Economics and the Public Welfare. Benjamin M. Anderson

Causes of the War. There are not a few writers, overimpressed by the economic interpretation of history and especially by Marxist versions of the economic interpretation of history, who have seen the war of 1914 as the result of inevitable economic tendencies. There is no one principle of historical interpretation and there are few, if any, inevitable economic tendencies. Political, moral, cultural, and religious forces are coefficients with economic forces in the determination of historical events, and the influence of outstanding personalities in strategic positions is often far more significant than any economic determinist will concede.

      Views of Munroe Smith and Veblen. The two writers who seem to have explained the outbreak of the war in 1914 most clearly are Munroe Smith, professor of Roman law at Columbia University, and Thorstein Veblen. Munroe Smith’s explanation appeared in the Political Science Quarterly in March 1915 in an article called “Military Strategy Versus Diplomacy.” Munroe Smith had previously written a very interesting biography of Bismarck. In the article referred to he begins by saying that he assumes that he will not be accused of setting up utopian standards when he judges the course of German diplomacy immediately preceding the war by the standards of Bismarck. Bismarck had always respected the “imponderables.”

      [print edition page 27]

      Bismarck had had a wholesome respect for world public opinion. He had never gone into war without first seeing to it that his alliances were dependable, that neutral relations were assured, and that world opinion was on the side of Germany. He had sometimes used devious tricks in creating a favorable world opinion, as in his falsification of the telegram at Ems, but he had had a respect for the opinion of mankind, and he had compelled his generals to wait until public opinion was on his side. In the war with Austria von Moltke had pleaded with Bismarck to let him strike at once, saying that every day’s delay meant unnecessary military losses. Bismarck made him wait until the psychological atmosphere was right. By 1914, however, the diplomat in Germany was no longer in the saddle—the military strategist was in the saddle. Bethmann-Hollweg later admitted this.¹ It is not correct to say, Munroe Smith contends, that German diplomacy failed in 1914. The correct thing to say is that German diplomacy never had a chance.

      Veblen’s explanation came in an unpublished manuscript in 1915.² Veblen pointed out that modern war cannot be successfully carried on except by a highly industrialized country. Modern war calls for immense mechanical equipment and for a continuing supply of mechanical equipment. But industrialization involves the growth of great cities and the bringing together of great masses of the population, taking them away from the control of rural nobles and landlords and bringing them together under new conditions which promote the growth of democracy. Industrialization and democracy in general grow together. But democracy makes for peace. The common man has nothing to gain from war. He will fight to defend his country, but there is no glamour for him in aggressive fighting against other countries. Primitive war often meant booty and women and adventure for the common man, but highly mechanized modern war has few attractions.

      With industrial power and democracy developing together, it was thus to be expected that the countries powerful enough to precipitate war would be pacific enough not to do it. But Veblen noted two dangerous exceptions to this rule. The first was Germany and the second was Japan. In each of these countries industrial power had developed without the concomitant growth of democracy. In each of these countries political power was in the hands of an oligarchy. Though the common man would gain nothing from war, the oligarchy might gain and would gain from a successful war. Germany and Japan, therefore, were two countries to which the world might look to force the pace in upsetting international peace.

      These two discussions seem to me to contain the most fundamental

      [print edition page 28]

      explanations of the rupturing of the peaceful world that came in 1914; and Veblen’s principle that industrial power in the hands of an oligarchy is a menace to the peace of the world is startlingly prophetic of the developments that have come in the 1930s. Democracy is pacific, dangerously pacific, as France and England and the United States demonstrated in the four or five years preceding the outbreak of the war in 1939. Woodrow Wilson had a profound insight when he said that we must “make the world safe for democracy.”

      Only Vienna Bourse Makes Immediate Response to Assassination at Sarajevo, June 28, 1914. The assassination of the Austrian crown prince at Sarajevo on June 28, 1914, did not at once alarm the world. It alarmed Austria. There was immediate heavy selling of securities on the Vienna Bourse. Paris was preoccupied with her own economic and political problems and did not take the episode seriously, although there was recognition that the situation called for tact and decorum. Paul Leroy-Beaulieu, in the issue of L’Economiste Français next following the assassination, gave editorial expression of sympathy for Austria and her venerable ruler, Franz Joseph, with a degree of courtesy that makes one feel that he was performing an official duty.

      Bourse Panics in Berlin and Paris, July 23. On July 20 Vienna had a further heavy decline in stocks. It was July 23 before Paris and Berlin had real panic in the stock markets. There had meanwhile been reflexes in the stock exchanges of London and New York. By July 25 selling in both markets on foreign accounts was very heavy. On July 27 the Vienna Exchange was closed. The next day Austria declared war on Serbia. Stock exchanges were closed on July 28 in Montreal, Toronto, and Madrid. On July 29 the Berlin Bourse discontinued. By July 30 the panic had reached London and bourses were closed in Saint Petersburg and all South American countries. The Coulisse (curb market) was closed in Paris that day. On the same day the Parquet, the official bourse of Paris, virtually suspended selling, although it was not officially closed until September 3, when the French government withdrew from Paris to Bordeaux.

      London and New York Stock Exchanges Close, July 31. On July 31 the London Stock Exchange was closed, and five hours later (the difference between London time and New York time), at four minutes before ten—the time for the opening of the New York Stock Exchange—the authorities of that institution announced to the anxious brokers that it would not open. Enormous selling orders from Europe and other frightened markets had accumulated in their hands overnight, selling orders “at the market” (meaning at any price obtainable); and it was clear that New York alone could not stand the strain of the concentrated selling of a frightened world.

      On August 1 Germany declared war on Russia, and late at night on August 4 England declared war on Germany.

      Danger, Uncertainty, and the Rush to Liquidity. Selling on the the stock

      [print edition page 29]

      exchanges at the outbreak of the war was an illustration of a fundamental principle in economic life. When there is general confidence in the uninterrupted goings on of economic life, confidence in the legal framework under which economic life operates and in the essential integrity and fairness of governments, men with capital prefer to have their capital employed. They want income from it. They want capital to work with, as giving additional scope to their personal efforts and their personal abilities. They are quite content to have their capital embodied in physical goods destined for future sale, in shares in industrial undertakings, in real estate which brings in rentals, or in loans to active men engaged in industry and commerce. But when grave uncertainties arise, and, above all, when unexpected war comes, men prefer gold to real estate. The man who has his wealth tied up in lands can make no shift. He must sit and take what comes. With the apprehension of war, however, the effort is made to convert illiquid wealth into liquid form as rapidly as possible, even though heavy sacrifices are involved.

      London Strong vis-à-vis the Outside World. London was the center for international payments in 1914, and London, like all financial centers, was hard hit. But in its financial relations with the rest of the world London was exceedingly strong. The world owed London. London did not owe the world. Foreigners held sterling balances in British banks, but, on a vastly greater scale, foreigners owed sterling on daily maturing quick obligations to the British money market.

      For example, a French coffee importer in Havre buying coffee at Santos in Brazil would arrange with a London acceptance house to finance the transaction. The coffee would be priced, not in francs or milreis, but in pounds sterling. The Brazilian exporter would draw, not on