Archive for February, 2013

Short of force: US debt diplomacy in the 1920s

February 27, 2013

‘During the latter half of the nineteenth century’, wrote Keynes in his Treatise on Money, ‘the influence of London on credit conditions throughout the world was so predominant that the Bank of England could almost have claimed to be the conductor of the international orchestra.’

By 1919 the baton had been wrested away, though not all of its attendant privileges were yet conceded.

Washington found itself in the novel position of global creditor, thanks largely to the enormous wartime growth of intergovernmental liabilities.

War had left several of the European imperial powers as broken reeds, while the victorious Allies  Britain, France and Italy — incurred heavy debt obligations to the US Treasury.

Inter-Ally loans

Over the next decade, with the US Federal Reserve now holding nearly half the world’s gold reserves, the US State and Treasury departments used this privileged status as a lever to intervene in the fiscal and monetary affairs of debtor governments, most notably in Europe, and thereby to shape their foreign and security policies.

Despite the conventional picture of aprèsguerre ‘isolationism’, it was this hypertrophy of the US state during the 1920s  extra-territorial incursions of its policymakers into other jurisdictions, including encroachments within the world’s developed European core  that provided both a staging post and testing ground for later expansionism.

Washington’s political domination of its European ‘partners’ during this earlier epoch would eventually allow imperialism, after 1945, to take the new institutional forms henceforth associated with Wilson, Franklin Roosevelt and Clinton’s ‘liberal internationalist’ foreign policy.

Dawes London Conference 1930

In 1921 the new Republican administration announced that a swiftly growing pool of US overseas assets was ‘assuming an increasing importance’ for ‘foreign political relations’.

Proclaiming official ‘alarm’, in mid-1921 President Harding, along with Treasury Secretary Mellon, Commerce Secretary Hoover and Secretary of State Hughes, met in Washington with representatives of JP Morgan & Co. and other investment houses and banks.

Hoover described the result:

It was finally agreed that all proposals for new foreign loans should be submitted to the State Department for its opinion, and a public notice to that effect was issued on March 3, 1922. The State Department in turn was to submit these proposals to Commerce and Treasury. The Commerce Department gave advice to the promoters, as to security and reproductive character. The State Department advised upon political desirability and undesirability. We made no pretense of authority, but relied upon cooperative action.

In 1926, writing in Foreign AffairsJohn Foster Dulles would describe the ease with which cooperation ensued: ‘There is, generally speaking, a real willingness on the part of American bankers to subordinate their interest in aid of the attainment of important national objectives in the field of international relations.’

Indeed the US foreign policymaking elite  which from 1921 found permanent organization outside the State Department via the Council on Foreign Relations  was heavily populated by J.P. Morgan & Co. partners like Henry Davison, Thomas Lamont, Dwight Morrow and Russell Leffingwell (the CFR’s inaugural president was Morgan’s legal counsel John W. Davis).

(Other New York investment banks like Lazard, through figures like Frank Altschul, also contributed personnel straddling the business elite and foreign-policy formation.)

Lamont attended the Paris Peace Conference as a Treasury Department delegate; he and Morrow served as diplomatic envoys to the 1924 Conference of London, where Whitehall and Paris agreed reluctantly to the Dawes Plan.

In 1922 Lamont confided to Jack Morgan that Mellon appeared to think ‘that if we keep alive all these notes owing to us from dinky little countries all over Europe, the fact that we are holding these notes will give us a sort of stranglehold politically on some of those countries and enable us to tell them what they shall and shall not do. Herbert Hoover has the same benevolent idea.’

The CFR’s 1928 Survey of American Foreign Relations described how federal supervision of foreign loans worked:

The [State Department’s] attitude is expressly one of watchfulness in the country’s larger interests of foreign relationships. It seeks (and has obtained) the cooperation of bankers, and its checks are applied so informally as to rely upon telephonic and verbal communication…

No matter how mild it is, any government action has unique and dominant implications. A request becomes a command when it emanates from a government department. To the bankers the request for cooperation was agreeable enough, for, apart from their desire not to impede the attainment of national objectives in the domain of foreign policy, the imprimatur (if the action of “passing” a loan application may be so called) of the State Department on any issue would connote a certain, if ambiguous, standing for the bonds to be marketed. It follows that any other course than acquiescence in the department’s wishes or acceptance of its ban would make it difficult for the issuing house to dispose of its loan to the American investor.

The pattern of formal objections and refusals of permission conformed exactly to strategic considerations.

With the suppression of Bolshevism being the foremost concern of postwar diplomacy, an embargo (not airtight) was imposed on lending to Soviet Russia.

And from 1924 the French government was unable to refinance its sovereign debt until it agreed to negotiate a repayment schedule with Washington’s World War Foreign Debt Commission (a three-year moratorium on interest had expired in October 1922).

The State Department’s refusal of permission to float a $100 million French loan through J.P. Morgan had the desired chastening effect on the Quai d’Orsay. It was soon brought to heel amid the Ruhr Crisis, rapid depreciation of the franc (one-fifth its prewar value), and the effective closure of the London capital market before Britain’s 1925 return to the gold standard.

The annual US Treasury Department report describes the calculated, sharp and precisely-timed application of pressure:

Early in 1925, after much consideration, it was decided that it was contrary to the best interests of the United States to permit foreign governments which refused to adjust or make a reasonable effort to adjust their debts to the United States to finance any portion of their requirements in this country. States, municipalities, and private enterprises within the country concerned were included in prohibition. Bankers consulting the State Department were notified that the government objected to such financing.

Henry Bérenger was sent to Washington to negotiate repayment terms with Mellon. In April 1926 he cabled back to Paris that  the ‘salvation of the franc and of the credit of France’ demanded their swift ratification.

By 1924, having wrested away effective control of the Inter-Allied Reparations Commission from Paris, business ‘experts’ from Wall Street and advisors from the US departments of Treasury and State were granted the right to monitor public expenditure in several Central European states.

These included Germany (via the Dawes Plan), parts of the former Austro-Hungarian Empire and newly created (and solidly anti-Bolshevik) states carved out from the former Tsarist Empire.

Following episodes of hyperinflation, the Hungarian ($50 000 000) and Austrian ($100 000 000) governments each borrowed stabilization funds from the League of Nations.

Conditionality attached to these loans compelled the indebted parties to undertake various institutional changes decreed by the creditors – including establishing central banks.

Under the borrowing protocols, these central banks would be constitutionally forbidden from refinancing government debt. (Adherence to this principle would later see the Reichsbank’s Hjalmar Schacht incur the ire of Hitler for refusing to finance 1930s armaments spending. The same prohibition would be included in the 1992 Maastricht Treaty of the European Union).

The terms also obliged the borrowing governments to submit to the oversight of a League of Nations Commissioner-General, who would monitor and adjust government expenditure to enforce compliance with the repayment schedules and other binding loan conditions.

The League Commissioner-General in Budapest, described by Time magazine as ‘the financial dictator of Hungary’, was the US’s Jeremiah Smith. Earlier attempts to have Roland Boyden, the US representative on the Reparations Commission, deployed to Vienna had been scuttled by the State Department.

Meanwhile S. Parker Gilbert, Mellon’s undersecretary at the US Treasury Department and later a J.P. Morgan & Co. partner, was installed as Agent-General for German reparations under the Dawes Plan.

The Polish government, recently turned over amid hyperinflation to the military strongman Jozef Piłsudski, also avoided League of Nations financial administration. Ignoring the imprecations of the Bank of England, Warsaw preferred oversight by a Wall Street ‘money doctor’.

The US ambassador in Warsaw had greeted Piłsudski, following his 1926 coup, as ‘the only man… who can prevent a Communistic uprising.’ Meanwhile he wrote to New York Federal Reserve Bank governor Benjamin Strong: ‘The net result of the revolution will be a strong and honest government which will lean towards America and American ideas rather than towards France.’

Upon consultation with Strong at the New York Fed, the new Polish government turned to the US economic advisor Edwin W. Kemmerer. Kemmerer and his ‘commission of American financial experts’ undertook a review of the Polish economy and its institutions.

Bank of England officials affected to find it ‘incredible’ that the Polish government would accept loan controls administered by  ‘a more or less irresponsible body of American bankers.’

The Kemmerer group’s policy advice for attaining ‘stability’ strayed far and wide: ‘As long as Poland’s international problems remain as they are … a strong army must, of course, be maintained.’

But above all, to stabilize its currency and return to gold convertibility, the Polish government was enjoined by Kemmerer’s experts to abandon its traditional reliance on French creditors:

Since the war the great bulk of the foreign loans floated throughout the world have been floated directly or indirectly in the American market; and this situation is likely to continue for some years to come. A large part of the world today is zealously seeking foreign capital. The United States is the principal source of such capital. A country that appoints American financial advisers and follows their advice in reorganizing its finances, along what American investors consider to be the most successful modern lines, increases its chances of appealing to the American investor and of obtaining from him capital on favorable terms.

Kemmerer was followed in Warsaw by US Treasury official Charles S. Dewey, who became a director of the Bank of Poland.

A 1927 publicity pamphlet written by John Foster Dulles for Bankers Trust read: ‘Polish stabilization is the first such operation to be realized under distinctively American leadership in all its phases.’

Poland loan 1927

Historians have drawn attention to how these ‘financial reconstruction’ programs, involving administration by external creditors, precociously anticipated features of later IMF structural-adjustment programs (compare, for example, the conditions imposed in Britain following its 1976 balance of payments crisis).

But installation of a debt-collection agency within the domestic state, staffed by foreign agents of the imperial powers and with the authority to directly control excise or customs revenue, might also be compared to the Chinese Imperial Maritime Customs Service, the Ottoman Public Debt Administration, or Greece’s International Financial Commission.

In 1922 the US State Department sent Arthur Milspaugh to Tehran as administrator-general of Persian finances; Jeremiah Jenks had travelled to China in 1904 to collect indemnities on behalf of the imperial Powers following the Boxer Rebellion.

Similar US outposts had been installed throughout the Caribbean basin and Central America over previous decades. The most notable case came from the Dominican Republic, where the Santo Domingo Improvement Company assumed the fiscal functions of state in 1893. Backed by warships, the Roosevelt administration took over Dominican finances in 1905.

Following this precedent, and after the announcement of the so-called Roosevelt Corollary to the Monroe Doctrine, US officials and New York bankers assumed administrative control of the customs houses of Nicaragua in 1910, Honduras and Guatemala in 1911, and Haiti in 1915.

In 1918 the Austrian economist Schumpeter had observed that ‘the budget is the skeleton of the state, stripped of all misleading ideologies’.

Thus Washington’s administrative control over the fiscal resources of its debtors, European as well as Latin American and Asian, allowed it to alter the substance of the domestic politics and internal social order of those countries.

German aspirations for a continental Mitteleuropa were thus exposed as idle daydreams, as were French hopes for a Europe threaded together by the loans of Société Générale and the Parisian bourse.

In 1927 the poet Paul Valéry observed mordantly: ‘Europe visibly aspires to be governed by an American commission. Its entire policy is directed to that end.’

September 1924 - S. Parker Gilbert - Agent General for German Reparations

In January 1923 a British delegation, led by Chancellor Stanley Baldwin and the Bank of England’s Montagu Norman, travelled to Washington to negotiate a settlement of Britain’s sovereign liabilities with Treasury Secretary Mellon and the World War Foreign Debt Commission.

Lloyd George remarked:

A business transaction at that date between Mr. Mellon and Mr. Baldwin was in the nature of a negotiation between a weasel and its quarry. The result was a bargain which brought international debt collection into disrepute… [This] crude job jocularly called a settlement, was to have a disastrous effect upon the whole further course of negotiations on international War Debts. The United States could not easily let off other countries with more favourable terms than she had exacted from us… Equally the exorbitant figure we had promised to pay raised by so much the amount we were compelled to demand from our debtors… I cannot help saying that I think in this matter of Debt Settlements Great Britain has had very shabby treatment, and had Great Britain been the creditor… I should have been a little ashamed as a Britisher if we had treated in this fashion a country so closely linked with ours in language, history and race.

Mellon boasted of having ‘made for the United States the most favourable settlements which could be obtained short of force… The only other alternative which they might urge is that the United States goes to war to collect.’

At this time, the US, UK and Japan were in fact engaged in an arms race. Each rival power was frantically increasing the size of its naval fleet, in particular capital ships.

Washington used its position as global creditor to demand that its European debtors reduce their military spending.

Hoover deplored how Allied governments were channelling national resources towards armaments instead of repaying wartime debts to the US Treasury: ‘loans that are dissipated… in military expenditure or in unbalanced budgets, or in the bolstering up of inflated currencies, are a double loss to the world.’

Following the 1922 announcement of the new policy on State Department oversight of external investment, Hoover explained to Benjamin Strong of the New York Federal Reserve Bank that a ‘governmental interest lies in finance which lends itself directly or indirectly to war or to the maintenance of political and economic stability’:

We are morally and selfishly interested in the economic and political recovery of all the world. America is practically the final reservoir of international capital. Unless this capital is to be employed for reproductive purposes there is little hope of economic recovery. The expenditure of American capital, whether represented by goods or gold in the maintenance of unbalanced budgets or the support of armies, is destructive use of capital. It is piling up dangers for the future of the world…

The most pertinent fact with regard to Europe today is that the whole political and economic life is enveloped in an atmosphere of war and not of peace. Restrictions on loans made from the United States to reproductive purposes will at least give the tendency to render impossible that form of statesmanship which would maintain such an atmosphere.

The Washington Naval Conference was held from November 1921.

There, the Five-Power Treaty (which included France and Italy) imposed limits on construction of new capital ships (aircraft carriers) while in the Four-Power Treaty the state parties (UK, Japan, US and France) agreed on bases and territorial possessions in the western Pacific. The Nine-Power Treaty sought to hold other powers to the terms of Washington’s Open Door Policy, forbidding dismemberment of China.

The combined outcome reduced the relative weight of British naval power, and broke the Anglo-Japanese naval alliance in the Pacific.

In 1923 British military spending fell by £50 million.

Meanwhile US-British strategic rivalry proceeded along several fronts.

An Anglo-French condominium (established through Sykes-Picot, the San Remo conference and secret protocols to the Treaty of Sèvres) had divided the oil-rich territory of the former Ottoman Empire and excluded US interests.

British armed forces had captured Mosul after signing the armistice with Turkey.

Lloyd George’s Cabinet Secretary Maurice Hankey had noted that ‘oil in the next war will occupy the place of coal in the present war, or at least a parallel place to coal’:

The only big potential supply that we can get under British control is the Persian and Mesopotamian supply. [Therefore] control over these oil supplies becomes a first-class British war aim.

‘I do not care under what system we keep the oil’, Lord Balfour had said of northern Mesopotamia and Iraqi Kurdistan in 1918. ‘But I am quite clear it is all-important for us that this oil should be available.’

The ‘system’ settled upon was a British League of Nations mandate over Mesopotamia, and the enforcement of an oil exploration and production concession granted in 1914 by the Ottoman government to the Turkish Petroleum Company (in which Anglo-Persian held a 50% stake, Royal Dutch Shell 25%, and the remaining 25% formerly held by Deutsche Bank was re-allocated after the war to the French government).

The US State Department was naturally displeased by the Anglo-French monopoly, seeking to open the region to investment by US-owned oil firms.

Secretary of State Frank Kellogg remarked to the Navy Secretary:

In view of our probable future dependence upon foreign reserves of petroleum, the importance of keeping the Government of the United States in a position consistently to support and assist American interests… will be appreciated.

Open Door principles of equal commercial opportunity were thus invoked, while Allen Dulles of the State Department’s Near Eastern Division insisted that the Turkish Petroleum Company’s concession was invalid.

In September 1919 Standard Oil of New York (Socony) sent geologists to undertake exploration in Mesopotamia:

One of them incautiously sent a letter to his wife telling her “I am going to the biggest remaining oil possibilities in the world” and “the pie is so very big that whatever had to be done should be done to gain us the rights which properly belong to American citizens.

The British Foreign Office intercepted the letter and the geologists were detained in Baghdad.

Several years of diplomatic acrimony followed between Washington and London. By October 1920 the British ambassador in Washington commented: ‘At the moment there is an hysteria of hatred against England and all her works.’

Throughout early 1921 the Foreign Office’s intransigent response to US State Department appeals continued. But in mid-1921 members of the British political elite suddenly decided to accommodate US oil interests in Iraq.

Cabinet declared that: ‘Britain cannot quarrel with the United States.’ Winston Churchill wrote to Lord Curzon that ‘so long as the Americans are excluded from participation in Iraq oil we shall never see the end of our difficulties in the Middle East… The importance of reconciling American oil interests… is so great that we may well pay a high price for it.’

In March 1922 Stanley Baldwin personally met the president of New Jersey Standard Oil, and Cabinet agreed to send John Cadman as Whitehall’s envoy to the US to arrange a deal.

Following extended negotiations, Standard Oil of New Jersey, Socony and Gulf Oil were granted an equity stake (a combined 23.75%) in the Turkish Petroleum Company (renamed the Iraq Petroleum Company).

Iraq petroleum company pipeline

But this obviously was a pragmatic and limited retreat by the British empire  reculer pour mieux sauter  rather than a broad assent to Open Door principles that might further crack open the British and French spheres of influence to US firms.

Plainly it was not true, as Keynes claimed, that since the war the United States could ‘influence the international situation’ to suit itself.

The British, French and other colonial empires still remained as exclusive economic zones. Meanwhile the gold-exchange standard agreed at the 1922 Genoa Conference had retained the role of the pound sterling as a reserve currency.

As suggested by Keynes’s opening quotation, this conferred privileges on the City of London and authority on the Bank of England, and partially immunized Britain from balance-of-payments problems.

Between 1870 and 1914 the international payments regime, nominally a gold standard, had effectively been a ‘sterling exchange standard’, with foreign governments holding much of their external balances in sterling reserves, and international payments settled using British state liabilities and adjustments to the London discount rate.

‘Pax Britannica’, said Polanyi, frequently ‘prevailed by the timely pull of a thread in the international monetary network’, with London sucking in capital flows through a tweak of the discount rate.

But during the 1920s London and Paris faced balance-of-payments pressures that they had avoided during the Belle Époque.

With the British and French states now struggling, by the mid-1920s, to maintain convertibility of their debt into gold at a fixed rate, their currencies lost safe-haven status and automatic acceptability as a means of payment. Unchallenged pre-eminence as world financial intermediaries and sources of credit was also lost.

The political authority of the Bank of England and Banque de France in European capitals was reduced as European borrowers, traditionally reliant on loans underwritten and floated in London by Barclays or in Paris by Société Générale, now turned increasingly to Wall Street investment houses to secure financing.

British and French involution thus heralded, for the US business and political classes, a glorious morning of national extroversion.

What hitherto had been domestic agencies like the Federal Reserve Bank of New York suddenly acquired an international policy reach, expanding their perimeter of influence to Warsaw and Budapest, as well as Tehran and Bogotá.

Across central and eastern Europe during the mid-1920s, currency stabilization, emergency loans and ‘reconstruction’ programs allowed US officials and economic advisors to take over administrative functions of debtor states (e.g. Horthy’s Hungary, Piłsudski’s Poland) that, a few years earlier, had faced the threat of socialist revolution and now were bulwarks of anti-Bolshevism.

Washington was thus able to affect the balance of forces within the propertied classes and governing elites of other countries.

US rulers could encourage the British and French states to promise to maintain convertibility of their debt into gold at a fixed rate, then watch as their governments enacted the wrenching policies needed to defend gold convertibility. (During the 1920s the Federal Reserve sterilized gold inflows, inflicting deflationary pressure on other economies.)

In 1920s Britain, as described by Keynes, deflation expressed the social supremacy of banks, financial institutions and the saving classes over the interests of borrowers  industrial and commercial firms  and their employees.

The result of credit restriction, besides stuffing money ‘into the pockets of the rentiers’, was that during Britain’s interwar years net additions to the stock of productive fixed capital (buildings, equipment, machinery) were meagre.

Capital intensity in interwar Britain

Since a higher level of output per unit of capital, alongside a lower share of value-added going to wages, raised profits, the domestic propertied classes were satisfied with this arrangement and a stable elite coalition persisted in Britain as it did not throughout much of Europe.

Interwar British profit rate

Yet the absorption of the surplus product by unproductive expenditure (dividends, interest payments, luxury consumption, etc.) prevented investment in new technology and impeded productivity growth.

Britain’s postwar technological backwardness would have lingering effects, the absence of an advanced and large-scale capital-goods sector (and the export weakness and chronic external deficits that resulted) providing an enduring economic basis for London’s ever deeper military-political submission to Washington.

The events of the 1920s would have lasting consequence for all the European powers that had been left weak by accumulated wartime liabilities and the social crises of the immediate postwar years.

In conditions that approximated Washington’s later imperial tutelage of ‘less-developed’ countries, personal connections were established and ideological affinities were cemented between a generation of US and West European financiers, businessmen, lawyers and state officials.

Individuals like John Foster Dulles, Jean Monnet, John J. McCloy and Dean Acheson  the first two of whom met at the 1919 Paris Peace Conference then worked intimately together in 1927 on a Polish stabilization loan underwritten by Bankers Trust and Chase National  would later emerge during the 1940s as eminences of the Atlantic alliance and ‘the father of Europe’ (Monnet).

John Foster Dulles funeral 1959

It would take the Second World War, the Atlantic Charter, Lend Lease and the Bretton Woods agreements (if not the Suez Crisis) before the institutions of world capitalism were finally remade to fit the designs of the US propertied classes.

But the 1920s laid solid foundations for Roosevelt’s later renovation: establishing circuits of financial, productive and commercial capital, and nurturing the personnel (technical advisors, diplomatic officials, etc.) and the intra-elite channels that would eventually guide Bretton Woods negotiations, the Marshall Plan, NATO, the European Coal and Steel Community and the Treaty of Rome.

Here, in the years of so-called isolationism, was the seedbed for the protection racket established after 1945, and never dissolved.

In this latter development, the other advanced capitalist states of Europe and East Asia were subordinated within a US-controlled Cold War military and security ‘alliance’: a hub-and-spokes network of ‘partners’ in which Tokyo was reduced to a diplomatic underling and European strategic goals could find no independent expression, being corralled within NATO integrated command.

Dean Acheson NATO


State debt as the best money: the US Federal Reserve system turns 100

February 19, 2013

This year marks 100 years since the US Federal Reserve system was established.

It was among the final grafts attached to the executive branch of the federal state, in several decades of enlargement begun under Cleveland, McKinley and Roosevelt, which would reshape and beef up the federal apparatus, and stabilize its finances to fit the demands of a unified national market, the world’s new industrial workshop, and an aspiring imperial power.

State expansion took a literal form: the stock of federal assets was sharply increased from the 1890s by the addition of vast tracts of land reserves and natural resources in the country’s west and northwest. These 150 million acres contained valuable timber and mineral deposits.


The addition of such non-financial assets to the US federal government’s balance sheet helped to secure the state’s debts, including currency issues. If need be, the state could always sell its physical assets or borrow against the marketable resources they contained.

Most importantly, federal liabilities were backed by the largest non-marketable asset of the government: the discounted present value of future primary fiscal surpluses from tax and custom receipts.

State liabilities thus became more central to the workings of the monetary system.

Almost immediately following the Fed’s creation, and ever since, the exigencies of war and economic crisis have ratcheted upwards the role of the national central bank in monetary and credit arrangements.

Wartime collapse of the gold standard began the pattern: as the central bank evolved, so did capitalist money pass juddering through stages of development, with state liabilities (US Treasury bills and central bank notes) eventually taking over from gold as the supreme measure of value for commodities, as well as the basic means of payment and purchase.

The Fed, its initial reach extended beyond any imagining, thus became central to the functioning of a world monetary system that now operates on a US dollar standard.

This status has only strengthened the historically observed tendency for emergencies, economic and military, to prompt a wholesale renovation and sudden, spasmic swelling of the institution (the Fed) and augmentation of its authority in a compressed period of time.

Since the outbreak of crisis in 2008, for example, the Fed has been obliged to take large parts of the market-based credit system on to its own balance sheet, in an attempt to maintain liquidity and support asset valuations.

It extended currency swap lines to other central banks and introduced the novel Term Auction Facility, the Term Asset-Backed Securities Loan Facility, the Primary Dealer Credit Facilitiy and the Commercial Paper Funding Facility.

In 2009 the Fed began purchasing Mortgage-Backed Securities outright.

This new ‘market-making’ role led Jan Toporowski to describe the new ‘central bank as hedge fund’ and Perry Mehrling to name the Fed ‘dealer of last resort.’

The Fed’s balance sheet grew from $800 billion in 2007 to $3 trillion today.

Federal Reserve holdings

The Fed’s maintenance of a liquid market in US Treasury securities, through open-market operations and lender-of-last resort facilities, comports with the United States’ global borrower-of-last-resort status.

Since 1945 the US has effectively been the creator of money for world capitalism. The emission of dollars  first through postwar trade surpluses recycled as loans and capital export, then more recently via the outflow of government liabilities  has provided liquidity to the global financial system.

The enthusiastic purchase of dollar liabilities by foreign governments and private lenders has effectively removed the budget constraint for US military activities and armaments spending.

How did such a position arise?

nimitz class supercarrier

Following US entry into the Great War (and amendments to the Federal Reserve Act), the Fed’s chief task became to maintain a liquid market in US Treasury securities (‘shiftability’) so the wartime government could borrow cheaply.

As of 1917, the Signal Corps which then controlled US military aviation had received just 142 aircraft during the previous ten years.

Yet enormous Congressional appropriations (including the largest ever single authorization of $640 000 000), creation of an Aviation Board and tightly organized production allowed the War Department to order 22 500 Liberty engines and 15 000 aircraft were quickly built.

Federal debt grew from $1 billion in 1917 to $25 billion in 1919.

The Fed itself absorbed $2 billion in Treasury issues, financing these purchases by expanding its own deposit liabilities. This liquidity injection, swelling bank reserves and note issues, then funded private purchases of federal debt.

Treasury bonds thus became the preferred form of loan collateral and main source of liquidity support for the US private money and capital markets.

Liberty bonds

Yet by 1919 Washington had assumed a new position as global creditor, thanks largely to the enormous wartime growth of intergovernmental liabilities.

By 1923, with the Fed’s Tenth Annual Report, Benjamin Strong was positioning the Fed as a global central bank responsible for credit stabilization and returning European economies to the gold standard.

Over the next decade the US state leadership, holder of nearly half the world’s gold reserves, used this privileged status as a lever to intervene in the fiscal and monetary affairs of debtor governments, especially the European powers, and thereby to shape their foreign and security policies.

Here, in the years of so-called isolationism, was the seedbed for the protection racket established after 1945, and never dissolved: in which the other advanced capitalist states of Europe and East Asia were subordinated within a US-controlled Cold War military and security ‘alliance’: Tokyo reduced to a diplomatic underling and European troops serving deferentially under NATO integrated command.

I’ll discuss this period (the 1920s) in the following post.

Dean Acheson NATO

‘Group’-based property rights and collective guilt

February 13, 2013

Full of sententious pathos and power worship, various Australian media outlets repeated the edifying fable of prime minister Paul Keating’s Redfern address on the event’s 20th anniversary last December.

The reverence was familiar for ‘an oration critically acclaimed as Australia’s version of Martin Luther King’s “I have a dream” civil rights speech’, a ‘seminal moment in reconciliation [that] has reverberated for two decades because of the power and poetry of its words.’

If, it was conceded sombrely, subsequent years have not realized ‘our’ hopes of 1992, there nonetheless was abundant consolation in the high values themselves, and in the ‘progress’ of their expression by a mature and enlightened member of the Australian ruling elite.

Here, in the voice of centre-left propriety, spoke the cynicism of the bien-pensant editorial page: pious, evasive, self-congratulatory.

Journalistic effusions find an echo in the world of scholarly ideas. (The workaday proximity of journalists and talking heads to political leaders, alongside the maintenance of a steep social gradient between them, typically spawns infatuations that are both more intense and less durable than the mutual complicities and common enterprises shared by academic clercs, court philosophers and governing elites.)

In his celebrated book The Guilt of Nations (2000), historian Elazar Barkan described the emergence during the 1990s of a ‘new international morality’, now a ‘major part of national politics and international diplomacy’.

This liberal internationalism, given human form in the shape of Clinton, Schröder, Chirac and Blair, had developed between the 1950s and 1970s but only achieved full flowering after the Cold War, when minority sensitivities could be indulged and ‘national self-reflexivity’ afforded.

Under a ‘new globalism that pays greater attention to human rights… international public opinion and organizations are increasingly attentive to moral issues.’

NATO airstrikes in Yugoslavia were one symptom of this ‘growing moral fervour’, founded in a ‘desire for moral politics’ and the ‘growing democratization of political life.’

Collective maturity (here the statements of political leaders presumably stood in for the ‘general will’ of the mass citizenry, much as Washington and Brussels made up the ‘international community’) included a ‘willingness of nations to embrace their own guilt’.

The practice of government apologies was tied, but not necessarily so, to the awarding of monetary reparations, restitution of plundered goods or the recognition of group ownership of property.

This was what Barkan called an ‘emerging political sense’ of ‘neo-Enlightenment morality’. In it, ‘the liberal framework of individual rights’ was supplemented by recognition of group rights.

An ethno-regional group, in other words, could now appear as a subject of right, a legal personality or bearer of substantive entitlements qua group.

Collective rights included those to self-determination, land ownership, communal identity, language and cultural patrimony, equal participation in the professions, etc.

Group rights were distinct from (irreducible to) the rights possessed by individuals who composed the group.

In this ‘negotiation’ between liberalism and communitarianism, the solid ‘inner core’ of liberal rights was swathed and adorned, and thereby enriched, by ‘local traditions and preferences’, the ‘place of the community’ and ‘group cultures’, ‘particularities and identities’.

Yet the existence of group rights had until recently been ignored  not least by the original ideologues of liberalism. Community rights had thereby been violated (recognition of a group’s traditions being one such collective entitlement enumerated by Barkan).

This raised the matter of collective guilt for national wrongdoing.

For, as a bearer of rights might also acquire corresponding duties (e.g. to uphold the rights of others), so collective desert implied the complementary possibility of group liability arising from group violation of rights.

Ideological coherence, rather than logical necessity, thus ensured that the crediting of one nation’s account would be balanced by a matching debit in another national ledger. An entire nation or other group could acquire guilt for having inflicted historical injuries on other nations or ethno-regional groups.

Elazar Barkan - The Guilt of Nations

As one of the few attempts to historically situate the entry of ‘national guilt’ into approved usage, Barkan’s book had several merits.

First, it linked the legitimizing armature of Clinton-era human-rights imperialism abroad (Somalia, Dayton Bosnia, Operation Desert Fox, etc.) with attempts to preserve social stability at home through ‘reconciliation’ with suitable leaders of oppressed groups (in Canada, New Zealand, Australia and the US).

Second, it provided context for the change of tack made by development agencies, policy advisors, donors and NGOs (of which the World Bank’s 2003 about-face was only the most striking and belated) regarding the suitability of group-based property rights in agrarian land reform.

Yet, for all this, it was a complacent and Whiggish piece of a sadly familiar sort.

In attributing the behaviour, public pronouncements and military interventions of state leaders to the diffusion of some new ‘international morality’, a global ecumene of human rights, it gave a Panglossian rendering of contemporary imperialism that bears comparison to Steven Pinker’s recent fluff.

More serious examinations are needed of the ideology of national guilt. (Since Barkan’s book, prominent academic work on the topic has been the domain of psychologists such as Nyla Branscombe and Bertjan Doosje and, in Australia, Martha Augoustinos and Amanda LeCouteur.)

Chimera it may be, but the distorted vision itself requires explanation.

Collective Guilt

Today the concept of collective guilt finds a dedicated and respectable constituency. It adorns the policy submissions, press releases and website banners of left-liberal and ‘compensatory justice’ circles, i.e. lawyers, lobbyists, state officials and would-be ‘community representatives’.

Adherence is also widespread among what Larissa Behrendt calls ‘an educated, professional class’, the ‘new middle class’ that, so Keating has claimed, Labor governments ‘created’ during the 1980s. (Recall that these policy changes of the  Hawke-Keating government required the ideological foregrounding of the national ‘we’.)

What social foundations account for this common currency of respectable thought?

What historical circumstances license the extension of personal blame, incurred for wrongdoing by an individual, to a group or multi-person entity of which that person is a member?

(This is distinct from the question of indemnifying the individual for injurious acts committed ‘under orders’ or as part of a concerted group project.)

Here Barkan’s book, and the example of the limited-liability corporation, provide a clue.

Both provide historical evidence for the adaptability of ideological constructions to institutional changes: any entity may plausibly be characterized as a moral agent after it has been recognized as a legal personality or subject of right.

For example, the evolution of juridical categories has allowed recognition of the corporate enterprise as a legal person, distinct from its owners or those who founded it, persisting after its original members have departed. This status means the corporate enterprise is capable of buying, selling and owning property, entering into contracts, incurring debts, exercising certain rights and acquiring duties, suing and being sued in its own corporate name, etc.

Juridical accommodation, of course, merely granted legal sanction, ex post, to economic ‘facts on the ground’ (i.e. that a business enterprise was an accounting unit, an independent entity that could undertake transactions with external parties, and had its own balance sheet of assets and liabilities).

Economic and legal developments were then quickly filled with ideological content, the three levels bevelling smoothly to neutralize any potential difficulties arising from the institutional change.

Thus the economic subject  the bearer of property rights  could be represented as a natural artifact, as timeless as a person or a household, rather than as the historical product of contingent economic institutions.

Much as capitalism was personified, during more primitive times, in the heroic and risk-bearing individual ‘entrepreneur’, so the corporate firm has been anthropomorphized.

The corporation as an entity has been discovered to share various characteristics with natural persons: it is capable of wrongdoing, entitled to free expression (‘commercial speech’) and due process, etc.

The question of whether the corporate enterprise qualifies as a moral agent has been a topic of reflection, more or less turgid, from the Harvard Business Review to ANU’s Centre for Applied Philosophy and Public Ethics (CAPPE).

The PR nostrums of ‘corporate social responsibility’ and ‘business ethics’ spring from this unpromising soil.

Corporate Moral Agency

With the rise of the corporate enterprise, the depersonalization of property was accompanied by the personalization of the property holder.

Similarly, when one nation or ethno-regional group may be said, for example, to hold title to property, to have a common seal, to endure in perpetuity, and to be capable (via an incorporated entity, trust, etc.) of entering into enforceable contracts with another party for the transfer or use of that property, it may also coherently be said that another nation or group, having long ago (through its agents) unilaterally seized or confiscated this property ‘for itself’, has collectively abrogated the rightful possession of the first party and thereby committed a wrongful act for which it is morally responsible if not legally culpable.

Hence, in his Redfern speech, Keating’s description of colonial plunder persistently used the anonymous national pronoun: ‘We took the land.’

Keating’s notion of non-Indigenous collective responsibility for the destruction of Australian Aboriginal and Torres Strait Islander societies is the flipside to the Australian governing elite’s assignment of group-based ‘land rights’.

Mortmain, belatedly acknowledged, imposes liability on whatever party has infringed it.

Thus Gareth Evans, introducing Keating’s Native Title bill to the Senate in 1993:

We do owe our indigenous peoples, our Aboriginal and Torres Strait Islander fellow Australians, a huge debt for the destruction and dispossession that we non-Aboriginal Australians wreaked for over 200 years of Australian history. I hope that, by passage of this legislation tonight, we have repaid just a little of that debt.

Features of contemporary society are thus projected backwards onto the history that preceded them: groups or nations, having become subjects of economic right in the present day, are observed to have been so all along (the corporate form presumes they live infinitely). And, the distribution and re-distribution of property having been everywhere a bloody affair, this status can be shown to go along with that of moral agency.

The nation, like the corporate enterprise before it, is ‘personalized’. And, with a regretful shrug, it is declared that one nation’s deprivation today follows, obviously enough, from another’s pilfering yesterday.

Ethnicity, Inc

As with the pieties of corporate ‘conscience’, personalization of the ethnos as a collective moral actor is treated, for the most part, as a salutary event. At any rate, its consequences for contemporary ideology and PR are not nugatory. It provides a set of shared premises and underpinning assumptions for polite opinion, and supplies intellectual justification and publicity cloak for official policy.

A vision of the nation as moral agent allows legal scholar Martin Krygier and Robert van Krieken to remark, approvingly quoting Keith Windschuttle, that ‘the debate over Aboriginal history goes far beyond its ostensible subject; it is about the character of the nation’:

We are members of a nation… [We] did come here and we did some things and not others. We must come to terms with what we did.

And thus recent efforts by agrarian reformers, development agencies (e.g. the World Bank), NGOs and imperialist states (USAID) to extend private-property rights into previously un-enclosed domains, by conferring ethno-regional groups with collective title to ‘customary land’, have also allowed, if not generated, the converse notion of national or collective guilt.

(And with that has come a variety of unpleasant paraphernalia, most notably tit-for-tat games of reciprocal plunder in central African ‘ethnocracies’. Here ‘restitution’ or compensation for past wrongs is frequently advanced via collective retribution, criminal sanction, asset seizures or punishment conditioned on ethnic identity, lineal descent or kinship, language or residence in a specific territory.)

Official recognition of ethnically-based ‘group rights’ typically involves the assignment of property rights to land, minerals or other scarce resources. (Meanwhile, culture may ‘congeal into a naturally copyrighted, legally protected collective possession; in other words, into genetically endowed intellectual property.’)

These rights may be used by group leaders to bargain for a share of the rent yielded by production using those resources. Access is exchanged for ‘benefit-sharing’ (as royalty payments, licence fees, etc).

The degree of bargaining leverage, and thus the share of rent captured, may be increased by appealing to nationalism, collective guilt and other supporting ideologies.

The Australian case can stand as an example. Group-based property is vested in a registered trust or other incorporated entity. These bodies are legally administered, ‘on behalf’ of communal owners, by salaried functionaries.

Senior figures enjoy a measure of managerial autonomy. This includes the right to negotiate, on behalf of the ‘community’, ‘informed consent’ deals with mining companies, to grant licences and commercial lease agreements (e.g. Indigenous Land Use Agreements and Native Title Agreements), and thus to strike rent-sharing contracts.

Bargaining power depends on what, in practice, are veto rights over commercial development (though they can be overruled on grounds of ‘national interest’).

Negotiated agreements channel into trust funds a portion of revenue from mining operations. A large share of these payments (>40%) is allocated to administrative expenses (consultants, legal advice, operational budgets, etc.) which the organizations can be expected rationally to maximize.

In 2010-11, for example, the Northern Land Council received a royalty-equivalent payment of $28 million from the Aboriginals Benefit Account (ABA) to cover administrative costs, and $9 million from the ABA for onward distribution to royalty associations.

That financial year the Northern Land Council spent $2 million on consultants and $3.3 million on travel expenses. The Chief Executive Officer received total remuneration (including salary, spending allowance and performance bonus) of $172 000. The five other senior executives each received salaries of $126 000.

This middle class of salaried bureaucrats and contractors absorbs a portion of the social surplus product.

As living standards for the vast, propertyless majority of Australian Indigenous people have stagnated or declined, the transfer of wealth and influence to these functionaries and ‘group representatives’ has been the material basis for ‘reconciliation.’

Aboriginals Benefit Account - royalty equivalents

Indigenous Land Use Agreements

Ideological support for this transfer, on the other hand, comes from various pieces of bienséance that since 1991 have gone by the name ‘reconciliation’.

The latter is an official project to build ‘partnerships’ between Indigenous people and ‘the wider community’ (sic), weaving ties between Aboriginal and Torres Strait Islander ‘representatives’ and ‘government, business, peak organizations and community groups.’

The origin of this enterprise may be dated to the third quarter of the twentieth century, and to policy decisions made by loyal servants of the Australian state from across the partisan spectrum: Hasluck, Beazley, Woodward, Barnes, Coombs, Chaney.

Kingpins of the business establishment  mining companies, banks and corporate law firms  were enthusiastic bankrollers. Behind this, obviously, lay calculations of advantage and expedience.

Suitably repackaged for public consumption in the progressive language of ‘self-determination’, state policy won warm support from the periphery of the political world (lobbyists and well-meaning ‘activists’). It was fortified by the intellectual connivance of eminent academics (anthropologist Bill Stanner and ‘left-wing’ historians Henry Reynolds and Ann Curthoys). Several of the latter were patronized by Kirribilli House and launched by the mainstream media.

The sycophancy with which Keating is unanimously remembered says much about this milieu.

Key flanks secured, the project won the public battle of ideas easily, attracting a nod of legitimacy from editorial sages, press commentators, talking heads and nearly the entire spectrum of respectable opinion. (The noisy opposition of sectional interests, though intermittently useful enough to be given a public airing, was weak; it exercised little independent influence on state policy.)

Tactical disagreements on the scale and destination of disbursements aside, elite comity reigned on the need to share the spoils. With conventional wisdom thus debauched, the broad population was easily disoriented.

Collective guilt forms a central thread in the ideological tangle that Mick and Patrick Dodson like to call, in a telling phrase, Australia’s ‘unfinished business’. The nature of this venture may be gleaned from the elder Dodson’s remarks about the Northern Territory ’emergency response’, made upon accepting the 2008 Sydney Peace Prize.

Hailing the previous day’s electoral coronation of Barack Obama, Dodson declared the ‘need for consultation, negotiation and partnership in dealing with any sector of the Australian community on whatever the issue.’ The NT intervention, in particular, was ‘pre-emptive, non-negotiated… crude, racist and poorly considered public policy.’ The government needed to ‘enter into a dialogue and negotiation over the nature of the engagement’.

Thankfully the Rudd Labor government, like Obama’s incoming administration, was seeking to avoid such ‘administrative disasters’, by recruiting accomplices from within ‘the Aboriginal Community’ to collaborate in ‘planning and implementation’ of such strategies, and in ‘governance delivery.’

‘Aboriginal-controlled organisations’ must have ‘roles in the delivery of the communications, education and social revolution’. Meanwhile aspiring young community leaders should ‘look to where they might maximise their participation in the strategies being put together by Industry and Government’.

The historical pre-condition for the emergence of Barkan’s ‘neo-Enlightenment mentality’  the enlargement of the liberal framework to include ‘the place of community’ and group rights  was a political development whereby national membership came to endow people with ethnically based claims to wealth (e.g. in which a ‘tribe’ could claim ‘customary’ ownership of a tract of land or other scarce resource).

Since the birth of industrial capitalism, technical innovations have meant a growth in the scale of production. This has been accompanied by gradual ‘de-personalization’ of the holder of title to property (the subject of right).

As the quantity of capital inputs required for production has increased, the asset owner has taken on a succession of more dispersed and ‘abstract’ forms: from the wealthy individual, to the family, the joint-stock company, the state-owned company and the institutional investor (pension or mutual fund).

Not all of these entities possess the attributes conventionally required for an entity to have moral responsibility: the capacity to hold beliefs, form goals, make decisions or undertake actions.

This does present problems for smooth ideological functioning of the existing system. The attempt to align economic, legal and moral categories cannot be supported, except by theoretical legerdemain or speciousness.

Here the categories of moral agency and legal personhood strive vainly for the flexibility of mainstream economics. For the latter, the rational agent may be ‘sometimes an individual, sometimes a household, sometimes a firm, sometimes a nation, and so on, depending on the demands of the problem and modeling convenience.’

Yet, though the nation may be an object of solidarity, affiliation and identification, it lacks any of the features that qualify the category for moral agency.

A business enterprise, on the other hand, may be held vicariously liable for the wrongs of an employee under the doctrine of respondeat superior.

Under the terms of the ’employment relationship’, the employee agrees to surrender, for a specified period, disposition over his labour. Having hired out his capacity to work, the employee must carry out the commands of the employer or managerial agent:

We will say that [the boss] exercises authority over W [the worker] if W permits B to select x [a ‘behaviour,’ i.e., any element of a set of ‘specific actions that W performs on the job (typing and filing certain letters, laying bricks, or what not)’].

That is, W accepts B‘s authority when his behaviour is determined by B’s decision.

In general, W will accept authority only if x0, the x chosen by B, is restricted to some given subset (W’s “area of acceptance”) of all the possible values. This is the definition of authority that is most generally employed in modem administrative theory.

Employees are contractually obliged to obey or comply with the directives issued by owners or their managerial delegates, whose commands have presumptive validity. The owner, who is the residual claimant of the firm’s profit (income net of wage and other input payments), is given the legitimate right to exercise authority and make decisions concerning the use of the firm’s income-generating assets or capital goods.

The administrative hierarchy of other multi-person organizations (e.g. armed forces) is organized according to a similar pyramidal command structure. It is this unified decision-making structure that makes it reasonable to attribute responsibility for actions to the collective entity rather than the individual atoms of which it is composed.

Thus we can say e.g. ‘the German Sixth Army beat a hasty retreat’ or ‘BP fouled up the Gulf of Mexico.’

It is of course possible to attribute causal powers to other types of social aggregates or collective actors  besides military command structures, business enterprises with administrative hierarchies, and incorporated legal persons that can enter into contracts and incur liability.

In some circumstances, the existence of certain institutions (e.g. political parties or strike committees) or a commonality of social position or interest (due to comparable degree of wealth) may give rise to group deliberation and conference, the emergence of decision procedures (whether formal or informal), mutual cooperation, collusion, unitary organization, the concerted exertion of purposeful effort, and joint action in pursuit of shared goals.

Thus it is permissible to say ‘the Pittsburgh Steelers won the Super Bowl’, ‘the German propertied classes turned in desperation to Hitler’, ‘the orchestra played well’, ‘the financial elite demanded that priority be given to low-inflation policies’ and ‘the gang knew they were done for after getting caught burgling the jewellery store’.

On the other hand, the idea, voiced publicly with increasing confidence throughout the 1990s, that a nation or an ancestral or ethno-regional group is a kind of supra-individual actor, a moral agent with responsibility for its actions, is neither philosophically respectable nor long-standing. (Here George P. Fletcher borrows Searle’s concept of ‘we-intentionality’ to argue for the idea).

Sorry book

I’ve devoted several posts here to criticizing the notion of collective responsibility for so-called ‘national’ wrongdoing, of popular liability for ‘acts of the nation itself’ (William Deane).

Conceptually, it leads from the miasma of the Volksgeist and the volonté généralevia the numerus clausus to the postwar atavism of collective reprisals.

Or else, evading obvious bloodletting or race hatred, it strides confidently into political quicksand.

Members of oppressed groups are encouraged to express solidarity with their ‘nation’ or ethno-regional group as the vehicle for salvation and personal advantage.

With the group becoming the primary object of affiliation and identification, broader political alliances based on common social positions are precluded, to the benefit of careerist national representatives. Ethnic tensions displace class antagonisms. Frustrated hopes for economic security and social betterment may then be consoled and redeemed by symbolic victories.

Thus, whatever their obedient publicists in the media and academy may say, group-based rights and the ideology of collective guilt have helped to sustain the widespread misery of Indigenous Australians (mass unemployment, incarceration, absent services, missing infrastructure, low life expectancy), rather than remedying or ameliorating it  or merely failing to do so sufficiently.

The latter deplorable circumstances persist because of them, in part, rather than despite them.

Now officially consecrated in public memory, their emergence in establishment discourse merits no fond elegies.

Les quarante-huitards? Postmodernism and French Stalinism

February 6, 2013

In a recent post I described the novelist Saul Bellow’s reaction to the literary review Les Temps modernes, which he encountered in 1948 while living in Paris.

Bellow would ‘scan the local sottises [and] observe with brutal contempt the latest wrinkle in anguish’:

One of the things that was clear to me when I went to Paris on a Guggenheim grant was that Les Temps modernes understood less about Marxism and left-wing politics than I had understood as a high-school boy.

Jean-Paul Sartre was ten years older than Bellow and a graduate from the rue d’Ulm. Among his prewar friends and fellow Normaliens were some prominent PCF intellectuals, like Georges Politzer and Paul Nizan. Yet Sartre didn’t read Marx seriously until the 1940s.

Nonetheless, in post-Liberation Paris, bestowed suddenly with enormous fame and influence, Sartre was esteemed as an authority on this and every other topic. Eager to consolidate this position, he leapt into print, with Les Temps modernes appearing from October 1945.

His early ventures into political pronouncement, like the 1946 essay ‘Materialism and Revolution’, in which the oracular tone betrayed rather than concealed the author’s ignorance, were accordingly embarrassing.

In them and in ‘political’ plays like Dirty Hands, Sartre used Marxist language and concepts (‘permanent revolution’, ‘united front’, etc.) with little regard for their established meaning.

Meanwhile his journal gradually developed a house ideology. For several decades this would remain stable yet incoherent: perched just off the PCF’s shoulder, it mixed relentless criticism of the party with, in the words of Edgar Morin, ‘courtesy, deference and flirtatiousness’.

Thus Bellow wrote later to Philip Roth: ‘When I landed in Paris in 1948 I found that the intellectual leaders (Sartre, Merleau-Ponty, etc.) remained loyal despite the Stalin sea of blood.’

By this Bellow meant Merleau-Ponty’s sinisterly fatuous remarks on the Moscow Trials, published in 1947. In them the philosopher had announced that ‘we are as far from [the prosecutor Andrey] Vyshinsky’s interpretation of them as we are from the leftist [Trotskyist] view.’

Sartre went on to draw closest to the PCF in the period between 1952 (Ridgway’s visit to Paris) and 1956 (the Hungarian uprising).

But neither before nor after this period did he develop any firm stance on the PCF based on an evaluation of Stalinism.

Responding in Les Temps modernes to the Hungarian events, Sartre expressed disappointment that the ‘path imposed on it by circumstances’ had led the ‘hidebound’ Kremlin leadership to ‘compromise on its principles’.

To a great extent, the lenient attitude of France’s marxisant intellectuals towards the Soviet bureaucracy (and the professional success enjoyed by these rapidly multiplying writers and academics) stemmed from the country’s unique political circumstances.

By 1948, Truman’s USA was undertaking a ‘de-Marxization of the intelligentsia’. Writers, artists and critics like Bellow, James Burnham and Clement Greenberg were shedding their anti-Stalinist socialism of the 1930s for the more salubrious fit of Cold War liberalism, on the way to full-blown reaction.

In contrast, les trente glorieuses, spanning France’s Fourth Republic and into the Fifth, involved a kind of permanent Popular Front, with Stalinism tolerated in official political culture and accommodated in the latter’s journalistic offshoots.

In 1952 Bellow’s friend and former socialist Mary McCarthy explained the contemporary behaviour of US intellectuals in a letter to a newly arrived Hannah Arendt.

Ex-Trotskyists, she said – including Greenberg, Sidney Hook and others from the Partisan Review crowd – were cooperating so intently with the HUAC because of bad memories from the Popular Front era:

They live in terror of a revival of the situation that prevailed in the thirties, when the fellow-travellers were powerful in teaching, publishing, the theatre, etc., when stalinism was the gravy-train and these people were off it and became the object of social slights, small economic deprivations, gossip and backbiting. These people, who are success-minded, think in terms of group-advancement and cultural monopoly and were really traumatized by the brief stalinist apogee of the thirties, when they suspected that their book, say, was not being pushed by their publishers because of stalinist influences among the salesmen or even the office-workers.

In postwar France different incentives prevailed. Ambitious intellectuals were presented with alternative prospects for networking, sources of patronage and routes to cultural authority.

Postwar, the eminence of Maurice Thorez’s PCF (le parti des 75 000 fusillés) had been restored. Along with the Stalinist party’s fortunes, so was the Popular Front, that travesty of socialism, revived. (The African-American novelist Richard Wright and Bellow’s friend, Ralph Ellison, had broken with Marxism due to disgust with the US version of this policy, which involved the prostration of Earl Browder’s CP to FDR’s Democrats, the party of Jim Crow.)

From Liberation until May 1947 the PCF formed a series of coalition governments with the SFIO and the Christian Democrat MRP.

During this time Thorez, as vice-premier, and four other Stalinist ministers approved the Monnet Plan for the reconstruction of the French coal and steel industries. This involved reductions in real wages and increases to hours worked.

In April 1947 Thorez was forced to posture as a defender of 30 000 striking Renault workers, whom the Stalinists had initially tried to force back to work, when the SFIO came out in support of the striking employees.

As a mainstream correspondent noted:

[The] Renault strike is a revolt against wages policy and union leadership. The Communist-controlled Confederation of Labour [CGT] intervened on Tuesday with the aim of taking the strike under its control, but it became clear yesterday that the Communists felt they could only counter an attempt to outflank them by supporting the demands for wage increases.

Thorez and the other PCF figures were expelled from the government ministry.

With France threatened by ‘armed insurrection’ and ‘civil war’, the government was granted emergency powers. It duly invoked anti-strike and anti-sabotage measures to mobilize the armed forces, and in December 1947 the CGT ordered employees back to work.

The governing troika was succeeded by an anti-communist parliamentary alliance, as the following years saw a wave of strikes.

These were the formative circumstances greeting a generation of young French thinkers, born around 1930, as they graduated from lycée, khâgne and grande école. They would go on to be feted (and mischaracterized) as the clerks of la pensée 68:

Derrida (born in 1930), Foucault (1926), Lyotard (1924), Deleuze (1925), Baudrillard (1929), Sollers (1936), Irigaray (1932), Ricardou (1932), Wahl (1925), Thibaudeau (1932), de Certeau (1925), Genette (1930), Meschonnic (1932), Debord (1931) and Guattari (1930).

Derrida would later describe how ‘very difficult’ it had been for him, studying under Louis Althusser at the ENS during the early 1950s, ‘not to join the Party’, and thus ‘to be thought of only as a crypto-Communist or fellow traveller.’

When later, in 1971, Phillipe Sollers and Tel Quel broke finally from the PCF and embraced Maoism, the PCF’s La Nouvelle Critique and Les Lettres Françaises embraced Derrida, and he, with some ambivalence, reciprocated.

His contemporaries in the social sciences were just then forming the brilliant cadre of the Rockefeller-funded École des hautes études en sciences sociales:

Le Roy Ladurie (b. 1929), Le Goff (1924), Bourdieu (1930), Touraine (1925), Furet (1927), Nora (1931), Ferro (1924), Castel (1933), Morin (1921), Augé (1935), Lefort (1934) and Godelier (1934).

The thoroughgoing anti-communist purges that took place elsewhere following the ascent of Cold War liberalism did not occur in France until the mid-1970s, when the electoral alliance between PCF and SFIO made the Stalinists likely participants in a future government.

Until then, from roughly 1945 to 1975, the existence of an avowedly revolutionary socialist party with a mass base influenced French intellectual and creative matters to a remarkable extent.

The PCF funded daily newspapers, maintained literary reviews, served as chief patron for other publications, colleges and institutional entities, and held ‘progressive’ writers, scholars and artists within its orbit.

The PCF, through Georges Sadoul and trade unions, had played a major part in the Comité de Défense du Cinéma Français, which organized film-industry lobbying, strikes and demonstrations against the postwar Blum-Byrnes Agreement – mostly on grotesquely nationalist and anti-American grounds.

In 1948 state funding was secured for local film production. Thereafter funds were distributed by the Centre nationale du cinéma, in whose administration, led by Michel Fourré-Cormeray, PCF and CGT members exercised disproportionate influence if not the preponderance claimed by right-wing alarmists.

Though the early 1950s saw a purge of suspected PCF sympathizers from official positions, what Mary McCarthy had called the ‘Stalinist gravy train’ survived intact to a degree unknown elsewhere.

Meanwhile the comparative weakness, marginality and disorganization of French intellectual liberalism, represented by Raymond Aron, Jacques Rueff, Maurice Allais and Bertrand de Jouvenel, was striking.

The managerial elite and civil servants, trained at Sciences Po and the Ecole nationale d’Administration, were raised on a distinctly dirigiste ideological stew. This technocratic doxa was most appropriate for the reconstruction of a postwar society playing productivity catchup, in which the largest social class remained independent farmers and the technological frontier was patrolled by state-owned enterprises (energy and transport firms) and state-financed infrastructure projects (commercial banks and insurance companies had been nationalized).

To be sure, the CIA-financed Congress for Cultural Freedom had an influential local branch in the review Preuves. Atlanticism was favoured on the editorial pages of Le Figaro. French intellectuals, as distinct from businessmen, were well-represented in the Mont Pèlerin Society.

But the US State Department’s sway over cultural and intellectual life was limited as, backstopped by nuclear autonomy, De Gaulle kept France out of NATO integrated command. Aron and his anti-communist associates went through the necessary motions, but the PCF was tolerated, plainly presenting no genuine revolutionary threat.

Raymond Aron, Denis de Rougemont, Michael Josselson

Thus, during the Cold War, French thinkers offered a glamorous source of apparent dissent and free thinking to people elsewhere (especially US or West German academics) whose available outlets for radical political activity and cultural avant-gardism were few. (The enormous influence of Sartre on the thought and style of US cultural theorist Fredric Jameson, for example, has never been adequately emphasized.)

In such circumstances, the fact that people like Sartre and his epigones understood only a bowdlerized and travestied form of Marxism – never enlisting in the PCF but never being sure exactly why they didn’t – was of deep consequence.

The enormous postwar pretensions of French culture also rested, to be sure, on Paris’s traditional status as a global clearing house for literature and the visual arts. It remained a central site for discovery and diffusion of new talent if no longer for its production.

It also prospered thanks to various eminent refugees, imports and transfusions from the colonial empire and Francophone world. (This was one reason why the Congress for Cultural Freedom devoted so much of its efforts and funds to shifting the world’s art market from Paris to New York.)

But the political context mattered deeply. In France there flourished a kind of Popular Front culture, of the sort that in the United States did not survive the 1940s; and it allowed postwar French cinema, for example, together with that of Italy (home to the even stronger PCI), to resist the craning towards commercial mediocrity that characterized US and other entertainment products of this era.

Therefore André Malraux’s ballyhooed stint during the 1960s as De Gaulle’s Minister for Cultural Affairs coincided with a shift in the composition of French intellectual exports to the world.

The longstanding hierarchy of the beaux-arts, with letters at its apex, crumbled. Though Camus was awarded the Nobel in 1957 and Sartre famously rejected the prize in 1964, literature had lost its pre-eminent place in the cultural and media pantheon. It was replaced by an interdisciplinary social science, mixing linguistics and anthropology with philosophy, psychoanalysis, literary theory and radical politics.

In the world’s intellectual shelves and shop windows of the 1970s, France’s contribution would not be the defanged grandeur of Voltaire, Montaigne, Flaubert and the Louvre.

Instead, it would be gauchiste iconoclasm, marketed to a demographic bulge of college students and intellectuals in the advanced capitalist countries, who had been radicalized by imperialist war and the end of the long economic boom.


Assigned a prominent place in the intellectual marketplace, these radical-sounding but harmless notions – pumped out by assorted Maoists, crypto-Stalinists and anarchists – were shopped to a largely Anglophone New Left that had come to understand French produce as a guarantee of quality and the acme of political trenchancy.

Wahl, Sollers, Pleynet, Barthes

As previously mentioned, the avowed adherence to Marxism of many French intellectuals did not break until the mid-1970s.

Before it did, post-1968 reforms to French higher education granted secure academic positions to a cohort of younger intellectuals. Official approbation and media renown eased their dependence on Stalinist patronage for income, and eventually opened up wider vistas of career opportunity.

In the wake of the May-June évènements, the government established new campuses like the Centre Universitaire Expérimental de Vincennes, now University of Paris VIII.

According to François Dosse’s History of Structuralism, the new minister for education, Edgar Faure, approached Jean Dubois, linguist at Nanterre and ‘a PCF member known for his fair-mindedness’, to be dean of the new ‘experimental centre’.

Faure had declared before the National Assembly: ‘If those who claim to possess imagination have not seized power, it remains for power to seize imagination’. Dubois demurred at the official request, and Faure instead turned to Raymond Las Vergnas, dean and director of the Institut d’Anglais at the Sorbonne.

The latter contacted a young Hélène Cixous, along with other ‘left-leaning colleagues associated with the Institut d’Anglais (notably Bernard Cassen and Pierre Dommergues) who all knew and admired the American university system’:

In October 1968, he invited a commission of twenty well-known figures, including Roland Barthes, Jacques Derrida, Jean-Pierre Vernant, Georges Canguilhem, and Emmanuel Le Roy Ladurie, to discuss the orientation of the programs at Vincennes. A dozen of those present were quickly appointed to a central committee responsible for naming the academic staff…

Michel Foucault was in charge of hiring the teaching staff for philosophy; Jean-Pierre Richard was responsible in French literature; Jean Dubois, Jean-Claude Chevalier and Maurice Gross decided on the teaching staff in linguistics. The university included a department of linguistics, which was a real first, headed by Serge Leclaire, second in command in the Lacanian organization.

‘The grand project was to make Vincennes a small MIT, an American university, a model of modernity, an internationally known enclave with overtly interdisciplinary amibitions…

Here, especially among the linguists, flourished roseate visions of North American intellectual life, with MIT exemplifying a cutting-edge modernity worthy of emulation, envy and longing trans-Atlantic glances.

‘Faure loved the project, and Cixous’ group suddenly found themselves in charge of creating a new university out of thin air.’

PCF members at the Sorbonne such as the historian Guy Bois were apparently consulted, and decided to ‘throw their weight’ behind the Vincennes idea.

The recruits to Foucault’s philosophy department would be ‘structuralist-Maoist.’ Its leader had spent the 1950s and 1960s on friendly terms with Gaullism after a shortlived stint in the PCF. More recently, in Les Mots et les choses (1966), he had derided Marx as a minor Ricardian.

But, following his typically well-timed gauchiste pirouette, Foucault brought to his faculty the likes of Lyotard, Deleuze, Étienne Balibar, Alain Badiou and Daniel Bensaïd.

Deleuze, Sartre, Foucault at Vincennes

The linguistics and politics departments acquired eminences like Cixous, Tzvetan Todorov, Henri Meschonnic, Mitsou Ronat and Nicos Poulantzas.

The psychoanalytic school boasted Guattari and a nest of Lacanians: Jacques-Alain and Judith Miller, Gérard Miller and Jacques Rancière. All were formerly of Cahiers pour l’analyse; most were now part of the Maoist groupuscule Gauche Prolétarienne, which waged campus battles against Badiou’s tiny sect and other ‘Marxist-Leninist’ anti-revisionists.

Thus at Vincennes, and elsewhere, a flow of state funds and media promotion nurtured what may, at a stretch, be called an intellectual ‘research program’.

But (as later disputes over the label ‘post-structuralist’ would attest) members of this milieu were unified mostly by their allegiance to ‘radical’ or New Left ideology. For all its revolutionary phraseology, the latter had proved during May-June 1968 that it presented no threat to the French state and the existing social order, nor to the Stalinist leadership of the PCF and CGT.

Official indulgence and the seal of academic respectability were thus granted costlessly. This concession of institutional territory and prestige to stars of the  intellectual New Left (whose members favoured Gramscian rhetoric about ‘wars of position’) soon brought rewards for the forces of order.

Bensaïd Krivine 1969

In July 1972 the PCF, shifting to ‘Eurocommunist’ parliamentarism, announced a Common Program with the Parti socialiste. This electoral union, raising the likely prospect of renewed Stalinist participation in government, immediately provoked anti-communist hysteria throughout the organs of public opinion.

Amid stagflation and geopolitical disorder, the party’s usefulness had abruptly been exhausted.

As France’s unique postwar compromise was finally erased, the responsibility for pronouncing obloquies of socialism fell to writers and academic ‘radicals’ who until recently had been members or enthusiasts of avowedly Marxist organizations.

In the literary world, the occasion for this thoroughgoing anti-Marxist upheaval among intellectuals was the translation of Solzhenitsyn’s Gulag Archipelago. This 1974 publication became the pretext for an explosion of commentary concerning ‘totalitarianism’ and its political roots, and to the widespread abandonment of old commitments.

The arrival to media fanfare of the Nouveaux philosophes smoothed the scholarly ascent, in the person of François Furet, of revisionist histories of the Jacobin Terror.

Suddenly French intellectuals underwent a transformation that their counterparts in other countries had experienced during the late 1940s: the enthusiasm for Dostoevsky, the turn to Zionism and Atlanticism, and various antiquarian rediscoveries and revivals (in France, of Tocqueville, Constant and Guizot as weighty political thinkers).

As described above, Bellow’s cohort of New York intellectuals (Hook, Podhoretz, Kristol, etc.) had undergone just such a postwar conversion to Zionism, market liberalism, State Department cheerleading and full-blown reaction.

In 1970s France, at the forefront of these efforts to reconquer old territory was Claude Lefort, the former contributor to Les Temps modernes, and his old ally in the third-campist outfit Socialisme ou barbarie, Jean-François Lyotard.

In Instructions païennes (1977), Lyotard invoked Solzhenitsyn as an example of how ‘little narratives’ (stories from the prison camps) could defeat ‘master narratives’ such as ‘le grand récit marxiste‘.

Daniel Bell’s ‘end of ideology’, for which Raymond Aron had tried forlornly to gain a French audience during the 1950s, finally found a belated echo in Lyotard’s declarations of the death of ‘metanarratives’ and renunciation of ‘the desire called Marx’.

Time September 1977 - Nouveaux Philosophes

Marcel Gauchet, another former Socialisme ou barbarie philosopher, would soon found the influential centre-right journal Le Débat, bringing liberalism to the centre of national ideological life.

Together with the Saint-Simon Foundation, a think tank co-founded by Furet, Le Débat sponsored a vision of NATO Atlanticism as France’s natural external posture

Claude Lanzmann, another member of the Sartre-Beauvoir ‘family’ at Les Temps modernes, would achieve international renown by directing the film Shoah, on which he commenced work in 1974 at the invitation of the Israeli Foreign Ministry. (Lanzmann elevated Primo Levi’s ‘Hier ist kein warum‘ from the motto of a camp guard to a general prohibition applying to treatment of the Judeocide, declaring the ‘obscenity’ of seeking to understand the calamitous event.)

The temper was such that Furet could rapidly ascend to the summit of domestic intellectual life, wrangle a measure of international fame and win a position in Bellow’s Committee on Social Thought at the University of Chicago.

That the revelation of crimes by the Soviet bureaucracy involved such world-shattering novelty and induced such demoralization in French littérateurs of the 1970s testifies to their own wilful preservation of ignorance (and to France’s still rather monoglot intellectual layer, who apparently formed their own sturdy Maginot Line against the intrusion of ideas common abroad). There was, of course, much cynicism in these exclamations of shock and betrayal.

But the disorientation was genuine, and that fact is incomprehensible without noting the decades-long hold of Stalinism and the PCF over France’s ‘left’ intellectuals, both within the party and outside.

Of course, as decades of the Fourth and Fifth Republic passed, the PCF’s radical appeal had sharply subsided thanks to its support for the colonial wars in Indochina and Algeria and its opposition to the ‘spontaneism’ of 1968.

Thus the increasing popularity during the 1960s of other avowedly socialist groups or perspectives. Yet, though critical to varying degrees of what uniformly was described as a ‘hidebound’ PCF, these organizations or networks taught members little principled opposition to nationalism and Stalinism.

While deploring the PCF’s policy or outlook on this or that matter, most continued to nurse hopes in the party’s revitalization, and would re-establish contact at intervals and then periodically feel let down by it. These groups displayed scanty historical or political understanding of the Soviet Union, China, Algeria, Vietnam and other societies; and the ‘anti-Stalinist’ scene was characterized by a curious circulation of members back and forth between different groups labelled Communist, Marxist-Leninist, state capitalist, Guevarist or Trotskyist.

Emblematic figures were people like Pierre Frank or Alain Krivine, for whom the PCF retained a lifelong attraction. 

The collapse of French Stalinism alongside the Kremlin bureaucracy’s embrace of capitalism thus led to a rush for the exits during the 1980s. Territory was abandoned and the vacuum was filled by Pierres Nora and Rosanvallon, etc.

During the 1980s ‘left’ intellectuals universally accepted, as sufficient excuse to despatch Marxism and make a complete break with socialism, arguments that were astonishingly feeble and uncompelling.

Mass ideological conversions of this sort may be explained by material incentives, herd behaviour and the lure of social advancement (as in McCarthy’s description of ‘success-minded’ intellectuals).

But similar explanations may also apply in retrospect. The ultimately flimsy adherence to socialism of many French intellectuals, the shallowness of declared commitments revealed in a sudden cascade of apostates during the 1970s and 1980s, suggests the confused and corrupted – if not wholly cynical and ersatz – character of much intellectual Marxism during the 1950s and 1960s.

Perry Anderson has described the ‘extraordinary vitality’ of French culture during the Fourth and early Fifth Republics, comparing its ‘full flowering of the intellectual energies’ to today, when figures like Bernard-Henri Lévy’s have a ‘bizarre prominence’:

It would be difficult to imagine a more extraordinary reversal of national standards of taste and intelligence than the attention accorded this crass booby in France’s public sphere, despite innumerable demonstrations of his inability to get a fact or an idea straight. Could such a grotesque flourish in any other major Western culture today?

This assessment of the earlier period may itself be explained by the tastes of Anderson’s own New Left Review.

The journal’s editorial line has always displayed an ambivalence about Stalinism and nationalism; and during the late 1960s and 1970s the NLR enthused over Althusser and the ‘student movement’, provided fascinated attention for the latest academic fashion, and served as a platform for the ambitious to reach an Anglophone audience and its related perks: a visiting position at a US university, lecture and publishing opportunities, media attention.

Paris’s transformation during the late 1970s into a global ‘capital of intellectual reaction’, alongside Chicago, was not a simple annulment of all that came before. The counter-revolution in thought had been prepared for decades, and the most vicious reprisals accompanying the return of the old regime were performed by those who had hitherto been the most enthusiastic cadre for the existing order.

The source of the later deluge was France’s national anomaly during the 1950s and 1960s: a singularly fortunate reprieve from Cold War strictures that, elsewhere throughout the advanced capitalist world, scrubbed any trace of socialist ideas from respectable public discourse and eliminated Stalinist influence in trade unions and state agencies.

This local respite, given world conditions, provided an institutional setting for the survival and growth of intellectual carpetbaggers and parasites, feeding off the apparatus of Stalinism. Here was the heartland of so-called Western Marxism.

Anti-socialist tropes that found early expression elsewhere (c.f. the New York intellectuals once again) were thus postponed in France, only to assume more toxically inane forms when they did finally emerge.

These historical circumstances, rather than any peculiar national talent for obscurantism, account for France’s competitive advantage in the production and intellectual export of theoretical dross during the 1970s (in any case, import substitution quickly took over and the industry migrated to North America).

Who knows Marxism and its flaws better than the seers at Vincennes, the Sorbonne, the rue d’Ulm? people could say with a straight face during this period.

Thus Lévy’s nomination of Sartre as a personal hero and the ‘philosopher of the twentieth century’ is not merely the grotesque and undignified appropriation of intellectual credibility that is usually claimed. Sartre – lacking professional competence as a philosopher, novelist, playwright and political theorist – nonetheless became world-famous in each of these fields.

Was he not in this sense the forerunner of BHL, Glucksmann, Finkielkraut and Bruckner?

Sartre Glucksmann Aron

Keynes and interwar diplomacy: anti-communism, arms spending and the rentier interest

February 2, 2013

I ended a recent post with a long quotation from Thorstein Veblen’s The Higher Learning in America (1918).

It gave a taste of Veblen’s impressive candour  his verdict on the university bureaucracy making a painful contrast with the supine academic ‘critics’ of today: ‘[From] the point of view of the higher learning, the academic executive and all his works are anathema, and should be discontinued by the simple expedient of wiping him off the slate.’

Veblen, who edited the University of Chicago’s Journal of Political Economy, made few concessions to collegial decorum or to the canting pieties of official liberalism.

In the September 1920 issue of Political Science Quarterly, he reviewed J.M. Keynes’s book on the Versailles Treaty, Economic Consequences of the Peace.

His assessment of the book  ‘Mr. Keynes only reflects the commonplace attitude of thoughtful citizens’  gives some idea  the Cambridge Apostle as philistine!  why the later Veblen has been so neglected by that selfsame polite opinion, his scholarly contribution reduced to a few unthreatening slogans: the ‘leisure class’, ‘pecuniary emulation’ and ‘conspicuous consumption’.

In skewering the greatest liberal economist of the twentieth century, Veblen summed up, without euphemism, the predatory character of post-Great War diplomacy.

The latter, while draped in the Wilsonian finery of liberal internationalism, was devoted to the tawdry ‘pursuit of political chicane and imperialistic aggrandizement’, and above all to the ‘suppression of Bolshevism and all its works’, so that the planet could be ‘made safe for that Democracy of Property Rights on which the existing political and civil order is founded.’

The Allied ‘peace’ conference, he showed, marked the true beginning of the Cold War: President Wilson’s Fourteen Points, Churchill’s wish to see Bolshevism ‘strangled in its cradle’, Clemenceau’s hopes for a cordon sanitaire in central Europe, and the intervention of Allied forces on the side of counter-revolution in Russia’s Civil War:

[Keynes’s Economic Consequences of the Peace] is an altogether sober and admirably candid and facile argument, by a man familiar with diplomatic usage and trained in the details of large financial policy; and the wide vogue and earnest consideration which have been given to this volume reflect its very substantial merit.

At the same time the same facts go to show how faithfully its point of view and its line of argument fall in with the prevailing attitude of thoughtful men toward the same range of questions. It is the attitude of men accustomed to take political documents at their face value.


Mr Keynes was continuously and intimately in touch with the Peace Conference during all those devious negotiations by which the Elder Statesmen of the Great Powers arrived at the bargains embodied in this instrument. These negotiations were quite secret, of course, as is fitting that negotiations among Elder Statesmen should be.

But for all their vulpine secrecy, the temper and purposes of that hidden Conclave of political hucksters were already becoming evident to outsiders a year ago, and it is all the more surprising to find that an observer so shrewd and so advantageously placed as Mr Keynes has been led to credit them with any degree of bona fides or to ascribe any degree of finality to the diplomatic instruments which came out of their bargaining…

Instead of its having brought a settlement of the world’s peace, the Treaty (together with the League) has already shown itself to be nothing better than a screen of diplomatic verbiage behind which the Elder Statesmen of the Great Powers continue their pursuit of political chicane and imperialistic aggrandisement. All this is patent now, and it needs no peculiar degree of courage to admit it. It is also scarcely too much to say that all this should have been sufficiently evident to Mr Keynes a year ago.

But in failing to take note of this patent state of the case Mr Keynes only reflects the commonplace attitude of thoughtful citizens.

His discussion, accordingly, is a faithful and exceptionally intelligent commentary on the language of the Treaty, rather than the consequences which were designed to follow from it or the uses to which it is lending itself. It would perhaps be an ungraceful overstatement to say that Mr. Keynes has successfully avoided the main facts in the case; but an equally broad statement to the contrary would be farther from the truth.

The events of the past months go to show that the central and most binding provision of the Treaty (and of the League [of Nations]) is an unrecorded clause by which the governments of the Great Powers are banded together for the suppression of Soviet Russia…

Apart from this unacknowledged compact there appears to be nothing in the Treaty that has any character of stability or binding force. Of course, this compact for the suppression of Soviet Russia was not written into the text of the Treaty; it may rather be said to have been the parchment upon which the text was written. A formal avowal of such a compact for continued warlike operation would not comport with the usages of secret diplomacy, and then it might also be counted on unduly to irritate the underlying populations of the Great Powers, who are unable to see the urgency of the case in the same perspective of the Elder Statesmen.

So this difficult but imperative task of suppressing Bolshevism, which faced the Conclave from the outset, has no place in Mr. Keynes’s analysis of the consequences to be expected from the Conclave’s Treaty.

Yet it is sufficiently evident now that the exigencies of the Conclave’s campaign against Russian Bolshevism have shaped the working-out of the Treaty hitherto, beyond any other consideration. This appears to be the only interest which the Elder Statesmen of the Great Powers hold in common; in all else they appear to be engrossed with mutual jealousies and cross purposes, quite in the spirit of that imperialistic status quo out of which the Great War arose.


[It] seems necessary to call to mind the main facts of the case, as these facts confronted [President Wilson] in the negotiations with the Conclave.

It is to be remarked, then, that Bolshevism is a menace to absentee ownership. At the same time the present economic and political order rests on absentee ownership. The imperialist policies of the Great Powers, including America, also look to the maintenance and extension of absentee ownership as the major and abiding purpose of all their political traffic.

Absentee ownership, accordingly, is the foundation of law and order, according to that scheme of law and order which has been handing down out of the past in all the civilized nations, and to the perpetuation of which all the Elder Statesmen are committed by native bent and by duties of office. This applies to both the economic and the political order, in all these civilised nations, where the security of property rights has become virtually the sole concern of the constituted authorities.


Bolshevism is a menace to absentee ownership; and in the light of events in Soviet Russia it became evident, point by point, that only with the definite suppression of Bolshevism and all its works, at any cost, could the world be made safe for that Democracy of Property Rights on which the existing political and civil order is founded.

So it became the first concern of all the guardians of the existing order to root out Bolshevism at any cost, without regard to international law.

Despite their shortcomings, the 1920s polemical pieces and newspaper articles of Keynes are still useful guides to their era and to Britain’s intra-elite conflict between industrial/commercial and financial interests.

Between the two world wars, industrial firms on the one hand and the City on the other were the contending constituencies behind, respectively, Keynes’s Liberal views and the policies of his critical targets: the Conservative Party and Montagu Norman’s Bank of England.

The power of the British rentier class had been reduced, domestically and internationally, by the Great War.

The gold standard had been suspended to fund military spending. Prices, wages and currency issue were inflated by war expenditure, reducing the real value to creditors of debts denominated in money terms.

The war also concentrated gold reserves in creditor countries, especially the US.

But in 1919 the Lloyd George government accepted the report of the Cunliffe Committee (whose members included Keynes’s Cambridge colleague, A.C. Pigou), which recommended a return to the metallic standard.

The Bank of England allowed the pound to appreciate and in 1925 Winston Churchill returned to gold convertibility at (greatly overvalued) prewar parity.

Stanley Baldwin and Winston Churchill

As described by Keynes in his article ‘The Economic Consequences of Mr. Churchill’, the Chancellor and his PM Stanley Baldwin, ‘deafened by the clamorous voices of conventional finance’, had opted for ‘dear money and credit restriction’.

Keynes noted that the objective of this ‘so-called sound policy’, which brought about a high rate of interest, was to create a ‘great depression in the export industries’, chiefly coal, iron and textiles, producing ‘an atmosphere favourable to the reduction of wages.’

Deflation openly favoured the saving classes over both borrowers (i.e. commercial and industrial firms) and the employed population:

When we raise the value of sterling by 10 per cent we transfer about £1,000,000,000 into the pockets of the rentiers out of the pockets of the rest of us…  For it is of the essence of any policy to lower prices that it benefits the receivers of interest at the expense of the rest of the community; this consequence of deflation is deeply embedded in our system of money contract…

The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labour at the existing level of prices and wages. The policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction of money wages under the pressure of hard facts.

This is the so-called “sound” policy, which is demanded as a result of the rash act of pegging sterling at a gold value, which it did not — measured in its purchasing power over British labour — possess as yet. It is a policy, nevertheless, from which any humane or judicious person must shrink…

The credit restriction already in force has been effected in several ways which are partly independent. First, there is the embargo on new issues which probably retards the normal rate of the circulation of money; then in March the bank-rate was raised; more recently market-rate was worked up nearer to bank-rate; lastly—and far the most important of all—the Bank has manoeuvred its assets and liabilities in such a way as to reduce the amount of cash available to the Clearing Banks as a basis for credit. This last is the essential instrument of credit restriction.


What we need to restore prosperity to-day is an easy credit policy. We want to encourage business men to enter on new enterprises, not, as we are doing, to discourage them.


Like other victims of economic transition in past times, the miners are to be offered the choice between starvation and submission, the fruits of their submission to accrue to the benefit of other classes… They represent in the flesh the “fundamental adjustments” engineered by the Treasury and the Bank of England to satisfy the impatience of the City fathers to bridge the “moderate gap” between $4.40 and $4.86. They (and others to follow) are the “moderate sacrifice” still necessary to ensure the stability of the gold standard. The plight of the coal miners is the first, but not—unless we are very lucky—the last, of the Economic Consequences of Mr. Churchill.

This transfer of income ‘into the pockets of the rentiers’ (as interest or dividends), shaped Britain’s long-run developmental trajectory during the interwar decades and thereafter.

It reduced that portion of the net surplus available, as the retained earnings of firms, to invest in new fixed capital, i.e. to augment the stock of buildings, machinery, equipment, etc.

Capital intensity in interwar Britain

Thus growth in labour productivity was impeded, freezing material standards of living.

But meanwhile this slowdown in the growth of fixed assets had the salutary result of raising the level of output per unit of capital. This (with wages and salaries held down) implied an increase to the rate of return on capital.

Interwar British profit rate

Thus, in a glittering foretaste of our own finance-led age since 1980, the social pre-eminence of creditors during the interwar decades raised overall profitability and bolstered the social position of the propertied classes, whose lavish consumption spending sustained effective demand even as it held back the productive capacity of the economy.

Cecil Beaton 1928

I’ve explained previously how the state’s appropriation of labour and resources through unproductive spending on armaments accomplishes much the same trick as luxury compensation.

It absorbs a chunk of the social surplus, preventing it from being invested productively, thus raising the output-capital ratio.

Yet Churchill proposed to cut military expenditure by £90 million pounds in the three years to 1928. As part of massive fiscal retrenchment, British military spending had already fallen by £50 million in a single year (1923).

Why didn’t British policymakers choose instead to expand military expenditure during the early interwar period, given the ‘continued warlike operations’ described by Veblen and the naval arms race of the early 1920s?

For, as predicted by Keynes and as transpired with the bursting of the equities bubble in 1929, finance-led growth would have macroeconomic consequences – falling prices, falling money wages, mass unemployment, high real interest rates and higher real indebtedness – that became politically destablizing and threatened the survival of capitalism itself.

Surely Britain’s ruling elite, as a simple matter of prudence, could have pursued a different course of action, reflating aggregate demand in line with Keynes’s recommendations?

HMS Hood

The answer to this apparent historical puzzle comes by enlarging the optic from the domestic scene to the capitalist world system as a whole.

Britain and France had emerged from the Great War as the only European powers with colonial empires still intact.

But the accumulation of wartime inter-ally debts and the emergence of the United States as the world’s creditor gave Washington leverage over the military and external policies of these states.

As delegates from Paris and London negotiated repayment schedules for wartime liabilities, US state leaders sought to use their favourable position to dismantle the European empires, pry open their exclusive colonial possessions to competition, seize assets and markets, win freedom of the seas and remake relations between the advanced capitalist economies.

One tool used by the so-called ‘isolationalist’ Republican administrations was to restrict the arms spending of these European powers. This they did by attaching conditionalities to loans, as well as via a succession of diplomatic manoeuvres including the Washington Naval Conference (1921-22), the Five Power Treaty and the Kellogg-Briand Pact (1928).

Through these means Washington secured parity with the Royal Navy, internationalized the Open Door policy in China, strived for a stake in the energy resources of southwest Asia and prohibited (at international law, though not in reality) the European powers from resorting to wars of aggression to make up for competitive disadvantage.

Delegates sign the Washington treaty

Thus the character of interwar diplomacy, as well as the spending priorities of the British state and the domestic organization of British society, all were symptoms of a transition from sterling to the dollar as world monetary standard.

Dismantling of the British empire and gold standard eventually brought the US state to the apex of the international monetary and credit pyramid.

Washington would emerge as ultimate guarantor of a world payments system based on dollar-denominated liabilities, able to finance its own military activities outside of any budget constraint.

But it would take the carnage of the Second World War, not the lofty blandishments of disarmament treaties, to ratify this bright new outcome.