712. Commercial antecedents of the war.—To picture the World War of 1914-18 as a necessary result of the commercial conditions in the period immediately preceding would be a distortion of the facts. The recourse to arms is a voluntary act, and this war, like others preceding it, would not have taken place if one party to it had not consciously chosen to use force to obtain what it wanted. War is never a necessary and inevitable result of economic conditions. On the other hand, there are periods in which commercial competition is so intense that it puts a strain on international relations, tempting one or another party in the struggle to further the interests of its people by threats of force or by force itself. The economic strain is particularly likely to lead to rupture if the political system of the period is faulty, if international politics provide no effective way for the just settlement of differences, and if national politics fail to represent the interests of the people as a whole but sacrifice these to the selfish interests of a group. Keen competition does not cause war, but keen competition and faulty politics in combination are apt to do so.

713. Germany and the outbreak of war.—The danger-spot in the international situation before 1914 was Germany. That country had achieved extraordinary success in its recent economic development. Its progress, moreover, was due only in minor degree to its endowment of natural resources; it proceeded from the industrial virtues of the people, from the efficiency of the organization, and from the leadership of scientific experts. The Germans were proud, and had a right to be proud, of their success. They could not complain of the reward which had been accorded them. They were troubled, however, about their future. They had come to depend upon world-trade, and found the world largely under the political control of rival states. It is true that in that very world they enjoyed abounding prosperity; but the foundations of their prosperity appeared to them uncertain. Inheriting antiquated ideas about the power of the state to guide economic development and to further commercial interests, they imputed to other countries political designs which were the products of their own peculiar ways of thought. They saw in the high tariffs of the United States and Russia, in the spread of the idea of a customs union in the British Empire, in the expansion of French influence in Morocco, so many evidences of a plan of their rivals to hem them in, and misuse political power to rob them of their deserts. Should they not, before it was too late, “break through the iron circle,” establish a great state in central Europe extending down to the Mediterranean and the Persian Gulf, take the place in “world-politics” which accorded with their economic merits, and so—for this was the sincere conviction of many Germans—not merely win their own “place in the sun,” but also direct in the right path the civilization of the world as a whole? Given the prevalence of ideas like these, given an antiquated political system that allowed exaggerated influence to dynastic and military interests, and the forces impelling Germany to war were strong; given the old-fashioned and outworn system of international diplomacy, the stress was irresistible and the rupture came.

714. Direct costs of the war.—For generations to come the effects of the World War will be working themselves out. This chapter and the following will attempt merely a survey of some of the more obvious effects upon the history of commerce. It will be convenient to have at hand for reference some estimates of the costs of the war, and the table gives those that were represented by the direct expenditure of money by the states involved. Some of the states advanced funds to their allies for the prosecution of the war, so a distinction is made between the gross sums raised, and the sums directly expended by each country; the cost of the war would be exaggerated if the same sum were counted twice. On the other hand it is apparent that the table of net cost is an accurate measure of the burden of the war on different countries only on condition that the advances to allies are treated as interest-bearing loans. To assist in an appreciation of the meaning of the costs estimates are supplied for some countries of the total national wealth in 1914.

715. Indirect costs of the war.—Even the figures of direct costs are subject to correction on various accounts, and must be taken merely as approximate indications of the value of the wealth that was devoted to destruction. Still more uncertain, necessarily, are the estimates of losses due to the war which were not recorded in the expenditures of governments. Figures in the accompanying table give some idea of the nature and extent of these indirect costs.

A few words of explanation will make some of the items more clear. Human beings have not, since the days of slavery, been counted in a census of national wealth, but they represent nevertheless in every country the heaviest investment and the largest source of income. The figures in the text are based on the assumption of about 13 million deaths in military service, and a money value of the individual ranging from about $2,000 (southern and eastern Europe) to $5,000 (United States). The assumption that the war caused at least as heavy a loss in the civil as in the military population is probably conservative. The loss due to the diversion of labor from production is figured on the basis of 20 million men, of an average productive capacity of $500 a year, withdrawn from industry for four and one half years.

716. Effects of the war on commerce.—In a modern country there is a small group of men known as wreckers, whose business it is to tear down and destroy. During the war the world went into the wrecking business on a grand scale. The figure of twenty million men engaged in it is an average for the whole period; at the close of the war nearly double that number were under arms. We have now to study some of the effects of this situation on commerce.

In every country that entered the war there was an immediate and imperative demand for the tools of the wrecking trade, first of all for guns and ammunition. The wrecker was engaged in an arduous occupation; he demanded more food than he had been used to consume, and wasted more; he used up clothes and shoes and implements at an appalling rate; he was always on the road, requiring subsistence and shelter in all sorts of out-of-the-way places. War therefore put an immediate strain on the industries serving these needs: chemical, metallurgical, agricultural, textile, and the industries providing and operating the equipment of transportation on land and water. On the other hand war withdrew workers from constructive industry, and restricted supply at the very time it intensified demand. Every country at war, therefore, sought by means of commerce to relieve the strain on its own resources, importing needed supplies from abroad; each group of belligerents sought to prevent the other group from profiting by this process. The tendency to an increase of imports was accompanied by a tendency to a decline in exports. A country at war could not afford to do business as usual in its foreign trade. If it could supply its military necessities by paying actual cash for its imports, or by promising to pay for them at some future time, it could withdraw workers from export industries, serving the needs of foreigners, and make them serve more pressing needs at home.

717. Commercial position of the Central Powers and of the Entente.—Germany and her allies, Austria-Hungary, Bulgaria, Turkey, enjoyed a great military advantage of which the character is suggested by their name, the Central Powers; they had interior lines of communication and could move their forces from one to another front much more easily than could their opponents. They would have enjoyed a corresponding commercial advantage if they could have brought the war to a conclusion with stocks of supplies accumulated at home or acquired in invaded territory, which they could mobilize in one part or another of their territory as they pleased. The powers of the Entente, on the other hand, desired in vain to effect an exchange of the wheat of Russia for the guns and ammunition of France or England. In a long war, however, in which the decision was to be effected not by stocks accumulated in the countries immediately engaged but by a mobilization of the resources and activities of the whole world, the Central Powers were at a critical disadvantage. They had immediately open to them only the territory of small neutral states (the Netherlands, Switzerland, the Scandinavian states); the path to richer sources of supply lay across the sea; and control of the sea rested, from the beginning to the end of the war, in the hands of the Entente.

718. The war against commerce.—The conditions were much like those of a hundred years before, when England was engaged in the desperate struggle with Napoleon. In neither period had the belligerents any scruple in departing from established principles of international law. The Entente proposed to starve Germany into surrender. It stopped the outlets of Germany across the territory of neutral states by edicts which amounted in substance to a rationing of the people of those states; these people might have enough food, fodder, cotton, etc., for their own immediate needs, but no surplus that they might transfer to Germany. Germany protested against this infraction of the principle of freedom of the seas, and retaliated by proclaiming a war zone about the British islands, within which German submarines ruthlessly destroyed the merchant shipping on which England depended for her supply of food. These measures on either side, took shape in the early years of the war. The measures of the Entente were effective in sealing the Central Powers from commercial intercourse with the outside world. The German policy failed. It remained a menace, which grew more serious in the latter part of the war when the danger to England was very real, but in its moral influence, instead of breaking the spirit of the English, it did much to rouse the spirit of neutral countries. As the occasion for the entry into the war of the United States on the side of the Entente it was a decisive factor in bringing the conflict to a conclusion.

719. The war on shipping.—The war on shipping resulted in the destruction by enemy action of a tonnage amounting to more than one quarter of the world’s total tonnage in 1914. The figures in the following table indicate the extent and distribution of the losses, and show at the same time how rapidly they were repaired by the construction of new ships. Changes in the relative standing of the different countries, were affected also by another factor, namely by the distribution among other countries of ships of the Central Powers, taken during and after the war. Germany was second in rank among maritime nations in 1914, with a tonnage of 5.5 million; in 1920 its tonnage had been reduced to less than 1 million, almost entirely by forced transfer.

720. Influence of the war on the issue of paper money.—War is itself abnormal. Naturally, the World War gave a peculiar cast to the commerce of the period and left behind it commercial conditions very different from those that had prevailed in the earlier period of peace. These results of the war involve reference to questions of currency and foreign exchange which can be treated only superficially in a book on the history of commerce, but which were of such practical importance that they cannot be omitted altogether.

The governments involved in the war had, of course, to strain every resource to get the funds for their necessary expenditures. An expedient which they all adopted was the issue of paper money. Let us consider, to illustrate the matter, the case of a country which had been doing business with a gold currency of say 100, using that figure to express the number of million francs, marks, dollars or other unit. If the government now printed 10 of paper money and used these to meet its extraordinary expenses, there would be a total of 110 in circulation. Price would rise roughly to correspond; that is, the unit would buy less than before. The gold unit would, however, be worth roughly as much in other countries as it was before, and would be sent abroad to make purchases, instead of being used at home where its purchasing power was diluted, as it were, by the issue of the paper units. After a period of readjustment 10 of gold would have gone out; the currency would have returned to its former level. The government has made a net gain of 10, for the paper money cost practically nothing to print. Has anybody lost? No; not if the paper money circulates readily at home, and does the work which an equal amount of gold money had formerly done. The country has simply “realized” part of its gold stock, using a cheap substitute for money purposes, and selling the dear gold to other people who were glad to exchange products for it.

721. Effect upon the flow of gold.—From the very beginning of the war the governments of the European states practised this expedient, paying out paper money and getting in return for it the goods and services which they needed for military operations. Gold went out of circulation and was replaced by paper. The government did not choose, however, to let private individuals profit by the exchange of this gold with people abroad. By an appeal to patriotism and by the threat of penalties each government sought to bring into its own treasury3 the gold which had been in the pockets and in the cash-boxes of its people. It opened the way for the circulation of its paper as well by locking up gold in its vaults as by sending it abroad. It cherished the gold as a precious asset: a sign of solvency and a ready resource in time of need. The gold reserves of some of the belligerents increased considerably in the course of the war.

These gold reserves, as the name implies, were not in active circulation. Gold passed entirely out of circulation. It flowed into the treasury, and part of it was retained there. The larger part flowed through the treasury, and was employed by the government in purchase of war material abroad. Some part of this outflow from the belligerent states remained in Europe; Spain and the Netherlands showed in the course of the war a notable increase in their gold holdings. By far the greater part of the gold left Europe altogether, most of it going to the United States, very considerable amounts going to the Far East and to South America.

722. Over-issue of paper money; worldwide inflation.—Let us return now to a consideration of the case which was assumed to illustrate the working of paper money. If we suppose the government issues 10 units, 20 units, and so on up to 100 units we may assume in each case that a corresponding amount of gold is driven out of circulation, to be impounded in the treasury or sent abroad; in either event the number of units in circulation and the price level remain the same as before. Suppose the issue of an additional 100. The paper money has no value abroad. The government will not keep it in the treasury. The government would not have issued it except as a means of purchasing services or supplies, and must reissue it when it comes back to the treasury in the payment of taxes, else it would renounce all its advantages in the collection of the tax. There would be left then double the number of units in circulation; prices would double; the unit would buy only half as much as before. Depreciation would follow inflation. The government would gain still by the issue of paper money, but it would have to issue twice as many units as before to get a given purchasing power; the dose would need to be constantly increased to produce a given effect. Furthermore, the government from now on would get its gain only at the expense of its people. Its gain would be offset all along the line by the losses of individuals who would receive for their services and products perhaps a greater number of monetary units but certainly a smaller actual purchasing power.

Not even the neutral countries could escape the effects of the issue of paper money by the belligerents. Even when they remained on a gold basis they had now so many more units, driven out from the belligerent countries, that the gold unit itself depreciated. The dilution of currency spread over the world and resulted in a world-wide inflation.

723. Statistics of currency inflation and of prices.—I have described conditions, in preceding sections, in an artificially simple form, and have neglected many elements that would have to be included if there were space for a more precise and complete treatment. The general tendencies and results were in rough accordance with the description given, as may be seen from the figures of the table below. In both columns the year 1913 is taken as the basis of comparison; the increase of currency of all kinds, and of wholesale prices, may be measured by comparing the figures given for 1919 with par, 100, in 1913.

The inflation of currency and prices presented in these figures was moderate in comparison with conditions in central and eastern Europe, where the flood of paper money broke all bounds; the quantity of currency in 1919, compared with 1913, was in Germany 875, in Rumania over 1,100, in Austria and in Poland higher still.

724. Effect upon foreign exchange.—Leaving aside the grave effects of these rapid changes in the price level on the earnings and income of different classes, there is a particular reason for studying them in their relation to international trade. We have had occasion to note previous changes in the price level, such as the rise in prices before 1914; but these earlier changes were more moderate, and what is still more important, were about the same in different countries. The changes resulting from the issue of paper money were not only more abrupt; they were different in individual countries, as can be seen from the figure in the last section. The price level in any country depended upon the particular amount of paper money which the government of that country felt obliged to issue. The prices of Europe were no longer gold prices, steadied at a common level by the inflow and outflow of gold; they had no common level, they lost their former steadiness. With these changes the time-honored basis of international transactions, the old par of foreign exchange, disappeared.

725. Par of exchange on the gold standard.—The significance of the change can be most readily appreciated if we consider a simple case, say that of an English spinner who buys raw cotton in the United States. The American wants dollars; the Englishman has pounds sterling to offer. It does not matter in which unit the bargain is expressed, whether the American gets the right to draw an order on the Englishman for so many pounds sterling and sells this to a bank for dollars, or whether the price is fixed at so many dollars, and the Englishman makes payment by buying a bill for that amount with his pounds sterling. In either event one party to the bargain must deal in the monetary unit of the other. Under the old system both units were perfectly definite weights of gold. A merchant knew, within narrow limits, how much he had to pay or to receive. The gold in £1,000 was equal to the gold in $4,866. Sterling exchange was at par in New York when the pound was quoted at 4.866. Exchange could not vary far from par, for the cost of shipping the gold itself was only about two cents per pound sterling, and the gold of either country was perfectly acceptable in the other.

726. Foreign exchange on a paper standard.—Consider now the situation after England has driven gold out of circulation by the over-issue of paper money. The pound sterling has become a “paper pound,” of which the value stands in no fixed relation to a definite weight of gold, but is determined by a new set of factors, particularly by the condition of the English treasury and the prospect of an expansion or contraction of the paper currency. The American can no longer count with any assurance on the value to him in dollars of a sum due him in pounds sterling three months hence; the Englishman is no longer in a position to calculate how many pounds sterling he will need to pay a debt contracted in dollars. The rate of exchange, instead of being fixed close to 4.866, may go down to 4.50, 4.00, 3.00—there is no limit to its depression or to the sharpness of its fluctuations. The student should note particularly two elements which are important in an analysis of the situation. First, international transactions involve a considerable time interval, say three months, within which events may occur that will make sweeping changes in rates. Second, the purchasing power of paper money at home, where prices are fixed by contract or affected by custom, does not change in accordance with the rate at which it is estimated in foreign exchange. As a result there is a “spread” in the factors determining profit or loss in international transactions which makes foreign trade extremely speculative, and makes its flow fitful and irregular.

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