World War I—Its Causes and Consequences (pt 1)

Owing to the author’s and editors’ participation in this weekend’s Gaza protest, the following has been posted a little later on the scheduled publication day than usual.

Almost exactly 100 years ago, on June 28, 1914, shots rang out in the city of Sarajevo, then part of the Austro-Hungarian Empire. Assassinated on that day were the heir to the throne of Austria-Hungary, Archduke Franz Ferdinand, and Sophie, his wife and Duchess of Hohenberg. Serbians and other “south Slav” nationalists struggling to create a federation of the small south-Slav nations—Yugoslavia, in their language—were held responsible. Within little more than a month, the entire world order as it had existed prior to June 28 completely unraveled. First Europe and eventually the world plunged into what was to become known as World War I.

Among the pillars of the world order that collapsed in 1914 was the international gold standard. Under this system, central banks issued banknotes that were actually promissory notes payable in gold coin of a definite fineness and weight to the bearer on demand. (1) As late as mid-1914, in the imperialist countries, gold coins still circulated side by side with banknotes, which along with bank checks were used for large transactions. Everyday purchases and wages were paid in coins made out of silver or base metals.

The fact that currencies of the imperialist nations were defined as a certain weight of gold of a given fineness meant that there was, within the narrow limits of the “gold points,” fixed rates of exchange among the imperialist countries. In effect, a single currency—gold—existed among the imperialist countries, with pound-sterling, dollars, marks, francs, and rubles merely local names for the universal currency, gold.

The international gold standard encouraged a massive growth of world trade and international investment rivaling today’s “globalization.” Individual countries on the gold standard had to remain on it or their access to the London-based capital markets would be undermined.

Things had not always been this way. In the mid-19th century, currencies of most European countries—with the exception of Britain—were defined in terms of weights of silver, not gold. The Russian ruble was a paper currency and was not convertible into either gold or silver at the state bank. In contrast, the United States defined both a silver and gold dollar, along with a fixed legal rate of exchange between the two. This system was known as bimetallism.

But since the value of gold and silver—the quantity of abstract human labor needed to produce a given weight of gold and silver bullion—constantly changes, it was the “cheaper” dollar that actually circulated. Originally, this had been the silver dollar, but by the middle of the 19th century after the gold dollar was made slightly lighter—in effect devalued—the U.S. was, like Britain, for all practical purposes on the gold standard. (2)

By mid-1914, all these currencies, including the Russian ruble, were on the gold standard. Only the currencies of semi-colonial or colonized countries such as China and Mexico were still defined in terms of weights of silver or were paper currencies. And in 1914, after years of populist resistance to central banking, the U.S. Federal Reserve System began operations establishing the centralized management that the U.S. gold standard had previously lacked.

Before 1914, the U.S. gold standard was managed by a combination of private for-profit bankers, such as J.P. Morgan, and the U.S. Treasury. The flaw in this system was that there was no mechanism to meet a sudden increased demand for currency as a means of payment such as tends to develop during crises. Under the old U.S. national banking system, when a crisis hit, panic-stricken depositors would attempt all at once to convert their deposits into cash. As a result, the crisis would rage unchecked until money capital, in the form of gold bullion eager to take advantage of the sky-high U.S. interest rates caused by the panic, arrived from overseas.

The cyclical crisis of overproduction that hit with full force in the fall of 1907, as had happened periodically during the 19th century, triggered a panicky run on U.S. commercial banks as depositors rushed to convert their deposits into cash. But the changing conditions of the early 20th century made bank runs much more dangerous than they had been earlier.

By 1907, the U.S. had emerged as the world’s leading industrial power. Far fewer of the unemployed could return to their family farms to ride out the crisis like many still could during the 19th century. But there was another factor at work. Because the U.S. had now emerged as the world’s leading industrial as well as agricultural power, a run on the U.S. commercial banking system threatened to crash the entire global capitalist economy. Therefore, a U.S. central banking system had to be created to allow a rapid expansion of the quantity of means of payment in a crisis.

The danger was that if this were not done, during a crisis so much money capital in the form of gold bullion in search of the highest rate of interest would be shipped to the U.S. from Europe and elsewhere that the European central banks would be forced off the gold standard. To protect the international gold standard, it was therefore necessary for the U.S. to create a system of central banking just as the European countries already had done that would make it easy to issue extra dollars in a crisis. The very knowledge by bank deposit owners that extra dollars could be created during a crisis would make bank runs far less likely. When the Federal Reserve System began operations at the beginning of 1914, the international gold standard was now secure. Or so it seemed.

Another international

As the capitalists were basking in the sun of their now perfected “gold international,” the working class had an international of its own. The Second International, as it was called—since it was the successor of the International Workingman’s Association that had operated in the era between 1864 and the Paris Commune of 1871 (3)—was founded in 1889 and united in a single global, if loosely knit, organization all those who believed that the working class needed its own political party.

Therefore, virtually all those who believed that the workers must have a political party of their own—whether they were revolutionaries or reformists—belonged to the party in their country affiliated to the International, often though not always called the Social Democratic Party of such and such a country.

The leading party of the International, virtually everybody agreed, was the Social Democratic Party of Germany. Marx and Engels had been Germans, after all, and it was natural to assume that Germans knew more about Marxism—though you didn’t have to be a Marxist to belong to the International—as a political, philosophical and economic doctrine than anybody else.

Leader of the SPD August Bebel (1840-1913) had died, but Karl Kautsky (1854-1938), considered the world’s leading expert of Marxism in the world, lived on. Among Kautsky’s many students was V.I. Lenin, the leader of the Russian Social Democratic Labor Party (Bolsheviks).

Kautsky had emerged as the world’s leading Marxist theoretician after the death of Marx’s co-worker and life-long friend Frederick Engels in August 1895 and the subsequent conversion to “revisionism” of the other leading Marxist theoretician after Engels, Eduard Bernstein. Despite Bernstein’s revisionist abandonment of Marxism, he remained a leading member of the German Social Democratic Party, since the International and many of its national parties, or sections as they were called, including the German Social Democratic Party, were open to Marxists and non-Marxists alike.

When Bernstein began to move away from Marxism around 1898, Kautsky led the struggle of the “orthodox Marxists” against Bernstein’s “revisionists.” Under the influence of the capitalist prosperity that took hold after 1896, Bernstein came to the conclusion that capitalist society would in the future evolve smoothly without either major economic crises, wars or political or social revolutions.

By the end of the 19th century, economic crises seemed to be losing their edge as capitalism became more “organized”—that is, monopolistic, through the growth of cartels and trusts—and central banks were learning how to manage the spreading international gold standard, avoiding the bank runs that intensified economic crises—with, as we saw above, the exception of the United States, which still lacked a central banking system before 1914.

Bernstein was confident that the future crises would continue to grow less intense as the capitalists learned to manage their system more effectively, both through the banking system and the industrial trusts and cartels that Bernstein believed were progressively replacing the economic anarchy of early capitalism with industrial planning.

The task of the future, according to the revisionists, would be strengthening the role of parliaments, which contained growing Social Democratic fractions. This, the revisionists believed, would guarantee that the industrial planning that, according to them, was replacing the anarchy of the market would be subordinated to the needs of the majority of the people and not just those of the wealthy capitalist minority.

According to the revisionists, this combination of ever-growing economic prosperity and stability, world peace, and expanding democracy would make revolutions both unlikely and unnecessary. Instead, Bernstein claimed, the fading away of revolutionary possibilities was opening up endless vistas of pro-working class reforms. There was virtually no limit, Bernstein and his supporters held, to what pro-working class reforms could be won as both the economy and democracy continued to expand. It was not the ultimate goal of a socialist society that mattered, Bernstein argued, but the movement itself.

In contrast to the revisionist arguments, Kautsky, though he of course supported the fight for pro-working class reforms, continued up until the European summer of 1914 to defend the orthodox Marxist perspective that sooner or later capitalist society was headed toward a revolutionary showdown between its two main classes, the working class and the capitalist class.

Differences within the International

The differences between the orthodox Marxist and revisionist or other non-Marxist currents within the International were not limited to the future prospects of economic crises and eventual revolution. For example, the Marxist wing of the International led by Kautsky opposed imperialism and colonialism, while the revisionists supported colonialism as the only means to bring “civilization” in the form of European imperialism to the “barbaric and savage nations.” In the U.S., members of the Socialist Party—the main U.S. section of the International—were divided between those who advocated equality of the “Negro”—the view of the left—and those on the right who held that “Negroes” were an inferior race.

In the U.S. South, there were even separate and unequal Jim Crow locals for “Negro” members of the Socialist Party. In practice, since the International tolerated such pro-colonialists and racists in its ranks, it was very much an International of the white working class of Europe and, though to a lesser extent, the United States. As a result, the Second International had virtually no sections in non-white colonized and semi-colonized countries.

Therefore, in the early European summer of 1914, two internationals confronted one another—one the capitalist international of gold, now greatly strengthened with the founding of the U.S. Federal Reserve System, and the international of the working class—or rather the white working class. Or so it seemed.

Before 1914 was over, the outbreak of war forced the imperialist countries to suspend convertibility of their currencies into gold. Only the United States was able to maintain its gold coin standard and internal circulation of gold dollars. But even here, as the events of 1933 were to show, the gold standard had been fatally wounded. More on this next month.

But it wasn’t only the capitalist international of gold that lay in ruins. By late summer, the Second International was also in ruins. And so was Karl Kautsky, the world’s leading expert on Marxism. The man who was sometimes called “the Pope of the Second International” announced that a workers’ international was only for times of peace, not for times of war! V.I. Lenin was shocked by the betrayal of his teacher.

Just as the marvel of early 20th-century technology the Titanic had sunk after hitting an iceberg on its first and what turned out to be its last voyage across the Atlantic between Britain and the U.S. two years before, so the “internationals” of both gold and the white working class were to sink by late summer beneath the ocean of history when both hit the “iceberg” known as the “Guns of August.”

With this important difference: While about 1,500 died when the Titanic sank, the casualties of the “Great War” totaled more than 16 million dead and 20 million wounded. Not to mention the tens of millions who died in the flu epidemic that followed the Great War—estimates range from 30 million to 100 million. Also unlike the wealthy passengers on the Titanic, the victims were in their overwhelming majority from the working class, the peasantry and lower middle classes.

The coming of the ‘Great War’

When Franz Ferdinand and Duchess Sophie were killed by the south Slav nationalists in Sarajevo on that June day of 1914, it led to a diplomatic crisis that at first appeared to be just one of a series of such crises in the new century.

There had been several such crises over the conflicting ambitions of France and Germany to colonize the still nominally independent North African country of Morocco. Then there was a series of wars in the Balkans. The decayed Ottoman (Turkish) Empire was fading fast, unleashing a bitter struggle between Austria-Hungary on one side and the Yugoslav—or in English, South Slav—peoples on the other.

Austria-Hungary, one of the “great” imperialist powers of Europe in those days, was determined to take the place of the Ottoman Empire in the Balkans. This was because of the general tendency of imperialist powers to expand but also because of the fear in Vienna of the example that the Yugoslav movement could set for its own numerous oppressed national minorities. (4)

In the weeks that followed the assassination, the pro-war faction in Vienna gained the upper hand. An ultimatum was addressed by the Austro-Hungarian government to Belgrade—the capital of Serbia—designed to be unacceptable. Much to the chagrin of the “hawks” in Vienna, the ultimatum was accepted by the Belgrade authorities, with a few reservations. Despite this, Austria-Hungary declared war against Serbia. (5)

Czarist Russia, under the influence of “pan-Slavism”—which held that all Slavs (Russians, Ukrainians, Czechs, and Poles as well as the south Slavs of Slovenia, Serbia and Croatia) were really one nation that should be united by Russian Czarism—felt obliged to come to Serbia’s aid. The czar’s government, already shaken by Russia’s defeat in the 1904-05 war with Japan and by the revolution of 1905, was eager to prove that the Russian Empire “was back” and was both willing and able to defend its fellow Slavs.

Germany, the most powerful imperialist power on the European continent, came to the defense of its ally, “civilized” Austria-Hungary, now threatened by the “barbarism” of Russian czarism. Pro-war circles in Berlin argued that there would never be a better opportunity for Germany to fight, because Russia was growing stronger and the balance of forces were turning against Germany.

Republican France, the home of the Great Revolution of 1789-94, came to the aid of its ally czarist absolutist Russia. It so happened that huge amounts of the finance capital of democratic-republican France was invested in czarist, absolutist Russia.

Britain came to the aid of its ally France. Then on August 4, the German Social Democratic Party voted for war credits. After all, the German Social Democratic Party argued, hadn’t Marx and Engels called for war against Russia in 1848?Presumably, Marxists had ever since been for a war against Russia, and now under the banner of Kaiser Wilhelm II, the long-desired war had finally arrived!

The French Socialist Party came out for war not against Russia but against monarchical Germany, which now menaced democratic-republican France. And so the international of the white working class collapsed. Rosa Luxemburg declared the Second International was now a stinking corpse, while Lenin declared the need for a Third International.

The consequences

The assassination of Franz Ferdinand and Duchess Sophie on June 28, 1914, was of course an historical accident. The “Great War” that this terrorist act triggered and its sequel known as World War II were to dramatically change the world. The German, Czarist and Austro-Hungarian empires were to be swept away by the wave of revolutions that the Great War provoked. The colonial empires of Britain and France were to decline and give way within a generation to a far more powerful empire, the world empire centered on the United States. This is “the Empire” of NATO, the WTO, the World Bank, the IMF and the dollar-centered international monetary system that we know today. The transition from the world of 1914 to today’s world began in a sense on that late June day in 1914.

In the decades that followed 1914, the world saw the dramatic breakthrough of the October Socialist Revolution, followed by the first real attempt to build a socialist society based on a planned economy. And the results were very far from the “failure” proclaimed by the capitalists and their “socialist” hangers-on today.

In the world of 1914, no Marxist believed that it would be possible to build a socialist society in the sense of the first stage of communism on the ruins of the Czarist Empire alone—later the Soviet Union and Eastern Europe. In the end, this view held by virtually every Marxist of 1914 was vindicated. But we shouldn’t forget that the achievements of what became the Soviet Union would have astonished without exception the Marxists of 1914. More on this next month.

By the late 20th century, it was beyond the power of any counterrevolution to restore the vanished world of 1914. Even now in the early 21st century, neither the czar nor the international gold standard have returned. The attempt by the U.S.-centered world empire to restore something akin to the old colonial system that reigned supreme as the summer of 1914 began has run into the massive opposition of peoples who tasted national independence and whose struggles were greatly encouraged by the existence of the Soviet Union and after World War II its allies as well. The Empire, therefore, keeps running into unexpected resistance—carried out under various banners—as it continues its attempts to turn back the clock of history, whether in tiny Gaza, in Iraq, Libya, Syria, Ukraine or in Africa or Latin America.

European early summer 1914

In the European summer of 1914, the effects of a new worldwide recession that had begun in 1913 were felt in the growing number of unemployed. Social unrest and the class struggle were sharply intensifying in a number of countries. This growing wave of class struggle was felt especially in the Czarist Empire in the East and Great Britain in the West.

In “Petersburg,” as St. Petersburg, both the political and industrial capital of Czarist Russia was popularly called, the trade union struggle, in retreat after the revolution of 1905 and the global recession of 1907-08, was again on the rise. More than that, under the whip of the new recession, it was gaining quasi-revolutionary momentum. Perhaps the Russian revolution had not run its course after all, despite the apparent victory of the counterrevolution in 1906.

At the same time, at the opposite end of Europe, Britain was also experiencing a wave of strikes, and there was even talk of “civil war”—that is, revolution—for the first time since the days of Chartism.

The fear of a British civil war was further fueled by the growing crisis over “home rule” in Ireland, which began to overshadow even the ongoing strike wave. Irish nationalism was on the rise, and the Irish were demanding their independence.

The determination of the Irish people to shake off England’s long and tyrannical rule was part of a much wider movement of colonized people to shake off the domination of the imperialist European powers. From the Iranian “constitutional revolution” of 1905-1907 and the “Young Turk” movement against the Ottoman absolute monarchy in 1908 to the Chinese revolution of 1911, encouraged by the spirit of the Russian revolution of 1905, the revolt of the nations oppressed by European colonialism and semi-colonialism was growing. And how long would it be before India, the “jewel in the crown,” would rise in rebellion against the British Empire? Even before the “Guns of August” sounded, the world “order” of 1914 had begun to crumble.

But when the “Guns of August” did sound in the imperialist countries such as Britain, France and Russia, the growing struggle of the working class came to an abrupt halt. A wave of nationalist hysteria swept the imperialist countries from Russia to Britain replacing the wave of strikes. In the factories of St. Petersburg, members of Russia’s radical left Bolshevik party were beaten up by their fellow workers outraged by the Bolsheviks’ lack of support for the glorious struggle against the Germanic enemy of all the Slavic peoples.

In Britain, the strike wave also came to a screeching halt. Patriotic demonstrations swept Austria-Hungary and Germany. And in France, the Socialist Party—French section of the Second International—declared “union sacrée” [sacred union] for the duration of the war. After all, what were the differences between the French capitalists and the working class compared to the struggle against “the Hun” (6), the enemy of all French people?

A face in the crowd

There is a picture of one such demonstration held in Munich, Germany, that appears in many history books, and is preserved for only one reason. Among the faces is that of a man with a Charlie Chaplin mustache who would soon be off with his fellow demonstrators to fight for fatherland and the Kaiser. The man was the son of a drunken Austrian-Hungarian civil servant who had treated him cruelly before dropping dead at a beer hall one night. The man had no desire to follow the example of his hated father by becoming a civil servant himself. Instead, he dreamed of a becoming an artist. He had, however, been refused admission to the Academy of Fine Arts of Vienna, which might have, if he had been accepted, enabled him to realize his ambition.

The would-be artist lacked the ability to capture the human form and face in drawings or paintings, but he was good at painting buildings. Therefore, the director suggested he study architecture instead. He duly applied to study architecture, but was turned down again, this time because of his lack of academic qualification. He was, however, able to use his talent to make a little money by selling his paintings of the landmarks of Vienna and later Munich (where he moved in 1913 to avoid military service in the armed forces of the Austro-Hungarian Empire) to tourists. Without the Great War, he would almost certainly have remained a downwardly mobile impoverished member of the middle class who would never have been noted by history.

But thanks to the upheaval unleashed by the Great War, he was to have a very different fate. The horrors that were to be associated with that man were unimaginable within “civilized” Europe, or so it thought of itself—but not the colonies—in those beautiful early summer days of 1914. However, when his time came, the barbarism that “civilized” Europe had been imposing on the rest of the world was to come home to Europe itself, big time. The name of this frustrated artist with the Charlie Chaplin mustache was, of course, Adolf Hitler. (7)

What really destroyed the world of 1914?

Did a single terrorist act really bring down the world of 1914 with its twin internationals of gold and white labor? How could a single terrorist act on June 28 cause the implosion of the world order by August 4?

Reduced to a single word, the answer is imperialism—defined as the monopoly stage of capitalism. During the “Long Depression” between 1873 and 1896, the centralization of capital had made giant strides as banks, and the trusts and cartels they often organized, came to increasingly dominate industry. By the turn of the 20th century, the world had been divided up by a handful of imperialist powers, mostly by Britain and France, which had been the leading capitalist countries of the 19th century.

However, in the early 20th century, the economies of Britain and France were relatively stagnant as they were losing markets to new rising capitalist countries, particularly the United States, Germany and Japan. But the new
capitalist-imperialist countries with their rapidly expanding industry and trade had relatively few colonies. And by the turn of the 20th century, there were few remaining areas to colonize. Even countries that were still nominally independent, such as China, Persia and the countries of Latin America, had been reduced to semi-colonial status. Turkey, itself the center of the dying Ottoman Empire, was being reduced to a semi-colonial status, as Lenin put it two years later in his book “Imperialism.”

The world of 1914, just like the world of 2014, was built on two forms of exploitation. Then as now, there was the exploitation of the working class by the capitalist class, explained by Marx’s theory of surplus value. Alongside this exploitation of class by class, there was (and is) the exploitation of the majority of the nations of the Earth by a handful of nations rich in wealth in the form of finance capital.

Unlike in 2014, where with a few exceptions the oppressed nations are nominally independent, the oppression of nations in 1914 very often, though not always, took the form of outright colonization. For example, India, a runner-up to China as the most populous nation on Earth, was an outright colony of Great Britain.

All of Africa with the exception of Ethiopia and Liberia were colonies of the “great” European powers in 1914, mostly Britain and France, but a few were colonies of Germany, while Liberia was a semi-colony of the United States. The countries of Latin America were semi-colonies of the United States—with the exception of Puerto Rico, which was—and is—an outright U.S. colony.

China, though nominally independent, was divided into “spheres of influence” among the imperialist powers. Russia and Britain had just agreed to divide nominally independent Persia—also called Iran—into spheres of influence. Russia was to get the north and Britain the south. Other countries, like Egypt, nominally still part of the Ottoman Empire, were falling under British and French control. In 1911, “liberal democratic” Italy fought a war against the Ottomans and colonized the north African nation of Libya.

The growing disproportion between the industrial power of the contending imperialist countries and the actual division of the world into colonies, semi-colonies and spheres of influence had to be adjusted, and it was. This was accomplished not through a peaceful agreement of the capitalists but through two world wars at the cost of many tens of millions of lives.

Germany was driven by its economic dynamism to “organize” the European continent, while the even more dynamic and much larger United States—which was not to formally join the war until April 1917—was being driven to organize the entire world. The other smaller imperialist states—mere regional powers, as they are called today—such as Japan were being driven to organize their “neighborhoods.” In Japan’s case, this was east Asia. For example, Japan colonized Taiwan in 1895 and Korea in 1910. (8)

This dual exploitation—of class by class and nation by nation—modified and continues to modify the struggle between the two main classes of capitalism, the capitalist class, which owns the means of production, and the working class, which is forced to sell its labor power to the capitalist owners of the means of production in order to live.

The imperialist powers were (and are) able to use super-profits, defined as profits above and beyond the average rate of profit, to bribe in various ways sections of the working class in the imperialist countries. This enabled and continues to enable the capitalists of the imperialist countries to share a portion of these super-profits with sections of the working class. These are generally the workers organized in trade unions, which in 1914 formed the basis of the parties of the Second International.

The growth of opportunism within the European workers’ movement was further intensified by a wave of capitalist prosperity that began around 1896. This exceptional wave of prosperity can be traced to the widespread adoption of the cyanide process of refining gold as well as the discoveries of new rich gold fields in Canada’s Yukon and in Alaska. As a result, gold production soared—and the value of gold relative to most other commodities dropped—which led to one of the sudden expansions of the world market that punctuate the history of capitalism.

A period of the upward movement of prices brought commodity prices into line with the lowered relative value of money—gold. Under the capitalist mode of production, the raising of prices to reflect a lowered relative value of gold money is achieved through a series of industrial cycles dominated by the boom phase of each cycle. During the boom phase, the demand for commodities exceeds their supply at existing prices, driving up the general price level.

In the first years of the 20th century, the resulting rise in prices increased the rate of profit in terms of money material—profit like prices must in the final analysis be measured in the use value of money material—which in turn encouraged a wave of capital investment. The result was a a sharp rise in industrial production and growth in world trade, which lasted—with brief cyclical interruptions, the most important of which was the crisis of 1907-08—until the year 1913.

These developments in the global capitalist economy profoundly corrupted the Social Democratic Parties and sapped their revolutionary spirit, much like the post-1945 industrial boom was to sap the revolutionary spirit of the Communist parties after World War II. An obvious manifestation of this was the revisionist movement led by Bernstein with its predictions of endless peace, prosperity and expanding (bourgeois) democracy.

But this corruption did not only affect the revisionist wing of the Second International. Many “orthodox Marxists” were affected as well. These Social Democrats still spoke the old revolutionary language, but they no longer felt it in their bones. One hint of this loss of revolutionary spirit was the continued treatment of the revisionists by orthodox Marxists as comrades, even though the revisionists supported colonialism and racism. Rosa Luxemburg’s demands for the expulsion of the revisionists from the Social Democratic Party was ignored by the orthodox Marxist German Social Democratic leadership grouped around Bebel and Kautsky.

But the full extent of this gradual but progressive corruption of the old Social Democratic movement did not become evident before the supreme test of the Great War. Led by Karl Kautsky in the years leading up to 1914, the German Social Democratic Party and the International had repeatedly voted down proposals of the revisionists to ditch Marxism. As long as “the peace” lasted, it was easy for the leaders of the International to talk about and even pass resolutions pledging a general strike and even revolution to stop an inter-imperialist war in its tracks. After all, many an orthodox Marxist leader figured, things “would never go that far,” would they?

It is relatively easy to be against war and talk about general strikes and even revolution to stop a war—in peacetime. It is quite another matter to oppose war when shooting starts and the class consciousness of workers dissolves in a wave of chauvinism whipped up by the ruling class and its mass media.

The world economic situation leading up to the war

Back in the mid-1890s, about 20 years before the Great War, the international gold standard appeared to be running into big trouble. The center of the problem was the world’s most dynamic capitalist country, the United States.

Under the influence of the Long Depression, and the falling prices associated with it, especially for farm commodities, the demand for a return to bimetallism, which had been abolished in 1873, at the old ratio of 16 to 1 had gained momentum. At that old ratio, the fall in the value of silver relative to gold that has continued to this very day (the ratio on July 18, 2014, was almost 63 to 1) would have meant that unlike the case in the middle of the 19th century, the silver dollar would soon have been much cheaper than the gold dollar. The gold dollar would have been driven out of circulation by cheap silver dollars, putting the U.S., in effect, on a silver standard.

If this policy had been implemented, there would have been a massive devaluation of the U.S. dollar in terms of gold and other currencies. Since the U.S. was now emerging as the country with the highest level of industrial production in the world, the move from a gold standard back to a de facto silver standard by the U.S., and the massive devaluation of the dollar that would have resulted, would have been a fatal blow to the global gold standard.

The victory of the “pro-gold” Republican William McKinley over the “pro-silver” Democrat William Jennings Bryan in the U.S. presidential election of 1896 temporarily ended the immediate threat to the U.S. gold standard. But it was the flooding of world money markets with “cheap” gold that followed the 1896 U.S. presidential election that really consolidated the up-to-then shaky U.S. gold standard.

The world recession of 1913-14

In 1907, world prosperity as we saw above was briefly interrupted by the global crisis of 1907-08, the same crisis that led to bank runs in the U.S. and then the creation of the Federal Reserve System. Following that crisis, the next crisis should have been due, assuming a 10-year cycle, around 1917, or perhaps 1916 at the earliest. In fact, the premature global recession of 1913 was a sign that the “order” the revisionist movement within the Social Democracy had come to see as permanent was coming to an end.

Because of the series of “diplomatic crises” among the European powers—and the growing threat of a general European war the diplomatic crises revealed—the central banks began to hoard gold, reversing an earlier trend for the international gold standard to evolve towards an international gold-exchange standard. Under a gold-exchange standard, central banks back up their currencies not only with gold but also short-term treasury bills payable in other currencies that are defined in fixed weights of gold.

From the viewpoint of the central banks, such short-term securities have the advantage that unlike gold bullion they pay interest. For world capitalism, a gold exchange standard has the advantage over a pure gold standard of “leveraging” the world’s gold supply, allowing a greater expansion of credit money and credit and consequently the market, on a given quantity of gold. Therefore, as a gold standard evolves into a gold-exchange standard, the market can expand faster than the growth in the quantity of global holdings of monetary gold would otherwise permit.

But as international tensions increased, the central banks became afraid to back their currencies with treasury bills denominated in foreign currencies as opposed to gold. What would happen if the reserves of a central bank of a given nation partially consisted of the treasury bills of countries that were at war with the given central bank’s nation? Wouldn’t payments to “the enemy” on such treasury bills and banknotes be suspended? Therefore, in light of the growing threat of a general European war, the European central banks increasingly saw no substitute for gold itself. What was the beginnings of a gold exchange standard began to regress back toward a pure gold standard.

Just like the expansion of the credit system increases the rate of growth of the world market, the regression of the international monetary system from the beginnings of a gold-exchange standard back towards a pure gold standard had the opposite effect. The rate of growth of the world market slowed. More concretely, as the demand for gold by the central banks rose, the competition among the central banks for the world’s gold bullion increased.

The main tool in those days that the central banks had in this inter-central bank competition for gold bullion was the (re)discount rate. Each central bank was under pressure to raise its rate of discount in order to attract gold bullion away from its rivals. This accelerated the rise of general interest rates that marks the prosperity phase of the industrial cycle, triggering the “premature” world recession. This recession in turn released money from circulation that was then used to finance the war when it came in August 1914. More on this next month.

If the rate of growth of global gold production had been accelerating, this would have counteracted the effects of a drift back toward a pure gold standard. But the exact opposite was happening. The boom in gold production that developed in the 1890s had lost momentum. There were no new technological breakthroughs in the refinement of gold comparable to the cyanide process nor were there any new geographical gold finds comparable to the Yukon and Alaska finds of the 1890s. And the rising level of commodity prices was raising the cost of producing gold.

From the viewpoint of the industrial capitalists engaged in gold production, rising prices expressed in gold were increasing their costs like it was for all industrial capitalists. Under the rules of the international gold standard, gold mines could sell their gold for a fixed price—known as the mint price. Under the prevailing rules of the international gold standard, unlike commodity prices the “mint price” (9) was fixed. Central banks—before 1914, the Treasury in the case of the U.S.—both bought and sold gold at a fixed mint price. Therefore, the mint price and the market price of gold were identical in terms of the currencies on the international gold standard.

As a result, the rate of profit on capital invested in the production of gold bullion, both relative to other branches of production as well as absolutely, was falling. Capital flowed out of gold mining and refining towards other now more profitable branches of industrial production, causing the rate of growth of gold bullion to slow.

In effect, the “global collective capitalist” was accumulating capital more and more in the form of real capital—consisting of non-money commodities—and less and less in the form of money capital. Therefore—and this is crucial to understanding the difference in evolution of both the economic and political situation after World War I as opposed to World War II—money capital was increasingly scarce up until the year 1913—that is, almost up to the outbreak of the war.

From the perspective of an observer of 1914, just before the war broke out the world economy seemed to be slipping back into something akin to the Long Depression of 1873-1896. The Long Depression had seen a big rise in unemployment in both Europe and America as well as declining agricultural commodity prices that hit the highly indebted peasantry and small farmers hard.

The situation was somewhat cushioned, however, as far as workers were concerned. Insomuch as they retained their jobs and avoided “short time,” as the cost of living fell hourly real wages could rise despite cuts in money wages. As a result, a major social crisis was largely avoided through the 1873-1896 Long Depression, though in the U.S. falling agricultural prices nourished the populist movement, which gained support from indebted farmers and to a lesser extent unemployed or underemployed workers through its demand for what amounted to an inflationary dollar devaluation.

Very different outcome

But what appeared to be the beginning of a similar situation in 1913-1914 was to have dramatically different consequences in the years between 1914 and 1945. Unlike in the period from 1873 to 1896, between 1914 and 1945 the capitalist system was shaken to its foundation. Why was the outcome so different?

In 1873, as the Long Depression was beginning, industrial production was still dominated by Great Britain. Britain exercised its military predominance—the result of its industrial domination—above all through its control of the seas. Or as the English chauvinists like to put it—”Britannia ruled the waves.” This was crucial to London, especially after Britain—as David Ricardo and his followers had long urged—had given up much of its agricultural production with the repeal of the Corn Laws in 1846. These were a system of tariffs that had protected British agricultural production.

In 1873, Britain held India in colonial slavery and was already penetrating the decaying Ottoman and Chinese empires. At that time, the division of the African continent between Britain and France still lay in the future. However, when the Long Depression began to bite in the form of long-term unemployment, Britain found the transformation of the unemployed into colonists in Africa helped stave off a social crisis at home. After all, unlike unemployed workers “with lots of time on their hands,” colonists kept busy exterminating or enslaving the native peoples of Africa were no revolutionary threat, on the contrary. (10) In addition, the colonies provided cheap sources of raw material for British industry and captive markets for its commodities.

On the continent, British foreign policy played the “powers,” as they were called in those days, France, Germany, Austria-Hungary and Russia, against one another. Britain’s policy was to prevent a single power from dominating the European continent, such as France under Napoleon and the Napoleonic system had attempted to do during what was in effect a world war that followed the French Revolution. The result was the long peace of 1815 to 1914—with relatively few European wars and no general European or world wars, though there were plenty of colonial wars.

In 1873, the United States had just emerged from the long struggle between the capitalists who based themselves on what was called the “free labor system”—wage labor—and the slave owners, who based themselves on the full-scale enslavement of kidnapped Africans and their descendants. The people of the U.S. were at that time hardly in a mood to fight a major war against Britain. Indeed, they were the last generation of Americans to know what war on their home soil was really like.

Modern Germany was just consolidating around the state of Prussia—with the German Austrians still trapped within that relic of the Middle Ages the Austro-Hungarian Empire. In both the U.S. and Germany, capitalism was developing rapidly, despite the headwinds of the Long Depression.

Russia had formally abolished serfdom only in 1861, and the serfs had to pay compensation to their former masters, which had the effect of transforming them into debt slaves. In the wake of Russia’s defeat in the Crimean War in the 1850s, the czar was well aware that Russia was in no position to fight a major war against any West European power. It took the October Revolution of 1917 for the Russian peasants to be freed from their status as debt slaves.

In 1873, Russia remained a modified feudal society ruled by an absolute monarchy. It wasn’t until the 1890s that capitalist development gained serious momentum in Russia. Japan for its part was just emerging from feudalism in the wake of the “Meiji Restoration” (11) and was in no position to launch aggressive wars of its own. Instead, it was trying to avoid becoming a colony itself.

The world of 1914 was therefore a very different place than the world of 1873. The United States was now the leading industrial country in the world and its industrial production—despite the periodic interruptions of the industrial cycle—was still rising rapidly. The same was true in Germany, though the industrial cycle was smoother in Germany than in the U.S., since Germany, unlike the U.S. before 1914, had a central banking system.

And unlike 1873, Russia and Japan were emerging as imperialist powers in their own right. Russian capitalism had inherited the vast “prison house of nations” and absolutist political system of czarism directly from feudalism. A similar situation existed with Japan, and as noted above, Japan was taking the first steps towards building an empire of its own through the colonization of Taiwan and Korea.

Also unlike the situation in 1873, by the turn of the 20th century, Africa was almost completely colonized, and other countries of the world were either colonies or semi-colonies of the European powers, the United States or Japan. With some minor exceptions, only the re-division of the world was now possible. Ultimately, this re-division would depend on the relative military power of the contending countries, and military power under the conditions of imperialism is rooted in industrial power.

The division of the world in the European summer of 1914 did not come close to coinciding with the relative industrial strengths of the main industrial nations. Instead, the division reflected the now bygone era of the 19th century, not the reality of the early 20th century. For example, the United States and Germany possessed the world’s most productive industry but relatively few colonies. Britain and France with their relatively stagnant industries ruled vast empires in Asia and Africa. Russia also ruled a vast empire that despite the strides made by Russian capitalist industry since the 1890s was way out of proportion to Russia’s still very limited industrial strength. The same, if to a lesser extent, was true of the Austro-Hungarian Empire, though its empire was located in Europe itself.

As long as relative prosperity prevailed, there was still room for compromises and “peaceful readjustments” that could postpone the inevitable. But as the expansion of the world market began to slow, the possibility of any peaceful re-divisions melted away. Only a forcible solution was now possible. And it didn’t take much to set it off. As it turned out, the shots fired by a few young south Slav nationalists were enough to set off Europe’s and then the world’s rapid descent into war. It wasn’t until 1945 before the world gained something like a new equilibrium, and the world of 1945 was a very different place than it had been in August 1914.

More on this next month.

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1 There are two types of gold standard, a gold coin standard and a gold bullion standard. In a gold bullion standard, only large quantities of notes (in terms of weights of gold) are convertible into not coins but gold bullion. Under a gold bullion standard, gold is not coined and no gold coins circulate. This is a weaker form of gold standard designed to economize on gold.

In contrast, under a gold coin standard, all banknotes are convertible into gold coins of a given weight to a bearer on demand. Unlike under a gold bullion standard, a portion of the nation’s gold consists of gold coins that circulate along with convertible-into-gold banknotes and coins of small value made out of silver or base metals. These coins are token money that as a rule represent amounts of gold that are too small to coin.

In 1914 before the Great War began, the imperialist countries were on a gold coin standard. After World War I, however, only the United States maintained a gold coin standard; other countries on a gold standard were on a gold bullion standard. In March 1933, the United States ended the domestic convertibility of dollars into gold, and the ownership of monetary gold by private individuals became illegal within the U.S., ending the internal circulation of gold coins within the U.S. economy. (back)

2 During the U.S. Civil War, paper dollars issued by the U.S. Treasury, nicknamed “greenbacks,” were issued to help finance the war against the slave owning rebels. Unlike as usually is the case with paper money systems, the U.S. government allowed the sellers of commodities to charge separate prices in terms of paper and gold dollars, and debts could be denominated in either paper or gold dollars.

As a result, the gold dollar was not driven out of circulation as is usually the case with paper money systems and continued to circulate side by side with paper dollars. The gold dollar, representing a fixed weight of gold, and the paper dollar, like today’s dollar representing a variable quantity of gold, were in effect two different currencies. A third dollar, the silver dollar, didn’t generally circulate, because the silver in the silver dollar had a higher exchange value as silver bullion than it did as the legal equivalent of the gold bullion that was contained in the gold dollar.

After the end of the U.S. Civil War, there was a rapid fall in the value of silver relative to gold. If the free coining of silver had continued, the increasingly cheap silver dollar would have driven the gold dollar out of circulation, putting the U.S. on a de facto silver standard. To prevent this, the U.S. government in 1873 suspended the free coining of silver.

Outraged populists called this the “crime of ’73” and demanded that the free coining of silver at the old ratio of 16 to 1 be resumed. These demands were never implemented, though at times the U.S. coined silver into silver dollars in limited amounts. This limited coining of silver proved sufficient in the 1890s to destabilize the U.S. monetary system, contributing to the “crash of 1893” and the severe depression and resulting mass unemployment that followed.

The silver dollars coined in limited quantities had the same effect as an issue of convertible banknotes backed by gold, since these silver dollars were redeemable at the U.S. Treasury for gold dollars at a fixed rate. Therefore, the coining of silver dollars tended to create a move by the owners of silver dollars to convert them into gold dollars at the first sign of pressure on the U.S. gold reserves.

The pressure on U.S. gold reserves continued until the defeat of William Jennings Bryan by the “pro-gold” William McKinley in the 1896 U.S. presidential election followed by a sharp rise in global gold production. Historians consider the depression of the 1890s to have been the worst U.S. depression before the Great Depression of the 1930s. (back)

3 The headquarters of the International Workingmen’s Association was moved to the U.S. in 1871. But after the move, the First International played no real role and was formally dissolved in 1876. By then, it had become clear that the politically heterogeneous organization, which reflected the international workers’ movement as it existed between the European strike wave of 1864 and the Paris Commune of 1871, was no longer viable under the changed conditions that were created by the experience of the Commune. (back)

4 At the end of the 20th century, in 1999, the U.S.-NATO Empire, which considers itself the legitimate heir to all the empires that existed in 1914, including the Austro-Hungarian Empire, launched an air war to break up what was left of Yugoslavia. The U.S. media bloomed with the same bitter hatred toward the “Yugoslav” idea that had characterized the old Austro-Hungarian Empire in 1914. During the Cold War, the U.S. in contrast had posed as the champion of Yugoslavia against the Soviet Union after the split between the USSR and Yugoslavia that occurred in 1948. (back)

5 In a grotesque parody of the events of 1914 during the crisis leading up to the 1999 U.S.-NATO air war against what was left of Yugoslavia, NATO delivered an ultimatum to Belgrade, the capital of both Serbia and Yugoslavia. Like the ultimatum delivered by Austria-Hungary in 1914, it was designed to be unacceptable but even more so. The demands were so excessive—for example, Yugoslavia was to finance the occupation of itself by NATO—that there was no “danger” that Belgrade would accept it. In this way, Washington—which controls NATO—learned from Vienna’s 1914 “mistake” in not making its demands outrageous enough. This didn’t prevent the corporate media from treating the NATO ultimatum as if it were a serious peace proposal. (back)

6 During World War I, the “allied” war propaganda described the Germans as “Huns”—a reference to invaders from central Asia that had terrorized Europe during the fall of the Western Roman Empire in the fifth century. On the occasion of the war against China in 1900, Kaiser Wilhelm II had called on the German soldiers to act as “Huns,” which they were in a sense along with the other imperialist members of the “Eight-Nation Alliance” from the United Kingdom, Czarist Russia, Japan, republican France, Italy, Austria-Hungary and of course the United States—all of whom participated in that colonial imperialist war of conquest. (back)

7 Ex-soldiers, particularly those from middle-class backgrounds played a major role in the development of fascism after World War I in Italy—the original “blackshirts”—Germany, and other countries. During the war, these men had learned how to command and were brutalized by the violence of trench warfare. Many of these veterans found it difficult to fit back into civilian life after the war.

We can actually trace two waves of fascism in the post-World War I period. The first came directly after the war and was based on these middle-class veterans–Hitler himself was such a person. These veterans were recruited into anti-working class militias whose purpose was to wage civil war against the workers’ movement and prevent them from following the example of the October Revolution. Mussolini’s coup, which bought him to power in 1922, was part of this first wave of fascism.

In Germany this first wave of fascism manifested itself initially in the Free Corps movement, which battled revolutionary workers who were attempting to create a socialist Germany. Various “National Socialist” groups, including the one that Hitler joined, appeared at this time, but unlike in Italy did not come to power during fascism’s first wave.

A second wave of fascism developed out of the super-crisis of 1929-33, which ruined the economic prospects of the new generation of middle-class youth too young to have fought in the “Great War.” In Germany, the “old fighters” of the Nazi movement belonging to the first wave of fascism recruited and trained a new generation to the German fascist movement during the super-crisis of 1929-32. This led to the establishment of the Nazi dictatorship in 1933 just as the recovery from the super-crisis was beginning. (back)

8 My article on the crisis in the Ukraine caused a considerable amount of discussion. Anybody interested in this discussion and the various viewpoints that were raised can refer to the comments at the end of that blog post. One point that was made is that in 1914-1916, Japanese finance capital, unlike the case today, was still poorly developed. Yet despite the limited development of Japanese finance capital, Lenin ranked Japan among the imperialist countries because Japan had militarily seized Taiwan in 1895 and Korea in 1910 and was clearly preparing for further colonial conquests. Therefore, Lenin saw Japan as a new emerging imperialist power. Japan’s development after World War I confirmed Lenin’s viewpoint.

Doesn’t Russia’s seizure of the Crimea show that despite the present-day lack of development of Russian finance capital, Russia is an emerging imperialist power
just as Japan was in the 1914 era? The supporters of this viewpoint argue that Russia’s seizure of the Crimea from Ukraine is analogous to Japan’s seizure of Taiwan from China in 1895 and its colonization of Korea in 1910, and that foreshadows more Russian aggression against Ukraine and other countries as well.

What the supporters of this viewpoint overlook is that the majority of the Crimean population is Russian and has been since the mid-1860s. Historically, the Crimea was never part of Ukraine before 1954 until Nikita Khrushchev proposed to the Presidium of the ruling Communist Party of the Soviet Union that Crimea be transferred from the Russian Soviet Socialist Republic to the Ukrainian Soviet Socialist Republic.

A majority of the population of the Crimea clearly does not want to live under the new rabidly anti-Russian, pro-imperialist government established in Kiev by the Empire-inspired February 2014 coup. In contrast, the population of Taiwan seized by Japan in 1895 was overwhelmingly Chinese and had no desire to live under Japan’s rule. The same was true in Korea for the Korean population. Indeed, Japanese rule is remembered in Korea and Taiwan with great bitterness to this very day. This is a crucial difference. (back)

9 The mint price is not a price in the scientific sense of the word. A price is a quantity of gold measured in terms of weight that a given commodity exchanges for. The mint price under the international gold standard was an arbitrary name given to a weight of gold bullion—or for countries on the silver standard, to a given weight of silver bullion. Examples of such names are dollar, pound, mark, franc and ruble, which a government mint gave to a given quantity of gold (or silver) bullion presented to it for coining. (back)

10 A more recent example of the de-radicalizing effects of colonization on the colonizing population is the effect the creation of the state of Israel has had on the European and North American Jewish people. Before World II, European and American Jews leaned strongly to the left. Many Jews supported the workers’ parties including the Communist parties. Indeed, the reactionaries of the time, such as the Jim Crow racists in the U.S. and the European fascist racists, charged that Communism—or “Bolshevism,” as the European fascists and other racist reactionaries such as Britain’s Winston Churchill preferred to put it—was part of a Jewish plot to dominate the world.

But with the creation of Israel, the politics of the Jewish people swung sharply to the right. Many of them were victims of the Nazi holocaust who were resettled in Palestine after the war and were directed toward fighting, killing and driving from their homeland the native Arab people of Palestine, just as the Jews had been driven out of their European homeland by imperialism. As a result, not only have Israel’s own internal politics evolved steadily rightward but the very existence of Israel as a colonial-settler apartheid state has had the effect of dragging the politics of non-Israeli Jews rightward as well insomuch as they in any way identify with or support the state of Israel.

More on the role the “Great War” in laying the foundation of the current situation in Palestine next month.

In the pre-World I days, colonization had similar effects on the politics of unemployed or underemployed workers, or generally impoverished European workers who were settled in colonized areas and found themselves fighting the native peoples.

The effects of European colonization and the resulting creation of “white colonial-settler states” on postponing the coming of the global socialist revolution cannot be overemphasized. We shouldn’t forget that the country that has been the biggest obstacle to the victory of the world socialist revolution, the United States, had its origins as a white colonial-settler state that exterminated the native peoples and kidnapped and enslaved African peoples. (back)

11 The Meiji Restoration was nominally a movement to restore the power of the emperor from the shogunate—government of the shogun, or hereditary military dictator, of feudal Japan from 1192 to 1867. But in essence, the Meiji Restoration meant the displacement of the ruling feudal class of Japan by the rising capitalist class. The Meiji Restoration therefore marks the beginning of serious capitalist development in Japan.

If the Meiji Restoration—or something like it—had been delayed much beyond 1868, Japan would have become an outright colony or semi-colony of one of the European powers and/or the United States. Instead, Japan was destined to develop into an imperialist power in its own right—the only imperialist power whose population is not predominately white. (back)

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