Conquering money

The extension of the states' control over society, which is the most prominent development of the years 1789-1945, could never have taken place had it not also acquired unprecedented financial means to back up its claims.

As best we know, the first coins were minted in Lydia during the seventh century BC, though the use of gold bars of a set weight was known in ancient Egypt and is much older.^[252] From Lydia the idea spread to the Aegean and the Greek cities all over the Mediterranean; the conquest of Asia Minor by Persia during the sixth century BC caused coined money to spread into Asia as well. Alexander's conquests opened up huge new sources of bullion and thus led to a very great increase in the use of money in the Hellenistic age as compared to the classical one. During the third century, it began to reach the Gauls on the western and northern shores of the Black Sea.

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While the use of money spread, its nature remained unchanged. Un­like their successors, premodern rulers and communities did not them­selves create value by fiat; instead, all they could do was to confirm, by adding their seal, that existing valuable commodities (mostly pieces of gold and silver, but sometimes also copper, bronze, and iron used for small change) did in fact conform to a certain standard of purity, weight, etc. In fact, the earliest coins seem to have been minted by private individuals, such as wealthy merchants, who used them for making payments among themselves. During the sixth century BC, control drift­ed into the hands of the temples which, in these as well as other societies, acted as banks; only during the fifth century did city-states assert their own control. However, it is characteristic of pre-state communities that, city-states apart, the concentration of all minting in a single hand was seldom achieved. For example, Augustus after he became princeps took the production of gold and silver coins into his own hands; but he left the minting of bronze coins to the Senate (for Italy) and to local authorities (in the provinces). In medieval Europe the - usually very profitable - operation of producing coins out of precious metal was dispersed among local lords, municipalities, and even abbeys.

Over time, the value of most coins tended to decline as rulers fiddled with their weight and the percentage of precious metal that they con­tained - especially but by no means exclusively as a method for financing wars. For example, between the time of Augustus and that of Diocletian three centuries later, the silver denarius lost 99 percent of its value, most of the loss being concentrated in the period from Nero on.⁷¹ Another age-old factor that worked against stability was bimetalism. Rulers had no control over the relative availability of gold and silver.

Apparently the first rulers who tried to produce paper money, i.e., a

⁷¹ For Roman inflation, see A. Cailleux, ‘‘L’allure hyperbolique des devaluations monet- aires,” Revue de Synthese, 101, 99-100, 1980, pp. 251ff. medium of payment that would not be dependent on precious metal and thus entirely under their own control, were some Chinese emperors between about AD 800 and 1300. The last of these attempts was made by the Mongol emperor, Kublai Khan (reigned 1260-94). It became the subject of an enthusiastic description by Marco Polo who lived in China from 1275to 1292;⁷² like its predecessors, though,itwas destined to end in monumental inflation as too large a supply caused the value of the currency to fall. Apparently influenced by the Chinese example, the shah of Iran tried to imitate it in 1294, issuing paper money known as ‘‘chao” and imposing the death penalty on those of his unfortunate subjects who refused to accept it. The experiment, which was limited to the city of Tabriz, was a complete disaster and had to be ended after just two months.

Given the decentralized nature of the political system and its instabil­ity, European rulers during the Middle Ages were generally in no position to imitate their oriental counterparts. Beginning already during the four­teenth century, though, banking and commerce revived; Italian banks in particular made great fortunes and were soon opening branch offices throughout the Continent.

While private institutions were thus beginning to develop paper money, rulers, on their part, were slowly imposing a monopoly on coinage. During the fourteenth century the thirty-two mints existing in France were successively closed down: e.g., Melgueil in 1316, Le Puy in 1318,

⁷² MarcoPolo, Travels (Harmondsworth, UK: Penguin Books, 1972),ch. 22.Foramodern account of the Chinese experiments, see F. T. Lui, ‘‘Cagan's Hypothesis and the First Nationwide Inflation of Paper Money in World History,” Journal ofPolitical Economy, 91, 1983, pp. 1067-74.

⁷³ See V. Barbour, Capitalism in Amsterdam in the Seventeenth Century (Ann Arbor: University of Michigan Press, 1961), ch. 2. and Rodez in 1378. Seigneurial coinage disappeared from circulation until, at the end of the fourteenth century, royal coins reigned supreme throughout the realm.⁷⁴ Shortly before 1500 Ferdinand and Isabella closed the last private mints still operating in Castile; as already men­tioned, the last remaining ecclesiastical mint in England was suppressed by Henry VIII in 1543-4.

The earliest modern attempts to create a paper currency, thus dissol­ving the link between money and bullion and theoretically putting un­limited sums at the disposal of the government, were made in Spain and Sweden. In Spain during the 1630s the duke of Olivares, desperately in need of money to pay for the country's involvement in the Thirty Years War, confiscated consignments of silver arriving from overseas and com­pensated the merchants by means of juros or interest-bearing letters of credit. As might have been expected, their value depreciated rapidly. The result was financial chaos as well as the collapse of Spanish trade with the New World; either the colonists preferred to buy from other suppliers - both the Dutch and the English stood ready to take the place of Spain in this respect - or else they suspended trade altogether. Olivares' failure did not prevent Sweden from imitating his example in 1661. Finding the treasury empty and the country exhausted by decades of war (1631-60), the government made a serious attempt to create a negotiable paper currency backed up not by gold and silver, which it did not have, but by copper. Again, however, overproduction resulted in inflation, causing the attempt to end in a failure that was as spectacular as it was rapid.

Meanwhile events in England followed a different course. Compared to the Continent the country had long enjoyed relatively stable money.

⁷⁴ See S. Piron, ‘‘Monnaie et majeste royale dans la France du XIVe siecle,” Annales, Histoire, Sciences Sociales, 51, 2, March-April 1996, pp. 325-54.

⁷⁵ See C. Read, Mr. Secretary Cecil and Queen Elizabeth (New York: Knopf, 1955), ch. 9. debts owing by the exchequer were recorded and which could be transfer­red to third parties.^[253] Things came to a head in 1640 when King Charles I, having quarreled with Parliament, found himself in dire financial straits and suspended the payment of coins produced by the mint to his credi­tors, the goldsmiths and merchants of London. Like their opposite numbers in other countries, the latter had used the deposits of bullion in their safes as backing for letters of credit, which were negotiable; hence the king's action threatened to ruin not just them but all who had business with them. Against this background, pressure was applied on Charles, who eventually relented and paid his debt in full. However, the episode did show how important it was to have a public, or national, bank that would be immune to arbitrary interference by the throne.

Given that people were already accustomed to token money, proposals for establishing a public, note-issuing bank modeled on that of Amster­dam met with a favorable reception. The first successful attempt to turn it into reality was made in 1694, the year which marked the founding of the Bank of England. A privately owned joint-stock company, the Bank agreed to lend money to the government which was strapped by the expenses of the seemingly endless wars that had to be fought against France. In return, it received a lien over the revenues from certain custom duties as well as an assurance that all the money at the disposal of the government would henceforward be deposited exclusively with it. Using these revenues and deposits as its security, the Bank issued notes which it sold to the public and which were negotiable. All notes were printed on the same blank form, so that the sum in question had to be entered by hand.

The number of notes printed was too large at first, leading to a financial crisis in 1696. However, and contrary to similar experiments in other countries, the Bank survived. Though privately owned, it came to be accepted almost as a government institution. Though it did not enjoy a monopoly, following the Bubble Act of 1720 it was the only institution licensed to print notes redeemable in less than six months; hence it could beat its competitors and watch its notes circulate side by side with coin. Between 1685 and 1700 the establishment of the Bank contributed to a spectacular increase in government borrowing, from £800,000 to £13.8 million. By 1714 it had more than doubled again; yet the Bank remained solvent and had no trouble meeting its obligations. Since people were ready to take new paper in repayment of the old, the loan became permanent or revolving, meaning that the real cost to the Exchequer consisted of the interest paid which at first stood at 8 percent but later fell to 5 and even 4 percent. Lenders received what were, in effect, annuities.

The reforms of 1694-6 constituted the key to the financial power of Britain during the eighteenth and nineteenth centuries.^[254] For the first time in history money in the form of notes was created and remained stable, thus leading to a vast increase in its supply without bringing about a notable increase in inflation. The difficulties resulting from the variable ratios between gold and silver also disappeared. Though silver coins remained in circulation, their importance diminished and, after 1750, the minting of new ones having all but ceased, Britain was effectively on a gold standard.^[255] Once an expanding yet stable currency that was free from arbitrary interference existed, the road toward the industrial revol­ution, which from the 1760s on was to make Britain into the world's economic leader, opened. What really made success possible was the separation between the monarch's person and the state. After 1694 it was no longer the former but the latter, operating by means of the Bank and resting on an alliance between the government and the city, which guaranteed the notes.

Meanwhile, on the continent, financial developments proceeded at a slower pace. When Louis XIV died in 1715, the regent, the duc d'Orleans, found the treasury empty; attempting to fill it he turned to one John Law, a Scotsman who had fled to France after killing a man in a fight over a woman. Already famous for his skill with numbers, Law was author of Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1705). His Banque de France assumed part of the gover­nment's debt, and in return was given permission to open a note-issuing bank in Paris; security consisted not of specie but of the fabulous wealth allegedly contained in the French territories in Louisiana to which Law and his partners in the Mississippi Company had purchased the rights. So successful was the scheme during its first three years that the shares of the Mississippi Company rose to thirty times their nominal value. Then, however, the wind changed and the public tried to cash in on its paper profits. On one day, so many people besieged the bank clamoring to have their money back that fifteen of them were crushed to death. While Law fled abroad, the failure of his company dragged others in its wake and ended by setting back the cause of paper money in France for the better part of a century. Absent a central bank free from royal interference, French billets d’etat could not inspire public confidence and often had to be sold at 30 or even 40 percent below face value.^[256]

Though all continental countries continued to use metal currency, one by one they also opened giro (i.e., note-issuing) public banks whose paper circulated side by side with coin and took the latter's place in carrying out large-scale transactions. By 1710 both Holland and the Austrian empire possessed such institutions; a Prussian giro bank was founded by Frederick the Great in 1765, and during the 1770s similar experiments were being made in Spain, Russia,^[257] and (again, after an interval of seventy years) France where the caisse d'escompte was set up by Turgot in 1776. However, none of these banks was nearly as successful as the Bank of England either in handling the government debt or in increasing the amount of money in circulation. In particular, the caisse d'escompte ended in spectacular failure: caught between the need to repay the royal debt and to meet military expenditure at a time of rapidly falling revenue, the National Convention printed so many assignats that hyperinflation and the collapse of the currency ensued.^[258] By 1797, when the Directory used the loot brought by Napoleon from Italy to put an end to the experiment, France had returned to a more primitive monetary system and was back on coin, if not barter. Meanwhile, in sharp contrast, Bank of England notes had become virtually the sole currency used in London, as the greatest commercial and banking center of the time. Only in the provinces were notes issued by other banks, all of them much smaller than the central one, still in circulation.

Even so, the real demonstration of the power of the Bank of England - and, with it, of the British state - to control money was yet to come. On 22 February 1797 a contingent of French troops, comprising ex-convicts, landed on Carregwastad near Fishguard in Wales; they were quickly rounded up and taken prisoner, allegedly because they had mistaken a distant gathering of women in Welsh costumes for Redcoats. Before it could be contained, however, rumors of the ‘‘invasion'' caused a run on the Bank of England. The result was to bring about ‘‘so violent an outrage upon credit, property, and liberty as... has seldom been exhibited by the alliance of bankruptcy and tyranny'' (Edmund Burke).^[259] Under the Bank Restriction Act of 3 May 1797, the convertibility of paper into gold was suspended, first as an emergency measure for seven weeks and then for fully twenty-four years; turning Bank of England notes (together with those issued by the Bank of Scotland) into a ‘‘forced currency.''^[260] In 1812 a cause celebre brought before Parliament led to the creation of a new term, ‘‘legal tender,” meaning that paper had to be accepted in settling all debts, even those originally contracted in gold. As might be expected, the move caused a decline in the value of the pound both against precious metal and against foreign currencies. From 1793 to 1810, the number of notes in circulation grew by 170 percent. Yet the result was only moder­ate inflation, and Britain's economy kept on growing rapidly throughout the period.

By this time France and the United States both had banks which, though privately owned (in France, Napoleon and his family were them­selves among the largest shareholders), carried out some of the functions of central banks by receiving government deposits and using them to issue notes. However, in neither country were the US Bank and the Banque de France the sole note-issuing bodies; even the Bank of England had to wait until 1844 before it was able to obtain that monopoly. Meanwhile a bewildering variety of notes belonging to many institutions remained in circulation, constantly changing their value against each other and oc­casionally losing all value as a panic struck or a bank went under. The road toward the establishment of a state monopoly in the United States proved particularly tortuous. Though minting had been centralized in 1798-9, President Jackson in 1833 removed government deposits from the US Bank into the state banks - pet banks, as they were called - thus turning the former into a mere primus inter pares. The decision of the Supreme Court in 1837 to uphold the note-issuing rights of state and private banks led to a banking free-for-all that lasted until 1861. In 1859 Hodges' Genuine Bank Notes of America listed no fewer than 9,916 dif­ferent notes issued by 1,365 different banks. Even then, another 200 genuine - and 5,400 counterfeit - notes failed to be included.

With the advent of the Civil War, nevertheless, the United States government gave an even more impressive demonstration of what a modern state could do with the financial power in its hands. At the beginning of the conflict, the US Army numbered just 28,000 men all told; by the time it ended the Federals alone numbered around 1 million (to say nothing of450,000 Confederates at their peak). This, too, in many ways was the first modern war. Sustained by the railways and connected by telegraphs, armaments and logistics grew to monumental dimensions beyond anything seen in history until then.⁸⁴ Obviously there was no way in which such an effort could be financed by traditional means, i.e., by paying out bullion or even making promises of future payment in bullion. In December 1861, to conserve the nation's supply of precious metal for the war effort, Congress put an end to convertibility. Three months later

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The federal logistic effort is outlined in J. C. Huston, The Sinews of War (Washington, DC: OCMH, 1966), pp. 159-239. the federal government received approval for the Legal Tender Act which authorized it to issue ‘‘greenbacks,” not redeemable in gold or silver.

Once the legal obstacles were out of the way, the printing presses were set to work. By 1865 no fewer than $640 million had been produced out of thin paper - a staggering sum, given that average federal expenditure in 1856-60 amounted to only $69 million annually, but dwarfed by the national debt which rose from some $170 million before the war to $2,756 million at its end.^[261] In the sameyeara 10 percent levy was placed on the conversion of other notes into federal currency, effectively taxing them out of existence. The process was crowned by an Act of Congress that finally did away with all notes except those of the US Treasury. The decision did not go unchallenged. In 1870 in Hepburn v. Griswold, the Supreme Court rejected the government’s monopoly as contrary to the Fifth Amendment; however, President Grant promptly added two chief justices, causing the court to reverse itself in the following year. Federal paper, properly printed (and often, it seems, counterfeited), has remained the national currency ever since. In 1875 the Resumption Act permitted the government to resume payment in specie from 1879 on. However, by that time public trust was such that people did not ask for gold and silver but accepted greenbacks instead.

Not surprisingly, the Civil War also marked a turning point in taxation. The first income tax in US history was imposed on 5 August 1861. Next, the Internal Revenue Act of 1862 led to a whole series of new taxes including stamp taxes, excise taxes, luxury taxes, gross receipt taxes, an inheritance tax, and a value-added tax on manufactured goods. To collect these taxes the Bureau of Internal Revenue was created. It quickly spread its tentacles through a network of 185 collection districts, turning itself into the most coercive civilian organ of the federal government and bringing many citizens into direct contact with it for the first time. It is true that the income tax was abolished when the war ended; however, many other wartime taxes - the sin tax, excise taxes, inheritance taxes, etc. - proved permanent. By 1865 the share of internal taxes out of total federal revenue had more than tripled from 20 to 65 percent, nor was it ever again to fall below 32 percent. As if this added burden were not heavy enough, in the North taxes paid to the individual states also rose by a factor of three to six between 1860 and 1870.^[262]

From 1850 on, the discovery of new gold fields in California and Australia caused a temporary decline in its value as compared to silver.^[263] One after another the most important countries seized the opportunity to demonetize the latter, leaving their currencies linked to the former only. When the United States, a latecomer to the field, followed suit in 1894, the switch was substantially complete. By that time Britain (since 1819), France, Italy (after a period of corso forzato in 1881-8), Belgium, Ger­many, Switzerland, Denmark, the Netherlands, Austria-Hungary, and Russia were all on a gold standard.^[264] In theory any person in any of these countries was free to walk into the bank and exchange his notes for gold; except in London, though, those who had the nerve to try were likely to be sent away empty-handed whenever the sums in question were anything but trivial.^[265] As time went on the banks of various countries vied with each other to see who could print the smallest notes (in Sweden, e.g., one-kroner notes, worth scarcely more than one British shilling or $0.25, were issued), thus causing even more bullion to disappear into their own vaults. Yet so much had the power of states grown that it scarcely mattered. Whereas French Revolutionary assignats were trading at 0.5 percent of nominal value within seven years of being issued,^[266] the notes of pre-1914 states were literally as good as gold.

Even as states used all the above methods in order to impose their own control over money, they also increased the role of their central banks.^[267] Regardless of whether they were privately or publicly owned, originally each such bank had only been one note-issuing institute among many, albeit one that, serving as the sole haven for the state's own deposits, led a charmed life and could hardly fail to grow at the expense of the rest. By 1870 or so, not only had they monopolized the issue of notes in most countries but they were also beginning to regulate other banks. Given that the central bank's reserves easily outstripped those of all the rest, it was inevitable that they should come to be treated as lenders of last resort. Acting as such, they not only set interest rates (the so-called discount rate) but were able to insist on the size of the reserves to be held by other banks, thus putting a cap on their operations.^[268] Sooner or later the informal supervisory power thus created was anchored in law; some countries went further still, charging the central bank with licensing other banks, auditing them, and even setting the fees which they were permitted to charge. The United States as usual was slow to adopt these changes; but even here the era of free banking ended with the creation of the Federal Reserve in 1913. From this point on, not only the currency but also the money supply as dictated by private lending came under state supervision.

In the event, the state's movement toward imposing its own control over money did not come a moment too soon. World War I broke out in August 1914. Within a matter of days all belligerents showed what they really thought of their own paper by taking it off gold, thus leaving their citizens essentially empty-handed. Draconian laws were pushed through, requiring those who happened to own gold coins or bullion to surrender them. Next the printing presses were put to work and started turning out their product in previously unimaginable quantities. Precisely because the United States was only marginally involved in the war - German submarines apart, the nearest enemy soldier was thousands of miles away - it can usefully illustrate these developments without fear of exagger­ation. Thus, in October 1917, the possession of specie was made into a criminal offense punishable by a $10,000 fine or, in the case of‘‘a natural person,'' up to ten years' imprisonment (the government that can put a corporation in jail has not yet been invented). By 1919 the amount of currency in circulation had grown from $3.3 billion to $5.1 billion, whereas the total money supply, which had stood at $22 billion in 1916, had passed the $33 billion mark. Meanwhile the cost-of-living index (with 1914 as base 100) went from 118 in 1916 to 218 in 1919, an increase of 83 percent.^[269]

That prices did not rise even more was, of course, the result of the state draining away the public's income and savings by taxes on the one hand and loans on the other. US federal non-debt receipts rose from $782 million in 1916 to $4.6 billion three years later; of this increase the lion's share - almost $2.5 billion - was due to the dramatic growth in the income tax paid by individuals and corporations. To this were added five successive ‘‘Liberty'' and ‘‘Victory'' loans, each but the last (which was floated in April 1919, i.e., when the war was already over) larger than the previous one and eventually raising $24 billion between them. Matching the rise in income, federal spending went up from $742 million in 1916 to almost $19 billion in 1919. The bulk of this increase (about $11 billion) was accounted for by the War Office and the Navy; but other federal agencies also looked after themselves. As it happened, the largest single increment was enjoyed by the so-called independent bureaus - in other words, the huge variety of agencies and boards newly created for the war and which stood outside the existing departmental structure. The sum they commanded rose from $7.2 million in 1916 to $1.1 billion in 1918 and $2.7 billion in 1919; if this was not the season for penpushers, what was?

Having entered the war earlier and stayed in longer, the governments of other countries had to do much more in proportion. In Britain, e.g., total government expenditure had stood at approximately 15 percent of GNP during the last years before the war, which itself represented an ap­proximately 50 percent increase since the Liberal government had taken office in 1906. By 1916-17 it had reached fully 85 percent, a figure so high that it could barely be improved on even during the largest conflict in history, i.e., World War II.^[270] As in the United States, the increase in expenditure was paid for partly by printing money, partly by taxation (‘‘tax them till they squeak” was the response of Lord Rothschild when asked by Lloyd George how to raise money to pay for the war) and partly by issuing bonds at what were, by the inflationary standards that prevailed during much of the late twentieth century, remarkably low interest rates. Again the infusion of huge sums into the economy - between 1913 and 1920 government spending rose from £342 million to just under £1.7 billion annually^[271] - led to inflation, though the bulk of it occurred after the war because, so long as it lasted, a combination of controls and scarcity meant that there was little to buy anyhow. Nor was Britain by any means the worst affected country. On the contrary, most of the remaining European belligerents made a much greater effort in terms of the number of troops raised per head of population, to say nothing of foreign oc­cupation, physical destruction, and defeat suffered.

Except in the Soviet Union, on which more below, the ‘‘Great War Robbery” of 1914-18 was followed by a return to ‘‘normalcy” during the 1920s. Everywhere government budgets and taxes fell, though never again to pre-war levels which, in retrospect, appeared like the dream of a laissezfaire enthusiast. For example, in Britain public spending fluctuated between 25 and 30 percent of GNP (double the pre-war figure); to finance this outlay, standard income tax rates had risen by a factor of three and a half. Meanwhile, across the Atlantic, the effect of the war on ordinary Americans may be gauged from the fact that the number of individuals and corporations subject to income tax leaped from fewer than 500,000 in 1916 to almost 7 million in 1920.^[272] Sitting on top of history's largest gold mountain - acquired in return for goods of every sort shipped to the Allies during the conflict - and little fearing that anyone would seriously try to buy it up, the United States resumed payments in gold almost as soon as the war was over. Britain followed in 1925, and by 1929 most other major countries - including even Italy, the poorest but, under Mussolini, by no means the humblest of the lot - had done the same.

As it happened, the return to the gold standard proved largely illusory. Not only were gold coins not returned to circulation, but the times were long gone since anybody in his or her sound mind dreamt of making large payments by physically transferring bullion from one place to another. In this way about the only effect of the move was to contribute to a severe deflation which in turn put obstacles in front of trade and thus helped trigger the Great Depression of 1929.^[273] To cut a long story short, in September 1931 a threatened pay cut caused the sailors of the British navy to go on strike. The newspapers exaggerated the event into a mutiny; a panic resulted, and the consequent run on the banks caused sterling and other currencies to be taken off gold, this time for good. In the United States, President Roosevelt, claiming that ‘‘gold held in private hoards serves no useful purpose under present circumstances,” imposed drastic penalties to make owners disgorge their wealth. In March 1933 a bank holiday was proclaimed; when those venerable institutions reopened their doors the dollar had been devalued by no less than 41 percent.^[274] The refusal of the Treasury to allow private citizens to exchange their dollars for monetized gold even at this rate meant that, from now on, all means of payment other than paper were definitely concentrated in the hands of the state. Conversely, whatever was paid out by the state was, by defini­tion, made of paper.

With every major currency depreciating fast against gold - the French franc, as the last to hold out, was devalued in 1936 and public confidence in it destroyed - many countries returned to forced currencies as did Germany, Italy, and, above all, the Soviet Union. In the former two this development was brought about by the world economic crisis; in the latter (in spite of its being the world's largest producer of gold) a forced currency had been in existence from the time of the 1917 Revolution and was backed solely by the word of Lenin, Stalin, and company. Whether called rubles or marks or lire, these currencies were inconvertible, which meant that in most cases they could be used only by citizens in transac­tions among themselves. The conduct of international business was mon­opolized by the state, which either created its own organs for the purpose or else operated through an elaborate licensing system. Often the short­age of ‘‘hard'' currency was such that imports had to be paid for in gold (the Soviet Union) or by means of barter (all three countries, particularly in their dealings with each other and with the underdeveloped Balkans). Those who found themselves unable to trade and, indeed, threatened with death or a concentration camp if they ventured to do so were the unfortunate citizens.

So far from the totalitarian countries proving an exception, the road toward control over the currency that they took during the 1930s was followed, with only minor modifications, by the ‘‘free'' ones during World War II itself. To repeat the story already told in connection with the events of 1914-18 would be tedious. There was little new except for even more stringent financial controls, even greater spending, an even tighter turning of the fiscal screws, and even greater loans. Even in the United States, as the richest and least affected country by far, expenditure exceeded revenue by a factor of one to two or three in each one of the war years 1942-5 - in spite of the fact that drastic tax increases caused that revenue itself to grow by a factor of six between 1939 and 1944." As in World War I, the fact that spending and income no longer stood in any kind of reasonable relation to each other led to a sharp rise in prices. Again as in World War I, so long as hostilities lasted, attempts were made to keep the lid on inflation by various administrative mechanisms such as rationing. When those were lifted, the citizens of the victorious countries found that the value of their savings had been greatly reduced, while with the losers money had literally turned into so much paper and could be used, if at all, only for such purposes as patching up broken windows.¹⁰⁰

Even more interesting than these developments was the change that

⁹⁹ Figures from Economic Report to the President, 1974 (Washington, DC: Government Printing Office, 1974), p. 324. Parallel figures on other countries can be found in G. Findlay Shirras, Federal Finance in Peace and War (London: Macmillan, 1944), pp. 77 (Canada), 149-50 (Australia), 171-2 (South Africa), and 217ff. (India).

¹⁰⁰ Data on US prices may be found in Economic Report to the President, 1975 (Washington, DC: Government Printing Office, 1975). came over the nature of money itself. Savings apart - what happened to savers has just been explained - to individuals it had always represented a means of purchasing commodities; to governments, a method by which they controlled the economy and allocated resources. Now, however, both functions were largely lost. From the citizens' point of view, this was because anything worth buying could be had, if at all, only in exchange for coupons. These were distributed on the basis of noneconomic criteria such as age, sex, and the amount of calories demanded by the kind of work in which one was engaged (needless to say, those with their hands on the levers of power looked after themselves; as Ludendorff once wrote, had he been made to eat ordinary rations, he ‘‘could not have existed''). From the point of view of the state, the reason why money lost its function as a tool of government was precisely because its supply, depending solely on the printing machines, had become essentially unlimited. Conse­quently it could no longer be used to determine which products and services would be purchased and which ones would not. Thus total war marked the culmination of a 200-year process by which the state imposed its control over money. Having done so, the result was to leave that commodity without any real value - leading to some cases to a return to barter, as when urbanites traded their kitchen utensils for potatoes. By way of other not-so-subtle indications of what was taking place, the Bank of England was absorbed into the machinery of state¹⁰¹ and the British secretary of the exchequer lost his traditional position as the first (after the prime minister) among equals; after 1940 he was no longer even a member of the war cabinet.¹⁰²

Once money had been conquered - meaning that it could no longer place any limits on what government could buy - the extent of the war effort in each country came to be determined by the physical means of production. The most important ones were shipping, transport, raw materials, factory space, energy, and transportation, and of course the labor on which all the rest depended and for which they often competed among themselves. Already in World War I, all the most important belligerents had pushed through laws that effectively overrode their citi­zens' property rights and enabled governments to take those means into their own hands when necessary. These controls they used to decide who should produce what, how, where, at what prices, and with the aid of which workers possessing which professional qualifications and working at which wages during how many hours a day or week. To focus on the most important countries only, in Germany the task was entrusted to the

¹⁰¹ See R. S. Sayers, Financial Policy, 1939-1945 (London, Longmans, 1956).

¹⁰² See A. Milward, War, Economy and Society, 1939-1945 (Berkeley: University of California Press, 1977), pp. 99ff. industrialist Walter Rathenau and his Raw Materials Department, an organization established against considerable opposition on the part of the military, who did not want civilians interfering with the conduct of the war. In Britain it was carried out rather more easily by the overbearing politician Lloyd George (later succeeded by Churchill) at the head of the newly established Ministry of Munitions; finally, in the United States it was done by the WIB or War Industries Board, whose chairman was the financier Bernard Baruch.¹⁰³

But whereas in most Western states most of the controls were disman­tled in 1918-19, in one country - the Soviet Union - they proved permanent. Large, ramshackle, and provided with comparatively few railways per square mile of territory, the tsarist empire had been less successful than most in mobilizing its resources for war.¹⁰⁴ Initially it was the armed forces which ran out of weapons and ammunition; by 1916-17 rampant inflation as well as shortages of virtually everything had made the country ready for revolution. Once the Bolsheviks took over power in 1917 they set out to change things with a vengeance. Not content with mere controls, they carried out their program of expropriating all means of production as well as services such as banking, insurance, communica­tions, and transportation down to retail commerce and hairdressing. With control over labor equally complete - in a communist state any breach of working discipline was automatically turned into a criminal offense - the modern Behemoth swallowed up the economy lock, stock, and barrel.

The result of the revolution was the bureaucrat’s dream come true. Claiming to serve the general welfare, but in fact working almost ex­clusively on its own behalf, the state owned everything, ran everything, produced everything, and bought and sold everything - all at prices, needless to say, which were determined by itself and which often had nothing to do either with the actual cost to producers or with the choices that consumers might have made if left to their own devices.¹⁰⁵ To carry out all these multitudinous functions and prevent them from running at odds with each other it also kept files and supervised everything by means

¹⁰³ German mobilization for World War I is covered in M. Feldman, Army, Industry and Labor in Germany, 1914-1918 (Providence, RI: Berg, 1993). For Britain, see S. J. Hurwitz, State Intervention in Great Britain: A Study of Economic and Social Response 1914-1919 (London: Columbia University Press, 1949); and, for the United States, R. D. Cuff, The War Industries Board: Business-Government Relations During World War I (Baltimore: Johns Hopkins University Press, 1973).

¹⁰⁴ See N. Stone, The Eastern Front 1914-1917 (London: Hodder and Stoughton, 1975), pp. 144-64, 194-211.

¹⁰⁵ For an analysis of the communist state very similar to the one here adduced, see M. Djilas, The New Ruling Class: Analysis of the Communist System (New York: Praeger, 1957). of an administrative apparatus unlike any in history. In 1980 it was estimated that the mature communist state was producing 100 billion documents per year, which avalanche of paperwork was backed up by the education system, the propaganda machine, the secret police, the con­centration camp, and, all too frequently, the execution wall.

Though other states did not at once follow in the wake of the Soviet Union, the respite granted their economies proved temporary. Through­out the interwar period socialist parties everywhere kept demanding that the most important means of production be nationalized so that their profits, instead of going to individuals, could be put to use on behalf of the community at large. In one country after another, some of their demands were met; this applied in particular to new industries such as broadcasting, telecommunications, air transport, and electricity gener­ation. Additional pressure in the same general direction sometimes came from the nationalist right. For example, Rathenau as the part-owner and chief executive officer of the Allgemeine Elektrizitat-Gesellschaft, one of Germany's largest industrial combines, was certainly no socialist; yet before the war was over he summed up his experience in The New Economy (Die Neue Wirtschaft, 1918). Partly a blueprint for increasing national power, partly a preemptive response to the socialist demand for eventual nationalization, the book argued that the days of unrestricted capitalism were over. Instead he advocated a new partnership between state and industry - one which, needless to say, translated into greater control by the former over the latter.

Nor did the dictators who came to rule Germany and Italy need Rathenau to teach them this lesson. Both Mussolini and Hitler shed their original socialist leanings at a comparatively early age. Having discovered which side of the bread was buttered - when Mussolini turned interventionist in 1915, his fellow socialists greeted him by cry­ing ‘‘chi paga'' (who pays)¹⁰⁶ - they were quite prepared to sing the praises of private enterprise; and in return, happily accepted its financial contributions during their struggle for power. Having seized it, they quickly moved to meet their obligations to their supporters by forbid­ding strikes, prohibiting collective bargaining, dismantling the existing trade unions, and putting their leaders in prison. This, however, did not mean a return to early nineteenth-century laissez faire; instead they pro­ceeded to conscript labor by means of the new, state-run corporations and Deutsche Arbeitsfront. The next step for both Nazis and Fascists was to establish direct controls over industry, the best-known instance being the 1936 Four-Year Plan which made Herman Goering into Ger-

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G. Seldes, Sawdust Caesar: The Untold Story of Mussolini and Fascism (London: Barker, 1936), p. 46.

many's economic tsar. Both also embarked on constructing a whole series of state-owned industries in fields considered vital to the war effort but which for one reason or another could not attract private investment.¹⁰⁷ Among them were steel, synthetic oil, and rubber (the latter manufactured with the aid of concentration-camp labor), and, of course, the famous Volkswagen car.

Once World War II had broken out, the mobilization plans of 1914-18 were taken out of the drawers and dusted, in some cases literally so as those responsible went to see their predecessors, several of whom were still alive, to ask for guidance. Regardless of whether their regimes were communist or fascist or liberal, all states hastened to assume control over the means of production or, if they already controlled them, tighten supervision even further by introducing the police into the factories and prescribing draconian penalties for any ‘‘slackers.'' It might even be argued that a ‘‘democratic'' country like Britain was able to go faster and further than ‘‘totalitarian'' ones such as Germany, Italy, and Japan. None of the three had an elected government; hence, and for all the police apparatus at their disposal, initially at any rate, they proved more fearful of imposing sacrifice on their populations.¹⁰⁸ Be this as it may, once again the bureaucratic machines grew and grew. In the United States the number of federal employees rose from 936,000 in 1933 to 3,800,000 in 1945, though half of those were discharged after the war; in Britain the newly created Ministry of Food alone expanded from 3,500 bureaucrats in 1940 to 39,000 in 1943, only to melt away once hostilities had ended. By the end of the year the point had long been reached where, in theory and to a considerable extent in practice, not an ounce of raw material could be worked nor a screw produced unless it had first received govern­ment blessing and had been declared vital to the war effort.

The states having finally succeeded in their drive to conquer money, the effect of absolute economic dominance on the states themselves was to allow them to fight each other on a scale and with a ferocity never equaled before or since. Practiced to a larger or smaller extent, central planning and central control enabled hundreds of thousands of tanks and aircraft to come off the assembly lines and go straight into battle. While

¹⁰⁷ For the German Four-Year Plan, see Militargeschichtliches Forschungsamt, ed.,

Germany and the Second World War (Oxford: Clarendon Press, 1990),pp. 273-315;for Italy, see V. Castronovo, ‘‘La strategie du conglomerat: l’etat banquier et entrepreneur en Italie,” Entreprises et Histoire, 1, 1992, pp. 13-25; and L. Ceva and A. Curio, ‘‘Industrie de guerre et l’etat dans l’imperialisme fasciste des annees 30,” Guerres Mondiales et Conflicts Contemporaines, 41, 61, 1991, pp. 31-50.

¹⁰⁸ The measures taken to maintain German workers’ morale in particular are discussed in S. Salter, ‘‘Structures of Consensus and Coercion: Workers’ Morale and the Main­tenance of Work Discipline, 1939-1945,’’ inD. Welch, ed., Nazi Propaganda (London: Croom Helm, 1983), pp. 88-116.

business, fed by titanic state contracts, often made equally titanic profits, the effect on the lives of ordinary people in most countries was described in that grim caricature of World War II life, George Orwell's 1984:

Always in your stomach and in your skin there was a sort of protest, a feeling that you had been cheated of something that you had a right to... there [was] never enough to eat, one never had socks or underclothes that were not full of holes, furniture was battered and rickety, rooms underheated, tube-trains crowded, houses falling to pieces, bread dark-colored, tea a rarity, coffee filthy-tasting, cigarettes insufficient - nothing cheap and plentiful except synthetic gin.^[275]