted,
they gave up the task.

Page 334

The Dawes Plan provided the gold reserves which served to protect
Germany from the accepted principles of orthodox finance.

Page 336

Financial capitalism had little interest in goods at all, but was
concerned entirely with claims on wealth - stocks, bonds, mortgages,
insurance, proxies, interest rates, and such. It built railroads in
order to sell securities, not to transport goods. Corporations were
built upon corporations in the form of holding companies so that
securities were issued in huge quantities bringing profitable fees and
commissions to financial capitalists without any increase in economic
production whatever. Indeed, these financial capitalists discovered
that they could not only make killings out of the issuing of such
securities,they could also make killings out of the bankruptcy of such
corporations through the fees and commissions of reorganization. A
very pleasant cycle of flotation, bankruptcy, flotation, bankruptcy
began to be practiced by these financial capitalists. The more
excessive the flotation, the greater the profits and the more imminent
the bankruptcy. The more frequent the bankruptcy, the greater the
profits of reorganization and the sooner the opportunity of another
excessive flotation.

Page 337

The growth of financial capitalism made possible a centralization
of world economic control and a use of this power for the direct
benefit of financiers and the indirect injury of all other economic
groups. Financial control could be exercised only imperfectly through
credit control and interlocking directorates.

Page 338

The real key rested on the control of money flows which were held
by investment bankers in 1900.

THE PERIOD OF DEFLATION, 1927-1936

Page 339

After 1929, deflation reached a degree which could be called
acute. In the first part of this period (1921-1925), the dangerous
economic implications of deflation were concealed by a structure of
self-deception which pretended that a great period of economic
progress would be inaugurated as soon as the task of stabilization had
been accomplished. This psychological optimism was completely
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unwarranted by the economic facts. After 1925, when deflation became
more deep-rooted and economic conditions worsened, the danger from
these conditions was concealed by a continuation of unwarranted
optimism.

THE CRASH OF 1929

Page 342

When France stabilized the franc at a level at which it was
devalued, the Bank of France sold francs in return for foreign
exchange. The francs were created as credit in France thus giving an
inflationary effect.

Page 343

The financial results of the stock market book in the U
S was credit diverted from production to speculation and increasing
amounts of funds being drained from the economic system into the stock
market where they circulated around and around, building up prices
of securities.

Page 344

Early in 1929, the board of governors of the Federal Reserve
System became alarmed at the stock market speculations draining credit
from industrial production. To curtail this, they called upon member
banks to reduce their loans on stock collateral to reduce the amount
of credit available for speculation. Instead, the available credit
went more and more to speculation and decreasingly to productive
business. Call money rates in New York which had reached 7% at the end
of 1928 were at 13% by June 1929.

Page 346

To restore confidence among the wealthy (who were causing the
panic) an effort was made to balance the budget by cutting public
expenditures drastically. This, by reducing purchasing power, had
injurious effects on business activity and increased unrest among the
masses of the people.

Page 350

Washington left gold in 1933 voluntarily in order to follow an
unorthodox financial program of inflation.

Page 351

The Thomas Amendment to the Agricultural Adjustment Act (1933)
gave the president the power to devaluate the dollar up to 50%, to
issue up to $3 billion fiat money,and to engage on an extensive
program of public spending.

Page 352

The economies of the different countries were so intertwined with
one another that any policy of self-interest on the part of one would
be sure to injure others in the short run and the country in the
long run. The international and domestic economic systems had
developed to the point where the customary methods of thought and
procedure in regard to them were obsolete.

page 353

As a result of the crisis, regardless of the nature of its
primary impact, all countries began to pursue policies of economic
nationalism. This spread rapidly as a result of imitation and
retaliation.

Page 355

The Bank of France raised its discount rate from 2.5% to 6% in
1935 with depressing economic results. In this way, the strain on gold
was relieved at the cost of increased depression. The Right discovered
that it could veto any actions of the Left government merely by
exporting capital from France.

Page 356

The franc passed through a series of depreciations and partial
devaluations which benefited no one except the speculators and left
France torn for years by industrial unrest and class struggles. The
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government was subjected to systematic blackmail by the well-to-do
of the country because of the ability of these persons to prevent
social reform, public spending, arming, or any policy of decision by
selling francs.

Page 357

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 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 defence. It gave rise to a conflict between the theorists of
orthodox and unorthodox financial methods.

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 in 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.

The unorthodox theorists sought to restore purchasing power by
increasing, instead of reducing, the money supply and by placing it in
the hands of potential consumers rather than in the banks or in the
hands of investors.

page 358

The whole relationship of money and resources remained a puzzle
to many and was still a subject of debate in the 1950s but at least a
great victory had been won by man in his control of his own destiny
when the myths of orthodox financial theory were finally challenged in
the 1930s.

REFLATION AND INFLATION 1933-1947

Page 360

Except for Germany and Russia, most countries in the latter half
of 1937 experienced sharp recession.

Page 361

As a result of the failure of most countries (excepting Germany
and Russia) to achieve full utilization of resources, it was possible
to devote increasing percentages of resources to armaments without
suffering any decline in the standards of living.

Page 366

It was discovered 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.

Page 368

Britain made barter agreements with various countries, including
one direct swap of rubber for wheat with the US.

Page 369

The period of reflation after 1933 was caused by increases in
public spending on armaments. In most countries,the transition from
reflation to inflation did not occur until after they had entered the
war. Germany was the chief exception and possibly also Italy and
Russia, since all of these were making fairly full utilization of
their resources. In France and the other countries overrun by
Germany, such full mobilization of resources was not achieved before
they were defeated.

Page 370

The use of orthodox financing in the First World War had left a
terrible burden of intergovernmental debts and ill-feeling...

Page 371

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The Post Second World War economy was entirely different in
character from that of the 1920s following the First World War. This
was most notable in the absence of a post-war depression which was
widely expected but which did not arrive because there was no effort
to stabilize on a gold standard. The major difference was the eclipse
of the bankers who have been largely reduced in status from the
masters to the servants of the economic system. This has been brought
about by the new concern with real economic factors instead of with
financial counters, as previously. As part of this program, there has
been a great reduction in the economic role of gold.

CHAPTER VIII: INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE

Page 375

Industrialism, especially in its early years, brought with it
social and economic conditions which were admittedly horrible. Human
beings were brought together around factories to form great new cities
which were sordid and unsanitary. In many cases, these persons were
reduced to conditions of animality, which shock the imagination.
Crowded together in want and disease, with no leisure and no security,
completely dependent on weekly wage which was less than a pittance,
they worked twelve to fifteen hours a day for six days in the week
among dusty and dangerous machines with no protection against
inevitable accidents, disease, or old age, and returned at night to
crowded rooms without adequate food and lacking light, fresh air,
heat, pure water, or sanitation. These conditions have been described
for us in the writings of novelists such as Dickens in England, Hugo
or Zola in France.

Page 376

The Socialist movement was a reaction against these deplorable
conditions to the working masses. It has been customary to divide this
movement into two parts at the year 1848, the publication of the
Communist Manifesto of Karl Marx. This work began with the ominous
sentence, "A specter is haunting Europe - the specter of Communism,"
and ended with the trumpet blast "Workers of the world, unite."
In general, the former division believed that man was innately
good and that all coercive power was bad, with public authority the
worst form of such coercive power. All the world's evils, according to
the anarchists, arose because man's innate goodness was corrupted and
distorted by coercive power. The remedy, they felt, was to destroy the
state. The simplest way to destroy the state would be to assassinate
the chief of the state to ignite a wholesale uprising of oppressed
humanity.

Page 377

Syndicalism was a somewhat more realistic and later version of
anarchism. It was equally determined to abolish all public authority.
The state would be destroyed by a general strike and replaced by a
flexible federation of free associations of workers.
The second group of radical social theorists wished to widen the
power and scope of governments by giving them a dominant role in
economic life. The group divided into two chief schools: The
Socialists and the Communists.

Page 378

From Ricardo, Marx derived the theory that the value of economic
goods was based on the amount of labor put into them.

Page 379

Marx built up a complicated theory which believed that all
history is the history of class struggles.
The money which the bourgeoisie took from the proletariat in the
economic system made it possible for them to dominate the political
system, including the police and the army. From such exploitation, the
bourgeoisie would become richer and richer and fewer and fewer in
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numbers and acquire ownership of all property in the society while the
proletariat would become poorer and poorer and more and more numerous
and be driven closer and closer to desperation. Eventually, the latter
would rise up and take over.

Page 381

In fact, what occurred was could be pictured as cooperative
effort by unionized workers and monopolized industry to exploit
unorganized consumers by raising prices higher and higher, quite
contrary to the expectations of Marx. Where he had expected
impoverishment of the masses and concentration of ownership with
gradual elimination of the middle classes, there occurred instead
rising standards of living, dispersal of ownership , a relative
decrease in the numbers of laborers, and a great increase in the
middle classes. Due to income and inheritance taxes, the rich became
poorer and poorer, relatively speaking.

THE BOLSHEVIK REVOLUTION TO 1924

Page 385

The new government forced the abdication of the czar. The more
radical Socialists had been released from prison or had been returned
from exile (in some cases, such as Lenin, by German assistance)

JCT: And Rockefeller and Mackenzie King.

Page 386

Lenin campaigned to replace the Provisional Government with a
system of Soviets and to adopt an immediate program of peace and land
distribution. The Bolshevik group seized the centers of government in
St. Petersburg and within 24 hours, issued a series of decrees which
abolished the Provisional government, ordered the end of the war with
Germany and the distribution of large land holdings to the peasants.

Page 387

By 1920 industrial production in general was about 13% of the
1913 figure. At the same time, paper money was printed so freely to
pay for the costs of war, civil war, and the operation of the
government that prices rose rapidly and the ruble became almost
worthless.

The secret police (Cheka) systematically murdered all real or
potential opponents.

Page 388

Various outsider Powers also intervened in the Russian chaos.
An allied expeditionary force invaded northern Russia from Murmansk
and Archangel, while a force of Japanese and another of Americans
landed at Vladivostok and pushed westward for hundreds of miles. The
British seized the oil fields of the Caspian region (late 1918) while
the French occupied parts of the Ukraine about Odessa (March 1919).
By 1920, Russia was in complete confusion. Poland invaded Russia
occupying much of the Ukraine.

Page 389

As part of this system, not only were all agricultural crops
considered to be government property but all private trade and
commerce were also forbidden; the banks were nationalized while all
industrial plants of over five workers and all craft enterprises of
over ten workers were nationalized. This culminated in peasant
uprisings and urban riots. Within a week, peasant requisitioning was
abandoned in favor of a "New Economic Policy" of free commercial
activity in agriculture and other commodities, with the
re-establishment of the profit motive and of private ownership in
small industries and in small landholding.

Page 395

The Bolsheviks insisted that the distribution of income in a
capitalistic society would become so inequitable that the masses of
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the people would not obtain sufficient income to buy the goods being
produced by the industrial plants. As such unsold goods accumulated
with decreasing profits and deepening depression, there would be a
shift toward the production of armaments to provide profits and
produce goods which could be sold and there would be an increasingly
aggressive foreign policy in order to obtain markets for unsold goods
in backward and undeveloped countries. Such aggressive imperialism
would inevitably make Russia a target of aggression in order to
prevent a successful Communist system there from becoming an
attractive model for the discontented proletariat in capitalistic
countries.

Page 396

Communism in Russia alone required that the country must be
industrialized with breakneck speed and must emphasize heavy industry
and armaments rather than rising standards of living. This meant that
goods produced by the peasants must be taken from them by political
duress, without any economic return, and that the ultimate in
authoritarian terror must be used to prevent the peasants from reducing
their level of production. It was necessary to crush all kinds of
foreign espionage, resistance to the Bolshevik state, independent
thought, or public discontent.

Page 397

Stalin forced the peasants off their land. In the space of six
weeks, (Feb-Mar 1930) collective farms increased from 59,400 with 4.4
million families to 110,200 farms with 14.3 million families. All
peasants who resisted were treated with violence; their property was
confiscated, they were beaten or sent into exile in remote areas; many
were killed. This process, known as "the liquidation of the kulaks"
affected five million kulak families. Rather than give up their
animals, many peasants killed them. The number of cattle was reduced
from 30.7 million in 1928 to 19.6 million in 1933. The planting
season of 1930 was entirely disrupted. Three million peasants
starved in 1931-1933. Stalin told Churchill that 12 million died in
this reorganization of agriculture.

Page 401

The privileged rulers and their favorites had the best of
everything obtained, however at a terrible price, at the cost of
complete insecurity for even the highest party officials were under
constant surveillance and would be inevitably purged to exile or
death.

The growth of inequality was embodied in law. All restrictions on
maximum salaries were removed. Special stores were established where
the privileged could obtain scarce goods at low prices; restaurants
with different menus were set up in industrial plants for different
levels of employees; housing discrimination became steadily wider.

Page 402

As public discontent and social tensions grew, the use of spying,
purges, torture and murder increased out of all proportion. Every wave
of discontent resulted in new waves of police activity. Hundreds of
thousands were killed while millions were arrested and exiled to
Siberia or put into huge slave-labor camps. Estimates vary from two
million as high as twenty million.

Page 403

For every leader who was publicly eliminated, thousands were
eliminated in secret. By 1939, all the leaders of Bolshivism had been
driven from public life and most had died violent deaths.
There were two networks of secret-police spies, unknown to each
other, one serving the special department of the factory while the
other reported to a high level of the secret police outside.

Page 404

Whenever the secret police needed more money it could sweep large
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numbers of persons, without trial or notice, into its wage deduction
system or into its labor camps to be hired out. It would seem that the
secret police were the real rulers of Russia. This was true except at
the very top where Stalin could always liquidate the head by having
him arrested by his second in command in return for Stalin's promise
to promote the arrester to the top position. In this way, the chiefs
of the secret police were successively eliminated.

TRAGEDY AND HOPE Chapters IX-XI
by Dr. Carroll Quigley
ISBN 0913022-14-4

CONTENTS

IX. GERMANY FROM KAISER TO HITLER 1913-1945

X. BRITAIN: THE BACKGROUND TO APPEASEMENT 1900-1939

XI. CHANGING ECONOMIC PATTERNS

CHAPTER IX: GERMANY FROM THE KAISER TO HITLER 1913-1945

Page 411

The German thirst for the coziness of a totalitarian way of life
is the key to German national character. Decision, which requires the
evaluation of alternatives, drives man to individualism, self-reliance
and rationalism, all hateful qualities to Germanism.

Page 413

They wanted a cozy society which would so absorb the individual
in its structure that he would never need to make significant
decisions for himself. Held within a framework of known, satisfying
personal relationships, such an individual would be safe because he
would be surrounded by fellows equally satisfied with their own
positions, each feeling important from his membership in the greater
whole.

Page 414

The German abhors the need to make decisions. He feels it
necessary to proclaim his position by verbal loudness which may seem
boastful to outsiders.

Page 415

Germans are ill-at-ease with equality, democracy, individualism,
freedom, and other features of modern life. Their neurological systems
were a consequence of the coziness of German childhood, which,
contrary to popular impression, was not a condition of misery and
personal cruelty (as it often is in England) but a warm, affectionate
and externally disciplined situation of secure relationships.
The Englishman is disciplined from within so that he takes his
self-discipline, embedded in his neurological system, with him
wherever he goes. The Englishman is the most socialized of Europeans,
as the Frenchman is the most civilized, the Italian most completely
gregarious, or the Spaniard most completely individualistic. But the
German, by seeking external discipline, shows his unconscious desire
to recapture the externally disciplined world of his childhood. With
such discipline he may be the best behaved of citizens, but without
it, he may be a beast.

He sees no need to make any effort to see anything from any point
of view other than his own. The consequence is a most damaging
inability to do this. His union, his neighborhood are the best and all
others may be denigrated. His myopic or narrow-angled vision of the
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universe must be universalized.

Page 417

The precarious structure left by Bismarck was not managed but
merely hidden from public view by a facade of nationalistic,
anti foreign, anti-Semitic, imperialistic, and chauvinistic propaganda
of which the emperor was the center.

The monarchy represented the body, which was supported by four
legs: the army, the landlords, the bureaucracy and the industrialists.
The revolution of 1918 was not really a revolution at all because it
removed the monarchy but it left the quartet of legs.

Page 426

The German inflation, which was a great benefit to the Quartet,
destroyed the economic position of the middle classes and lower middle
classes and permanently alienated them from the republic.

Page 427

The Nationalist Party built up a pervasive propaganda campaign to
show that all Germany's problems were caused by the democratic and
laboring groups, by the internationalists, and by the Jews.

Page 428

The Centre and Left shared this nationalistic poison sufficiently
to abstain from any effort to give the German people the true story of
Germany's responsibility for the war and for her own hardships. Thus
the Right was able to spread its own story of the war, that Germany
had been overcome by a "stab in the back" from "the three
Internationals": the "Gold" International of the Jews, the "Red"
International of the Socialists, and the "Black" International of the
Catholics, an unholy triple alliance which was symbolized in the gold,
red, and black flag of the Weimar Republic. Every effort was made to
divert popular animosity at the defeat of 1918 and the Versailles
settlement from those who were really responsible to the democratic
and republican groups. At the same time, German animosity against
economic exploitation was directed away from the landlords and
industrialists by racist doctrines which blamed all such problems on
bad Jewish international bankers and department store owners.

Page 429

The Nazi drive to build up a mass following was kept alive by the
financial contributions of the Quartet. The Nazis were financed by the
Black Reichswehr from 1919-1923, then this support ceased but was
compensated for by the support of the industrialists, who financed the
Nazis from Hitler's exit from prison in 1924 to the end of 1932.

The destruction of the Weimar Republic has five stages:

1) Bruning: March 24 1930 - May 30 1932
2) Von Papen: May 31 1932 - November 14 1932
3) Schleicher: December 2 1932 - January 28 1933
4) Hitler: January 30 1933 - March 5 1933
5) Gleichschaltung: March 6 1933 - August 2 1934

When the economic crisis began in 1929, Germany had a democratic
government of the Center and Social Democratic parties. The crisis
resulted in a decrease in tax receipts and a parallel increase in
demands for government welfare services. This brought to a head the
latent dispute over orthodox and unorthodox financing of a depression.
Big business and big finance were determined to place the burden of
the depression on the working classes by forcing the government to
adopt a policy of deflation - that is, by wage reductions and
curtailment of government expenditures. The Social Democrats wavered
in their attitude but in general were opposed to this policy. Schacht,
as president of the Reichsbank, was able to force the Socialist Rudolf
Hilferding out of the position of minister of finance by refusing bank
credit to the government until this was done.

In March 1930, the Center broke the coalition on the issue of
 (40 of 129)

reduction of unemployment benefits, the Socialists were thrown out of
the government, and Heinrich Bruning, leader of the Center Party, came
in as chancellor. Because he did not have a majority, he had to put
the deflationary policy into effect by the use of presidential decree.
This marked the end of the Weimar Republic.

The Socialists permitted Bruning to remain in office by refusing
to vote on a motion of no confidence. Left in office, Bruning
continued the deflationary policy by decrees.

Page 431

Bruning's policy of deflation was a disaster. The suffering of
the people was terrible with almost eight million unemployed out of
twenty-five million employable.

Page 433

President Hindenburg had no liking for any unorthodox economic
schemes.

The Quartet, especially the industrialists, decided that Hitler
had learned a lesson and could safely be put into office as the
figurehead of a Right government because he was growing weaker. The
whole deal was arranged by Papen and was sealed in an agreement made
at the home of Cologne banker Baron Kurt Von Schroder in 1933.

THE NAZI REGIME 1933-1934

Adolf Hitler's life had been a succession of failures, the seven
years 1907-1914 being passed as a social derelict in Vienna and
Munich. There he had become a fanatical Pan-German anti-semite,
attributing his own failures to the "intrigues of international
Jewry."

Page 434

During the Great War, he was an excellent soldier always
volunteering for the most dangerous tasks. Although he was decorated
with the Iron Cross first class in 1918, he was never promoted beyond
Private First Class. His regiment of 3,500 suffered 3,260 killed and
Hitler himself was wounded twice.

After the war, he stayed with the army and eventually became a
political spy for the Reichswehr. In the course of spying on the
numerous political groups, Hitler became fascinated by the rantings of
Gottfried Feder against the "interest slavery of the Jews."
Hitler joined the National Socialist German Worker's Party which
drew up a Twenty-five Point Program.

Page 435

These included:

4) all Jews and other aliens eliminated;
5) all unearned incomes to be abolished;
6) to punish all war profiteers and usurers with death.

Page 446

Prices were set at a level sufficient to give a profit to most
participants and quotas were based on assessments estimated by the
farmers themselves. The autarky program gave them a stable market for
the products, shielding them from the vicissitudes which they had
suffered under liberalism with its unstable markets and fluctuating
prices. The prices fixed under Nazism were not high but were adequate,
especially in combination with other advantages.

Payments for interest and taxes were both reduced.
All farms of over family size were made secure in possession of
their owner's family, with no possibility of alienation, by increasing
the use of entail on great estates and by the Hereditary Farms Act for
lesser units.

Page 447

A law of December 28, 1939 stated, what had always been
understood, that in his civil service work a party member was not
subject to party orders but only to the orders of the civil service
superior.
 (41 of 129)

Page 448

There was a statutory provision which made it illegal for members
of the armed services to be simultaneously members of the party.

Page 452

Maximum wage rates were set in June 1938. In return for
exploitation of labor, the worker received certain compensations
of which the chief was the fact that he was no longer threatened with
the danger of mass unemployment. Increased economic activity went to
nonconsumers' goods.

Page 454

The threat to industry from depression was eliminated.

CHAPTER X: BRITAIN: THE BACKGROUND TO APPEASEMENT, 1900-1939

Page 463

It is the Government that controls the House of Commons. This
control is exercised through the Cabinet's control of the political
machinery. This power over the party machinery is exercised through
control of party funds and of nominations to constituencies. The fact
party candidates are named by an inner clique is of tremendous
importance and is the key to the control which the inner clique
exercises over the House of Commons, yet it is rarely mentioned in
books on the English political system. The party control is almost
completely centralized in the hands of a largely self-perpetuating
inner clique which has power of approval over all candidates. Cabinet
can force the majority by using party discipline to pass bills.

Page 464

Britain can be divided into two groups, the "classes" and the
"masses." The "classes" were the ones who had leisure. This meant that
they had property and income and did not need to work for a living;
they obtained an education in a separate and expensive system; they
married within their own class; they had a distinctive accent; and
they had a distinctive attitude based on the training provided in the
special educational system of the "classes."

Page 465

This educational system was based on three great negatives:

a) education must not be vocational, not aimed at assisting one to
make a living;
b) education is not aimed directly at creating or training
intelligence;
c) education is not aimed at finding the "Truth."
It is aimed at developing a moral outlook, a respect for
traditions, qualities of leadership and cooperation, and that ability
for cooperation in competition summed up in the English idea of
"sport" and "playing the game." Because of the restricted numbers of
the upper class, these attitudes applied chiefly to one another, and
did not necessarily apply to foreigners or even to the masses. They
applied to people who "belonged" and not to all human beings.

Page 469

House members are expected to vote as their party whips tell them
to and are not expected to understand the contents of the bills for
which they are voting. Legislation originates in the meetings of the
clique of the party, acting as first chamber. If accepted by the
Cabinet, it passes the House of Commons almost automatically. This
situation is sometimes called "Cabinet dictatorship."

Page 470

There have been restrictions on democracy in Britain almost all
based on one criterion, the possession of wealth. Britain, until 1945,
was the world's greatest plutocracy.
In political life, local government had a restricted suffrage.
Elected members were unpaid thus restricting these posts to those who
 (42 of 129)

had leisure (that is, wealth).

Page 471

Members of Parliament were, for years, restricted to the well-todo
by the fact that Members were unpaid. In 1938, each candidate must
post a deposit of #150 amounting to more than the total annual income
of about three-quarters of all English families which is forfeited if
he does not receive over one-eighth of the total vote. As a result of
these monetary barriers, the overwhelming mass of Englishmen could not
participate actively in politics unless they could find an outside
source of funds.

Until 1915, the two parties represented the same social class,
the small group known as "society." Both Conservatives and Liberals
were controlled by the same small clique consisting of no more than
half-a-dozen chief families, their relatives and allies.

Page 472

At the beginning of the 20th century, the inner clique of the
Conservative Party was made up almost completely of the Cecil family
and their relatives.

This is quite different from the US where both major parties are
middle-class parties and where geographic, religious and traditional
influences are more important than class influences in determining
party membership.

Page 474

In eight years (1931-1939) thirteen directors of the "Big Five
Banks" and two directors of the Bank of England were raised to the
peerage by the Conservative government. Of ninety peers created,
thirty five were directors of insurance companies. In 1935, Walter
Runciman, as president of the Board of Trade, introduced a bill to
grant a subsidy of #2 million to tramp merchant vessels and gave
#92,000 to his father's company in which he held 21,000 shares. There
is relatively little objection to activities of this kind in England.

Page 475

The Labour Party arose because of the discovery by the masses of
the people that their vote did not avail them much so long as the only
choice of candidates was "Which of two rich people will you choose?"

Page 476

The radio, the second most important instrument of publicity, is
sometimes run very unfairly. In the election of 1931, the government
allowed 15 period on the BBC for political campaigning, it took 11,
gave 3 to Labour and 1 to the Liberals.

Page 478

France is in sharp contrast where the amount of education by a
student is limited only by his ability and willingness to work; and
positions of importance in the civil service, the professions, and
even business are available to those who do best in the system. In
Britain, it is based largely on the ability to pay.

Page 479

For admission to the bar in England, a man had to be a member of
one of the four Inns of Court. These are private clubs to which
admission was by nomination with large admission fees. Sons of wage
earners formed less than 1% of the admissions and members of the bar
are almost entirely from the well-to-do classes. Since judges are
appointed exclusively from barristers, the judicial system has also
been monopolized by the upper classes. Obtaining justice has been
complex, slow and above all, expensive. As a result, only the fairly
well-to-do can defend their rights in a civil suit and if the less
well-to-do go to court at all, they find themselves in an atmosphere
completely dominated by members of the upper classes. Accordingly, the
ordinary Englishman avoids litigation even when he has right on his
side.

Page 483
 (43 of 129)

The 1909 Liberal budget was aimed directly at Conservative
supporters by its taxation of unearned incomes, especially from landed
properties. Its rejection by the House of Lords was denounced by
Asquith as a breach of the constitution which gave control over money
bills to the House of Commons. The Lords refused to yield until
Asquith threatened to create enough new peers to carry his bill. This
bill provided that the Lords could not veto a money bill and could not
prevent any other bill from becoming law if it was passed in three
sessions of the Commons over a period of at least two years.

Page 485

Liberal Lloyd George's effort to deflate prices after the Great
War in order to go back onto the gold standard was fatal to prosperity
and domestic order. Unemployment and strikes increased.
The Conservatives prevented any realistic attack on these
problems and passed the Emergency Power Act of 1920 which for the
first time gave a peace-time government the right to proclaim a state
of siege (as was done in 1920, 1921, 1926).

Page 486

In 1924, Winston Churchill, as chancellor of the Exchequer,
carried out a stabilization policy which put England on the gold
standard. This policy of deflation drove Britain into an economic
depression and a period of labour conflict and the policy was so
bungled in its execution that Britain was doomed to semi-depressions
for almost a decade, to financial subjugation to France until 1931 and
was driven closer to domestic rebellion than she had been at any time
since the Chartist movement of 1848.

The deflation of 1926 hit the mines with special impact since
prices could only be cut if wages were cut. The government invoked the
Emergency Powers Act and the Trade Unions Congress ordered a General
Strike but soon ended it leaving the striking miners to shift for
themselves. The miners stayed out for six months and then began to
drift back to work to escape starvation.

Page 489

In 1931, the Macmillan Committee reported that the whole
financial structure was unsound and should be remedied by a managed
currency, controlled by the Bank of England. The crisis revealed the
incapacity of the Labour Party and the power of the bankers. Labour
members had no understanding of economics. Snowden, the economic
expert" of the Cabinet, had financial views about the same as Montagu
Norman of the Bank of England.

Page 490

As for the bankers, they were in control throughout the crisis.
While publicly they insisted on a balanced budget, privately, they
refused to accept balancing by taxation and insisted on balancing by
cuts in relief payments. Working in close cooperation with American
bankers, they were in a position to overthrow any government which was
not willing to crush them completely. While they refused cooperation
to the Labour government, they were able to obtain a loan of #80
million from the US and France for the National Government when it
was only four days old.

The National government at once attacked the financial crisis
with a typical bankers' weapon: deflation. It offered a budget
including higher taxes and drastic cuts in unemployment benefits and
public salaries. Riots, protests, and mutiny in the navy were the
results.

The domestic program of the National Government was to curtail
the personal freedom of individuals. On this, there was no real
protest for the Labour opposition had a program which, in fact if not
in theory, tended in the same direction.

Page 491
 (44 of 129)

The police of London were reorganized in 1933 to destroy their
obvious sympathy with the working classes by restricting all ranks
above inspector to persons with an upper-class education.
A severe Incitement to Disaffection Act in 1934 threatened to
destroy the personal freedoms built up over centuries by making
police searches of homes less restricted and making the simple
possession of material likely to disaffect the armed forces a crime.
For the first time in three generations, personal freedom and civil
rights were restricted in time of peace. The Prevention of Violence
Act of 1939 empowered a secretary of state to arrest without warrant
and to deport without trial.

Page 492

Neville Chamberlain was chiefly responsible for the National
government's fiscal policies. For the first time in almost a century,
there was an increase in the proportion of total tax paid by the
working class. For the first time since 1846, there was a tax on food.
There was a reversal in the trend to more education for the people.
The budget was kept balanced by at a considerable price in human
suffering and in wastage of Britain's irreplaceable human resources.
Hundreds of thousands had been unemployed for years and had their
moral fiber completely destroyed by years of living on inadequate
dole. The capitalists of these areas were supported either by
government subsidy or were bought out by cartels and trade
associations from funds assessed on the more active members of the
industry.

Chamberlain's Derating Act of 1929 exempted industry from payment
of three quarters of its taxes while many unemployed were allowed to
starve.

CHAPTER XI: CHANGING ECONOMIC PATTERNS

Page 497

The economic system itself has become organized for expansion and
if it does not expand, it tends to collapse. The basic reason for this
maladjustment is that investment has become an essential part of the
system and if investment falls off, consumers have insufficient
incomes to buy the consumers' goods which are being produced in
another part of the system because part of the flow of purchasing
power created by the production of goods was diverted from purchasing
goods it had produced into savings, and all the goods produced could
not be sold until those savings came back into the market by being
invested.

Page 498

If the groups in society who control the savings which are
necessary for progress are the same vested interests who benefit by
the existing way of doing things, they are in a position to defend
these vested interests and prevent progress merely by preventing the
use of surpluses to finance new inventions. The 20th century's
economic crisis was a situation of this type.

GREAT BRITAIN

Page 499

The element of secrecy is one of the outstanding features of
English business and financial life. The inner circle of English
financial life remains a matter of "whom one knows," rather than "what
one knows." Jobs are still obtained by family, marriage, or school
connections and important positions are given to men who have no
training, experience or knowledge to qualify them.

Page 500

At the core of English financial life have been seventeen private
firms of "merchant bankers" with a total of less than a hundred active
partners including Baring Brothers, N.M. Rothschild, J. Henry
 (45 of 129)

Schroder, Morgan Grenfell, Hambros and Lazard Brothers. These merchant
bankers had a dominant position with the Bank of England and,
strangely enough, still have retained some of this, despite the
nationalization of the Bank by the Labour government in 1946.

Page 501

Financial capitalism was marked not only by a growing financial
control of industry but also by an increasing concentration of this
control and by an increasing banking control of government.
The control of the Bank of England over business was exercised
indirectly through the joint-stock banks. This growth of a "money
trust" led to an investigation. A bill was drawn up to prevent further
concentration but was withdrawn when the bankers made a "gentlemen's
agreement" to ask Treasury permission for future amalgamations.

Page 502

In 1931, financiers led by Montagu Norman and J.P. Morgan forced
the resignation of the British Labour government. But the handwriting
was already on the wall. The deflationary financial policy of the
bankers had alienated politicians and industrialists and driven
monopolist trade unions to form a united front against the bankers.
Labour and industry were united in opposition to continuance to the
bankers' economic policy with its low prices and high unemployment.
The decisive factor which caused the end of financial capitalism in
Britain was the revolt of the British fleet in 1931 and not the
abandonment of gold six days later. The mutiny made it clear that the
policy of deflations must be ended. As a result, no effort was made to
defend the gold standard.

Page 503

The Coal Mines Act of 1930 allowed the National Shipbuilders
Security to buy up and destroy shipyards. By 1934, one quarter of
Britain's shipbuilding capacity had been eliminated. The Purchase
Finance Company was set up to buy up and destroy flour mills. By 1933,
over one-sixth of the flour mills in England had been eliminated.

GERMANY

Page 507

In Germany, capital was scarce when industrialism arrived and
industry found itself dependent upon banks almost at once. The chief
credit banks floated securities for industry by granting credit to the
firm, taking securities in return. These securities were slowly sold
to the public with the bank retaining enough stock to give it control
and appointing its men as directors to give that control final form.
The importance of interlocking directorships can be seen from the
fact that the same Dresdner Bank had its directors on the boards of
over two hundred industrial concerns in 1913.

This banking control of industry was made even closer since most
investors left their securities on deposit with the banks which voted
all this stock for directorships and other control measures, unless
the stock-owners expressly forbade it. The banks also voted the stock
left as collateral for loans and all stock bought on margin.

Page 509

The control of German financial capitalism rested in the credit
banks. It was largely beyond the control of the government and rested
in private hands. Of the hundreds of German credit banks, the eight
so-called "Great Banks" were the masters of the German economy from
1865 to 1915 and controlled 74% of the capital assets of all 421
banks.

Page 512

I.G. Farbenindustrie made many individual cartel agreements with
Du Pont and other American corporations.

Page 514

In France, Britain and the US, the war played a significant role
in demonstrating conclusively that economic stagnation and
 (46 of 129)

underemployment of resources were not necessary and could be avoided
if the financial system were subordinated to the economic system. In
Germany, this was not necessary since the Nazis had already made this
discovery in the 1930s.

Thus a surplus of labor, low wages, experience in unorthodox
financial operations and an immense task to be done all contributed to
the German revival.

FRANCE

Page 515

With the founding of the Bank of France in 1800, financial power
was in the hands of about ten or fifteen banking houses whose
founders, in most cases, had come from Switzerland. These bankers, all
Protestant, were deeply involved in the agitations leading up to the
French Revolution. When it got out of the hand, they were the chief
forces behind the rise of Napoleon. As a reward for this support,
Napoleon gave these bankers a monopoly over French financial life by
giving them control of the new Bank of France.

Page 516

By 1811, most of these bankers had gone over to the opposition
and survived the change in regime in 1815. As a result, the Protestant
bankers who had controlled financial life under the First Empire were
still the main figures on the board of regents of the Bank of France
until 1936. The chief names were Mirabaud, Mallet, Neuflize, and
Hottinger.

In the course of the nineteenth century, a second group was added
to French banking circles. This second group, largely Jewish, was also
non-French origin, the majority Germanic (like Rothschild, Heine,
Fould, Stern and Worms). A rivalry soon grew up between the older
Protestant bankers and the newer Jewish bankers, largely along
political rather than religious lines which grew confused as some of
the Jewish group gave up their religion and moved over to the
Protestant group.

The leadership of the Protestant group was exercised by Mirabaud,
the leadership of the Jewish group was held by Rothschild. These two
wings were so close that Mirabaud and Rothschild together dominated
the whole financial system and frequently cooperated together even
when their groups as a whole were in competition.

After 1838, this simple picture was complicated by the slow rise
of a third group of bankers who were Catholics which soon split into
two halves and joined the other two groups.

Page 517

The rivalry of these two great powers fills the pages of French
history in the period 1884-1940. It paralyzed the French political
system and economic system preventing economic recovery from the
depression in 1935-1940.

From 1880-1925, the private bankers continued to exist and grow
in power. They were at first chiefly interested in government
obligations and the greatest bankers, like Mirabaud and Rothschild,
had intimate connections with governments and weak connections with
the economic life of the country.

Page 518

To finance railroads, the small savings of many were gathered and
made available to the private banker to direct wherever he thought
fitting. Thus the private banker became a manager of other persons'
funds rather than lender of his own. The private banker became much
more influential and much less noticeable. He now controlled billions
where he formerly controlled millions and he did it unobtrusively,
acting from the background, concealed from public view. The public did
not notice that the names of private bankers and their agents still
graced the list of directors of new financial enterprises.

 (47 of 129)

Page 520

The centre of the French economic system in the 20th century was
not to be found, as some have believed, in the Bank of France, but,
instead, resided in a group of almost unknown institutions - the
private banks. There were over a hundred of these private banks and
two (Rothschild and Mirabaud) were more powerful than all the others
combined. These private banks acted as the High Command of the French
economic system. Their stock was closely held in the hands of about
forty families. They were the same private banks which had set up the
Bank of France divided into a group of seven Jewish banks, a group of
seven Protestant banks and a group of five Catholic banks. The various
groups continued to cooperate in the management of the Bank of France
which was controlled until 1936, as it had been in 1813, by the
handful of private banks which created it.

Page 521

The state was influenced by the Treasury's need for funds from
the Bank of France.

These investment banks supplied long-term capital to industry and
took stock and directorships in return. In 1931, Paribas held
the securities of 357 corporations and its own directors and top
managers held 180 directorships in 120 of the more important of these.

Page 522

The Jewish bankers were allied to Standard Oil and Rockefeller
while the Catholic-Protestant bankers were allied to Royal Dutch Shell
and Deterding.

Page 524

In 1936, there were about 800 important firms. Of these 800, the
Paribas bloc controlled almost 400 and the Union-Comite bloc about
300.

Page 525
The whole Paribas system in the 20th century was headed by Baron
Edouard de Rothschild with the chief center of operation in the Banque
de Paris which controlled communications companies such as Havas.
Havas was a great monopolistic news agency. It could, and did,
suppress or spread both news and advertising. It received secret
subsidies from the government for almost a century. The monopoly on
distribution of periodicals and books could be used to kill papers
which were regarded as objectionable.

After 1937, the Paribas bloc was badly split by the controversy
over orthodox and unorthodox financial methods for dealing with
depression. The Rothschild desire to form an alliance with Russia and
adopt a policy of resistance to Hitler, continuing orthodox financial
policies, collapsed from its own internal contradictions, their own
lack of faith in it, and the pressure of Great Britain.

Page 528

The three prewar blocs have played no significant role in France
since 1945 although Rene Mayer, active head of the Rothschild family
interests was minister of finance in the early postwar government.
Later in 1962, De Gaulle made the director of the Rothschild bank,
George Pompidou, prime minister.

UNITED STATES OF AMERICA

Page 529

By the 1880s, the techniques of financial capitalism reached
levels of corruption which were never approached in Europe. This
corruption sought to cheat the ordinary investor by flotations and
manipulations of securities for the benefit of insiders. The
practitioners of these dishonesties were as socially acceptable as
their wealth entitled them to be without animadversions on how that
wealth was obtained.

Page 530
 (48 of 129)

Corrupt techniques associated with the names Daniel Drew and Jay
Gould were also practiced by Morgan and others who became respectable
from longer sustained success.

Any reform of Wall Street practices came from pressure from the
farming West and was long delayed by the close alliance of Wall Street
with the two major political parties. By 1900, the influence of Morgan
in the Republican party was dominant, his chief rivalry coming from
Rockefeller of Ohio.

From 1880 to 1930, financial capitalism approximated a feudal
structure in which two great powers, centered in New York, dominated a
number of lesser powers. No description of this structure as it
existed in the 1920s can be given in a brief compass, since it
infiltrated all aspects of American life and especially all branches
of economic life.

At the center were a group of less than dozen investment banks
which were still unincorporated partnerships at the height of their
powers. These included J.P. Morgan, the Rockefeller family, Kuhn,
Loeb, Dillon, Read, Brown Brothers and Harriman, and others. Each of
these was linked in organizational or personal relationships with
various banks, insurance companies, railroads, utilities and
industrial firms. The result was to form a number of webs of economic
power.

J.P. Morgan worked in close relationship with a group of banks
and insurance companies. The whole nexus dominated a network of
business firms which included at least one-sixth of the two hundred
largest non-financial corporations.

Page 531

The Rockefeller group, investing only its own profits, functioned
as a capitalist unit in close cooperation with Morgan and controlled
over half the assets of the oil industry.

Page 532

The economic power represented by these figures is almost beyond
imagination to grasp. Morgan and Rockefeller together frequently
dominated the national Republican Party while Morgan occasionally had
extensive influence in the national Democratic Party. These two were
also powerful on the state level, especially Morgan in New York
and Rockefeller in Ohio. Mellon was a power in Pennsylvania and Du
Pont in Delaware.

In the 1920s, this system of economic and political power formed
a hierarchy headed by the Morgan interests and played a principal role
both in political and business life. Morgan, operating on the
international level in cooperation with his allies abroad, especially
in England, influenced the events of history to a degree which cannot
be specified in detail but which certainly was tremendous. The
deflationary financial policies on which these bankers insisted were
laying the foundations of the economic collapse into general social
disaster by 1940. Unemployment which had reached 13 million persons in
1933 was still at 10 million in 1940

Page 533

The deflationary policies of the bankers were acceptable to heavy
industry chiefly because it was not unionized. With assembly-line
techniques financed by the bankers and unorganized labor, the
employers could rearrange, curtail, or terminate labor without notice
on a daily basis and could thus reduce labor costs to meet falls in
prices from bankers' deflation.

The fact that reductions in wages and large lay-offs also reduced
the volume of purchasing power as a whole, to the injury of the groups
selling consumers' goods, was ignored by the makers of heavy
producers' goods. In this way, farmers and other segments of the
society were injured by the deflationary policies of the bankers and
 (49 of 129)

by the employment policies of heavy industry, closely allied to the
bankers.

When these policies became unbearable in the depression of 1929-
1933, these other interest blocs deserted the Republican party which
remained subservient to high finance and heavy industry. The shift of
the farm bloc to the Democratic Party in 1932 resulted in the election
of Franklin D. Roosevelt and the New Deal.

Page 534

The New Deal's actions against finance did not represent any
victory for unorthodox financing, the real key to either monopoly
capitalism or to a managed pluralist society. The reason for this was
that the New Deal was fundamentally orthodox in its ideas on the
nature of money. Roosevelt was quite willing to unbalance the budget
and to spend in a depression in an unorthodox fashion because he had
grasped the idea that lack of purchasing power was the cause of the
lack of demand which made unsold goods and unemployment, but he had no
idea of the causes of the depression and had quite orthodox ideas on
the nature of money. As a result, his administration treated the
symptoms rather than the causes of the depression and, while spending
unorthodoxly to treat these symptoms, did so with money borrowed from
the banks in the accepted fashion. The New Deal allowed bankers to
create the money, borrowed it from the banks,and spent it. This meant
that the New Deal ran up the national debt to the credit of the banks,
and spent money in such a limited fashion that no drastic reemployment
of idle resources was possible.

One of the most significant facts about the New Deal was its
orthodoxy on money. For the whole 12 years he was in the White House,
Roosevelt had statutory power to issue fiat money in the form of
greenbacks printed by the government without recourse to the banks.
This authority was never used. As a result of such orthodoxy, the
depression's symptoms of idle resources were overcome only when the
emergency of the war in 1942 made it possible to justify a limitless
increase in the national debt by limitless borrowing from private
persons and the banks. But the whole episode showed a failure to grasp
the nature of money and the function of the monetary system, of which
considerable traces remained in the postwar period.

Page 535

One reason for the New Deal's readiness to continue with an
orthodox theory of the nature of money, along with an unorthodox
practice in its use, arose from the failure of the Roosevelt
administration to recognize the nature of the economic crisis itself.
This failure can be seen in Roosevelt's theory of "pump priming." He
sincerely believed, as did his Secretary of the Treasury, that there
was nothing structurally wrong with the economy, that it was
temporarily stalled, and would keep going of its own powers if it
could be restarted...

The inadequacy of this theory of the depression was shown in 1937
when the New Deal, after four years of pump priming and a victorious
election in 1936, stopped its spending. Instead of taking off, the
economy collapsed in the steepest recession in history. The New Deal
had to resume its treatment of symptoms but now without hope that the
spending program could ever be ended, a hopeless prospect since the
administration lacked the knowledge of how to reform the system or
even how to escape from borrowing bank credit with its mounting public
debt, and the administration lacked the courage to adopt the really
large-scale spending necessary to give full employment of resources.
The administration was saved from this impasse by the need for the
rearmament program followed by the war. Since 1947 the Cold War and
the space program have allowed the same situation to continue, so that
even today, prosperity is not the result of a properly organized
economic system but of government spending, and any drastic reduction
 (50 of 129)

in such spending would give rise to an acute depression.

THE ECONOMIC FACTORS

Page 540

There are a number of important elements in the economic
situation of the 20th century.
8. The increasing disparity in the distribution of income is the
most controversial and least well-established characteristic of the
system. It would appear that the disparity in national income has been
getting wider.

In the US, the richest one-fifth receive 46% of the income in
1910, 51% in 1929 and 48% in 1937. In the same three years, the share
of the poorest one-fifth fell from 8% to 5.4% to 3.6%
If instead of one-fifth, we examine the richest and poorest onetenth,
in 1910 the ratio was 10, in 1929 it was 21.7, in 1937, it was
34.4. This means that the rich were getting richer relatively and
probably absolutely while the poor were getting poorer both relatively
and absolutely.

Page 542

The progressives who insisted that the lack of investment was
caused by lack of consumer purchasing power were correct. But the
conservatives who insisted that the lack of investment was caused by
lack of confidence were also correct. Each was looking at the opposite
side of a single continuous cycle:

a) purchasing power creates demand for goods;
b) demand for goods creates confidence in the minds of investors;
c) confidence creates new investment;
d) new investment creates purchasing power which then creates demand.
It would appear that the economic factors alone affected the
distribution of incomes in the direction of increasing disparity.

Page 543

In Germany, Hitler's 1934 adoption of an unorthodox financial
policy which raised the standards of living of the lower-income levels
even more drastically (by shifting them from unemployment with incomes
close to nothing into wage-earning positions in industry) was not
acceptable to the high-income classes because it stopped the threat of
revolution by the discontented masses and because it was obviously of
long-run benefit to them. This long-run benefit began to appear when
capacity employment of capital and labor was achieved in 1937.

Page 546

In the modern economic community, the sum total of goods and
services appearing in the market is at one and the same time the
income of the community and the aggregate cost of producing goods and
services in question. Aggregate costs, aggregate incomes and aggregate
prices are the same since they are merely opposite sides of the
identical expenditures.

The purchasing power available in the community is equal to
income minus savings. If there are any savings, the available
purchasing power will be less than the aggregate prices being asked
for the products for sale and the amount of the savings. Thus, all the
goods and services produced cannot be sold as long as savings are held
back. In order for al the goods to be sold, it is necessary for the
savings to reappear in the market as purchasing power. The
disequilibrium between purchasing power and prices which are created
by the act of saving is restored completely by the act of investment,
and all the goods can be sold at the prices asked. But whenever
investment is less than savings, the available supply of purchasing
power is inadequate by the same amount to by the goods being offered.
This margin by which purchasing power is inadequate because of an
excess of savings over investment may be called the "deflationary
gap."This "deflationary gap" is the key to the twentieth century
 (51 of 129)

economic crisis and one of the three central cores of the whole
tragedy of the century.

THE RESULTS OF THE ECONOMIC DEPRESSION

Page 547

The deflationary gap arising from a failure of investment to
reach the level of savings can be closed either by lowering the supply
of goods to the level of available purchasing power or by raising the
supply of purchasing power to a level able to absorb the existing
supply of goods, or a combination of both. The first solution will
give a stabilized economy on a low level of activity; the second will
give a stabilized economy on a high level of activity. Left to itself,
the economic system under modern conditions would adopt the former
procedure working as follows: The deflationary gap will result in
falling prices, declining economic activity and rising unemployment.
This will result in a fall in national income resulting in an even
more rapid decline in the volume of savings. This decline continues
until the volume of savings reaches the level of investment at which
point the fall is arrested and the economy becomes stabilized at a low
level.

This process did not work itself out in any industrial country
during the great depression because the disparity in national income
was so great that a considerable portion of the population would have
been driven to zero incomes and absolute want before savings of the
richer segment fell to the level of investment. Under such conditions,
the masses of population would have been driven to revolution and the
stabilization, if reached, would have been on a level so low that a
considerable portion of the population would have been in absolute
want. Because of this, governments took steps to arrest the course of
the depression before their citizens were driven to desperation.
The methods used to deal with the depression and close the
deflationary gap were all reducible to two fundamental types:

a) those which destroy goods, and
b) those which produce goods which do not enter the market.

The destruction of goods will close the deflationary gap by
reducing the supply of unsold goods through lowering the supply of
goods to the level of the supply of purchasing power. It is not
generally realized that this method is one of the chief ways in which
the gap is closed in a normal business cycle where goods are destroyed
by the simple expedient of not producing the goods which the system is
capable of producing. The failure to use full level of 1929 output
represented a loss of $100 billion in the US, Britain and Germany
alone. This loss was equivalent to the destruction of such goods.
Destruction of goods by failure to gather the harvest is a common
phenomenon under modern conditions. When a farmer leaves his crop
unharvested because the price is too low to cover the expense of
harvesting, he is destroying the goods. Outright destruction of goods
already produced is not common and occurred for the first time as a
method of combating depression in the years 1930-1934. During this
period, stores of coffee, sugar, and bananas were destroyed, corn was
plowed under, and young livestock was slaughtered to reduce the supply
on the market. The destruction of goods in warfare is another example
of this method of overcoming deflationary conditions in the economic
system.

Page 548

The second method of filling the deflationary gap, namely, by
producing goods which do not enter the market, accomplishes its
purpose by providing purchasing power in the market, since the costs
of production of such goods do enter the market as purchasing power,
while the goods themselves do not drain funds from the system if they
are not offered for sale. New investment was the usual way in which
this was accomplished in the normal business cycle but it is not the
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normal way of filling the gap under modern conditions of depression.
We have already seen the growing reluctance to invest and the unlikely
chance that the purchasing power necessary for prosperity will be
provided by a constant stream of private investment. It this is so,
the funds for producing goods which do not enter the market must be
sought in a program of public spending.

Any program of public spending at once runs into the problems of
inflation and public debt. These are the same two problems mentioned
in connection with the efforts of government to pay for the First
World War. The methods of paying for a depression are exactly the same
as the methods of paying for a war, except that the combination of
methods used may be somewhat different because the goals are somewhat
different. In financing a war, we should seek to achieve a method
which will provide a maximum of output with a minimum of inflation and
public debt. In dealing with a depression, since a chief aim is to
close the deflationary gap, the goal will be to provide a maximum of
output with a necessary degree of inflation and a minimum of public
debt. Thus the use of fiat money is more justifiable in financing a
depression than in financing a war. Moreover the selling of bonds to
private persons in wartime might well be aimed at the lower-income
groups in order to reduce consumption and release facilities for war
production, while in a depression (where low consumption is the chief
problem) such sales of bonds to finance public spending would have to
be aimed at the savings of the upper-income groups.

These ideas on the role of government spending in combating
depression have been formally organized into the "theory of the
compensatory economy." This theory advocates that government spending
and fiscal policies be organized so that they work exactly contrary to
the business cycle, with lower taxes and larger spending in
deflationary period and higher taxes with reduced spending in a boom
period, the fiscal deficits of the down cycle being counterbalanced in
the national budget by the surpluses of the up cycle.

Page 549

This compensatory economy has not been applied with much success
in any European country except Sweden. In a democratic country, it
would take the control of taxing and spending away from the elected
representatives of the people and place this precious "power of the
purse" at the control of the automatic processes of the business cycle
as interpreted by bureaucratic (and representative) experts. Moreover,
all these programs of deficit spending are in jeopardy in a country
with a private banking system. In such a system, the creation of money
(or credit) is usually reserved for the private banking institutions
and is deprecated as a government action. The argument that the
creation of finds by the government is bad while creation of funds by
the banks is salutary is very persuasive in a system based on
traditional laissez faire and in which the usual avenues of
communications (such as newspapers and radio) are under private, or
even banker, control.

Public spending as a method of counteracting depression can vary
very greatly in character, depending on the purposes of the spending.
Spending for destruction of goods or for restriction of output, as
under the New Deal agricultural program, cannot be justified easily
in a democratic country with freedom of communications because it
obviously results in a decline in national income and living
standards.

Spending for non-productive monuments is somewhat easier to
justify but is hardly a long-run solution.

Spending for investment in productive equipment (like the
Tennessee Valley Authority Dam) is obviously the best solution since
it leads to an increase in national wealth and standards of living and
 (53 of 129)

is a long-run solution but it marks a permanent departure from a
system of private capitalism and can be easily attacked in a country
with a capitalistic ideology and a private banking system.
Spending on armaments and national defence is the last method of
fighting depression and is the one most readily and most widely
adopted in the twentieth century.

A program of public expenditure on armaments is a method for
filling the deflationary gap and overcoming depression because it adds
purchasing power to the market without drawing it out again later
(since the armaments, once produced, are not put up for sale). From an
economic point of view, this method of combating depression is not
much different from the method listed earlier under destruction of
goods, for, in this case also, economic resources are diverted from
constructive activities or idleness to production for destruction. The
appeal of this method for coping with the problem of depression does
not rest on economic grounds at all, for, on such grounds, there is
no justification. It's appeal is rather to be found on other,
especially political, grounds.

Page 550

The adoption of rearmament as a method of combating depression
does not have to be conscious. The country which adopts it may
honestly feel that it is adopting the policy for good reasons, that it
is threatened by aggression, and that a program of re-armament is
necessary for political protection. It is very rare for a country
consciously to adopt a program of aggression, for, in most wars, both
sides are convinced that their actions are defensive. It is almost
equally rare for a country to adopt a policy of re-armament as a
solution for depression. If a country adopts re-armament because of
fear of another's arms and these last are the result of efforts to
fill a deflationary gap, it can also be said that the re-armament of
the former has a basic economic cause.

In the 20th century, the vested interests usually sought to
prevent the reform of the economic system (a reform whose need was
made evident by the long-drawn-out depression) by adopting an economic
program whose chief element was the effort to fill the deflationary
gap by re-armament.

THE PLURALIST ECONOMY AND WORLD BLOCS

The economic disasters of two wars, a world depression, and the
post-war fluctuations showed clearly by 1960 that a new economic
organization of society was both needed and available. The laissezfaire
competitive system had destroyed itself and almost destroyed
civilization as well by its inability to distribute the goods it could
produce. The system of monopoly capitalism had helped in this
disaster.

Page 551

The almost simultaneous failure of laissez-faire, Fascism, and of
Communism to satisfy the growing popular demand both for rising
standards of living and for spiritual liberty had forced the mid-20th
century to seek some new economic organization.

Underdeveloped peoples have been struck by the conflicting claims
of the two great super-Powers.. The former offered the goods the new
peoples wanted (rising standards of living and freedom) while the
latter seemed to offer methods of getting these goods (by state
accumulation of capital, government direction of resources) which
might tend to smother these goals. The net result has been a
convergence toward a common, if remote, system of the future whose
ultimate nature is not yet clear but which we might call the
"pluralist economy."

CHAPTER XII: THE POLICY OF APPEASEMENT 1931-1936

 (54 of 129)

Page 559

The structure of collective security was destroyed completely
under the assaults of Japan, Italy and Germany who were attacking the
whole nineteenth century way of life and some of the most fundamental
attributes of Western Civilization itself. They were in revolt against
democracy, against the parliamentary system, against laissez-faire and
the liberal outlook, against nationalism (although in the name of
nationalism), against humanitarianism, against science and against all
respect for human dignity and human decency. It was recruited from the
dregs of society.

Page 560

During the nineteenth century, goals were completely lost or were

reduced to the most primitive level of obtaining more power and more
wealth. But the constant acquisition of power or wealth, like a
narcotic for which the need grows as its use increases without in any
way satisfying the user, left man's "higher" nature unsatisfied.

Page 561

Germany could have made no aggression without the acquiescence
and even in some cases the actual encouragement of the "satisfied"
Powers, especially Britain.

THE JAPANESE ASSAULT, 1931-1941

The similarity between Germany and Japan was striking: each had a
completely cartelized industry, a militaristic tradition, a hardworking
population which respected authority and loved order, a facade
of parliamentary constitutionalism which barely concealed the reality
of power wielded by an alliance of army, landlords, and industry.

Page 562

The steady rise in tariffs against Japanese manufactured goods
after 1897 led by America served to increase the difficulties of
Japan's position. The world depression and the financial crisis hit
Japan a terrible blow. Under this impact, the reactionary and
aggressive forces were able to solidify their control and embark on
that adventure of aggression and destruction that ultimately led to
the disasters of 1945.

Page 563

Separate from the armed forces were the forces of monopoly
capitalism, the eight great economic complexes controlled as family
units knows as "zaibatsu" which controlled 75% of the nation's wealth.
By 1930, the militarists and zaibatsu came together in their last
fateful alliance.

Page 569

Japan's unfavorable balance of trade was reflected in a heavy
outflow of gold in 1937-1938. It was clear that Japan was losing its
financial and commercial ability to buy necessary materials of foreign
origin. The steps taken by America, Australia, and others to restrict
export of strategic or military materials to Japan made this problem
even more acute. The attack on China had been intended to remedy this
situation by removing the Chinese boycott on Japanese goods.

Page 570

Under the pressure of the growing reluctance of neutral countries
to supply Japan with necessary strategic goods, the most vital being
petroleum products and rubber, it seemed that the occupation of the
Dutch Indies and Malaya could do much to alleviate these shortages but
which would lead to an American war on Japan. They decided to attack
the United States first.

THE ITALIAN ASSAULT, 1934-1936

Page 571

In 1922, the Fascists came to power in a parliamentary system; in
1925 it was replaced by a political dictatorship while the economic
system remained that of orthodox financial capitalism; in 1927 an
orthodox and restrictive stabilization of the lira on the
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international gold standard led to such depressed economic conditions
that Mussolini adopted a much more active foreign policy; in 1934
Italy replaced orthodox economic measures by a totalitarian economy
functioning beneath a fraudulent corporate facade.

Italy was dissatisfied over its lack of colonial gains at
Versailles and the refusal of the League to accede to Tittoni's
request for a redistribution of the world's resources in accordance
with population needs made in 1920.

In a series of agreements with Austria and Hungary known as the
"Rome Protocols," the Austrian government under Engelbert Dollfuss
destroyed the democratic institutions of Austria, wiped out all
Socialist and working-class organizations, and established a one-party
dictatorial corporate state at Mussolini's behest in 1934. Hitler took
advantage of this to attempt a Nazi coup in Austria, murdering
Dollfuss in July 1934 but he was prevented by the quick mobilization
of Italian troops on the Brenner frontier and a stern warning from
Mussolini.

Page 572

Hitler's ascension to office in Germany in 1933 found French
foreign policy paralyzed by British opposition to any efforts to
support collective security or to enforce German observation of its
treaty obligations by force. As a result, a suggestion from Poland in
1933 for joint armed intervention in Germany to remove Hitler from
office was rejected by France. Poland at once made an non-aggression
pact with Germany and extended a previous one with the Soviet Union.
In 1934, France under Jean Louis Bathou, began to adopt a more
active policy against Hitler seeking to encircle Germany by bringing
the Soviet Union and Italy into a revived alignment of France, Poland,
the Little Entente, Greece and Turkey.

Page 573

France's Laval was convinced that Italy could be brought into the
anti-German front only if its long-standing grievances and unfulfilled
ambitions in Africa could be met. Accordingly, he gave Mussolini 7% of
the stock in the Djibouti-Addis Ababa Railway, a stretch of desert
114,000 square miles in extent but containing only a few hundred
persons (sixty-two according to Mussolini) on the border of Libya, a
small wedge of territory between French Somaliland and Italian
Eritrea, and the right to ask for concessions throughout Ethiopia.
While Laval insisted that he had made no agreement which
jeopardized Ethiopia's independence or territorial integrity, he made
it equally clear that Italian support against Germany was more
important than the integrity of Ethiopia in his eyes. France had been
Ethiopia's only friend and had brought it into the League of Nations.
Italy had been prevented from conquering Ethiopia in 1896 only by a
decisive defeat of her invading forces at the hands of the Ethiopians
themselves, while in 1925, Britain and Italy had cut her up into
economic spheres by an agreement which was annulled by a French appeal
to the League. Laval's renunciation of France's traditional support of
Ethiopian independence brought Italy, Britain and France into
agreement on this issue.

Page 574

This point of view was not shared by public opinion in these
three countries. Stanley Baldwin (party leader and prime minister)
erected one of the most astonishing examples of British "dual" policy
in the appeasement period. While publicly supporting collective
security and sanctions against Italian aggression, the government
privately negotiated to destroy the League and to yield Ethiopia to
Italy. They were completely successful in this secret policy.
The Italian invaders had no real fear of British military
sanctions when they put a major part of their forces in the Red Sea
 (56 of 129)

separated from home by the British-controlled Suez canal. The British
government's position was clearly stated in a secret report by Sir
John Maffey which declared that Italian control of Ethiopia would be a
"matter of indifference" to Britain. This opinion was shared by the
French government too.

Unfortunately, public opinion was insisting on collective
sanctions against the aggressor. To meet this demand, both governments
engaged in a public policy of unenforced or partially enforced
sanctions at wide variance with their real intentions.
Foreign Secretary Samuel Hoare delivered a smashing speech to
support sanctions against Italy. The day previously he and Anthony
Eden had secretly agreed with Pierre Laval to impose only partial
economic sanctions avoiding all actions such as blockade of the Suez
canal.

Page 575

A number of governments including Belgium, Czechoslovakia, France
and Britain had stopped all exports of munitions to Ethiopia as early
as May 1935 although Ethiopia's appeal to the League for help had been
made on March 17th while the Italian attack did not come until
October. The net result was that Ethiopia was left defenceless and her
appeal to the US for support was at once rejected.
Hoare's speech evoked such applause from the British public that
Baldwin decided to hold a general election on that issue. Accordingly,
with ringing pledge to support collective security, the National
government won an amazing victory and stayed in power until the next
general election ten years later (1945).

Although Article 16 of the League Covenant bound the signers to

break off all trade with an aggressor, France and Britain combined to
keep their economic sanctions partial and ineffective. The imposition
of oil sanctions was put off again and again until the conquest of
Ethiopia was complete. The refusal to establish this sanction resulted
from a joint British-French refusal on the grounds that an oil
sanction would be so effective that Italy would be compelled to break
of its was with Ethiopia and would, in desperation, make war on
Britain and France. This, at least, was the amazing logic offered by
the British government later.

Page 576

Hoare and Laval worked out a secret deal which would have given
Italy outright about one-sixth of Ethiopia. When news of this deal was
broken to the public, there was a roar of protest on the grounds
that this violated the election pledge made but a month previously. To
save his government, Baldwin had to sacrifice Hoare who resigned on
December 19 but returned to Cabinet on June 5 as soon as Ethiopia was
decently buried. Laval fell from office and was succeeded by Pierre
Flandin who pursued the same policy.

Ethiopia was conquered on May 2 1936. Sanctions were removed in
the next two months just as they were beginning to take effect. The
consequences of the Ethiopian fiasco were of the greatest importance.
The Conservative Party in England was entrenched in office for a
decade during which it carried out its policy of appeasement and waged
the resulting war. The US passed a "Neutrality Act" which encouraged
aggression, at the outbreak of war, by cutting off supplies to both
sides, to the aggressor who had armed at his leisure and to the victim
as yet unarmed. Above all, it destroyed French efforts to encircle
Germany.

CIRCLES AND COUNTERCIRCLES, 1935-1939

Page 577

The remilitarization of the Rhineland in violation of the
Versailles Treaty was the most important result of the Ethiopian
crisis.

Page 578
 (57 of 129)

In order to destroy the French and Soviet alliances with
Czechoslovakia, Britain and Germany sought to encircle France and the
Soviet Union in order to dissuade France from honoring its alliances
with either Czechoslovakia or the Soviet Union and France, finding
itself encircled, dishonored its alliance with Czechoslovakia when it
came due in 1938.

Page 579

The British attitude towards eastern Europe was made perfectly
clear when Sir John Simon demanded arms equality for Germany. Adding
to the encirclement of France was the Anglo-German Naval Agreement of
June 1935.

Page 580

Parallel with the encirclement of France went the encirclement of
the Soviet Union known as the anti-Comintern Pact, the union of
Germany and Japan against Communism.

The last encirclement was that against Czechoslovakia. Hungary
and Germany were both opposed to Czechoslovakia as an "artificial"
creation of the Versailles Conference. The Polish-German agreement of
1934 opened a campaign until the Polish invasion in 1938.
An analysis of the motivations of Britain in 1938-1939 is bound
to be difficult because the motives of government were clearly not the
same as the motives of the people and in no country has secrecy and
anonymity been carried so has been been so well preserved as in
Britain. In general, motives become vaguer and less secret as we move
our attention from the innermost circles of the government outward. As
if we were looking at the layers of an onion, we may discern four
points of view:

1) the anti-Bolsheviks at the center;
2) the "three-bloc-world" supporters close to the center;
3) the supporters of "appeasement" and
4) the "peace at any price" group in peripheral position.

Page 581

The chief figures in the anti-Bolshevik group were Lord
Curzon, Lord D'Abernon and General Smuts. They did what they could to
destroy reparations and permit German re-armament.
This point of view was supported by the second group, the Round
Table Group, and came later to be called the Clivenden Set which
included Lord Milner, Lord Brand (managing director of Lazard
Brothers, international bankers). This group wielded great influence
because it controlled the Rhodes Trust and dominated the Royal
Institute of International Affairs. They sought to contain the Soviet
Union rather than destroy it as the anti-Bolsheviks wanted. They
advocated a secret alliance of Britain with the German military
leaders against the Soviet.

Page 583

Abandoning Austria, Czechoslovakia and the Polish Corridor to
Germany was the aim of both the anti-Bolsheviks and the "three-bloc"
people.

Page 584

From August 1935 to March 1939, the government built upon the
fears of the "peace at any price" group by steadily exaggerating
Germany's armed might and belittling their own, by calculated
indiscretions like the statement that there were no real anti-aircraft
guns in London, by constant hammering at the danger of air attack
without warning, by building ostentatious and quite useless air-raid
trenches in the streets and parks of London, and by insisting through
daily warnings that everyone must be fitted with a gas mask
immediately (although the danger of a gas attack was nil). In this
way, the government put London into a panic in 1938 and by this panic,
Chamberlain was able to get the people to accept the destruction of
 (58 of 129)

Czechoslovakia. Since he could not openly appeal on the anti-
Bolshevik basis, he had to adopt the expedient of pretending to
resist (in order to satisfy the British public) while really
continuing to make every possible concession to Hitler which would
bring Germany to a common frontier with the Soviet Union.

Page 585

Chamberlain's motives were not really bad ones; he wanted peace
so he could devote Britain's limited resources to social welfare; but
he was narrow and totally ignorant of the realities of power,
convinced that international politics could be conducted in terms of
secret deals, as business was, and he was quite ruthless in carrying
out his aims, especially in his readiness to sacrifice non-English
persons who, in his eyes, did not count.

THE SPANISH TRAGEDY, 1931-1939

Page 587

From the invasion of the Arabs in 711 to their final ejection in
1492, Spanish life has been dominated by the struggle against foreign
intruders. As a result of more than a thousand years of such
struggles, almost all elements of Spanish society have developed a
fanatical intolerance, an uncompromising individualism, and a fatal
belief that physical force is a solution to all problems, however
spiritual.

Page 588

The war of 1898, by depriving Spain of much of its empire, left
its over-sized army with little to do and with a reduced area on which
to batten. Like a vampire octopus, the Spanish Army settled down to
drain the life-blood of Spain and, above all, Morocco. This brought
the army officers into alignment with conservative forces consisting
of the Church (upper clergy), the landlords, and the monarchists. The
forces of the proletariat discontent consisted of the urban workers
and the much larger mass of exploited peasants.

Page 591

In 1923, while most of Spain was suffering from malnutrition,
most of the land was untilled and the owners refused to use irrigation
facilities which had built by government. As a result, agricultural
yields were the poorest in western Europe. While 15 men owned about a
million acres and 15,000 men owned about the of all taxed land, almost
2 million owned the other half, frequently in plots too small for
subsistence. About 2 million more, who were completely landless,
worked 10 to 14 hours a day for about 2.5 pesetas (35 cents) a day for
only six months in the year and paid exorbitant rents without any
security of tenure.

In the Church, while the ordinary priests share the poverty and
tribulations of the people, the upper clergy were closely allied with
government and supported by an annual grant. They had seats in the
upper chamber, control of education, censorship, marriage. In
consequence of this alliance of the upper clergy with government and
the forces of reaction, all animosities built against the latter came
to be directed against the former also. Although the people remained
universally and profoundly catholic, they also became incredibly
anticlerical reflected in the proclivity for burning churches.
All these groups, landlords, officers, upper clergy, and
monarchists, were interest groups seeking to utilize Spain for their
own power and profit.

Page 592

Alfonso XIII ordered municipal elections but in 46 out of 50
provincial capitals, the anti-monarchial forces were victorious.
Alfonso fled to France on April 14, 1931.
The republicans at once began to organize their victory, electing
a Constituent Assembly in June and establishing an ultramodern uni

(59 of 129)

cameral, parliamentary government with universal suffrage, separation
of Church and State, secularization of education, local autonomy for
separatist areas and power to socialize the great estates or the
public utilities.

The republic lasted only five years before Civil War began in
1936 after being challenged constantly from the Right and the extreme
Left. Because of shifting governments, the liberal program which was
enacted into law in 1931 was annulled or unenforced.

Page 593

In an effort to reduce illiteracy (over 45% in 1930), the
republic created thousands of new schools and new teachers, raised
teachers' salaries, founded over a thousand libraries.
Army officers were reduced with the surplus being retired on full
pay. The republican officers tended to retire, the monarchists to stay
on.

To assist the peasants and workers, mixed juries were established
to hear rural rent disputes, importation of labor for wage-breaking
purposes was forbidden; and credit was provided for peasants to
obtain land, seed, or fertilizers on favorable terms. Customarily
uncultivated lands were expropriated with compensation to provide
farms for a new class of peasant proprietors.
Most of these reforms went into effect only partially. Few of the
abandoned estates could be expropriated because of the lack of money
for compensation.

Page 594

The conservative groups reacted violently. Three plots began to
be formed against the new republic, the one monarchist led by Sotelo
in parliament and by Goicoechea behind the scenes; the second a
parliamentary alliance of landlords and clericals under Robles; and
the last a conspiracy of officers under Generals Barrera and Sanjurjo.
In the meantime, the monarchist conspiracy was organized by
former King Alfonso from abroad. Goicoechea performed his task with
great skill under the eyes of a government which refused to take
preventative action because of its own liberal and legalistic
scruples. He organized an alliance of the officers, the Carlists, and
his own Alfonsist party. Four men from these three groups then signed
an agreement with Mussolini in 1934 who promised arms, money,
diplomatic support and 1.5 million pesetas, 10,000 rifles,10,000
grenades, and 200 machine guns. In return, the signers promised to
sign a joint export policy with Italy.

Page 595

The Robles coalition of Right parties with the clerical party and
agrarian party of landlords was able to replace the Left Republican
Azana by the Right Republican Lerroux as prime minister. It then
called new elections, won victory and revoked many of the 1931 reforms
while allowing most of the rest to go unenforced and restored
expropriated estates.

This led to a violent agitation which burst into open revolt in
the two separatist centers of the Basque country and Catalonia. The
uprising in Asturias spearheaded by anarchist miners hurling dynamite
from slings, lasted for nine days. The government used the Foreign
Legion and Moors, brought to Morocco by sea, and crushed the rebels
without mercy. The latter suffered at 5,000 casualties. After the
uprising, 25,000 suspects were thrown into prison.
The uprising of October 1934, although crushed, split the
oligarchy. The demands of the army, monarchists and the biggest
landlords for a ruthless dictatorship alarmed the leaders of the
Church and president of the republic Zamora. Robles as minister of war
encouraged reactionary control of the army and even put General Franco
in as his undersecretary of war.

Page 596
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For the 1936 elections, the parties of the Left formed the
Popular Front with a published program promising a full restoration of
the constitution, amnesty for political crimes committed after 1933,
civil liberties, an independent judiciary, minimum wages, protection
for tenants, reform of taxation, credit, banking. It repudiated the
Socialist program for nationalization of the land, the banks, and
industry.

While all the Popular Front parties would support the government,
only the bourgeois parties would hold seats in the Cabinet while the
workers parties such as the Socialists would remain outside.
The Popular Front captured 266 of 473 seats while the Right had
153, the Center 54, CEDA 96, Socialists 87, Republic Left 81,
Communists 14.

The defeated forces of the Right refused to accept the election
results and tried to persuade Valladeres to hand over the government
to General Franco. That was rebuffed. On Feb. 20, the conspirators met
and decided the time was not yet ripe. The new government heard of
this meeting and transferred Franco to the Canary Islands. The day
before he left Madrid, Franco met with the chief conspirators and they
completed their plans for a military revolt but fixed no date.
In the meantime, provocation, assassination, and retaliation grew
steadily with the verbal encouragement of the Right. Property was
seized or destroyed and churches were burned on all sides. The mob
retaliated by assaults on monarchists and by burning churches.

Page 597

Italian Air Force planes were painted over and went into action
in support of the revolt which was a failure when the navy remained
loyal because the crews overthrew their officers; the Air Force
remained loyal; the army revolted with much of the police but were
overcome. At the first news of the revolt, the people, led by labor
unions, demanded arms. Because arms were lacking, orders were sent at
once to France. The recognized government in Madrid had the right to
buy arms abroad and was even bound to do so by treaty with France.
As a result of the failure of the revolt, the generals found
themselves isolated in several different parts of Spain with no mass
popular support.

Page 598

The rebels held the extreme northwest, the north and the south as
well as Morocco and the islands. They had the unlimited support of
Italy and Portugal and tentative support from Germany.
The French suggested an agreement not to intervene in Spain since
it was clear that if there was no intervention, the Spanish government
could suppress the rebels. Britain accept the French offer at once but
efforts to get Portugal, Italy, Germany and Russia into the agreement
were difficult because Portugal and Italy were both helping the
rebels. By August, all six Powers had agreed.

Efforts to establish some kind of supervision were rejected by
the rebels and by Portugal while Britain refused to permit any
restrictions to be placed on war material going to Portugal at the
very moment when it was putting all kinds of pressure on France to
restrict any flow of supplies to the recognized government of Spain.
Portugal had delayed joining the agreement until it would hurt the
Loyalist forces more than the rebels. Even then, there was no
intention of observing the agreements.

Page 599

France did little to help the Madrid government while Britain was
positively hostile to it. Both governments stopped all shipments of
war material to Spain. By its insistence on enforcing non-intervention
against the Loyalists, while ignoring the systematic and large-scale
evasions of the agreement in behalf of the rebels, Britain was neither
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fair nor neutral, and had to engage in large-scale violations of
international law. Britain refuse to permit any restrictions to be
placed on war material going to Portugal (to the rebels). It refused
to allow the Loyalist Spanish Navy to blockade the seaports held by
the rebels, and took immediate action against efforts by the Madrid
government to interfere with any kind of shipments to rebel areas,
while wholesale assaults by the rebels on British and other neutral
ships going to Loyalist areas drew little more than feeble protests
from Britain.

Britain was clearly seeking a rebel victory and instead of trying
to enforce nonintervention, was actively supporting the rebel blockade
of Loyalist Spain when the British Navy began, in 1937, to intercept
British ships headed for Loyalist ports and on some pretext, or simply
by force, made them go elsewhere.

The rebel forces were fewer than the Loyalists but were
eventually successful because of their great superiority in artillery,
aviation, and tanks as a result of the one-sided enforcement of the
non-intervention agreement.

Page 600

The failure of Franco to capture Madrid led to a joint Italian-
German meeting where it was decided to recognize the Franco government
and withdraw their recognition from Madrid on Nov. 18, 1936. Japan
recognized the Franco regime in December.

As a result, Franco received the full support of the aggressor
states while the Loyalist government was obstructed in every way by
the "peace-loving" Powers. Italy sent 100,000 men and suffered 50,000
casualties, Germany sent 20,000 men. On the other side, the Loyalists
were cut off from foreign supplies almost at once because of the
embargoes of the Great Powers and obtained only limited amounts,
chiefly from Mexico, Russia and the US until the Non-intervention
agreement cut these off. On Jan. 18, 1937, the American Neutrality Act
was revised to apply to civil as well as international wars and was
invoked against Spain immediately but unofficial pressure from the
American government prevented such exports to Spain even earlier.
The Madrid government made violent protests against the Axis
intervention both before the Non-intervention Committee in London and
before the League of Nations. These were denied by the Axis Powers. An
investigation of these charges was made under Soviet pressure but the
Committee reported that these charges were unproved. Anthony Eden went
so far to say that so far as non-intervention was concerned, "there
were other governments more to blame tan either Germany or Italy."

Page 601

Soviet intervention began Oct 7,1936, three and a half years
after Italian intervention and almost three months after both Italian
and German units were fighting with the rebels. The Third
International recruited volunteers throughout the world to fight in
Spain. This Soviet intervention in support of the Madrid government at
a time when it could find support almost nowhere else served to
increase Communist influence in the government very greatly.

Page 602

The Italian submarine fleet was waiting for Russian shipping in
the Mediterranean and did not hesitate to sink it in the last few
months of 1936.

Although the evidence for Axis intervention in Spain was
overwhelming and was admitted by the Powers themselves early in 1937,
the British refused to admit it and refused to modify the nonintervention
policy. Britain's attitude was so devious that it can
hardly be untangled although the results were clear enough. The real
sympathy of the London government clearly favored the rebels although
it had to conceal the fact from public opinion since this opinion
favored the Loyalists over Franco by 57% to 7% according to a 1938
 (62 of 129)

opinion poll.

Page 603

On December 18, 1936, Eden admitted that the government had
exaggerated the danger of war four months earlier to get the nonintervention
agreement accepted, and when Britain wanted to use force
to achieve its aims, as it did in the piracy of Italian submarines in
1937, it did so without risk of war. The non-intervention agreement,
as practiced, was neither an aid to peace nor an example of
neutrality, but was clearly enforced in such a way as to give aid to
the rebels and place all possible obstacles in the way of the Loyalist
government suppressing the rebellion.

The attitude of the British government could not be admitted
publicly and every effort was made to picture the actions of the Nonintervention
Committee as one of even-handed neutrality. In fact, it
was used to throw dust in the eyes of the world, especially the
British public. For months, the meaningless debates of this committee
were reported in detail to the world and charges, countercharges,
proposals, counterproposals, investigations and inconclusive
conclusions were offered to the a confused world, thus successfully
increasing its confusion. While debating and quibbling on about issues
like belligerence, patrols, volunteers, etc., before the Committee in
London, the Franco forces, with their foreign contingents, slowly
crushed the Loyalist forces.

Page 604

The Loyalist forces surrendered on March 28th 1939. England and
France had recognized the Franco government on February 17 and the
Axis troops were evacuated from Spain after a triumphal march through
Madrid in June.

When the war ended, much of Spain was wrecked, at least 450,000
Spaniards had been killed and an unpopular military dictatorship had
been imposed as a result of the actions of non-Spanish forces. At
least 400,000 Spaniards were in prison and large numbers were hungry
and destitute. Germany recognized this problem and tried to get France
to follow a path of conciliation, humanitarian reform, and social,
agricultural, and economic reform. This advice was rejected, with the
result that Spain has remained weak, apathetic, war-weary, and
discontented ever since.

TRAGEDY AND HOPE Chapters XIII-XVI

by Dr. Carroll Quigley
ISBN 0913022-14-4

CONTENTS
XII. THE POLICY OF APPEASEMENT 1931-1936

XIII. THE DISRUPTION OF EUROPE

XIV. WORLD WAR II: THE TIDE OF AGGRESSION 1939-1941

XV. WORLD WAR II: THE EBB OF AGGRESSION 1941-1945

XVI. THE NEW AGE

CHAPTER XIII: THE DISRUPTION OF EUROPE, 1937-1939

AUSTRIA INFELIX, 1933-1938

Page 607

The Austria which was left after the Treaty of St. Germain
consisted of little more than the great city of Vienna surrounded by a
huge but inadequate suburb whose population had been reduced from 52
to 6.6 million.

Page 608
 (63 of 129)

The Social Democrats were unable to reconcile their desire for
union with Germany (called Anschluss) with the need for financial aid
from the Entente Powers who opposed this.
The Social Democrats embarked on an amazing program of social
welfare by a system of direct taxes which bore heavily on the well-todo.

Page 609

Before 1914, the living conditions of the poor had been
maintained by a very undemocratic political system under which only
83,000 persons, on a property basis, were allowed to vote and 5,500 of
the richest were allowed to choose one-third of all seats on city
council. By 1933, the Social Democrats had built almost 60,000
dwellings so efficiently that the average cost per apartment was only
about $1,650 each with average rent of $2 per month. Thus the poor of
Vienna had all kinds of free or cheap medical care, dental care,
education, libraries, amusements, sports, school lunches and maternity
care provided by the city.

While this was going on in Vienna, the Christian Socialist-Pan-
German federal government of Catholic priest Monsignor Ignaz Seipel
was sinking deeper into corruption, The diversion of public funds to
banks and industries controlled by Seipel's supporters was revealed by
parliamentary investigations in spite of the government's efforts to
conceal the facts.

Seipel formed a "Unity List" of all the anti-Socialist parties he
could muster but the election gave his party only 73 seats compared to
71 for the Social Democrats, 12 for the pan-Germans, 9 for the
Agrarian League. He sought to change the Austrian constitution into a
presidential dictatorship which required a two-thirds vote. It became
necessary to use illegal methods.

Page 610

The secret documents published since 1945 make it quite clear
that Germany had no carefully laid plans to annex Austria and was not
encouraging violence by the Nazis in Austria. Instead, every effort
was made to restrict the Austrian Nazis to propaganda in order to win
a gradual peaceful extension of Nazi influence.

Page 611

The invasion of Austria in 1938 was a pleasant surprise even for
the Nazi leaders and arose from several unexpected favorable
circumstances. Secret documents now make it clear that in 1937 the
German and British governments made secret decisions which sealed the
fate of Austria and Czechoslovakia. It is evident from some of
Hitler's statements that he had already received certain information
about the secret decisions being made by Chamberlain on the British
side.

Page 612

The British government group controlling foreign policy had
reached a seven point decision regarding Germany:

1. Hitler's Germany was the front-line bulwark against the spread of
Communism in Europe.
2. The aim was a four power pact including Britain, France, Italy and
Germany to exclude all Russian influence from Europe.
3. Britain had no objection to German acquisition of Austria,
Czechoslovakia, and Danzig.
4. Germany must not use force to achieve its aims as this would
precipitate a war in which Britain would have to intervene.

Page 622

For years before June 1938, the government insisted that British
rearming was progressing in a satisfactory fashion. Churchill
questioned this and produced figures on German rearmament to prove
that Britain's own progress in this field was inadequate. These
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figures (which were not correct) were denied by the government. As
late as March 1938, Chamberlain said that British rearmament were such
as to make Britain an "almost terrifying power." But as the year went
on, the government adopted a quite different attitude. In order to
persuade public opinion that it was necessary to yield to Germany, the
government pretended that its armaments were quite inadequate.

Page 623

We now know that this was a gross exaggeration. Britain produced
almost 3000 "military" planes in 1938 and about 8,000 in 1939 compared
to 3350 "combat" planes produced in Germany in 1938 and 4,733 in 1939.
It is quite clear that Britain did not yield to superior force in
1938, as was stated at the time and has been stated since by many
writers including Churchill. We have evidence that Chamberlain knew
these facts but consistently gave a contrary impression and that Lord
Halifax went so far as to call forth protests from the British
military attaches in Prague and Paris.

The British government made it clear to Germany both publicly and
privately that they would not oppose Germany's projects. Dirksen wrote
to Ribbentrop on June 3 1928 "Anything which could be got without
firing a shot can count upon the agreement of the British."

THE CZECHOSLOVAK CRISIS, 1937-1938

Page 626

The economic discontent became stronger after the onset of the
world depression in 1929 and especially after Hitler demonstrated that
his policies could bring prosperity to Germany.

Page 627

Within two weeks of Hitler's annexation of Austria, Britain put
pressure on the Czechs to make concessions to the Germans; to
encourage France and Germany to do the same. All this was justified by
the argument that Germany would be satisfied if it obtained the
Sudetenland and the Polish Corridor. All these assumptions were
dubious.

Page 628

Czechoslovakia was eliminated with the help of German aggression,
French indecision and war-weariness, and British public appeasement
and merciless secret pressure.

Page 629

Five days after Anschluss, the Soviet government call for
collective actions to stop aggression and to eliminate the increased
danger of a new world slaughter was rejected by Lord Halifax.

Page 633

It was necessary to impose the plan for Czechoslovakia on public
opinion of the world by means of the slowly mounting war scare which
reached the level of absolute panic on September 28th. The mounting
horror of the relentless German mobilization was built up day by day
while Britain and France ordered the Czechs not to mobilize in order
"not to provoke Germany."
We now know that all these statements and rumors were not true
and that the British government knew that they were not true at the
time.

Page 634

The Chamberlain government knew these facts but consistently gave
a contrary impression. Lord Halifax particularly distorted the facts.
Just as the crisis was reaching the boiling point in September
1938, the British ambassador in Paris reported to London that Colonel
Lindbergh had just emerged from Germany with a report that Germany had
8,000 military planes and could manufacture 1,500 a month. We now know
that Germany had about 1,500 planes, manufactured 280 a month.

Page 635

Lindbergh repeated his tale of woe daily both in Paris and in
London during the crisis. The British government began to fit the
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people of London with gas masks, the prime minister and the king
called on the people to dig trenches in the parks, schoolchildren
began to be evacuated. In general, every report or rumor which could
add to the panic and defeatism was played up, and everything that
might contribute to a strong or a united resistance to Germany was
played down.

Page 636

The Anglo-French decision was presented to the Czechoslovak
government at 2a.m. on September 19 to be accepted at once. The
Czechoslovak government accepted at 5p.m. on September 21st. Lord
Halifax at once ordered the Czech police to be withdrawn from the
Sudeten districts, and expressed the wish that the German troops move
in at once.

Page 638

At Munich, Hitler, Chamberlain, Mussolini and Daladier carved up
Czechoslovakia without consulting anyone, least of all the Czechs.
Germany was supreme in Europe. Since this was exactly what Chamberlain
and his friends had wanted, they should have been satisfied.

THE YEAR OF DUPES, 1939

Page 642

Concessions to Germany continued but now parallel with
concessions went a real effort to build up a strong front against
Hitler.

Page 643

The anti-Bolshevik and "three-bloc-world" groups had expected
Hitler would get the Sudetenland, Danzig, and perhaps the Polish
Corridor and that he would then be stabilized between the "oceanic
bloc" and the Soviet Union.

As a result of these hidden and conflicting forces, the history
of international relations from September 1938 and September 1939 or
even later is neither simple nor consistent. In general, the key to
everything was the position of Britain. As a result of Lord Halifax's
"dyarchic" policy, there were not only two policies but two groups
carrying them out. Lord Halifax tried to satisfy the public demand for
an end to appeasement while Chamberlain, Wilson, Simon and Hoare
sought to make secret concessions to Hitler in order to achieve a
general Anglo-German settlement. The one policy was public; the other
was secret. Since the Foreign Office knew of both, it tried to build
up the "peace front" against Germany so that it would look
sufficiently imposing to satisfy public opinion and to drive Hitler to
seek his desires by negotiation rather than by force so that public
opinion in England would not force the government to declare a war
that they did not want in order to remain in office. This complex plan
broke down because Hitler was determined to have a war merely for the
personal emotional thrill of wielding great power, while the effort to
make a "peace front" sufficiently collapsible so that it could be case
aside if Hitler either obtained his goals by negotiation or made a
general settlement with Chamberlain merely resulted in making a "peace
front" which was so weak it could neither maintain peace by threat of
force nor win a war when peace was lost.

Page 644

On March 15th, Chamberlain told the Commons that he accepted the
seizure of Czechoslovakia and refused to accuse Hitler of bad faith.
But two days later, when the howls of rage from the British public
showed that he had misjudged the electorate, he denounced the seizure.
However, nothing was done other than to recall Henderson from Berlin
for consultations and cancel a visit to Berlin by the president of the
Board of Trade. The seizure was declared illegal but was recognized in
fact at once. Moreover, #6 million in Czech gold reserves in London
were turned over to Germany with the puny and untrue excuse that the
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British government could not give orders to the Bank of England.

Page 647

Germany opened its negotiations with Poland in a fairly friendly
way on October 24, 1938. It asked for Danzig and a strip a kilometer
wide across the Polish Corridor to provide a highway and four-track
railroad under German sovereignty. Poland's economic and harbor rights
in Danzig were to be guaranteed and the "corridor across the Corridor"
was to be isolated from Polish communications facilities by bridging
or tunneling. Germany also wanted Poland to join an anti-Russian bloc.
Germany was prepared to guarantee the country's existing frontiers, to
extend the Non-aggression Pact of 1934 for 25 years, to guarantee the
independence of Slovakia and to dispose of Ruthenia as Poland wished.
These suggestions were rejected by Poland. About the same time, the
Germans were using pressure on Romania to obtain an economic agreement
which was signed on March 23rd.

On March 17, London received a false report of a German ultimatum
to Romania. Lord Halifax lost his head and, without checking his
information, sent telegrams to Greece, Turkey, Poland, Bulgaria,
Soviet Union asking what each country was prepared to do in the event
of a German aggression against Romania. Four replied by asking London
what it was prepared to do but Moscow suggested and immediate
conference which Halifax rebuffed, wanting nothing more than an
agreement to consult in a crisis. Poland was reluctant to sign any
agreement involving Russia. However, when news reached London of
Hitler's demands on Poland, Britain suddenly issued a unilateral
guarantee of the latter state (March 31st).

Page 648

"In the event of any action which clearly threatened Polish
independence and which the Polish government accordingly considered it
vital to resist with their national forces, His Majesty's Government
would feel themselves bound at once to lend the Polish Government all
support in their power."

This was an extraordinary assurance. The British government
since 1918 had resolutely refused any bilateral agreement guaranteeing
any state in western Europe. Now they were making a "unilateral"
declaration in "eastern" Europe and they were giving that state the
responsibility of deciding when that guarantee would take effect,
something quite unprecedented. If Germany used force in Poland, public
opinion in Britain would force Britain to declare war whether there
was a guarantee or not.

If the chief purpose of the unilateral guarantee to Poland was to
frighten Germany, it had precisely the opposite effect.

Page 649

Hitler announced that the terms he had offered Poland had been
rejected, negotiations broken off. The crisis was intensified by
provocative acts on both sides.

Page 650

In 1939, there was talk of a British loan to Poland of #100
million in May; On August 1 Poland finally got a credit for $8 million
at a time when all London was buzzing about a secret loan of #1
billion from Britain to Germany.

In 1936, Poland was given 2 billion francs as a rearmament long
and on May 19, 1939, an agreement was signed by which France promised
full air support to Poland on the first day of war, local skirmishing
by the third day, and a full-scale offensive on the sixteenth day. On
Aug. 23, General Gamelin informed his government that no military
support could be given to Poland until the spring of 1940 and that a
full-scale offensive could not be made before 1941-1942. Poland was
never informed of this change and seems to have entered the war on
September 1st in the belief that a full-scale offensive would be made
 (67 of 129) [14/06/2005 11:42:40]

against Germany during September.

The failure to support Poland was probably deliberate in the
hope that this would force Poland to negotiate with Hitler. If so, it
was a complete failure. Poland was so encouraged by the British
guarantee that it not only refused to make concessions but also
prevented the reopening of negotiations by one excuse after another
until the last day of peace.

Page 651

In light of these facts, the British efforts to reach a
settlement with Hitler and their reluctance to make an alliance with
Russia, were very unrealistic. Nevertheless, they continued to exhort
the Poles to reopen negotiations with Hitler, and continued to inform
the German government that the justice of their claims to Danzig and
the Corridor were recognized but that these claims must be fulfilled
by peaceful means and that force would inevitably be met with force.
The British continued to emphasize that the controversy was over
Danzig when everyone else knew that Danzig was merely a detail, and an
almost indefensible detail. Danzig was no issue on which to fight a
world war, but it was an issue on which negotiation was almost
mandatory. This may have been why Britain insisted that it was the
chief issue. But because it was not the chief issue, Poland refused to
negotiate because it feared it would lead to partition of Poland.
Danzig was a free city under supervision of the League of Nations
and while it was within the Polish customs and under Polish economic
control, it was already controlled politically under a German
Gauleiter and would at any moment vote to join Germany if Hitler
consented.

Page 654

Lord Halifax's report reads: "Herr Hitler asked whether England
would be willing to accept an alliance with Germany. I said I did not
exclude such a possibility provided the development of events
justified it."

The theory that Russia learned of these British approaches to
Germany in July 1939 is supported by the fact that the obstacles and
delays in the path of a British-Russian agreement were made by Britain
from the middle of April to the second week of July but were made by
Russia from the second week in July to the end on August 21st.
The Russians probably regarded the first British suggestion
that the Soviet Union should give unilateral guarantees to Poland
similar to those of Britain as a trap to get them into a war with
Germany in which Britain would do little or nothing or even give aid
to Germany. That this last possibility was not completely beyond
reality is clear from the fact that Britain did prepare an
expeditionary force to attack Russia in March 1940 when Britain was
technically at war with Germany but was doing nothing to fight her.
Russia offered the guarantee if it were extended to all states on
their western frontier including Finland, Estonia, Latvia, Lithuania,
Poland and Romania. This offer meant that Russia was guaranteeing its
renunciation of all the territory in these six states which it had
lost to them since 1917.

Instead of accepting the offer, the British began to quibble.
They refused to guarantee the Baltic States on the ground that these
states did not want to be guaranteed although they had guaranteed
Poland on March 31st when Jozef Beck did not want it and had just
asked the Soviet Union to guarantee Poland and Romania, neither of
whom wanted a Soviet guarantee. When the Russians insisted, the
British countered by insisting that Greece, Turkey, Holland, Belgium,
and Switzerland must also be guaranteed.

Page 655

France and Russia were both pushing Britain to form a Triple
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Alliance but Britain was reluctant and delayed the discussions to the
great irritation of the Soviet leaders. To show its displeasure, the
Soviet Union on May 3rd replaced Litvinov with Molotov as foreign
minister. This would have been a warning, Litvinov knew the West and
was favorable to democracy and to the Western Powers. As a Jew, he was
anti-Hitler. Molotov was a contrast from every point of view.
On May 19th, Chamberlain refused an alliance and pointed with
satisfaction to "that great virile nation on the borders of Germany
which under this agreement (of April 6th) is bound to give us all the
aid and assistance it can." He was talking about Poland!

Page 656

The members of the military mission took a slow ship (speed
thirteen knots) and did not reach Moscow until August 11th. They were
again negotiators of second rank. In London, according to
rumor, neither side wanted an agreement. Considering Chamberlain's
secret efforts to make a settlement with Germany, there is no reason
to believe that he wanted an agreement with Russia.
The Russians demanded an exact military commitment as to what
forces would be used against Germany; they wanted guarantees whether
the states concerned accepted or not; they wanted specific permission
to fight across a territory such as Poland. These demands were flatly
rejected by Poland on August 19th. On the same day, Russia signed a
commercial treaty with Germany. Two days later, France ordered its
negotiators to sign the right to cross Poland but Russia refused to
accept this until Poland consented as well.

Page 657

On Aug. 23, Ribbentrop and Molotov signed an agreement which
provided that neither signer would take any aggressive action against
the other signer or give any support to a third Power in such action.
The secret protocol delimited spheres of interest in eastern Europe.
The line followed the northern boundary of Lithuania and the Narew,
Vistula, and San rivers in Poland and Germany gave Russia a free hand
in Bessarabia. This agreement was greeted as a stunning surprise in
the Entente countries. There was no reason why it should have been.
The British begged the Poles and the Germans to negotiate; the
Italians tried to arrange another four-Power conference; various
outsiders issued public and private appeals for peace; secret
emissaries flew back and forth between London and Germany.
All this was in vain because Hitler was determined on war and
his attention was devoted to manufacturing incidents to justify his
approaching attack. Political prisoners were taken from concentration
camps, dressed in German uniforms, and killed on the Polish frontier
as "evidence" of Polish aggression. A fraudulent ultimatum with
sixteen superficially reasonable demands on Poland was presented to
the British ambassador when the time limit had elapsed. It was not
presented to the Poles because the Polish ambassador in Berlin had
been ordered by Beck not to accept any document from the Germans.

Page 658

The German invasion of Poland at 4:45a.m. on September 1, 1939,
did not end the negotiations to make peace, nor did the complete
collapse of Polish resistance on September 16. Since these efforts
were futile, little need be said of them except that France and
Britain did not declare war on Germany until more than two days had
elapsed. During this time, no ultimatums were sent to Germany. On
September 3 at 9a.m., Britain presented an ultimatum which expired at
11a.m. In a similar fashion, France entered the war at 6p.m. on
September 3.

CHAPTER XIV: WORLD WAR II: THE TIDE OF AGGRESSION, 1939-1941

Page 661

The Second World War lasted exactly six years. It was fought on
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every continent and on every sea. Deaths of civilians exceeded deaths
of combatants and many of both were killed without any military
justification as victims of sheer brutality, largely through coldblooded
savagery by Germans, and to a lesser extent by Japanese and
Russians, although British and American attacks from the air on
civilian populations and on non-military targets contributed to the
total. The distinctions between civilians and military personnel and
between neutrals and combatants which had been blurred in the First
World War were almost completely lost in the second. Civilians killed
reached 17 millions.

The armies had no new weapons which had not been possessed in
1918 but the proportions of these and the ways in which they
cooperated with one another had been greatly modified.

Page 662

The chief reason the Germans had sufficient military resources
was not based, as is so often believed, on the fact that Germany was
highly mobilized for war, but on other factors. In the first place,
Hitler's economic revolution in Germany had reduced financial
considerations to a point where they played no role in economic or
political decisions. When decisions were made, on other grounds, money
was provided through completely unorthodox methods of finance, to
carry them out. In France and England, on the other hand, orthodox
financial principles, especially balanced budgets and stable exchange
rates, played a major role in all decisions and was one of the chief
reasons why these countries did not mobilize or why, having mobilized,
they had totally inadequate numbers of airplanes, tanks, etc.

Page 665

Strategic bombing used long-range planes against industrial
targets and other civilian objectives. The upholders of strategic
bombing received little encouragement in Germany, in Russia, or even
in France.

THE BATTLE OF POLAND, SEPTEMBER 1939

Page 667

Although Britain and France declared war on Germany on September
3rd 1939, it cannot be said that they made war during the next two
weeks in which fighting raged in Poland. British airplanes roamed over
Germany, dropping leaflets for propaganda purposes but no support was
given to Poland. No attack was made by France and strict orders were
issued to the British Air Force not to bomb any German land forces
until April 1940. Similar orders to the Luftwaffe by Hitler were
maintained for part of this same period. When some British Members of
Parliament put pressure to drop bombs on German munition stores in the
Black Forest, Sir Kingsley Wood rejected the suggestion declaring:
"Are you aware it is private property? Why, you will be asking me to
bomb Essen next." Essen was the home of Krupp Munitions factories.
Blockade of Germany was established in such a perfunctory fashion
that large quantities of French iron ore continued to go to Germany
through the neutral Low Countries in return for German coal coming by
the same route. Hitler issued orders to his air force not to cross the
Western frontier except for reconnaissance, to his navy not to fight
the French, and to his submarines not to molest passenger vessels and
to treat unarmed merchant ships according to established rules of
international prize law. In open disobedience of these orders, a
German submarine sank the liner Athenia on September 3rd.
The Soviet Union was invited by Hitler to invade Poland from the
east and occupy the areas which had been granted to it in the Soviet-
German agreement of August 23rd. The Russians were afraid the Western
Powers might declare war on Russia in support of their guarantee to
Poland.

When the Polish government moved to Romania, the Soviet Union
felt that it could not be accused of aggression against Poland if no
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Polish state still existed on Polish soil and justified their advance
with the excuse that they must restore order. On September 28, the
divided Poland between them.

THE SITZKRIEG, September 1939 - May 1940

Page 668

The period from the end of the Polish campaign to the German
attack on Denmark and Norway on April 9, 1940 is frequently called the
Sitzkrieg (sitting war) or even "phony war" because Western powers
made no real effort to fight Germany, eager to use the slow process of
economic blockade.

Early in October, Hitler made a tentative offer to negotiate
peace with the Western Powers on the grounds that the cause of
fighting for Poland no longer existed. This offer was rejected by the
Western Powers with the public declaration that they were determined
to destroy Hitler's regime. This meant that war must continue. The
British and French answers were not based on a desire to continue war
but more on the belief that Hitler's rule in Germany was insecure and
that the best way to reach peace would be to encourage some anti-
Hitler movement within Germany itself.

Page 669

Germany was vulnerable to a blockade but there was no real effort
toward economic mobilization by Germany before 1943. Contrary to
general opinion, Germany was neither armed to the teeth nor fully
mobilized in this period. In each of the four years 1939-1942,
Britain's production of tanks, self-propelled guns, and planes was
higher tan Germany's. As late as September 1941, Hitler issued an
order for substantial reduction in armaments production. In 1944, only
33% of Germany's output went for direct war purposes compared to 40%
in the U.S. and almost 45% in Britain.

Page 671

In order to reduce the enemy's ability to buy abroad, financial
connections were cut, his funds abroad were frozen, and his exports
were blocked. The U.S. cooperated as well, freezing the financial
assets of various nations as they were conquered by the aggressor
Powers and finally the assets of the aggressors themselves in June
1941.

At the same time, pre-emptive buying of vital commodities at
their source to prevent Germany and its allies from obtaining them
began. Because of limited British funds, most of this task of
pre-emptive buying was taken over by the U.S., almost completely by
Feb. 1941.

The blockade was enforced by Britain with little regard for
international law or for neutral rights there was relatively test from
the neutrals. The U.S. openly favored Britain while Italy and Japan
equally openly favored Germany. On the whole, the blockade had no
decisive effect on Germany's ability to wage war until 1945. Germany's
food supply was at the pre-war level until the very last months of the
war by starving the enslaved peoples of Poland, Czechoslovakia, Russia
and other countries.

Page 674

During the "phony war" there were persons in Britain, France and
Germany who were eager to make war or peace. Such persons engaged in
extensive intrigues in order to negotiate peace or to prevent it.
There were a number of unsuccessful efforts to make peace between the
Western Powers and Germany in the six months following the defeat of
Poland.

Page 677

Hitler had no political ambition with respect to the Balkans or
the Soviet Union. From both he wanted nothing more than the maximum
supply of raw materials and a political peace which would permit these
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goods to flow.

Page 679

It is not yet clear why Finland rejected the Russian demands of
October 1939. The Germans and Russians believed that it was done under
British influence. For some unexplained reason the Finns seem to have
felt that the Russians would not attack their country but the Soviets
attacked at several points November 29th.

Page 680

In early 1939, the Anglo-French leaders now prepared to attack
the Soviet Union both from Finland and from Syria. On February 5,
1940, the Supreme War Council decided to send to Finland an
expeditionary force of 100,000 heavily armed troops to fight the
Soviet hordes. Germany at once warned Norway and Sweden that it would
take action against them if the two Scandinavian countries permitted
passage of this force. Germany feared the Anglo-French forces would be
able to stop shipments of Swedish iron ore across Norway to Germany.
The evidence supports these fears because the high quality of Swedish
iron ore was essential to the German steel industry. As early as
September 1939, the British were discussing a project to interrupt the
Swedish shipments either by an invasion of Norway of by mining
Norwegian territorial waters. When Germany heard of the Anglo-French
expeditionary force, it began to prepare its own plans to seize Norway
first.

THE FALL OF FRANCE (MAY-JUNE 1940) AND THE VICHY REGIME.

Page 690

Hitler was so convinced that Britain would also make peace that
he gave lenient terms to France. France did not give up any overseas
territories or any ports on the Mediterranean, no naval vessels or any
airplanes or armaments. Northern France and all the western coast to
the Pyrenees came under occupation but the rest was left unoccupied,
ruled by a government free from direct German control.

Page 698

Operation Barbarossa was based on the consideration that only by
destroying Russia and all Britain's hopes based on Russia could
Britain be forced to ask for peace.

AMERICAN NEUTRALITY AND AID TO BRITAIN

Page 707

In buying supplies, chiefly from the U.S., Britain had used up,
by June 1941, almost two-thirds of its dollars assets, gold stocks,
and marketable U.S. certificates.

When the war began, American public opinion was united in its
determination to stay out. The isolationist reaction following
American intervention in the First World War had become stronger in
the 1930s. Historian were writing extensively to show that Germany had
not been solely guilty of beginning the war in 1914 and that the
Entente Powers had made more than their share of secret treaties
seeking selfish territorialism, both before the war and during the
fighting.

In 1934, a committee of the U.S. Senate investigated the role
played by foreign loans and munition sales to belligerents in getting
the U.S. involved in World War I. Through the carelessness of the
Roosevelt administration, this committee fell under the control of
isolationists led by Republican Senator Gerald Nye. As a result, the
evidence was mobilized to show that American intervention in WWI had
been pushed by bankers and munitions manufacturers ("merchants of
death") to protect their profits and their interests in an Entente
victory. American public opinion had the uncomfortable feeling that
American youths had been sent to die for selfish purposes concealed
behind propaganda slogans about "the rights of small nations,"
"freedom of the seas," or "making the world safe for democracy." All
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this created a widespread determination to keep out of Europe's
constant quarrels and avoid what was regarded as the "error of 1917."

Page 708

The isolationist point of view had been enacted into the socalled
Neutrality Act curtailing loans and munitions sales to
belligerent countries. Materials had to be sold on a "cash and carry"
basis and had to be transported on foreign ships. Also, loans to
belligerents were forbidden.
These laws gave a great advantage to a state like Italy which had
ships to carry supplies from the U.S. or which had cash to buy them
here in contrast to a country like Ethiopia which had no ships and
little cash.

Page 709

Roosevelt called a special session of Congress to revise the
neutrality laws so that the Entente powers could obtain supplies in
the U.S. The embargo on munitions was repealed. American ships were
not to be armed, to carry munitions, or to go to any areas the
President had proclaimed as combat zones.
The extremes ranged from the advocates of immediate intervention
into the war on the side of Britain to the defenders of extreme
isolation. Most American opinion was somewhere between the two
extremes.

In order to unify America's political front, Roosevelt took two
interventionists into his cabinet as Secretaries of War and the Navy.
Roosevelt himself was sympathetic to this point of view.

Page 710

Wendell Wilkie assured the American people that Roosevelt's reelection
in 1940 meant that "we will be at war." Roosevelt replied
with assurances that "We will not sent our army, navy, or air forces
to fight in foreign lands except in case of attack. Your boys are not
going to be sent into any foreign wars." This campaign oratory was
based on the general recognition that the overwhelming majority were
determined to stay out of war.

Page 711

Strategic plans were drawn up deciding that Germany was the major
danger, with Japan of secondary importance, and that every effort,
including actual warfare, should be used. Germany's declaration of war
on the U.S. four days after Pearl Harbor saved the U.S. from the need
to attempt something which American public opinion would have never
condoned, an attack on Germany after we had been attacked by Japan.

Page 714

Roosevelt improvised a policy which consisted in almost equal
measure of propagandist public statements, tactical subterfuges, and
hesitant half-steps. In September 1940, Roosevelt gave fifty old WWI
destroyers to Britain in return for 99 year leases of naval and air
bases in this hemisphere.

Page 715

Loans were forbidden by the Neutrality Act. To Roosevelt, it
seemed foolish to allow monetary considerations to stand as an
obstacle in the way of self-defence (as he regarded the survival of
Great Britain).

Page 716

Opponents argued that Britain had tens of billions in concealed
assets and that Lend-Lease was merely a clever trick for foisting the
costs of Britain's war onto the backs of American tax-payers. Still
others insisted that Lend-Lease was an unneutral act which would
arouse German rage and eventually involved the American people in a
war they had no need to get in. The bill passed and provided that the
president could "sell, transfer title to, exchange, lease, lend, or
dispose of any defence article" to any nation whose defence he found
vital to the defence of the U.S.
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Page 717

Behind this whole effort toward economic mobilization was a
secret decision of Roosevelt's military advisers in 1941 that the war
could not be won unless the U.S. planned eventually to raise the
number of men in its armed forces to eight million. At once,
isolationists were in full cry and an ACt extending selective-service
training passed 203-202.

Page 718

The British had no plans for an invasion of Europe and hoped that
Germany could be worn down by blockade. No one pointed out that a
Germany defeat by British methods would leave the Soviet armies
supreme in all Europe with no forces to oppose them.

Page 719

At the same time he gave Britain ten coast-guard cutters,
Roosevelt seized possession of 65 Axis and Danish ships in American
harbors. The financial assets of the Axis Powers were frozen. American
flying schools were made available to train British aviators. By
presidential proclamation, the American Neutrality Zone was extended
to Iceland. The U.S. navy was ordered to follow all Axis raiders or
submarines west of this meridian broadcasting their positions to the
British.

Page 720

American naval escort of British convoys could not fail to lead
to a "shooting war" with Germany. The Roosevelt administration did not
shrink from this possibility. Fortunately for the Administration's
plans, Hitler played right into its hands by declaring war on the
U.S. By that date, incidents were becoming more frequent.
On Oct. 17, the U.S. destroyer Kearney was torpedoed; two weeks
later, the destroyer Rueben James was blown to pieces. On Nov. 10, an
American escort of 11 vessels picked up a convoy of six vessels
including America's three largest ocean liners with 20,000 British
troops and guarded them from Halifax to India and Singapore.
Many of the activities of the American Navy in the summer of 1941
were known not at all or were known only very imperfectly to they
American public but it would seem that public opinion generally
supported the Administration's actions. In September, Roosevelt sought
to repeal the Neutrality Act forbidding the arming of merchant vessels
which was done on Oct. 17. Two weeks later, all the essential points
of the Neutrality Act were repealed. This meant that open warfare with
Germany was in the immediate future.

THE NAZI ATTACK ON SOVIET RUSSIA 1941-1942

Page 725

Large numbers of anti-Stalinist Russians began to surrender to
the Nazis. Most of these were Ukranians and eager to fight with the
Nazis against the Stalinist regime. Anti-Stalinist deserters serving
in the Nazi forces reached 900,000 in June 1944 under Soviet general
A. A. Vlasov. At the end of the war, hundreds of thousands of Vlasov's
supporters fled westward to the American and British armies for refuge
from Stalin's vengeance but were handed over to the Soviet Union to be
murdered out of and or sent to slave-labor camps in Siberia. The
dimensions of the human suffering involved in this whole situation is
beyond the human imagination.

CHAPTER XV: WORLD WAR II: THE EBB OF AGGRESSION,1941-1945
THE RISING SUN IN THE PACIFIC, TO 1942

PAGE 732

Japanese aggressions of 1941 which culminated in the attack on
Pearl Harbor were based on fear and weakness and not on arrogance and
strength.

By 1939, the Japanese economy was beginning to totter under the

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growing restrictions on Japanese trade imposed by Western countries
and acute material shortages. Problems such as these might have driven
many nations, even the West, to desperate action.

The world depression made it very difficult to increase Japanese
exports. The excessively high American tariff, although no so
intended, seemed to the Japanese to be an aggressive restriction
on their ability to live. The "imperial preference" regulations of the
British Commonwealth had a similar consequence. Since Japan could not
defend itself against such economic measures, it resorted to political
measures and the Western Powers would inevitably defend themselves
with even greater economic restrictions driving Japan to open war.

Page 735

The American government began to tighten the economic pincers on
Japan just as Japan was seeking to tighten its military pincers on
China. Japan was able to close all routes to China. The American
government retaliated with economic warfare. In 1938, it established a
"moral embargo" on the shipment of aircraft or their parts and bombs
to Japan. In 1939, large U.S. and British loans to China sought to
strengthen its collapsing financial system and Washington gave
notice to cancel the 1911 commercial treaty with Japan opening the
door to all kinds of economic pressure. The "moral embargo" was
extended to cover light metals and all machinery or plans for making
aviation gasoline.

Such a policy was opposed by isolationists insisting such
economic sanctions could only be enforced, in the long run, by war. If
Japan could not get petroleum, bauxite, rubber and tin by trade, it
could be prevented from seizing these areas producing these products
only by force. To avoid this obvious inference,l Cordell Hull sought
to make America's economic policy ambiguous so that Japan might be
deterred by fear of sanctions not yet imposed and won by hopes of
concessions not yet granted. Such a policy was a mistake but it
obtained Roosevelt's explicit approval since it allowed more
aggressive elements of Japanese to take control and any drastic action
seeking to end the strain became welcome.

Page 736

The ambiguity of American commercial policy slowly resolved in
the direction of increasing economic sanctions. There was a steady
increase in America's economic pressure by the growth of financial
obstacles and by increasing purchasing difficulties.
From Hull's doctrinaire refusal to encourage any Japanese hope
that they could win worthwhile American concessions, the advocates of
extremism gained influence.

The President ordered the embargo of many goods which Japan
needed, including aluminum, airplane parts, all arms and munitions,
optical supplies, and various "strategic" materials but left petroleum
and scrap iron unhindered.

Page 737

American diplomatic pressure on Japan must be timed to avoid
pushing Japan into desperate action before American-German relations
had passed the breaking point.

Page 739

On July 26, 1941, the U.S. froze all Japanese financial assets in
the U.S. virtually ending trade between the two countries. Members of
the British Commonwealth issued similar orders. As a result of these
pressures, Japan found itself in a position where its oil reserves
would be exhausted in two years, its aluminum reserves in seven
months. The chief of the Navy told the emperor that if Japan resorted
to war, it would be very doubtful that it could win. It was also clear
that if war came, economic pressure was too damaging to allow Japan to
postpone such operations until 1942. The decision was made to
negotiate until late October. If an agreement could be reached, the
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preparations for war could be suspended, otherwise the negotiations
would be ended and the advance to open war continued. The Cabinet
sought desperately to reach an agreement in Washington.

Page 741

The Japanese misjudged American psychology. Nomura found it
impossible to reach an agreement because Hull's demands were extreme.
The Americans had broken the secret Japanese codes and knew that war
would begin if Nomura failed to obtain relaxation of the economic
embargo. They did not however have the plans for the attack on Pearl
Harbor.

Page 742

On November 27th, a war warning was sent from Washington to Pearl
Harbor but no increased precautions were made. On December 7, an army
enlisted man, using radar, detected a group of strange planes
coming down from the north 132 miles away but his report was
disregarded. The American losses included 2,400 killed, 1,200 injured.
Japanese losses amounted to a couple of dozen planes.

TURNING THE TIDE, 1942-1943

Page 751

At Casablanca, the political decision of Roosevelt and Churchill
on unconditional surrender was published with great fanfare, and at
once initiated a controversy which still continues based on the belief
that it had an adverse influence by discouraging any hopes within Axis
countries that they could find a way out by slackening their efforts,
by revolting against their governments, or by negotiations seeking
some kind of of "conditional" surrender. There seems little doubt that
it solidified our enemies and prolonged their resistance where
opposition to the war was widespread and active.

Page 754

In May 1943, Sicily was overrun and in September,Italy
surrendered and the German armies were pushed backward from eastern
Europe. Major decisions were made in 1943 which played a major role in
determining the nature of the postwar world.

Page 757

Although Soviet demands were clearly in conflict with the high
purposes of the Atlantic charter, Churchill was not averse to
accepting them on the grounds of physical necessity but American
objections to discussions of territorial questions while the war was
still going on forced him to refuse Stalin's requests. The British
found themselves between the high and proclaimed principles of the
Americans and the low and secret interests of the Russians.
At the American centers of power, there was complete conviction
in the value of unrestricted aid to Russia. These aims were embraced
by men like Harry Hopkins, General Marshall, and Roosevelt himself.

Page 760

The Americans decided to choke off the Italian offensive in order
to concentrate on the cross-channel attack. The attack on North Africa
was a substitute for an attack on Germany from Italy.

Page 762

Once ashore, the Sicilian campaign was ineptly carried on because
occupation of territory was given precedence over destruction of the
enemy. No efforts were made to close the Straits of Messina so the
Germans were able to send almost two divisions as reinforcements from
Italy and later, when the island had to be abandoned, they were
equally free to evacuate it in seven days without the loss a man.

Page 763

The history of Italy in 1943 is a history of lost opportunities.
Italy might have got out in the summer and the Germans might have been
ejected shortly afterward. Instead, Italy was torn to pieces and got
out of the war so slowly that Germans were still fighting on Italian
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soil at the final surrender in 1945.

These great misfortunes were the result of a number of forces:

1) weakness of Italy relative to Germany;
2) weakness of Allies after diversion of power to Britain;
3) mistrust of Italians by Allies;
4) the inflexible Allied insistence on unconditional surrender which
left the Italians helpless to resist the Germans.

Page 764

When the Italian government offered the join the Allies in
fighting the Germans, they insisted that the publication of the
armistice and a tentative paratrooper drop in Rome be put off until
sufficient Allied forces were within striking distance to protect the
city from the German troops nearby. Eisenhower refused and published
the Italian surrender one day before the American Army landed at
Salerno. The Germans reacted to the news of the Italian "betrayal"
with characteristic speed. Available forces converged on the Salerno
beachhead, an armored division fought its way into Rome, Italian
troops were disarmed everywhere, and the Italian government had to
flee. Numerous vessels were sunk by the Germans.

Page 765

As Allied forces slowly recovered Italian territory from the
tenacious grasp of the Germans, the royal government remained
subservient to its conquerors. Civilian affairs were completely in
military hands under and organization known as Allied Military
Government of Occupied Territories. The creation of these
organizations on a purely Anglo-American basis,to rule the first Axis
territory to be "liberated" became a very important precedent for
Soviet behavior wen their armies began to occupy enemy territory in
eastern Europe who were able to argue that they could exclude
Anglo-Americans from active participation in military government in
the east since they had earlier been excluded in the west.
While these political events were taking place, the military
advance was moving like a snail. The Allied invasion of Italy was
given very limited resources for a very large task.. It was only under
such limitations of resources, explicitly stated, that the Americans
accepted the British suggestion for an invasion of Italy at all.

Page 767

It was suggested that German success in holding the Rapido was
due to the accuracy of their artillery fire and that this was was
being spotted from the ancient monastery founded by St. Benedict in
529 A.D. on the top of Monte Cassino. It was further suggested that
General Clark should have obliterated the monastery with aerial
bombardment but had failed to do so because he was a Roman Catholic.
After Feb. 15, 1944, General Clark did destroy the site completely
without helping the situation a bit. We now know that the Germans had
not been using the monastery; but once it was destroyed by us, they
dug into the rubble to make a stronger defence.
On May 16th, a Polish Division captured Monte Cassino.

Page 770

Efforts to create a new Polish army were hampered by the fact
that about 10,000 POlish officers along with 5,000 intellectuals and
professional persons, all of whom had been held in three camps in
western Russia, could not be found. At least 100,000 Polish prisoners
of war, out of 320,000 captured in 1939, had been exterminated.
The German radio suddenly announced on April 13, 1943, that
German forces in occupied Russia had discovered, at Katyn, near
Smolensk, Russia, mass graves containing the bodies of 5,000 Polish
officers who had been murdered by the Soviet authorities in 1940.
Moscow called this a Nazi propaganda trick and declared that the
Polish officers had been murdered and buried by the Nazis themselves
when they captured the officers and this Soviet territory.
 (77 of 129) [14/06/2005 11:42:40]


Page 772

The strategic decision of September 1943 to reject Churchill's
plans for a Balkan campaign in order to concentrate on a cross-Channel
offensive in 1944 were of vital importance in setting the form that
postwar Europe would take. If it had been decided to postpone the
cross-Channel attack and concentrate on an assault from the Aegean
across Bulgaria and Romania toward Poland and Slovakia, the postwar
situation would have been quite different.

It has been argued that failure to reach agreement on the
territorial settlement of eastern Europe while the war was still in
progress meant that Soviet armies would undoubtedly dominate once
Germany was defeated. This assumption implies that America should have
threatened to reduce of to cut off Lend-Lease supplies going unless
we could obtain Soviet agreement to the kind of eastern European
settlement we wanted.

Page 790

The Soviet advance became a race with the Western Powers even
though Eisenhower's orders held back their advance at many points
(such as Prague) to allow the Russians to occupy areas the Americans
could easily have taken first.

Page 791


Roosevelt's sense of the realities of power were quite as acute
as Churchill's or Stalin's but he concealed that sense much more
deliberately and much more completely under a screen of high-sounding
moral principles.

Page 795

Polish ministers rushed from London to Moscow to negotiate. While
they were still talking and when the Soviet army was only six miles
from Warsaw, the Polish underground forces in the city, at a Soviet
invitation, rose up against the Germans. A force of 40,000 responded
to the suggestion but the Russian armies stopped their advance and
obstructed supplies to the rebels in spite of appeals from all parts
of the world. After sixty-three days of hopeless fighting, the Polish
Home Army had to surrender to the Germans. This Soviet treachery
removed their chief obstacle to Communist rule in Poland and the
London government in London was accordingly ignored.

Page 797

When victorious armies broke into Germany, late in 1944, the
Nazis were still holding the survivors of 8 million enslaved workers,
10 million Jews, 6 million Russian prisoners of war and millions of
prisoners from other armies. Over half of the Jews and Russians,
possibly 12 million, were killed before final victory in 1945.

Page 799

The ideas that strategic air attacks must be directed at
civilians in enemy cities were almost wholly ignored in the Soviet
Union, largely rejected in Germany, created great controversy in
France, but were accepted to a large extent among airmen in Britain
and the U.S.

Page 800

The contribution by strategic bombing to the defeat of Germany
was relatively incidental, in spite of the terrible losses suffered in
the effort. The shift to city bombing was more or less accidental. In
spite of the erroneous ideas of Chamberlain, Baldwin, Churchill, the
war opened and continued for months with no city bombing at all, for
the simple reason that the Germans had no intentions, no planes, and
no equipment for strategic bombing.

The attack on cities began by accident when a group of German
planes which were lost dumped their bomb loads, contrary to orders, on
London on August 1940. The RAF retaliated by bombing Berlin the next
night. Goring in counter-retaliation. British efforts to counterattack
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by daylight raids on military objectives resulted in such losses that
the air offensive was shifted to night attacks. This entailed a shift
from industrial targets to indiscriminate bombing of urban areas. This
was justified with the wholly mistaken argument that civilian morale
was a German weak point and that the destruction of workers' housing
would break this morale. The evidence shows that the German war effort
was not weakened in any way by lowering civilian morale in spite of
the horrors heaped on it.

Page 802

The most extraordinary example of this suffering occurred in the
British fire raids on Hamburg in 1943 which was attacked for more than
a week with a mixture of high-explosive and incendiary bombs so
persistently that fire-storms appeared. The air in the city heated to
over a thousand degrees began to rise rapidly with the result that
winds of hurricane force rushed into the city. The water supply was
destroyed and the flames were too hot for water to be effective. Final
figures for the destruction were set at 40,000 dead, 250,000 houses
destroyed with over a million made homeless. This as the greatest
destruction by air attacks on a city until the fire raid on Tokyo on
March 9 1945 which still stands today as the most devastating air
attack in human history.

Page 806

General Eisenhower ignored Berlin and drove directly eastward
toward Dresden. Eisenhower's decisions permitted the Soviet forces to
"liberate" all the capital cities of central Europe. As late as May
4th, when the American forces were sixty miles from Prague and the
Soviet armies more than a hundred, an effort by the former to advance
to the city was stopped at the request of the Soviet commander,
despite a vain message from Churchill to Eisenhower to take the Czech
capital for political bargaining purposes.

Page 807

Soon the names Buchenwald, Dachau, and Belsen were repeated with
horror throughout the world. At Belsen, 35,000 dead bodies and 30,000
still breathing were found. The world was surprised and shocked. There
was no reason for the world's press to be surprised at Nazi bestiality
in 1945 since the evidence had been fully available in 1938.

CLOSING IN ON JAPAN, 1943-1945

When Germany surrendered on May 8, 1945, Japan was already
defeated but could not make itself accept unconditional surrender.

Page 808

Even American strategic bombing was different in the Pacific
using B-29s, unknown in Europe, for area bombing of civilians in
cities, something we disapproved in Europe.

Page 815

279 B-29s carrying 1,900 tons of fire bombs were sent on a lowlevel
attack on Tokyo. The result was the most devastating air attack
in all history. With the loss of only 3 planes, 16 square miles of
central Tokyo were burned out; 250,000 houses were destroyed, over a
million persons were made homeless and 84,793 were killed. This was
more destructive than the first atomic bomb over Hiroshima five months
later.

Page 817

American leaders shuddered to think of the results if such
Kamikaze attacks were hurled at troop transports and American
estimates of casualties were over half a million. These considerations
form the background to the Yalta and Potsdam conferences and the
decision to use to atom bomb on Japan.
The nature and decisions taken at the conference of Roosevelt,
Churchill and Stalin held at Yalta in February 1945 has been so much
distorted by partisan propaganda that it is difficult for any
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historian to reconstruct the situation as it seemed at the time.

Page 819

In China,90%of the railroads were out of operation. The dominant
Kuomintang Party's chief aim seemed to be to maintain its armed
blockade of the Communist forces operating out of Yenan in
northwestern China where the highly-disciplined Communist armies had
gained some degree of local support.

American hopes of fusing the two parties into a common Chinese
government broke down on the refusals of the Kuomintang and the
remoteness of the Communists. In September 1944, Roosevelt suggest
that General Stillwell be given command of all Chinese forces fighting
the Japanese. General Chiang answered with a demand that Stilwell be
removed from China.

Page 823

It is extremely likely that the frantic and otherwise
inexplicable haste to use the second and third bombs, 21 and 24 days
after Alamagordo arose from the desire to force the Japanese surrender
before any effective Soviet intervention.

Page 824

On the economic side was a somewhat modified version of the
Morgenthau scheme (which had sought the complete ruralization of
German economic life to an agrarian basis) which was modified almost
at once by a number of factors.

The first modifying factor was a desire for reparations. The
Americans insisted that reparations betaken from existing stocks and
plants rather than from future production in order to avoid the error
of the 1919-1933 period, the overbuilding of German capital equipment
and American financing of reparations into the indefinite future. It
was provided that all reparations come from Germany as a whole and be
credited to the victors on a percentage basis.

Page 828

On August 10th, a message accepting the Potsdam terms was sent.
Thus ended six years of world war in which 70 million men had been
mobilized and 17 million killed in battle. At least 18 million
civilians had been killed. The Soviet Union had lost 6.1 million
soldiers and 14 million wounded and over 10 million civilians dead.
Germany lost 6.6 million servicemen with 7.2 million wounded and 1.3
million missing. Japan had 1.9 million dead. Britain war dead were
357,000 and America's were 294,000.

All this personal tragedy and material damage of untold billions
was needed to demonstrate that Germany could not establish and Nazi
continental bloc in Europe nor could Japan dominate an East-Asian co-
Prosperity Sphere. This is the chief function of war: to demonstrate
as conclusively as possible to mistaken minds that they are mistaken
in regard to power relationships. But as we shall see, war also
changes most drastically the objective facts themselves.

CHAPTER XVI: THE NEW AGE

INTRODUCTION.

Page 831

World War II transformed a system where man's greatest problems
were the material ones of man's helplessness in the face of natural
threats of disease, starvation, and natural catastrophes to the
totally different system of the 1960s and 1970s where the greatest
threat to man is man himself and where his greatest problems are the
social (and non-material) ones of what his true goals of existence are
and what use he should make of his immense power of the universe, his
fellow men.

For thousands of years, some men had viewed themselves as
creatures a little lower than angels, or even God, and a little higher
than the beasts. Now, in the 20th century, man has acquired almost
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divine powers and it has become increasingly clear that he can no
longer regard himself as an animal but must regard himself as at least
a man if not obligated to act like an angel or even a god.

Page 832

The whole trend of the 19th century had been to emphasize man's
animal nature and seek to increase his supply of material necessities.

Page 833

The great achievements of the 19th century and the great crisis
of the 20th century are both related to the Puritan tradition of the
17th century which regarded the body and the material as sinful and
dangerous and something which must be sternly controlled.

Page 837

These methods appeared in a number of ways, notably in an
emphasis on self-discipline for future benefits, on restricted
consumption and on saving in a devotion to work, and in a postponement
of enjoyment to a future which never arrived. A typical example might
be John D. Rockefeller: great saver, great worker, and great postponer
of any self-centered action, even death. To such people, the most
adverse comments which could be made about a failure to distinguish
from a "successful" man were that he was a "saltrel," a "loafer," a
"sensualist," and "self-indulgent." These terms reflected the value
that the middle classes placed on work, saving, self-denial and social
conformity.

Page 838

The nineteenth century's emphasis on acquisitive behavior, on
achievement, and on infinitely expansible demand is equally associated
with the middle-class outlook. These basic features are inevitably
lacking in backward, tribal, underdeveloped peasant societies and
groups, not only in Africa and Asia but also in much of the
Mediterranean, Latin America, central France, in the Mennonite
communities of Pennsylvania and elsewhere. The lack of future
preference and expansible material demands in other areas are
essential features of the 20th century crisis.

George Sorel (Reflections on Violence, 1908) sought a solution to
this crisis in irrationalism, in action for its own sake. The other
tendency sought a solution in rationalization, science, universality,
cosmopolitanism and the continued pursuit of truth. The war became a
struggle between the forces of irrationality represented by Fascism
and the forces of Western science and rationalization represented by
the Allied nations.

RATIONALIZATION AND SCIENCE

Page 838

Rationalization gradually spread into the more dominant problem
of business. From maximizing production, it shifted to maximizing
profits.

The introduction of rationalization into war was attributed to
the efforts of Professor P.M.S. Blackett (Nobel Prize 1948) to apply
radar to antiaircraft guns. From there, Blackett took the technique
into antisubmarine defence whence it spread under the name
"Operational Research" (OP).

Operational research, unlike science, made its greatest
contribution in regard to the use of existing equipment rather than
the effort to invent new equipment. It often game specific
recommendations, reached through techniques of mathematical
probability, which directly contradicted the established military
procedures. A simple case concerned the problem of air attack on enemy
submarines: For what depth should the bomb fuse be set? In 1940, RAF
set its fuses at 100 feet. based on three factors:

1) the time interval between the moments when the submarine sighted
the plane and the plane sighted the submarine;
2) the speed of approach of the plane; and
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3) the speed of submergence of the submarine.

The submarine was unlikely to be sunk if the bomb exploded more
than 20 feet away. Operational Research added an additional factor:How
near was the bomber to judging the exact spot where the submarine went
down? since this error increased rapidly with the distance of the
original sighting, a submarine which had time to submerge deeply would
almost inevitably be missed by the bomb in position if not in depth;
but with 100 foot fuses, submarines which had little time to submerge
were missed because the fuse was too deep even when the position was
correct. OP recommended setting fuses at 25 feet to sink the near
sightings and practically conceded the escape of all distant
sightings. When fuses were set at 35 feet, successful attacks on
submarines increased 400 percent with the same equipment.

Page 839

The British applied OP to many similar problems.

1) With an inadequate3 number of A.A. guns, is it better to
concentrate them to protect part of a city thoroughly or to disperse
them to protect all of the city inadequately? (The former is better)
2) Repainting night bombers from black to white when used on submarine
patrol increased sightings of submarines 30%.
3) Are small convoys safer for merchant ships than large ones (No by a
large margin.)
4) With an inadequate number of patrol planes, was it better to search
the whole patrol area some days (as was the practice) or to search
part of it ever day with whatever planes were available? (the latter
was better).

OP calculated the number of people killed per ton of bombs
dropped showing that the casualties inflicted on Germany were about
400 civilians killed per month - about half the German automobile
accident death rate - while 200 RAF crewmen were killed per month in
doing the bombing. Later it was discovered the raids were actually
killing 200 German civilians contributing little to the war effort at
the cost of the 200 RAF men each month and thus were a contribution to
the German victory. These estimates made it advisable to shift planes
to U-boat patrol. A bomber in its average life of 30 missions, dropped
100 tons of bombs killing 20 Germans and destroying a few houses. The
same plane in 30 missions of submarine patrol saved 6 loaded merchant
ships and their crews from submarines. This discovery was violently
resisted by the head of the RAF, Sir Arthur (Bomber) Harris.

Page 840

In 1938, Vannevar Bush, professor of electrical engineering and
vice-president of the Massachusetts Institute of Technology persuaded
Roosevelt to create the National Defence Research Committee with Bush
as Chairman. When money ran short, they obtained half from MIT and an
equal sum from John D. Rockefeller.

Page 842

First news of the success of Operations Research in Britain was
brought to the U.S. by Conant in 1940 and was formally introduced by
Bush. With the arrival of peace, it became an established civilian
profession.

The rationalizing of society used the tremendous advances in
mathematics of the 19th century but a good deal came from new
developments. Amlong these have been applications of game theory,
information theory, symbolic logic, cybernetics, and electronic
computing. The newest of these was probably game theory, worked out by
a Hungarian refugee mathematician, John von Neumann, at the Institute
for Advanced Study. This applied mathematical techniques to situations
in which persons sought conflicting goals in a nexus of relationships
governed by rules. The basic work was "Theory of Games and Economic
Behavior" by John von Neumann and Oskar Morgenstern (Princeton 1944).
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Page 843

A flood of books all sought to apply mathematical methods to
information, communications, and control systems.

THE TWENTIETH-CENTURY PATTERN

Page 862

The decision to use the bomb against Japan marks one of the
turning points in history of our times. The scientists who were
consulted had no information on the status of the war itself, had no
idea how close to the end Japan already was. Some people like General
Groves wanted it to be used to justify the two billion they had spent.
After it was all over, Director of Military Intelligence for the
Pacific theatre of War Alfred McCormack, who was probably in as good
position as anyone to for judging the situation, felt that the
Japanese surrender could have been obtained in a few weeks by blockade
alone. "The Japanese had no longer enough food in stock, and their
fuel reserves were practically exhausted. We were mining all their
harbors and if we had brought this operation to its logical
conclusion, the destruction of Japanese cities with incendiary and
other bombs would have been quite unnecessary. But General Norstad
declared at Washington that this blockading action was a cowardly
proceeding unworthy of the Air Force. It was therefore discontinued."

Page 863

IT was equally clear that the defeat of Japan did not require the
A-bomb just as it did not require the Russian entry into the war or an
American invasion of the Japanese home islands. But again, other
factors involving interests and nonrational considerations were too
powerful. However, if the U.S. had not finished the bomb project or
had not used it, it seems most unlikely that the Soviet Union would
have made its postwar efforts to get the bomb.

Page 864

The Russian leaders would almost certainly not have made the
effort to get the bomb if we had not used it on Japan. On the other
hand, if we had not used the bomb on Japan, we would have been quite
incapable of preventing the Soviet forces from expanding wherever they
were ordered in Eurasia in 1946.

Page 865

The growth of the army of specialists destroys one of the three
basic foundations of political democracy. These three bases are:

1) that men are relatively equal in factual power;
2) that men have relatively equal access to the information needed to
make a government's decisions;
3) that men have a psychological readiness to accept majority rule in
return for those civil rights which will allow any minority to work to
build itself up to become a majority.

Page 866

It is increasingly clear that in the 20th century, the expert
will replace the industrial tycoon in control of the economic system
even as he will replace the democratic voter in control of the
political system. This is because planning will inevitably replace
laissez-faire in the relationships between the two systems.
Hopefully, the elements of choice and freedom may survive for the
ordinary individual in that he may be free to make a choice between
two opposing political groups (even if these groups have little policy
choice within the parameters of policy established by the experts) and
he may have the choice to switch his economic support from one large
unit to another. But in general, his freedom and choice will be
controlled within very narrow alternatives by the fact that he will be
numbered from birth and followed, as a number, through his educational
training, his required military and other public service, his tax
contributions, his health and medical requirements, and his final
retirement and death benefits.

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Page 867

One consequence of the nuclear rivalry has been the almost total
destruction of international law as existed from the middle of the
17th century to the end of the 19th. That old international law was
based on distinctions which no longer exist including the distinction
between war and peace, the rights of neutrals, the distinction between
public and private authority. These are now destroyed or in great
confusion.

The post-war balance of terror reached its peak of total
disregard both of noncombatants and of neutrals in the policies of
John Foster Dulles who combined sanctimonious religion with "massive
retaliation wherever and whenever we judge fit" to the complete
destruction of any non-combatant or neutral status.

Page 868

As a result, all kinds of groups could destroy law and order without
suffering retaliation by ordinary powers and could become recognized
as states when they were totally lacking in the traditional attributes
of statehood. For example, the Leopoldville group were recognized as
the real government of the whole Congo in spite of the fact that they
were incapable of maintaining law and order over the area. Similarly,
a gang of rebels in Yemen in 1962 were instantly recognized before
they gave any evidence whatever of ability to maintain control or of
readiness to assume the existing international obligations of the
Yemen state and before it was established that their claims to have
killed the king were true.

Page 869

Under the umbrella of nuclear stalemate, outside governments
subsidize murders or revolts as the Russians did in Iraq and as the
American CIA did in several places, successfully in Iran in 1953, and
in Guatemala in 1954 or very unsuccessfully as in the Cuban invasion
of 1961. Under the Cold War umbrella, small groups can obtain
recognition as states by securing the intervention (usually secret) of
some outside Power.

TRAGEDY AND HOPE Chapters XVII-XVIII
by Dr. Carroll Quigley
ISBN 0913022-14-4

CONTENTS
XVII. NUCLEAR RIVALRY AND COLD WAR, AMERICAN NUCLEAR SUPERIORITY 1950-
1957

XVIII. NUCLEAR RIVALRY AND COLD WAR, RACE FOR THE H-BOMB 1950-1957

CHAPTER XVII: NUCLEAR RIVALRY AND THE COLD WAR:
AMERICAN ATOMIC SUPREMACY 1945-1950

THE FACTORS

Page 873

The period 1945 to early 1963 forms a unity during which a number
of factors interacted upon one another to present a very complicated
and extraordinarily dangerous series of events. That mankind and
civilized life got through the period may be attributed to a number of
lucky chances rather than to any particular skill among the two
opposing political blocs.

The Cold War is almost always described in terms which put minor
emphasis or even neglect the role of technological rivalry because

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most historians do not feel competent to discuss it but chiefly
because much of the evidence is secret. Because of such secrecy, the
story of this rivalry falls into two quite distinct and even
contradictory parts:

1) what the real situation was; and
2) what prevalent public opinion believed the situation to be.

For example, the Soviet Union had an H-bomb many months before we
did when public opinion believed the opposite; the 1960 believe
throughout the world of a so-called "missile gap" or American
inferiority in nuclear missiles when no such inferiority existed.

Page 875

The balance of nuclear weapons was the central factor in the Cold
War. Cessation on nuclear testing came close to achievement in 1950
when both sides had atomic weapons but was destroyed at that time by
President Truman's order to proceed with the development of the
hydrogen bomb. By 1963, both sides had these weapons and the balance
of terror had been achieved.

Page 879

The party struggle in the U.S. found the intellectuals (including
scientists), the internationalists, the minorities and the
cosmopolitans in the Democratic Party with the businessmen, bankers
and clerks in the Republican Party. The Republicans had fallen into
the control (represented by Senators Taft, Wherry, Bridges and Jenner)
of those who were most ignorant of the real issues and were most
remote from any conceptions of national political responsibility.

Page 880

This group, to whom we often give the name "neo-isolationist,"
knew nothing of the world outside the U.S., and generally despised it.
Thus, they gave no consideration to our allies or neutrals, and saw no
reason to know or to study Russia, since it could be hated completely
without need for accurate knowledge. All foreigners were regarded as
unprincipled, weak, poor, ignorant and evil, with only one aim in
life, namely, to prey on the United States. These neo-isolationists
and unilateralists were equally filled with suspicion or hatred of any
American intellectuals, including scientists, because they had no
conception of any man who placed objective truth higher than
subjective interests since such an attitude was a complete challenge
to the American businessman's assumption that all men are and should
be concerned with the pursuit of self-interest and profit.
Neo-isolationism had a series of assumptions which could not be
held by anyone who had any knowledge of the world outside U.S. middleclass
business circles. These beliefs were seven in number:

1) Unilateralism: that the U.S. should and could act by itself without
need to consider allies, neutrals or the Soviet Union;

2) National omnipotence: that the U.S. is so rich and powerful that no
one else counts and that there is no need to study foreign areas,
customs, policies;

Page 881

3) Unlimited goals (or utopianism): the belief that there are final
solutions to the world's problems. Upholders of this view refused to
accept that constant danger and constant problems were a perpetual
condition of human life except in brief and unusual circumstances.
Dulles insisted that the Truman policy of containment must be replaced
by a policy of "liberation." These policies were not designed to win
conclusively and did not seek to solve the problem of the Soviet Union
but to live with it, "presumably forever." He did accept preventive
war in the form of massive retaliation if the Communists made any
further advances.

4) The neo-isolationist belief that continuance of the Soviet threat
arose from internal treason within America.

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Page 882

5) Since the chief "high moral principle" which motivated the neoisolationists
insisted that Soviet Russia and Democrats were engaged
in a joint tacit conspiracy to destroy America by high taxes by using
the Cold War to tax America into bankruptcy

6) Since neo-isolationists rejected all partial solutions, there was
little they could do but talk loudly and sign anti-communist pacts.

7) The unrealistic and unhistoric nature of neo-isolationism meant
that it could not actually be pursued as a policy. It was pursued by
John Foster Dulles with permanent injury to our allies. When Senator
McCarthy turned his extravagant charges of subversion and treason from
the State Department to the army, his downfall began. The neoisolationist
forces still continue in an increasingly irresponsible
form under a variety of names including John Birch Society members or
more generally as the "Radical Right."

Page 885

Robert Oppenheimer was on a total of thirty five government
committees. There was a shadow on Oppenheimer's past. In his younger
and more naive days, he had been closely associated with Communists.
Certainly never a Communist himself, and never, at any time, disloyal
to the U.S., he had nonetheless associated with Communists. His
brother Frank and his wife were Communist Party workers while
Oppenheimer's own wife was an ex-Communist, widow of a Communist who
had been killed fighting Fascism in Spain in 1937. The Oppenheimers
continued to have friends who were Communists and contributed money
until the end of 1941.

Page 886

All this derogatory information was known to General Groves and
to Army Intelligence and used in 1953-1954 to destroy his reputation.
It was an essential element in the neo-isolationist McCarthyite,
Dulles interregnum of 1953-1957.

THE ORIGINS OF THE COLD WAR, 1945-1949

Page 891

IN the Soviet system, while most Russians lived in poverty, a
privileged minority, buying in special stores with special funds and
special ration cards, had access to luxuries undreamed of by the
ordinary person.

Page 900

In 1944, Secretary of the Treasury Morgenthau took advantage of
his close personal friendship with Roosevelt to push forward his own
pet scheme to reduce Germany to a purely agricultural state by almost
total destruction of her industry, the millions of surplus population
to be, if necessary, deported to Africa. The secretary, supported by
his assistant secretary, Harry Dexter White, was deeply disturbed by
Germany's history of aggression. The only way to prevent it was to
reduce Germany's industry and thus her warmaking capacity as close to
nothing as possible. The resulting chaos, inflation, and misery would
be but slight repayment for the horrors Germany had inflicted on
others over many years.

By personal influence, Morgenthau obtained acceptance of a
somewhat modified version of this plan by both Roosevelt and Churchill
at the Quebec conference of September 1944. The error at Quebec was
quickly repudiated but no real planning was done and the Morgenthau
Plan played a considerable role in the JCS 1067, the directive set up
to guide the American military occupation of Germany. It proposed
reparations be obtained by dismantling Germany industry. The JCS 1067
directive ordered that Germany be treated as a defeated enemy and not
as a liberated country. No steps were taken to secure its economic
recovery.

Page 901

At the Potsdam conference, it was agreed that the German economy

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should not be permitted should not be permitted to recover higher than
the standard of living of 1932, at the bottom of the depression, the
level, in fact, which had brought Hitler to power in 1933.
It took more than two years of misery for Germany to secure any
changes in these American objectives. Hunger and cold took a
considerable toll, and the Germans, for two years, experienced some of
the misery they had inflicted on others in the preceding dozen years.
The Germany currency reform of 1948 is the fiscal miracle of the
post-war world. From it came

(1) an explosion of industrial expansion and economic prosperity for
West Germany;
(2) they tying of the West Germany economy to the West;
(3) an example for other western European in economic expansion; and
(4) a wave of prosperity for western Europe as a whole.

AMERICAN CONFUSIONS, 1945-1950

Page 909

The American response to the Soviet refusal of postwar
cooperation was confused and tentative.
Winston Churchill in June 1946 spoke of the "Iron Curtain" which
Staling was lowering between the Soviet bloc and the West.
Lasting from 1947-1953, the chief characteristics of
"containment" were economic and financial aid to other nations to
eliminate the misery and ignorance which fosters communism.

Page 910

Americans, when goals are established as they are in war, work
together very effectively, but political work in peacetime, with its
ambiguous goals, is relegated to rivalry, bickering, and total
inability to relate means to goals. As a result, the means themselves
tend to become goals.

Page 911

Each service has alliances with the industrial complexes which
supply their equipment. These complexes not only supply funds for each
service to carry its message to the Congress but also exert every
influence to retain equipment by dangling before the high officers who
can influence contracts, offers of future well-paying consultant
positions with the industrial firms concerned. Most high officers
retired and then took consultant jobs with those firms.

Page 912

Four-star general Somervell retired on a disability salary of
$16,000 to join a number of firms which paid him R$125,000 a year;
three-star general Campbell retired on a disability salary of $9,000
and became an executive at $50,000 a year of firms from whom he had
previously purchased $3 billion in armaments; four-star general Clay
retired on $16,000 a year but signed up at over $100,000 a year.
These are but a few of more than a hundred general officers whose
post retirement alliances with industrial firms encouraged their
successors, still on active service, to remain on friendly terms with
such appreciative business corporations.

Page 919

Pearl Harbor was a total surprise. This last point was so hard to
believe, once the evidence was available, that the same groups who
were howling about Soviet espionage in 1948-1955 were also claiming
that Roosevelt expected and wanted Pearl Harbor. Both these beliefs,
if they were believed, were based on gigantic ignorance and
misconceptions about the nature of intelligence.

Page 921

A great deal of nuclear information (whether secret or not is
unknown) as well as uranium metal, went to the Soviet Union as part of
Lend-Lease in 1943. Major George Racey Jordan, USAAF, tried in vain to
disrupt these shipments at the time. While most of Jordan's evidence

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is unreliable, the shipment of uranium to Russia is corroborated from
other sources. The export licenses for such shipments were granted at
the request of General Groves. Jordan's other evidence, most of which
was very discreditable to the New Deal (since he testified that he,
Groves, and others were under direct pressure from Harry Hopkins to
allow export of nuclear materials) was subsequently shown to be false.

Page 923

Much of the evidence on the Communist movement came from ex-
Communists such as Elizabeth Bentley, Louis Budenz, Whittaker
Chambers, John Lautner and others. The first three names mentioned are
known because they dramatized, distorted and manipulated evidence for
their own private purposes. This is particularly true of Elizabeth
Bentley who exaggerated her role.

Page 925

The House Un-American Committee was aimed more at partisan
advantage than ascertaining the nature of the Communist conspiracy.
the truth cannot now be ascertained. Numerous other accused
Communists, both in government and out, whose names were given to the
committee in the same breath as Hiss or Lattimore were almost totally
ignored.

Page 927

Others called before the committee who refused to give evidence
under the Fifth Amendment which protects against self-incrimination
were in fact Communists and Bentley and Chambers knew them as such.

Page 938

The revelation of Communist influence in the U.S. was undoubtedly
valuable but the cost in damage to reputations of innocent persons was
very high. Much of this damage came from the efforts of Senator Joseph
McCarthy, Republican, of Wisconsin to prove that the State Department
and the army were widely infiltrated with Communists.

Page 939

McCarthy was not a conservative, still less a reactionary. He was
a fragment of elemental force, a throwback to primeval chaos. He was
the enemy of all order and all authority, with no respect, or even
understanding, for principles, laws, regulations, or rules. As such,
he had nothing to do with rationality or generality. Concepts, logic,
distinctions of categories were completely outside his world. It is
clear he did not have any idea what a Communist was, still less
Communism itself, and he did not care. This was simply a term he used
in his game of personal power. Most of the terms which have been
applied to him, such as "truculent," "brutal," "ignorant," "sadistic,"
"foul-mouthed," "brash," are quite correct but not quite in the sense
that his enemies applied them, because they assumed that these
qualities and distinctions had meaning in his world as they did in
their own. They did not, because his behavior was all an act, the
things he did to gain the experience he wanted, that is, the feeling
of power, of creating fear, of destroying the rules, and of winning
attention and admiration for doing so. His act was that of Peck's Bad
Boy but on a colossal scale. He sought fame and acclaim by showing an
admiring world of schoolmates what a tough guy he was, defying all the
rules, even the rules of decency and ordinary civilized behavior. But
like the bad boy of the schoolyard, he had no conception of time or
anything established, and once he had found his act, it was necessary
to demonstrate it every day. His thirst for power, the power of mass
acclaim and publicity, reached the public scene at the same moment as
television, and he was the first to realize what could be done by
using the new instrument for reaching millions.

His thirst for power was insatiable because like hunger, it was a
daily need. It had nothing to do with the power of authority or
regulated discipline, but the personal power of a sadist. All his

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destructive instincts were against anything established, the wealthy,
the educated, the well-mannered, the rules of the Senate, the American
party system, the rules of fair play. As such, he had no conception of
truth or the distinction between it and falsehood, just as he had no
conception of yesterday, today, tomorrow as distinct entities. He
simply said whatever would satisfy, momentarily, his yearning to be
the center of the stage surrounded by admiring, fearful, shocked,
amazed people. He did not even care if their reaction was admiration,
fear, shock, or amazement and he did not care if they, as persons, had
the same reaction or a different one the next day or even a moment
later. He was exactly like an actor in a drama, one in which he had
made the script as he went along, full of falsehoods and
inconsistencies, and he was genuinely surprised and hurt if a person
whom he had abused and insulted for hours at a hearing did not walk
out with him to a bar or even to dinner the moment the hearing session
was over. He knew it was an act; he expected you to know it was an
act. There was really no hypocrisy in it, no cynicism, no falsehood,
as far as he was concerned, because he was convinced that this was the
way the world was. Everyone he was convinced, had a racket; this just
happened to be his, and he expected people to realize this and to
understand it.

Page 930

Of course, to the observant outsider who did not share his total
amorality, it was all false, invented as he went along, and constantly
changed, everything substantiated by documents pulled from his
briefcase and waved about too rapidly to be read. Mostly these
documents had nothing to do with what he was saying; mostly he had
never looked at them himself; they were merely props for the
performance, and to him, it was as silly for his audience to expect
such documents to be relevant as it would be for the audience in a
theater to expect the food that is being eaten, the whiskey that is
being drunk, or the documents which are read in that play to be
relevant to what the actor is saying.

Every time he spoke, with each version he became a larger more
nonchalant hero. In 1952, he intimidated the Air Force into awarding
him the Distinguished Flying (given for twenty five combat missions)
although he had been a grounded intelligence officer who took
occasional rides in planes.

Since laws and regulations were, for McCarthy, nonexistent, his
business and financial affairs are, like his life, a chaos of
illegalities.

Page 931

He seized upon Communism. "That's it," he said. "The government
is full of communists. We can hammer away at them." Without any real
conception of what he was doing, and without any research or knowledge
of the subject, on February 9, McCarthy waved a piece of paper and
said "I have here in my hand a list of 205 members of the Communist
Party still working and shaping the policy of the State Department.

Page 932

On Feb 20th, in an incoherent speech in the Senate was six hours
of bedlam, as case after case was presented filled with contradictions
and irrelevancies. According to Senate Republican Leader Taft, "It was
a perfectly reckless performance." Nevertheless, Taft and his
colleagues determined to accept and support these charges since they
would injure the Administration. Few people realize that in five years
of accusations, McCarthy never turned up a Communist in the State
Department although undoubtedly there must have been some.

Page 933

He claimed that "the top Russian espionage agent" in the U.S.,
Alger Hiss's boss in the State Department, "the chief architect of our
Far Eastern policy" was Professor Owen Lattimore. The trouble was

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Lattimore was not a Communist, not a spy, and not employed by the
State department.

In July, the Tydings subcommittee condemned McCarthy for a "fraud
and a hoax." McCarthy had the power of an inflamed and misled public
opinion. Tydings was beaten in Maryland in 1950. Benton from
Connecticut who introduced the resolution to expel McCarthy from the
Senate in 1951 and whose charges were fully supported by the Senate's
investigation of McCarthy's private finances, was defeated in 1952.
During this period, McCarthy violated more laws and regulations than
any previous senator in history. When a reporter once said "Isn't that
a classified document?" McCarthy said, "It was. I just declassified
it."

Page 934

Eisenhower was soon boasting that 1,456 Federal workers had been
"separated" in the first four months of the Eisenhower security
program. 2,200 at the end of the first year. Nixon said "We're kicking
the Communists and fellow travellers and security risks out of the
Government by the thousands." It was soon clear that no Communists
were kicked out and that security risks included all kinds of persons.
For a while, the Administration tried to outdo McCarthy by
demonstrating in hearings that China had been "lost" to the Communists
because of the careful planning and intrigue of Communists in the
State Department. But they failed to prove their contention.

Page 935

There is considerable truth in the China Lobby's contention that
the American experts on China were organized into a single
interlocking group which had a general consensus of a Leftish
character. It is also true that this group, from its control of funds,
academic recommendations, and research of publication opportunities,
could favor persons who accepted the established consensus and could
injure, financial or in professional advancement, persons who did not
accept it. It is also true that the established group, by its
influence on book reviewing in the New York Times, the Herald Tribune
and the Saturday Review, a few magazines including the "liberal
weeklies" and in the professional journals, could advance or hamper
any specialist's career. It is also true that these things were done
in the United States by the Institute of Pacific Relations, that this
organization had been infiltrated by Communists, and by Communist
sympathizers, and that much of this group's influence arose from its
access to and control over the flow of funds from financial
foundations to scholarly activities. All these things were true, but
they would have been true of many other areas of American scholarly
research and academic administration.

On the other hand, the charges of the China Lobby that China was
"lost" because of this group is not true. Yet the whole subject is of
major importance in understanding the twentieth century.

Page 936

Lattimore, because he knew Mongolian, tended to become
everybody's expert. Many of these experts which were favored by the
Far East "establishment" in the Institute of Pacific RElations were
captured by Communist ideology. Under its influence, they
propagandized, as experts, erroneous ideas and sought to influence
policy in mistaken directions.

Behind this unfortunate situation lies another, more profound,
relationship, which influences matters much broader than Far Eastern
policy. It involves the organization of tax-exempt fortunes of
international financiers into foundations to be used for educational,
scientific, and "other public purposes." Sixty or more years ago,
public life in the East was dominated by the influence of "Wall
Street" referring to international financial capitalism deeply

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involved in the gold standard, foreign exchange fluctuations,floating
of fixed-interest securities and shares for stock-exchange markets.

Page 937

This group, which in the United States, was completely dominated
by J.P. Morgan and Company from the 1880s to the 1930s was
cosmopolitan, Anglophile, internationalist, Ivy League, eastern
seaboard, high Episcopalian and European-culture conscious. Their
connection with the Ivy League colleges rested on the fact that large
endowments of these institutions required constant consultation with
the financiers of Wall Street and was reflected in the fact that these
endowments were largely in bonds rather than in real estate or common
stocks. As a consequence of these influences, J.P. Morgan and his
associates were the most significant figures in policy making at
Harvard, Columbia and Yale while the Whitneys and Prudential Insurance
Company dominated Princeton. The chief officials of these universities
were beholden to these financial powers and usually owed their jobs to
them.

The significant influence of "Wall Street" (meaning Morgan) both
in the Ivy League and in Washington explains the constant interchange
between the Ivy League and the Federal Government, and interchange
which undoubtedly aroused a good deal of resentment in less-favored
circles who were more than satiated with the accents, tweeds, and High
Episcopal Anglophilia of these peoples. Poor Dean Acheson, in spite of
(or perhaps because of) his remarkable qualities of intellect and
character, took the full brunt of this resentment from McCarthy and
his allies. The same feeling did no good to pseudo-Ivy League figures
like Alger Hiss.

Page 938

In spite of the great influence of this "Wall Street" alignment,
an influence great enough to merit the name of the "American
Establishment," this group could not control the Federal Government
and, in consequence, had to adjust to a good many government actions
thoroughly distasteful to the group. The chief of these were in
taxation law, beginning with the graduated income tax in 1913, but
culminating above all else with the inheritance tax. These tax laws
drove the great private fortunes dominated by Wall Street into taxexempt
foundations which became the major link in the Establishment
network between Wall Street, the Ivy League and the Federal
government. Dean Rusk, Secretary of State after 1961, formerly
president of the Rockefeller Foundations, is as much a member of this
nexus as Alger Hiss, the Dulles brothers, Jerome Green, etc.
More than fifty years ago, the Morgan firm decided to infiltrate
the Left-wing political movements of the United States. This was
relatively easy to do since these groups were starved for funds and
eager for a voice to reach the people. Wall Street supplied both. The
purpose was not to destroy, dominate, or take over but was really
three-fold:

1) to keep informed about the Left-wing or liberal groups;
2) to provide them with a mouthpiece so they could blow off steam;
3) to have a final "veto" on their actions if they ever went radical.

There was nothing really new about this decision, since other
financiers had talked about it and even attempted it earlier.
The best example of the alliance of Wall Street and Left-wing
publication was "The New Republic" a magazine founded in 1914 by
Willard Straight using Payne Whitney money. The original purpose for
establishing the paper was to provide an outlet for the progressive
Left and to guide it in an Anglophile direction. This latter task was
entrusted to Walter Lippmann.

Willard Straight, like many Morgan agents, was present at the
Paris Peace Conference in 1919.

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Page 940

The first New Republic editor,Herbert Croly wrote, "Of course,
the Straights could always withdraw their financial support if they
ceased to approve of the policy of the paper;and in that event, it
would go out of existence as a consequence of their disapproval." The
chief achievement of The New Republic in 1914-1918 and again in 1938-
1948 was for interventionism in Europe.

Page 942

Straight allowed the Communists to come into the New Republic.
The first to arrive was Lew Frank.

Page 944

Frank joined a "Communist Research Group" which met in the
Manhattan home of the wealthy "Wall Street Red," Frederick Vanderbilt
Field.

Page 945

To Morgan, all political parties were simply organizations to be
used, and the firm always was careful to keep a foot in all camps.
Like the Morgan interest libraries, museums and art, its
recognition of the need for social work among the poor went back to
the original founder of the firm, George Peabody. To this same figure
may be attributed the use of tax-exempt foundations for controlling
these activities as in the use of Peabody foundations to support
Peabody libraries and museums. Unfortunately, we do not have space
here for this great and untold story, but it must be remembered that
what we do say is part of a much larger picture.

Our concern at the moment is with the links between Wall Street
and the Left, especially the Communists. Here the chief link was the
Thomas W. Lamont family. Tom Lamont was brought into the Morgan firm,
as Straight several years later, by Henry P. Davison, a Morgan
partner. Each had a wife who became a patroness of Leftish causes and
two sons, of which the elder was a conventional banker, and the
youngest was a Left-wing sympathizer and sponsor.
HUAC files show Tom Lamont, his wife Flora, and his son Corliss
as sponsors and financial angels to almost twenty extreme Left
organizations, including the Communist Party itself.

Page 946

In 1951, the McCarran Committee sought to show that China had not
been lost to the Communists by the deliberate actions of a group of
academic experts on the Far East and Communist fellow travellers whose
work in that direction was controlled and coordinated by the Institute
of Pacific Relations (IPR). The influence of the Communists in the IPR
is well established but the patronage of Wall Street is less well
known.

The IPR was a private association of ten independent national
councils in ten countries concerned with affairs in the Pacific. Money
for the American Council of the IPR came from the Carnegie Foundation
and the Rockefeller Foundation. The financial deficits which occurred
each year were picked up by financial angels, almost all with close
Wall Street connections. There can be little doubt that the IPR line
had many points in common both with the Kremlin's party line on the
Far East and with the State Department's police line in the same area.
Clearly there were some Communists, even party members, involved but
it is much less clear that there was any disloyalty to the U.S. There
was a great deal of intrigue both to help those who agreed with the
IPR line and to influence U.S. government policy in this direction,
but there is no evidence of which I am aware of any explicit plot or
conspiracy to direct American policy in a direction favorable either
to the Soviet Union or to international Communism.

Page 948

It must be confessed that the IPR had many of the marks of a
fellow traveller or Communist "captive" organization. But this does

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not mean that the Radical Right version of these events is accurate.
For example, Elizabeth Bentley testified on the IPR and identified
almost every person associated with the organization as a Communist.

Page 949

This Radical Right fairy tale, which is not an accepted folk myth
in many groups in America, pictured the recent history of the United
States as a well-organized plot of extreme Left-wing elements,
operating from the White House itself and controlling all the chief
avenues of publicity in the United States. This plot, if we are to
believe the myth, worked through such avenues as the New York Times,
Herald Tribute, Christian Science Monitor, Washington Post, Atlantic
Monthly, and Harper's Magazine and had at its core the wild-eyed and
bushy-haired theoreticians of Socialist Harvard and the London School
of Economics. It was determined to bring the U.S. into World War II on
the side of England (Roosevelt's first love) and Soviet Russia (his
second love) and, as part of this consciously planned scheme, invited
Japan to attack Pearl Harbor all the while undermining America's real
strength by excessive spending and unbalanced budgets.

Page 950

This myth, like all fables, does in fact have a modicum of truth.
There does exist and has existed for a generation, an international
Anglophile network which operates to some extent in the way the
Radical Right believes the Communists act. In fact, this network,
which we may identify as the Round Table Groups, has no aversion to
cooperating with the Communists, or any other groups, and frequently
does so. I know of the operations of this network because I have
studied it for twenty years and was permitted for two years, in the
early 1960s, to examine its papers and secret records. I have no
aversion to it or to most of its aims and have, for much of my life,
been close to it and to many of its instruments. I have objected, both
in the past and recently, to a few of its policies but in general my
chief difference of opinion is that it wishes to remain unknown, and I
believe its role in history is significant enough to be known.
The Round Table Groups have already been mentioned several times.
At the risk of some repetition, the story will be summarized here
because the American branch of this organization (sometimes called the
"Eastern Establishment) has played a very significant role in the
history of the United States in the last generation.

The Round Table Groups were semi-secret discussion and lobbying
groups whose original purpose was to federate the English-speaking
world along lines laid down by Cecil Rhodes. By 1915, Round Table
groups existed in seven countries including England, South Africa,
Canada, Australia, New Zealand, India and the United States.

Page 951

Money for their activities originally came from Cecil Rhodes,
J.P. Morgan, the Rockefeller and Whitney families and associates of
bankers Lazard Brothers and Morgan, Grenfell and Company.
The chief backbone of this organization grew up along the already
existing financial cooperation running from the Morgan Bank in New
York to a group of international financiers in London led by Lazard
Brothers.
Lionel Curtis established in England and each dominion a front
organization to the existing local Round Table Group. This front
organization called the Royal Institute of Public Affairs, had as its
nucleus in each area the existing submerged Round Table Group.

Page 952

In New York, it was known as the Council on Foreign Relations and
was a front for J.P. Morgan and Company in association with the very
small American Round Table Group. The American organizers were
dominated by the large number of Morgan "experts" including Lamont and

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Beer, who had gone to the Paris Peace Conference and there became
close friends with the similar group of English "experts" which had
been recruited by the Milner group. In fact, the original plans for
the Royal Institute and the Council on Foreign Relations.
In 1928, the Council on Foreign Relations was dominated by the
associates of the Morgan bank. Closely allied with this Morgan
influence were a small group of Wall Street lawyers whose chief
figures were Elihu Root, John W. Davis, the Dulles Brothers, John J.
McCloy.

Page 953

On this basis, there grew up in the 20th century a power
structure between London and New York which penetrated deeply into
university life, the press, and the practice of foreign policy.
The American branch of this "English Establishment" exerted much
of its influence through five American newspapers (New York Times and
Herald Tribune, Christian Science Monitor, Washington Post, Boston
Evening Transcript). It might be pointed out that the existence of
this Wall Street Anglo-American axis is quite obvious once it is
pointed out. It is reflected by the fact that such Wall Street
luminaries such as John W. Davis, Lewis Douglas, Jock Whitney and
Douglas Dillon were appointed to be American ambassadors in London.
This double international network in which the Round Table groups
formed the semi-secret or secret nuclei of the Institutes of
International Affairs was extended into a third network for Pacific
Affairs in 1925 by the same people for the same motives.

Page 954

The chief aims of this elaborate, semi-secret organization were
largely commendable: to coordinate the international activities and
outlooks of all the English-speaking world into one; to work to
maintain peace; to help backward, colonial, and underdeveloped areas
toward prosperity along the lines somewhat similar to those taught at
Oxford and the University of London.

These organizations and their financial backers were in no sense
reactionary or Fascistic persons, as Communist propaganda would like
to depict them. Quite the contrary, they were gracious and cultured
gentlemen who were much concerned with the freedom of expression of
minorities and the rule of law for all and who were convinced that
they could forcefully civilize the Boers, the Irish, the Arabs, and
the Hindus, and who are largely responsible for the partitions of
Ireland, Palestine, and India. If their failures now loom larger than
their successes, this should not be allowed to conceal the high
motives with which they attempted both.

It was this group of people, whose wealth and influence so
exceeded their experience and understanding, who provided much of the
framework of influence which the Communist sympathizers and fellow
travellers took over in the United States in the 1930s. It must be
recognized that the power of these energetic Left-wingers exercised
was never their own power or Communist power but was ultimately the
power of the international financial coterie, and, once the anger and
suspicions of the American people were aroused as they were in the
1950s, it was a fairly simple matter to get rid of the Red
sympathizers. Before this could be done, however, a congressional
committee, following backward to their source the threads which led
from the admitted Communists like Whittaker Chambers, through Alger
Hiss, and the Carnegie Endowment to Thomas Lamont and the Morgan Bank,
fell into the whole complicated network of the interlocking tax-exempt
foundations. The Eighty-third Congress set up in 1953 a Special Reece
Committee to investigate Tax-Exempt Foundations. It soon became clear
that people of immense wealth would be unhappy if the investigation
went too far and that the "most respected" newspapers in the country,
closely allied with these men of wealth, would not get excited enough
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about any revelations to make the publicity worthwhile. An interesting
report showing the Left-wing associations of interlocking nexus of
tax-exempt foundations was issued in 1954 rather quietly.. Four years
later, the Reece Committee's general counsel, Rene A Wormser, wrote a
shocked, but not shocking, book on the subject called "Foundations:
Their Power and Influence."

Page 956

Jerome Green is a symbol of much more than the Wall Street
influence in the IPR. He is also a symbol of the relationship between
the financial circles of London and those of the eastern U.S. which
reflects one of the most powerful influences in 20th century American
and world history. The two ends of this English-speaking axis have
sometimes been called, perhaps facetiously, the English and American
Establishments. There is, however, a considerable degree of truth
behind the joke, a truth which reflects a very real power structure.
It is this power structure which the Radical Right in the U.S. has
been attacking for years in the belief they are attacking the
Communists. These misdirected attacks did much to confuse the American
people in 1948-1955. By 1953 most of these attacks had run their
course. The American people, thoroughly bewildered at the widespread
charges of twenty years of treason and subversion, had rejected the
Democrats and put into the White House a war hero, Eisenhower. At the
time,two events, one public and one secret, were still in process. The
public one was the Korean War; the secret one was the race for the
thermonuclear bomb.

CHAPTER XVIII: NUCLEAR RIVALRY AND COLD WAR,
RACE FOR THE H-BOMB 1950-1957

Page 965

On March 1, 1954, we exploded our first real thermonuclear bomb
at Bikini atoll. It was a horrifying device which spread death-dealing
radioactive contamination over more than 8,000 square miles and
injurious radiation over much of the world.

Page 968

To prepare public opinion to accept use of the H-bomb, if it
became necessary, Strauss sponsored a study of radioactive fallout
whose conclusion was prejudged by calling it "Project Sunshine." By
selective release of some evidence and strict secrecy of other
information, they tried to establish in public opinion that there was
no real danger to anyone from nuclear fallout even in all-out nuclear
war. This gave rise to controversy between the scientists and the
Administration on the danger of fallout.

The Eisenhower through the Dulles doctrine of "massive
retaliation" was so deeply committed to nuclear war that it could not
permit the growth of public opinion which would refuse to accept the
use of nuclear weapons because of objections to the danger of fallout
to neutrals and non-combatants. By 1953, this struggle became so
intense that supporters of massive retaliation decided they must
destroy the public image and public career of Oppenheimer.
THE KOREAN WAR AND ITS AFTERMATH, 1950-1954

Page 970

The emphasis on nuclear retaliation to Communist aggression
anywhere in the world made it necessary to draw a defence perimeter
over which such aggression would trigger retaliation. At the
insistence of MacArthur, that perimeter was drawn to exclude Korea,
Formosa and Mainland China; accordingly, all American forces had been
evacuated from South Korea in June 1949.

Page 971

The Soviet Union interpreted this to mean that the U.S. would

 (95 of 129) [14/06/2005 11:42:40]

allow South Korea to be conquered by the North. Instead, when Russia,
through its satellite North Korea, sought to take Korea, this game
rise to an American counteraction.

Page 972

For forty-eight hours after the Korean attack, the world
hesitated, awaiting America's reaction. Truman immediately committed
American air and sea forces in the area south of 38 degrees and
demanded a UN condemnation of the aggression. Thus, for the first time
in history, a world organization voted to use collective force to stop
armed aggression. This was possible because the North Korean attack
occurred at a time when the Soviet delegation was absent from the UN
Security Council, boycotting it as a protest at the presence of the
delegation from Nationalist China. Accordingly, the much-used Soviet
veto was unavailable.

Page 974

The frontier was reached by UN forces as the month ended. The Red
Chinese decision to intervene was made nine days after American troops
crossed the 38th parallel into North Korea. It was inevitable as Red
China could hardly be expected to allow the buffer North Korean state
to be destroyed and American troops to occupy the line of the Yalu. As
soon as it became clear that American forces would continue past the
38th parallel to the Yalu, the Chinese intervened, not to restore the
38th parallel frontier but to clear the U.N. forces from Asia
completely.

Page 975

The Truman Administration, after the victory at Inchon, did not
intend to stop at the 38th parallel and hoped to reunite the country
under the Seoul government. It is probable that this alone triggered
the Chinese intervention.
On October 9, 1950, two of MacArthur's planes attacked a Russian
air base sixty-two miles inside Russian territory.

Page 977

After Truman removed MacArthur, Republican leaders spoke publicly
of impeaching the President. Senator William Jenner said: This country
today is in the hands of a secret inner coterie which is directed by
agents of the Soviet Union. We must cut this whole cancerous
conspiracy out at once. Our only choice is to impeach the president
and find out who is the secret invisible government which has so
cleverly led our country down the road to destruction."

Page 979

On the whole, neo-isolationist discontent was a revolt of the
ignorant against the informed or educated, of the nineteenth century
against the insoluble problems of the twentieth, of the Midwest of Tom
Sawyer against the cosmopolitan East of J.P. Morgan and Company, of
old Siwash against Harvard, of the Chicago Tribune against the
Washington Post or New York Times, of simple absolutes against complex
relativisms, of immediate final solutions against long-range partial
alleviations, of frontier activism against European though, a
rejection, out of hand, of all the complexities of life which had
arisen since 1915 in favor of a nostalgic return to the simplicities
of 1905, and above all a desire to get back to the inexpensive,
thoughtless, and irresponsible international security of 1880.

Page 980

This neurotic impulse swept over the U.S. in a great wave in the
years 1948-1955, supported by hundreds of thousands of self-seeking
individuals, especially peddlers of publicity and propaganda, and
financed no longer by the relatively tied-up funds of declining Wall
Street international finance, but by its successors, the freely
available winnings of self-financing industrial profits from such new
industrial activities as air power, electronics, chemicals, which
pretended to themselves that their affluence was entirely due to their

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own cleverness. At the head of this list were the new millionaires led
by the Texas oil pluggers whose fortunes were based on tricky tax
provisions and government-subsidized transportation systems.

Page 982

The Kremlin was quite wiling to keep America's men, money, and
attention tied down in Korea.

Page 985

During Truman's last four budgets, expenditures on national
security increased from $13 billion in 1950 to $50 billion in 1953.

THE EISENHOWER TEAM, 1952-1956

Page 986

The Korean War disrupted the pleasures of the postwar economic
boom with military service, shortages, restrictions and cost-of-living
inflation which could not help but breed discontent. And through it,
all the mobilized wealth of the country, in alliance with most of the
press, kept up a constant barrage of "Communists in Washington,"
"twenty years of treason." In creating this picture, the leaders of
the Republican Party totally committed themselves to the myths of the
neo-isolationists and of the Radical Right.

In June 1951, Senator McCarthy delivered a speech in the Senate
of 60,000 words attacking General Marshall as a man "steeped in
falsehood" who has "recourse to the lie whenever it suits his
convenience," one of the architects of America's foreign policy made
by "men high in Government who are concerting to deliver us to
disaster, a conspiracy so black that when it is finally exposed, its
principals shall be forever deserving of the maledictions of all
honest men."

Page 987

Eisenhower had no particular assets except a bland and amiable
disposition combined with his reputation as a victorious general. He
also had a weakness, one which is frequently found in his profession,
the conviction that anyone who has become a millionaire, even by
inheritance, is an authoritative person on almost any subject.

Page 988

If elected, he would go to Korea to make peace. Although himself
not a neo-isolationist or a reactionary, Eisenhower had few deep
personal convictions and was eager to be president. When his advisers
told him that he must collaborate with the Radical Right, he went all
the way, even to the extent of condoning McCarthy's attack on General
Marshall when he, under McCarthy's pressure, removed a favorable
reference to Marshall from a Wisconsin speech.

Eisenhower allotted the functions of government to his Cabinet
members ("eight millionaires and a plumber").

Page 991

Attorney General Herbert Brownell confided to a businessmen's
luncheon in Chicago that President Truman, knowing that Harry Dexter
White was a Russian spy, had promoted him from assistant secretary of
the treasury to executive director of the U.S. Mission to the
International Monetary Fund in 1946. The House Committee on Un-
American activities at once issued a subpoena to the ex-President to
testify which was ignored.

McCarthy's attacks on the U.S. Information Agency overseas
libraries led to burning of books like Tom Sawyer and Robin Hood as
subversive (Robin Hood stole from the rich and gave to the poor,
clearly a Communist tactic).

Page 992

Dulles publicly announced the conception of "massive retaliation"
before the Council on Foreign Relations on January 12, 1954.

Page 995

W.L. Borden wrote a letter to J. Edgar Hoover stating that "J.

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Robert Oppenheimer is an agent of the Soviet Union." This charge was
supported by a biased rehash of all the derogatory stories about
Oppenheimer and was made up of wild charges which no responsible
person has ever been willing to defend." On the basis of this letter
and at the direct order of President Eisenhower, Chairman Strauss
suspended Oppenheimer's security clearance.

Page 998

Broadest of the three narrowing circles of outlook was a violent
neurotic rebellion of harassed middle-class persons against a longtime
challenge to middle-class values arising from depression, war,
insecurity, science, foreigners, and minority groups of all kinds.
Public opinion always supported large defence forces.
Public opinion gave much less support to foreign aid.
These statements based on public opinion polls.

THE RISE OF KHRUSHCHEV, 1953-1958

Page 1009

Immediately after Stalin's death, the "collective leadership" was
headed by Malenkov, Beria and Molotov. Malenkov supported a policy of
relaxation with increased emphasis on production of consumers goods
and rising standards of living, as well as increased efforts to avoid
any international crises which might lead to war; Beria supported a
"thaw" in internal matters, with large-scale amnesties for political
prisoners as well as rehabilitation of those already liquidated;
Molotov continued to insist on the "hard" policies of Stalin with no
relaxation of domestic tyranny.

Page