War, Big Government, and Lost Freedom

We are currently marking the hundredth anniversary of the fighting of the First World War. For four years between the summer of 1914 and November 11, 1918, the major world powers were in mortal combat with each other. The conflict radically changed the world. It overthrew the pre-1914 era of relatively limited government and free market economics, and ushered in a new epoch of big government, planned economies, and massive inflations, the full effects from which the world has still not recovered.

All the leading countries of Europe were drawn into the war. It began when the archduke of Austria- Hungary, Franz Ferdinand, and his wife, Sophia, were assassinated in Bosnia in June 1914. The Austro-Hungarian government claimed that the Bosnian-Serb assassin had the clandestine support of the Serbian government, which the government in Belgrade denied.

How a Terrible War Began and Played Out

Ultimatums and counter-ultimatums soon set in motion a series of European military alliances among the Great Powers. In late July and early August, the now-warring parties issued formal declarations of war. Imperial Germany, the Turkish Empire, and Bulgaria supported Austria-Hungary. Imperial Russia supported Serbia, which soon brought in France and Great Britain because these countries were aligned with the czarist government in St. Petersburg. Italy entered the war in 1915 on the side of the British and the French.

The United States joined the conflict in April 1917, a month after the abdication of the Russian czar and the establishment of a democratic government in Russia. But this first attempt at Russian democracy was overthrown in November 1917, when Vladimir Lenin led a communist coup d’état; Lenin’s revolutionary government then signed a separate peace with Imperial Germany and Austria-Hungary in March 1918, taking Russia out of the war.

The arrival of large numbers of American soldiers in France in the summer of 1918, however, turned the balance of forces against Germany on the Western Front. After having been driven out of the French territory they had occupied since the first year of the war, the Germans agreed to the armistice on November 11, 1918 that ended what was already called the Great War – the “War to End All Wars” as it was falsely believed.

The Human and Material Costs of War

The human and material cost of the First World War was immense. During the conflict more than 60 million men were called up to fight. At least 20 million soldiers and civilians lost their lives, with an equal number wounded.

The participating governments combined spent more than $145.9 billion in fighting each other. In 2015 dollars, this represents a monetary expenditure of more than $3.8 trillion. (As a point of comparison, what the belligerent powers spent, in total, fighting each other in the four years of World War I, the U.S government almost spent, alone, in fiscal year 2015 – $3.6 trillion!)

These numbers, of course, do not capture the human suffering from the four years of war. On the Western Front, which ran through northern France from the English Channel to the Swiss border, millions of soldiers lived endless months – years – in frontline trench warfare. They fought in the heat of the summer and the cold of winter, often with the decomposing bodies of their fallen comrades next to them for days on end.

They fought in battles such as the one for the French town of Verdun in which hundreds of thousands of men were killed during human wave attacks in attempts to capture enemy positions. Soldiers were mowed down by machine guns or crushed under the treads of that new machine of war, the tank.

The airplane entered modern warfare for the first time, raining down bombs on both military and civilian targets. And both sides introduced the use of poison mustard gas that blinded the eyes, blistered the lungs, and brought agonizing death.

War and the End of Limited Government Liberalism

The First World War also brought about the end of the (classical) liberal epoch in modern Western civilization. For most of the 100 years before 1914, the Western world had moved in the direction of greater individual freedom and wider economic liberty.

All-powerful kings were replaced with representative democratic government or constitutionally limited monarchy. Expanding civil liberty brought about a more impartial equality before the law and the end of human slavery.

The older eighteenth century mercantilist system of economic planning and control by government was ended. In its place, arose domestic free enterprise and widening global freedom of trade. The standard of living of tens of millions in the West began to dramatically rise above subsistence and starvation for the first time in human history, while at the same time population sizes grew exponentially.

War may not have been abolished in the nineteenth century, but new international “rules of war” meant that they were less frequent, of shorter duration, and when among the Great Powers, at least, often involved fewer deaths and greater respect for civilian life and property.

(The American Civil War in the 1860s was the one major exception with more than 650,000 deaths and massive destruction in the Southern states.)

Wars and armament races, many argued at the time, had become too costly and destructive among “civilized” nations. A universal epoch of international peace was hoped for when the new century dawned in 1900.

But in 1914, the First World War shattered the long liberal peace that had more or less prevailed in Europe since the last world war that ended with the defeat of Napoleon’s France in 1815. But even before 1914, there were emerging anti-liberal forces that were moving the world toward greater government control and a renewal of international conflict. (See my article, “Before Modern Collectivism: The Rise and Fall of Classical Liberalism.”)

The Rise of Nationalism and Socialism

Early in the nineteenth century, the ideology of nationalism became a new rallying cry for peoples throughout Europe and increasingly around the world. If liberalism had espoused peaceful market exchange and the freedom of individuals under the rule of law, nationalism called for the forced unification under one government of all peoples speaking the same language or sharing the same culture or ethnicity. National collectivism was considered a higher ideal than respect for the liberty of the individuals comprising communities and nations.

In the middle of the nineteeth century, another form of collectivism started to gain popularity and support: socialism. Karl Marx and other socialists argued that capitalism was the root of all social evil, causing poverty and resulting in exploitation of the masses for the benefit of those who privately owned the means of production. Socialists called for the nationalization of the means of production, central planning of all economic activity, and the curtailing of individual freedom for the sake of the collective good.

War and the Planned Society

Imperialist designs by the Great Powers in conjunction with the new ideological forces of rising nationalism and socialism all came together in the caldron of conflict that enveloped so much of the world after 1914.

Immediately with the outbreak of hostilities, the liberal system of individual liberty, private property, free enterprise, free trade, limited government, low taxes, and sound money was thrown to the wind.

The epoch of political and economic collectivism had begun. Civil liberties were rapidly curtailed in all the belligerent nations, with laws restricting freedom of speech and the press. Opponents of war were silenced with long prison sentences for “anti-patriotic” behavior. Industry and agriculture were soon placed under increasingly strict price and wage controls.

Governments imposed wartime planning boards that directed the economic activities of all. They raised taxes to heights never experienced even under the most plundering hands of absolute monarchs of the past. Governments also ended international free trade, and introduced rigid regulations over all imports and exports.

The nineteenth century freedom of movement under which people in the West could travel from one nation to another without passport or visa was abolished; a new era of immigration and emigration barriers began. The individual was now completely under the control and command of the state.

With this came a new governmental responsibility: direct caring for the economic welfare of the citizenry. German free-market economist Gustav Stolper explained:

“Just as the [First World] War for the first time in history established the principle of universal military service, so for the first time in history it brought economic national life in all its branches and activities to the support and service of state politics – made it effectively subordinate to the state. . . . Not supply and demand, but the dictatorial fiat of the state determined economic relationships – production, consumption, wages, and cost of living   . . .

“At the same time, and for the first time, the state made itself responsible for the physical welfare of its citizens; it guaranteed food and clothing, not only to the army in the field but to the civilian population as well . . .

“Here is a fact pregnant with meaning: the state became for a time the absolute ruler of our economic life, and while subordinating the entire economic organization to its military purposes, also made itself responsible for the welfare of the humblest of its citizens, guaranteeing him a minimum of food, clothing, heating, and housing.”

Gold as Money in the Prewar Liberal World

Along with these losses of personal civil and economic freedom came yet another abridgement of the liberal system of government: the abolition of the gold standard. During the 25 years of war between France and Great Britain following the French Revolution of 1789, both governments had resorted to the money printing press to finance their war expenditures. As a result, inflation had eaten away at the wealth and security of the British and French citizenry.

When those wars ended in 1815, the lesson learned was that governments could not be trusted with direct control over the creation of money. The liberal monetary goal was the reestablishment of the gold standard, so the amount of money in society was independent of political manipulation.

Better to rely upon the market forces of supply and demand and the profitability of gold mining, the classical liberals argued, than the caprice of politicians and special interest groups desiring to print the paper money they wanted to use to plunder the peaceful production of the mass of humanity.

Through the decades of the nineteenth century, first Great Britain and then the rest of the Western nations legally established the gold standard as the basis of their monetary systems. The gold standard was mostly managed by national central banks, and thus not truly free market monetary systems.

But central banks were expected to, and for the most part did, abide by the monetary “rules of the game” of limiting increases (or decreases) in the domestic currency to additions to (or reductions in) the nation’s supply of gold. Sound money for the nineteenth century liberals was gold money.

Paper Money and Inflation Finances the War

But with the firing of the first shots in the summer of 1914, the belligerent governments all ended legal redemption of their currencies for fixed amounts of gold. The citizens in these warring counties were pressured or compelled to hand over to their respective governments the gold in their private hands, in exchange for paper money.

Almost immediately, the monetary printing presses were set to work creating the vast financial means needed to fight an increasingly expensive war.

In 1913, the British money supply amounted to 28.7 billion pounds sterling. But soon, as British economist, Edwin Cannan, expressed it, the country was suffering from a “diarrhea of pounds.” When the war ended in 1918, Great Britain’s money supply had almost doubled to 54.8 billion pounds, and continued to increase for three more years of peacetime until it reached 127.3 billion pounds in 1921, a fivefold increase from its level eight years earlier.

The French money supply had been 5.7 billion francs in 1913. By war’s end in 1918, it had increased to 27.5 billion francs. In this case, a fivefold increase in a mere five years. By 1920, the French money supply stood at 38.2 billion francs. The Italian money supply had been 1.6 billion lire in 1913 and increased to 7.7 billion lire, for a more than fourfold increase, and stood at 14.2 billion lire in 1921.

In addition, these countries took on huge amounts of debt to finance their war efforts. Great Britain had a national debt of 717 million pounds in 1913. At the end of the war that debt had increased to 5.9 billion pounds, and rose to 7.8 billion pounds by 1920.

French national debt increased from 32.9 billion francs before the war to 124 billion francs in 1918 and 240 billion francs in 1920. Italy was no better, with a national debt of 15.1 billion lire in 1913 that rose to 60.2 billion lire in 1918 and climbed to 92.8 billion in 1921.

Though the United States had only participated in the last year and a half of the war, it too created a large increase in its money supply to fund government expenditures that rose from $1.3 billion in 1916 to $15.6 billion in 1918. The U.S. money supply grew 70 percent during this period from $20.7 billion in 1916 to 35.1 billion in 1918.

Twenty-two percent of America’s war costs were covered by taxation, about 25 percent from printing money, and the remainder of 53 percent by borrowing.

The German Ideology of Power for War

The most severe inflations during World War I occurred in Central and Eastern Europe. Among the worst of these were the one in Germany during and then after the war, with the near total collapse of the German currency in 1922 and 1923.

For decades before the start of the war, German nationalist and imperialist ambitions were directed to military and territorial expansion. A large number of German social scientists known as members of the Historical School had been preaching the heroism of war and the superiority of the German people who deserved to rule over other nationalities in Europe.

Hans Kohn, one of the twentieth century’s leading scholars on the history and meaning of nationalism, explained the thinking of leading figures of the Historical School, who were also known as “the socialists of the chair” in reference to their prominent positions at leading German universities. He wrote:

“The ‘socialists of the chair’ desired a benevolent paternal socialism to strengthen Germany’s national unity. Their leaders, Adolf Wagner and Gustav von Schmoller, [who were Heinrich von] Treitschke’s colleagues at the University of Berlin and equally influential in molding public opinion, shared Treitschke’s faith in the German power state and its foundations. They regarded the struggle against English and French political and economic liberalism as the German mission, and wished to substitute the superior and more ethical German way for the individualistic economics of the West . . . In view of the apparent decay of the Western world through liberalism and individualism, only the German mind with its deeper insight and its higher morality could regenerate the world.”

These German advocates of war and conquest also believed that Germany’s monetary system had to be subservient to the wider national interests of the state and its imperial ambitions. Austrian economist Ludwig von Mises met frequently with members of the Historical School at German academic gatherings in the years before World War I. He recalled:

“The monetary system, they said, is not an end in itself. Its purpose is to serve the state and the people. Financial preparations for war must continue to be the ultimate and highest goal of monetary policy, as of all policy. How could the state conduct war, after all, if every self- interested citizen retained the right to demand redemption of banknotes in gold? It would be blindness not to recognize that only full preparedness for war [could further the higher ends of the state].”

Germany’s Great Inflation began with the government’s turning to the printing press to finance its war expenditures. Almost immediately after the start of World War I, on July 29, 1914, the German government suspended all gold redemption for the mark. Less than a week later, on August 4, the German Parliament passed a series of laws establishing the government’s ability to issue a variety of war bonds that the Reichsbank – the German central bank – would be obliged to finance by printing new money.

The government created a new set of Loan Banks to fund private sector borrowing, as well as state and municipal government borrowing, with the money for the loans simply being created by the Reichsbank.

During the four years of war, from 1914 to 1918, the total quantity of paper money created for government and private spending went from 2.37 billion to 33.11 billion marks. By an index of wholesale prices (with 1913 equal to 100), prices had increased more than 245 percent (prices failed to increase far more because of wartime price and wage controls). In 1914, 4.21 marks traded for $1 on the foreign exchange market. By the end of 1918, the mark had fallen to 8.28 to the dollar.

Germany’s Hyperinflation and the Destruction of the Mark

But the worst was to come in the five years following the end of the war. Between 1919 and the end of 1922, the supply of paper money in Germany increased from 50.15 billion to 1,310.69 billion marks. Then in 1923 alone, the money supply increased to a total of 518,538,326,350 billion marks.

By the end of 1922, the wholesale price index had increased to 10,100 (still using 1913 as a base of 100). When the inflation ended in November 1923, this index had increased to 750,000,000,000,000. The foreign exchange rate of the mark decreased to 191.93 to the dollar at the end of 1919, to 7,589.27 to the dollar in 1922, and then finally on November 15, 1923, to 4,200,000,000,000 marks for the dollar.

During the last months of the Great Inflation, according to Gustav Stolper, “more than 30 paper mills worked at top speed and capacity to deliver notepaper to the Reichsbank, and 150 printing firms had 2,000 presses running day and night to print the Reichsbank notes.” In the last year of the hyperinflation, the government was printing money so fast and in such frequently larger and larger denominations that to save time, money, and ink, the bank notes were being produced with printing on only one side.

Finally, facing a total economic collapse and mounting social disorder, the German government in Berlin appointed the prominent German banker, Halmar Schacht, as head of the Reichsbank. He publicly declared in November 1923 that the inflation would be brought to an end and a new non-inflationary currency backed by gold would be issued. The printing presses were brought to a halt, and the hyperinflation was stopped just as the country stood at the monetary and social precipice of total disaster.

The Legacies of Tyranny, Paternalism and Lost Freedom

But the deaths, destruction, and disruptions of the First World War and its immediate aftermath were never fully recovered from. In 1922, Mussolini and his Fascist Party came to power in Italy. In 1933, Hitler’s Nazi movement took power in Germany in the midst of the Great Depression.

In the United States, also in 1933, Franklin D. Roosevelt’s New Deal ushered in the arrival of America’s version, at first, of a fascist-type planned economy, with a growing concentration of political control and economic paternalism in the form of the modern interventionist-welfare state in the postwar period that followed a worse and far more destructive and mass murdering Second World War. (See my article, “When the Supreme Court Stopped Economic Fascism in America.”)

Out of this second “war to end all wars,” came America’s role as global policeman and international social engineer during the Cold War with the Soviet Union. But even the post-Cold War era after the end of the Soviet Union in 1991 has seen part of the legacy of World War I in international affairs.

The wars and “ethnic cleansings” experienced in the former Yugoslavia in the 1990s, and at least part of the causes behind the current conflicts in the Middle East are outgrowths of the post-World War I peace settlements imposed by the victorious Allied powers.

But most importantly, I would suggest, is the lasting legacy out of the First World War that has been the rationales and implementations of paternalist Big Government in the Western world, with its diminished recognition and respect for individual liberty, free association, freedom of competitive trade and exchange, reduced civil liberties and weakened impartial rule of law.

From this has followed the regulating and redistributing State, which includes political control and manipulation of the monetary and banking systems to serve those in governmental power and others who feed at the trough of governmental largess.

It is a legacy that will likely take another century to completely overcome and reverse, if we are able to devise a strategy for restoring the idea and ideal of a society of liberty.