
Tragedy and Hope: A History of the World in Our Time', by Carroll Quigley

TRAGEDY AND HOPE Chapters I-IV
by Dr. Carroll Quigley 
ISBN 0913022-14-4


CONTENTS

I. INTRODUCTION: WESTERN CIVILIZATION IN ITS WORLD SETTING
II. WESTERN CIVILIZATION TO 1914
III. THE RUSSIAN EMPIRE TO 1917
IV. THE BUFFER FRINGE
V. THE FIRST WORLD WAR
VI. THE VERSAILLES SYSTEM AND RETURN TO NORMALCY 1919-1929
VII. FINANCE, COMMERCIAL POLICY AND BUSINESS ACTIVITY 1897-1947
VIII. INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE
IX. GERMANY FROM KAISER TO HITLER 1913-1945
X. BRITAIN: THE BACKGROUND TO APPEASEMENT 1900-1939
XI. CHANGING ECONOMIC PATTERNS
XII. THE POLICY OF APPEASEMENT 1931-1936
XIII. THE DISRUPTION OF EUROPE
XIV. WORLD WAR II: THE TIDE OF AGGRESSION 1939-1941
XV. WORLD WAR II: THE EBB OF AGGRESSION 1941-1945
XVI. THE NEW AGE
XVII. NUCLEAR RIVALRY AND COLD WAR, AMERICAN NUCLEAR SUPERIORITY 1950-1957
XVIII. NUCLEAR RIVALRY AND COLD WAR, RACE FOR THE H-BOMB 1950-1957
XIX. THE NEW ERA
XX. TRAGEDY AND HOPE: THE FUTURE IN PERSPECTIVE




CONTENTS
I. INTRODUCTION: WESTERN CIVILIZATION IN ITS WORLD SETTING
II. WESTERN CIVILIZATION TO 1914
III. THE RUSSIAN EMPIRE TO 1917
IV. THE BUFFER FRINGE

Back cover

     TRAGEDY AND HOPE is a lively, informed and always readable view 
of our not quite One World of today, seen in historical perspective. 
Quigley has already shown his command of the kind of historical 
perspective seen in the a world like that of Toynbee and Spengler; but 
unlike them he does not so much concern himself with projections from 
a distant past to a distant future as he does with what must interest 
us all much more closely - our own future and that of our immediate 
descendants. He uses the insights, but in full awareness of the 
limitations of our modern social sciences, and especially those of  
economics, sociology, and psychology. Not all readers will agree with 
what he sees ahead of us in the near future, nor with what he thinks 
we should do about it. But all will find this provocative and 
sometimes provoking book a stimulus to profitable reflection. 
David Brinton
Inside cover
     TRAGEDY AND HOPE shows the years 1895-1950 as a period of 
transition from the world dominated by Europe in the nineteenth 
century to the world of three blocs in the twentieth century. With 
clarity, perspective and cumulative impact, Professor Quigley examines 
the nature of that transition through two world wars and a worldwide 
economic depression. As an interpretative historian, he tries to show 
each event in the full complexity of its historical context. The 
result is a unique work, notable in several ways. It gives a picture 
of the world in terms of the influence of different cultures and 
outlooks upon each other; it shows, more completely than in any 
similar work, the influence of science and technology on human life; 
and it  explains, with unprecedented clarity, how the intricate 
financial and commercial patterns of the West prior to 1914 influenced 
the development of today's world. 
     Carroll Quigley, professor of history at the Foreign Service 
School of Georgetown University, formerly taught at Princeton and at 
Harvard. He has done research in the archives of France, Italy and 
England, and is the author  of the widely praised "Evolution of 
Civilizations." A member of the editorial board of the monthly Current 
History, he is a frequent lecturer and consultant for public and semi-
public agencies. He is a member of the American Association for the 
Advancement of Science, the American Anthropological Association, and 
the American Economic Association, as well as various historical 
associations. He has been lecturer on Russian history at the 
Industrial College of the Armed Forces since 1951 and on Africa at the 
Brookings Institution since 1961, and has lectured at many other other 
places including the U.S. Naval Weapons Laboratory, the Foreign 
Service Institute of the State Department, and the Naval College at 
Norfolk, Virginia. In 1958, he was a consultant to the Congressional 
Select Committee which set up the present national space agency. He 
was collaborator in history to the Smithsonian Institution after 1957, 
in connection with the establishment of its new Museum of History and 
Technology. In the summer of 1964 he went to the Navy Post-Graduate 
School, Monterey, California, as a consultant to project Seabed, which 
tried to visualize what American weapons systems would be like in 
twelve years. 

 
CHAPTER I: INTRODUCTION: WESTERN CIVILIZATION IN ITS WORLD SETTING

Page 3
     Each civilization is born in some inexplicable fashion and, after 
a slow start, enters a period of vigorous expansion, increasing its 
size and power, both internally and at the expense of its neighbors, 
until gradually a crisis of organization appears... It becomes 
stabilized and eventually stagnant. After a Golden Age of peace and 
prosperity, internal crises again arise. At this point, there appears 
for the first time, a moral and physical weakness. 
Page 5
     The passage from the Age of Expansion to the Age of Conflict is 
the most complex, most interesting and most critical of all periods of 
the life cycle of a civilization. It is marked by four chief 
characteristics: it is a period:
a) of declining rate of expansion;
b) of growing tensions and class conflicts;
c) of increasingly frequent and violent imperialist wars;
d) of growing irrationality.
Page 8
     When we consider the untold numbers of other societies, simpler 
than civilizations, which Western Civilization has destroyed or is now 
destroying, the full frightening power of Western Civilization becomes 
obvious.
     This shift from an Age of Conflict to an Age of Expansion is 
marked by a resumption of the investment of capital and the 
accumulation of capital on a large scale.
     In the new Western civilization, a small number of men, equipped 
and trained to fight, received dues and services from the overwhelming 
majority of men who were expected to till the soil. From this 
inequitable but effective defensive system emerged an inequitable 
distribution of political power and, in turn, an inequitable 
distribution of the social economic income. This, in time, resulted in 
an accumulation of capital, which, by giving rise to demand for luxury 
goods of remote origin, began to shift the whole economic emphasis of 
the society from its earlier organization in self-sufficient agrarian 
units to commercial interchange, economic specialization, and, a 
bourgeois class. 
Page 9
     At the end of the first period of expansion of Western 
Civilization covering the years 970-1270, the organization of society 
was becoming a petrified collection of vested interests and entered 
the Age of Conflict from 1270-1420. 
     In the new Age of Expansion, frequently called the period of 
commercial capitalism from 1440 to 1680, the real impetus to economic 
expansion came from efforts to obtain profits by the interchange of 
goods, especially semi-luxury or luxury goods, over long distances. In 
time, profits were sought by imposing restrictions on the production 
or interchange of goods rather than by encouraging these activities. 
     
Page 10
     The social organization of this third Age of Expansion from 1770-
1929 following upon the second Age of Conflict of 1690-1815 might be 
called "industrial capitalism." In the last of the nineteenth century, 
it began to become a structure of vested interests to which we might 
give the name "monopoly capitalism." 
     We shall undoubtedly get a Universal Empire in which the United 
States will rule most of the Western Civilization. This will be 
followed, as in other civilizations, by a period of decay and 
ultimately, as the civilizations grows weaker, by invasions and the 
total destruction of Western culture. 
EUROPE'S SHIFT TO THE TWENTIETH CENTURY
Page 24
     The belief in the innate goodness of man had its roots in the 
eighteenth century when it appeared to many that man was born good and 
free but was everywhere distorted, corrupted, and enslaved by bad 
institutions and conventions. As Rousseau said, "Man is born free yet 
everywhere he is in chains."
     Obviously, if man is is innately good and needs but to be freed 
from social restrictions, he is capable of tremendous achievements in 
this world of time, and does not need to postpone his hopes of 
personal salvation into eternity. 
Page 25
     To the nineteenth century mind, evil, or sin, was a negative 
conception. It merely indicated a lack or, at most, a distortion of 
good. Any idea of sin or evil as a malignant force opposed to good, 
and capable of existing by its own nature, was completely lacking in 
the typical nineteenth century mind. The only evil was frustration and 
the only sin, repression. 
     Just as the negative idea of the nature of evil flowed from the 
belief that human nature was good, so the idea of liberalism flowed 
from the belief that society was bad. For, if society was bad,the 
state,which was the organized coercive power of society, was doubly 
bad, and if man was good, he should be freed, above all, from the 
coercive power of the state. 
     "No government in business" was commonly called "laissez faire" 
and would have left society with little power beyond that required to 
prevent the strong from physically oppressing the weak.
     This strange, and unexamined, belief held that there really 
existed, in the long run, a "community of interests" between the 
members of a society. It maintained that, in the long run, what was 
good for one was bad for all. It believed that there did exist a 
possible social pattern in which each member would be secure, free and 
prosperous.
Page 26
     Capitalism was an economic system in which the motivating force 
was the desire for private profit as determined in a price system with 
the seeking of aggrandization of profits for each individual.  
     Nationalism served to bind persons of the same nationality 
together into a tight, emotionally satisfying, unit. On the other 
side, it served to divide persons of different nationalities into 
antagonistic groups, often to the injury of their real mutual 
political, economic or cultural advantages. 
     The event which destroyed the pretty dream world of 1919-1929 
were the stock market crash, the world depression, the world financial 
crisis. 
Page 28
     The twentieth century came to believe that human nature is, if 
not innately bad, at least capable of being very evil. Left to 
himself, man falls very easily to the level of the jungle or even 
lower and this result can be prevent only by the coercive power of 
society. Along with this change from good men and bad society to bad 
men and good society has appeared a reaction from optimism to 
pessimism. The horrors of Hitler's concentration camps and Stalin's 
slave-labor units are chiefly responsible for this change. 


CHAPTER II: WESTERN CIVILIZATION TO 1914
WESTERN CIVILIZATION TO 1914

Page 39
     The financial capitalist sought profits from the manipulation of 
claims on money; and the monopoly capitalist sought profits from 
manipulation of the market to make the market price and the amount 
sold such that his profits would be maximized. 
Page 41
     Karl Marx,about 1850, formed his ideas of an inevitable class 
struggle in which the groups of owners would become fewer and fewer 
and richer and richer while the mass of workers became poorer and 
poorer but more and more numerous. 
     Mass production required less labor. But mass production required 
mass consumption.
EUROPEAN ECONOMIC DEVELOPMENT
Page 42
     Investments in railroads, steel mills and so on could not be 
financed from the profits and private fortunes of individual 
proprietors. New instruments for financing industry came into 
existence in the form of limited-liability corporations and investment 
banks. These were soon in a position to control the chief parts of the 
industrial system since they provided the capital to it. This gave 
rise to financial capitalism. 
Page 43     
     Great industrial units, working together either directly or 
through cartels and trade associations, were in a position to exploit 
the majority of the people. The result was a great economic crisis 
which soon developed into a struggle for control of the state - the 
minority hoping to use the state to defend their privileged position, 
the majority hoping to use the state to curtail the power and 
privileges of the minority. 
     Capitalism, because it seems profits as its primary goal, is 
never primarily seeking to achieve prosperity, high production, high 
consumption, political power, patriotic improvement, or moral uplift. 
Page 44 
     Goods moved from low-price areas to high-price areas and money 
moved from high-price areas to low-price areas because goods were more 
valuable where prices were high and money was more valuable where 
prices were low. 
     Thus, clearly, money and goods are not the same thing but are, on 
the contrary, exactly opposite things. Most confusion in economic 
thinking arises from failure to recognize this fact. Goods are wealth 
which you have, while money is a claim on wealth which you do not 
have. Thus goods are an asset; money is a debt. If goods are wealth; 
money is non-wealth, or negative wealth, or even anti-wealth. 
Page 45
     In time, some merchants turned their attention from exchange of 
goods to the monetary side of the exchange. They became concerned with 
the lending of money to merchants to finance their ships and their 
activities, advancing money for both, at high interest rates, secured 
by claims on ships or goods as collateral for repayment and made it 
possible for people to concentrate on one portion of the process and, 
by maximizing that portion, to jeopardize the rest.
Page 46
     Three parts of the system, production, transfer, and consumption 
of goods were concrete and clearly visible so that almost anyone could 
grasp them simply examining them while the operations of banking and 
finance were concealed, scattered, and abstract so that they appeared 
to many to be difficult. To add to this, bankers themselves did 
everything they could to make their activities more secret and more 
esoteric. Their activities were reflected in mysterious marks in 
ledgers which were never opened to the curious outsider. 
     Changes of prices, whether inflationary or deflationary, have 
been major forces in history for the last six centuries at least. 
Page 47
     Hundreds of years ago, bankers began to specialize, with richer 
and more influential ones associated increasingly with foreign trade 
and foreign-exchange transactions. Since these were richer and more 
cosmopolitan and increasingly concerned with questions of political 
significance, such as stability and debasement of currencies, war and 
peace, dynastic marriages, and worldwide trading monopolies, they 
became financiers and financial advisers of governments. Moreover, 
they were always obsessed with the stability of monetary exchanges and 
used their power and influence to do two things:
1) to get all money and debts expressed in terms of strictly limited 
commodity - ultimately gold; and
2) to get all monetary matters out of the control of governments and 
political authority, on the ground that they would be handled better 
by private banking interests in terms of such a stable value of gold. 
INDUSTRIAL CAPITALISM, 1770-1850
Page 48
     Britain's victories had many causes such as its ability to 
control the sea and its ability to present itself to the world as the 
defender of the freedoms and rights of small nations and of diverse 
social and religious groups. Also, financially, England had discovered 
the secret of credit and economically, it had embarked on the 
Industrial Revolution. 
     Credit had been known to the Italians and Netherlanders long 
before it became one of the instruments of English world supremacy. 
Nevertheless, the founding of the Bank of England by William Paterson 
and his friends in 1694 is one of the great dates in world history. 
For generations, men had sought to avoid the one drawback of gold, its 
heaviness, by using pieces of paper to represent specific pieces of  
gold. Today, we call such pieces of paper gold certificates which 
entitles its bearer to exchange it for its piece ofgold on demand, but 
in view of the convenience of paper, only a small fraction of 
certificate holders ever did make such demands. It early became clear 
that gold need be held on hand only to the amount needed to cover the 
fraction of certificates likely to be presented for payment; 
accordingly, the rest of the gold could be used for business purposes, 
or, what amounts to the same thing, a volume of certificates could be 
issued greater than the volume of gold reserved for payment of demands 
against them. such an excess volume of paper claims against reserves 
we now call bank notes. 
     In effect, this creation of paper claims greater than the 
reserves available means that bankers were creating money out of 
nothing. The same thing could be done in another way, not by note-
issuing banks but by deposit banks. Deposit bankers discovered that 
orders and checks drawn against deposits by depositors and given to 
third persons were often not cashed by the latter but were deposited 
to their own accounts. Thus there were no actual movements of funds, 
and payments were made simply by bookkeeping transactions on the 
accounts. Accordingly, it was necessary for the banker to keep on hand 
in actual money (gold, certificates and notes) no more than the 
fraction of deposits likely to be drawn upon and cashed; the rest 
could be used for loans and if these loans were made by creating a 
deposit for the borrower, who in turn would draw checks upon it rather  
than withdraw it in money, such "created deposits" or loans could also 
be covered adequately by retaining reserves to only a fraction of 
their value. Such created deposits also were a creation of money out 
of nothing, although bankers usually refused to express their actions, 
either note issuing or deposit lending, in these terms. William 
Paterson, on obtaining the charter of the Bank of England, said "the 
Bank hath benefit of interest on all moneys it creates out of 
nothing." This is generally admitted today. 
     This organizational structure for creating means of payment out 
of nothing, which we call credit, was not invented by England but was 
developed by her to become one of her chief weapons in the victory 
over Napoleon in 1815. The emperor, could not see money in any but 
concrete terms, and was convinced that his efforts to fight wars on 
the basis of "sound money" by avoiding the creation of credit, would 
ultimately win him a victory by bankrupting England. He was wrong 
although the lesson has had to be relearned by modern financiers in 
the twentieth century. 
     
FINANCIAL CAPITALISM 1850-1931
Page 50
     The third stage of capitalism is of such overwhelming 
significance in the history of the twentieth century, and its 
ramifications and influences have been so subterranean and even 
occult, that we may be excused if we devote considerate attention to 
this organization and methods. 
     Essentially, what it did was to take the old disorganized and 
localized methods of handling money and credit and organize them into 
an integrated system, on an international basis, which worked with 
incredible and well-oiled facility for many decades. The center of 
that system was in London, with major offshoots in New York and Paris 
and it has left, as its greatest achievement, an integrated banking 
system and a heavily capitalized - if now largely obsolescent - 
framework of heavy industry, reflected in railroads, steel mills, coal 
mines and electrical utilities.
     This system had its center in London for four chief reasons. 
First was the great volume of savings in England. Second was England's 
oligarchic social structure which provided a very inequitable 
distribution of incomes with large surpluses coming to the control of 
a small, energetic upper class. Third was that this upper class was 
aristocratic but not noble, quite willing to recruit both money and 
ability from lower levels and even from outside the country, welcoming 
American heiresses and central-European Jews to its ranks almost as 
willingly as it welcomed monied, able and conformist recruits from the 
lower classes of Englishmen. Fourth (and by no means last) in 
significance was the skill in financial manipulation, especially on 
the international scene, which the small group of merchant bankers of 
London had acquired. 
     In time, they brought into their financial network the provincial 
banking centers as well as insurance companies to form all of these 
into a single financial system on an international scale which 
manipulated the quantity and flow of money so that they were able to 
influence, if not control, governments on one side and industries on 
the other.   
     The men who did this, looking backward toward the period of 
dynastic monarchy in which they had their own roots, aspired to 
establish dynasties of international bankers and were at least as 
successful at this as were many of the dynastic political rulers. The 
greatest of these dynasties, of course, were the descendants of Meyer 
Amschel Rothschild (1743-1812) whose male descendants for at least two 
generations, generally married first cousins or even nieces. 
Rothschild's five sons, established at branches in Vienna, London, 
Naples and Paris as well as Frankfort, cooperated together in ways 
which other international banking dynasties copied but rarely 
excelled. 
     In concentrating, as we must, on the financial or economic 
activities of international bankers, we must not totally ignore their 
other attributes. They were cosmopolitan rather than nationalistic; 
they were a constant, if weakening, influence for peace, a pattern 
established in 1830 and 1840 when the Rothschilds threw their whole 
tremendous influence successfully against European wars. 
     They were usually highly civilized, cultured gentlemen, patrons 
of education and of the arts, so that today, colleges, professorships, 
opera companies, symphonies, libraries, and museum collections still 
reflect their munificence. For these purposes they set a pattern of 
endowed foundations which still surround us today. 
     The names of some of these banking families are familiar to all 
of us and should be more so. They include Baring, Lazard, Erlanger, 
Warburg, Schroder, Seligman, Speyers, Mirabaud, Mallet, Fould and 
above all Rothschild and Morgan. Even after these banking families 
became fully involved in domestic industry by the emergence of 
financial capitalism, they remained different from ordinary bankers in 
distinctive ways:
1) they were cosmopolitan and international;
2) they were close to governments and were particularly concerned with 
questions of government debts, including foreign government debts, 
even in areas which seemed, at first glance, poor risks, like Egypt, 
Persia, Ottoman Turkey, Imperial China and Latin America;
3) their interests were almost exclusively in bonds and very rarely in 
goods since they admired "liquidity";
4) they were fanatical devotees of deflation (which they called 
"sound" money from its close association with high interest rates and 
a high value of money) and of the gold standard;
5) they were almost equally devoted to secrecy and the secret use of 
financial influence in political life. These bankers came to be called 
"international bankers" and were known as "merchant bankers" in 
England, "private bankers" in France and "investment bankers" in the  
United States. 
     Everywhere, they were sharply distinguishable from other, more 
obvious, kinds of banks, such as savings banks or commercial banks. 
     One of their less obvious characteristics was that they remained 
as private unincorporated firms offering no shares, no reports, and 
usually no advertising to the public until modern inheritance taxes 
made it essential to surround such family wealth with the immortality 
of corporate status for tax-avoidance purposes. This persistence as 
private firms continued because it ensured the maximum of anonymity 
and secrecy to persons of tremendous public power who dreaded public 
knowledge of their activities as an evil almost as great as inflation. 
Page 53
     Firms like Morgan, like others of the international banking 
fraternity, constantly operated through corporations and governments, 
yet remained itself an obscure private partnership. 
     The influence of financial capitalism and the international 
bankers who created it was exercised both on business and on 
governments, but could have neither if it had not been able to 
persuade both these to accept two "axioms" of its own ideology. Both 
of these were based on the assumption that politicians were too weak 
and too subject to temporary public pressures to be trusted with 
control of the money system; accordingly, the soundness of money must 
be protected in two ways: by basing the value of money on gold and by 
allowing bankers to control the money supply. To do this it was 
necessary to conceal, even mislead, both governments and people about
the nature of money and its methods of operation. 
Page 54
     Since it is quite impossible to understand the history of the 
twentieth century without some understanding of the role played by 
money in domestic affairs and in foreign affairs, as well as the role 
played by bankers in economic life and in political life, we must take 
a least a glance at each of these four subjects: 
DOMESTIC FINANCIAL PRACTICES
     In each country, the supply of money took the form of an inverted 
pyramid or cone balanced on its point. In the point was the supply of 
gold and its equivalent certificates; on the intermediate levels was a 
much larger supply of notes; and at the top, with an open and 
expandable upper surface, was an even greater supply of deposits. Each 
level used the levels below it as its reserves and these lower levels 
had smaller quantities of money, they were "sounder." 
     Notes were issued by "banks of emission" or "banks of issue" and 
were secured by reserves of gold or certificates held in some central 
reserve. The fraction held in reserve depended upon banking 
regulations or statute law. Such banks, even central banks, were 
private institutions, owned by shareholders who profited by their 
operations. 
     Deposits on the upper level of the pyramid were called by this 
name, with typical bankers' ambiguity, in spite of the fact that they 
consisted of two utterly different kinds of relationships: 
1) "lodged deposits" which were real claims left by a depositor in a 
bank on which a depositor might receive interest; and
2) "created deposits" which were claims created by the bank out of 
nothing as loans from the bank to "depositors" who had to pay interest 
on them. 
     Both form part of the money supply. Lodged deposits as a form of 
savings are deflationary while created deposits, being an addition to 
the money supply, are inflationary. 
Page 55
     The volume of deposits banks can create, like the amount of notes 
they can issue, depends upon the volume of reserves available to pay 
whatever fraction of checks are cashed rather than deposited. In the 
United States, deposits were traditionally limited to ten times 
reserves notes and gold. In Britain it was usually nearer twenty times 
such reserves. In most countries, the central bank was surrounded 
closely by the almost invisible private investment banking firms. 
These, like the planet Mercury, could hardly be seen in the dazzle 
emitted by the central bank, which they, in fact, often dominated. Yet 
a lost observer could hardly fail to notice the close private 
associations between these private, international bankers and the 
central bank itself. In France, in 1936, the Board of the Bank of 
France was still dominated by the names of the families who had 
originally set it up in 1800. 
     In England, a somewhat similar situation existed. In a secondary 
ring are the "joint stock banks." Outside this secondary ring are the 
savings banks, insurance firms, and trust companies. 
     In France and England the private bankers exercised their powers 
through the central bank and had much more influence on the government 
and foreign policy and less on industry. In the United States, much 
industry was financed by investment bankers directly and the power of 
these both on industry and government was very great. 
Page 57
     The various parts of the pyramid of money were but loosely 
related to each other. Much of this looseness arose from the fact that 
the controls were compulsive in a deflationary direction and were only 
permissive in an inflationary direction. This last point can be seen 
in the fact that the supply of gold could be decreased but could 
hardly be increased. If an ounce of gold was added to the point of the 
pyramid, it could permit an increase in deposits equivalent to $2067 
on the uppermost level. If such an ounce of gold were withdrawn from a 
fully expanded pyramid of money, this would compel a reduction of 
deposits by at least this amount, probably by a refusal to renew 
loans.
     Throughout modern history, the influence of the gold standard has 
been deflationary, because the natural output of gold each year, 
except in extraordinary times, has not kept pace with the increase in 
the output of goods. Only new supplies of gold or the development of 
new kinds of money have saved our civilization over the last couple of 
centuries. The three great periods of war ended with an extreme 
deflationary crisis (1819, 1873, 1921) as the influential Money Power 
persuaded governments to re-establish a deflationary monetary unit 
with a high gold content. 
     The obsession of the Money Power with deflation was partly a 
result of their concern with money rather than with goods but was also 
founded on other factors, one of which was paradoxical. The paradox 
arose from the fact that the basic economic conditions of the 
nineteenth century were deflationary, with a monetary system based on 
gold and an industrial system pouring out increasing supplies of goods 
but in spite of falling prices, the interest rate tended to fall 
rather than rise. Moreover, merchant banking continued to emphasize 
bonds rather than equity securities (stocks), to favor government 
issues rather than private offerings. 
     Another paradox of banking practice arose from the fact that 
bankers, who loved deflation, often acted in an inflationary fashion 
from their eagerness to lend money at interest. Since they make money 
out of loans, they are eager to increase the amounts of bank credit on 
loan. But this is inflationary. The conflict between the deflationary 
ideas and inflationary practices of bankers had profound repercussions 
on business. The bankers made loans to business so that the volume of 
money increased faster than the increase of goods. The result was 
inflation. When this became clearly noticeable, the bankers would flee 
to notes or specie by curtailing credit and raising discount rates. 
This was beneficial to the bankers in the short run (since it allowed 
them to foreclose on collateral for loans) but it could be disastrous 
to them in the long run (by forcing the value of the collateral below 
the amount of the loans it secured). But such bankers' deflation was 
destructive to business and industry in the short run as well as the 
long run. 
Page 59
     The resulting fluctuation in the supply of money, chiefly 
deposits, was a prominent aspect of the "business cycle." The quantity 
of money could be changed by changing reserve requirements or discount 
(interest) rates. Central banks can usually vary the amount of money 
in circulation by "open market operations" or by influencing the 
discount rates of lesser banks. In open market operations, a central 
bank buys or sells government bonds in the open market. If it buys, it 
releases money into the economic system; it if sells it reduces the 
amount of money in the community. If the Federal Reserve Bank buys, it 
pays for these by checks which are soon deposited in a bank. It thus 
increases this bank's reserves with the Federal Reserve Bank. Since 
banks are permitted to issue loans for several times the value of 
their reserves with the FED, such a transaction permits them to issue 
loans for a much larger sum. 
     Central banks can also change the quantity of money by raising 
the discount rate which forces the lesser banks to raise their 
discount rates; such a raise in interest rates tends to reduce the 
demand for credit and thus the amount of deposits (money). Lowering 
the discount rate permits an opposite result. 
     It is noted that the control of the central bank over the credit 
policies of local banks are permissive in one direction and compulsive 
in the other. They can compel these local banks to curtail credit and 
can only permit them to increase credit. This means that they have 
control powers against inflation and not deflation - a reflection of 
the old banking idea that inflation was bad and deflation was good. 
     
Page 60
     The powers of governments over the quantity of money are: 
a) control over a central bank;
b) control over public taxation;
c) control over public spending;
     Since most central banks have been (technically) private 
institutions, this control is frequently based on custom rather than 
on law. 
     Taxation tends to reduce the amount of money in a community and 
is usually a deflationary force. Government spending is usually an 
inflationary force. 
     On the whole, in the period up to 1931, bankers, especially the 
Money Power controlled by the international investment bankers, were 
able to dominate both business and government. They could dominate 
business because investment bankers had the ability to supply or 
refuse to supply such capital. Thus Rothschild interests came to 
dominate many of the railroads of Europe, while Morgan dominated at 
least 26,000 miles of American railroads. Such bankers took seats on 
the boards of directors of industrial firms, as they had already done 
on commercial banks, savings banks, insurance firms, and finance 
companies. From these lesser institutions, they funneled capital to 
enterprises which yielded control and away from those who resisted. 
These firms were controlled through interlocking directorships, 
holding companies, and lesser banks. 
Page 61
     As early as 1909,Walter Rathenau said, "Three hundred men, all of 
whom know one another, direct the economic destiny of Europe and 
choose their successors from among themselves."
     The power of investment bankers over governments rests on the 
need of governments to issue short-term treasury bills as well as 
long-term government bonds. Just as businessmen go to commercial banks 
for current capital advances, so a government has to go to merchant 
bankers to tide over the shallow places caused by irregular tax 
receipts. As experts in government bonds, the international bankers 
provided advice to government officials and, on many occasions, placed 
their own members in official posts. This was so widely accepted even 
today, that in 1961 a Republican investment banker became Secretary of 
the Treasury in a Democratic administration in Washington without 
significant comment from any direction. 
     Naturally, the influence of bankers over governments during the 
age of financial capitalism (roughly 1850-1931) was not something 
about which anyone talked about freely, but it has been admitted 
freely enough by those on the inside, especially in England. In 1842, 
Gladstone, chancellor of the Exchequer, declared "The hinge of the 
whole situation was this: the government itself was not to be the 
substantive power in matters of Finance, but was to leave the Money 
Power supreme and unquestioned." On Sept. 26, 1921, the Financial 
Times wrote, "Half a dozen men at the top of the Big Five Banks could 
upset the whole fabric of government finance by refraining from 
renewing Treasury Bills." In 1924, Sir Drummond Fraser, vice-president 
of the Institute of Bankers, stated, "The Governor of the Bank of 
England must be the autocrat who dictates the terms upon which alone 
the Government can obtain borrowed money." 
Page 62
     In addition to their power over government based on government 
financing and personal influence, bankers could steer governments in 
ways they wished them to go by other pressures. Since most government 
officials felt ignorant of finance, they sought advice from bankers 
whom they considered experts in the field. The history of the last 
century shows that the advice given to governments by bankers, like 
the advice they gave to industrialists, was consistently good for 
bankers but was often disastrous for governments, businessmen and the 
people generally. 
     Such advice could be enforced if necessary by manipulation of 
exchanges, gold flows, discount rates, and even levels of business 
activity. Thus Morgan dominated Cleveland's second administration by 
gold withdrawals, and in 1936-13 French foreign exchange manipulators 
paralyzed the Popular Front governments. The powers of these 
international bankers reached their peak in 1919-1931 when Montagu 
Norman and J.P. Morgan dominated not only the financial world but 
international relations and other matters as well. On Nov. 11, 1927, 
the Wall Street Journal called Mr. Norman "the currency dictator of 
Europe." This was admitted by Mr. Norman who said, "I hold the 
hegemony of the world." 
     The conflict of interests between bankers and industrialists has 
resulted in the subordination of the bankers (after 1931) to the 
latter by the adoption of "unorthodox financial policies" - that is, 
financial policies not in accordance with the short-run interests of 
the bankers. 
THE UNITED STATES TO 1917
Page 71
     The civil service reform began in the federal government with the 
Pendleton Bill of 1883. As a result, the government was controlled 
with varying degrees of completeness by the forces of investment 
banking and heavy industry from 1884 to 1933. Popularly known as 
"Society," or the "400," they lived a life of dazzling splendor.  
Page 72
     The structure of financial control created by the tycoons of "Big 
Banking" and "Big Business" in the period 1880-1933 was of 
extraordinary complexity, one business fief being built upon another, 
both being allied with semi-independent associates, the whole rearing 
upward into two pinnacles of economic and financial power, of which 
one, centered in New York, was headed by J.P. Morgan and Company, and 
the other, in Ohio, was headed by the Rockefeller family. When these 
two cooperated, as they generally did, they could influence the 
economic life of the country to a large degree and could almost 
control its political life, at least on the federal level. 
     The influence of these business leaders was so great that the 
Morgan and Rockefeller groups acting together, or even Morgan acting 
alone, could have wrecked the economic system of the country merely by 
throwing securities on the stock market for sale, and having 
precipitated a stock market panic, could then have bought back the 
securities they had sold but at a lower price. Naturally, they were 
not so foolish as to do this, although Morgan came very close to it in 
precipitating the "panic of 1907," but they did not hesitate to wreck 
individual corporations, at the expense of holders of common stock, by 
driving them to bankruptcy. In this way, Morgan wrecked the New York, 
New Haven and Hartford railroad before 1914 and William Rockefeller 
wrecked the Chicago, Milwaukee, St. Paul and Pacific Railroad before 
1925. 
Page 73
     The discovery by financial capitalists that they made money out 
of issuing and selling securities rather than out of production, 
distribution and consumption of goods accordingly led them to the 
point where they discovered that the exploiting of an operating 
company by excessive issuance of securities or the issuance of bonds 
rather than equity securities not only was profitable to them but made 
it possible for them to increase their profits by bankruptcy of the 
firm, providing fees and commission of reorganization as well as the 
opportunity to issue new securities. 
     When the business interests pushed through the first installment 
of the civil service reform in 1881, they expected to control both 
political parties equally. Some intended to contribute to both and to 
allow an alternation of the two parties in public office in order to  
conceal their own influence, inhibit any exhibition of independence by 
politicians, and allow the electorate to believe that they were 
exercising their own free choice. 
     The inability of the investment bankers to control the Democratic 
Party Convention of 1896 was a result of the agrarian discontent of 
the period 1868-1896. This discontent was based very largely on the 
monetary tactics of the banking oligarchy. The bankers were wedded to 
the gold standard and at the end of the Civil War, persuaded the Grant 
administration to curb the postwar inflation and go back on the gold 
standard (crash of 1873 and resumption of specie payment in 1875). 
Page 74
     This gave the bankers a control of the supply of money which they 
did not hesitate to use for their own  purposes. The bankers' 
affection for low prices was not shared by farmers, since each time 
prices of farm products went down, the burden of farmers' debts became 
greater. As farmers could not reduce their costs or modify their 
production plans, the result was a systematic exploitation of the 
agrarian sectors of the community by the financial and industrial 
sectors. This exploitation took the form of high industrial prices and 
discriminatory railroad rates, high interest charges, low farm prices 
and very low level of farm services. 
     Unable to resist by economic weapons, the farmers turned to 
political relief. They tried to work on the state political level 
through local legislation (so-called Granger Laws) and set up third-
party movements (like the Greenback Party of 1878 or the Populist 
Party in 1892). By 1896, the capture of the Democratic Party by the 
forces of discontent under William Jennings Bryant who was determined 
to obtain higher prices by increasing the supply of money on a 
bimetallic rather than a gold basis, presented the electorate with an 
election on a social and economic issue for the first time in a 
generation. Though the forces of high finance were in a state of near 
panic, by a mighty effort involving very large-scale spending they 
were successful in electing McKinley. 
     Though the plutocracy were unable to control the Democratic Party 
as they controlled the Republican Party, they did not cease their 
efforts to control both and in 1904 and 1924, Morgan was able to sit 
back with a feeling of satisfaction to watch presidential elections in 
which the candidates of both parties were in his sphere of influence. 
Page 75
     The agrarian discontent, the growth of monopolies, the oppression 
of labor, and the excesses of Wall Street financiers made the country 
very restless between 1890-1900. All this could have been alleviated 
merely by increasing the supply of money sufficiently to raise prices 
somewhat, but the financiers were determined to defend the gold 
standard no matter what happened. 
     In looking for some issue to distract public discontent from 
domestic issues, what better solution than a crisis in foreign 
affairs? Cleveland had stumbled upon this alternative in 1895 when he 
stirred up controversy with England over Venezuela. The great 
opportunity came with the Cuban revolt against Spain in 1895. While 
the "yellow press" roused public opinion, Henry Cabot Lodge and 
Theodore Roosevelt plotted how they could best get the United States 
into the fracas. They got the excuse they needed when the American 
battleship Maine was sunk by a mysterious explosion in Havana Harbor 
in 1898. In two months, the United States declared war on Spain to 
fight for Cuban independence. The resulting victory revealed the 
United States as a world naval power, established it as an imperialist 
power with possession of Puerto Rico, Guam, and the Philippines. 
     America's entrance upon the stage as a world power continued with 
the annexation of Hawaii in 1898, the intervention in the Boxer 
uprising in 1900, the seizure of the Panama canal in 1903, the 
diplomatic intervention in the Russo-Japanese war in 1905, the 
military occupation of Nicaragua in 1912, the military intervention in 
Mexico in 1916. 
Page 76
     As an example of the more idealistic impulse we might mention the 
creation of various Carnegie foundations to work for universal peace. 
As an example of the more practical point of view, we might mention 
the founding of "The New Republic," a liberal weekly paper, by an 
agent of Morgan financed with Whitney money (1914). 
     The combined forces of the liberal East and the agrarian West 
were able to capture the Presidency under Woodrow Wilson in 1912. 
Wilson roused a good deal of popular enthusiasm with his talk of "New 
Freedom" and the rights of the underdog, but his program amounted to 
little more than an amateur attempt to establish on a federal basis 
those reforms which agrarian and labor discontent had been seeking on 
a state basis for many years. Wilson was by no means a radical and 
there was a good deal of unconscious hypocrisy in many of his 
resounding public speeches. His political and administrative reforms 
were a good deal more effective than his economic or social reforms. 
The establishment of an income tax and the Federal Reserve System 
justified the support which Progressives had given to Wilson. Wilson 
did much to extend equality of opportunity to wider groups of American 
people. 



CHAPTER III: THE RUSSIAN EMPIRE TO 1917

Page 88
     The abolition of serfdom made it necessary for the landed 
nobility to cease to regard the peasants as private property. Peter 
the Great (1689-1725) and Catherine the Great (1762-1796) were 
supporters of westernization and reform. Paul I (1796-1801) was 
reactionary. Alexander I (1801-1825) and Alexander II (1855-1881) were 
reformers while Nicholas I (1825-1855) and Nicholas II (1855-1881) 
were reactionaries. By 1864, serfdom had been abolished, and a fairly 
modern system of law, of justice, and of education had been 
established; local government had been somewhat modernized; a fairly 
good financial and fiscal system had been established; and an army 
based on universal military service (but lacking in equipment) had 
been created. On the other hand, the autocracy continued in the hands 
of weak men and the freed serfs had no adequate lands. 
Page 93
     The first Russian railroad opened in 1838 but growth was slow 
until 1857. At that time, there were only 663 miles of railroads, but 
this figure went up over tenfold by 1871, doubled again by 1881 with 
14,000 miles, reached 37,000 by 1901 and 46,000 by 1915.
Page 94
     In 1900, Russia had 48% of the total world production of 
petroleum products. The State Bank was made a bank of issue in 1897 
and was required by law to redeem its notes in gold, thus placing 
Russia on the international gold standard. 
Page 97
     In 1902, a cartel created by a dozen iron and steel firms handled 
almost three-fourths of all Russian sales. It was controlled by four 
foreign banking groups. 
Page 100
     Until 1910, Stolypin continued his efforts to combine oppression 
with reform, especially agrarian reform. Rural credit banks were 
established; various measures were taken to place larger amounts of 
land in the hands of the peasants; restrictions of immigration of 
peasants, especially to Siberia, were removed; participation in local 
government was opened to lower social classes previously excluded; 
education, especially technical education, was made more accessible; 
and certain provisions for social insurance were enacted into law. He 
was assassinated in the presence of the Tsar in 1911. 
     The fourth duma (1912-1916) was elected by universal suffrage. 


CHAPTER IV: THE BUFFER FRINGE 
THE NEAR EAST TO 1914

Page 111
     The Ottoman Empire was divided into 21 governments and subdivided 
into seventy vilayets, each under a pasha. The supreme ruler in 
Constantinople was not only sultan (head of the empire) but was also 
caliph (defender of the Muslim creed). 
Page 121
     The Great Powers showed mild approval of the Baghdad Railway 
until about 1900. Then, for more than ten years, Russia, Britain and 
France showed violent disapproval and did all they could the obstruct 
the project. They described the Baghdad Railway as the emerging wedge 
of German imperialist aggression seeking to weaken and destroy the 
Ottoman Empire and the stakes of the other powers in the area. 
Page 122
     The Germans were not only favorably inclined toward Turkey; their 
conduct seems to have been completely fair in regard the 
administration of the railway itself. At a time when the American and 
other railways were practicing wholesale discrimination between 
customers, the Germans had the same rates and same treatment for all, 
including Germans and non-Germans. They worked to make the railroad 
efficient and profitable although their income from it was guaranteed 
by the Turkish government. In consequence, the Turkish payments to the 
railroad steadily declined, and the government was able to share in 
its profits to the extent of almost three million francs in 1914. 
Moreover, the Germans did not seek to monopolize control of the 
railroad, offering to share equally with France and England and 
eventually with the other Powers. France accepted this offer in 1899, 
but Britain continued to refuse and placed every obstacle in the path 
of the project. 
     When the Ottoman government sought to raise their customs duties 
from 11% to 14% in order to continue construction, Britain prevented 
this. In order to carry on the project, the Germans sold their 
railroad interests in the Balkans and gave the Ottoman building 
subsidy of $275,000 a kilometer. In striking contrast, the Russians 
demanded arrears of 57 million francs under the Treaty of 1878. The 
French, in spite of investments in Turkey, refused to allow Baghdad 
Railway securities to be handled on the Paris Stock Exchange. 
Page 123
     In 1903, Britain made an agreement for a joint German, French, 
and British control of the railroad. Within three weeks this agreement 
was repudiated because of newspaper protests against it. When the 
Turkish government tried to borrow, it was summarily rebuffed in Paris 
and London, but obtained the sum unhesitatingly in Berlin. The growth 
of German prestige and the decline in favor of the Western Powers at 
the sultan's court is not surprising and goes far to explain the 
Turkish intervention on the side of the Central powers in the war of 
1914-1919. 
     Britain withdrew her opposition to the Baghdad Railway in return 
for promises that:
1) it would not be extended to the Persian Gulf;
2) British capitalists would be given a monopoly on the navigation of 
the Euphrates and Tigris rivers and exclusive control over their 
irrigation projects;
3) 2 British subjects would be given seats on the Board of directors;
4) Britain would have exclusive control over commercial activities in 
Kuwait, the only good port on the upper Persian Gulf;
5) a monopoly over the oil resources given to a new corporation: Royal 
Dutch Shell Company in which British held half interest, the Germans 
and French a quarter interest each;
THE BRITISH IMPERIAL CRISIS TO 1926
Page 127
     In England, the landed class obtained control of the bar and the 
bench and were, thus, in a position to judge all disputes about real 
property in their favor. Control of the courts and of the Parliament 
made it possible for this ruling group to override the rights of 
peasants in land, to eject them from the land, to enclose the open 
fields of the medieval system, to deprive the cultivators of their 
manorial rights and thus reduce them to the condition of landless 
rural laborers or tenants. 
Page 130
     Until 1870, there was no professorships of Fine Arts at Oxford, 
but in that year, thanks to a bequest,John Ruskin was named to such a 
chair. He hit Oxford like an earthquake, not so much because he talked 
about fine arts but because he talked about the empire and England's 
downtrodden masses as moral issues. Until the end of the nineteenth 
century, the poverty-stricken masses in the cities lived in want, 
ignorance and crime much like described by Charles Dickens. Ruskin 
spoke to the Oxford undergraduates as members of the privileged ruling 
class. He told them that they were the possessors of a magnificent 
tradition of education, beauty, rule of law, freedom, decency, and 
self-discipline but that this tradition could not be saved and did not 
deserve to be saved, unless it could be extended to the lower classes 
and to the non-English masses throughout the world. If not extended to 
these classes, the minority upper-class would be submerged and the 
tradition lost. 
     Ruskin's message had a sensational impact. His inaugural lecture 
was copied out in longhand by one undergraduate, Cecil Rhodes. Rhodes 
feverishly exploited the diamond and gold fields of South Africa, rose 
to be prime minister of Cape Colony, contributed money to political 
parties, controlled parliamentary seats both in England and South 
Africa. 
     With financial support from Lord Rothschild, he was able to 
monopolize the diamond mines as De Beers Mines and Gold Fields. In the 
mid 1890s, Rhodes had a personal income of a least a million pounds 
(then five million dollars) a year which was spent so freely for his 
mysterious purposes that he was usually overdrawn on his account. 
These purposes centered on his desire to federate the English-speaking 
peoples and to bring all the habitable portions of the world under 
their control. 
Page 131
     Among Ruskin's most devoted disciples at Oxford were a group of 
intimate friends who devoted the rest of their lives to carrying out 
his ideas. They were remarkably successful in these aims. 
     In 1891, Rhodes organized a secret society with members in a 
"Circle of Initiates" and an outer circle known as the "Association of 
Helpers" later organized as the Round Table organization. 
Page 132
     In 1909-1913, they organized semi-secret groups know as Round 
Table Groups in the chief British dependencies and the United States. 
In 1919, they founded the Royal Institute of International Affairs. 
Similar Institutes of International Affairs were established in the 
chief British dominions and the United States where it is known as the 
Council on Foreign Relations. After 1925, the Institute of Pacific 
Relations was set up in twelve Pacific area countries. 
Page 133
     They were constantly harping on the lessons to be learned from 
the failure of the American Revolution and the success of the Canadian 
federation of 1867 and hoped to federate the various parts of the 
empire and then confederate the whole with the United Kingdom
EGYPT AND THE SUDAN TO 1922
     Disraeli's purchase, with Rothschild money, of 176,602 shares of 
Suez Canal stock for #3,680,000 from the Khedive of Egypt in 1875 was 
motivated by concern for communications with India just as the 
acquisition of the Cape of Good Hope in 1814 had resulted from the 
same concern. 
Page 135
     As a result of complex and secret negotiations in which Lord 
Rosebery was the chief figure, Britain kept Uganda, Rhodes was made a 
privy councilor, Rosebery replaced his father-in-law, Lord Rothschild, 
in Rhodes secret group and was made a trustee under Rhodes' next and 
last will. 
Page 137
     By 1895, the Transvaal Republic presented an acute problem. All 
political control was in the hands of a rural, backward, Bible-
reading, racist minority of Boers while all economic wealth was in the 
hands of a violent, aggressive majority of foreigners, (Utlanders) 
most of whom lived in Johannesburg. The Utlanders, who were twice as 
numerous and owned two thirds of the land and nine-tenths of the 
wealth of the country, were prevented from participating in political 
life or from becoming citizens (except after 14 years residence) and 
were irritated by President Paul Kruger's intriguing to obtain some 
kind of German intervention and protection. 
     At this point, Rhodes made his plans to overthrow Kruger's 
government by an uprising in Johannesburg, financed by himself and led 
by his brother Frank, followed by an invasion led by Frank Jameson 
from Rhodesia. Flora Shaw used The Times to prepare public opinion in 
England while others negotiated for the official support necessary. 
     When the revolt fizzled, Jameson raided anyway and was easily 
captured by the Boers. The public officials involved denounced the 
plot, loudly proclaimed their surprise at the event, and were able to 
whitewash most of the participants in the subsequent parliamentary 
inquiry. A telegram from the German Kaiser to Kruger congratulating 
him on his success "in preserving the independence of his country," 
was built up by The Times into an example of brazen German 
interference in British affairs, and almost eclipsed Jameson's 
aggression. 
     Rhodes was stopped only temporarily. For almost two years, he and 
his friends stayed quiet waiting for the storm to blow over. Then they 
began to act again. Propaganda, most of it true about the plight of 
the Utlanders flooded England from Flora Shaw. Milner was made British 
High Commissioner to South Africa; his friend Brett worked his way 
into the confidence of the monarchy to become its chief political 
advisor. Milner made provocative British troop movements on the Boer 
frontiers in spite of the vigorous protests of his commanding general 
in South Africa, who had to be removed; and finally, war was 
precipitated when Smuts drew up an ultimatum insisting that the 
British troop movements cease and when this was rejected by Milner. 
Page 138
     The Boer War (1899-1902) was one of the most important events in 
British imperial history. The ability of 40,000 Boer farmers to hold 
off ten times as many British for three years, inflicting a series of 
defeats on them over that period, destroyed faith in British power. 
Although the Boer republics were defeated and annexed in 1902, 
Britain's confidence was so shaken that it made a treaty with Japan 
providing that if either became engaged in war with two enemies in the 
Far East, the other would come to the  rescue. This treaty allowed 
Japan to attack Russia in 1904.
     
Page 138 
     Milner's group, known as "Milner's Kindergarten" reorganized the 
government. By 1914, the Smuts government passed a law excluding 
natives from most semi-skilled or skilled work or any high-paying 
positions. 
Page 139 
     By the Land Act of 1913, 7% was reserved for purchases by natives 
and the other 93% by whites. The wages of natives were about one tenth 
of those of whites. 
Page 141
     These natives lived on inadequate and eroded reserves or in 
horrible urban slums and were drastically restricted in movements, 
residence, or economic opportunities and had almost no political or 
even civil rights. By 1950 in Johannesburg, 90,000 Africans were 
crowded into 600 acres of shacks with no sanitation with almost no 
running water and denied all opportunity except for animal survival 
and reproduction. 
Page 142
     In 1908, the Milner Round Table group worked a scheme to reserve 
the tropical portions of Africa north of the Zambezi river for natives 
under such attractive conditions that the blacks south of that river 
would be enticed to migrate northward. Its policy would be to found a 
Negro dominion in which Blacks could own land, enter professions, and 
stand on a footing of equality with Whites. Although this project has 
not been achieved, it provides the key to Britain's native policies 
from 1917 onward. 
Page 143
     In 1903, when Milner took over the Boer states, he tried to 
follow the policy that native could vote. This was blocked by the 
Kindergarten because they considered reconciliation with the Boers to 
be more urgent. 
     In South Africa, the three native protectorates of Swaziland, 
Bechuanaland, and Basutoland were retained by the imperial authorities 
as areas where native rights were paramount and where tribal forms of 
living could be maintained at least partially. 
MAKING THE COMMONWEALTH 1910-1926
Page 144
     Back in London, they founded the Round Table and met in conclaves 
presided over by Milner to decide the fate of the empire. Curtis and 
others were sent around the world to organize Round Table groups in 
the chief British dependencies to give them, including India and 
Ireland, their complete independence. 
Page 146
     The creation of the Round Table groups was so secretive that, 
even today, many close students of the subject are not aware of its 
significance. 
Page 147
     Curtis said, "The task of preparing for freedom the races which 
cannot as yet govern themselves is the supreme duty of those who can. 
Personally, I regard this challenge to the long unquestioned claim of 
the white man to dominate the world as inevitable and wholesome, 
especially to ourselves. Our whole race has outgrown the merely 
national state and will pass either to a Commonwealth of Nations or 
else to an empire of slaves. And the issue of these agonies rests with 
us." 
EAST AFRICA 1910-1931
Page 149 
     Publicity for their views on civilizing the natives and training 
them for eventual self-government received wide dissemination. 
Page 150
     By 1950 Kenya had discontented and detribalized blacks working 
for low wages on lands owned by whites. It had about two million 
blacks and only 3,400 whites in 1910. Forty years later, it had about 
4 million blacks and only 30,000 whites. The healthful highlands were 
reserved for white ownership as early as 1908. The native reserves had 
five times as much land although they had 150 times as many people.
     The whites tried to increase the pressure on natives to work on 
white farms rather than to seek to make a living on their own lands 
within the reserves, by forcing them to pay taxes in cash, by 
curtailing the size or quality of the reserves, by restricting 
improvements in native agricultural techniques and by personal and  
political pressure and compulsion. 
     The real crux of the controversy before the Mau Mau uprising of 
1948-1955 was the problem of self-government; Pointing to South 
Africa, the settlers in Kenya demanded self-rule which would allow 
them to enforce restrictions on non-whites. 
Page 151
     From this controversy came a compromise which gave Kenya a 
Legislative Council containing representatives of the imperial 
government, the white settlers, the Indians, the Arabs, and a white 
missionary to represent the blacks. Most were nominated rather than 
elected but by 1949, only the official and Negro members were 
nominated. 
Page 152
     As a result of the 1923 continued encroachment of white settlers 
on native preserves, the 1930 Native Land Trust Ordinance guaranteed 
native reserves but these reserves remained inadequate. 
Page 153
     Efforts to extend the use of native courts, councils and to train 
natives for an administrative service were met with growing suspicion 
based on the conviction that the whites were hypocrites who taught a 
religion that they did not obey, were traitors to Christ's teachings, 
and were using these to control the natives and to betray their 
interests under cover of religious ideas which the whites themselves 
did not observe in practice. 
INDIA TO 1926
     Although the East India Company was a commercial firm, it had to 
intervene again and again to restore order, replacing one nominal 
ruler by another and even taking over the government of those areas 
where it was more immediately concerned and to divert to their own 
pockets some of the fabulous wealth they saw flowing by. Areas under 
rule expanded steadily until by 1858 they covered three-fifths of the 
country. 
Page 154
     In 1857-1858, a sudden, violent insurrection of native forces, 
known as the Great Mutiny, resulted in the end of the Mogul empire and 
of the East India Company, the British government taking over their 
political activities. 
Page 157
     Numerous legislative enactments sought to improve the conditions 
but were counterbalanced... by the growing burden of peasant debt at 
onerous terms and at high interest rates. Although slavery was 
abolished in 1843, many of the poor were reduced to peonage by 
contracting debts at unfair terms and binding themselves and their 
heirs to work for their creditors until the debt was paid. Such a debt 
could never be paid, in many cases, because the rate at which it was 
reduced was left to the creditor and could rarely be questioned by the 
illiterate debtor.
Page 158
     In spite of India's poverty, there was a considerable volume of 
savings arising chiefly from the inequitable distribution of income to 
the landlord class and to the moneylenders (if these two groups can be 
separated in this way).
Page 161
     Hinduism was influenced by Christianity and Islam so that the  
revived Hinduism was really a synthesis of these three religions. 
Played down was the old and basic Hindu idea of Karma where each would 
reappeared again and again in a different physical form and in a 
different social status, each difference being a reward or punishment 
for the soul's conduct in at it's previous appearance. There was no 
real hope of escape from this cycle, except by a gradual improvement 
through a long series of successive appearances to the ultimate goal 
of complete obliteration of personality (Nirvana) by ultimate mergence 
in the soul of the universe (Brahma). This release (moksha) from the 
endless cycle of existence could be achieved only by the suppression 
of all desire, of all individuality and of all will to live. 
IRELAND TO 1939
Page 173
     The Cromwellian conquest of Ireland in the seventeenth century 
had transferred much Irish land, as plunder of war, to absentee 
English landlords. In consequence, high rents, insecure tenure, lack 
of improvements and legalized economic exploitation, supported by 
English judges and English soldiers, gave rise to violent agrarian 
unrest and rural atrocities against English lives and properties. 
THE FAR EAST TO WORLD WAR I
THE COLLAPSE OF CINA TO 1920
Page 176
     The destruction of traditional Chinese culture under the impact 
of Western Civilization was considerably later than the similar 
destruction of Indian culture by Europeans
     The upper-most group derived its income as tribute and taxes from 
its possession of military and political power the middle group 
derived its incomes from sources such as interest on loans, rents from 
lands and the profits from commercial enterprises. Although the 
peasants were clearly an exploited group, this exploitation was 
impersonal and traditional and thus more easily borne. 
Page 179
     Only in the late nineteenth and early twentieth century did 
peasants in China come to regard their positions as so hopeless that 
violence became preferable to diligence or conformity. This change 
arose from the fact that the impact of Western culture on China did, 
in fact, make a peasant's position economically hopeless. 
     
Page 180
     Chinese society was too weak to defend itself against the West. 
When it tried to do so, as in the Opium Wars of 1840-1861 or in the 
Boxer uprising of 1900, such Chinese resistance to European 
penetration was crushed by armaments of the Western Powers and all 
kinds of concessions to these Powers were imposed on China. 
     Until 1841, Canton was the only port allowed for foreign imports 
and opium was illegal. As a consequence of Chinese destruction of 
illegal Indian opium and the commercial exactions of Cantonese 
authorities, Britain imposed on China the treaties of Nanking (1842) 
and of Tientsin (1858). These forced China to cede Hong Kong to 
Britain and to open sixteen ports to foreign trade, to impose a 
uniform import tariff of no more than 5%, to pay an indemnity of about 
$100 million, to permit foreign legations in Peking, to allow a 
British official to act as head of the Chinese customs service, and to 
legalize the import of opium. China lost Burma to Britain, Indochina 
to France. Also Formosa and the Pescadores to Japan, Macao to 
Portugal, Kiaochow to Germany, Liaotung (including Port Arthur) to 
Russia, France took Kwangchowan and Britain took Kowloon and 
Weihaiwei. Various Powers imposed on China a system of 
extraterritorial courts under which foreigners in judicial cases could 
not be tried in Chinese courts or under Chinese law. 



 
TRAGEDY AND HOPE Chapters V-VIII
by Dr. Carroll Quigley 
ISBN 0913022-14-4

CONTENTS
V. THE FIRST WORLD WAR
VI. THE VERSAILLES SYSTEM AND RETURN TO NORMALCY 1919-1929
VII. FINANCE, COMMERCIAL POLICY AND BUSINESS ACTIVITY 1897-1947
VIII. INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE


CHAPTER V: THE FIRST WORLD WAR
THE GROWTH OF INTERNATIONAL TENSIONS 1871-1914

Page 249
     Four chief reasons have been given for the intervention of the 
United States in World War I.
1) to secure "freedom of the seas" from German submarine attacks;
2)British propaganda;
3) a conspiracy by international bankers and munitions manufacturers 
either to protect their loans to the Entente Powers or their wartime 
profits from sales to these Powers;
4) Balance of Power principles to prevent Great Britain from being 
defeated by Germany
Page 250
     The fact that German submarines were acting in retaliation for 
the illegal British blockades of the continent of Europe and British 
violations of  international law and neutral rights on the high seas.
     Britain was close to defeat in April 1917 and on that basis the 
United States entered the war. The unconscious assumption by American 
leaders that an Entente victory was inevitable was at the bottom of 
their failure to enforce the same rules of  neutrality and 
international law against Britain as against Germany. They constantly 
assumed that British violations of these rules could be compensated 
with monetary damages while German violations of these rules 
must be resisted by force if necessary. Since they could not admit 
this unconscious assumption or publicly defend the legitimate basis of 
international power politics on which it rested, they finally went to 
war on an excuse which was legally weak, "the assertion of a right to 
protect belligerent ships on which Americans saw fit to travel and the 
treatment of armed belligerent merchantmen as peaceful vessels. Both 
assumptions were contrary to  reason and to settled law and no other 
professed neutral advanced them."
     The Germans at first tried to use the established rules of 
international law regarding destruction of merchant vessels. This 
proved so dangerous because the British instructions to merchant ships 
to attack submarines. American protests reached a peak when the 
Lusitania was sunk in 1915. The Lusitania was a British merchant 
vessel constructed as an auxiliary cruiser carrying a  cargo of 2,400 
cases of rifle cartridges and 1250 cases of shrapnel with orders to 
attack German submarines whenever possible. The incompetence of the 
acting captain contributed to the heavy loss of life as did also a 
mysterious second explosion after the German torpedo struck. The 
captain was on course he had orders to avoid; he was running at 
reduced speed, he had an inexperienced  crew; the portholes had been 
left open; the lifeboats had not been swung out; and no  lifeboat 
drills had been held. 
Page 251
     The propaganda agencies of the Entente Powers made full use of 
the occasion. The Times of London announced that 80% were citizens of 
the US (actually 15.6%); the British manufactured and distributed a 
medal which they pretended had been awarded to the submarine crew by 
the German government; a French paper published a picture of the 
crowds in Berlin at the outbreak of war in 1914 as a picture of 
Germans "rejoicing" at the news of the sinking of the Lusitania.
     The US protested violently against the submarine warfare while 
brushing aside German arguments based on the British blockade. It was 
so irreconcilable in these protests that Germany sent Wilson a note 
which promised that "in the future merchant vessels within and without 
the war zone shall not be sunk without warning and without 
safeguarding human lives unless these ships try to escape or offer 
resistance. In return, the German government hoped that the US would 
put pressure on Britain to follow the established rules of 
international law in regard to blockade and freedom of the sea. Wilson 
refused to do so. It became clear to the Germans that they would be 
starved into defeat unless they could defeat Britain first by  
unrestricted submarine warfare. Since they were aware this would 
probably bring the US into  the war against them, they made another 
effort to negotiate peace before resorting to it. It was rejected by 
the Entente Powers on Dec. 27 and unrestricted submarine attacks were 
resumed. Wilson broke off diplomatic relations and the Congress 
declared war on April 3, 1917.
Page 252
     Britain was unwilling to accept any peace which would  leave 
Germany supreme on the continent or in a position to resume the 
commercial, naval, and colonial rivalry which had existed before 1914.
Page 253
     The Vatican, working through Cardinal Pacelli (later Pope Pius 
XII) sought a negotiated peace. 
     On Oct 5, a German note to Wilson asked for an armistice based on 
the basis of the Fourteen Points which promised the end of secret 
diplomacy, freedom of the seas; freedom of commerce; disarmament; a 
fair settlement of colonial claims, with  the interests of the native 
peoples receiving equal weight with the titles of the Imperialist 
Powers; the evacuation of Russia, the evacuation and restoration 
of Belgium, the  evacuation of France and the restoration of her 
Alsace-Lorraine as in 1870.
Page 254
     The Entente Supreme War Council refused to accept the Fourteen 
Points as the basis for peace until Colonel House threatened that the 
US would make a separate peace with Germany. 
Page 255
     Wilson had clearly promised that the peace treaty would be 
negotiated and based on the Fourteen Points but the Treaty of 
Versailles was imposed without negotiation and the Fourteen Points 
fared very poorly in its provisions. The subsequent claim of the 
German militarists that the German Army was never defeated but was 
"stabbed in the back" by the home front through a combination of 
international Catholics, international Jews, and international 
Socialists have no merit whatever. 
     On all fronts, almost 13 million men in the various armed forces 
died and the war destroyed over $400 billion in property at a time 
when the value of every object in France and Belgium was not  worth 
over $75 billion. 
Page 256
     In July 1914, the military men were confident that a decision 
would be reached in six months. This belief was supported by the 
financial experts who, while greatly underestimating the cost of  
fighting, were confident financial resources would be exhausted in six 
months. By financial resources, they meant "gold reserves." These were 
clearly limited; all the Great Powers were on the gold standard. 
However each country suspended  the gold standard at the outbreak of 
war.  This removed the automatic limitation on the supply of paper 
money. The each country proceeded to pay for the war by borrowing from 
the banks. The banks created the money which they lent my merely 
giving the government a deposit of any size against which the 
government could draw checks. The banks were no longer limited in the 
amount of credit they could create because they no longer had to  pay 
out  gold for checks on demand. This the creation of money in the form 
of credit by the banks was limited only by the demands of its 
borrowers. Naturally, as governments borrowed to pay for their needs, 
private businesses borrowed to be able to  fill the  
government's orders. The percentage of outstanding bank notes covered 
by gold reserves steadily fell and the percentage of bank credit 
covered by either gold or bank notes fell even further. 
     Naturally, when the supply of money was increased in this fashion 
faster than the supply of goods, prices rose because  a larger supply 
of money was competing for a smaller supply of goods. People received 
money for making capital goods, consumer goods and munitions but they 
could spend their money only to buy consumer goods. The problem of 
public debt became steadily worse because governments were financing 
such a large part of their activities by bank credit. Public debts 
rose by 1000 percent. 
Page 259
     Governments began to regulate imports and exports to ensure that 
necessary materials stayed in the country and did not go to enemy 
states. This led to the British blockade of Europe. 
Page 251
     The results of the blockade were devastating. Continued for 
nine months after the armistice, it caused the deaths of 800,000 
persons, reparations took 108,000 horses, 205,000 cattle, 426,000 
sheep and 240,000 fowl. 
Page 262
     Countries engaged in a variety  of activities designed to 
regulate the flow of information which involved censorship, propaganda 
and curtailment of civil liberties.
Page 263
     The War Propaganda Bureau was able to control almost all 
information going to the American press.
     The Censorship and Propaganda bureaus worked together. The former 
concealed all stories of Entente violations of the laws of war or of 
the rules of humanity while the Propaganda Bureau widely publicized 
the violations and crudities of the Central Powers. The German 
violation of Belgian neutrality was constantly bewailed,while nothing 
was said of the  Entente violation of Greek neutrality. A great deal 
was made of the Austrian ultimatum to Serbia while the Russian 
mobilization which had precipitated the war was hardly mentioned. In 
the Central Powers a great deal was made of the Entente encirclement 
while nothing was said of the Kaiser's demands for "a place in the 
sun" of the High Command's refusal to renounce annexation of any part 
of Belgium.
     Manufacture of outright lies by propaganda agencies was 
infrequent and the desired picture of the enemy was built up by a 
process of selection and distortion of evidence until, by 1918,many in 
the West regarded the Germans as bloodthirsty and sadistic militarists 
while the Germans regarded the Russians as "subhuman monsters." A 
great deal was made, especially by the British, of "atrocity" 
propaganda; stories of German mutilation of bodies, violation of 
women, cutting off a  children's hands, desecration of churches, and 
crucifixions of Belgians were widely believed in the West by 1916. In 
1917, Henry Carter is created a story that the  Germans were cooking 
human bodies to extract glycerine and produced pictures to prove it. 
Again, photographs of mutilated bodies  in a Russian anti-Semitic 
outrage in 1905 were circulated as pictures of Belgians in 1915. There 
were several reasons for the use of such atrocity stories:   
a) to build up the fighting spirit of the mass army;
b) to stiffen civilian morale;
c) to encourage enlistments;
d) to increase subscriptions for war bonds;
e) to justify one's own breaches of international law;
f) to destroy the chances of negotiating peace or to justify a severe 
final peace;
g) to win the support of the neutrals. 
     The relative innocence and credulity of the average person who 
was not yet immunized to propaganda assaults through mediums of mass 
communication in 1914 made the use of such stories relatively 
effective. But the discovery in the period after 1919 that they had 
been hoaxed gave rise to a skepticism toward all government 
communications which was especially noticeable in the Second World 
War. 


CHAPTER VI: THE VERSAILLES SYSTEM AND THE RETURN TO NORMALCY 1919-1929
THE PEACE SETTLEMENTS 1919-1923
Page 267
     The criticisms of the peace settlements was as ardent from the 
victors as from the vanquished aimed at the terms which were neither 
unfair nor ruthless. The causes of the discontent rested on the 
procedures which were used rather than the terms themselves. Above 
all, there was discontent at the contrast between the procedures which 
were used  and the procedures which pretended to be used, as well as 
between the high-minded principles which were supposed to be applied 
and those which really were applied.
     
Page 268
     When it became clear that they were to be imposed rather than 
negotiated, that the Fourteen Points had been lost in the confusion, 
that the terms had been reached by a process of secret negotiations 
from which the smaller nations had been excluded, there was a 
revulsion against the treaties. By 1929, most of the Western World had 
feelings of guilt and shame whenever they thought of the Versailles 
Treaty. In England, the same groups, often the same people, who had 
made the wartime propaganda and the peace settlements were loudest in 
their complaint that the latter had fallen far below the ideals of the 
former while all the while their real aims were to use power politics 
to the benefit of Britain.  
     The peace settlements were made by an organization which  was 
chaotic and by a procedure which was fraudulent. None of this was 
deliberate. It arose rather from weakness and ignorance, from a 
failure to decide on what principles it would be based. 
Page 269
     Since the Germans had been promised the right to negotiate, it 
became clear that the terms could not first be made the subject of 
public compromise. Unfortunately, by the time the victorious Great 
Powers realized all this and decided to make the terms by  secret 
negotiations among themselves, invitations had already been sent to 
all the victorious  powers to come to the conference. As a solution to  
this embarrassing situation, the  peace treaty was made on two levels. 
On one level, in the full glare of  publicity, the Inter-Allied 
Conference became the  Plenary Peace 
Conference  and with the considerable fanfare, did nothing. ON 
the other level, the Great Powers  worked out their  peace terms in 
secret and  when they were ready, imposed them simultaneously on the 
conference and on the Germans. This had not been intended. It was not 
clear to anyone just what was being done. 
Page 271
     At all these meetings, as at the Peace Conference itself, the 
political leaders were assisted by groups of experts and interested 
persons. Many of the experts were members associates of the 
international banking fraternity. In every case  but one, where a 
committee of experts submitted a unanimous report, the Supreme Council 
accepted its recommendation. The one case where a report was not 
accepted was concerned with the Polish corridor, the same issue which 
led to the Second World War where the experts were much harsher on 
Germany than the final decision of the politicians.  
Page 272
     The German delegation offered to accept the disarmament 
sections and reparations if the Allies would withdraw any statement 
that Germany had, alone, caused the war and would re-admit Germany to  
the  world's  markets. 
Page 273
     The Allies answer accused the Germans of sole guilt in causing 
the war and of inhuman practices during it. The Germans voted to sign 
if the articles on war guilt and war criminals could be struck from 
the treaty.. When the Allies refused these concessions, the Catholic 
Center Party voted 64-14 not to sign. The High Command of the German 
army ordered the Cabinet to sign. The Treaty of Versailles was signed 
by all the delegations except the Chinese in protest against the 
disposition of the prewar German concessions in Shantung.
Page 274
     No progress was possible in Hungary without some solution of the 
agrarian question and the peasant discontent arising from 
monopolization of the land. 
     The French Ministry of Foreign Affairs (acting on behalf of 
France's greatest industrialist, Eugene Schneider) made a deal with 
the Hungarians that if they would sign the Treaty of Trianon and give 
Schneider control  of the Hungarian state railways, the port of 
Budapest and the Hungarian General Credit Bank, France would 
eventually make Hungary one of the mainstays of  its anti-German bloc 
in Eastern Europe and, at the proper time, obtain a drastic revision 
of the Treaty of Trianon. Paleologue received his reward from 
Schneider. He was  made director  of Schneider's personal holding 
company. 
     The Treaty of Sevres with Turkey was never signed because of the 
scandal caused by the Bolsheviki publication of the secret treaties 
regarding the Ottoman Empire, since these treaties contrasted so 
sharply with the expressed war aims of the Allies. 
     The British felt that richer prospects were to be obtained from 
the Turkish sultan. In particular, the French were prepared to support 
the claims of Standard Oil to such concessions while the British were 
prepared to support Royal Dutch Shell.
Page 277
     The chief territorial disputes arose over the Polish corridor. 
France's Foch wanted to give all of East Prussia to Poland. Instead, 
the experts gave Poland access to the sea by severing East Prussia 
from the rest of Germany by creating a Polish corridor in the valley 
of the Vistula. However, the city of Danzig was clearly a German city 
and Lloyd George refused to give it  to POland. Instead, it was a made 
a free city under the protection of the League of Nations. 
Page 279
     The most violent controversies arose in regard to the boundaries 
of Poland. Of these, only that with Germany was set by the Treaty of 
Versailles. The Poles refused to accept their other frontiers and by  
1920 were at war  with Lithuania over Vilna, with Russia over the  
eastern border, with the Ukrainians over Galaicia, and with 
Czechoslovakia over Teschen. 
Page 280
     These territorial disputes are of importance because they 
continued to lacerate relationships between neighboring states until 
well into the period of World War II. There were 1,000,000 Germans 
living in Poland, 550,000 in Hungary, 3,100,000 in Czechoslovakia, 
about 700,000 in Romania, 500,000  in Yugoslavia and 250,000 in Italy. 
To protect these minorities, the Allied Powers forced the new states 
to sign treaties grating a certain minimum political rights guaranteed 
by the League of Nations with no power to enforce observation of them.
Page 282
     The French were torn between a desire to obtain as large a 
fraction as possible  of Germany's payments and a desire to pile on 
Germany such a crushing burden of indebtedness that Germany would be 
ruined beyond the point where it could threaten French security again. 
     A compromise originally suggested by John Foster Dulles was 
adopted by  which Germany was forced to admit an unlimited, 
theoretical obligation to pay  but was actually bound to pay  for only 
a limited list of ten categories of obligations with pensions being 
larger than the preceding nine categories together. All reparations 
were wiped out in the financial debacle of 1931-1932.
Page 283
     Britain had obtained all her chief ambitions. The German navy was 
at the bottom of Scapa Flow scuttled by the the Germans themselves;
the German merchant fleet was scattered, captured, destroyed; the 
German colonial rivalry was ended and its areas occupied; the German 
commercial rivalry was crippled by the loss of its patents and 
industrial techniques, the destruction of all its commercial outlets 
and banking connections throughout the world, and the loss of its 
rapidly growing prewar markets. France on the other hand, had not 
obtained the one thing it wanted: security.
SECURITY 1919-1935
Page 287
     The British governments of the Right began to follow a double 
policy: a public policy in which they spoke loudly in support of the 
foreign policy  of the Left; and a secret policy in which they 
supported the foreign policy of the Right. Thus the stated policy was 
based on support of the League of Nations and of disarmament yet the 
real policy was quite different. While openly supporting Naval 
disarmament, Britain signed a secret agreement with France which 
blocked disarmament and signed an agreement with Germany which 
released her from her naval disarmament in 1935. After 1935, the 
contrast between the public and secret policy became so sharp that 
Lord Halifax called it "dyarchy." 
Page 289
     The British Right forced France to give away every advantage 
which it held  over Germany. Germany was allowed to rearm in 1935, 
allowed to remilitarize the Rhineland in 1936. Finally, when all had 
been lost, public opinion forced the British government to abandon the 
Right's policy of appeasement and adopt the old French policy of 
resistance made on a poor issue (Poland 1939)
     In France, as in Britain, there appeared a double policy. While 
France continued to talk of collective  security, this was largely for 
public consumption for in fact she had no policy independent of 
Britain's policy of appeasement. 
Page 290
     War was not outlawed but merely subjected to certain procedural 
delays in making it, nor were peaceful procedures for settling 
international disputes made compulsory. 
     The Covenant had been worded by a skillful British lawyer, Civil 
Hurst, who filled it with loopholes cleverly concealed under a mass 
of impressive verbiage so that no  state's freedom of action was 
vitally restricted. 
Page 293
     The Locarno Pacts, which were presented at the time throughout 
the English-speaking world as a sensational contribution to the peace  
and  stability of Europe, really formed the background for the events 
of 1938 when Czechoslovakia was destroyed at Munich. When the 
guarantee of Locarno became due in 1936, Britain dishonored its 
agreement, the Rhine was remilitarized and the way was open for 
Germany to move eastward. 
     Poland protested violently at the refusal to guarantee her 
frontiers. 
Page 294 
     France agreed to an extension of a multilateral agreement by 
which all countries could renounce the use of war as an instrument of 
national policy. The British government reserved certain areas, 
notably the Middle East, where it wished to be able to wage wars which 
could not be termed self-defence in a strict sense. The US also made 
reservation preserving its right to make war under the Monroe 
doctrine. The net result was that only aggressive war was to be 
renounced. The Kellogg-Briand Pact took one of the first steps toward 
destroying the legal distinction between war and peace, since the 
Powers, having renounced the use of war, began towage wars without 
declaring them as was done by Japan in China in 1937, by Italy in 
Spain in 1936 and by everyone in Korea in 1950. 
Page 296
     The outlawry of war was relatively meaningless without some 
sanctions that could compel the use of peaceful methods. Efforts in 
this direction were nullified by Britain. 
DISARMAMENT 1919-1935
     
Page 303
     Disarmament suggestions of the Soviet representative, Litvinoff, 
providing for immediate and complete disarmament of every country, was 
denounced by  all. A substitute draft provided that the most heavily 
armed states would disarm by 50%, the less heavily-armed by 31% and 
the lightly armed by 25%, and the disarmed by 0%. That all tanks, 
planes, gas and heavy artillery be completely prohibited was also 
rejected without discussion and Litvinoff was beseeched to show a more 
"constructive spirit." 
Page 305
     Once it was recognized that security was in acute danger, 
financial considerations were ruthlessly subordinated to rearmament 
giving rise to an economic boom which showed clearly what might have 
been achieved earlier if financial consideration had been subordinated 
to the world's economic and social needs earlier; such action would 
have provided prosperity and rising standards of living which might 
have made rearming unnecessary.  
     JCT: How true. 
REPARATIONS 1919-1932
Page 305
     The preliminary payments were supposed to amount to a total of 20 
billion marks by May 1921. Although the Entente Powers contended 
that only 8 billion had been paid,the whole matter was dropped when 
the Germans were presented with a total reparations bill of 132 
billion marks. Under pressure, Germany accepted this bill and gave the 
victors bonds of indebtedness. Of these, 82 billion were set aside and 
forgotten. Germany was to pay the other 50 billion at 2.5 billion a 
year in interest and .5 billion a year to reduce the total debt. 
     JCT: It would only take 200 years to pay off a total of 500 
billion in interest and 50 billion in principal. 
Page 306
     Germany could only pay if two conditions prevailed:
a) if it had a budgetary surplus and
b) if it sold abroad more than it bought abroad. 
     Since neither of these conditions generally existed in the period 
1921-1931, Germany could not, in fact, pay reparations.
     The failure to obtain a budgetary surplus was solely the  
responsibility of the government which refused to reduce its own 
expenditures or the standards of living off its own people or to  tax 
them sufficiently heavily. The failure to obtain a favorable balance 
of trade because foreign creditors refused to allow a free flow of 
German goods into their own countries. Thus creditors were unwilling 
to accept payment in the only way in which payments could honestly be 
made, that is, by accepting German goods and services.  
     JCT: Notice they wanted money and not the goods they could buy 
with it. 
     Germany could have paid in real goods and services if the 
creditors had been willing to accept such goods and services. The 
government made up the deficits by borrowing from the Reichsbank. The 
result was an acute inflation which was not injurious to the 
influential groups though it was generally ruinous to the middle 
classes and thus encouraged extremist elements. 
Page 307
     On Jan 9,1923, the Reparations Committee voted 3 to 1 (Britain 
opposing France, Belgium and  Italy) that Germany was in default. 
Armed forces of the three nations began to occupy the Ruhr two 
days later. Germany declared a general strike in the area, ceased all 
reparation payments, and adopted a program of passive resistance, the 
government supporting the strikers by printing more paper money.
     The area occupied was no more than 60 miles long by 30 miles wide 
but contained 10% of Germany's population and produced 80% of 
Germany's coal, iron and steel and 70% of her freight traffic. Almost 
150,000 Germans were deported. 
     
Page 308
     A compromise was reached by which Germany accepted the Dawes Plan 
for reparations and the Ruhr was evacuated. The Dawes Plan was largely 
a J.P. Morgan production drawn up by an international committee of 
financial experts presided over by American banker Charles Dawes. 
Germany paid reparations for five years (1924-1929) and owed more at 
the end than it had owed at the beginning. It is worthy of note that 
this system was set up by the international bankers and that the 
subsequent lending of other people's money to Germany was very 
profitable to these bankers. 
     Using these American loans, Germany's industry was largely 
rebuilt to make it the second best in the world and to pay 
reparations. 
Page 309
     By these loans Germany's creditors were able to pay their war 
debts to England without sending goods or services. Foreign exchange 
went to Germany as loans, back to Italy, Belgium, France and Britain 
as reparations and finally back to the US as payments on war debts. In 
that period, Germany paid 10.5 billion marks in reparations but 
borrowed 18.6 billion abroad. Nothing was settled by all this but the 
international bankers sat in heaven under a rain of fees and 
commissions. 
Page 310
     The Dawes Plan was replaced by the Young Plan, named after the 
American Owen Young (a Morgan agent). A new private bank called the 
Bank for International Settlements was established in Switzerland. 
Owned by the chief central banks of the world and holding accounts for 
each of them, "a Central Bankers' Bank," it allowed payments to be 
made by merely shifting credits from one country's account to another 
on the books of the bank. 
     The Young Plan lasted for less than 18 months. The crash of the 
New York stock market in 1929 marked the end of the decade of 
reconstruction and ended the American loans to Germany. 
     Germans and others had begun a "flight from the mark" which 
created a great drain on the German gold reserve. As it dwindled, the 
volume of money and credit erected on that reserve had to be reduced 
by raising the interest rate. Prices fell because of the reduced money 
supply so that it became almost impossible for the banks to sell 
collateral to obtain funds to meet the growing demand for money.
     JCT: Here he thinks loans are savings and has forgotten that he 
had earlier told us it was new credit. 
Page 311
     On May 8, 1931, the largest Austrian bank, the Credit-Anstalt (a 
Rothschild institution) which controlled 70% of Austria's industry, 
announced a $140 million schillings loss. The true loss was over a 
billion and the bank had been insolvent for years. The Rothschilds and 
the Austrian government gave the Credit-Anstalt 160 million to cover 
the loss but public confidence had been destroyed. A run began on the 
bank. To meet this run,the Austrian banks called in all the funds they 
had in German banks. The German banks began to collapse. These latter 
began to call in all their funds in London. The London banks began to 
fall and gold flowed outward. On Sept.21, England was forced off the 
gold standard. The Reichsbank lost 200 million marks of its gold 
reserve in the first week of June and a billion in the second. The 
discount rate was raised step by step to 15% without stopping the loss 
of reserves but destroying the activities of the German industrial 
system almost completely.
     Germany begged for relief on her reparations payments but her 
creditors were reluctant unless they obtained similar relief on the 
war-debt payments to the US. The President suggested a moratorium for  
one year if its debtors would extend the same privilege to their 
debtors. 
Page 312
     At the June 1932 Lausanne Conference, German reparations were cut 
to a total of only 3 billion marks but the agreement was never 
ratified because of the refusal of the US Congress to cut war debts 
equally drastically. In 1933, Hitler repudiated all reparations. 


CHAPTER VII: FINANCE, COMMERCIAL POLICY, AND BUSINESS POLICY 1897-1947
REFLATION AND INFLATION 1897-1925
page 315
A real understanding of the economic history of twentieth century 
Europe is imperative to any understanding of the events of the period. 
Such an understanding will require a study of the history of finance. 
Page 316
     The outbreak of war in 1914 showed these financial capitalists in 
their worst, narrow in outlook, ignorant and selfish, while 
proclaiming, as usual, their total devotion to the social good. They 
generally agreed that war could not go on for more than six to ten 
months because of the "limited financial resources" of the 
belligerents (by which they meant gold reserves).This idea reveals the 
fundamental misunderstanding of the nature and of money on the part of 
the very persons who were reputed to be experts on the subject. Wars 
are not fought with gold or even with money but by proper organization 
of real resources.  
     The attitudes of bakers were revealed most clearly in England, 
where every move was dictated by efforts to protect their own position 
and to profit from it rather than by considerations of 
economic mobilization for war or the welfare of the British people. 
War found the British banking system insolvent in the sense that its 
funds, created by the banking system for profit and rented out to the 
economic system to permit it to operate, could not be covered by the 
existing volume of gold reserves or collateral which could be 
liquidated rapidly. Accordingly,the bankers secretly devised a scheme 
by  which their  obligations could be met by fiat money (so-called 
Treasury Notes), but as soon as the crisis was over, they ten insisted 
that the government must pay for the war without recourse to fiat 
money (which was always damned by the bankers as immoral) but by 
taxation and by borrowing at high interest rates from the bankers. The 
decision to use Treasury Notes to fulfill the bankers' liabilities was 
made on July 25, 1915 by Sir John Bradbury. the first Treasury Notes 
were run off the presses at Waterloo and Sons on July 28th. It was 
announced that the Treasury Notes, instead of gold, would be used for 
bank payments. The discount rate was raised at the Bank of England 
from 3% to 10% to prevent inflation, a figure taken merely because the 
traditional rule of the bank stated that a 10% bank rate would draw 
gold out of the ground itself. 
     
Page 317 
     At the outbreak of war, most of the belligerent countries 
suspended gold payments and accepted their bankers' advice that the 
proper way to pay for the war was by a combination of bank loans and 
taxation of consumption. The governments paid for the war by taxation, 
by fiat money, by borrowing from banks (which created credit for the 
purpose) and by borrowing from the people by selling them war bonds.
     Each of these methods had a different effect upon the two 
consequences of the war: inflation and public debt. 
a) Taxation gives no inflation and no debt.
b) Fiat money gives inflation and no debt.
c) Bank credit gives inflation and debt.
d) Sales of bonds give no inflation but give debt.
     It would appear from this table that the best way to pay for the 
war would be by taxation and the worst way would be by bank credit. 
Probably the best way to finance war is a combination of the four 
methods. 
Page 318
     In the period 1914-1918, the various belligerents used a mixture 
of  these four methods but it was a mixture dictated by expediency and 
false theories so that at the end of the war all countries found 
themselves with both public debts and inflation.
     While the prices in most countries rose 200 to 300 percent and 
public debts rose 1000%, the financial leaders tried to keep up the 
pretense that the money was as valuable as it had ever been. For this 
reason, they did not openly abandon the gold standard. Instead, they 
suspended certain attributes of the gold standard. In most countries, 
payments in gold and export of gold were suspended but every effort 
was made to keep gold reserves up to a respectable percentage of 
notes. These attributes were achieved in some cases by deceptive 
methods. In Britain, the gold reserves against notes fell from 52% to 
18% in the month of July 1914; then the situation was concealed, 
partly by moving assets of local banks into the Bank of England and 
using them as reserves for both, partly by issuing a new kind of notes 
(Currency Notes) which had no real reserve and little gold backing. 
     
Page 320
     As soon as the war was over, governments began to turn their 
attention to restoring the prewar financial system. Since the 
essential element was believed to be the gold standard, this movement 
was called "stabilization." 
     Productive capacity in both agriculture and industry had been 
increased by the artificial demand of the war period to a degree far 
beyond the ability of normal domestic demand to buy the products.
     JCT: But not to eat them.  
     The backwards areas had increased their outputs of raw materials 
and food so greatly that the total could hardly have been sold.
     JCT: But no eaten.
     The result was as situation where all countries were eager to 
sell and reluctant to buy. The only sensible solution to this problem 
of excessive productive capacity would have been a substantial rise in 
domestic standards of living but this would have required a 
fundamental reapportionment of the national income so that claims to 
this product of the excess capacity would go to those masses eager to 
consume, rather than continue to go  to the minority desiring to save. 
Such reform was rejected by the ruling groups in both "advanced" and 
"backwards" countries so that this solution was reached only to a 
small degree in a relatively few countries (chiefly US and Germany in 
1925-1929).
Page 324
     The powers of financial capitalism had another far-reaching 
aim, nothing less than to create a world system of financial control 
in private hands able to dominate the political system of each country 
and the economy of the world as a whole. This system was to be 
controlled in a feudalist fashion by the central banks of the world 
acting in concert, by secret agreements arrived at in frequent private 
meetings and conferences. The apex of the system was to be the Bank 
for International Settlements in Basle, Switzerland, a private bank 
owned and controlled by the world's central banks which were 
themselves private corporations. Each central bank sought to dominate 
its government by its ability to control Treasury loans, to manipulate 
foreign exchanges, to influence the level of economic activity in the 
country, and to influence cooperative politicians by subsequent 
economic rewards in the business world. 
     In each country, the power of the central bank rested largely on 
its control of credit and money supply. In the world as a whole the 
power of the central bankers rested very largely on their control 
of loans and the gold flows. They made agreements on all the major 
financial problems of the world, as well as on many of  the 
economic and political problems, especially in reference to loans, 
payments, and the economic future of the chief areas of the globe. 
     The Bank of International Settlements, B.I.S. is generally 
regarded as the apex of the structure of financial capitalism whose 
remote origins go back to the creation of the Bank of England in 1694.

Page 325
     It was set up to be the world cartel of every-growing national 
financial powers by assembling the nominal heads of these national 
financial centers. 
     The commander in Chief of the world system of banking control was 
Montagu Norman, Governor of the Bank of England, who was built up by 
the private bankers to a position where he was regarded as an oracle 
in all matters of government and business. In government, the power of 
the Bank of England was a considerable restriction on political action 
as early as 1819 but an effort  to break this power by a modification 
of the bank's charter in1844 failed. In 1852, Gladstone, then 
chancellor of the Exchequer and later Prime Minister, declared, 
"The hinge of the whole situation was this: the government itself was 
not to be a substantive power in matters of Finance, but was to leave 
the Money Power supreme and unquestioned." 
     This power of the Bank of England was admitted in 1924 by 
Reginald McKenna, who had been Chancellor of the Exchequer, when he, 
as Chairman, told the stockholders of the Midland bank, "I am afraid 
the ordinary citizen will not like to be told that the banks can, and 
do, create money. And they who control the credit of a nation direct 
the policy if Governments and hold in the hollow of their hands the 
destiny of the people." In that same year, Sir Drummond Fraser, vice-
president of the Institute of Bankers stated, "The Governor must be 
the autocrat who dictates the terms upon which alone the Government 
can obtain borrowed money." On Sep. 26, 1921,
Vincent Vickers, director of the bank, the Financial Times wrote, 
"Half a dozen meant the top of the Big Five Banks could upset the 
whole fabric of government by refraining from renewing Treasury 
Bills." 
Page 326
     Norman had no use for governments and feared democracy. Both 
of these seemed to him to be threats to private banking and thus to 
all that was proper and precious to human life. He viewed his life as 
a kind of cloak-and-dagger struggle with the forces of unsound money 
which were in league with anarchy and Communism. When he rebuilt the 
Bank of England,he constructed it as a fortress prepared to defend 
itself against any popular revolt. For much of his life, he 
rushed about the world under the assumed name of "Professor Skinner."
     Norman had a devoted colleague in Benjamin Strong, the first 
governor of the Federal Reserve Bank of New York. Strong owed his 
career to the favor of the Morgan bank. 
     In the 1920s, they were determined to use the financial power of 
Britain and the US to force all the major countries of the world to go 
on the gold standard and to operate it through central banks free from 
all political control, with all questions of international finance to 
be settled by agreements by such central banks without interference 
from governments. 
Page 327
          It must not be felt that these heads of the world's chief 
central banks were themselves substantive powers in world finance. 
They were not. Rather, they were the technicians and agents of the 
dominant investment bankers of their own countries, who had raised 
them up and were perfectly capable of throwing them down. The 
substantive financial powers of the world were in the hands of 
investment bankers (also called "international" or "merchant" bankers) 
who remained largely behind the scenes in their own unincorporated 
private banks. 
     These formed system of international cooperation and national 
dominance which was more private,more powerful, and more secret tan 
that of their agents in the central banks. This dominance of 
investment bankers was based on their control over the flows of credit 
and investment funds in their own countries and throughout the world. 
They could dominate the financial and industrial systems of their own 
countries by their influence over the flow of current funds through 
bank loans,the discount rate,the rediscounting of commercial debts; 
they could dominate governments by their control over current 
government loans and the play of the international exchanges. 
     Almost all of this power was exercised by  the personal influence 
and prestige men who had demonstrated their ability in the past to 
bring off successful financial coups, to keep their word, to remain 
cool in a crisis, and to share their winning opportunities with their 
associates. 
     In this system, the Rothschilds had been preeminent during much 
of the nineteenth century, but, at the end of that century, they were 
being replaced by J.P. Morgan in New York. 
     At the present stage, we must follow the efforts of the central 
bankers to compel the world to return to the gold standard of 1914. 
Page 328
     The problem of public debts arose from the fact that as money 
(credit) was created, it was usually made in such a way that it was 
not in the control of the state but was in the control of private 
financial institutions which demanded real wealth at some future date 
for the creation of claims on wealth in the present. The problem of 
public debt could have been met in one or more of several fashions:
a) by increasing the amount of real wealth...
b) by devaluation...
c) by repudiation...
d) by taxation...
e) by the issuance of fiat money and the payment of the debt by such 
money. 
Page 329
     Efforts to pay the public debt by fiat money would have made the 
inflation problem worse. 
     Orthodox theory rejected fiat money as solutions to the problem. 
Page 332
     In Britain, the currency notes which had been used to supplement 
bank notes were retired and credit was curtailed by raising the 
discount rate to panic level. The results were horrible. Business 
activity fell drastically and unemployment rose to well over a million 
and a half. The outcome was a great wave of strikes and industrial 
unrest. 
Page 333
     To maintain the gold reserve at all, it was necessary to keep 
the discount rate at a level so high (4.5% or more) that business 
activity was discouraged. As a result of this financial policy, 
Britain found herself faced with deflation and depression for the 
whole period of 1920-1923. The number of unemployed averaged about 
1.75 millions for each of the thirteen years of 1921-1932 and reached 
3 million in 1931.
     Belgium, France and Italy, accepted orthodox financial ideas and 
tried to deflate in 1920-1921 but after the depression which resulted, 
they gave up the task. 
Page 334
     The Dawes Plan provided the gold reserves which served to protect 
Germany from the accepted principles of orthodox finance. 
Page 336
     Financial capitalism had little interest in goods at all, but was 
concerned entirely with claims on wealth - stocks, bonds, mortgages, 
insurance, proxies, interest rates, and such. It built railroads in 
order to sell securities, not to transport goods. Corporations were 
built upon corporations in the form of holding companies so that 
securities were issued in huge quantities bringing profitable fees and 
commissions to financial capitalists without any increase in economic  
production whatever. Indeed, these financial capitalists discovered 
that they could not only make killings out of the issuing of such 
securities,they could also make killings out of the bankruptcy of such 
corporations through the fees and commissions of reorganization. A 
very pleasant cycle of flotation, bankruptcy, flotation, bankruptcy 
began to be practiced by these financial capitalists. The more 
excessive the flotation, the greater the profits and the more imminent 
the bankruptcy. The more frequent the bankruptcy, the greater the  
profits of reorganization and the sooner the opportunity of another 
excessive flotation. 
Page 337
     The growth of financial capitalism made possible a centralization 
of world economic control and a use of this power for the direct 
benefit of financiers and the indirect injury of all other economic 
groups. Financial control could be exercised only imperfectly through 
credit control and interlocking directorates. 
Page 338
     The real key rested on the control of money flows which were held 
by investment bankers in 1900.  
THE PERIOD OF DEFLATION, 1927-1936
Page 339
     After 1929, deflation reached a degree which could be called 
acute. In the first part of this period (1921-1925), the dangerous 
economic implications of deflation were concealed by a structure of 
self-deception which pretended that a great period of economic 
progress would be inaugurated as soon as the task of stabilization had 
been accomplished. This psychological optimism was completely 
unwarranted by the economic facts. After 1925, when deflation became 
more deep-rooted and economic conditions worsened, the danger from 
these conditions was concealed by a continuation of unwarranted 
optimism. 
THE CRASH OF 1929
Page 342
     When France stabilized the franc at a level at which it was 
devalued, the Bank of France sold francs in return for foreign 
exchange. The francs were created as credit in France thus giving an 
inflationary effect. 
Page 343
     The financial results of the stock market book in the U
S was credit diverted from production to speculation and increasing 
amounts of funds being drained from the economic system into the stock 
market where they circulated around and around, building up prices 
of securities. 
Page 344
     Early in 1929, the board of governors of the Federal Reserve 
System became alarmed at the stock market speculations draining credit 
from industrial production. To curtail this, they called upon member 
banks to reduce their loans on stock collateral to reduce the amount 
of credit available for speculation. Instead, the available credit 
went more and more to speculation and decreasingly to productive 
business. Call money rates in New York which had reached 7% at the end 
of 1928 were at 13% by June 1929. 
Page 346
     To restore confidence among the wealthy (who were causing the 
panic) an effort was made to balance the budget by cutting public 
expenditures drastically. This, by reducing purchasing power, had 
injurious effects on business activity and increased unrest among the 
masses of the people. 
Page 350
     Washington left gold in 1933 voluntarily in order to follow an 
unorthodox financial program of inflation. 
Page 351
     The Thomas Amendment to the Agricultural Adjustment Act (1933) 
gave the president the power to devaluate the dollar up to 50%, to 
issue up to $3 billion fiat money,and to engage on an extensive 
program of public spending. 
Page 352
     The economies of the different countries were so intertwined with 
one another that any policy of self-interest on the part of one would 
be sure to injure others in the short run and the country in the 
long run. The international and domestic economic systems had 
developed to the point where the customary methods of thought and 
procedure in regard to them were obsolete. 
page 353
     As a result of the crisis, regardless of the nature of its 
primary impact, all countries began to pursue policies of economic 
nationalism. This spread rapidly as a result of imitation and 
retaliation. 
Page 355
     The Bank of France raised its discount rate from 2.5% to 6% in 
1935 with depressing economic results. In this way, the strain on gold 
was relieved at the cost of increased depression. The Right discovered 
that it could veto any actions of the Left government merely by 
exporting capital from France. 
Page 356
     The franc passed through a series of depreciations and partial 
devaluations which benefited no one except the speculators and left 
France torn for years by industrial unrest and class struggles. The 
government was subjected to systematic blackmail by the well-to-do 
of the country because of the ability of these persons to prevent 
social reform, public spending, arming, or any policy of decision by 
selling francs.  
Page 357
     The historical importance of the banker-engendered deflationary 
crisis of 1927-1940 can hardly be overestimated. It gave a blow to 
democracy and to the parliamentary system and thus became a chief 
cause of World War II. It so hampered the Powers which remained 
democratic by its orthodox economic theories that these were unable to 
rearm for defence. It gave rise to a conflict between the theorists of 
orthodox and unorthodox financial methods. 
     The bankers' formula for treating a depression was by clinging to 
the gold standard, by raising interest rates and seeking deflation, 
and by insisting on a reduction in public spending, a fiscal surplus 
or at least a balanced budget.
     These ideas were rejected totally, on a point by point basis, by 
the unorthodox economists, (somewhat mistakenly called Keynesian). The 
bankers' formula sought to encourage economic recovery by "restoring 
confidence in the value of money," that is, their own confidence in 
what was the primary concern of bankers. 
     The unorthodox theorists sought to restore purchasing power by 
increasing, instead of reducing, the money supply and by placing it in 
the hands of potential consumers rather than in the banks or in the 
hands of investors. 
page 358
     The whole relationship of money and resources remained a puzzle 
to many and was still a subject of debate in the 1950s but at least a 
great victory had been won by man in his control of his own destiny 
when the myths of orthodox financial theory were finally challenged in 
the 1930s. 
REFLATION AND INFLATION 1933-1947
Page 360
     Except for Germany and Russia, most countries in the latter half 
of 1937 experienced sharp recession. 
Page 361
     As a result of the failure of most countries (excepting Germany 
and Russia) to achieve full utilization of resources, it was possible 
to devote increasing percentages of resources to armaments without 
suffering any decline in the standards of living. 
Page 366
     It was discovered by Germany in 1932, by Italy in 1934, by Japan 
in 1936 and by the United States in 1938 that deflation could be 
prevented by rearming. 
Page 368
     Britain made barter agreements with various countries, including 
one direct swap of rubber for wheat with the US. 
Page 369
     The period of reflation after 1933 was caused by increases in 
public spending on armaments. In most countries,the transition from 
reflation to inflation did not occur until after they had entered the 
war. Germany was the chief exception and possibly also Italy and 
Russia, since all of these were making fairly full utilization of 
their  resources. In France and the other countries overrun by 
Germany, such full mobilization of resources was not achieved before 
they were defeated. 
Page 370
     The use of orthodox financing in the First World War had left a 
terrible burden of intergovernmental debts and ill-feeling...
Page 371
     The Post Second World War economy was entirely different in 
character from that of  the 1920s following the First World War. This 
was most notable in the absence of a post-war depression which was 
widely expected but which did not arrive because there was no effort 
to stabilize on a gold standard. The major difference was the eclipse 
of the bankers who have been largely reduced in status from the 
masters to the servants of the economic system. This has been brought 
about by the new concern with real economic factors instead of with 
financial counters, as previously. As part of this program, there has 
been a great reduction in the economic role of gold. 

CHAPTER VIII: INTERNATIONAL SOCIALISM AND THE SOVIET CHALLENGE
Page 375
     Industrialism, especially in its early years, brought with it 
social and economic conditions which were admittedly horrible. Human 
beings were brought together around factories to form great new cities 
which were sordid and unsanitary. In many cases, these persons were 
reduced to conditions of animality, which shock the imagination. 
Crowded together in want and disease, with no leisure and no security, 
completely dependent on weekly wage which was less than a pittance, 
they worked twelve to fifteen hours a day for six days in the week 
among dusty and dangerous machines with no protection against 
inevitable accidents, disease, or old age, and returned at night to 
crowded rooms without adequate food and lacking light, fresh air, 
heat, pure water, or sanitation. These conditions have been described 
for us in the writings of novelists such as Dickens in England, Hugo 
or Zola in France. 
Page 376
     The Socialist movement was a reaction against these deplorable 
conditions to the working masses. It has been customary to divide this 
movement into two parts at the year 1848, the publication of the 
Communist Manifesto of Karl Marx. This work began with the ominous 
sentence, "A specter is haunting Europe - the specter of Communism," 
and ended with the trumpet blast "Workers of the world, unite." 
     In general, the former division believed that man was innately 
good and that all coercive power was bad, with public authority the 
worst form of such coercive power. All the world's evils, according to 
the anarchists, arose because man's innate goodness was corrupted and 
distorted by coercive power. The remedy, they felt, was to destroy the 
state. The simplest way to destroy the state would be to assassinate 
the chief of the state to ignite a wholesale uprising of oppressed 
humanity.
Page 377
     Syndicalism was a somewhat more realistic and later version of 
anarchism. It was equally determined to abolish all public authority. 
The state would be destroyed by a general strike and replaced by a 
flexible federation of free associations of workers. 
     The second group of radical social theorists wished to widen the 
power and scope of governments by giving them a dominant role in 
economic life. The group divided into0 two chief schools: The 
Socialists and the Communists. 
Page 378
     From Ricardo, Marx derived the theory that the value of economic 
goods was based on the amount of labor put into them. 
Page 379
     Marx built up a complicated theory which believed that all 
history is the history of class struggles.
     The money which the bourgeoisie took from the proletariat in the 
economic system made it possible for them to dominate the political 
system, including the police and the army. From such exploitation, the 
bourgeoisie would become richer and richer and fewer and fewer in 
numbers and acquire ownership of all property in the society while the 
proletariat would become poorer and poorer and more and more numerous 
and be driven closer and closer to desperation. Eventually, the latter 
would rise up and take over. 
Page 381
     In fact, what occurred was could be pictured as cooperative 
effort by unionized workers and monopolized industry to exploit 
unorganized consumers by raising prices higher and higher, quite 
contrary to the expectations of Marx. Where he had expected 
impoverishment of the masses and concentration of ownership with 
gradual elimination of the middle classes, there occurred instead 
rising standards of living, dispersal of ownership , a relative 
decrease in the numbers of laborers, and a great increase in the 
middle classes. Due to income and inheritance taxes, the rich became 
poorer and poorer, relatively speaking. 
THE BOLSHEVIK REVOLUTION TO 1924
Page 385
     The new government forced the abdication of the czar. The more 
radical Socialists had been released from prison or had been returned 
from exile (in some cases, such as Lenin, by German assistance)
     JCT: And Rockefeller and Mackenzie King. 
     
Page 386
     Lenin campaigned to replace the Provisional Government with a 
system of Soviets and to adopt an immediate program of peace and land 
distribution. The Bolshevik group seized the centers of government in 
St. Petersburg and within 24 hours, issued a series of decrees which 
abolished the Provisional government, ordered the end of the war with 
Germany and the distribution of large land holdings to the peasants. 
     
Page 387
     By 1920 industrial production in general was about 13% of the 
1913 figure. At the same time, paper money was printed so freely to 
pay for the costs of war, civil war, and the operation of the 
government that prices rose rapidly and the ruble became almost 
worthless. 
     The secret police (Cheka) systematically murdered all real or 
potential opponents. 
Page 388
     Various outsider Powers also intervened in the Russian chaos. 
An allied expeditionary force invaded northern Russia from Murmansk 
and Archangel, while a force of Japanese and another of Americans 
landed at Vladivostok and pushed westward for hundreds of miles. The 
British seized the oil fields of the Caspian region (late 1918) while 
the French occupied parts of the Ukraine about Odessa (March 1919).
     By 1920, Russia was in complete confusion. Poland invaded Russia 
occupying much of the Ukraine. 
Page 389
     As part of this system, not only were all agricultural crops 
considered to be government property but all private trade and 
commerce were also forbidden; the banks were nationalized while all 
industrial plants of over five workers and all craft enterprises of 
over ten workers were nationalized. This culminated in peasant 
uprisings and urban riots. Within a week, peasant requisitioning was 
abandoned in favor of a "New Economic Policy" of free commercial 
activity in agriculture and other commodities, with the 
re-establishment of the profit motive and of private ownership in 
small industries and in small landholding. 
Page 395
     The Bolsheviks insisted that the distribution of income in a 
capitalistic society would become so inequitable that the masses of 
the people would not obtain sufficient income to buy the goods being 
produced by the industrial plants. As such unsold goods accumulated 
with decreasing profits and deepening depression, there would be a 
shift toward the production of armaments to provide profits and 
produce goods which could be sold and there would be an increasingly 
aggressive foreign policy in order to obtain markets for unsold goods 
in backward and undeveloped countries. Such aggressive imperialism 
would inevitably make Russia a target of aggression in order to 
prevent a successful Communist system there from becoming an 
attractive model for the discontented proletariat in capitalistic 
countries. 
Page 396
     Communism in Russia alone required that the country must be 
industrialized with breakneck speed and must emphasize heavy industry 
and armaments rather than rising standards of living. This meant that 
goods produced by the peasants must be taken from them by political 
duress, without any economic return, and that the ultimate in 
authoritarian terror must be used to prevent the peasants from reducing 
their level of production. It was necessary to crush all kinds of 
foreign espionage, resistance to the Bolshevik state, independent 
thought, or public discontent. 
Page 397
     Stalin forced the peasants off their land. In the space of six 
weeks, (Feb-Mar 1930) collective farms increased from 59,400 with 4.4 
million families to 110,200 farms with 14.3 million families. All 
peasants who resisted were treated with violence; their property was 
confiscated, they were beaten or sent into exile in remote areas; many 
were killed. This process, known as "the liquidation of the kulaks" 
affected five million kulak families. Rather than give up their 
animals, many peasants killed them. The number of cattle was reduced 
from 30.7 million in 1928 to 19.6 million in 1933. The planting 
season of 1930 was entirely disrupted. Three million peasants 
starved in 1931-1933. Stalin told Churchill that 12 million died in 
this reorganization of agriculture. 
Page 401
     The privileged rulers and their favorites had the best of 
everything obtained, however at a terrible price, at the cost of 
complete insecurity for even the highest party officials were under 
constant surveillance and would be inevitably purged to exile or 
death. 
     The growth of inequality was embodied in law. All restrictions on 
maximum salaries were removed. Special stores were established where 
the privileged could obtain scarce goods at low prices; restaurants 
with different menus were set up in industrial plants for different 
levels of employees; housing discrimination became steadily wider. 
Page 402
     As public discontent and social tensions grew, the use of spying, 
purges, torture and murder increased out of all proportion. Every wave 
of discontent resulted in new waves of police activity. Hundreds of 
thousands were killed while millions were arrested and exiled to 
Siberia or put into huge slave-labor camps. Estimates vary from two 
million as high as twenty million. 
Page 403
     For every leader who was publicly eliminated, thousands were 
eliminated in secret. By 1939, all the leaders of Bolshivism had been 
driven from public life and most had died violent deaths. 
     There were two networks of secret-police spies, unknown to each 
other, one serving the special department of the factory while the 
other reported to a high level of the secret police outside. 
Page 404
     Whenever the secret police needed more money it could sweep large 
numbers of persons, without trial or notice, into its wage deduction 
system or into its labor camps to be hired out. It would seem that the 
secret police were the real rulers of Russia. This was true except at 
the very top where Stalin could always liquidate the head by having 
him arrested by his second in command in return for Stalin's promise 
to promote the arrester to the top position. In this way, the chiefs 
of the secret police were successively eliminated. 




  

TRAGEDY AND HOPE Chapters IX-XI
by Dr. Carroll Quigley 
ISBN 0913022-14-4


CONTENTS
IX. GERMANY FROM KAISER TO HITLER 1913-1945
X. BRITAIN: THE BACKGROUND TO APPEASEMENT 1900-1939
XI. CHANGING ECONOMIC PATTERNS


CHAPTER IX: GERMANY FROM THE KAISER TO HITLER 1913-1945
Page 411
     The German thirst for the coziness of a totalitarian way of life 
is the key to German national character. Decision, which requires the 
evaluation of alternatives, drives man to individualism, self-reliance 
and rationalism, all hateful qualities to Germanism. 
Page 413
     They wanted a cozy society which would so absorb the individual 
in its structure that he would never need to make significant 
decisions for himself. Held within a framework of known, satisfying 
personal relationships, such an individual would be safe because he 
would be surrounded by fellows equally satisfied with their own 
positions, each feeling important from his membership in the greater 
whole. 
Page 414
     The German abhors the need to make decisions. He feels it 
necessary to proclaim his position by verbal loudness which may seem 
boastful to outsiders. 
Page 415
     Germans are ill-at-ease with equality, democracy, individualism, 
freedom, and other features of modern life. Their neurological systems 
were a consequence of the coziness of German childhood, which, 
contrary to popular impression, was not a condition of misery and 
personal cruelty (as it often is in England) but a warm, affectionate 
and externally disciplined situation of secure relationships. 
     The Englishman is disciplined from within so that he takes his 
self-discipline, embedded in his neurological system, with him 
wherever he goes. The Englishman is the most socialized of Europeans, 
as the Frenchman is the most civilized, the Italian most completely 
gregarious, or the Spaniard most completely individualistic. But the 
German, by seeking external discipline, shows his unconscious desire 
to recapture the externally disciplined world of his childhood. With 
such discipline he may be the best behaved of citizens, but without 
it, he may be a beast. 
     He sees no need to make any effort to see anything from any point 
of view other than his own. The consequence is a most damaging 
inability to do this. His union, his neighborhood are the best and all 
others may be denigrated. His myopic or narrow-angled vision of the 
universe must be universalized. 
Page 417
     The precarious structure left by Bismarck was not managed but 
merely hidden from public view by a facade of nationalistic, 
anti foreign, anti-Semitic, imperialistic, and chauvinistic propaganda 
of which the emperor was the center. 
     The monarchy represented the body, which was supported by four 
legs: the army, the landlords, the bureaucracy and the industrialists. 
The revolution of 1918 was not really a revolution at all because it 
removed the monarchy but it left the quartet of legs. 
Page 426
     The German inflation, which was a great benefit to the Quartet, 
destroyed the economic position of the middle classes and lower middle 
classes and permanently alienated them from the republic. 
     
Page 427
     The Nationalist Party built up a pervasive propaganda campaign to 
show that all Germany's problems were caused by the democratic and 
laboring groups, by the internationalists, and by the Jews. 
Page 428
     The Centre and Left shared this nationalistic poison sufficiently 
to abstain from any effort to give the German people the true story of 
Germany's responsibility for the war and for her own hardships. Thus 
the Right was able to spread its own story of the war, that Germany 
had been overcome by a "stab in the back" from "the three 
Internationals": the "Gold" International of the Jews, the "Red" 
International of the Socialists, and the "Black" International of the 
Catholics, an unholy triple alliance which was symbolized in the gold, 
red, and black flag of the Weimar Republic. Every effort was made to 
divert popular animosity at the defeat of 1918 and the Versailles 
settlement from those who were really responsible to the democratic 
and republican groups. At the same time, German animosity against 
economic exploitation was directed away from the landlords and 
industrialists by racist doctrines which blamed all such problems on 
bad Jewish international bankers and department store owners.
Page 429
     The Nazi drive to build up a mass following was kept alive by the 
financial contributions of the Quartet. The Nazis were financed by the 
Black Reichswehr from 1919-1923, then this support ceased but was 
compensated for by the support of the industrialists, who financed the 
Nazis from Hitler's exit from prison in 1924 to the end of 1932. 
     The destruction of the Weimar Republic has five stages:
1) Bruning: March 24 1930 - May 30 1932
2) Von Papen: May 31 1932 - November 14 1932
3) Schleicher: December 2 1932 - January 28 1933
4) Hitler: January 30 1933 - March 5 1933 
5) Gleichschaltung: March 6 1933 - August 2 1934
     When the economic crisis began in 1929, Germany had a democratic 
government of the Center and Social Democratic parties. The crisis 
resulted in a decrease in tax receipts and a parallel increase in 
demands for government welfare services. This brought to a head the 
latent dispute over orthodox and unorthodox financing of a depression. 
Big business and big finance were determined to place the burden of 
the depression on the working classes by forcing the government to 
adopt a policy of deflation - that is, by wage reductions and 
curtailment of government expenditures. The Social Democrats wavered 
in their attitude but in general were opposed to this policy. Schacht, 
as president of the Reichsbank, was able to force the Socialist Rudolf 
Hilferding out of the position of minister of finance by refusing bank 
credit to the government until this was done. 
     In March 1930, the Center broke the coalition on the issue of 
reduction of unemployment benefits, the Socialists were thrown out of 
the government, and Heinrich Bruning, leader of the Center Party, came 
in as chancellor. Because he did not have a majority, he had to put 
the deflationary policy into effect by the use of presidential decree. 
This marked the end of the Weimar Republic. 
     The Socialists permitted Bruning to remain in office by refusing 
to vote on a motion of no confidence. Left in office, Bruning 
continued the deflationary policy by decrees.
Page 431
     Bruning's policy of deflation was a disaster. The suffering of 
the people was terrible with almost eight million unemployed out of 
twenty-five million employable. 
Page 433
     President Hindenburg had no liking for any unorthodox economic 
schemes. 
     The Quartet, especially the industrialists, decided that Hitler 
had learned a lesson and could safely be put into office as the 
figurehead of a Right government because he was growing weaker. The 
whole deal was arranged by Papen and was sealed in an agreement made 
at the home of Cologne banker Baron Kurt Von Schroder in 1933. 
THE NAZI REGIME 1933-1934
     Adolf Hitler's life had been a succession of failures, the seven 
years 1907-1914 being passed as a social derelict in Vienna and 
Munich. There he had become a fanatical Pan-German anti-semite, 
attributing his own failures to the "intrigues of international 
Jewry." 
Page 434
     During the Great War, he was an excellent soldier always 
volunteering for the most dangerous tasks. Although he was decorated 
with the Iron Cross first class in 1918, he was never promoted beyond 
Private First Class. His regiment of 3,500 suffered 3,260 killed and 
Hitler himself was wounded twice. 
     After the war, he stayed with the army and eventually became a 
political spy for the Reichswehr. In the course of spying on the 
numerous political groups, Hitler became fascinated by the rantings of 
Gottfried Feder against the "interest slavery of the Jews." 
     Hitler joined the National Socialist German Worker's Party which 
drew up a Twenty-five Point Program.
Page 435
     These included:
4) all Jews and other aliens eliminated;
5) all unearned incomes to be abolished;
6) to punish all war profiteers and usurers with death.
Page 446
     Prices were set at a level sufficient to give a profit to most 
participants and quotas were based on assessments estimated by the 
farmers themselves. The autarky program gave them a stable market for 
the products, shielding them from the vicissitudes which they had 
suffered under liberalism with its unstable markets and fluctuating 
prices. The prices fixed under Nazism were not high but were adequate, 
especially in combination with other advantages. 
     Payments for interest and taxes were both reduced. 
     All farms of over family size were made secure in possession of 
their owner's family, with no possibility of alienation, by increasing 
the use of entail on great estates and by the Hereditary Farms Act for 
lesser units. 
Page 447
     A law of December 28, 1939 stated, what had always been 
understood, that in his civil service work a party member was not 
subject to party orders but only to the orders of the civil service 
superior. 
Page 448
     There was a statutory provision which made it illegal for members 
of the armed services to be simultaneously members of the party. 
Page 452
     Maximum wage rates were set in June 1938. In return for 
exploitation of labor, the worker received certain compensations 
of which the chief was the fact that he was no longer threatened with 
the danger of mass unemployment. Increased economic activity went to 
nonconsumers' goods. 
Page 454
     The threat to industry from depression was eliminated. 


CHAPTER X: BRITAIN: THE BACKGROUND TO APPEASEMENT, 1900-1939
Page 463
     It is the Government that controls the House of Commons. This 
control is exercised through the Cabinet's control of the political 
machinery. This power over the party machinery is exercised through 
control of party funds and of nominations to constituencies. The fact 
party candidates are named by an inner clique is of tremendous 
importance and is the key to the control which the inner clique 
exercises over the House of Commons, yet it is rarely mentioned in 
books on the English political system. The party control is almost 
completely centralized in the hands of a largely self-perpetuating 
inner clique which has power of approval over all candidates. Cabinet 
can force the majority by using party discipline to pass bills. 
Page 464
     Britain can be divided into two groups, the "classes" and the 
"masses." The "classes" were the ones who had leisure. This meant that 
they had property and income and did not need to work for a living; 
they obtained an education in a separate and expensive system; they 
married within their own class; they had a distinctive accent; and 
they had a distinctive attitude based on the training provided in the 
special educational system of the "classes." 
Page 465
     This educational system was based on three great negatives:
a) education must not be vocational, not aimed at assisting one to 
make a living;
b) education is not aimed directly at creating or training 
intelligence;
c) education is not aimed at finding the "Truth." 
     It is aimed at developing a moral outlook, a respect for 
traditions, qualities of leadership and cooperation, and that ability 
for cooperation in competition summed up in the English idea of 
"sport" and "playing the game." Because of the restricted numbers of 
the upper class, these attitudes applied chiefly to one another, and 
did not necessarily apply to foreigners or even to the masses. They 
applied to people who "belonged" and not to all human beings. 
Page 469
     House members are expected to vote as their party whips tell them 
to and are not expected to understand the contents of the bills for 
which they are voting. Legislation originates in the meetings of the 
clique of the party, acting as first chamber. If accepted by the 
Cabinet, it passes the House of Commons almost automatically. This 
situation is sometimes called "Cabinet dictatorship." 
Page 470
     There have been restrictions on democracy in Britain almost all 
based on one criterion, the possession of wealth. Britain, until 1945, 
was the world's greatest plutocracy. 
     In political life, local government had a restricted suffrage. 
Elected members were unpaid thus restricting these posts to those who 
had leisure (that is, wealth). 
Page 471
     Members of Parliament were, for years, restricted to the well-to-
do by the fact that Members were unpaid. In 1938, each candidate must 
post a deposit of #150 amounting to more than the total annual income 
of about three-quarters of all English families which is forfeited if 
he does not receive over one-eighth of the total vote. As a result of 
these monetary barriers, the overwhelming mass of Englishmen could not 
participate actively in politics unless they could find an outside 
source of funds. 
     Until 1915, the two parties represented the same social class, 
the small group known as "society." Both Conservatives and Liberals 
were controlled by the same small clique consisting of no more than 
half-a-dozen chief families, their relatives and allies. 
Page 472
     At the beginning of the 20th century, the inner clique of the 
Conservative Party was made up almost completely of the Cecil family 
and their relatives. 
     This is quite different from the US where both major parties are 
middle-class parties and where geographic, religious and traditional 
influences are more important than class influences in determining 
party membership. 
Page 474
     In eight years (1931-1939) thirteen directors of the "Big Five 
Banks" and two directors of the Bank of England were raised to the 
peerage by the Conservative government. Of ninety peers created, 
thirty five were directors of insurance companies. In 1935, Walter 
Runciman, as president of the Board of Trade, introduced a bill to 
grant a subsidy of #2 million to tramp merchant vessels and gave 
#92,000 to his father's company in which he held 21,000 shares. There 
is relatively little objection to activities of this kind in England.
Page 475
     The Labour Party arose because of the discovery by the masses of 
the people that their vote did not avail them much so long as the only 
choice of candidates was "Which of two rich people will you choose?"
Page 476
     The radio, the second most important instrument of publicity, is 
sometimes run very unfairly. In the election of 1931, the government 
allowed 15 period on the BBC for political campaigning, it took 11, 
gave 3 to Labour and 1 to the Liberals.
Page 478
     France is in sharp contrast where the amount of education by a 
student is limited only by his ability and willingness to work; and 
positions of importance in the civil service, the professions, and 
even business are available to those who do best in the system. In 
Britain, it is based largely on the ability to pay. 
Page 479
     For admission to the bar in England, a man had to be a member of 
one of the four Inns of Court. These are private clubs to which 
admission was by nomination with large admission fees. Sons of wage 
earners formed less than 1% of the admissions and members of the bar 
are almost entirely from the well-to-do classes. Since judges are 
appointed exclusively from barristers, the judicial system has also 
been monopolized by the upper classes. Obtaining justice has been 
complex, slow and above all, expensive. As a result, only the fairly 
well-to-do can defend their rights in a civil suit and if the less 
well-to-do go to court at all, they find themselves in an atmosphere 
completely dominated by members of the upper classes. Accordingly, the 
ordinary Englishman avoids litigation even when he has right on his 
side. 
Page 483
     The 1909 Liberal budget was aimed directly at Conservative 
supporters by its taxation of unearned incomes, especially from landed 
properties. Its rejection by the House of Lords was denounced by 
Asquith as a breach of the constitution which gave control over money 
bills to the House of Commons. The Lords refused to yield until 
Asquith threatened to create enough new peers to carry his bill. This 
bill provided that the Lords could not veto a money bill and could not 
prevent any other bill from becoming law if it was passed in three 
sessions of the Commons over a period of at least two years. 
Page 485
     Liberal Lloyd George's effort to deflate prices after the Great 
War in order to go back onto the gold standard was fatal to prosperity 
and domestic order. Unemployment and strikes increased. 
     The Conservatives prevented any realistic attack on these 
problems and passed the Emergency Power Act of 1920 which for the 
first time gave a peace-time government the right to proclaim a state 
of siege (as was done in 1920, 1921, 1926). 
Page 486
     In 1924, Winston Churchill, as chancellor of the Exchequer, 
carried out a stabilization policy which put England on the gold 
standard. This policy of deflation drove Britain into an economic 
depression and a period of labour conflict and the policy was so 
bungled in its execution that Britain was doomed to semi-depressions 
for almost a decade, to financial subjugation to France until 1931 and 
was driven closer to domestic rebellion than she had been at any time 
since the Chartist movement of 1848. 
     The deflation of 1926 hit the mines with special impact since 
prices could only be cut if wages were cut. The government invoked the 
Emergency Powers Act and the Trade Unions Congress ordered a General 
Strike but soon ended it leaving the striking miners to shift for 
themselves. The miners stayed out for six months and then began to 
drift back to work to escape starvation. 
Page 489
     In 1931, the Macmillan Committee reported that the whole 
financial structure was unsound and should be remedied by a managed 
currency, controlled by the Bank of England. The crisis revealed the 
incapacity of the Labour Party and the power of the bankers. Labour 
members had no understanding of economics. Snowden, the economic 
expert" of the Cabinet, had financial views about the same as Montagu 
Norman of the Bank of England. 
Page 490
     As for the bankers, they were in control throughout the crisis. 
While publicly they insisted on a balanced budget, privately, they 
refused to accept balancing by taxation and insisted on balancing by 
cuts in relief payments. Working in close cooperation with American 
bankers, they were in a position to overthrow any government which was 
not willing to crush them completely. While they refused cooperation 
to the Labour government, they were able to obtain a loan of #80 
million from the US and France for the National Government when it 
was only four days old. 
     The National government at once attacked the financial crisis 
with a typical bankers' weapon: deflation. It offered a budget 
including higher taxes and drastic cuts in unemployment benefits and 
public salaries. Riots, protests, and mutiny in the navy were the 
results. 
     The domestic program of the National Government was to curtail 
the personal freedom of individuals. On this, there was no real 
protest for the Labour opposition had a program which, in fact if not 
in theory, tended in the same direction. 
Page 491
     The police of London were reorganized in 1933 to destroy their 
obvious sympathy with the working classes by restricting all ranks 
above inspector to persons with an upper-class education.
     A severe Incitement to Disaffection Act in 1934 threatened to 
destroy the personal freedoms built up over centuries by making 
police searches of homes less restricted and making the simple 
possession of material likely to disaffect the armed forces a crime. 
For the first time in three generations, personal freedom and civil 
rights were restricted in time of peace. The Prevention of Violence 
Act of 1939 empowered a secretary of state to arrest without warrant 
and to deport without trial. 
Page 492
     Neville Chamberlain was chiefly responsible for the National 
government's fiscal policies. For the first time in almost a century, 
there was an increase in the proportion of total tax paid by the 
working class. For the first time since 1846, there was a tax on food. 
There was a reversal in the trend to more education for the people. 
The budget was kept balanced by at a considerable price in human 
suffering and in wastage of Britain's irreplaceable human resources. 
Hundreds of thousands had been unemployed for years and had their 
moral fiber completely destroyed by years of living on inadequate 
dole. The capitalists of these areas were supported either by 
government subsidy or were bought out by cartels and trade 
associations from funds assessed on the more active members of the 
industry.
     Chamberlain's Derating Act of 1929 exempted industry from payment 
of three quarters of its taxes while many unemployed were allowed to 
starve. 


CHAPTER XI: CHANGING ECONOMIC PATTERNS
Page 497
     The economic system itself has become organized for expansion and 
if it does not expand, it tends to collapse. The basic reason for this 
maladjustment is that investment has become an essential part of the 
system and if investment falls off, consumers have insufficient 
incomes to buy the consumers' goods which are being produced in 
another part of the system because part of the flow of purchasing 
power created by the production of goods was diverted from purchasing 
goods it had produced into savings, and all the goods produced could 
not be sold until those savings came back into the market by being 
invested. 
Page 498
     If the groups in society who control the savings which are 
necessary for progress are the same vested interests who benefit by 
the existing way of doing things, they are in a position to defend 
these vested interests and prevent progress merely by preventing the 
use of surpluses to finance new inventions. The 20th century's 
economic crisis was a situation of this type. 
GREAT BRITAIN
Page 499
     The element of secrecy is one of the outstanding features of 
English business and financial life. The inner circle of English 
financial life remains a matter of "whom one knows," rather than "what 
one knows." Jobs are still obtained by family, marriage, or school 
connections and important positions are given to men who have no 
training, experience or knowledge to qualify them. 
Page 500
     At the core of English financial life have been seventeen private 
firms of "merchant bankers" with a total of less than a hundred active 
partners including Baring Brothers, N.M. Rothschild, J. Henry 
Schroder, Morgan Grenfell, Hambros and Lazard Brothers. These merchant 
bankers had a dominant position with the Bank of England and, 
strangely enough, still have retained some of this, despite the 
nationalization of the Bank by the Labour government in 1946. 
Page 501
     Financial capitalism was marked not only by a growing financial 
control of industry but also by an increasing concentration of this 
control and by an increasing banking control of government. 
     The control of the Bank of England over business was exercised 
indirectly through the joint-stock banks. This growth of a "money 
trust" led to an investigation. A bill was drawn up to prevent further 
concentration but was withdrawn when the bankers made a "gentlemen's 
agreement" to ask Treasury permission for future amalgamations. 
Page 502
     In 1931, financiers led by Montagu Norman and J.P. Morgan forced 
the resignation of the British Labour government. But the handwriting 
was already on the wall. The deflationary financial policy of the 
bankers had alienated politicians and industrialists and driven 
monopolist trade unions to form a united front against the bankers. 
Labour and industry were united in opposition to continuance to the 
bankers' economic policy with its low prices and high unemployment. 
The decisive factor which caused the end of financial capitalism in 
Britain was the revolt of the British fleet in 1931 and not the 
abandonment of gold six days later. The mutiny made it clear that the 
policy of deflations must be ended. As a result, no effort was made to 
defend the gold standard. 
Page 503
     The Coal Mines Act of 1930 allowed the National Shipbuilders 
Security to buy up and destroy shipyards. By 1934, one quarter of 
Britain's shipbuilding capacity had been eliminated. The Purchase 
Finance Company was set up to buy up and destroy flour mills. By 1933, 
over one-sixth of the flour mills in England had been eliminated. 
GERMANY
Page 507
     In Germany, capital was scarce when industrialism arrived and 
industry found itself dependent upon banks almost at once. The chief 
credit banks floated securities for industry by granting credit to the 
firm, taking securities in return. These securities were slowly sold 
to the public with the bank retaining enough stock to give it control 
and appointing its men as directors to give that control final form. 
     The importance of interlocking directorships can be seen from the 
fact that the same Dresdner Bank had its directors on the boards of 
over two hundred industrial concerns in 1913. 
     This banking control of industry was made even closer since most 
investors left their securities on deposit with the banks which voted 
all this stock for directorships and other control measures, unless 
the stock-owners expressly forbade it. The banks also voted the stock 
left as collateral for loans and all stock bought on margin. 
Page 509
     The control of German financial capitalism rested in the credit 
banks. It was largely beyond the control of the government and rested 
in private hands. Of the hundreds of German credit banks, the eight 
so-called "Great Banks" were the masters of the German economy from 
1865 to 1915 and controlled 74% of the capital assets of all 421 
banks. 
Page 512
     I.G. Farbenindustrie made many individual cartel agreements with 
Du Pont and other American corporations.
Page 514
     In France, Britain and the US, the war played a significant role 
in demonstrating conclusively that economic stagnation and 
underemployment of resources were not necessary and could be avoided 
if the financial system were subordinated to the economic system. In 
Germany, this was not necessary since the Nazis had already made this 
discovery in the 1930s. 
     Thus a surplus of labor, low wages, experience in unorthodox 
financial operations and an immense task to be done all contributed to 
the German revival. 
FRANCE
Page 515
     With the founding of the Bank of France in 1800, financial power 
was in the hands of about ten or fifteen banking houses whose 
founders, in most cases, had come from Switzerland. These bankers, all 
Protestant, were deeply involved in the agitations leading up to the 
French Revolution. When it got out of the hand, they were the chief 
forces behind the rise of Napoleon. As a reward for this support, 
Napoleon gave these bankers a monopoly over French financial life by 
giving them control of the new Bank of France. 
     
Page 516
     By 1811, most of these bankers had gone over to the opposition 
and survived the change in regime in 1815. As a result, the Protestant 
bankers who had controlled financial life under the First Empire were 
still the main figures on the board of regents of the Bank of France 
until 1936. The chief names were Mirabaud, Mallet, Neuflize, and 
Hottinger. 
     In the course of the nineteenth century, a second group was added 
to French banking circles. This second group, largely Jewish, was also 
non-French origin, the majority Germanic (like Rothschild, Heine, 
Fould, Stern and Worms). A rivalry soon grew up between the older 
Protestant bankers and the newer Jewish bankers, largely along 
political rather than religious lines which grew confused as some of 
the Jewish group gave up their religion and moved over to the 
Protestant group. 
     The leadership of the Protestant group was exercised by Mirabaud, 
the leadership of the Jewish group was held by Rothschild. These two 
wings were so close that Mirabaud and Rothschild together dominated 
the whole financial system and frequently cooperated together even 
when their groups as a whole were in competition. 
     After 1838, this simple picture was complicated by the slow rise 
of a third group of bankers who were Catholics which soon split into 
two halves and joined the other two groups. 
Page 517
     The rivalry of these two great powers fills the pages of French 
history in the period 1884-1940. It paralyzed the French political 
system and economic system preventing economic recovery from the 
depression in 1935-1940. 
     From 1880-1925, the private bankers continued to exist and grow 
in power. They were at first chiefly interested in government 
obligations and the greatest bankers, like Mirabaud and Rothschild, 
had intimate connections with governments and weak connections with 
the economic life of the country. 
Page 518
     To finance railroads, the small savings of many were gathered and 
made available to the private banker to direct wherever he thought 
fitting. Thus the private banker became a manager of other persons' 
funds rather than lender of his own. The private banker became much 
more influential and much less noticeable. He now controlled billions 
where he formerly controlled millions and he did it unobtrusively, 
acting from the background, concealed from public view. The public did 
not notice that the names of private bankers and their agents still 
graced the list of directors of new financial enterprises. 
Page 520
     The centre of the French economic system in the 20th century was 
not to be found, as some have believed, in the Bank of France, but, 
instead, resided in a group of almost unknown institutions - the 
private banks. There were over a hundred of these private banks and 
two (Rothschild and Mirabaud) were more powerful than all the others 
combined. These private banks acted as the High Command of the French 
economic system. Their stock was closely held in the hands of about 
forty families. They were the same private banks which had set up the 
Bank of France divided into a group of seven Jewish banks, a group of 
seven Protestant banks and a group of five Catholic banks. The various 
groups continued to cooperate in the management of the Bank of France 
which was controlled until 1936, as it had been in 1813, by the 
handful of private banks which created it. 
Page 521
     The state was influenced by the Treasury's need for funds from 
the Bank of France. 
     These investment banks supplied long-term capital to industry and 
took stock and directorships in return. In 1931, Paribas held 
the securities of 357 corporations and its own directors and top 
managers held 180 directorships in 120 of the more important of these. 
Page 522
     The Jewish bankers were allied to Standard Oil and Rockefeller 
while the Catholic-Protestant bankers were allied to Royal Dutch Shell 
and Deterding. 
Page 524
     In 1936, there were about 800 important firms. Of these 800, the 
Paribas bloc controlled almost 400 and the Union-Comite bloc about 
300. 
     
Page 525
     The whole Paribas system in the 20th century was headed by Baron 
Edouard de Rothschild with the chief center of operation in the Banque 
de Paris which controlled communications companies such as Havas. 
Havas was a great monopolistic news agency. It could, and did, 
suppress or spread both news and advertising. It received secret 
subsidies from the government for almost a century. The monopoly on 
distribution of periodicals and books could be used to kill papers 
which were regarded as objectionable. 
     After 1937, the Paribas bloc was badly split by the controversy 
over orthodox and unorthodox financial methods for dealing with 
depression. The Rothschild desire to form an alliance with Russia and 
adopt a policy of resistance to Hitler, continuing orthodox financial 
policies, collapsed from its own internal contradictions, their own 
lack of faith in it, and the pressure of Great Britain. 
Page 528
     The three prewar blocs have played no significant role in France 
since 1945 although Rene Mayer, active head of the Rothschild family 
interests was minister of finance in the early postwar government. 
Later in 1962, De Gaulle made the director of the Rothschild bank, 
George Pompidou, prime minister. 
UNITED STATES OF AMERICA
Page 529
     By the 1880s, the techniques of financial capitalism reached 
levels of corruption which were never approached in Europe. This 
corruption sought to cheat the ordinary investor by flotations and 
manipulations of securities for the benefit of insiders. The 
practitioners of these dishonesties were as socially acceptable as 
their wealth entitled them to be without animadversions on how that 
wealth was obtained. 
Page 530
     Corrupt techniques associated with the names Daniel Drew and Jay 
Gould were also practiced by Morgan and others who became respectable 
from longer sustained success. 
     Any reform of Wall Street practices came from pressure from the 
farming West and was long delayed by the close alliance of Wall Street 
with the two major political parties. By 1900, the influence of Morgan 
in the Republican party was dominant, his chief rivalry coming from 
Rockefeller of Ohio. 
     From 1880 to 1930, financial capitalism approximated a feudal 
structure in which two great powers, centered in New York, dominated a 
number of lesser powers. No description of this structure as it 
existed in the 1920s can be given in a brief compass, since it 
infiltrated all aspects of American life and especially all branches 
of economic life. 
     At the center were a group of less than dozen investment banks 
which were still unincorporated partnerships at the height of their 
powers. These included J.P. Morgan, the Rockefeller family, Kuhn, 
Loeb, Dillon, Read, Brown Brothers and Harriman, and others. Each of 
these was linked in organizational or personal relationships with 
various banks, insurance companies, railroads, utilities and 
industrial firms. The result was to form a number of webs of economic 
power. 
     J.P. Morgan worked in close relationship with a group of banks 
and insurance companies. The whole nexus dominated a network of 
business firms which included at least one-sixth of the two hundred 
largest non-financial corporations. 
Page 531
     The Rockefeller group, investing only its own profits, functioned 
as a capitalist unit in close cooperation with Morgan and controlled 
over half the assets of the oil industry. 
Page 532
     The economic power represented by these figures is almost beyond 
imagination to grasp. Morgan and Rockefeller together frequently 
dominated the national Republican Party while Morgan occasionally had 
extensive influence in the national Democratic Party. These two were 
also powerful on the state level, especially Morgan in New York 
and Rockefeller in Ohio. Mellon was a power in Pennsylvania and Du 
Pont in Delaware. 
     In the 1920s, this system of economic and political power formed 
a hierarchy headed by the Morgan interests and played a principal role 
both in political and business life. Morgan, operating on the 
international level in cooperation with his allies abroad, especially 
in England, influenced the events of history to a degree which cannot 
be specified in detail but which certainly was tremendous. The 
deflationary financial policies on which these bankers insisted were 
laying the foundations of the economic collapse into general social 
disaster by 1940. Unemployment which had reached 13 million persons in 
1933 was still at 10 million in 1940
Page 533
     The deflationary policies of the bankers were acceptable to heavy 
industry chiefly because it was not unionized. With assembly-line 
techniques financed by the bankers and unorganized labor, the 
employers could rearrange, curtail, or terminate labor without notice 
on a daily basis and could thus reduce labor costs to meet falls in 
prices from bankers' deflation.
     The fact that reductions in wages and large lay-offs also reduced 
the volume of purchasing power as a whole, to the injury of the groups 
selling consumers' goods, was ignored by the makers of heavy 
producers' goods. In this way, farmers and other segments of the 
society were injured by the deflationary policies of the bankers and 
by the employment policies of heavy industry, closely allied to the 
bankers. 
     When these policies became unbearable in the depression of 1929-
1933, these other interest blocs deserted the Republican party which 
remained subservient to high finance and heavy industry. The shift of 
the farm bloc to the Democratic Party in 1932 resulted in the election 
of Franklin D. Roosevelt and the New Deal. 
Page 534
     The New Deal's actions against finance did not represent any 
victory for unorthodox financing, the real key to either monopoly 
capitalism or to a managed pluralist society. The reason for this was 
that the New Deal was fundamentally orthodox in its ideas on the 
nature of money. Roosevelt was quite willing to unbalance the budget 
and to spend in a depression in an unorthodox fashion because he had 
grasped the idea that lack of purchasing power was the cause of the 
lack of demand which made unsold goods and unemployment, but he had no 
idea of the causes of the depression and had quite orthodox ideas on 
the nature of money. As a result, his administration treated the 
symptoms rather than the causes of the depression and, while spending 
unorthodoxly to treat these symptoms, did so with money borrowed from 
the banks in the accepted fashion. The New Deal allowed bankers to 
create the money, borrowed it from the banks,and spent it. This meant 
that the New Deal ran up the national debt to the credit of the banks, 
and spent money in such a limited fashion that no drastic re-
employment of idle resources was possible. 
     One of the most significant facts about the New Deal was its 
orthodoxy on money. For the whole 12 years he was in the White House, 
Roosevelt had statutory power to issue fiat money in the form of 
greenbacks printed by the government without recourse to the banks. 
This authority was never used. As a result of such orthodoxy, the 
depression's symptoms of idle resources were overcome only when the 
emergency of the war in 1942 made it possible to justify a limitless 
increase in the national debt by limitless borrowing from private 
persons and the banks. But the whole episode showed a failure to grasp 
the nature of money and the function of the monetary system, of which 
considerable traces remained in the postwar period. 
Page 535
     One reason for the New Deal's readiness to continue with an 
orthodox theory of the nature of money, along with an unorthodox 
practice in its use, arose from the failure of the Roosevelt 
administration to recognize the nature of the economic crisis itself. 
This failure can be seen in Roosevelt's theory of "pump priming." He 
sincerely believed, as did his Secretary of the Treasury, that there 
was nothing structurally wrong with the economy, that it was 
temporarily stalled, and would keep going of its own powers if it 
could be restarted...
     The inadequacy of this theory of the depression was shown in 1937 
when the New Deal, after four years of pump priming and a victorious 
election in 1936, stopped its spending. Instead of taking off, the 
economy collapsed in the steepest recession in history. The New Deal 
had to resume its treatment of symptoms but now without hope that the 
spending program could ever be ended, a hopeless prospect since the  
administration lacked the knowledge of how to reform the system or 
even how to escape from borrowing bank credit with its mounting public  
debt, and the administration lacked the courage to adopt the really 
large-scale spending necessary to give full employment of resources. 
The administration was saved from this impasse by the need for the 
rearmament program followed by the war. Since 1947 the Cold War and 
the space program have allowed the same situation to continue, so that 
even today, prosperity is not the result of a properly organized 
economic system but of government spending, and any drastic reduction 
in such spending would give rise to an acute depression. 
THE ECONOMIC FACTORS
Page 540
     There are a number of important elements in the economic 
situation of the 20th century. 
     8. The increasing disparity in the distribution of income is the 
most controversial and least well-established characteristic of the 
system. It would appear that the disparity in national income has been 
getting wider. 
     In the US, the richest one-fifth receive 46% of the income in 
1910, 51% in 1929 and 48% in 1937. In the same three years, the share 
of the poorest one-fifth fell from 8% to 5.4% to 3.6%
     If instead of one-fifth, we examine the richest and poorest one-
tenth, in 1910 the ratio was 10, in 1929 it was 21.7, in 1937, it was 
34.4. This means that the rich were getting richer relatively and 
probably absolutely while the poor were getting poorer both relatively 
and absolutely. 
Page 542
     The progressives who insisted that the lack of investment was 
caused by lack of consumer purchasing power were correct. But the 
conservatives who insisted that the lack of investment was caused by 
lack of confidence were also correct. Each was looking at the opposite 
side of a single continuous cycle:
a) purchasing power creates demand for goods;
b) demand for goods creates confidence in the minds of investors;
c) confidence creates new investment;
d) new investment creates purchasing power which then creates demand.
     It would appear that the economic factors alone affected the 
distribution of incomes in the direction of increasing disparity. 
Page 543
     In Germany, Hitler's 1934 adoption of an unorthodox financial 
policy which raised the standards of living of the lower-income levels 
even more drastically (by shifting them from unemployment with incomes 
close to nothing into wage-earning positions in industry) was not 
acceptable to the high-income classes because it stopped the threat of 
revolution by the discontented masses and because it was obviously of 
long-run benefit to them. This long-run benefit began to appear when 
capacity employment of capital and labor was achieved in 1937. 
Page 546
     In the modern economic community, the sum total of goods and 
services appearing in the market is at one and the same time the 
income of the community and the aggregate cost of producing goods and 
services in question. Aggregate costs, aggregate incomes and aggregate 
prices are the same since they are merely opposite sides  of the 
identical expenditures. 
     The purchasing power available in the community is equal to 
income minus savings. If there are any savings, the available 
purchasing power will be less than the aggregate prices being asked 
for the products for sale and the amount of the savings. Thus, all the 
goods and services produced cannot be sold as long as savings are held 
back. In order for al the goods to be sold, it is necessary for the 
savings to reappear in the market as purchasing power. The 
disequilibrium between purchasing power and prices which are created 
by the act of saving is restored completely by the act of investment, 
and all the goods can be sold at the prices asked. But whenever 
investment is less than savings, the available supply of purchasing 
power is inadequate by the same amount to by the goods being offered. 
This margin by which purchasing power is inadequate because of an 
excess of savings over investment may be called the "deflationary 
gap."This "deflationary gap" is the key to the twentieth century 
economic crisis and one of the three central cores of the whole 
tragedy of the century. 
THE RESULTS OF THE ECONOMIC DEPRESSION
Page 547
     The deflationary gap arising from a failure of investment to 
reach the level of savings can be closed either by lowering the supply 
of goods to the level of available purchasing power or by raising the 
supply of purchasing power to a level able to absorb the existing 
supply of goods, or a combination of both. The first solution will 
give a stabilized economy on a low level of activity; the second will 
give a stabilized economy on a high level of activity. Left to itself, 
the economic system under modern conditions would adopt the former 
procedure working as follows: The deflationary gap will result in 
falling prices, declining economic activity and rising unemployment. 
This will result in a fall in national income resulting in an even 
more rapid decline in the volume of savings. This decline continues 
until the volume of savings reaches the level of investment at which 
point the fall is arrested and the economy becomes stabilized at a low 
level. 
     This process did not work itself out in any industrial country 
during the great depression because the disparity in national income 
was so great that a considerable portion of the population would have 
been driven to zero incomes and absolute want before savings of the 
richer segment fell to the level of investment. Under such conditions, 
the masses of population would have been driven to revolution and the 
stabilization, if reached, would have been on a level so low that a 
considerable portion of the population would have been in absolute 
want. Because of this, governments took steps to arrest the course of 
the depression before their citizens were driven to desperation. 
     The methods used to deal with the depression and close the 
deflationary gap were all reducible to two fundamental types:
a) those which destroy goods, and
b) those which produce goods which do not enter the market. 
     The destruction of goods will close the deflationary gap by 
reducing the supply of unsold goods through lowering the supply of 
goods to the level of the supply of purchasing power. It is not 
generally realized that this method is one of the chief ways in which 
the gap is closed in a normal business cycle where goods are destroyed 
by the simple expedient of not producing the goods which the system is 
capable of producing. The failure to use full level of 1929 output 
represented a loss of $100 billion in the US, Britain and Germany 
alone. This loss was equivalent to the destruction of such goods. 
Destruction of goods by failure to gather the harvest is a common 
phenomenon under modern conditions. When a farmer leaves his crop 
unharvested because the price is too low to cover the expense of 
harvesting, he is destroying the goods. Outright destruction of goods 
already produced is not common and occurred for the first time as a 
method of combating depression in the years 1930-1934. During this 
period, stores of coffee, sugar, and bananas were destroyed, corn was 
plowed under, and young livestock was slaughtered to reduce the supply 
on the market. The destruction of goods in warfare is another example 
of this method of overcoming deflationary conditions in the economic 
system.  
Page 548
     The second method of filling the deflationary gap, namely, by 
producing goods which do not enter the market, accomplishes its 
purpose by providing purchasing power in the market, since the costs 
of production of such goods do enter the market as purchasing power, 
while the goods themselves do not drain funds from the system if they 
are not offered for sale. New investment was the usual way in which 
this was accomplished in the normal business cycle but it is not the 
normal way of filling the gap under modern conditions of depression. 
We have already seen the growing reluctance to invest and the unlikely 
chance that the purchasing power necessary for prosperity will be 
provided by a constant stream of private investment. It this is so, 
the funds for producing goods which do not enter the market must be 
sought in a program of public spending. 
     Any program of public spending at once runs into the problems of 
inflation and public debt. These are the same two problems mentioned 
in connection with the efforts of government to pay for the First 
World War. The methods of paying for a depression are exactly the same 
as the methods of paying for a war, except that the combination of 
methods used may be somewhat different because the goals are somewhat 
different. In financing a war, we should seek to achieve a method 
which will provide a maximum of output with a minimum of inflation and 
public debt. In dealing with a depression, since a chief aim is to 
close the deflationary gap, the goal will be to provide a maximum of 
output with a necessary degree of inflation and a minimum of public 
debt. Thus the use of fiat money is more justifiable in financing a 
depression than in financing a war. Moreover the selling of bonds to 
private persons in wartime might well be aimed at the lower-income 
groups in order to reduce consumption and release facilities for war 
production, while in a depression (where low consumption is the chief 
problem) such sales of bonds to finance public spending would have to 
be aimed at the savings of the upper-income groups. 
     These ideas on the role of government spending in combating 
depression have been formally organized into the "theory of the 
compensatory economy." This theory advocates that government spending 
and fiscal policies be organized so that they work exactly contrary to 
the business cycle, with lower taxes and larger spending in 
deflationary period and higher taxes with reduced spending in a boom 
period, the fiscal deficits of the down cycle being counterbalanced in 
the national budget by the surpluses of the up cycle. 
     
Page 549
     This compensatory economy has not been applied with much success 
in any European country except Sweden. In a democratic country, it 
would take the control of taxing and spending away from the elected 
representatives of the people and place this precious "power of the 
purse" at the control of the automatic processes of the business cycle 
as interpreted by bureaucratic (and representative) experts. Moreover, 
all these programs of deficit spending are in jeopardy in a country 
with a private banking system. In such a system, the creation of money 
(or credit) is usually reserved for the private banking institutions 
and is deprecated as a government action. The argument that the 
creation of finds by the government is bad while creation of funds by 
the banks is salutary is very persuasive in a system based on 
traditional laissez faire and in which the usual avenues of 
communications (such as newspapers and radio) are under private, or 
even banker, control. 
     Public spending as a method of counteracting depression can vary 
very greatly in character, depending on the purposes of the spending. 
Spending for destruction of goods or for restriction of output, as 
under the New Deal agricultural program, cannot be justified easily 
in a democratic country with freedom of communications because it 
obviously results in a decline in national income and living 
standards. 
     Spending for non-productive monuments is somewhat easier to 
justify but is hardly a long-run solution. 
     Spending for investment in productive equipment (like the 
Tennessee Valley Authority Dam) is obviously the best solution since 
it leads to an increase in national wealth and standards of living and 
is a long-run solution but it marks a permanent departure from a 
system of private capitalism and can be easily attacked in a country 
with a capitalistic ideology and a private banking system. 
     Spending on armaments and national defence is the last method of 
fighting depression and is the one most readily and most widely 
adopted in the twentieth century. 
     A program of public expenditure on armaments is a method for 
filling the deflationary gap and overcoming depression because it adds 
purchasing power to the market without drawing it out again later 
(since the armaments, once produced, are not put up for sale). From an 
economic point of view, this method of combating depression is not 
much different from the method listed earlier under destruction of 
goods, for, in this case also, economic resources are diverted from 
constructive activities or idleness to production for destruction. The 
appeal of this method for coping with the problem of depression does 
not rest on economic grounds at all, for, on such grounds, there is 
no justification. It's appeal is rather to be found on other, 
especially political, grounds. 
Page 550
     The adoption of rearmament as a method of combating depression 
does not have to be conscious. The country which adopts it may 
honestly feel that it is adopting the policy for good reasons, that it 
is threatened by aggression, and that a program of re-armament is 
necessary for political protection. It is very rare for a country 
consciously to adopt a program of aggression, for, in most wars, both 
sides are convinced that their actions are defensive. It is almost 
equally rare for a country to adopt a policy of re-armament as a 
solution for depression. If a country adopts re-armament because of 
fear of another's arms and these last are the result of efforts to 
fill a deflationary gap, it can also be said that the re-armament of 
the former has a basic economic cause. 
     In the 20th century, the vested interests usually sought to 
prevent the reform of the economic system (a reform whose need was 
made evident by the long-drawn-out depression) by adopting an economic 
program whose chief element was the effort to fill the deflationary 
gap by re-armament. 
THE PLURALIST ECONOMY AND WORLD BLOCS
     The economic disasters of two wars, a world depression, and the 
post-war fluctuations showed clearly by 1960 that a new economic 
organization of society was both needed and available. The laissez-
faire competitive system had destroyed itself and almost destroyed 
civilization as well by its inability to distribute the goods it could 
produce. The system of monopoly capitalism had helped in this 
disaster.
Page 551
     The almost simultaneous failure of laissez-faire, Fascism, and of 
Communism to satisfy the growing popular demand both for rising 
standards of living and for spiritual liberty had forced the mid-20th 
century to seek some new economic organization. 
     Underdeveloped peoples have been struck by the conflicting claims 
of the two great super-Powers.. The former offered the goods the new 
peoples wanted (rising standards of living and freedom) while the 
latter seemed to offer methods of getting these goods (by state 
accumulation of capital, government direction of resources) which 
might tend to smother these goals. The net result has been a 
convergence toward a common, if remote, system of the future whose 
ultimate nature is not yet clear but which we might call the 
"pluralist economy."


CHAPTER XII: THE POLICY OF APPEASEMENT 1931-1936
Page 559
     The structure of collective security was destroyed completely 
under the assaults of Japan, Italy and Germany who were attacking the 
whole nineteenth century way of life and some of the most fundamental 
attributes of Western Civilization itself. They were in revolt against 
democracy, against the parliamentary system, against laissez-faire and 
the liberal outlook, against nationalism (although in the name of 
nationalism), against humanitarianism, against science and against all 
respect for human dignity and human decency. It was recruited from the 
dregs of society. 
Page 560
     During the nineteenth century, goals were completely lost or were 
reduced to the most primitive level of obtaining more power and more 
wealth. But the constant acquisition of power or wealth, like a 
narcotic for which the need grows as its use increases without in any 
way satisfying the user, left man's "higher" nature unsatisfied. 
Page 561
     Germany could have made no aggression without the acquiescence 
and even in some cases the actual encouragement of the "satisfied" 
Powers, especially Britain. 
THE JAPANESE ASSAULT, 1931-1941
     The similarity between Germany and Japan was striking: each had a 
completely cartelized industry, a militaristic tradition, a hard-
working population which respected authority and loved order, a facade 
of parliamentary constitutionalism which barely concealed the reality 
of power wielded by an alliance of army, landlords, and industry. 
Page 562
     The steady rise in tariffs against Japanese manufactured goods 
after 1897 led by America served to increase the difficulties of 
Japan's position. The world depression and the financial crisis hit 
Japan a terrible blow. Under this impact, the reactionary and 
aggressive forces were able to solidify their control and embark on 
that adventure of aggression and destruction that ultimately led to 
the disasters of 1945. 
Page 563
     Separate from the armed forces were the forces of monopoly 
capitalism, the eight great economic complexes controlled as family 
units knows as "zaibatsu" which controlled 75% of the nation's wealth. 
By 1930, the militarists and zaibatsu came together in their last 
fateful alliance.
Page 569
     Japan's unfavorable balance of trade was reflected in a heavy 
outflow of gold in 1937-1938. It was clear that Japan was losing its 
financial and commercial ability to buy necessary materials of foreign 
origin. The steps taken by America, Australia, and others to restrict 
export of strategic or military materials to Japan made this problem 
even more acute. The attack on China had been intended to remedy this 
situation by removing the Chinese boycott on Japanese goods.
Page 570
     Under the pressure of the growing reluctance of neutral countries 
to supply Japan with necessary strategic goods, the most vital being 
petroleum products and rubber, it seemed that the occupation of the 
Dutch Indies and Malaya could do much to alleviate these shortages but 
which would lead to an American war on Japan. They decided to attack 
the United States first. 
THE ITALIAN ASSAULT, 1934-1936 
Page 571
     In 1922, the Fascists came to power in a parliamentary system; in 
1925 it was replaced by a political dictatorship while the economic 
system remained that of orthodox financial capitalism; in 1927 an 
orthodox and restrictive stabilization of the lira on the 
international gold standard led to such depressed economic conditions 
that Mussolini adopted a much more active foreign policy; in 1934 
Italy replaced orthodox economic measures by a totalitarian economy 
functioning beneath a fraudulent corporate facade. 
     Italy was dissatisfied over its lack of colonial gains at 
Versailles and the refusal of the League to accede to Tittoni's 
request for a redistribution of the world's resources in accordance 
with population needs made in 1920. 
     In a series of agreements with Austria and Hungary known as the 
"Rome Protocols," the Austrian government under Engelbert Dollfuss 
destroyed the democratic institutions of Austria, wiped out all 
Socialist and working-class organizations, and established a one-party 
dictatorial corporate state at Mussolini's behest in 1934. Hitler took 
advantage of this to attempt a Nazi coup in Austria, murdering 
Dollfuss in July 1934 but he was prevented by the quick mobilization 
of Italian troops on the Brenner frontier and a stern warning from 
Mussolini. 
Page 572
     Hitler's ascension to office in Germany in 1933 found French 
foreign policy paralyzed by British opposition to any efforts to 
support collective security or to enforce German observation of its 
treaty obligations by force. As a result, a suggestion from Poland in 
1933 for joint armed intervention in Germany to remove Hitler from 
office was rejected by France. Poland at once made an non-aggression 
pact with Germany and extended a previous one with the Soviet Union. 
     In 1934, France under Jean Louis Bathou, began to adopt a more 
active policy against Hitler seeking to encircle Germany by bringing 
the Soviet Union and Italy into a revived alignment of France, Poland, 
the Little Entente, Greece and Turkey. 
Page 573
     France's Laval was convinced that Italy could be brought into the 
anti-German front only if its long-standing grievances and unfulfilled 
ambitions in Africa could be met. Accordingly, he gave Mussolini 7% of 
the stock in the Djibouti-Addis Ababa Railway, a stretch of desert 
114,000 square miles in extent but containing only a few hundred 
persons (sixty-two according to Mussolini) on the border of Libya, a 
small wedge of territory between French Somaliland and Italian 
Eritrea, and the right to ask for concessions throughout Ethiopia. 
     While Laval insisted that he had made no agreement which 
jeopardized Ethiopia's independence or territorial integrity, he made 
it equally clear that Italian support against Germany was more 
important than the integrity of Ethiopia in his eyes. France had been 
Ethiopia's only friend and had brought it into the League of Nations. 
Italy had been prevented from conquering Ethiopia in 1896 only by a 
decisive defeat of her invading forces at the hands of the Ethiopians 
themselves, while in 1925, Britain and Italy had cut her up into 
economic spheres by an agreement which was annulled by a French appeal 
to the League. Laval's renunciation of France's traditional support of 
Ethiopian independence brought Italy, Britain and France into 
agreement on this issue. 
Page 574
     This point of view was not shared by public opinion in these 
three countries. Stanley Baldwin (party leader and prime minister) 
erected one of the most astonishing examples of British "dual" policy 
in the appeasement period. While publicly supporting collective 
security and sanctions against Italian aggression, the government 
privately negotiated to destroy the League and to yield Ethiopia to 
Italy. They were completely successful in this secret policy. 
     The Italian invaders had no real fear of British military 
sanctions when they put a major part of their forces in the Red Sea 
separated from home by the British-controlled Suez canal. The British 
government's position was clearly stated in a secret report by Sir 
John Maffey which declared that Italian control of Ethiopia would be a 
"matter of indifference" to Britain. This opinion was shared by the 
French government too. 
     Unfortunately, public opinion was insisting on collective 
sanctions against the aggressor. To meet this demand, both governments 
engaged in a public policy of unenforced or partially enforced 
sanctions at wide variance with their real intentions. 
     Foreign Secretary Samuel Hoare delivered a smashing speech to 
support sanctions against Italy. The day previously he and Anthony 
Eden had secretly agreed with Pierre Laval to impose only partial 
economic sanctions avoiding all actions such as blockade of the Suez 
canal. 
Page 575
     A number of governments including Belgium, Czechoslovakia, France 
and Britain had stopped all exports of munitions to Ethiopia as early 
as May 1935 although Ethiopia's appeal to the League for help had been 
made on March 17th while the Italian attack did not come until 
October. The net result was that Ethiopia was left defenceless and her 
appeal to the US for support was at once rejected. 
     Hoare's speech evoked such applause from the British public that 
Baldwin decided to hold a general election on that issue. Accordingly, 
with ringing pledge to support collective security, the National 
government won an amazing victory and stayed in power until the next 
general election ten years later (1945).
     Although Article 16 of the League Covenant bound the signers to 
break off all trade with an aggressor, France and Britain combined to 
keep their economic sanctions partial and ineffective. The imposition 
of oil sanctions was put off again and again until the conquest of 
Ethiopia was complete. The refusal to establish this sanction resulted 
from a joint British-French refusal on the grounds that an oil 
sanction would be so effective that Italy would be compelled to break 
of its was with Ethiopia and would, in desperation, make war on 
Britain and France. This, at least, was the amazing logic offered by 
the British government later. 
Page 576
     Hoare and Laval worked out a secret deal which would have given 
Italy outright about one-sixth of Ethiopia. When news of this deal was 
broken to the public, there was a roar of protest on the grounds 
that this violated the election pledge made but a month previously. To 
save his government, Baldwin had to sacrifice Hoare who resigned on 
December 19 but returned to Cabinet on June 5 as soon as Ethiopia was 
decently buried. Laval fell from office and was succeeded by Pierre 
Flandin who pursued the same policy. 
     Ethiopia was conquered on May 2 1936. Sanctions were removed in 
the next two months just as they were beginning to take effect. The 
consequences of the Ethiopian fiasco were of the greatest importance.  
The Conservative Party in England was entrenched in office for a 
decade during which it carried out its policy of appeasement and waged 
the resulting war. The US passed a "Neutrality Act" which encouraged 
aggression, at the outbreak of war, by cutting off supplies to both 
sides, to the aggressor who had armed at his leisure and to the victim 
as yet unarmed. Above all, it destroyed French efforts to encircle 
Germany. 
CIRCLES AND COUNTERCIRCLES, 1935-1939
Page 577
     The remilitarization of the Rhineland in violation of the 
Versailles Treaty was the most important result of the Ethiopian 
crisis. 
Page 578
     In order to destroy the French and Soviet alliances with 
Czechoslovakia, Britain and Germany sought to encircle France and the 
Soviet Union in order to dissuade France from honoring its alliances 
with either Czechoslovakia or the Soviet Union and France, finding 
itself encircled, dishonored its alliance with Czechoslovakia when it 
came due in 1938. 
Page 579
     The British attitude towards eastern Europe was made perfectly 
clear when Sir John Simon demanded arms equality for Germany. Adding 
to the encirclement of France was the Anglo-German Naval Agreement of 
June 1935. 
Page 580
     Parallel with the encirclement of France went the encirclement of 
the Soviet Union known as the anti-Comintern Pact, the union of 
Germany and Japan against Communism. 
     The last encirclement was that against Czechoslovakia. Hungary 
and Germany were both opposed to Czechoslovakia as an "artificial" 
creation of the Versailles Conference. The Polish-German agreement of 
1934 opened a campaign until the Polish invasion in 1938. 
     An analysis of the motivations of Britain in 1938-1939 is bound 
to be difficult because the motives of government were clearly not the 
same as the motives of the people and in no country has secrecy and 
anonymity been carried so has been been so well preserved as in 
Britain. In general, motives become vaguer and less secret as we move 
our attention from the innermost circles of the government outward. As 
if we were looking at the layers of an onion, we may discern four 
points of view: 
1) the anti-Bolsheviks at the center;
2) the "three-bloc-world" supporters close to the center;
3) the supporters of "appeasement" and
4) the "peace at any price" group in peripheral position. 
     
Page 581
     The chief figures in the anti-Bolshevik group were Lord 
Curzon, Lord D'Abernon and General Smuts. They did what they could to 
destroy reparations and permit German re-armament. 
     This point of view was supported by the second group, the Round 
Table Group, and came later to be called the Clivenden Set which 
included Lord Milner, Lord Brand (managing director of Lazard 
Brothers, international bankers). This group wielded great influence 
because it controlled the Rhodes Trust and dominated the Royal 
Institute of International Affairs. They sought to contain the Soviet 
Union rather than destroy it as the anti-Bolsheviks wanted. They 
advocated a secret alliance of Britain with the German military 
leaders against the Soviet. 
Page 583
     Abandoning Austria, Czechoslovakia and the Polish Corridor to 
Germany was the aim of both the anti-Bolsheviks and the "three-bloc" 
people.  
Page 584
     From August 1935 to March 1939, the government built upon the 
fears of the "peace at any price" group by steadily exaggerating 
Germany's armed might and belittling their own, by calculated 
indiscretions like the statement that there were no real anti-aircraft 
guns in London, by constant hammering at the danger of air attack 
without warning, by building ostentatious and quite useless air-raid 
trenches in the streets and parks of London, and by insisting through 
daily warnings that everyone must be fitted with a gas mask 
immediately (although the danger of a gas attack was nil). In this 
way, the government put London into a panic in 1938 and by this panic, 
Chamberlain was able to get the people to accept the destruction of 
Czechoslovakia. Since he could not openly appeal on the anti-
Bolshevik basis, he had to adopt the expedient of pretending to  
resist (in order to satisfy the British public) while really 
continuing to make every possible concession to Hitler which would 
bring Germany to a common frontier with the Soviet Union. 
Page 585
     Chamberlain's motives were not really bad ones; he wanted peace 
so he could devote Britain's limited resources to social welfare; but 
he was narrow and totally ignorant of the realities of power, 
convinced that international politics could be conducted in terms of  
secret deals, as business was, and he was quite ruthless in carrying 
out his aims, especially in his readiness to sacrifice non-English 
persons who, in his eyes, did not count.  
THE SPANISH TRAGEDY, 1931-1939
Page 587
     From the invasion of the Arabs in 711 to their final ejection in 
1492, Spanish life has been dominated by the struggle against foreign 
intruders. As a result of more than a thousand years of such 
struggles, almost all elements of Spanish society have developed a 
fanatical intolerance, an uncompromising individualism, and a fatal 
belief that physical force is a solution to all problems, however 
spiritual. 
Page 588
     The war of 1898, by depriving Spain of much of its empire, left 
its over-sized army with little to do and with a reduced area on which 
to batten. Like a vampire octopus, the Spanish Army settled down to 
drain the life-blood of Spain and, above all, Morocco. This brought 
the army officers into alignment with conservative forces consisting 
of the Church (upper clergy), the landlords, and the monarchists. The 
forces of the proletariat discontent consisted of the urban workers 
and the much larger mass of exploited peasants. 
Page 591
     In 1923, while most of Spain was suffering from malnutrition, 
most of the land was untilled and the owners refused to use irrigation 
facilities which had built by government. As a result, agricultural 
yields were the poorest in western Europe. While 15 men owned about a 
million acres and 15,000 men owned about the of all taxed land, almost 
2 million owned the other half, frequently in plots too small for 
subsistence. About 2 million more, who were completely landless, 
worked 10 to 14 hours a day for about 2.5 pesetas (35 cents) a day for 
only six months in the year and paid exorbitant rents without any 
security of tenure.
     In the Church, while the ordinary priests share the poverty and 
tribulations of the people, the upper clergy were closely allied with 
government and supported by an annual grant. They had seats in the 
upper chamber, control of  education, censorship, marriage. In 
consequence of this alliance of the upper clergy with government and 
the forces of reaction, all animosities built against the latter came 
to be directed against the former also. Although the people remained 
universally and profoundly catholic, they also became incredibly 
anticlerical reflected in the proclivity for burning churches. 
     All these groups, landlords, officers, upper clergy, and 
monarchists, were interest groups seeking to utilize Spain for their 
own power and profit. 
Page 592
     Alfonso XIII ordered municipal elections but in 46 out of 50 
provincial capitals, the anti-monarchial forces were victorious. 
Alfonso fled to France on April 14, 1931. 
     The republicans at once began to organize their victory, electing 
a Constituent Assembly in June and establishing an ultramodern uni-
cameral, parliamentary government with universal suffrage, separation 
of Church and State, secularization of education, local autonomy for 
separatist areas and power to socialize the great estates or the 
public utilities. 
     The republic lasted only five years before Civil War began in 
1936 after being challenged constantly from the Right and the extreme 
Left. Because of shifting governments, the liberal program which was 
enacted into law in 1931 was annulled or unenforced. 
Page 593
     In an effort to reduce illiteracy (over 45% in 1930), the 
republic created thousands of new schools and new teachers, raised 
teachers' salaries, founded over a thousand libraries. 
     Army officers were reduced with the surplus being retired on full 
pay. The republican officers tended to retire, the monarchists to stay 
on. 
     To assist the peasants and workers, mixed juries were established 
to hear rural rent disputes, importation of labor for wage-breaking 
purposes was forbidden; and credit was provided for peasants to 
obtain land, seed, or fertilizers on favorable terms. Customarily 
uncultivated lands were expropriated with compensation to provide 
farms for a new class of peasant proprietors. 
     Most of these reforms went into effect only partially. Few of the 
abandoned estates could be expropriated because of the lack of money 
for compensation. 
Page 594
     The conservative groups reacted violently. Three plots began to 
be formed against the new republic, the one monarchist led by Sotelo 
in parliament and by Goicoechea behind the scenes; the second a 
parliamentary alliance of landlords and clericals under Robles; and 
the last a conspiracy of officers under Generals Barrera and Sanjurjo. 
     In the meantime, the monarchist conspiracy was organized by 
former King Alfonso from abroad. Goicoechea performed his task with 
great skill under the eyes of a government which refused to take 
preventative action because of its own liberal and legalistic 
scruples. He organized an alliance of the officers, the Carlists, and 
his own Alfonsist party. Four men from these three groups then signed 
an agreement with Mussolini in 1934 who promised arms, money, 
diplomatic support and 1.5 million pesetas, 10,000 rifles,10,000 
grenades, and 200 machine guns. In return, the signers promised to 
sign a joint export policy with Italy. 
Page 595
     The Robles coalition of Right parties with the clerical party and 
agrarian party of landlords was able to replace the Left Republican 
Azana by the Right Republican Lerroux as prime minister. It then 
called new elections, won victory and revoked many of the 1931 reforms 
while allowing most of the rest to go unenforced and restored 
expropriated estates. 
     This led to a violent agitation which burst into open revolt in 
the two separatist centers of the Basque country and Catalonia. The 
uprising in Asturias spearheaded by anarchist miners hurling dynamite 
from slings, lasted for nine days. The government used the Foreign 
Legion and Moors, brought to Morocco by sea, and crushed the rebels 
without mercy. The latter suffered at 5,000 casualties. After the 
uprising, 25,000 suspects were thrown into prison. 
     The uprising of October 1934, although crushed, split the 
oligarchy. The demands of the army, monarchists and the biggest 
landlords for a ruthless dictatorship alarmed the leaders of the 
Church and president of the republic Zamora. Robles as minister of war 
encouraged reactionary control of the army and even put General Franco 
in as his undersecretary of war. 
Page 596
     For the 1936 elections, the parties of the Left formed the 
Popular Front with a published program promising a full restoration of 
the constitution, amnesty for political crimes committed after 1933, 
civil liberties, an independent judiciary, minimum wages, protection 
for tenants, reform of taxation, credit, banking. It repudiated the 
Socialist program for nationalization of the land, the banks, and 
industry. 
     While all the Popular Front parties would support the government, 
only the bourgeois parties would hold seats in the Cabinet while the 
workers parties such as the Socialists would remain outside. 
     The Popular Front captured 266 of 473 seats while the Right had 
153, the Center 54, CEDA 96, Socialists 87, Republic Left 81, 
Communists 14.
     The defeated forces of the Right refused to accept the election 
results and tried to persuade Valladeres to hand over the government 
to General Franco. That was rebuffed. On Feb. 20, the conspirators met 
and decided the time was not yet ripe. The new government heard of 
this meeting and transferred Franco to the Canary Islands. The day 
before he left Madrid, Franco met with the chief conspirators and they 
completed their plans for a military revolt but fixed no date. 
     In the meantime, provocation, assassination, and retaliation grew 
steadily with the verbal encouragement of the Right. Property was 
seized or destroyed and churches were burned on all sides. The mob 
retaliated by assaults on monarchists and by burning churches.
Page 597
     Italian Air Force planes were painted over and went into action 
in support of the revolt which was a failure when the navy remained 
loyal because the crews overthrew their officers; the Air Force 
remained loyal; the army revolted with much of the police but were 
overcome. At the first news of the revolt, the people, led by labor 
unions, demanded arms. Because arms were lacking, orders were sent at 
once to France. The recognized government in Madrid had the right to 
buy arms abroad and was even bound to do so by treaty with France. 
     As a result of the failure of the revolt, the generals found 
themselves isolated in several different parts of Spain with no mass 
popular support. 
Page 598
     The rebels held the extreme northwest, the north and the south as  
well as Morocco and the islands. They had the unlimited support of 
Italy and Portugal and tentative support from Germany. 
     The French suggested an agreement not to intervene in Spain since 
it was clear that if there was no intervention, the Spanish government 
could suppress the rebels. Britain accept the French offer at once but 
efforts to get Portugal, Italy, Germany and Russia into the agreement 
were difficult because Portugal and Italy were both helping the 
rebels. By August, all six Powers had agreed. 
     Efforts to establish some kind of supervision were rejected by 
the rebels and by Portugal while Britain refused to permit any 
restrictions to be placed on war material going to Portugal at the 
very moment when it was putting all kinds of pressure on France to 
restrict any flow of supplies to the recognized government of Spain. 
Portugal had delayed joining the agreement until it would hurt the 
Loyalist forces more than the rebels. Even then, there was no 
intention of observing the agreements.
Page 599
     France did little to help the Madrid government while Britain was 
positively hostile to it. Both governments stopped all shipments of 
war material to Spain. By its insistence on enforcing non-intervention 
against the Loyalists, while ignoring the systematic and large-scale 
evasions of the agreement in behalf of the rebels, Britain was neither 
fair nor neutral, and had to engage in large-scale violations of 
international law. Britain refuse to permit any restrictions to be 
placed on war material going to Portugal (to the rebels). It refused 
to allow the Loyalist Spanish Navy to blockade the seaports held by 
the rebels, and took immediate action against efforts by the Madrid 
government to interfere with any kind of shipments to rebel areas, 
while wholesale assaults by the rebels on British and other neutral 
ships going to Loyalist areas drew little more than feeble protests 
from Britain. 
     Britain was clearly seeking a rebel victory and instead of trying 
to enforce nonintervention, was actively supporting the rebel blockade 
of Loyalist Spain when the British Navy began, in 1937, to intercept 
British ships headed for Loyalist ports and on some pretext, or simply 
by force, made them go elsewhere. 
     The rebel forces were fewer than the Loyalists but were 
eventually successful because of their great superiority in artillery, 
aviation, and tanks as a result of the one-sided enforcement of the 
non-intervention agreement. 
Page 600
     The failure of Franco to capture Madrid led to a joint Italian-
German meeting where it was decided to recognize the Franco government 
and withdraw their recognition from Madrid on Nov. 18, 1936. Japan 
recognized the Franco regime in December.
     As a result, Franco received the full support of the aggressor 
states while the Loyalist government was obstructed in every way by 
the "peace-loving" Powers. Italy sent 100,000 men and suffered 50,000 
casualties, Germany sent 20,000 men. On the other side, the Loyalists 
were cut off from foreign supplies almost at once because of the 
embargoes of the Great Powers and obtained only limited amounts, 
chiefly from Mexico, Russia and the US until the Non-intervention 
agreement cut these off. On Jan. 18, 1937, the American Neutrality Act 
was revised to apply to civil as well as international wars and was 
invoked against Spain immediately but unofficial pressure from the 
American government prevented such exports to Spain even earlier. 
     The Madrid government made violent protests against the Axis 
intervention both before the Non-intervention Committee in London and 
before the League of Nations. These were denied by the Axis Powers. An 
investigation of these charges was made under Soviet pressure but the 
Committee reported that these charges were unproved. Anthony Eden went 
so far to say that so far as non-intervention was concerned, "there 
were other governments more to blame tan either Germany or Italy." 
Page 601
     Soviet intervention began Oct 7,1936, three and a half years 
after Italian intervention and almost three months after both Italian 
and German units were fighting with the rebels. The Third 
International recruited volunteers throughout the world to fight in 
Spain. This Soviet intervention in support of the Madrid government at 
a time when it could find support almost nowhere else served to 
increase Communist influence in the government very greatly. 
Page 602
     The Italian submarine fleet was waiting for Russian shipping in 
the Mediterranean and did not hesitate to sink it in the last few 
months of 1936. 
     Although the evidence for Axis intervention in Spain was 
overwhelming and was admitted by the Powers themselves early in 1937, 
the British refused to admit it and refused to modify the non-
intervention policy. Britain's attitude was so devious that it can 
hardly be untangled although the results were clear enough. The real 
sympathy of the London government clearly favored the rebels although 
it had to conceal the fact from public opinion since this opinion 
favored the Loyalists over Franco by 57% to 7% according to a 1938 
opinion poll.
Page 603
     On December 18, 1936, Eden admitted that the government had 
exaggerated the danger of war four months earlier to get the non-
intervention agreement accepted, and when Britain wanted to use force 
to achieve its aims, as it did in the piracy of Italian submarines in 
1937, it did so without risk of war. The non-intervention agreement, 
as practiced, was neither an aid to peace nor an example of 
neutrality, but was clearly enforced in such a way as to give aid to 
the rebels and place all possible obstacles in the way of the Loyalist 
government suppressing the rebellion. 
     The attitude of the British government could not be admitted 
publicly and every effort was made to picture the actions of the Non-
intervention Committee as one of even-handed neutrality. In fact, it 
was used to throw dust in the eyes of the world, especially the 
British public. For months, the meaningless debates of this committee 
were reported in detail to the world and charges, countercharges, 
proposals, counterproposals, investigations and inconclusive 
conclusions were offered to the a confused world, thus successfully 
increasing its confusion. While debating and quibbling on about issues 
like belligerence, patrols, volunteers, etc., before the Committee in 
London, the Franco forces, with their foreign contingents, slowly 
crushed the Loyalist forces. 
Page 604
     The Loyalist forces surrendered on March 28th 1939. England and 
France had recognized the Franco government on February 17 and the 
Axis troops were evacuated from Spain after a triumphal march through 
Madrid in June. 
     When the war ended, much of Spain was wrecked, at least 450,000 
Spaniards had been killed and an unpopular military dictatorship had 
been imposed as a result of the actions of non-Spanish forces. At 
least 400,000 Spaniards were in prison and large numbers were hungry 
and destitute. Germany recognized this problem and tried to get France 
to follow a path of conciliation, humanitarian reform, and social, 
agricultural, and economic reform. This advice was rejected, with the 
result that Spain has remained weak, apathetic, war-weary, and 
discontented ever since. 


 

TRAGEDY AND HOPE Chapters XIII-XVI
by Dr. Carroll Quigley 
ISBN 0913022-14-4


CONTENTS
XII. THE POLICY OF APPEASEMENT 1931-1936
XIII. THE DISRUPTION OF EUROPE
XIV. WORLD WAR II: THE TIDE OF AGGRESSION 1939-1941
XV. WORLD WAR II: THE EBB OF AGGRESSION 1941-1945
XVI. THE NEW AGE


CHAPTER XIII: THE DISRUPTION OF EUROPE, 1937-1939
AUSTRIA INFELIX, 1933-1938
Page 607
     The Austria which was left after the Treaty of St. Germain 
consisted of little more than the great city of Vienna surrounded by a 
huge but inadequate suburb whose population had been reduced from 52 
to 6.6 million. 
Page 608
     The Social Democrats were unable to reconcile their desire for 
union with Germany (called Anschluss) with the need for financial aid 
from the Entente Powers who opposed this. 
     The Social Democrats embarked on an amazing program of social 
welfare by a system of direct taxes which bore heavily on the well-to-
do. 
Page 609
     Before 1914, the living conditions of the poor had been 
maintained by a very undemocratic political system under which only 
83,000 persons, on a property basis, were allowed to vote and 5,500 of 
the richest were allowed to choose one-third of all seats on city 
council. By 1933, the Social Democrats had built almost 60,000 
dwellings so efficiently that the average cost per apartment was only 
about $1,650 each with average rent of $2 per month. Thus the poor of 
Vienna had all kinds of free or cheap medical care, dental care, 
education, libraries, amusements, sports, school lunches and maternity 
care provided by the city. 
     While this was going on in Vienna, the Christian Socialist-Pan-
German federal government of Catholic priest Monsignor Ignaz Seipel 
was sinking deeper into corruption, The diversion of public funds to 
banks and industries controlled by Seipel's supporters was revealed by 
parliamentary investigations in spite of the government's efforts to 
conceal the facts. 
     Seipel formed a "Unity List" of all the anti-Socialist parties he 
could muster but the election gave his party only 73 seats compared to 
71 for the Social Democrats, 12 for the pan-Germans, 9 for the 
Agrarian League. He sought to change the Austrian constitution into a 
presidential dictatorship which required a two-thirds vote. It became 
necessary to use illegal methods. 
 
Page 610
     The secret documents published since 1945 make it quite clear 
that Germany had no carefully laid plans to annex Austria and was not 
encouraging violence by the Nazis in Austria. Instead, every effort 
was made to restrict the Austrian Nazis to propaganda in order to win 
a gradual peaceful extension of Nazi influence. 
Page 611
     The invasion of Austria in 1938 was a pleasant surprise even for 
the Nazi leaders and arose from several unexpected favorable 
circumstances. Secret documents now make it clear that in 1937 the 
German and British governments made secret decisions which sealed the 
fate of Austria and Czechoslovakia. It is evident from some of 
Hitler's statements that he had already received certain information 
about the secret decisions being made by Chamberlain on the British 
side.
Page 612
     The British government group controlling foreign policy had 
reached a seven point decision regarding Germany:
1. Hitler's Germany was the front-line bulwark against the spread of 
Communism in Europe.
2. The aim was a four power pact including Britain, France, Italy and 
Germany to exclude all Russian influence from Europe.
3. Britain had no objection to German acquisition of Austria, 
Czechoslovakia, and Danzig.
4. Germany must not use force to achieve its aims as this would 
precipitate a war in which Britain would have to intervene. 
Page 622
     For years before June 1938, the government insisted that British 
rearming was progressing in a satisfactory fashion. Churchill 
questioned this and produced figures on German rearmament to prove 
that Britain's own progress in this field was inadequate. These 
figures (which were not correct) were denied by the government. As 
late as March 1938, Chamberlain said that British rearmament were such 
as to make Britain an "almost terrifying power." But as the year went 
on, the government adopted a quite different attitude. In order to 
persuade public opinion that it was necessary to yield to Germany, the 
government pretended that its armaments were quite inadequate. 
Page 623
     We now know that this was a gross exaggeration. Britain produced 
almost 3000 "military" planes in 1938 and about 8,000 in 1939 compared 
to 3350 "combat" planes produced in Germany in 1938 and 4,733 in 1939. 
     It is quite clear that Britain did not yield to superior force in 
1938, as was stated at the time and has been stated since by many 
writers including Churchill. We have evidence that Chamberlain knew 
these facts but consistently gave a contrary impression and that Lord 
Halifax went so far as to call forth protests from the British 
military attaches in Prague and Paris. 
     The British government made it clear to Germany both publicly and 
privately that they would not oppose Germany's projects. Dirksen wrote 
to Ribbentrop on June 3 1928 "Anything which could be got without 
firing a shot can count upon the agreement of the British." 
THE CZECHOSLOVAK CRISIS, 1937-1938
Page 626
     The economic discontent became stronger after the onset of the 
world depression in 1929 and especially after Hitler demonstrated that 
his policies could bring prosperity to Germany. 
Page 627
     Within two weeks of Hitler's annexation of Austria, Britain put 
pressure on the Czechs to make concessions to the Germans; to 
encourage France and Germany to do the same. All this was justified by 
the argument that Germany would be satisfied if it obtained the 
Sudetenland and the Polish Corridor. All these assumptions were 
dubious. 
Page 628
     Czechoslovakia was eliminated with the help of German aggression, 
French indecision and war-weariness, and British public appeasement 
and merciless secret pressure. 
Page 629
     Five days after Anschluss, the Soviet government call for 
collective actions to stop aggression and to eliminate the increased 
danger of a new world slaughter was rejected by Lord Halifax. 
Page 633
     It was necessary to impose the plan for Czechoslovakia on public 
opinion of the world by means of the slowly mounting war scare which 
reached the level of absolute panic on September 28th. The mounting 
horror of the relentless German mobilization was built up day by day 
while Britain and France ordered the Czechs not to mobilize in order 
"not to provoke Germany."
     We now know that all these statements and rumors were not true 
and that the British government knew that they were not true at the 
time. 
Page 634
     The Chamberlain government knew these facts but consistently gave 
a contrary impression. Lord Halifax particularly distorted the facts. 
     Just as the crisis was reaching the boiling point in September 
1938, the British ambassador in Paris reported to London that Colonel 
Lindbergh had just emerged from Germany with a report that Germany had 
8,000 military planes and could manufacture 1,500 a month. We now know 
that Germany had about 1,500 planes, manufactured 280 a month. 
Page 635
     Lindbergh repeated his tale of woe daily both in Paris and in 
London during the crisis. The British government began to fit the 
people of London with gas masks, the prime minister and the king 
called on the people to dig trenches in the parks, schoolchildren 
began to be evacuated. In general, every report or rumor which could 
add to the panic and defeatism was played up, and everything that 
might contribute to a strong or a united resistance to Germany was 
played down. 
Page 636
     The Anglo-French decision was presented to the Czechoslovak 
government at 2a.m. on September 19 to be accepted at once. The 
Czechoslovak government accepted at 5p.m. on September 21st. Lord 
Halifax at once ordered the Czech police to be withdrawn from the 
Sudeten districts, and expressed the wish that the German troops move 
in at once. 
Page 638
     At Munich, Hitler, Chamberlain, Mussolini and Daladier carved up 
Czechoslovakia without consulting anyone, least of all the Czechs. 
Germany was supreme in Europe. Since this was exactly what Chamberlain 
and his friends had wanted, they should have been satisfied. 
THE YEAR OF DUPES, 1939
Page 642
     Concessions to Germany continued but now parallel with 
concessions went a real effort to build up a strong front against 
Hitler. 
Page 643
     The anti-Bolshevik and "three-bloc-world" groups had expected 
Hitler would get the Sudetenland, Danzig, and perhaps the Polish 
Corridor and that he would then be stabilized between the "oceanic 
bloc" and the Soviet Union.
     As a result of these hidden and conflicting forces, the history 
of international relations from September 1938 and September 1939 or 
even later is neither simple nor consistent. In general, the key to 
everything was the position of Britain. As a result of Lord Halifax's 
"dyarchic" policy, there were not only two policies but two groups 
carrying them out. Lord Halifax tried to satisfy the public demand for 
an end to appeasement while Chamberlain, Wilson, Simon and Hoare 
sought to make secret concessions to Hitler in order to achieve a 
general Anglo-German settlement. The one policy was public; the other 
was secret. Since the Foreign Office knew of both, it tried to build 
up the "peace front" against Germany so that it would look 
sufficiently imposing to satisfy public opinion and to drive Hitler to 
seek his desires by negotiation rather than by force so that public 
opinion in England would not force the government to declare a war 
that they did not want in order to remain in office. This complex plan 
broke down because Hitler was determined to have a war merely for the 
personal emotional thrill of wielding great power, while the effort to 
make a "peace front" sufficiently collapsible so that it could be case 
aside if Hitler either obtained his goals by negotiation or made a 
general settlement with Chamberlain merely resulted in making a "peace 
front" which was so weak it could neither maintain peace by threat of 
force nor win a war when peace was lost. 
Page 644
     On March 15th, Chamberlain told the Commons that he accepted the 
seizure of Czechoslovakia and refused to accuse Hitler of bad faith. 
But two days later, when the howls of rage from the British public 
showed that he had misjudged the electorate, he denounced the seizure. 
However, nothing was done other than to recall Henderson from Berlin 
for consultations and cancel a visit to Berlin by the president of the 
Board of Trade. The seizure was declared illegal but was recognized in 
fact at once. Moreover, #6 million in Czech gold reserves in London 
were turned over to Germany with the puny and untrue excuse that the 
British government could not give orders to the Bank of England. 

Page 647
     Germany opened its negotiations with Poland in a fairly friendly 
way on October 24, 1938. It asked for Danzig and a strip a kilometer 
wide across the Polish Corridor to provide a highway and four-track 
railroad under German sovereignty. Poland's economic and harbor rights 
in Danzig were to be guaranteed and the "corridor across the Corridor" 
was to be isolated from Polish communications facilities by bridging 
or tunneling. Germany also wanted Poland to join an anti-Russian bloc. 
Germany was prepared to guarantee the country's existing frontiers, to 
extend the Non-aggression Pact of 1934 for 25 years, to guarantee the 
independence of Slovakia and to dispose of Ruthenia as Poland wished. 
These suggestions were rejected by Poland. About the same time, the 
Germans were using pressure on Romania to obtain an economic agreement 
which was signed on March 23rd.
     On March 17, London received a false report of a German ultimatum 
to Romania. Lord Halifax lost his head and, without checking his 
information, sent telegrams to Greece, Turkey, Poland, Bulgaria, 
Soviet Union asking what each country was prepared to do in the event 
of a German aggression against Romania. Four replied by asking London 
what it was prepared to do but Moscow suggested and immediate 
conference which Halifax rebuffed, wanting nothing more than an 
agreement to consult in a crisis. Poland was reluctant to sign any 
agreement involving Russia. However, when news reached London of 
Hitler's demands on Poland, Britain suddenly issued a unilateral 
guarantee of the latter state (March 31st). 
Page 648
     "In the event of any action which clearly threatened Polish 
independence and which the Polish government accordingly considered it 
vital to resist with their national forces, His Majesty's Government 
would feel themselves bound at once to lend the Polish Government all 
support in their power." 
     This was an extraordinary assurance. The British government 
since 1918 had resolutely refused any bilateral agreement guaranteeing 
any state in western Europe. Now they were making a "unilateral" 
declaration in "eastern" Europe and they were giving that state the 
responsibility of deciding when that guarantee would take effect, 
something quite unprecedented. If Germany used force in Poland, public 
opinion in Britain would force Britain to declare war whether there 
was a guarantee or not. 
     If the chief purpose of the unilateral guarantee to Poland was to 
frighten Germany, it had precisely the opposite effect. 
Page 649
     Hitler announced that the terms he had offered Poland had been 
rejected, negotiations broken off. The crisis was intensified by 
provocative acts on both sides. 
Page 650
     In 1939, there was talk of a British loan to Poland of #100 
million in May; On August 1 Poland finally got a credit for $8 million 
at a time when all London was buzzing about a secret loan of #1 
billion from Britain to Germany. 
     In 1936, Poland was given 2 billion francs as a rearmament long 
and on May 19, 1939, an agreement was signed by which France promised 
full air support to Poland on the first day of war, local skirmishing 
by the third day, and a full-scale offensive on the sixteenth day. On 
Aug. 23, General Gamelin informed his government that no military 
support could be given to Poland until the spring of 1940 and that a 
full-scale offensive could not be made before 1941-1942. Poland was 
never informed of this change and seems to have entered the war on 
September 1st in the belief that a full-scale offensive would be made 
against Germany during September. 
     The failure to support Poland was probably deliberate in the 
hope that this would force Poland to negotiate with Hitler. If so, it 
was a complete failure. Poland was so encouraged by the British 
guarantee that it not only refused to make concessions but also 
prevented the reopening of negotiations by one excuse after another 
until the last day of peace. 
     
Page 651
     In light of these facts, the British efforts to reach a 
settlement with Hitler and their reluctance to make an alliance with 
Russia, were very unrealistic. Nevertheless, they continued to exhort 
the Poles to reopen negotiations with Hitler, and continued to inform 
the German government that the justice of their claims to Danzig and 
the Corridor were recognized but that these claims must be fulfilled 
by peaceful means and that force would inevitably be met with force. 
     The British continued to emphasize that the controversy was over 
Danzig when everyone else knew that Danzig was merely a detail, and an 
almost indefensible detail. Danzig was no issue on which to fight a 
world war, but it was an issue on which negotiation was almost 
mandatory. This may have been why Britain insisted that it was the 
chief issue. But because it was not the chief issue, Poland refused to 
negotiate because it feared it would lead to partition of Poland. 
Danzig was a free city under supervision of the League of Nations 
and while it was within the Polish customs and under Polish economic 
control, it was already controlled politically under a German 
Gauleiter and would at any moment vote to join Germany if Hitler 
consented. 
Page 654
     Lord Halifax's report reads: "Herr Hitler asked whether England 
would be willing to accept an alliance with Germany. I said I did not 
exclude such a possibility provided the development of events 
justified it." 
     The theory that Russia learned of these British approaches to 
Germany in July 1939 is supported by the fact that the obstacles and 
delays in the path of a British-Russian agreement were made by Britain 
from the middle of April to the second week of July but were made by 
Russia from the second week in July to the end on August 21st. 
     The Russians probably regarded the first British suggestion 
that the Soviet Union should give unilateral guarantees to Poland 
similar to those of Britain as a trap to get them into a war with 
Germany in which Britain would do little or nothing or even give aid 
to Germany. That this last possibility was not completely beyond 
reality is clear from the fact that Britain did prepare an 
expeditionary force to attack Russia in March 1940 when Britain was 
technically at war with Germany but was doing nothing to fight her. 
     Russia offered the guarantee if it were extended to all states on 
their western frontier including Finland, Estonia, Latvia, Lithuania, 
Poland and Romania. This offer meant that Russia was guaranteeing its 
renunciation of all the territory in these six states which it had 
lost to them since 1917. 
     Instead of accepting the offer, the British began to quibble. 
They refused to guarantee the Baltic States on the ground that these 
states did not want to be guaranteed although they had guaranteed 
Poland on March 31st when Jozef Beck did not want it and had just 
asked the Soviet Union to guarantee Poland and Romania, neither of 
whom wanted a Soviet guarantee. When the Russians insisted, the 
British countered by insisting that Greece, Turkey, Holland, Belgium, 
and Switzerland must also be guaranteed. 
Page 655
     France and Russia were both pushing Britain to form a Triple 
Alliance but Britain was reluctant and delayed the discussions to the 
great irritation of the Soviet leaders. To show its displeasure, the 
Soviet Union on May 3rd replaced Litvinov with Molotov as foreign 
minister. This would have been a warning, Litvinov knew the West and 
was favorable to democracy and to the Western Powers. As a Jew, he was 
anti-Hitler. Molotov was a contrast from every point of view. 
     On May 19th, Chamberlain refused an alliance and pointed with 
satisfaction to "that great virile nation on the borders of Germany 
which under this agreement (of April 6th) is bound to give us all the 
aid and assistance it can." He was talking about Poland!
Page 656
     The members of the military mission took a slow ship (speed 
thirteen knots) and did not reach Moscow until August 11th. They were 
again negotiators of second rank. In London, according to 
rumor, neither side wanted an agreement. Considering Chamberlain's 
secret efforts to make a settlement with Germany, there is no reason 
to believe that he wanted an agreement with Russia. 
     The Russians demanded an exact military commitment as to what 
forces would be used against Germany; they wanted guarantees whether 
the states concerned accepted or not; they wanted specific permission 
to fight across a territory such as Poland. These demands were flatly
rejected by Poland on August 19th. On the same day, Russia signed a 
commercial treaty with Germany. Two days later, France ordered its 
negotiators to sign the right to cross Poland but Russia refused to 
accept this until Poland consented as well. 
Page 657
     On Aug. 23, Ribbentrop and Molotov signed an agreement which 
provided that neither signer would take any aggressive action against 
the other signer or give any support to a third Power in such action. 
The secret protocol delimited spheres of interest in eastern Europe. 
The line followed the northern boundary of Lithuania and the Narew, 
Vistula, and San rivers in Poland and Germany gave Russia a free hand 
in Bessarabia. This agreement was greeted as a stunning surprise in 
the Entente countries. There was no reason why it should have been. 
     The British begged the Poles and the Germans to negotiate; the 
Italians tried to arrange another four-Power conference; various 
outsiders issued public and private appeals for peace; secret 
emissaries flew back and forth between London and Germany. 
     All this was in vain because Hitler was determined on war and  
his attention was devoted to manufacturing incidents to justify his 
approaching attack. Political prisoners were taken from concentration 
camps, dressed in German uniforms, and killed on the Polish frontier 
as "evidence" of Polish aggression. A fraudulent ultimatum with 
sixteen superficially reasonable demands on Poland was presented to 
the British ambassador when the time limit had elapsed. It was not 
presented to the Poles because the Polish ambassador in Berlin had 
been ordered by Beck not to accept any document from the Germans. 
Page 658
     The German invasion of Poland at 4:45a.m. on September 1, 1939, 
did not end the negotiations to make peace, nor did the complete 
collapse of Polish resistance on September 16. Since these efforts 
were futile, little need be said of them except that France and 
Britain did not declare war on Germany until more than two days had 
elapsed. During this time, no ultimatums were sent to Germany. On 
September 3 at 9a.m., Britain presented an ultimatum which expired at 
11a.m. In a similar fashion, France entered the war at 6p.m. on 
September 3. 

CHAPTER XIV: WORLD WAR II: THE TIDE OF AGGRESSION, 1939-1941
Page 661
     The Second World War lasted exactly six years. It was fought on 
every continent and on every sea. Deaths of civilians exceeded deaths 
of combatants and many of both were killed without any military 
justification as victims of sheer brutality, largely through cold-
blooded savagery by Germans, and to a lesser extent by Japanese and 
Russians, although British and American attacks from the air on 
civilian populations and on non-military targets contributed to the 
total. The distinctions between civilians and military personnel and 
between neutrals and combatants which had been blurred in the First 
World War were almost completely lost in the second. Civilians killed 
reached 17 millions.
     The armies had no new weapons which had not been possessed in 
1918 but the proportions of these and the ways in which they 
cooperated with one another had been greatly modified.
Page 662
     The chief reason the Germans had sufficient military resources 
was not based, as is so often believed, on the fact that Germany was 
highly mobilized for war, but on other factors. In the first place, 
Hitler's economic revolution in Germany had reduced financial 
considerations to a point where they played no role in economic or 
political decisions. When decisions were made, on other grounds, money 
was provided through completely unorthodox methods of finance, to 
carry them out. In France and England, on the other hand, orthodox 
financial principles, especially balanced budgets and stable exchange 
rates, played a major role in all decisions and was one of the chief 
reasons why these countries did not mobilize or why, having mobilized, 
they had totally inadequate numbers of airplanes, tanks, etc. 
Page 665
     Strategic bombing used long-range planes against industrial 
targets and other civilian objectives. The upholders of strategic 
bombing received little encouragement in Germany, in Russia, or even 
in France. 
THE BATTLE OF POLAND, SEPTEMBER 1939
Page 667
     Although Britain and France declared war on Germany on September 
3rd 1939, it cannot be said that they made war during the next two 
weeks in which fighting raged in Poland. British airplanes roamed over 
Germany, dropping leaflets for propaganda purposes but no support was 
given to Poland. No attack was made by France and strict orders were 
issued to the British Air Force not to bomb any German land forces 
until April 1940. Similar orders to the Luftwaffe by Hitler were 
maintained for part of this same period. When some British Members of 
Parliament put pressure to drop bombs on German munition stores in the 
Black Forest, Sir Kingsley Wood rejected the suggestion declaring: 
"Are you aware it is private property? Why, you will be asking me to 
bomb Essen next." Essen was the home of Krupp Munitions factories. 
     Blockade of Germany was established in such a perfunctory fashion 
that large quantities of French iron ore continued to go to Germany 
through the neutral Low Countries in return for German coal coming by 
the same route. Hitler issued orders to his air force not to cross the 
Western frontier except for reconnaissance, to his navy not to fight 
the French, and to his submarines not to molest passenger vessels and 
to treat unarmed merchant ships according to established rules of 
international prize law. In open disobedience of these orders, a 
German submarine sank the liner Athenia on September 3rd.
     The Soviet Union was invited by Hitler to invade Poland from the 
east and occupy the areas which had been granted to it in the Soviet-
German agreement of August 23rd. The Russians were afraid the Western 
Powers might declare war on Russia in support of their guarantee to 
Poland. 
     When the Polish government moved to Romania, the Soviet Union 
felt that it could not be accused of aggression against Poland if no 
Polish state still existed on Polish soil and justified their advance 
with the excuse that they must restore order. On September 28, the 
divided Poland between them. 
THE SITZKRIEG, September 1939 - May 1940
Page 668
     The period from the end of the Polish campaign to the German 
attack on Denmark and Norway on April 9, 1940 is frequently called the 
Sitzkrieg (sitting war) or even "phony war" because Western powers 
made no real effort to fight Germany, eager to use the slow process of 
economic blockade. 
     Early in October, Hitler made a tentative offer to negotiate 
peace with the Western Powers on the grounds that the cause of 
fighting for Poland no longer existed. This offer was rejected by the 
Western Powers with the public declaration that they were determined 
to destroy Hitler's regime. This meant that war must continue. The 
British and French answers were not based on a desire to continue war 
but more on the belief that Hitler's rule in Germany was insecure and 
that the best way to reach peace would be to encourage some anti-
Hitler movement within Germany itself. 
Page 669
     Germany was vulnerable to a blockade but there was no real effort 
toward economic mobilization by Germany before 1943. Contrary to 
general opinion, Germany was neither armed to the teeth nor fully 
mobilized in this period. In each of the four years 1939-1942, 
Britain's production of tanks, self-propelled guns, and planes was 
higher tan Germany's. As late as September 1941, Hitler issued an 
order for substantial reduction in armaments production. In 1944, only 
33% of Germany's output went for direct war purposes compared to 40% 
in the U.S. and almost 45% in Britain. 
Page 671
     In order to reduce the enemy's ability to buy abroad, financial 
connections were cut, his funds abroad were frozen, and his exports 
were blocked. The U.S. cooperated as well, freezing the financial 
assets of various nations as they were conquered by the aggressor 
Powers and finally the assets of the aggressors themselves in June 
1941. 
     At the same time, pre-emptive buying of vital commodities at 
their source to prevent Germany and its allies from obtaining them 
began. Because of limited British funds, most of this task of 
pre-emptive buying was taken over by the U.S., almost completely by 
Feb. 1941. 
     The blockade was enforced by Britain with little regard for 
international law or for neutral rights there was relatively test from 
the neutrals. The U.S. openly favored Britain while Italy and Japan 
equally openly favored Germany. On the whole, the blockade had no 
decisive effect on Germany's ability to wage war until 1945. Germany's 
food supply was at the pre-war level until the very last months of the 
war by starving the enslaved peoples of Poland, Czechoslovakia, Russia 
and other countries. 
Page 674
     During the "phony war" there were persons in Britain, France and 
Germany who were eager to make war or peace. Such persons engaged in 
extensive intrigues in order to negotiate peace or to prevent it. 
There were a number of unsuccessful efforts to make peace between the 
Western Powers and Germany in the six months following the defeat of 
Poland. 
Page 677
     Hitler had no political ambition with respect to the Balkans or 
the Soviet Union. From both he wanted nothing more than the maximum 
supply of raw materials and a political peace which would permit these 
goods to flow. 
Page 679
     It is not yet clear why Finland rejected the Russian demands of 
October 1939. The Germans and Russians believed that it was done under 
British influence. For some unexplained reason the Finns seem to have 
felt that the Russians would not attack their country but the Soviets 
attacked at several points November 29th. 
     
Page 680
     In early 1939, the Anglo-French leaders now prepared to attack 
the Soviet Union both from Finland and from Syria. On February 5, 
1940, the Supreme War Council decided to send to Finland an 
expeditionary force of 100,000 heavily armed troops to fight the 
Soviet hordes. Germany at once warned Norway and Sweden that it would 
take action against them if the two Scandinavian countries permitted 
passage of this force. Germany feared the Anglo-French forces would be 
able to stop shipments of Swedish iron ore across Norway to Germany. 
The evidence supports these fears because the high quality of Swedish 
iron ore was essential to the German steel industry. As early as 
September 1939, the British were discussing a project to interrupt the 
Swedish shipments either by an invasion of Norway of by mining 
Norwegian territorial waters. When Germany heard of the Anglo-French 
expeditionary force, it began to prepare its own plans to seize Norway 
first. 
THE FALL OF FRANCE (MAY-JUNE 1940) AND THE VICHY REGIME. 
Page 690
     Hitler was so convinced that Britain would also make peace that 
he gave lenient terms to France. France did not give up any overseas 
territories or any ports on the Mediterranean, no naval vessels or any 
airplanes or armaments. Northern France and all the western coast to 
the Pyrenees came under occupation but the rest was left unoccupied, 
ruled by a government free from direct German control. 
Page 698
     Operation Barbarossa was based on the consideration that only by 
destroying Russia and all Britain's hopes based on Russia could 
Britain be forced to ask for peace. 
AMERICAN NEUTRALITY AND AID TO BRITAIN
Page 707
     In buying supplies, chiefly from the U.S., Britain had used up, 
by June 1941, almost two-thirds of its dollars assets, gold stocks, 
and marketable U.S. certificates. 
     When the war began, American public opinion was united in its 
determination to stay out. The isolationist reaction following 
American intervention in the First World War had become stronger in 
the 1930s. Historian were writing extensively to show that Germany had 
not been solely guilty of beginning the war in 1914 and that the 
Entente Powers had made more than their share of secret treaties 
seeking selfish territorialism, both before the war and during the 
fighting. 
     In 1934, a committee of the U.S. Senate investigated the role 
played by foreign loans and munition sales to belligerents in getting 
the U.S. involved in World War I. Through the carelessness of the 
Roosevelt administration, this committee fell under the control of 
isolationists led by Republican Senator Gerald Nye. As a result, the 
evidence was mobilized to show that American intervention in WWI had 
been pushed by bankers and munitions manufacturers ("merchants of 
death") to protect their profits and their interests in an Entente 
victory. American public opinion had the uncomfortable feeling that 
American youths had been sent to die for selfish purposes concealed 
behind propaganda slogans about "the rights of small nations," 
"freedom of the seas," or "making the world safe for democracy." All 
this created a widespread determination to keep out of Europe's 
constant quarrels and avoid what was regarded as the "error of 1917." 
Page 708
     The isolationist point of view had been enacted into the so-
called Neutrality Act curtailing loans and munitions sales to 
belligerent countries. Materials had to be sold on a "cash and carry" 
basis and had to be transported on foreign ships. Also, loans to 
belligerents were forbidden.   
     These laws gave a great advantage to a state like Italy which had 
ships to carry supplies from the U.S. or which had cash to buy them 
here in contrast to a country like Ethiopia which had no ships and 
little cash. 
Page 709
     Roosevelt called a special session of Congress to revise the 
neutrality laws so that the Entente powers could obtain supplies in 
the U.S. The embargo on munitions was repealed. American ships were 
not to be armed, to carry munitions, or to go to any areas the 
President had proclaimed as combat zones. 
     The extremes ranged from the advocates of immediate intervention 
into the war on the side of Britain to the defenders of extreme 
isolation. Most American opinion was somewhere between the two 
extremes. 
     In order to unify America's political front, Roosevelt took two 
interventionists into his cabinet as Secretaries of War and the Navy. 
Roosevelt himself was sympathetic to this point of view. 
Page 710
     Wendell Wilkie assured the American people that Roosevelt's re-
election in 1940 meant that "we will be at war." Roosevelt replied 
with assurances that "We will not sent our army, navy, or air forces 
to fight in foreign lands except in case of attack. Your boys are not 
going to be sent into any foreign wars." This campaign oratory was 
based on the general recognition that the overwhelming majority were 
determined to stay out of war. 
Page 711
     Strategic plans were drawn up deciding that Germany was the major 
danger, with Japan of secondary importance, and that every effort, 
including actual warfare, should be used. Germany's declaration of war 
on the U.S. four days after Pearl Harbor saved the U.S. from the need 
to attempt something which American public opinion would have never 
condoned, an attack on Germany after we had been attacked by Japan. 
Page 714
     Roosevelt improvised a policy which consisted in almost equal 
measure of propagandist public statements, tactical subterfuges, and 
hesitant half-steps. In September 1940, Roosevelt gave fifty old WWI 
destroyers to Britain in return for 99 year leases of naval and air 
bases in this hemisphere. 
Page 715
     Loans were forbidden by the Neutrality Act. To Roosevelt, it 
seemed foolish to allow monetary considerations to stand as an 
obstacle in the way of self-defence (as he regarded the survival of 
Great Britain). 
Page 716
     Opponents argued that Britain had tens of billions in concealed 
assets and that Lend-Lease was merely a clever trick for foisting the 
costs of Britain's war onto the backs of American tax-payers. Still 
others insisted that Lend-Lease was an unneutral act which would 
arouse German rage and eventually involved the American people in a 
war they had no need to get in. The bill passed and provided that the 
president could "sell, transfer title to, exchange, lease, lend, or 
dispose of any defence article" to any nation whose defence he found 
vital to the defence of the U.S. 
Page 717
     Behind this whole effort toward economic mobilization was a 
secret decision of Roosevelt's military advisers in 1941 that the war 
could not be won unless the U.S. planned eventually to raise the 
number of men in its armed forces to eight million. At once, 
isolationists were in full cry and an ACt extending selective-service 
training passed 203-202. 
Page 718
     The British had no plans for an invasion of Europe and hoped that 
Germany could be worn down by blockade. No one pointed out that a 
Germany defeat by British methods would leave the Soviet armies 
supreme in all Europe with no forces to oppose them. 
Page 719
     At the same time he gave Britain ten coast-guard cutters, 
Roosevelt seized possession of 65 Axis and Danish ships in American 
harbors. The financial assets of the Axis Powers were frozen. American 
flying schools were made available to train British aviators. By 
presidential proclamation, the American Neutrality Zone was extended 
to Iceland. The U.S. navy was ordered to follow all Axis raiders or 
submarines west of this meridian broadcasting their positions to the 
British. 
Page 720
     American naval escort of British convoys could not fail to lead 
to a "shooting war" with Germany. The Roosevelt administration did not 
shrink from this possibility. Fortunately for the Administration's 
plans, Hitler played right into its hands by declaring war on the 
U.S. By that date, incidents were becoming more frequent. 
     On Oct. 17, the U.S. destroyer Kearney was torpedoed; two weeks 
later, the destroyer Rueben James was blown to pieces. On Nov. 10, an 
American escort of 11 vessels picked up a convoy of six vessels 
including America's three largest ocean liners with 20,000 British 
troops and guarded them from Halifax to India and Singapore. 
     Many of the activities of the American Navy in the summer of 1941 
were known not at all or were known only very imperfectly to they 
American public but it would seem that public opinion generally 
supported the Administration's actions. In September, Roosevelt sought 
to repeal the Neutrality Act forbidding the arming of merchant vessels 
which was done on Oct. 17. Two weeks later, all the essential points 
of the Neutrality Act were repealed. This meant that open warfare with 
Germany was in the immediate future. 
THE NAZI ATTACK ON SOVIET RUSSIA 1941-1942
Page 725
     Large numbers of anti-Stalinist Russians began to surrender to 
the Nazis. Most of these were Ukranians and eager to fight with the 
Nazis against the Stalinist regime. Anti-Stalinist deserters serving 
in the Nazi forces reached 900,000 in June 1944 under Soviet general 
A. A. Vlasov. At the end of the war, hundreds of thousands of Vlasov's 
supporters fled westward to the American and British armies for refuge 
from Stalin's vengeance but were handed over to the Soviet Union to be 
murdered out of and or sent to slave-labor camps in Siberia. The 
dimensions of the human suffering involved in this whole situation is 
beyond the human imagination. 


CHAPTER XV: WORLD WAR II: THE EBB OF AGGRESSION,1941-1945 
THE RISING SUN IN THE PACIFIC, TO 1942
PAGE 732
     Japanese aggressions of 1941 which culminated in the attack on 
Pearl Harbor were based on fear and weakness and not on arrogance and 
strength. 
     By 1939, the Japanese economy was beginning to totter under the 
growing restrictions on Japanese trade imposed by Western countries 
and acute material shortages. Problems such as these might have driven 
many nations, even the West, to desperate action. 
     The world depression made it very difficult to increase Japanese 
exports. The excessively high American tariff, although no so 
intended, seemed to the Japanese to be an aggressive restriction 
on their ability to live. The "imperial preference" regulations of the 
British Commonwealth had a similar consequence. Since Japan could not 
defend itself against such economic measures, it resorted to political 
measures and the Western Powers would inevitably defend themselves 
with even greater economic restrictions driving Japan to open war. 
Page 735
     The American government began to tighten the economic pincers on 
Japan just as Japan was seeking to tighten its military pincers on 
China. Japan was able to close all routes to China. The American 
government retaliated with economic warfare. In 1938, it established a 
"moral embargo" on the shipment of aircraft or their parts and bombs 
to Japan. In 1939, large U.S. and British loans to China sought to 
strengthen its collapsing financial system and Washington gave 
notice to cancel the 1911 commercial treaty with Japan opening the 
door to all kinds of economic pressure. The "moral embargo" was 
extended to cover light metals and all machinery or plans for making 
aviation gasoline. 
     Such a policy was opposed by isolationists insisting such 
economic sanctions could only be enforced, in the long run, by war. If 
Japan could not get petroleum, bauxite, rubber and tin by trade, it 
could be prevented from seizing these areas producing these products 
only by force. To avoid this obvious inference,l Cordell Hull sought 
to make America's economic policy ambiguous so that Japan might be 
deterred by fear of sanctions not yet imposed and won by hopes of 
concessions not yet granted. Such a policy was a mistake but it 
obtained Roosevelt's explicit approval since it allowed more 
aggressive elements of Japanese to take control and any drastic action 
seeking to end the strain became welcome. 
Page 736
     The ambiguity of American commercial policy slowly resolved in 
the direction of increasing economic sanctions. There was a steady 
increase in America's economic pressure by the growth of financial 
obstacles and by increasing purchasing difficulties. 
     From Hull's doctrinaire refusal to encourage any Japanese hope 
that they could win worthwhile American concessions, the advocates of 
extremism gained influence. 
     The President ordered the embargo of many goods which Japan 
needed, including aluminum, airplane parts, all arms and munitions, 
optical supplies, and various "strategic" materials but left petroleum 
and scrap iron unhindered. 
Page 737
     American diplomatic pressure on Japan must be timed to avoid 
pushing Japan into desperate action before American-German relations 
had passed the breaking point.
Page 739
     On July 26, 1941, the U.S. froze all Japanese financial assets in 
the U.S. virtually ending trade between the two countries. Members of 
the British Commonwealth issued similar orders. As a result of these 
pressures, Japan found itself in a position where its oil reserves 
would be exhausted in two years, its aluminum reserves in seven 
months. The chief of the Navy told the emperor that if Japan resorted 
to war, it would be very doubtful that it could win. It was also clear 
that if war came, economic pressure was too damaging to allow Japan to 
postpone such operations until 1942. The decision was made to 
negotiate until late October. If an agreement could be reached, the 
preparations for war could be suspended, otherwise the negotiations 
would be ended and the advance to open war continued. The Cabinet 
sought desperately to reach an agreement in Washington. 
Page 741
     The Japanese misjudged American psychology. Nomura found it 
impossible to reach an agreement because Hull's demands were extreme. 
The Americans had broken the secret Japanese codes and knew that war 
would begin if Nomura failed to obtain relaxation of the economic 
embargo. They did not however have the plans for the attack on Pearl 
Harbor. 
Page 742
     On November 27th, a war warning was sent from Washington to Pearl 
Harbor but no increased precautions were made. On December 7, an army 
enlisted man, using radar, detected a group of strange planes 
coming down from the north 132 miles away but his report was 
disregarded. The American losses included 2,400 killed, 1,200 injured. 
Japanese losses amounted to a couple of dozen planes. 
TURNING THE TIDE, 1942-1943
Page 751
     At Casablanca, the political decision of Roosevelt and Churchill 
on unconditional surrender was published with great fanfare, and at 
once initiated a controversy which still continues based on the belief 
that it had an adverse influence by discouraging any hopes within Axis 
countries that they could find a way out by slackening their efforts, 
by revolting against their governments, or by negotiations seeking 
some kind of of "conditional" surrender. There seems little doubt that 
it solidified our enemies and prolonged their resistance where 
opposition to the war was widespread and active.
Page 754
     In May 1943, Sicily was overrun and in September,Italy 
surrendered and the German armies were pushed backward from eastern 
Europe. Major decisions were made in 1943 which played a major role in 
determining the nature of the postwar world. 
Page 757
     Although Soviet demands were clearly in conflict with the high 
purposes of the Atlantic charter, Churchill was not averse to 
accepting them on the grounds of physical necessity but American 
objections to discussions of territorial questions while the war was 
still going on forced him to refuse Stalin's requests. The British 
found themselves between the high and proclaimed principles of the 
Americans and the low and secret interests of the Russians. 
     At the American centers of power, there was complete conviction 
in the value of unrestricted aid to Russia. These aims were embraced 
by men like Harry Hopkins, General Marshall, and Roosevelt himself. 
Page 760
     The Americans decided to choke off the Italian offensive in order 
to concentrate on the cross-channel attack. The attack on North Africa 
was a substitute for an attack on Germany from Italy. 
Page 762
     Once ashore, the Sicilian campaign was ineptly carried on because 
occupation of territory was given precedence over destruction of the 
enemy. No efforts were made to close the Straits of Messina so the 
Germans were able to send almost two divisions as reinforcements from 
Italy and later, when the island had to be abandoned, they were 
equally free to evacuate it in seven days without the loss a man. 
Page 763
     The history of Italy in 1943 is a history of lost opportunities. 
Italy might have got out in the summer and the Germans might have been 
ejected shortly afterward. Instead, Italy was torn to pieces and got 
out of the war so slowly that Germans were still fighting on Italian 
soil at the final surrender in 1945. 
     These great misfortunes were the result of a number of forces:
1) weakness of Italy relative to Germany;
2) weakness of Allies after diversion of power to Britain;
3) mistrust of Italians by Allies;
4) the inflexible Allied insistence on unconditional surrender which 
left the Italians helpless to resist the Germans. 
Page 764
     When the Italian government offered the join the Allies in 
fighting the Germans, they insisted that the publication of the 
armistice and a tentative paratrooper drop in Rome be put off until 
sufficient Allied forces were within striking distance to protect the 
city from the German troops nearby. Eisenhower refused and published 
the Italian surrender one day before the American Army landed at 
Salerno. The Germans reacted to the news of the Italian "betrayal" 
with characteristic speed. Available forces converged on the Salerno 
beachhead, an armored division fought its way into Rome, Italian 
troops were disarmed everywhere, and the Italian government had to 
flee. Numerous vessels were sunk by the Germans. 
Page 765
     As Allied forces slowly recovered Italian territory from the 
tenacious grasp of the Germans, the royal government remained 
subservient to its conquerors. Civilian affairs were completely in 
military hands under and organization known as Allied Military 
Government of Occupied Territories. The creation of these 
organizations on a purely Anglo-American basis,to rule the first Axis 
territory to be "liberated" became a very important precedent for 
Soviet behavior wen their armies began to occupy enemy territory in 
eastern Europe who were able to argue that they could exclude 
Anglo-Americans from active participation in military government in 
the east since they had earlier been excluded in the west. 
     While these political events were taking place, the military 
advance was moving like a snail. The Allied invasion of Italy was 
given very limited resources for a very large task.. It was only under 
such limitations of resources, explicitly stated, that the Americans 
accepted the British suggestion for an invasion of Italy at all. 
Page 767
     It was suggested that German success in holding the Rapido was 
due to the accuracy of their artillery fire and that this was was 
being spotted from the ancient monastery founded by St. Benedict in 
529 A.D. on the top of Monte Cassino. It was further suggested that 
General Clark should have obliterated the monastery with aerial 
bombardment but had failed to do so because he was a Roman Catholic. 
After Feb. 15, 1944, General Clark did destroy the site completely 
without helping the situation a bit. We now know that the Germans had 
not been using the monastery; but once it was destroyed by us, they 
dug into the rubble to make a stronger defence. 
     On May 16th, a Polish Division captured Monte Cassino. 
Page 770
     Efforts to create a new Polish army were hampered by the fact 
that about 10,000 POlish officers along with 5,000 intellectuals and 
professional persons, all of whom had been held in three camps in 
western Russia, could not be found. At least 100,000 Polish prisoners 
of war, out of 320,000 captured in 1939, had been exterminated. 
     The German radio suddenly announced on April 13, 1943, that 
German forces in occupied Russia had discovered, at Katyn, near 
Smolensk, Russia, mass graves containing the bodies of 5,000 Polish 
officers who had been murdered by the Soviet authorities in 1940. 
Moscow called this a Nazi propaganda trick and declared that the 
Polish officers had been murdered and buried by the Nazis themselves 
when they captured the officers and this Soviet territory. 
Page 772
     The strategic decision of September 1943 to reject Churchill's 
plans for a Balkan campaign in order to concentrate on a cross-Channel 
offensive in 1944 were of vital importance in setting the form that 
postwar Europe would take. If it had been decided to postpone the 
cross-Channel attack and concentrate on an assault from the Aegean 
across Bulgaria and Romania toward Poland and Slovakia, the postwar 
situation would have been quite different. 
     It has been argued that failure to reach agreement on the 
territorial settlement of eastern Europe while the war was still in 
progress meant that Soviet armies would undoubtedly dominate once 
Germany was defeated. This assumption implies that America should have 
threatened to reduce of to cut off Lend-Lease supplies going unless 
we could obtain Soviet agreement to the kind of eastern European 
settlement we wanted. 
Page 790
     The Soviet advance became a race with the Western Powers even 
though Eisenhower's orders held back their advance at many points 
(such as Prague) to allow the Russians to occupy areas the Americans 
could easily have taken first. 
Page 791
     Roosevelt's sense of the realities of power were quite as acute 
as Churchill's or Stalin's but he concealed that sense much more 
deliberately and much more completely under a screen of high-sounding 
moral principles. 
Page 795
     Polish ministers rushed from London to Moscow to negotiate. While 
they were still talking and when the Soviet army was only six miles 
from Warsaw, the Polish underground forces in the city, at a Soviet 
invitation, rose up against the Germans. A force of 40,000 responded 
to the suggestion but the Russian armies stopped their advance and 
obstructed supplies to the rebels in spite of appeals from all parts 
of the world. After sixty-three days of hopeless fighting, the Polish 
Home Army had to surrender to the Germans. This Soviet treachery 
removed their chief obstacle to Communist rule in Poland and the 
London government in London was accordingly ignored. 
Page 797
     When victorious armies broke into Germany, late in 1944, the 
Nazis were still holding the survivors of 8 million enslaved workers, 
10 million Jews, 6 million Russian prisoners of war and millions of 
prisoners from other armies. Over half of the Jews and Russians, 
possibly 12 million, were killed before final victory in 1945. 
Page 799
     The ideas that strategic air attacks must be directed at 
civilians in enemy cities were almost wholly ignored in the Soviet 
Union, largely rejected in Germany, created great controversy in 
France, but were accepted to a large extent among airmen in Britain 
and the U.S. 
Page 800
     The contribution by strategic bombing to the defeat of Germany 
was relatively incidental, in spite of the terrible losses suffered in 
the effort. The shift to city bombing was more or less accidental. In 
spite of the erroneous ideas of Chamberlain, Baldwin, Churchill, the 
war opened and continued for months with no city bombing at all, for 
the simple reason that the Germans had no intentions, no planes, and 
no equipment for strategic bombing. 
     The attack on cities began by accident when a group of German 
planes which were lost dumped their bomb loads, contrary to orders, on 
London on August 1940. The RAF retaliated by bombing Berlin the next 
night. Goring in counter-retaliation. British efforts to counterattack 
by daylight raids on military objectives resulted in such losses that 
the air offensive was shifted to night attacks. This entailed a shift 
from industrial targets to indiscriminate bombing of urban areas. This 
was justified with the wholly mistaken argument that civilian morale 
was a German weak point and that the destruction of workers' housing 
would break this morale. The evidence shows that the German war effort 
was not weakened in any way by lowering civilian morale in spite of 
the horrors heaped on it. 
Page 802
     The most extraordinary example of this suffering occurred in the 
British fire raids on Hamburg in 1943 which was attacked for more than 
a week with a mixture of high-explosive and incendiary bombs so 
persistently that fire-storms appeared. The air in the city heated to 
over a thousand degrees began to rise rapidly with the result that 
winds of hurricane force rushed into the city. The water supply was 
destroyed and the flames were too hot for water to be effective. Final 
figures for the destruction were set at 40,000 dead, 250,000 houses 
destroyed with over a million made homeless. This as the greatest 
destruction by air attacks on a city until the fire raid on Tokyo on 
March 9 1945 which still stands today as the most devastating air 
attack in human history. 
Page 806
     General Eisenhower ignored Berlin and drove directly eastward 
toward Dresden. Eisenhower's decisions permitted the Soviet forces to 
"liberate" all the capital cities of central Europe. As late as May 
4th, when the American forces were sixty miles from Prague and the 
Soviet armies more than a hundred, an effort by the former to advance 
to the city was stopped at the request of the Soviet commander, 
despite a vain message from Churchill to Eisenhower to take the Czech 
capital for political bargaining purposes. 
Page 807
     Soon the names Buchenwald, Dachau, and Belsen were repeated with 
horror throughout the world. At Belsen, 35,000 dead bodies and 30,000 
still breathing were found. The world was surprised and shocked. There 
was no reason for the world's press to be surprised at Nazi bestiality 
in 1945 since the evidence had been fully available in 1938. 
 
CLOSING IN ON JAPAN, 1943-1945
     When Germany surrendered on May 8, 1945, Japan was already 
defeated but could not make itself accept unconditional surrender. 
Page 808
     Even American strategic bombing was different in the Pacific 
using B-29s, unknown in Europe, for area bombing of civilians in 
cities, something we disapproved in Europe. 
Page 815
     279 B-29s carrying 1,900 tons of fire bombs were sent on a low-
level attack on Tokyo. The result was the most devastating air attack 
in all history. With the loss of only 3 planes, 16 square miles of 
central Tokyo were burned out; 250,000 houses were destroyed, over a 
million persons were made homeless and 84,793 were killed. This was 
more destructive than the first atomic bomb over Hiroshima five months 
later. 
Page 817
     American leaders shuddered to think of the results if such 
Kamikaze attacks were hurled at troop transports and American 
estimates of casualties were over half a million. These considerations 
form the background to the Yalta and Potsdam conferences and the 
decision to use to atom bomb on Japan. 
     The nature and decisions taken at the conference of Roosevelt, 
Churchill and Stalin held at Yalta in February 1945 has been so much 
distorted by partisan propaganda that it is difficult for any 
historian to reconstruct the situation as it seemed at the time. 
Page 819
     In China,90%of the railroads were out of operation. The dominant 
Kuomintang Party's chief aim seemed to be to maintain its armed 
blockade of the Communist forces operating out of Yenan in 
northwestern China where the highly-disciplined Communist armies had 
gained some degree of local support. 
     American hopes of fusing the two parties into a common Chinese 
government broke down on the refusals of the Kuomintang and the 
remoteness of the Communists. In September 1944, Roosevelt suggest 
that General Stillwell be given command of all Chinese forces fighting 
the Japanese. General Chiang answered with a demand that Stilwell be 
removed from China. 
Page 823
     It is extremely likely that the frantic and otherwise 
inexplicable haste to use the second and third bombs, 21 and 24 days 
after Alamagordo arose from the desire to force the Japanese surrender 
before any effective Soviet intervention. 
Page 824
     On the economic side was a somewhat modified version of the 
Morgenthau scheme (which had sought the complete ruralization of 
German economic life to an agrarian basis) which was modified almost 
at once by a number of factors. 
     The first modifying factor was a desire for reparations. The 
Americans insisted that reparations betaken from existing stocks and 
plants rather than from future production in order to avoid the error 
of the 1919-1933 period, the overbuilding of German capital equipment 
and American financing of reparations into the indefinite future. It 
was provided that all reparations come from Germany as a whole and be 
credited to the victors on a percentage basis. 
Page 828
     On August 10th, a message accepting the Potsdam terms was sent. 
Thus ended six years of world war in which 70 million men had been 
mobilized and 17 million killed in battle. At least 18 million 
civilians had been killed. The Soviet Union had lost 6.1 million 
soldiers and 14 million wounded and over 10 million civilians dead. 
Germany lost 6.6 million servicemen with 7.2 million wounded and 1.3 
million missing. Japan had 1.9 million dead. Britain war dead were 
357,000 and America's were 294,000. 
     All this personal tragedy and material damage of untold billions 
was needed to demonstrate that Germany could not establish and Nazi 
continental bloc in Europe nor could Japan dominate an East-Asian co-
Prosperity Sphere. This is the chief function of war: to demonstrate 
as conclusively as possible to mistaken minds that they are mistaken 
in regard to power relationships. But as we shall see, war also 
changes most drastically the objective facts themselves. 

CHAPTER XVI: THE NEW AGE
INTRODUCTION.
Page 831
     World War II transformed a system where man's greatest problems 
were the material ones of man's helplessness in the face of natural 
threats of disease, starvation, and natural catastrophes to the 
totally different system of the 1960s and 1970s where the greatest 
threat to man is man himself and where his greatest problems are the 
social (and non-material) ones of what his true goals of existence are 
and what use he should make of his immense power of the universe, his 
fellow men. 
     For thousands of years, some men had viewed themselves as 
creatures a little lower than angels, or even God, and a little higher 
than the beasts. Now, in the 20th century, man has acquired almost 
divine powers and it has become increasingly clear that he can no 
longer regard himself as an animal but must regard himself as at least 
a man if not obligated to act like an angel or even a god. 
Page 832
     The whole trend of the 19th century had been to emphasize man's 
animal nature and seek to increase his supply of material necessities. 
Page 833
     The great achievements of the 19th century and the great crisis 
of the 20th century are both related to the Puritan tradition of the 
17th century which regarded the body and the material as sinful and 
dangerous and something which must be sternly controlled. 
Page 837
     These methods appeared in a number of ways, notably in an 
emphasis on self-discipline for future benefits, on restricted 
consumption and on saving in a devotion to work, and in a postponement 
of enjoyment to a future which never arrived. A typical example might 
be John D. Rockefeller: great saver, great worker, and great postponer 
of any self-centered action, even death. To such people, the most 
adverse comments which could be made about a failure to distinguish 
from a "successful" man were that he was a "saltrel," a "loafer," a 
"sensualist," and "self-indulgent." These terms reflected the value 
that the middle classes placed on work, saving, self-denial and social 
conformity. 
Page 838
     The nineteenth century's emphasis on acquisitive behavior, on 
achievement, and on infinitely expansible demand is equally associated 
with the middle-class outlook. These basic features are inevitably 
lacking in backward, tribal, underdeveloped peasant societies and 
groups, not only in Africa and Asia but also in much of the 
Mediterranean, Latin America, central France, in the Mennonite 
communities of Pennsylvania and elsewhere. The lack of future 
preference and expansible material demands in other areas are 
essential features of the 20th century crisis. 
     George Sorel (Reflections on Violence, 1908) sought a solution to 
this crisis in irrationalism, in action for its own sake. The other 
tendency sought a solution in rationalization, science, universality, 
cosmopolitanism and the continued pursuit of truth. The war became a 
struggle between the forces of irrationality represented by Fascism 
and the forces of Western science and rationalization represented by 
the Allied nations. 
RATIONALIZATION AND SCIENCE
Page 838
     Rationalization gradually spread into the more dominant problem 
of business. From maximizing production, it shifted to maximizing 
profits. 
     The introduction of rationalization into war was attributed to 
the efforts of Professor P.M.S. Blackett (Nobel Prize 1948) to apply 
radar to antiaircraft guns. From there, Blackett took the technique 
into antisubmarine defence whence it spread under the name 
"Operational Research" (OP).
     Operational research, unlike science, made its greatest 
contribution in regard to the use of existing equipment rather than 
the effort to invent new equipment. It often game specific 
recommendations, reached through techniques of mathematical 
probability, which directly contradicted the established military 
procedures. A simple case concerned the problem of air attack on enemy 
submarines: For what depth should the bomb fuse be set? In 1940, RAF 
set its fuses at 100 feet. based on three factors:
1) the time interval between the moments when the submarine sighted 
the plane and the plane sighted the submarine;
2) the speed of approach of the plane; and
3) the speed of submergence of the submarine. 
     The submarine was unlikely to be sunk if the bomb exploded more 
than 20 feet away. Operational Research added an additional factor:How 
near was the bomber to judging the exact spot where the submarine went 
down? since this error increased rapidly with the distance of the 
original sighting, a submarine which had time to submerge deeply would 
almost inevitably be missed by the bomb in position if not in depth; 
but with 100 foot fuses, submarines which had little time to submerge 
were missed because the fuse was too deep even when the position was 
correct. OP recommended setting fuses at 25 feet to sink the near 
sightings and practically conceded the escape of all distant 
sightings. When fuses were set at 35 feet, successful attacks on 
submarines increased 400 percent with the same equipment. 
Page 839
     The British applied OP to many similar problems. 
1) With an inadequate3 number of A.A. guns, is it better to 
concentrate them to protect part of a city thoroughly or to disperse 
them to protect all of the city inadequately? (The former is better)
2) Repainting night bombers from black to white when used on submarine 
patrol increased sightings of submarines 30%. 
3) Are small convoys safer for merchant ships than large ones (No by a 
large margin.)
4) With an inadequate number of patrol planes, was it better to search 
the whole patrol area some days (as was the practice) or to search 
part of it ever day with whatever planes were available? (the latter 
was better).
     OP calculated the number of people killed per ton of bombs 
dropped showing that the casualties inflicted on Germany were about 
400 civilians killed per month - about half the German automobile 
accident death rate - while 200 RAF crewmen were killed per month in 
doing the bombing. Later it was discovered the raids were actually 
killing 200 German civilians contributing little to the war effort at 
the cost of the 200 RAF men each month and thus were a contribution to 
the German victory. These estimates made it advisable to shift planes 
to U-boat patrol. A bomber in its average life of 30 missions, dropped 
100 tons of bombs killing 20 Germans and destroying a few houses. The 
same plane in 30 missions of submarine patrol saved 6 loaded merchant 
ships and their crews from submarines. This discovery was violently 
resisted by the head of the RAF, Sir Arthur (Bomber) Harris. 
Page 840
     In 1938, Vannevar Bush, professor of electrical engineering and 
vice-president of the Massachusetts Institute of Technology persuaded 
Roosevelt to create the National Defence Research Committee with Bush 
as Chairman. When money ran short, they obtained half from MIT and an 
equal sum from John D. Rockefeller.
Page 842
     First news of the success of Operations Research in Britain was 
brought to the U.S. by Conant in 1940 and was formally introduced by 
Bush. With the arrival of peace, it became an established civilian 
profession. 
     The rationalizing of society used the tremendous advances in 
mathematics of the 19th century but a good deal came from new 
developments. Amlong these have been applications of game theory, 
information theory, symbolic logic, cybernetics, and electronic 
computing. The newest of these was probably game theory, worked out by 
a Hungarian refugee mathematician, John von Neumann, at the Institute 
for Advanced Study. This applied mathematical techniques to situations 
in which persons sought conflicting goals in a nexus of relationships 
governed by rules. The basic work was "Theory of Games and Economic 
Behavior" by John von Neumann and Oskar Morgenstern (Princeton 1944).
Page 843
     A flood of books all sought to apply mathematical methods to 
information, communications, and control systems. 
THE TWENTIETH-CENTURY PATTERN
Page 862
     The decision to use the bomb against Japan marks one of the 
turning points in history of our times. The scientists who were 
consulted had no information on the status of the war itself, had no 
idea how close to the end Japan already was. Some people like General 
Groves wanted it to be used to justify the two billion they had spent. 
     After it was all over, Director of Military Intelligence for the 
Pacific theatre of War Alfred McCormack, who was probably in as good 
position as anyone to for judging the situation, felt that the 
Japanese surrender could have been obtained in a few weeks by blockade 
alone. "The Japanese had no longer enough food in stock, and their 
fuel reserves were practically exhausted. We were mining all their 
harbors and if we had brought this operation to its logical 
conclusion, the destruction of Japanese cities with incendiary and 
other bombs would have been quite unnecessary. But General Norstad 
declared at Washington that this blockading action was a cowardly 
proceeding unworthy of the Air Force. It was therefore discontinued."
Page 863
     IT was equally clear that the defeat of Japan did not require the 
A-bomb just as it did not require the Russian entry into the war or an 
American invasion of the Japanese home islands. But again, other 
factors involving interests and nonrational considerations were too 
powerful. However, if the U.S. had not finished the bomb project or 
had not used it, it seems most unlikely that the Soviet Union would 
have made its postwar efforts to get the bomb.
Page 864
     The Russian leaders would almost certainly not have made the 
effort to get the bomb if we had not used it on Japan. On the other 
hand, if we had not used the bomb on Japan, we would have been quite 
incapable of preventing the Soviet forces from expanding wherever they 
were ordered in Eurasia in 1946. 
Page 865
     The growth of the army of specialists destroys one of the three 
basic foundations of political democracy. These three bases are:
1) that men are relatively equal in factual power;
2) that men have relatively equal access to the information needed to 
make a government's decisions;
3) that men have a psychological readiness to accept majority rule in 
return for those civil rights which will allow any minority to work to 
build itself up to become a majority. 
Page 866
     It is increasingly clear that in the 20th century, the expert 
will replace the industrial tycoon in control of the economic system 
even as he will replace the democratic voter in control of the 
political system. This is because planning will inevitably replace 
laissez-faire in the relationships between the two systems. 
     Hopefully, the elements of choice and freedom may survive for the 
ordinary individual in that he may be free to make a choice between 
two opposing political groups (even if these groups have little policy 
choice within the parameters of policy established by the experts) and 
he may have the choice to switch his economic support from one large 
unit to another. But in general, his freedom and choice will be 
controlled within very narrow alternatives by the fact that he will be 
numbered from birth and followed, as a number, through his educational 
training, his required military and other public service, his tax 
contributions, his health and medical requirements, and his final 
retirement and death benefits. 
Page 867
     One consequence of the nuclear rivalry has been the almost total 
destruction of international law as existed from the middle of the 
17th century to the end of the 19th. That old international law was 
based on distinctions which no longer exist including the distinction 
between war and peace, the rights of neutrals, the distinction between 
public and private authority. These are now destroyed or in great 
confusion. 
     The post-war balance of terror reached its peak of total 
disregard both of noncombatants and of neutrals in the policies of 
John Foster Dulles who combined sanctimonious religion with "massive 
retaliation wherever and whenever we judge fit" to the complete 
destruction of any non-combatant or neutral status.
Page 868
As a result, all kinds of groups could destroy law and order without 
suffering retaliation by ordinary powers and could become recognized 
as states when they were totally lacking in the traditional attributes 
of statehood. For example, the Leopoldville group were recognized as 
the real government of the whole Congo in spite of the fact that they 
were incapable of maintaining law and order over the area. Similarly, 
a gang of rebels in Yemen in 1962 were instantly recognized before 
they gave any evidence whatever of ability to maintain control or of 
readiness to assume the existing international obligations of the 
Yemen state and before it was established that their claims to have 
killed the king were true. 
Page 869
     Under the umbrella of nuclear stalemate, outside governments 
subsidize murders or revolts as the Russians did in Iraq and as the 
American CIA did in several places, successfully in Iran in 1953, and 
in Guatemala in 1954 or very unsuccessfully as in the Cuban invasion 
of 1961. Under the Cold War umbrella, small groups can obtain 
recognition as states by securing the intervention (usually secret) of 
some outside Power. 





TRAGEDY AND HOPE Chapters XVII-XVIII
by Dr. Carroll Quigley 
ISBN 0913022-14-4


CONTENTS
XVII. NUCLEAR RIVALRY AND COLD WAR, AMERICAN NUCLEAR SUPERIORITY 1950-
1957
XVIII. NUCLEAR RIVALRY AND COLD WAR, RACE FOR THE H-BOMB 1950-1957



CHAPTER XVII: NUCLEAR RIVALRY AND THE COLD WAR: 
AMERICAN ATOMIC SUPREMACY 1945-1950
THE FACTORS
Page 873
     The period 1945 to early 1963 forms a unity during which a number 
of factors interacted upon one another to present a very complicated 
and extraordinarily dangerous series of events. That mankind and 
civilized life got through the period may be attributed to a number of 
lucky chances rather than to any particular skill among the two 
opposing political blocs. 
     The Cold War is almost always described in terms which put minor 
emphasis or even neglect the role of technological rivalry because 
most historians do not feel competent to discuss it but chiefly 
because much of the evidence is secret. Because of such secrecy, the 
story of this rivalry falls into two quite distinct and even 
contradictory parts: 
1) what the real situation was; and
2) what prevalent public opinion believed the situation to be.
     For example, the Soviet Union had an H-bomb many months before we 
did when public opinion believed the opposite; the 1960 believe 
throughout the world of a so-called "missile gap" or American 
inferiority in nuclear missiles when no such inferiority existed. 
     
Page 875
     The balance of nuclear weapons was the central factor in the Cold 
War. Cessation on nuclear testing came close to achievement in 1950 
when both sides had atomic weapons but was destroyed at that time by 
President Truman's order to proceed with the development of the 
hydrogen bomb. By 1963, both sides had these weapons and the balance 
of terror had been achieved. 
Page 879
     The party struggle in the U.S. found the intellectuals (including 
scientists), the internationalists, the minorities and the 
cosmopolitans in the Democratic Party with the businessmen, bankers 
and clerks in the Republican Party. The Republicans had fallen into 
the control (represented by Senators Taft, Wherry, Bridges and Jenner) 
of those who were most ignorant of the real issues and were most 
remote from any conceptions of national political responsibility.
Page 880
     This group, to whom we often give the name "neo-isolationist," 
knew nothing of the world outside the U.S., and generally despised it. 
Thus, they gave no consideration to our allies or neutrals, and saw no 
reason to know or to study Russia, since it could be hated completely 
without need for accurate knowledge. All foreigners were regarded as 
unprincipled, weak, poor, ignorant and evil, with only one aim in 
life, namely, to prey on the United States. These neo-isolationists 
and unilateralists were equally filled with suspicion or hatred of any 
American intellectuals, including scientists, because they had no 
conception of any man who placed objective truth higher than 
subjective interests since such an attitude was a complete challenge 
to the American businessman's assumption that all men are and should 
be concerned with the pursuit of self-interest and profit. 
     Neo-isolationism had a series of assumptions which could not be 
held by anyone who had any knowledge of the world outside U.S. middle-
class business circles. These beliefs were seven in number:
1) Unilateralism: that the U.S. should and could act by itself without 
need to consider allies, neutrals or the Soviet Union;
2) National omnipotence: that the U.S. is so rich and powerful that no 
one else counts and that there is no need to study foreign areas, 
customs, policies;
Page 881
3) Unlimited goals (or utopianism): the belief that there are final 
solutions to the world's problems. Upholders of this view refused to 
accept that constant danger and constant problems were a perpetual 
condition of human life except in brief and unusual circumstances. 
Dulles insisted that the Truman policy of containment must be replaced 
by a policy of "liberation." These policies were not designed to win 
conclusively and did not seek to solve the problem of the Soviet Union 
but to live with it, "presumably forever." He did accept preventive 
war in the form of massive retaliation if the Communists made any 
further advances.
4) The neo-isolationist belief that continuance of the Soviet threat 
arose from internal treason within America.
Page 882
5) Since the chief "high moral principle" which motivated the neo-
isolationists insisted that Soviet Russia and Democrats were engaged 
in a joint tacit conspiracy to destroy America by high taxes by using 
the Cold War to tax America into bankruptcy
6) Since neo-isolationists rejected all partial solutions, there was 
little they could do but talk loudly and sign anti-communist pacts.
7) The unrealistic and unhistoric nature of neo-isolationism meant 
that it could not actually be pursued as a policy. It was pursued by 
John Foster Dulles with permanent injury to our allies. When Senator 
McCarthy turned his extravagant charges of subversion and treason from 
the State Department to the army, his downfall began. The neo-
isolationist forces still continue in an increasingly irresponsible 
form under a variety of names including John Birch Society members or 
more generally as the "Radical Right." 
Page 885
     Robert Oppenheimer was on a total of thirty five government 
committees. There was a shadow on Oppenheimer's past. In his younger 
and more naive days, he had been closely associated with Communists. 
Certainly never a Communist himself, and never, at any time, disloyal 
to the U.S., he had nonetheless associated with Communists. His 
brother Frank and his wife were Communist Party workers while 
Oppenheimer's own wife was an ex-Communist, widow of a Communist who 
had been killed fighting Fascism in Spain in 1937. The Oppenheimers 
continued to have friends who were Communists and contributed money 
until the end of 1941. 
Page 886
     All this derogatory information was known to General Groves and 
to Army Intelligence and used in 1953-1954 to destroy his reputation. 
It was an essential element in the neo-isolationist McCarthyite, 
Dulles interregnum of 1953-1957. 
THE ORIGINS OF THE COLD WAR, 1945-1949
Page 891
     IN the Soviet system, while most Russians lived in poverty, a 
privileged minority, buying in special stores with special funds and 
special ration cards, had access to luxuries undreamed of by the 
ordinary person. 
Page 900
     In 1944, Secretary of the Treasury Morgenthau took advantage of 
his close personal friendship with Roosevelt to push forward his own 
pet scheme to reduce Germany to a purely agricultural state by almost 
total destruction of her industry, the millions of surplus population 
to be, if necessary, deported to Africa. The secretary, supported by 
his assistant secretary, Harry Dexter White, was deeply disturbed by 
Germany's history of aggression. The only way to prevent it was to 
reduce Germany's industry and thus her warmaking capacity as close to 
nothing as possible. The resulting chaos, inflation, and misery would 
be but slight repayment for the horrors Germany had inflicted on 
others over many years. 
     By personal influence, Morgenthau obtained acceptance of a 
somewhat modified version of this plan by both Roosevelt and Churchill 
at the Quebec conference of September 1944. The error at Quebec was 
quickly repudiated but no real planning was done and the Morgenthau 
Plan played a considerable role in the JCS 1067, the directive set up 
to guide the American military occupation of Germany. It proposed 
reparations be obtained by dismantling Germany industry. The JCS 1067 
directive ordered that Germany be treated as a defeated enemy and not 
as a liberated country. No steps were taken to secure its economic 
recovery. 
Page 901
     At the Potsdam conference, it was agreed that the German economy 
should not be permitted should not be permitted to recover higher than 
the standard of living of 1932, at the bottom of the depression, the 
level, in fact, which had brought Hitler to power in 1933.
     It took more than two years of misery for Germany to secure any 
changes in these American objectives. Hunger and cold took a 
considerable toll, and the Germans, for two years, experienced some of 
the misery they had inflicted on others in the preceding dozen years. 
     The Germany currency reform of 1948 is the fiscal miracle of the 
post-war world. From it came 
(1) an explosion of industrial expansion and economic prosperity for 
West Germany; 
(2) they tying of the West Germany economy to the West; 
(3) an example for other western European in economic expansion; and
(4) a wave of prosperity for western Europe as a whole.
AMERICAN CONFUSIONS, 1945-1950
Page 909
     The American response to the Soviet refusal of postwar 
cooperation was confused and tentative. 
     Winston Churchill in June 1946 spoke of the "Iron Curtain" which 
Staling was lowering between the Soviet bloc and the West. 
     Lasting from 1947-1953, the chief characteristics of 
"containment" were economic and financial aid to other nations to 
eliminate the misery and ignorance which fosters communism. 
Page 910
     Americans, when goals are established as they are in war, work 
together very effectively, but political work in peacetime, with its 
ambiguous goals, is relegated to rivalry, bickering, and total 
inability to relate means to goals. As a result, the means themselves 
tend to become goals. 
Page 911
     Each service has alliances with the industrial complexes which 
supply their equipment. These complexes not only supply funds for each 
service to carry its message to the Congress but also exert every 
influence to retain equipment by dangling before the high officers who 
can influence contracts, offers of future well-paying consultant 
positions with the industrial firms concerned. Most high officers 
retired and then took consultant jobs with those firms.
     
Page 912
     Four-star general Somervell retired on a disability salary of 
$16,000 to join a number of firms which paid him R$125,000 a year; 
three-star general Campbell retired on a disability salary of $9,000 
and became an executive at $50,000 a year of firms from whom he had 
previously purchased $3 billion in armaments; four-star general Clay 
retired on $16,000 a year but signed up at over $100,000 a year. 
     These are but a few of more than a hundred general officers whose 
post retirement alliances with industrial firms encouraged their 
successors, still on active service, to remain on friendly terms with 
such appreciative business corporations. 
Page 919
     Pearl Harbor was a total surprise. This last point was so hard to 
believe, once the evidence was available, that the same groups who 
were howling about Soviet espionage in 1948-1955 were also claiming 
that Roosevelt expected and wanted Pearl Harbor. Both these beliefs, 
if they were believed, were based on gigantic ignorance and 
misconceptions about the nature of intelligence. 
Page 921
     A great deal of nuclear information (whether secret or not is 
unknown) as well as uranium metal, went to the Soviet Union as part of 
Lend-Lease in 1943. Major George Racey Jordan, USAAF, tried in vain to 
disrupt these shipments at the time. While most of Jordan's evidence 
is unreliable, the shipment of uranium to Russia is corroborated from 
other sources. The export licenses for such shipments were granted at 
the request of General Groves. Jordan's other evidence, most of which 
was very discreditable to the New Deal (since he testified that he, 
Groves, and others were under direct pressure from Harry Hopkins to 
allow export of nuclear materials) was subsequently shown to be false. 
Page 923
     Much of the evidence on the Communist movement came from ex-
Communists such as Elizabeth Bentley, Louis Budenz, Whittaker 
Chambers, John Lautner and others. The first three names mentioned are 
known because they dramatized, distorted and manipulated evidence for 
their own private purposes. This is particularly true of Elizabeth 
Bentley who exaggerated her role. 
Page 925 
     The House Un-American Committee was aimed more at partisan 
advantage than ascertaining the nature of the Communist conspiracy. 
the truth cannot now be ascertained. Numerous other accused 
Communists, both in government and out, whose names were given to the 
committee in the same breath as Hiss or Lattimore were almost totally 
ignored. 
Page 927
     Others called before the committee who refused to give evidence 
under the Fifth Amendment which protects against self-incrimination 
were in fact Communists and Bentley and Chambers knew them as such. 
Page 938
     The revelation of Communist influence in the U.S. was undoubtedly 
valuable but the cost in damage to reputations of innocent persons was 
very high. Much of this damage came from the efforts of Senator Joseph 
McCarthy, Republican, of Wisconsin to prove that the State Department 
and the army were widely infiltrated with Communists. 
Page 939
     McCarthy was not a conservative, still less a reactionary. He was 
a fragment of elemental force, a throwback to primeval chaos. He was 
the enemy of all order and all authority, with no respect, or even 
understanding, for principles, laws, regulations, or rules. As such, 
he had nothing to do with rationality or generality. Concepts, logic, 
distinctions of categories were completely outside his world. It is 
clear he did not have any idea what a Communist was, still less 
Communism itself, and he did not care. This was simply a term he used 
in his game of personal power. Most of the terms which have been 
applied to him, such as "truculent," "brutal," "ignorant," "sadistic," 
"foul-mouthed," "brash," are quite correct but not quite in the sense 
that his enemies applied them, because they assumed that these 
qualities and distinctions had meaning in his world as they did in 
their own. They did not, because his behavior was all an act, the 
things he did to gain the experience he wanted, that is, the feeling 
of power, of creating fear, of destroying the rules, and of winning 
attention and admiration for doing so. His act was that of Peck's Bad 
Boy but on a colossal scale. He sought fame and acclaim by showing an 
admiring world of schoolmates what a tough guy he was, defying all the 
rules, even the rules of decency and ordinary civilized behavior. But 
like the bad boy of the schoolyard, he had no conception of time or 
anything established, and once he had found his act, it was necessary 
to demonstrate it every day. His thirst for power, the power of mass 
acclaim and publicity, reached the public scene at the same moment as 
television, and he was the first to realize what could be done by 
using the new instrument for reaching millions. 
     His thirst for power was insatiable because like hunger, it was a 
daily need. It had nothing to do with the power of authority or 
regulated discipline, but the personal power of a sadist. All his 
destructive instincts were against anything established, the wealthy, 
the educated, the well-mannered, the rules of the Senate, the American 
party system, the rules of fair play. As such, he had no conception of 
truth or the distinction between it and falsehood, just as he had no 
conception of yesterday, today, tomorrow as distinct entities. He 
simply said whatever would satisfy, momentarily, his yearning to be 
the center of the stage surrounded by admiring, fearful, shocked, 
amazed people. He did not even care if their reaction was admiration, 
fear, shock, or amazement and he did not care if they, as persons, had 
the same reaction or a different one the next day or even a moment 
later. He was exactly like an actor in a drama, one in which he had 
made the script as he went along, full of falsehoods and 
inconsistencies, and he was genuinely surprised and hurt if a person 
whom he had abused and insulted for hours at a hearing did not walk 
out with him to a bar or even to dinner the moment the hearing session 
was over. He knew it was an act; he expected you to know it was an 
act. There was really no hypocrisy in it, no cynicism, no falsehood, 
as far as he was concerned, because he was convinced that this was the 
way the world was. Everyone he was convinced, had a racket; this just 
happened to be his, and he expected people to realize this and to 
understand it. 
Page 930
     Of course, to the observant outsider who did not share his total 
amorality, it was all false, invented as he went along, and constantly 
changed, everything substantiated by documents pulled from his 
briefcase and waved about too rapidly to be read. Mostly these 
documents had nothing to do with what he was saying; mostly he had 
never looked at them himself; they were merely props for the 
performance, and to him, it was as silly for his audience to expect 
such documents to be relevant as it would be for the audience in a 
theater to expect the food that is being eaten, the whiskey that is 
being drunk, or the documents which are read in that play to be 
relevant to what the actor is saying. 
     Every time he spoke, with each version he became a larger more 
nonchalant hero. In 1952, he intimidated the Air Force into awarding 
him the Distinguished Flying (given for twenty five combat missions) 
although he had been a grounded intelligence officer who took 
occasional rides in planes. 
     Since laws and regulations were, for McCarthy, nonexistent, his 
business and financial affairs are, like his life, a chaos of 
illegalities. 
Page 931
     He seized upon Communism. "That's it," he said. "The government 
is full of communists. We can hammer away at them." Without any real 
conception of what he was doing, and without any research or knowledge 
of the subject, on February 9, McCarthy waved a piece of paper and 
said "I have here in my hand a list of 205 members of the Communist 
Party still working and shaping the policy of the State Department. 
Page 932
     On Feb 20th, in an incoherent speech in the Senate was six hours 
of bedlam, as case after case was presented filled with contradictions 
and irrelevancies. According to Senate Republican Leader Taft, "It was 
a perfectly reckless performance." Nevertheless, Taft and his 
colleagues determined to accept and support these charges since they 
would injure the Administration. Few people realize that in five years 
of accusations, McCarthy never turned up a Communist in the State 
Department although undoubtedly there must have been some. 
Page 933
     He claimed that "the top Russian espionage agent" in the U.S., 
Alger Hiss's boss in the State Department, "the chief architect of our 
Far Eastern policy" was Professor Owen Lattimore. The trouble was 
Lattimore was not a Communist, not a spy, and not employed by the 
State department. 
     In July, the Tydings subcommittee condemned McCarthy for a "fraud 
and a hoax." McCarthy had the power of an inflamed and misled public 
opinion. Tydings was beaten in Maryland in 1950. Benton from 
Connecticut who introduced the resolution to expel McCarthy from the 
Senate in 1951 and whose charges were fully supported by the Senate's 
investigation of McCarthy's private finances, was defeated in 1952. 
During this period, McCarthy violated more laws and regulations than 
any previous senator in history. When a reporter once said "Isn't that 
a classified document?" McCarthy said, "It was. I just declassified 
it." 
Page 934
     Eisenhower was soon boasting that 1,456 Federal workers had been 
"separated" in the first four months of the Eisenhower security 
program. 2,200 at the end of the first year. Nixon said "We're kicking 
the Communists and fellow travellers and security risks out of the 
Government by the thousands." It was soon clear that no Communists 
were kicked out and that security risks included all kinds of persons. 
     For a while, the Administration tried to outdo McCarthy by 
demonstrating in hearings that China had been "lost" to the Communists 
because of the careful planning and intrigue of Communists in the 
State Department. But they failed to prove their contention. 
Page 935
     There is considerable truth in the China Lobby's contention that 
the American experts on China were organized into a single 
interlocking group which had a general consensus of a Leftish 
character. It is also true that this group, from its control of funds, 
academic recommendations, and research of publication opportunities, 
could favor persons who accepted the established consensus and could 
injure, financial or in professional advancement, persons who did not 
accept it. It is also true that the established group, by its 
influence on book reviewing in the New York Times, the Herald Tribune 
and the Saturday Review, a few magazines including the "liberal 
weeklies" and in the professional journals, could advance or hamper 
any specialist's career. It is also true that these things were done 
in the United States by the Institute of Pacific Relations, that this 
organization had been infiltrated by Communists, and by Communist 
sympathizers, and that much of this group's influence arose from its 
access to and control over the flow of funds from financial 
foundations to scholarly activities. All these things were true, but 
they would have been true of many other areas of American scholarly 
research and academic administration.
     On the other hand, the charges of the China Lobby that China was 
"lost" because of this group is not true. Yet the whole subject is of 
major importance in understanding the twentieth century.
Page 936
     Lattimore, because he knew Mongolian, tended to become 
everybody's expert. Many of these experts which were favored by the 
Far East "establishment" in the Institute of Pacific RElations were 
captured by Communist ideology. Under its influence, they 
propagandized, as experts, erroneous ideas and sought to influence 
policy in mistaken directions. 
     Behind this unfortunate situation lies another, more profound, 
relationship, which influences matters much broader than Far Eastern 
policy. It involves the organization of tax-exempt fortunes of 
international financiers into foundations to be used for educational, 
scientific, and "other public purposes." Sixty or more years ago, 
public life in the East was dominated by the influence of "Wall 
Street" referring to international financial capitalism deeply 
involved in the gold standard, foreign exchange fluctuations,floating 
of fixed-interest securities and shares for stock-exchange markets. 
Page 937
     This group, which in the United States, was completely dominated 
by J.P. Morgan and Company from the 1880s to the 1930s was 
cosmopolitan, Anglophile, internationalist, Ivy League, eastern 
seaboard, high Episcopalian and European-culture conscious. Their 
connection with the Ivy League colleges rested on the fact that large 
endowments of these institutions required constant consultation with 
the financiers of Wall Street and was reflected in the fact that these 
endowments were largely in bonds rather than in real estate or common 
stocks. As a consequence of these influences, J.P. Morgan and his 
associates were the most significant figures in policy making at 
Harvard, Columbia and Yale while the Whitneys and Prudential Insurance 
Company dominated Princeton. The chief officials of these universities 
were beholden to these financial powers and usually owed their jobs to 
them. 
     The significant influence of "Wall Street" (meaning Morgan) both 
in the Ivy League and in Washington explains the constant interchange 
between the Ivy League and the Federal Government, and interchange 
which undoubtedly aroused a good deal of resentment in less-favored 
circles who were more than satiated with the accents, tweeds, and High 
Episcopal Anglophilia of these peoples. Poor Dean Acheson, in spite of 
(or perhaps because of) his remarkable qualities of intellect and 
character, took the full brunt of this resentment from McCarthy and 
his allies. The same feeling did no good to pseudo-Ivy League figures 
like Alger Hiss.
Page 938
     In spite of the great influence of this "Wall Street" alignment, 
an influence great enough to merit the name of the "American 
Establishment," this group could not control the Federal Government 
and, in consequence, had to adjust to a good many government actions 
thoroughly distasteful to the group. The chief of these were in 
taxation law, beginning with the graduated income tax in 1913, but 
culminating above all else with the inheritance tax. These tax laws 
drove the great private fortunes dominated by Wall Street into tax-
exempt foundations which became the major link in the Establishment 
network between Wall Street, the Ivy League and the Federal 
government. Dean Rusk, Secretary of State after 1961, formerly 
president of the Rockefeller Foundations, is as much a member of this 
nexus as Alger Hiss, the Dulles brothers, Jerome Green, etc. 
     More than fifty years ago, the Morgan firm decided to infiltrate 
the Left-wing political movements of the United States. This was 
relatively easy to do since these groups were starved for funds and 
eager for a voice to reach the people. Wall Street supplied both. The 
purpose was not to destroy, dominate, or take over but was really 
three-fold:
1) to keep informed about the Left-wing or liberal groups;
2) to provide them with a mouthpiece so they could blow off steam;
3) to have a final "veto" on their actions if they ever went radical. 
     There was nothing really new about this decision, since other 
financiers had talked about it and even attempted it earlier. 
     The best example of the alliance of Wall Street and Left-wing 
publication was "The New Republic" a magazine founded in 1914 by 
Willard Straight using Payne Whitney money. The original purpose for 
establishing the paper was to provide an outlet for the progressive 
Left and to guide it in an Anglophile direction. This latter task was 
entrusted to Walter Lippmann. 
     Willard Straight, like many Morgan agents, was present at the 
Paris Peace Conference in 1919. 
     
Page 940
     The first New Republic editor,Herbert Croly wrote, "Of course, 
the Straights could always withdraw their financial support if they 
ceased to approve of the policy of the paper;and in that event, it 
would go out of existence as a consequence of their disapproval." The 
chief achievement of The New Republic in 1914-1918 and again in 1938-
1948 was for interventionism in Europe. 
Page 942
     Straight allowed the Communists to come into the New Republic. 
The first to arrive was Lew Frank. 
Page 944
     Frank joined a "Communist Research Group" which met in the 
Manhattan home of the wealthy "Wall Street Red," Frederick Vanderbilt 
Field. 
Page 945
     To Morgan, all political parties were simply organizations to be 
used, and the firm always was careful to keep a foot in all camps. 
     Like the Morgan interest libraries, museums and art, its 
recognition of the need for social work among the poor went back to 
the original founder of the firm, George Peabody. To this same figure 
may be attributed the use of tax-exempt foundations for controlling 
these activities as in the use of Peabody foundations to support 
Peabody libraries and museums. Unfortunately, we do not have space 
here for this great and untold story, but it must be remembered that 
what we do say is part of a much larger picture. 
     Our concern at the moment is with the links between Wall Street 
and the Left, especially the Communists. Here the chief link was the 
Thomas W. Lamont family. Tom Lamont was brought into the Morgan firm, 
as Straight several years later, by Henry P. Davison, a Morgan 
partner. Each had a wife who became a patroness of Leftish causes and 
two sons, of which the elder was a conventional banker, and the 
youngest was a Left-wing sympathizer and sponsor. 
     HUAC files show Tom Lamont, his wife Flora, and his son Corliss 
as sponsors and financial angels to almost twenty extreme Left 
organizations, including the Communist Party itself. 
Page 946
     In 1951, the McCarran Committee sought to show that China had not 
been lost to the Communists by the deliberate actions of a group of 
academic experts on the Far East and Communist fellow travellers whose 
work in that direction was controlled and coordinated by the Institute 
of Pacific Relations (IPR). The influence of the Communists in the IPR 
is well established but the patronage of Wall Street is less well 
known. 
     The IPR was a private association of ten independent national 
councils in ten countries concerned with affairs in the Pacific. Money 
for the American Council of the IPR came from the Carnegie Foundation 
and the Rockefeller Foundation. The financial deficits which occurred 
each year were picked up by financial angels, almost all with close 
Wall Street connections. There can be little doubt that the IPR line 
had many points in common both with the Kremlin's party line on the 
Far East and with the State Department's police line in the same area. 
Clearly there were some Communists, even party members, involved but 
it is much less clear that there was any disloyalty to the U.S. There 
was a great deal of intrigue both to help those who agreed with the 
IPR line and to influence U.S. government policy in this direction, 
but there is no evidence of which I am aware of any explicit plot or 
conspiracy to direct American policy in a direction favorable either 
to the Soviet Union or to international Communism. 
Page 948
     It must be confessed that the IPR had many of the marks of a 
fellow traveller or Communist "captive" organization. But this does 
not mean that the Radical Right version of these events is accurate. 
For example, Elizabeth Bentley testified on the IPR and identified 
almost every person associated with the organization as a Communist. 
Page 949
     This Radical Right fairy tale, which is not an accepted folk myth 
in many groups in America, pictured the recent history of the United 
States as a well-organized plot of extreme Left-wing elements, 
operating from the White House itself and controlling all the chief 
avenues of publicity in the United States. This plot, if we are to 
believe the myth, worked through such avenues as the New York Times, 
Herald Tribute, Christian Science Monitor, Washington Post, Atlantic 
Monthly, and Harper's Magazine and had at its core the wild-eyed and 
bushy-haired theoreticians of Socialist Harvard and the London School 
of Economics. It was determined to bring the U.S. into World War II on 
the side of England (Roosevelt's first love) and Soviet Russia (his 
second love) and, as part of this consciously planned scheme, invited 
Japan to attack Pearl Harbor all the while undermining America's real 
strength by excessive spending and unbalanced budgets. 
Page 950
     This myth, like all fables, does in fact have a modicum of truth. 
There does exist and has existed for a generation, an international 
Anglophile network which operates to some extent in the way the 
Radical Right believes the Communists act. In fact, this network, 
which we may identify as the Round Table Groups, has no aversion to 
cooperating with the Communists, or any other groups, and frequently 
does so. I know of the operations of this network because I have 
studied it for twenty years and was permitted for two years, in the 
early 1960s, to examine its papers and secret records. I have no 
aversion to it or to most of its aims and have, for much of my life, 
been close to it and to many of its instruments. I have objected, both 
in the past and recently, to a few of its policies but in general my 
chief difference of opinion is that it wishes to remain unknown, and I 
believe its role in history is significant enough to be known. 
     The Round Table Groups have already been mentioned several times. 
At the risk of some repetition, the story will be summarized here 
because the American branch of this organization (sometimes called the 
"Eastern Establishment) has played a very significant role in the 
history of the United States in the last generation. 
     The Round Table Groups were semi-secret discussion and lobbying 
groups whose original purpose was to federate the English-speaking 
world along lines laid down by Cecil Rhodes. By 1915, Round Table 
groups existed in seven countries including England, South Africa, 
Canada, Australia, New Zealand, India and the United States. 
Page 951
     Money for their activities originally came from Cecil Rhodes, 
J.P. Morgan, the Rockefeller and Whitney families and associates of 
bankers Lazard Brothers and Morgan, Grenfell and Company. 
     The chief backbone of this organization grew up along the already 
existing financial cooperation running from the Morgan Bank in New 
York to a group of international financiers in London led by Lazard 
Brothers. 
     Lionel Curtis established in England and each dominion a front 
organization to the existing local Round Table Group. This front 
organization called the Royal Institute of Public Affairs, had as its 
nucleus in each area the existing submerged Round Table Group. 
Page 952
     In New York, it was known as the Council on Foreign Relations and 
was a front for J.P. Morgan and Company in association with the very 
small American Round Table Group. The American organizers were 
dominated by the large number of Morgan "experts" including Lamont and 
Beer, who had gone to the Paris Peace Conference and there became 
close friends with the similar group of English "experts" which had 
been recruited by the Milner group. In fact, the original plans for 
the Royal Institute and the Council on Foreign Relations.
     In 1928, the Council on Foreign Relations was dominated by the 
associates of the Morgan bank. Closely allied with this Morgan 
influence were a small group of Wall Street lawyers whose chief 
figures were Elihu Root, John W. Davis, the Dulles Brothers, John J. 
McCloy.
Page 953
     On this basis, there grew up in the 20th century a power 
structure between London and New York which penetrated deeply into 
university life, the press, and the practice of foreign policy. 
     The American branch of this "English Establishment" exerted much 
of its influence through five American newspapers (New York Times and 
Herald Tribune, Christian Science Monitor, Washington Post, Boston 
Evening Transcript). It might be pointed out that the existence of 
this Wall Street Anglo-American axis is quite obvious once it is 
pointed out. It is reflected by the fact that such Wall Street 
luminaries such as John W. Davis, Lewis Douglas, Jock Whitney and 
Douglas Dillon were appointed to be American ambassadors in London. 
     This double international network in which the Round Table groups 
formed the semi-secret or secret nuclei of the Institutes of 
International Affairs was extended into a third network for Pacific 
Affairs in 1925 by the same people for the same motives. 
Page 954
     The chief aims of this elaborate, semi-secret organization were 
largely commendable: to coordinate the international activities and 
outlooks of all the English-speaking world into one; to work to 
maintain peace; to help backward, colonial, and underdeveloped areas 
toward prosperity along the lines somewhat similar to those taught at 
Oxford and the University of London. 
     These organizations and their financial backers were in no sense 
reactionary or Fascistic persons, as Communist propaganda would like 
to depict them. Quite the contrary, they were gracious and cultured 
gentlemen who were much concerned with the freedom of expression of 
minorities and the rule of law for all and who were convinced that 
they could forcefully civilize the Boers, the Irish, the Arabs, and 
the Hindus, and who are largely responsible for the partitions of 
Ireland, Palestine, and India. If their failures now loom larger than 
their successes, this should not be allowed to conceal the high 
motives with which they attempted both. 
     It was this group of people, whose wealth and influence so 
exceeded their experience and understanding, who provided much of the 
framework of influence which the Communist sympathizers and fellow 
travellers took over in the United States in the 1930s. It must be 
recognized that the power of these energetic Left-wingers exercised 
was never their own power or Communist power but was ultimately the 
power of the international financial coterie, and, once the anger and 
suspicions of the American people were aroused as they were in the 
1950s, it was a fairly simple matter to get rid of the Red 
sympathizers. Before this could be done, however, a congressional 
committee, following backward to their source the threads which led 
from the admitted Communists like Whittaker Chambers, through Alger 
Hiss, and the Carnegie Endowment to Thomas Lamont and the Morgan Bank, 
fell into the whole complicated network of the interlocking tax-exempt 
foundations. The Eighty-third Congress set up in 1953 a Special Reece 
Committee to investigate Tax-Exempt Foundations. It soon became clear 
that people of immense wealth would be unhappy if the investigation 
went too far and that the "most respected" newspapers in the country, 
closely allied with these men of wealth, would not get excited enough 
about any revelations to make the publicity worthwhile. An interesting 
report showing the Left-wing associations of interlocking nexus of 
tax-exempt foundations was issued in 1954 rather quietly.. Four years 
later, the Reece Committee's general counsel, Rene A Wormser, wrote a 
shocked, but not shocking, book on the subject called "Foundations: 
Their Power and Influence."
Page 956
     Jerome Green is a symbol of much more than the Wall Street 
influence in the IPR. He is also a symbol of the relationship between 
the financial circles of London and those of the eastern U.S. which 
reflects one of the most powerful influences in 20th century American 
and world history. The two ends of this English-speaking axis have 
sometimes been called, perhaps facetiously, the English and American 
Establishments. There is, however, a considerable degree of truth 
behind the joke, a truth which reflects a very real power structure. 
It is this power structure which the Radical Right in the U.S. has 
been attacking for years in the belief they are attacking the 
Communists. These misdirected attacks did much to confuse the American 
people in 1948-1955. By 1953 most of these attacks had run their 
course. The American people, thoroughly bewildered at the widespread 
charges of twenty years of treason and subversion, had rejected the 
Democrats and put into the White House a war hero, Eisenhower. At the 
time,two events, one public and one secret, were still in process. The 
public one was the Korean War; the secret one was the race for the 
thermonuclear bomb. 


CHAPTER XVIII: NUCLEAR RIVALRY AND COLD WAR, 
RACE FOR THE H-BOMB 1950-1957
 
Page 965
     On March 1, 1954, we exploded our first real thermonuclear bomb 
at Bikini atoll. It was a horrifying device which spread death-dealing 
radioactive contamination over more than 8,000 square miles and 
injurious radiation over much of the world. 
Page 968
     To prepare public opinion to accept use of the H-bomb, if it 
became necessary, Strauss sponsored a study of radioactive fallout 
whose conclusion was prejudged by calling it "Project Sunshine." By 
selective release of some evidence and strict secrecy of other 
information, they tried to establish in public opinion that there was 
no real danger to anyone from nuclear fallout even in all-out nuclear 
war. This gave rise to controversy between the scientists and the 
Administration on the danger of fallout. 
     The Eisenhower through the Dulles doctrine of "massive 
retaliation" was so deeply committed to nuclear war that it could not 
permit the growth of public opinion which would refuse to accept the 
use of nuclear weapons because of objections to the danger of fallout 
to neutrals and non-combatants. By 1953, this struggle became so 
intense that supporters of massive retaliation decided they must 
destroy the public image and public career of Oppenheimer. 
THE KOREAN WAR AND ITS AFTERMATH, 1950-1954
Page 970
     The emphasis on nuclear retaliation to Communist aggression 
anywhere in the world made it necessary to draw a defence perimeter 
over which such aggression would trigger retaliation. At the 
insistence of MacArthur, that perimeter was drawn to exclude Korea, 
Formosa and Mainland China; accordingly, all American forces had been 
evacuated from South Korea in June 1949.
Page 971
     The Soviet Union interpreted this to mean that the U.S. would 
allow South Korea to be conquered by the North. Instead, when Russia, 
through its satellite North Korea, sought to take Korea, this game 
rise to an American counteraction. 
Page 972
     For forty-eight hours after the Korean attack, the world 
hesitated, awaiting America's reaction. Truman immediately committed 
American air and sea forces in the area south of 38 degrees and 
demanded a UN condemnation of the aggression. Thus, for the first time 
in history, a world organization voted to use collective force to stop 
armed aggression. This was possible because the North Korean attack 
occurred at a time when the Soviet delegation was absent from the UN 
Security Council, boycotting it as a protest at the presence of the 
delegation from Nationalist China. Accordingly, the much-used Soviet 
veto was unavailable. 
Page 974
     The frontier was reached by UN forces as the month ended. The Red 
Chinese decision to intervene was made nine days after American troops 
crossed the 38th parallel into North Korea. It was inevitable as Red 
China could hardly be expected to allow the buffer North Korean state 
to be destroyed and American troops to occupy the line of the Yalu. As 
soon as it became clear that American forces would continue past the 
38th parallel to the Yalu, the Chinese intervened, not to restore the 
38th parallel frontier but to clear the U.N. forces from Asia 
completely. 
Page 975
     The Truman Administration, after the victory at Inchon, did not 
intend to stop at the 38th parallel and hoped to reunite the country 
under the Seoul government. It is probable that this alone triggered 
the Chinese intervention. 
     On October 9, 1950, two of MacArthur's planes attacked a Russian 
air base sixty-two miles inside Russian territory.
Page 977
     After Truman removed MacArthur, Republican leaders spoke publicly 
of impeaching the President. Senator William Jenner said: This country 
today is in the hands of a secret inner coterie which is directed by 
agents of the Soviet Union. We must cut this whole cancerous 
conspiracy out at once. Our only choice is to impeach the president 
and find out who is the secret invisible government which has so 
cleverly led our country down the road to destruction."
Page 979
     On the whole, neo-isolationist discontent was a revolt of the 
ignorant against the informed or educated, of the nineteenth century 
against the insoluble problems of the twentieth, of the Midwest of Tom 
Sawyer against the cosmopolitan East of J.P. Morgan and Company, of 
old Siwash against Harvard, of the Chicago Tribune against the 
Washington Post or New York Times, of simple absolutes against complex 
relativisms, of immediate final solutions against long-range partial 
alleviations, of frontier activism against European though, a 
rejection, out of hand, of all the complexities of life which had 
arisen since 1915 in favor of a nostalgic return to the simplicities 
of 1905, and above all a desire to get back to the inexpensive, 
thoughtless, and irresponsible international security of 1880. 
Page 980 
     This neurotic impulse swept over the U.S. in a great wave in the 
years 1948-1955, supported by hundreds of thousands of self-seeking 
individuals, especially peddlers of publicity and propaganda, and 
financed no longer by the relatively tied-up funds of declining Wall 
Street international finance, but by its successors, the freely 
available winnings of self-financing industrial profits from such new 
industrial activities as air power, electronics, chemicals, which 
pretended to themselves that their affluence was entirely due to their 
own cleverness. At the head of this list were the new millionaires led 
by the Texas oil pluggers whose fortunes were based on tricky tax 
provisions and government-subsidized transportation systems. 
Page 982
     The Kremlin was quite wiling to keep America's men, money, and 
attention tied down in Korea. 
Page 985
     During Truman's last four budgets, expenditures on national 
security increased from $13 billion in 1950 to $50 billion in 1953. 
THE EISENHOWER TEAM, 1952-1956
Page 986
     The Korean War disrupted the pleasures of the postwar economic 
boom with military service, shortages, restrictions and cost-of-living 
inflation which could not help but breed discontent. And through it, 
all the mobilized wealth of the country, in alliance with most of the 
press, kept up a constant barrage of "Communists in Washington," 
"twenty years of treason." In creating this picture, the leaders of 
the Republican Party totally committed themselves to the myths of the 
neo-isolationists and of the Radical Right. 
     In June 1951, Senator McCarthy delivered a speech in the Senate 
of 60,000 words attacking General Marshall as a man "steeped in 
falsehood" who has "recourse to the lie whenever it suits his 
convenience," one of the architects of America's foreign policy made 
by "men high in Government who are concerting to deliver us to 
disaster, a conspiracy so black that when it is finally exposed, its 
principals shall be forever deserving of the maledictions of all 
honest men."
Page 987
     Eisenhower had no particular assets except a bland and amiable 
disposition combined with his reputation as a victorious general. He 
also had a weakness, one which is frequently found in his profession, 
the conviction that anyone who has become a millionaire, even by 
inheritance, is an authoritative person on almost any subject. 
Page 988 
     If elected, he would go to Korea to make peace. Although himself 
not a neo-isolationist or a reactionary, Eisenhower had few deep 
personal convictions and was eager to be president. When his advisers 
told him that he must collaborate with the Radical Right, he went all 
the way, even to the extent of condoning McCarthy's attack on General 
Marshall when he, under McCarthy's pressure, removed a favorable 
reference to Marshall from a Wisconsin speech. 
     Eisenhower allotted the functions of government to his Cabinet 
members ("eight millionaires and a plumber"). 
Page 991
     Attorney General Herbert Brownell confided to a businessmen's 
luncheon in Chicago that President Truman, knowing that Harry Dexter 
White was a Russian spy, had promoted him from assistant secretary of 
the treasury to executive director of the U.S. Mission to the 
International Monetary Fund in 1946. The House Committee on Un-
American activities at once issued a subpoena to the ex-President to 
testify which was ignored. 
     McCarthy's attacks on the U.S. Information Agency overseas 
libraries led to burning of books like Tom Sawyer and Robin Hood as 
subversive (Robin Hood stole from the rich and gave to the poor, 
clearly a Communist tactic). 
     
Page 992
     Dulles publicly announced the conception of "massive retaliation" 
before the Council on Foreign Relations on January 12, 1954. 
Page 995
     W.L. Borden wrote a letter to J. Edgar Hoover stating that "J. 
Robert Oppenheimer is an agent of the Soviet Union." This charge was 
supported by a biased rehash of all the derogatory stories about 
Oppenheimer and was made up of wild charges which no responsible 
person has ever been willing to defend." On the basis of this letter 
and at the direct order of President Eisenhower, Chairman Strauss 
suspended Oppenheimer's security clearance. 
Page 998
     Broadest of the three narrowing circles of outlook was a violent 
neurotic rebellion of harassed middle-class persons against a long-
time challenge to middle-class values arising from depression, war, 
insecurity, science, foreigners, and minority groups of all kinds. 
     Public opinion always supported large defence forces.
     Public opinion gave much less support to foreign aid.
     These statements based on public opinion polls. 
THE RISE OF KHRUSHCHEV, 1953-1958
Page 1009
     Immediately after Stalin's death, the "collective leadership" was 
headed by Malenkov, Beria and Molotov. Malenkov supported a policy of 
relaxation with increased emphasis on production of consumers goods 
and rising standards of living, as well as increased efforts to avoid 
any international crises which might lead to war; Beria supported a 
"thaw" in internal matters, with large-scale amnesties for political 
prisoners as well as rehabilitation of those already liquidated; 
Molotov continued to insist on the "hard" policies of Stalin with no 
relaxation of domestic tyranny. 
Page 1010
     Wild rumors and and some relaxation, at Beria's behest, in East 
Germany, gave rise to false hopes and on June 16, 1953, these workers 
rose up against the Communist government. These uprising were crushed 
with the full power of the Soviet occupation armored divisions. Using 
this as an excuse, the Kremlin leaders suddenly arrested Beria and 
shot him. 
     The overthrow of the master of terror was followed by an 
extensive curtailment of the secret police and its powers. Secret 
courts were abolished. 
Page 1011
     The gradual elimination of Molotov found Khrushchev as the 
champion of "thaw" in the Cold War.
Page 1012
     Khrushchev's six-day visit to Tito is of great importance because 
it showed Russia in an apologetic role for a major past error and 
because it reversed Stalin's rule that all Communist parties 
everywhere must follow the Kremlin's leadership such that "differences 
in the concrete application of Socialism are the exclusive concern of 
individual countries." En route home, he stopped in Sofia and place 
the fuse in another, even larger, stick of dynamite, by a secret 
denunciation of Stalin personally as a bloodthirsty tyrant. Back in 
Moscow, Khrushchev won over the majority by arguing that the loyalty 
of the satellites, and especially their vital economic cooperation, 
could be ensured better by a loose leash than by a club. 
Page 1013
     The Russians spoke favorably about disarmament which, to them, 
meant total renunciation of nuclear weapons and drastic cuts in ground 
forces, a combination which would make the United States very weak 
against Russia while leaving Russia still dominant in Europe. 
Page 1012
     The Geneva Conference discussions were conducted in an 
unprecedented atmosphere of friendly cooperation which came to be 
known as the "Geneva spirit" and continued for several years and was 
never completely overcome even when matters were at their worst 
following the U-2 incident of 1960 and the Cuban crisis of 1962.
Page 1016
     At the Twentieth Party Congress in February 1956, the first 
speech of 50,000 words delivered by Khrushchev over seven hours urged 
the need for coexistence with the West and references to the 
possibility of peaceful rather than revolutionary change from 
capitalism to Socialism. 
     The real explosion came at a secret all-night session on July 24 
in a 30,000 word speech where Khrushchev made a horrifying attack on 
Stalin as a bloodthirsty and demented tyrant who had destroyed tens of 
thousands of loyal party members on falsified evidence. The full 
nightmare of the Soviet system was revealed. 
Page 1017
     A few passages from this speech: 
     "This concept "enemy of the people" eliminated any possibility of 
rebuttal. Usually, the only evidence used, against all the rules of 
modern legal science, was the confession of the accused, and as 
subsequent investigation showed, such "confessions" were obtained by 
physical pressure on the accused. The formula "enemy of the people" 
was specifically introduced for the purpose of physically annihilating 
these persons. 
     How is it that a person confesses to crimes that he has not 
committed? Only in one way - by application of physical pressure, 
tortures, taking away of his human dignity.
Page 1019
     The "secret speech" also destroyed Stalin's reputation as a 
military genius:
     "Stalin said that the tragedy of the war resulted from the 
unexpected attack by the Germans. This is completely untrue. Churchill 
warned Stalin that the Germans were going to attack. Stalin took no 
had and warned that no credence be given to information of this sort 
not to provoke a German invasion. Had our industry been mobilized 
properly and in time to supply the army, our wartime losses would have 
been decidedly smaller. 
     Very grievous consequences followed Stalin's destruction of many 
military commanders during 1937-1941 because of his suspiciousness and 
false accusations. During that time, leaders who had gained military 
experience in Spain and the Far East were almost completely 
liquidated. 
Page 1021
     Stalin's 1948 "Short Biography" is an expression of most 
dissolute flattery, making a man into a god, transforming him into an 
infallible sage, "the greatest leader and most sublime strategist of 
all times and nations." We need not give examples of the loathsome 
adulation filling this book. They were all approved and edited by 
Stalin personally. He added "Although he performed his task of leader 
of the people with consummate skill and enjoyed the unreserved support 
of the whole Soviet people, Stalin never allowed his work to be marred 
by the slightest hint of vanity, conceit, or self-adulation." I'll 
cite one more insertion by Stalin: "Comrade Stalin's genius enabled 
him to divine the enemy's plans and defeat them. The battles in which 
Comrade Stalin directed the Soviet armies are brilliant examples of 
operational military skill." "
Page 1022
     By directing all the criticism of Stalin personally, he 
exculpated himself and the other Bolshevik survivors who were fully as 
guilty as Stalin was - guilty not merely because they acquiesced in 
Stalin's atrocities from fear, as admitted in Khrushchev's speech, but 
because they fully cooperated with him. 
     A study of Khrushchev's life shows that he defended Stalin's acts 
which caused the deaths of millions. The fault was not merely with 
Stalin; it was with the system, it was with Russia. 
     The more completely total and irresponsible power is concentrated 
in one man's hands, the more frequently will a monster of sadism be 
produced. 
     The very structure of Russian life drove Khrushchev, as it had 
driven Stalin, to concentrate all power in his own hands. Neither man 
could relax halfway to power for fear that someone else would continue 
on, seeking the peak of power. The basis of the whole system was fear 
and like all neurotic drives in a neurotic system, such fear could not 
be overcome even by achievement of total power. That is why it grows 
into paranoia as it did with Ivan the Terrible, Peter the Great, Paul 
I, Stalin and others. 
Page 1031
     Having failed to block Khrushchev's economic plans, his rivals in 
the Presidium were reduced to a last resort, they had to get rid of 
the man himself. At a Presidium meeting on June 18, 1957, the motion 
was made to remove Khrushchev as the first party secretary. The 
discussion grew violent with Malenkov and Molotov attaching and 
Khrushchev defending himself. He was accused of practicing a "cult of 
personality" and of economic mismanagement. The vote was 7-4 against 
him with Mikoyan, Kirichenko and Suslov his only supporters. He was 
offered the reduced position of minister of agriculture. 
     
Page 1032
     Khrushchev refused to accept the result, denying that the 
Presidium had the authority to remove a first secretary, and appealing 
to the Central Committee. The members of this larger group joined in 
the discussions as they arrived while Khrushchev's supporters sought 
to delay the vote until his men could come in from the provinces. 
Marshall Zhukov provided planes to bring in the more distant ones. The 
discussion became bitter when Zhukov threatened to produce evidence 
that Malenkov and Molotov had been deeply involved in the bloody 
purges of 1937. Madame Furtseva, an alternate member of the Presidium, 
filibustered with a speech for six hours. Eventually, there were 309 
members present. When the vote was finally taken, Khrushchev's 
supporters voted for him solidly and his removal, already voted by the 
Presidium, was reversed. Khrushchev at once counterattacked. He moved 
and carried the expulsion from the Presidium of Malenkov, Molotov, 
Kaganovich and Shepilov for "anti-party" activities. Then came the 
election of a new Presidium with fifteen full members instead than the 
previous eleven, and nine alternates instead of the previous six. 
     This change was Khrushchev's most smashing personal victory and 
the most significant event in Russia's internal history. It led 
Khrushchev to a position of political power more complete than 
Stalin's had been although it was clear that Khrushchev would never be 
allowed to abuse his power the way Stalin had done. 
Page 1033
     Khrushchev did not rest on his oars. During the summer of 1957, 
he made notable concessions to the peasants (ending compulsory 
deliveries from products of their personal plots), slammed down the 
lid on freedom of writers and artists, pushed vigorously both the 
"virgin lands" scheme and the decentralization of industry, and worked 
to curtail the growing autonomy of the armed forces and revived trade 
unions into the new regional economic councils. 
Page 1034
     Russian objection to city-bombing or to strategic terror of the 
V-2 kind as ineffective and a waste of resources was undoubtedly 
sincere. 
     The Soviet Union has no idea of being able to achieve military 
victory over the United States simply because they have no method of 
occupying the territory of the United States at any stage in a war. 
Page 1035
     They are unlikely to use nuclear weapons first although fully 
prepared to resort to them once they are used by an enemy. 
Page 1036
     However such a war is regarded by the Soviet leaders as highly 
undesirable while they, in a period of almost endless cold war, can 
seek to destroy capitalist society by nonviolent means. This theory of 
"nibbling" the capitalist world to death is combined with a tactic 
which would resist "capitalist imperialism" by encouraging "anti-
colonialism." 
     Stalin and Dulles saw the world largely in black-and-white terms: 
who was not with them was obviously against them.
Page 1037
     Stalin did not see the possibility of colonial areas becoming 
non-Communist and non-colonial independent states and rebuffed the 
local native groups. Khrushchev did the opposite. 
Page 1038
     This shift in the Soviet attitude toward neutralism was helped by 
Dulles' refusal to accept the existence of neutralism. His rebuffs 
tended to drive those areas which wanted to be neutral into the arms 
of Russian because the new nations of the developing Buffer Fringe 
valued their independence above all else. The Russian acceptance of 
neutralism may be dated about 1954 while Dulles still felt strongly 
adverse to neutralism four or five years later. This gave the Soviet 
Union a chronological advantage to compensate for its many 
disadvantages in the basic struggle to win the favor of the neutrals. 
THE COLD WAR IN EASTERN AND SOUTHERN ASIA, 1950-1957
Page 1039
     By 1939, there was only one independent state in southeast Asia: 
Siam. Thus all southeast Asia, except Thailand, was under the colonial 
domination of five Western states in 1939. 
     French Indochina emerged from Japanese occupation as the three 
states of Vietnam, Laos, and Cambodia, each claiming independence. 
Efforts by the European Powers to restore their prewar rule led to 
violent clashes with the supporters of independence. These struggles 
were brief and successful in Burma and Indonesia but were very 
protracted in Indochina.
Page 1042
     In all these areas, native nationalists were inclined to the 
political Left, if for no other reason than the fact that the 
difficulties of capital accumulation and investment to finance 
economic improvements could be achieved only under state control. In 
some cases, such Communism may have been ideological but inmost cases, 
it involved little more than the desire to play off the Soviet Union 
and China against the Western imperialist Powers. 
Page 1042
     A communist revolt in the Philippines had already begun and was 
joined by similar uprisings in Burma, Indonesia, and Malaya. Most of 
these revolts took the form of agrarian agitations and armed raids by 
Communist guerrilla jungle fighters. Since the operated on a hit-and-
run basis and had to live off the local peasantry, their exploitation 
of peasant life eventually made them decreasingly welcome to this very 
group for whom they pretended to be fighting.
     In the Philippines, the rebels were smashed in 1953. In 
Indonesia, Sukarno repressed the insurrection and executed its 
leaders. In Malaya, the Communists were systematically hunted down and 
destroyed by British troops. In Burma, they weren't eliminated until 
1960. 
     The real problem was Indochina. There, the French Army was 
uncompromising and Communist leadership was skillful. As a result, the 
struggle became part of the Cold War. The Malay peninsula is dominated 
by a series of mountain ranges with their intervening rivers running 
southward from Chinese Yunnan. These rivers fan out into fertile 
alluvial deltas which produce surplus foods for undemanding peoples. 
Page 1043
     Indochina brought considerable wealth to France. After the 
Japanese withdrawal, the Paris government was reluctant to see this 
wealth, chiefly from the tin mines, fall into native groups and by 
1949, decided to use force to recover the area. 
     Opposed to the French effort was Ho Chi Minh, a member of the 
French Communist Party. Ho had set up a coalition government under his 
Viet Minh Party and proclaimed independence for Vietnam (chiefly 
Tonkin and Annam) in 1945, while French troops, in a surprise coup, 
seized Saigon in the south. Ho received no support from the Kremlin. 
     At first, Ho sought support from the United States but after the 
establishment of Red China in 1949, he turned to that new Communist 
state for help. Mao's government was the first state to give Vietnam 
diplomatic recognition (January 1950) and at once began to send 
military supplies and guidance. Since the U.S. was granting extensive 
aid to France, the struggle in Vietnam became, through surrogates, a 
struggle between the United States and China. In world opinion, this 
made the U.S. the defender of European imperialism against anti-
colonial native nationalism. 
     During this turmoil, independent neutralist governments came into 
existence in Laos and Cambodia. Both states accepted aid from whoever 
would give it and both were ruled by an unstable balance of pro-
Communists, neutralists, and pro-Westerners, all with armed 
supporters. On the whole, the neutralist group was largest and the 
pro-Western was the smallest but could obtain support from America's 
wealth. The decisive influence was that the Communists were prepared 
to accept and support neutralism years before Dulles would condone it. 
Page 1044
     The readiness of Dulles and the French Army to force a showdown 
in Vietnam was unacceptable to the British and many in France. Out of 
this came a Soviet suggestion for a conference on Indochina in Geneva. 
     By early 1954, the Communist guerrillas were in control of most 
of northern Indochina, were threatening Laos, and were plaguing 
villages as far south as Saigon. About 200,000 French troops and 
300,000 Vietnamese militia were tied in knots by about 335,000 Viet 
Minh guerrillas. France was being bled to death with nothing to show 
for it. 
     By the end of March 1953, the outer defences of the French strong 
point at Dien Bien Phu were crumbling. The French chief of staff found 
Dulles ready to risk all-out war with Red China by authorizing direct 
American intervention in Indochina. As usual, Dulles thought that 
wonders could be achieved by air strikes alone against the besiegers 
of Dien Bien Phu and for a few day, at Dulles' prodding, the United 
States tottered "on the brink of war." Dulles proposed "a united 
action policy:" "If Britain would join the United States and France 
would agree to stand firm, the three Western states could combine with 
friendly asian nations to oppose communist forces. 
Page 1045
     President Eisenhower agreed but his calls to Churchill and Eden 
found the British government opposed to the adventure because the 
Sino-Soviet Treaty of 1950 bound Russia to come to the assistance of 
China if it were attacked by the United States as Dulles contemplated. 
     During the 1954 Far Eastern Geneva Conference, two American 
aircraft carriers, loaded with atomic weapons, were cruising the South 
China Sea, awaiting orders from Washington to hurl their deadly bombs 
at the Communist forces besieging the 15,000 exhausted troops trapped 
at Dien Bien Phu. In Washington, Admiral Radford was vigorously 
advocating such aggressive action on a generally reluctant government. 
In Paris, public outrage was rising over Indochina where the French 
had expended 19,000 lives and $8 billion without improving matters a 
particle. The fall of Dien Bien Phy on May 7th led to the fall of the 
French government. The new prime minister promised a cease-fire or his 
own retirement within 30 days. He barely met the deadline. 
     The Indochinese settlement of July 20, 1954 was basically a 
compromise, some of whose elements did not appear in the agreement 
itself. A Communist North Vietnam state was recognized north of the 
17th parallel and the rest was left in three states: Laos, Cambodia 
and South Vietnam. 
     The new state system was brought within the Dulles network of 
trip-wire pacts on September 8, 1954 when Britain, France, Australia, 
New Zealand, Pakistan, Thailand, Philippines and the U.S. formed the 
South-East Asia Treaty Organization (SEATO) and extended their 
protection to Laos, Cambodia and South Vietnam.
     The Geneva agreement was to neutralize the Indochina states but 
was apparently not acceptable to the Dulles brothers and any possible 
stability in the area was soon destroyed by their activities, 
especially through the Central Intelligence Agency (CIA) seeking to 
subvert the neutrality of Laos and South Vietnam by channeling 
millions in American funds to Right-wing army officers, building up 
large military forces, rigging elections, and backing reactionary 
coups d'etat.
Page 1046
     These techniques might have been justified in the eyes of the CIA 
if they had been successful but, on the contrary, they alienated the 
mass of the natives in the area, brought numerous recruits to the 
Left, gave justification for Communist intervention from North 
Vietnam, disgusted our allies in Britain, France, Burma, India and 
elsewhere, and by 1962 had almost destroyed the American image and 
position in the area. 
     In Laos, the chief political figure was Prince Phouma, leader of 
the neutralist group, who tried to keep a balance between the 
Communist Pathet Lao on his Left and the American-subsidized 
politicians and militarists led by General Nosavan on his Right. 
American aid was about $40 million a year of which about $36 million 
went to the army. This was used, under American influence, as an anti-
neutralist rather than an anti-Leftist influence culminating in a 
bungled army attack on two Pathet Lao battalions in 1959 and openly 
rigged elections in which all the Assembly seats were won by Right-
wing candidates in 1960. In August 1960, an open revolt in behalf of 
the neutralist Phouma game rise to a Right-wing revolution led by 
General Nosavan. This drove the neutralists in the arms of the Pathet 
Lao. 
     The SEATO Council refused to support the American position, the 
Laotian army was reluctant to fight, and the American military mission 
was soon involved in the confused fighting directly. 
     The American bungle in Laos was repeated, with variations, 
elsewhere in southern and southeastern Asia. In South Vietnam, 
American aid, largely military, amounted to about two thirds of the 
country's budget, and by 1962, it had reached $2 billion. Such aid, 
which provided little benefit for the people, corrupted the 
government, weakened the swollen defense forces, and set up a chasm 
between the rulers and people which drove the best of the latter 
Leftward, in spite of the exploitative violence of the Communist 
guerrillas. A plebiscite in 1955 was so rigged that the American-
supported candidate won over 98% of the vote. The election of 1960 was 
similarly managed, except in Saigon, the capital, where many people 
refused to vote. As might have been expected, denial of a fair ballot 
led to efforts to assassinate the American-sponsored President, Diem, 
and gave rise to widespread discontent which made it possible for the 
Communist guerrillas to operate throughout the country. The American-
sponsored military response drove casualties to a high sustained 
figure by 1962 and was uprooting peasantry throughout the country in 
an effort to establish fortified villages which the British had 
introduced with success in Malaya. 
Page 1047
     These errors of American policy, which were repeated in other 
places, arose very largely from two factors:
1) American ignorance of local conditions which were passed over in 
animosity against Russia and China;
2) American insistence on using military force to overcome local 
neutralism which the mass of Asiatic people wanted.
     The American militarization of both Thailand and South Vietnam 
was used to increase pressure on Cambodia which was driven to seek 
support for its independence from China and Russia. 
     North Vietnam had a deficiency of food while South Vietnam, like 
all delta areas, is a zone of rice surplus and thus a shining target 
for North Vietnamese aggression. 
     The collapse of the world price of rice at the end of the Korean 
War left Burma with an unsellable surplus of almost two million tons. 
Within the next three years, Burma signed barter agreements with Red 
China and Soviet Europe by which Burma got rid of a third of its 
surplus each year in return for Communist goods and technical 
assistance. These returns were so poor in quality, high in price and 
poorly shipped that Burma refused to renew the agreements in 1958. 
SOUTHERN ASIA
     Farther west, in southern Asia (correctly called the Middle East 
from the Persian Gulf to Burma) American bungling also opened may 
opportunities for Soviet penetration which the Soviets failed to 
exploit. 
Page 1048
     India was determined to be neutral; Pakistan was willing to be an 
ally of the United States. 
Page 1049
     The partition of India before independence in 1947, as in 
Palestine and earlier in Ireland, received strong impetus from the 
Round Table Group, and in all three cases, it led to horrors of 
violence. In India's case, the partition was a butchery rather than a 
surgical process. Imposed by the British, it cut off two areas in 
northwestern and northeastern India to form a new Muslim state of 
Pakistan (cutting right through the Sikhs in the process). The two new 
nations began under two new leaders. In the post-partition confusion, 
minorities on the wrong sides of the lines sought to flee, as 
refugees, to India or Pakistan, while the Sikhs sought to establish a 
new homeland by exterminating Muslims in East Punjab. In a few weeks, 
almost 200,000 were killed and twelve million were forced to flee as 
refugees. 
     The two sections of Pakistan were separated from each other by 
1,100 miles of India territory, its boundaries irrational, its 
economic foundations torn to shreds by the partition. 
Page 1050
     In 1958, martial law was established and General Khan became 
president. Under military rule, a sweeping land-reform program 
restricted owners to 500 irrigated or 1000 non-irrigated acres with 
the surplus distributed to existing tenants or other peasants. Former 
landlords received compensation in long-term bonds. 
Page 1052
     The American insistence on the non-committed nations adopting 
anti-Soviet lines opened the way for the Soviet to pose as the friend 
of such nations by supporting their neutralism. 
Page 1053
     At the end of World War II, about 80 percent of Iran's population 
were peasants. Four fifths of the land was almost entirely useless, 
being either mountainous or arid. Moreover, the peasants who tilled 
the land were much oppressed by heavy rents to absentee landlords who 
also controlled, as separate rights, essential access to water. Only 
about a seventh of the land was owned by peasants who worked it. 
Peasants retained little more than a fifth of what they produced. 
     The shah has shifted the basis of his support from the elite 
landed group to this growing middle class.
     Before 1914, the shah sought to raise funds for his personal use 
by selling concessions and monopolies to foreign groups. Most of these 
were exploitive of the Iranian peoples. Of these, the most important 
was the concession for petroleum which came into possession of the new 
Anglo-Persian Oil Company which came to be controlled, through secret 
stock ownership, by the British government. 
Page 1054
     At the end of World War I, Iran was a battleground between 
Russian and British armed forces. By 1920, the withdrawal of British 
forces left the anti-Bolshevik Russian Cossack Brigade as the only 
significant military force in the country. The chief Iranian officer 
in that force, Reza Pahlavi, in the course of 1921-1925 gradually took 
over control of the government and eventually deposed the incompetent 
28-year-old Shah Ahmad. 
     Pahlavi's chief aim was to break down tribalism and localism. To 
this end, he defeated the autonomous tribes, settled nomadic groups in 
villages, shifted provincial boundaries to break up local loyalties, 
created a national civil service and police force, established 
national registration with identity cards for all, and used universal 
conscription to mingle various groups in a national army.
     All these projects needed money and the chief resource, oil, was 
tied up completely in the concession held by the AIOC with the 
inevitable result that it became the target of the Iranian nationalist 
desire for traditional development funds. The older Iranian elite 
would have been satisfied with a renegotiated deal but the newer urban 
groups demanded the complete removal of foreign economic influence by 
nationalization of the petroleum industry. 
Page 1056
     By 1950, the Shah put his prime minister in to force through the 
supplemental agreement. Opposing groups introduced nationalization 
bills. Gradually, the nationalization forces began to coalesce about a 
strange figure, Mr. Muhammad Mossadegh, with a doctorate in Economics. 
Politically, he was a moderate but his strong emotional appeal to 
Iranian nationalism encouraged extreme reactions among his followers. 
     The company insisted that its status was based on a contractual 
agreement which could not be modified without its consent. The British 
government maintained the agreement was a matter of international 
public law which it had a right to enforce. The Iranian government 
declared it had the right to nationalize an Iranian corporation 
operating under its law on its territory, subject only to adequate 
compensation. 
     The nationalist arguments against the company were numerous:
1) It had promised to train Iranians for all positions possible but 
had only used them in menial tasks, trained few natives and employed 
many foreigners.
2) The company had reduced its payments to Iran, which were based on 
profits, by reducing the amount of its profits by bookkeeping tricks. 
It sold oil at very low prices to wholly-owned subsidiaries outside 
Iran or to the British Navy, allowing the former to resell at world 
prices so that AIOC made small profits, while the subsidiaries made 
large profits not subject to the Iranian royalty obligations. Iran 
believe that all profits should fall under the obligations. but as 
late as 1950, AIOC admitted that the accounts of 59 such dummy 
corporations were not included in AIOC accounts. 
3) AIOC generally refused to pay Iranian taxes, especially income tax 
but paid such taxes to Britain; at the same time, it calculated the 
Iranian profit royalties after such taxes so that the higher British 
taxes went, the less the Iranian payment became. Thus, Iran paid 
income tax to Britain. In 1933, AIOC paid #305,000 in British taxation 
and #274,000 in Iranian taxes. In 1948, the two figures were #28.3 
million to Britain and #1.4 million to Iran. 
Page 1057
4) The payment to Iran was also reduced by putting profits into 
reserves or into company investments outside Iran, often in 
subsidiaries, and calculating the Iranian share only on the profits 
distributed as dividends. Thus in 1947, when profits were really #40.5 
million, almost #15 million went to British income taxes, over #7 
million to stockholders, and only #7 million to Iran. If the payment 
to Iran had been calculated before taxes and reserves, it would have 
received at least #6 million more that year. 
5) AIOC's exemption from Iranian customs deprived Iran of about #6 
million a year. 
6) The company drew many persons to arid and uninhabited areas and 
then provided very little of the costs of housing, education, or 
health. 
7) AIOC as a member of the international oil cartel reduced its oil 
production and thus reduced Iran's royalties. 
8) AIOC continued to calculate its payments to Iran in gold at #8.1 
per ounce for years after the world gold price had risen to #13 an 
ounce while the American Aramco in Saudi Arabia raised its gold price 
on demand.
9) AIOC's monopoly prevented Iran developing other Iranian oil fields.
     As a consequence of all these activities, the Iranian 
nationalists of 1952 felt angered to think that Iran had given up 300 
million tons of oil over fifty years and obtained about #800 million 
in profits. 
     The Iranian opposition to nationalization was broken in 1951 when 
the prime minister was assassinated. The nationalization bill was 
passed and at the request of the Majlis, the shah appointed Mossadegh 
prime minister to carry it out. This was done with considerable 
turmoil which included strikes by AIOC workers against mistimed 
British wage cuts, anti-British street riots and the arrival of 
British gun-boats at the head of the Persian Gulf. Rather than give up 
the enterprise or operate it for the Iranian government, AIOC began to 
curtail operations and ship home its engineers. In May 1951, it 
appealed to the International Court of Justice in spite of Iranian 
protests that the case was a domestic one, not international. Only in 
July, 1952, did the court's decision uphold Iran's contention by 
refusing jurisdiction.
Page 1058
     At first, the U.S. supported Iran's position fearing British 
recalcitrance would push Iran toward Russia. However it soon became 
apparent that the Soviet Union, while supporting Iran's position, was 
not going to interfere. The American position then became increasingly 
pro-British and anti-Mossadegh. This was intensified by pressure from 
the international petroleum cartel comprising the seven greatest oil 
companies in the world. 
     As soon as Britain lost its case in the International Court of 
Justice, it put into effect a series of reprisals against Iran which 
rapidly crippled the country. Iranian funds were blocked; its 
purchases in British controlled markets were interrupted; its efforts 
to sell oil abroad were frustrated by a combination of the British 
Navy and the world oil cartel (which closed sales and distribution 
facilities to Iranian oil). These cut off a substantial portion of the 
Iranian government's revenues and forced a drastic curtailment of 
government expenditures. 
Page 1059
     Mossadegh broke off diplomatic relations with the British, 
deported various economic and cultural groups, and dismissed both the 
Senate and the Iranian Supreme Court which were beginning to question 
his actions. 
     By that time, almost irresistible forces were building up against 
Mossadegh, since lack of Soviet interference gave the West full 
freedom of action. The British, the AIOC, the world petroleum cartel, 
the American government and the older Iranian elite led by the shah 
combined to crush Mossadegh. The chief effort came from the CIA under 
the personal direction of Allen Dulles, brother of the Secretary of 
State. Dulles, a former director of the Schroeder Bank in New York. It 
will be remembered that the Schroeder Bank in Cologne helped to 
arrange Hitler's accession to power as chancellor in January 1933. 
     In the Near East, the mobs are easily roused and directed by 
those who are willing to pay and Dulles had the unlimited secret funds 
of the CIA. From these he gave $10 million to Colonel H. Norman 
Schwartzkopf who was in charge of training the Imperial Iranian 
Gendarmerie and this was judiciously applied in ways which changed the 
mobs tune. The whole operation was directed personally by Dulles from 
Switzerland. 
     In August Mossadegh held a plebiscite to approve his policies. 
The official vote was about two million approvals against twelve 
hundred disapprovals but his days were numbered. On August 13th, the 
Shah precipitated the planned anti-Mossadegh coup by naming General 
Zahedi as prime minister and sent a messenger dismissing Mossadegh. 
The latter refused to yield and called his supporters into the streets 
where they rioted against the Shah who fled with his family to Rome. 
Two days later, anti-Mossadegh mobs, supported by the army, defeated 
Mossadegh supporters. He was forced out of office and replaced by 
General Sahedi. The shah returned from Italy on August 22nd. 
Page 1060
     The fall of Mossadegh ended the period of confusion. From 1953 
on, the shah and the army, backed by the conservative elite, 
controlled the country and the docile Majlis. Two weeks after the 
shah's countercoup, the U.S. gave Iran an emergency grant of $45 
million, increased its economic aid payment to $23 million and began 
to pay $5 million a month in Mutual Security funds. In return, Iran 
became a firm member of the Western bloc. The Communist Tudeh Party 
was relentlessly pursued after 1953. 
     By 1960, the shah tried a program of agrarian reform which sought 
to restrict each landlord's holdings to a single village, taking all 
excess lands for payments spread over 10 years and granting the lands 
to the peasants who worked them for payments over 15 years. The shah's 
own estates were among the first to be distributed but by the end of 
1962 over 5000 villages had been granted to their peasants. 
     In the meantime, the oil dispute was settled and the incomes to 
Iran were considerably increased averaging about $250 million or more 
a year. 




TRAGEDY AND HOPE Chapters XIX-XX
by Dr. Carroll Quigley 
ISBN 0913022-14-4



CONTENTS
XIX. THE NEW ERA
XX. TRAGEDY AND HOPE: THE FUTURE IN PERSPECTIVE


CHAPTER XIX: THE NEW ERA, 1957-1964
THE GROWTH OF NUCLEAR STALEMATE
Page 1088
     Dulles refused to recognize the right of anyone to be neutral and 
tried to force all states to join the American side of the Cold War or 
be condemned to exterior darkness. 
Page 1090
     The so-called "missile gap" was a mistaken idea for the U.S. was 
in a condition of "nuclear plenty" and of "overkill capacity" that 
posed a serious problem for the Soviet Union. It was, strangely 
enough, just at that time (end of 1957) that two American studies (the 
Gaither Report and the Special Studies Project of the Rockefeller 
Brothers Fund) suggested the existence of a missile gap or inferiority 
in missile capacity of the United States compared to the Soviet Union 
based on the overemphasis on the "size" of Soviet rocket boosters. In 
this pleasant period of self-deception, the Soviet Union entered upon 
an unofficial international suspension of nuclear bomb testing from 
1958 until 1961. 
Page 1097
     As a result of NASA's $5 billion budget, the educational system 
was brought into the tempestuous atmosphere of the frantic American 
marketplace and was being ransacked from the highest levels down to 
high school and even below for talented, trained, or merely eager 
people. As the demands for such people grew and their remunerations 
and opportunities increased, the substantial minority who were not 
talented, trained or eager found fewer and fewer opportunities to make 
a living and began to sink downward toward a steadily growing lower 
class of social outcasts and underprivileged, the socially self-
perpetuating group of the impoverished. 
Page 1098
     In 1959, Red China began making increasingly unfavorable comments 
about Khrushchev's doctrines of "peaceful coexistence with capitalism" 
and the "inevitable victory of Socialism without war." He ruled out 
the need for war and the Soviet Union was willing to reach complete 
disarmament supervised by mutual controls including aerial 
photography. 
Page 1101
     As late as 1960, only 38,000 man-days of labor were lost by 
strikes and lockouts in West Germany compared to almost half a million 
in the Netherlands, 3 million in the U.K. and 19 million in the U.S.
     In Germany in 1958, eight great trusts still controlled 75 
percent of crude steel production, 80 percent of raw iron, 60 percent 
of rolled steel, and 36 percent of coal output. 
     The ten percent increase each year in the West German gross 
national product was something that could not be denied or 
disbelieved. 
Page 1102
     In East Germany in 1960, almost a million farmers were forced 
into less than 20,000 collective farms by methods of violence and 
social pressure similar to those Stalin had used. And the consequences 
were similar: agricultural production collapsed. Shortages of food 
were soon followed by other shortages. 
Page 1103
     Khrushchev's talk about "peaceful co-existence" was sincere and 
he sincerely wished to divert the Communist-Capitalist struggle into 
non-violent areas. Thus he was sincere in his disarmament suggestions. 
Page 1105
     Metternich said, "A diplomat is a man who never allows himself 
the pleasure of a triumph," and does so simply because it is to the 
interest of the stronger that an opponent who recognizes the victor's 
strength and is reasonable in yielding to it not be overthrown or 
replaced by another ruler who is too ignorant or too unreasonable to 
do so. 
Page 1108
     After Russia backed down on the Cuban missile crisis, the White 
House received a long and confused letter from Khrushchev whose tone 
clearly showed his personal panic and, to save his reputation, it was 
not released to the public. The next morning, the Soviet Foreign 
Office published a quite different text, suggesting that a deal be 
made dismantling both the American missile sites in Turkey and the 
Soviet missile sites in Cuba. To those inside both governments, this 
was recognized as a Soviet surrender since they knew that the Turkish 
sites were obsolete and were already scheduled to be dismantled. It 
was rejected by the White House because it would have represented to 
the world a surrender of Turkey. Instead, the White House replied to 
an offer to remove the Russian missiles if we would lift the blockade 
and promise not to invade Cuba.
THE DISINTEGRATING SUPERBLOCS
LATIN AMERICA: A RACE BETWEEN DISASTER AND REFORM
Page 1109
     The Brazilian cost of living rose 40% in 1961, 50% in 1962, and 
70% in 1963. 
Page 1110
     Latin America is not only poverty-ridden but the distribution of 
wealth and income is so unequal that the most ostentatious luxury 
exists for a small group side by side with the most degrading poverty 
for the overwhelming majority. Four fifths of the population of Latin 
America get about $53 a year, while a mere 100 families own 90% of the 
native-owned wealth of the whole area and only 30 families own 72% of 
that wealth. In Brazil, half of all and is owned by 2.6% of the 
landowners while 22.5% is owned by only 1/2% of the owners. In Latin 
America, at least two thirds of the land is owned by 10% of the 
families. 
Page 1111
     As things stood in 1960, infant mortality varied between 20% and 
35% in different countries. 
Page 1112
     While such conditions may rouse North American to outrage or 
humanitarian sympathy, no solution can be found by emotion or 
sentimentality. The problems are not based on lack of anything but on 
structural weaknesses. Solutions will not rest on anything that can be 
done to or for individual people but on the arrangements of peoples. 
Latin American lacks the outlook that will mobilize its resources in 
constructive rather than destructive directions. 
     Obviously, the birthrate must decrease or the food supply must be 
increased faster than the population. And some provision must be made 
to provide peasants with capital and know-how before the great landed 
estates are divided up among them. A more productive organization of 
resources should have priority over any effort to raise standards of 
living. 
Page 1113
     We hear a great deal about Latin America's need for American 
capital and American know-how, when in fact the need for these is much 
less than the need for utilization of Latin America's own capital and 
know-how. The wealth and income of Latin America, in absolute 
quantities, is so great and it is so inequitably controlled and 
distributed that there is an enormous accumulation of incomes, far 
beyond their consumption needs, in the hands of a small percentage of 
Latin Americans. Much of these excess incomes are wasted, hoarded, or 
merely used for wasteful competition in ostentatious social display 
largely due to the deficiencies of Latin American personalities and 
character. 
     The solution is not to redistribute incomes but to change the 
patterns of character and of personality formation so that excess 
incomes will be used constructively and not wasted. 
Page 1114
     At least half the value of American aid has been wiped away by 
the worsening of Latin America's terms of trade which made it 
necessary for it to pay more and more for its imports at the same time 
that it got less and less for its exports made worse by much of the 
available supply of foreign exchange spent for self-indulgent and non 
constructive spending abroad or simply to hoard their money in New 
York, London or Switzerland. The solution must be found in more 
responsible, more public-spirited, and more constructive patterns of 
outlook, of money flows, and of political and social security. A 
similar solution must be found for social deficiencies like inadequate 
housing, education, and social stability. 
Page 1115
     An Asian despotism is a two-class society in which a lower class 
consisting of nine tenths of the population supports an upper ruling 
class consisting of a governing bureaucracy of scribes and priests 
associated with army leaders, landlords, and moneylenders. The 
essential character of an Asian despotism rests on the fact that the 
ruling class has legal claim on the working masses and possesses the 
power to enforce these claims. 
Page 1119
     Arabic boys grow up egocentric, self-indulgent, undisciplined, 
immature, spoiled, subject to waves of emotionalism, whims, passion, 
and pettiness. Another aspect of Arabic society is its scorn of 
honest, steady manual work, especially agricultural work. There is a 
lack of respect for manual work that is so characteristic of the 
Pakistani-Peruvian axis. The Bedouin outlook include lack of respect 
for the soil, for vegetation, for most animals, and for outsiders. 
These attitudes are to be seen constantly as erosion, destruction of 
vegetation and wild life, personal cruelty and callousness to most 
living things, including one's fellow man, and a general harshness and 
indifference to God's creation. 
Page 1120
     The ethical sides of Judaism, Christianity and Islam sought to 
counteract harshness, egocentricity, tribalism, cruelty, scorn of work 
and one's fellow creatures but these efforts have met with little 
success. 
Page 1122
     The method for the reform of Latin America rest in the upper 
class of that society. Such reform can come about only when the 
surpluses that accumulate in the hands of the Latin American oligarchy 
are used to establish more progressive utilization of Latin American 
resources. 
Page 1123
     The whole system is full of paradox and contradiction. The 
obstacle to progress and hope rests in the oligarchy because it 
controls wealth and power, and also because there is no hope at all 
unless it changes its ideology. 
Page 1124
     World War II, by increasing demand for Latin America's mineral 
and agricultural products, pushed starvation and controversy away from 
the immediate present. Latin American boomed: the rich got richer; the 
poor had more children. A few poor became rich, or at least richer. 
But nothing was done to modify the basic pattern of Latin American 
power, wealth, and outlook. 
Page 1127
     Until the 1952 revolution, the Bolivians, mostly of Indian 
descent, who were treated as second-class persons working as 
semislaves in the mines or as serfs on the large estates, had a per 
capita annual outcome of about $100. As might be expected, the 
majority were illiterate, sullen and discouraged. 
Page 1128
     The Junta was overthrown in 1952. Paz Estenssoro returned from 
exile to become president. Pressure from the tin miners and from the 
peasants forced the new regime to nationalize the mines and to break 
up many of the large estates. Production costs of tin rose above 
market price thus wiping out their foreign exchange earnings. Worse, 
the world price of tin collapsed in 1957. 
     The problems could hardly be handled because of popular pressures 
in a democratic country to live beyond the country's income. The final 
collapse did not occur because of the efforts of President Siles and 
assistance from the United States. 
Page 1129
     If any proof were needed that radical reform for sharing the 
wealth of the few among the many poor is not an easy, or feasible 
method, Bolivia's hard-working Indians, once hopelessly dull, morose, 
and sullen, are not bright, hopeful, and self-reliant. Even their 
clothing is gradually shifting from the older funereal black to 
brighter colors and variety. 
     Few contrasts could be more dramatic than that between the 
Bolivian revolutionary government (in which a moderate regime was 
pushed toward radicalism by popular pressures and survived, year after 
year, with American assistance) and the Guatemala revolution where a 
Communist-inspired regime tried to lead a rather inert population in 
the direction of increasing radicalism but was overthrown by direct 
American action within three years (1951-1954).
     Guatemala is one of the "banana republics." The retail value of 
Latin America's part of the world's trade in bananas is several 
billion dollars a year but Latin America's gets less than 7% of that 
value. One reason for this is the existence of the United Fruit 
Company which owns two million acres of plantations in six countries 
and handles about a third of the world's banana sales. It pays about 
$145 million a year into the six countries and claims to earn about 
$26 million profits on its $159 million investment but this profit 
figure of about 16.6% is undoubtedly far below the true figure. In 
1970, 95% of the land held by United Fruit was uncultivated. 
Page 1130
     Guatemala, like Bolivia, has a population that consists largely 
of impoverished Indians and mixed bloods (mestizos). From 1931 to 1944 
it was ruled by the dictator Jorge Ubico, the last of a long line of 
corrupt and ruthless tyrants. When he retired to New Orleans in 1944, 
free elections chose Juan Jose Arevalo (1945-1950) and Jacobo Arbenz 
Guzman (1950-1954) as presidents. Reform was long overdue and these 
two administrations tried to provide it, becoming increasingly anti-
American and pro-Communist over their nine-year rule. When they began, 
civil or political rights were almost totally unknown and 142 persons 
(including corporations) owned 98% of the arable land. Free speech and 
press, legalized unions, and free elections preceded the work of 
reform but opposition from the United States began as soon as it 
became clear that the Land Reform Act of June 1952 would be applied to 
the United Fruit Company. This act called for redistribution of 
uncultivated holdings above a fixed acreage or lands of absentee 
owners, with compensation from the twenty year 3 percent bonds equal 
to the tax value of the lands. About 400,000 acres of United Fruit 
lands fell under this law and were distributed by the Arbenz Guzman 
government to 180,000 peasants. This was declared to be a Communist 
penetration by Allen Dulles, Director of the CIA, which soon found an 
American-trained and American-financed Guatemalan Colonel, Carlos 
Castillo Armas, who was prepared to lead a revolt against Arbenz. With 
American money and equipment, and even some American "volunteers" to 
fly "surplus" American planes, Armas mounted an attack of Guatemalan 
exiles from bases in two adjacent dictatorships, Honduras and 
Nicaragua." Both these countries are horrible examples of everything a 
Latin American government should not be, corrupt, tyrannical, cruel, 
and reactionary, but they won the favor of the United States State 
Department by echoing American foreign policy at every turn. 
Nicaragua, often a target of American intervention in the past, was 
decayed, dirty, and diseased under the twenty-year tyranny of 
Anastasio Somoza (1936-1956). His assassination handed the country 
over to be looted by his two sons, one of whom became president while 
the other served as commander of the National Guard.
Page 1131
     From these despotic bases, the CIA-directed assault of Colonel 
Armas overthrew Arbenz Guzman in 1954 and established in Guatemala a 
regime similar to that of the Somozas. All civil and political 
freedoms were overthrown, the land reforms were undone, and corruption 
reigned. When Armas was assassinated in 1957 and a moderate elected as 
his successor, the army annulled those elections and held new ones in 
which one of their own, General Fuentes, was "elected." He liquidated 
what remained of Guatemala's Socialist experiments by granting these 
enterprises, at very reasonable prices, to his friends while 
collecting his own pay of a $1 million a year. Discontent from his 
associates led to a conservative army revolt but American pressure 
secured his position. The U.S. could not afford a change of regime 
since that country was the chief aggressive base for the Cuban exiles' 
attack on Cuba at the Bay of Pigs in April 1962. 
     The CIA success in attacking "Communist" Guatemala from 
dictatorial Nicaragua in 1954 was not repeated in its more elaborate 
attack on "Communist" Cuba from dictatorial Guatemala in 1962. In 
fact, the Bay of Pigs must stand as the most shameful event in U.S. 
history since the end of World War II.
     The causes of the Cuban disaster, if we oversimplify, may be 
organized in terms of two intersecting factors:
1) the personality deficiencies of the Cubans themselves such as their 
lack of rationality and self-discipline, their emotionalism and 
corruptibility;
2) the ignorance and ineptitude of the American State Department which 
seems incapable of dealing with Latin America in terms of the real 
problems of the area but instead insists on treating it in terms of 
America's vision of the world, which is to day, America's political 
preconceptions and economic interests. 
     Cuba is more Spanish than much of Latin America and only obtained 
its independence in 1898, two generations later than the rest of Latin 
America. Then, for over thirty years, until the abrogation of the 
Platt Amendment in 1934, Cuba was under American occupation or the 
threat of direct American intervention. It fell under American 
economic domination by American investments on the island and by 
becoming deeply involved in the american market, especially for sugar. 
A local oligarchy of Cubas was built up including an exploitative 
landlord group that had not existed previously. 
     With the establishment of the Good Neighbor Policy in 1933 and 
ending the threat of American direct intervention, it became possible 
for the Cubans to overthrow the tyrannical and bloody rule of General 
Machado which had lasted for eight years (1925-1933).
Page 1132
     The opportunity to begin a series of urgently needed and widely 
demanded social reforms under Machado's successor, San Martin, was 
lost when the United States refused to recognize or to assist the new 
regime. As a result, a ruthless Cuban army sergeant, Fuegencio 
Batista, was able to overthrow San Martin and begin a ten-year rule 
through civilian puppets chosen in fraudulent elections, and then 
directly as president himself. When San Martin was elected president 
in 1944, he abandoned his earlier reformist ideas and became the first 
of a series of increasingly corrupt elected regimes over the next 
eight years. The fourth such election for 1953 was prevented when 
Batista seized power once again in 1952. 
     The next seven years were filled with Batista's efforts to hold 
his position by violence and corruption against the rising tide of 
discontent against his rule. 
     One of the earliest episodes in that tide was an attempted revolt 
by a handful of youths, led by 26-year-old Fidel Castro in eastern 
Cuba on July 26, 1953. The failure of the rising gave Castro two years 
of imprisonment and more than a year of exile but at the end of 1956, 
he landed with a handful of men to begin guerrilla operations. 
Batista's regime was so corrupt that many segments of the army and 
middle class were neutral or favorable to Castro's operations. The 
necessary arms and financial support came from these groups although 
the core of the movement was made up of peasants and workers led by 
young middle-class university students. 
     This Castro uprising was not typical because of Castro's 
fanatical thirst for power, his ruthless willingness to destroy 
property or lives in order to weaken the Batista regime, and his 
double method of operation, from within Cuba rather than from abroad 
and from a rural base, the peasants, rather than the usual urban base, 
the army, used by most Latin American rebels. 
     On New Year's day of 1959, Castro marched into Havana. Within two 
weeks, the supporters of the Batista regime and dissident elements in 
Castro's movement began to be executed by firing squad. 
     For a year, Castro's government carried on reforms aimed at 
satisfying the more obvious demands of the dispossessed groups. 
Military barracks were converted into schools; the militia was 
permanently established to replace the regular army; rural health 
centers were set up; a full-scale attack was made on illiteracy; new 
schools were constructed; urban rents were cut in half; utility rates 
were slashed; taxes were imposed on the upper classes; the beaches, 
once reserved for the rich, were opened to all; and a drastic land 
reform was launched. 
Page 1133
     These actions were not integrated into any viable economic 
program but they did spread a sense of well-being in the countryside 
although they curtailed the building boom in the cities, largely 
rooted in American investment, and they instigated a flight of the 
rich from the island to refuge in the U.S. 
     Castro sought to export revolution to the rest of Latin America. 
Arms and guerrilla fighters were sent, and lost, in unsuccessful 
efforts to invade Panama, Nicaragua, Haiti, and the Dominican 
Republic. Failure of these turned him to methods of more subtle 
penetration, largely worked by propaganda and the arming and training 
of small subversive groups, especially where democratic or progressive 
regimes seemed to be developing as in Venezuela or Colombia. At the 
same time, an unsuccessful effort was made to persuade all Latin 
America to form an anti-Yankee front. 
     Although the U.S. had promised in 1959 to follow a policy of non-
intervention toward Cuba, these changes within the island and a visit 
of Soviet Deputy Premier Mikoyan in February 1960 forced a 
reconsideration of this policy. The Mikoyan agreement promised Cuba 
petroleum, arms and other needs for its sugar followed by 
establishment of diplomatic relations with the Soviet Union in May and 
with Red China later in the year. The Soviet embassy in Havana became 
a source of Communist subversion for all Latin America almost at once, 
while in September Khrushchev and Castro jointly dominated the annual 
session of the General Assembly of the U.N. in New York. 
     Castro obtained petroleum for Cuban sugar. When he insisted that 
American-owned refineries in Cuba process this oil, they refused and 
were at once seized by Castro. 
Page 1134
     The U.S. struck back by reducing the Cuban sugar quota in the 
American market which led, step by step, to Castro's sweeping 
nationalization of foreign-owned factories on the island. The United 
States retaliated by establishing a series of embargoes on Cuban 
exports to the U.S. These controversies led Castro into an economic 
trap similar to that into which Nasser had fallen with Egypt's cotton. 
Each nationalist leader committed his chief foreign-exchange-earning 
product (sugar and cotton) to the Soviet Union as payment for 
Communist (often Czech) arms. This tied these countries to the Soviet 
Union and deprived them of the chance to use their own source of 
foreign money for equipment so urgently needed for economic 
improvement. By December when American diplomatic relations with Cuba 
were broken off, the Cuban economic decline had begun and soon reached 
a point where standards of living were at least a third below the 
Batista level except for some previously submerged groups. 
     At the end of 1960, the Eisenhower Administration decided to use 
force to remove Castro. This decision was a major error and led to a 
totally shameful fiasco. The error apparently arose in the CIA and was 
based on a complete misjudgment of the apparent east with which that 
agency had overthrown the Arbenz regime in Guatemala in 1954 by 
organizing a raid of exiles, armed and financed by the CIA, into 
Guatemala from Nicaragua. The CIA analyzed this apparently successful 
coup quite incorrectly,since it assumed that Arbenz had been 
overthrown by the raiding exiles when he had really been destroyed by 
his own army which used the raid as an excuse and occasion to get rid 
of him. But on this mistaken basis, the CIA decided to get rid of 
Castro by a similar raid of Cuban exiles from Guatemala. 
     This decision was worse than a crime; it was stupid. A 
unilateral, violent attack on a neighboring state with which we were 
not at war, in an area where we were committed to multilateral and 
peaceful procedures for settling disputes, was a repudiation of all 
our idealistic talk about the rights of small nations and our devotion 
to peaceful procedures that we had been pontificating around the world 
since 1914. It was a violation of our commitment to non-intervention 
in the Americas and specifically in Cuba. In sequence to our CIA 
intervention in Guatemala, it strengthened Latin American picture of 
the U.S. as indifferent to Latin America's growing demand for social 
reform.
     The whole operation, patterned on Hitler's operations to subvert 
Austria and Czechoslovakia in 1938 was bungled as Hitler could never 
have bungled anything. The project was very much a Dulles brothers' 
job and its execution was largely in the hands of the CIA. 
Page 1135
     The plan of invasion of Cuba seems to have been drawn on typical 
Hitler lines: the expeditionary force was to establish a beachhead in 
Cuba, set up a government on the island, be recognized by the U.S. as 
the actual government of Cuba, and ask Washington for aid to restore 
order in the rest of the island which it did not yet control. The CIA 
assured President Kennedy that if matters were allowed to go on as 
they were, Castro would be strengthened in power (which was untrue) 
and that the invasion would be success because of the Cuban people, 
led by the anti-Castro underground, would rise against him as soon as 
they heard of the landing. 
     The executive committee of Cuban refugees in the U.S., mostly 
representatives of the older ruling groups in Cuba, were eager to 
restore the inequitable economic and social system that had existed 
before Castro. They were alienated from the most vigorous anti-Castro 
groups in the Cuban underground who had no desire to turn back the 
clock to the Batista era. The CIA would not cooperate with the anti-
Castro underground because it was opposed to their wish for social and 
economic reform. Accordingly, the CIA launched the invasion without 
notifying the Cuban underground. Then the attack was bungled. 
Page 1136
     This greatly strengthened Castro's prestige in Latin American 
more than in Cuba itself. This in turn permitted him to survive a 
deepening wave of passive resistance and sabotage within Cuba itself, 
chiefly from the peasants to recapture control of the Cuban 
revolutionary movement.
Page 1138
     In May 1961, Castro proclaimed that Cuba would be a socialist 
state but despite his statements, he was not in any way a convinced 
Communist or a convinced anything else, but was a power-hungry and 
emotionally unstable individual, filled with hatred of authority 
himself, and restless unless he had constant change and megalomaniac 
satisfactions. His tactical skill, especially in foreign affairs, is 
remarkable, and shows similarity to Hitler's.
Page 1139
     On the whole, the role of the U.S. in Latin America has not been 
such as to help either patterns or priorities, largely because our 
concern has been with what seems to be useful or better for us rather 
than with what would be most helpful to them. 
Page 1140
     Despite the enthusiasm and energy that make it possible for them 
to overthrow corrupt and tyrannical regimes,it soon becomes clear that 
they have little idea what to do once they get into power. As a 
result, they fall under the personal influence of unstable and 
ignorant men, the Nassers, the Perons, and the Castros who fall back 
on emotionally charged programs of hatreds and spectacular displays of 
unconstructive nationalism that waste time and use up resources while 
the real problems go unsolved. 
     A heavy responsibility rests with the United States for this 
widespread failure to find solutions to problems all the way from 
Pakistan to Peru. The basic reason for this is that our policies in 
this great area have been based on efforts to find solutions to our 
own problems rather than theirs; to make profits, to increase supplies 
of necessary raw materials, to fight Hitler, to keep out Communism and 
prevent the spread of neutralism. The net result is that we are now 
more hated than the Soviet Union and neutralism reveals itself as 
clearly as it dares through the whole area. 
Page 1141
     The sole consequence of the Dulles efforts to do the wrong thing 
along the Pakistani-Peruvian axis has been to increase what he was 
seeking to reduce: local political instability, increased Communist 
and Soviet influence, neutralism, and hatred of the U.S. 
     Although the Dulles period shows most clearly the failures of 
American foreign policy in Latin America, the situation was the same, 
both before and since Dulles. American policy has been determined by 
American needs and desires and not by the problems of Latin Americans.   
There are four chief periods in U.S. policy in Latin America in the 
20th century:
1) a period of investment and interventionism (until 1933) and was 
basically a period of American imperialism. American money came as 
investments seeking profits out of the exploitation of the areas 
resources. There was little respect for the people themselves and 
intervention by American military and diplomatic forces was always 
close at hand as a protection for American profits and investments. 
2) the Good Neighbor Policy in 1933 reduced intervention while 
retaining investment.
3) from 1940 until 1947, our efforts to involved the are in our 
foreign policy against Hitler and Japan;
4) since 1947, against the Soviet Union. 
     Both these efforts have been mistakes. 
Page 1142
     That this failure continued into the 1960s was clear in 
Washington's joy at the military coup that ejected the left-of-center 
Goulart government from Brazil in 1964 for that government, however 
misdirected and incompetent, at least recognized that there were 
urgent social and economic problems in Brazil demanding treatment. No 
real recognition that such problems existed was achieved in Washington 
until Castro's revolution forced the realization. 
     The formal agreement for the Alliance for Progress aims and 
attitudes were admirable but required implementation features that 
were not covered in the Charter itself.
     "We, the American Republics, hereby proclaim our decision to 
unite in a common effort to bring our people accelerated economic 
progress and broader social justice within the framework of personal 
dignity and personal liberty. Almost two hundred years ago we began in 
this hemisphere the long struggle for freedom which now inspires 
people in all parts of the world. Now we must give a new meaning to 
that revolutionary heritage. For America stands at a turning point in 
history. The men and women of this hemisphere are reaching for the 
better life which today's skills have placed within their grasp. They 
are determined for themselves and their children to have decent and 
ever more abundant lives, to gain access to knowledge and equal 
opportunity for all, to end those conditions which benefit the few at 
the expense of the needs and dignity of the many." 
Page 1144
     These were fine words but the methods for achieving these 
desirable goals were only incidentally established in the Charter. On 
the whole, it cannot be said that it has been a success. It's 
achievement has been ameliorative rather than structural, and this 
alone indicates that it has not been a success. For unless there are 
structural reforms, its economic development will not become self-
sustaining or even manage to keep up with the growth of population on 
the basis of income per capita. 
Page 1145
     The failure of the Alliance for Progress to achieve what it was 
touted to achieve was a result that it was not intended primarily to 
be a method for achieving a better life for Latin Americans but was 
intended to be a means of implementing American policy in the Cold 
War. This became clearly evident at the second Punta del Este 
Conference in 1962 where Washington's exclusive control over the 
granting of funds was used as a club to force the Latin American 
states to exclude Cuba from the Organization of American States. The 
original plan was to cut off Cuba's trade with all Western Hemisphere 
countries. A two-thirds vote was obtained only after the most intense 
American "diplomatic" pressure and bribery involving the granting and 
withholding of American aid to the Alliance. Even at that, six 
countries, Brazil, Mexico, Argentina, Chile, Bolivia, and Ecuador, 
representing 70% of Latin America's population refused to vote for the 
American motions. 
     The aid takes the form not of money which can be used to buy the 
best goods in the cheapest market but as credits which can be used 
only in the U.S. Much of these credits goes either to fill the gaps in 
the budgets or the foreign-exchange balances which provides the 
maximum of leverage in getting these governments to follow America's 
lead but provides little or no benefit to the impoverished peoples of 
the hemisphere. 
THE JAPANESE MIRACLE
Page 1148
     The post-war agrarian reform redistributed the ownership of land 
by the government taking all individual land holdings beyond 7.5 
acres, all rented land over 2.5 acres, and the land of absentee 
landlords. The former owners were paid with long-term bonds. In turn, 
peasants without land or with less than the maximum permitted amount 
were allowed to buy land from the state on a long-term low-interest-
rate basis. Cash rents for land were also lowered. As a result, Japan 
became a land of peasant owners with about 90% of the cultivated land 
worked by its owners. 
Page 1151
     Agrarian reform has driven Communism out of the rural areas and 
restricted it to the cities, chiefly to student groups.
Page 1153
     Under the Czar, Russia produced great surpluses, especially of 
food. 
COMMUNIST CHINA
Page 1159
     Previous to the Land Reform Law of 1950, 10% of families owned 
53% farm land while 32% owned 78% of the land. This left over two 
thirds of such families with only 22% of the land. The first stage in 
agrarian reform had been the "elimination of landlordism." The 
landlords were eliminated with great brutality in a series of 
spectacular public trials in which landlords were accused of every 
crime in the book. At least 3 million were executed and several times 
that number were imprisoned but the totals may have been much higher. 
The land thus obtained was distributed to poor peasant families with 
each obtaining about one-third of an acre. 
     The second stage sought to establish cooperative farming. In 
effect, it took away from the peasants the lands they had just 
obtained. The third stage constituting the basic feature of the "Great 
Leap Forward" merged the 750,000 collective farms into about 26,000 
agrarian communes of about 5,000 families each. This was a social 
rather than simply an agrarian revolution since its aims included the 
destruction of the family household and the peasant village. All 
activities of the members, including child rearing, came under the 
control of the commune. 
Page 1160
     The Communist government was not involved in corruption, self-
enrichment, and calculated inefficiency as earlier Chinese governments 
were and had both greater power and greater desire to operate a fair 
rationing system but the fact remains that the inability of communized 
agricultural system to produce sufficient food surpluses to support a 
communized industrial system at a high rate of expansion is now 
confirmed and the need for all Communist regimes to purchase grain 
from the Western countries confirms that there is something in the 
Western pattern of living which does provide a bountiful agricultural 
system. 
Page 1164
     A source of alienation between Moscow and Peking is concerned 
with the growing recognition that the Kremlin was being driven toward 
a policy of peaceful coexistence with the U.S. not as a temporary 
tactical maneuver (which would have been acceptable to China) but as a 
semipermanent policy since Marxist-Leninist theory envisioned the 
advanced capitalist states as approaching a condition of economic 
collapse from "the internal contradictions of capitalism itself." This 
crisis would be reflected in two aspects: the continued impoverishment 
of the working class with the consequent growth of the violence of the 
class struggle in such countries and increasing violence of the 
imperialist aggressions of such countries toward each other in 
struggles to control more backward areas as markets for the industrial 
products that the continued impoverishment of their own workers made 
impossible to sell in domestic market. The falseness of these theories 
was fully evident in the rising standards of living of the advanced 
industrial countries. This evidence of the errors of Marxist-Leninist 
theories was increasingly clear to the Kremlin, although it could not 
be admitted, but it was quite unclear to Peking. 
Page 1165
     Mao Tse-tung, son of a peasant who became wealthy on speculation 
and moneylending was born in 1893 in Hunan province. 
Page 1168
     There are at least half a dozen legal, minor political parties in 
Red China today (1966). These not only exist and are permitted to 
participate in the governing process in a very minor way, but they are 
subject to no real efforts at forcible suppression, although they are 
subject to persistent, rather gentle, efforts at conversion. 
Page 1170
     French expenditure of $7 billion and about 100,000 lives during 
the eight-year struggle ended at Geneva in 1954. The Geneva agreements 
provided that all foreign military forces, except a French training 
group, be withdrawn from Laos. When the Pathet Lao showed increased 
strength in the elections of May 1958, the anti-Communist group 
combined to oust Premier Phouma and put in the pro-Western Sananikone. 
This government was then ejected and replaced by a Right-wing military 
junta led by General Nosavan in 1960; but within seven months a new 
coup led by Kong Le brought Phouma back to office. Four months later, 
Nosavan once again replaced Phouma by military force. The Communist 
countries refused to recognize this change and increased their 
supplies to the Pathet Lao by Soviet airlift. 
Page 1172
     The Geneva agreement of 1954 had recognized the Communist 
government of North Vietnam dividing the country at the 17th parallel 
but this imaginary line could not keep discontent or Communist 
guerrillas out of South Vietnam so long as the American-sponsored 
southern government carried on its tasks with corruption, favoritism 
and arbitrary despotism. These growing characteristics of the South 
Vietnam government centered around the antics of the Diem family. 
President Diem's brother Nhu was the actual power in the government 
heading up a semi-secret political organization that controlled all 
military and civil appointments. On the Diem family team were three 
other brothers, including the Catholic Archbishop of Vietnam, the 
country's ambassador to London, and the political boss of central 
Vietnam who had his own police force. 
     While the country was in its relentless struggle with the 
Vietcong Communist guerrillas who lurked in jungle areas, striking 
without warning at peasant villages that submitted to the established 
government or did not cooperate with the rebels, the Diem family 
tyranny was engaged in such pointless tasks as crushing Saigon high 
school agitations by secret police raids or efforts to persecute the 
overwhelming Buddhist majority and to extend favors to the Roman 
Catholics who were less than 10% of the population. 
     When Diem became president in 1955, after the deposition of the 
pro-French Emperor Bao Dai, the country had just received 800,000 
refugees from North Vietnam which the Geneva conference had yielded to 
Ho Chi Minh's communists, the overwhelming majority of which were 
Roman Catholics, raising their number to over a million in a 
population of 14 million. Nevertheless, Diem made these Catholics the 
chief basis of his power, chiefly recruiting the refugees into various 
police forces dominated by the Diem family.
Page 1173
     By 1955, these were already beginning to persecute the Buddhist 
majority, at first by harassing their religious festivals and parades 
but later with brutal assaults on their meetings. An attempted coup by 
army units was crushed and the Diem rule became increasingly 
arbitrary. 
     American military assistance tried to curtail the depredations of 
the Communist guerrillas. The intensity of the guerrilla attacks 
steadily increased following Diem's re-election with 88% of the vote. 
American intervention was also stepped up and gradually began to shift 
from a purely advisory and training role to increasingly direct 
participation in the conflict. From 1961 onward, American casualties 
averaged about one dead a week, year after year. The Communist 
guerrilla casualties were reported to be about 500 per week but this 
did not seem to diminish their total number or relax their attacks. 
     These guerrilla attacks consisted of rather purposeless 
destruction of peasant homes and villages, apparently designed to 
convince the natives of the impotence of the government and the 
advisability of cooperating with the rebels. To stop these 
depredations, the government undertook the gigantic task of organizing 
the peasants into "agrovilles" or "strategic hamlets" which were to be 
strongly defended residential centers entirely enclosed behind 
barricades. The process, it was said, would also improve the economic 
and social welfare of the people to give them a greater incentive to 
resist the rebels. There was considerable doubt about the 
effectiveness of the reform aspect of this process and some doubt 
about the defence possibilities of the scheme as a whole. Most 
observers felt that very little American economic aid ever reached the 
village level but instead was lost on much higher levels. By the 
summer of 1963, guerrillas were staging successful attacks on the 
strategic hamlets and the need for a more active policy became acute. 
Page 1175
     This final crisis in the story of the Diem family and its 
henchmen arose from religious persecution of the Buddhists under the 
guise of maintaining political order. On November 1, 1963, an 
American-encouraged military coup led by General Minh overthrew the 
Diem family. A new government with a Buddhist premier calmed down the 
domestic crisis but was no more able to suppress guerrilla activities.
THE ECLIPSE OF COLONIALISM
Page 1178
     The massive economic mobilization for World War II showed clearly 
that there could be an equally massive post-war mobilization of 
resources for prosperity. 
Page 1184
     It is usually not recognized that the whole economic expansion of 
Western society rests upon a number of psychological attitudes that 
are prerequisites to the system as we have it but are not often stated 
explicitly. Two of these may be identified as:
1) future preference and
2) infinitely expandable material demand. 
     In a sense, these are contradictory since the former implies that 
Western economic man will make almost any sacrifice in the present for 
the same of some hypothetical benefit in the future while the latter 
implies almost insatiable demand in the present. Nonetheless, both are 
essential features of the overwhelming Western economic system. 
     Future preference came out of the Christian outlook and 
especially the Puritan tradition which was prepared to accept almost 
any kind of sacrifice in the temporal world for the sake of future 
eternal salvation, willing to restrict their enjoyment of income for 
the sake of capital accumulation. 
     The mass production of this new industrial system was able to 
continue and to accelerate to the fantastic rate of the 20th century 
so that today, the average middle-class family of suburbia has a 
schedule of future material demands which is limitless.
     Without these two psychological assumptions, the Western economy 
would break down or would never have started. At present, future 
preference may be breaking down and infinitely expanding material 
demand may soon follow it in the weakening process. If so, the 
American economy will collapse unless it finds new psychological 
foundations. 
Page 1187
     In Asia, as is traditional along the Pakistani-Peruvian axis, the 
structure of societies had been one in which a coalition of army, 
bureaucracy, landlords, and moneylenders have exploited a great mass 
of peasants by extortion of taxes, rents, low wages, and high interest 
rates in a system of such persistence that its basic structure goes 
back to the Bronze Age empires before 1000 B.C.


CHAPTER XX: TRAGEDY AND HOPE, THE FUTURE IN PERSPECTIVE
THE UNFOLDING OF TIME
Page 1200
     Weapons will continue to be expensive and complex. This means 
that they will increasingly be the tools of professionalized, if not 
mercenary, forces. All of past history shows that the shift from a 
mass army of citizen-soldiers to a smaller army of professional 
fighters leads, in the long run, to a decline of democracy. 
Page 1204
     When Khrushchev renounced the use of both nuclear war and 
conventional violence, and promised to defeat the West by peaceful 
competition, he was convinced that the Soviet Union could out-perform 
the U.S. because it could, in his opinion, overcome the American lead 
in the race for economic development that the Socialist way of life 
would become the model for emulation by the uncommitted nations. 
Page 1213
     In other economies, when additional demands are presented to the 
economy, less resources are available for alternative uses. But in the 
American system, as it now stands, additional new demands usually lead 
to increased resources becoming available for alternative purposes, 
notably consumption. Thus if the Soviet Union embraced a substantial 
increase in space activity, the resources available for raising 
Russian levels of consumption would be reduced while in America, any 
increases in the space budget makes levels of consumption also rise. 
Page 1214
     It does this because increased space expenditures provide 
purchasing power for consumption that makes available previously 
unused resources out of the unused American productive capacity. 
     This unused capacity exists in the American economy because the 
structure of our economic system is such that it channels flows of 
funds into the production of additional capacity (investment) without 
any conscious planning process or any real desire by anyone to 
increase our productive capacity. It does this because certain 
institutions in our system (such as insurance, retirement funds,social 
security payments, undistributed corporate profits and such) and 
certain individuals who personally profit by the flow of funds not 
theirs into investment continue to operate to increase investment even 
when they have no real desire to increase productive capacity (and 
indeed many decry it). In the Soviet Union, on the contrary, resources 
are allotted to the increase of productive capacity by a conscious 
planning process and at the cost of reducing the resources available 
in their system for consumption or for the government (largely 
defence). 
     Thus the meaning of "costs" and the limitations on ability to 
mobilize economic resources are entirely different in our system from 
the Soviet system and most others. In the Soviet economy, "costs" are 
real costs, measurable in terms of the allotment of scarce resources 
that could have been used otherwise. In the American system, "costs" 
are fiscal or financial limitations that have little connection with 
the use of scarce resources or even with the use of available (and 
therefore not scarce) resources. The reason for this is that in the 
American economy, the fiscal or financial limit is lower than the 
limit established by real resources and therefore, since the financial 
limits act as the restraint on our economic activities, we do not get 
to the point where our activities encounter the restraints imposed by 
the limits of real resources (except rarely and briefly in terms of 
technically trained manpower, which is our most limited resource).
     These differences between the Soviet and American economies are:
1) the latter has built-in, involuntary, institutionalized investment 
which the former lacks;
2) the latter has fiscal restraints at a much lower level of economic 
activity which the Soviet system also lacks. 
     Thus greater activity in defence in the USSR entails real costs 
since it puts pressure on the ceiling established by limited real 
resources while greater activity in the American defence or space 
effort releases money into the system which presses upward on the 
artificial financial ceiling, pressing it upward closer to the higher, 
and remote, ceiling established by the real resources limit of the 
American economy. This makes available the unused productive capacity 
that exists in our system between the financial ceiling and the real 
resources ceiling; it not only makes these unused resources available 
for the government sector of the economy from which the expenditure 
was directly made but also makes available portions of these released 
resources for consumption and additional capital investment. 

Page 1215
     For this reason, government expenditures in the U.S. for things 
like defence or space may entail no real costs at all in terms of the 
economy as a whole. In fact, if the volume of unused capacity brought 
into use by expenditures for these things (that is, defence and so on) 
is greater than the resources necessary to satisfy the need for which 
the expenditure was made, the volume of unused resources made 
available for consumption or investment will be greater than the 
volume of resources used in the governmental expenditure and this 
additional government effort will cost nothing at all in real terms, 
but will entail "negative" real costs. (Our wealth will be increased 
by making the effort).
     The basis for this strange, and virtually unique, situation is to 
be found in the large amount of unused productive capacity in the U.S. 
even in our most productive years. In the second quarter of 1962, our 
productive system was running at a very high level of prosperity, yet 
it was functioning about 12% below capacity, which represented a loss 
of $73 billion annually. In this way, in the whole period from the 
beginning of 1953 to the middle of 1962, our productive system 
operated at $387 billion below capacity. Thus if the system had 
operated near capacity, our defence effort over the nine years would 
have cost us nothing, in terms of loss of goods or capacity.
     This unique character in the American economy rests on the fact 
that the utilization of resources follows flow lines in the economy 
that are not everywhere reflected by corresponding flow lines of 
claims on wealth (that is, money). In general, in our economy the 
lines of flow of claims on wealth are such that they provide a very 
large volume of savings and a rather large volume of investment, even 
when no one really wants new productive capacity; they also provide an 
inadequate flow of consumer purchasing power, in terms of flows, or 
potential flows, of consumer goods; but they provide very limited, 
sharply scrutinized and often misdirected flows of funds for the use 
of resources to fulfill the needs of the government sector of our 
trisectored economy. As a result, we have our economy distorted 
resource-utilization patterns, with overinvestment in many areas, 
overstuffed consumers in one place and impoverished consumers in 
another place, a drastic undersupply of social services, and 
widespread social needs for which public funds are lacking. 
     In the Soviet Union, money flows follow fairly well the flows of 
real goods and resources, but, as as result, pressures are directly on 
resources. These pressures mean that saving and investment conflict 
directly with consumption and government services (including defence), 
putting the government under severe direct strains, as the demands for 
higher standards of living cannot be satisfied except by curtailing 
investment, defence, space, or other government expenditures. 
 
Page 1216
     Many countries of the world are worse off the Soviet Union 
because their efforts to increase consumers' goods may well require 
investment based on savings that must be accumulated at the expense of 
consumption. 
     As a chief consequence of these conditions, the contrast between 
the "have" nations and the "have-not" nations will become even wider. 
This would be of little great importance to the rest of the world were 
it not that the peoples of the backward areas, riding the "crisis of 
rising expectations" are increasingly unwilling to be ground down in 
poverty as their predecessors were. At the same time, the Superpower 
stalemate increases the abilities of these nations to be neutral, to 
exercise influence out of all relationship to their actual powers, and 
to act, sometimes, in an irresponsible fashion. 
     These neutrals and other peoples of backward areas have acute 
problems. Solutions do exist but the underdeveloped nations are 
unlikely to find them. 
Page 1221
     A growing lowest social class of the social outcasts (the 
Lumpenproletariat) has reappeared. This group of rejects from the 
bourgeois industrial society provide one of our most intractable 
future problems because they are gathered in urban slums, have 
political influence, and are socially dangerous. 
     In the U.S. where these people congregate in the largest cities 
and are often Negroes or Latin Americans, they are regarded as a 
racial or economic problem, but they are really an educational and 
social problem for which economic or racial solutions would help 
little. This group is most numerous in the more advanced industrial 
areas and now forms more than 20% of the American population. Since 
they are a self-perpetuating group and have many children, they are 
increasing in numbers faster than the rest of the population. 
Page 1229
     The pattern of outlook on which the tradition of the West is 
based has six parts:
1) There is truth, a reality (thus the West rejects skepticism, 
solipsism and nihilism)
2) No person, group, or organization has the whole picture of the 
truth (thus there is no absolute or final authority.)
3) Every person of goodwill has some aspect of the truth, some vision 
of it from the angle of his own experience.
4) Through discussion, the aspects of the truth held by many can be 
pooled and arranged to form a consensus closer to the truth than any 
of the sources that contributed to it.
5) This consensus is a temporary approximation of the truth which new 
experiences make it necessary to reformulate.
6) Thus Western man's picture of the truth advances closer and closer 
to the whole truth without ever reaching it.
     This methodology of the West is basic to the success, power and 
wealth of Western Civilization.
Page 1231
     To the West, in spite of all its aberrations, the greatest sin 
from Lucifer to Hitler, has been pride, especially in the form of 
intellectual arrogance, and the greatest virtue has been humility, 
especially in the intellectual form which concedes that opinions are 
always subject to modification by new experiences, new evidence, and 
the opinions of our fellow men. 
     The most triumphant of these aspects is science, whose method is 
a perfect example of the Western tradition. The scientist goes eagerly 
to work each day because he has the humility to know that he does not 
have any final answers and must work to modify and improve the answers 
he has. He publishes his opinions and research reports or exposes 
these in scientific gatherings so that they may be subjected to the 
criticism of his colleagues and thus gradually play a role in 
formulating the constantly unfolding consensus that is science. That 
is what science is, "a consensus unfolding in time by a cooperative 
effort in which each works diligently seeking the truth and submits 
his work to the discussion and critique of his fellows to make a new, 
slightly improved, temporary consensus." 
THE UNITED STATES AND THE MIDDLE-CLASS CRISIS
Page 1234
     American society in the 1920s was largely middle-class. Its 
values and aspirations were middle-class and power or influence within 
it was in the hands of middle-class people. 
     Most defenders of bourgeois America saw the country in middle-
class terms and looked forward to a not remote future in which 
everyone would be middle-class except for a small shiftless minority 
of no importance. America was regarded as a ladder of opportunity. 
Wealth, power, prestige and respect were all obtained by the same 
standard, based on money. This in turn was based on a pervasive 
emotional insecurity that sought relief in the ownership and control 
of material possessions. 
Page 1235
     Years ago in Europe, the risks (and rewards) of commercial 
enterprise, well reflected in the fluctuating fortunes of figures such 
as Antonio in The Merchant of Venice were extreme. A single venture 
could ruin a merchant or make him rich. This insecurity was increased 
by the fact that the prevalent religion of the day disapproved of what 
he was doing, seeking profits or taking interest, and he could see no 
way of providing religious services to the town dwellers because of 
the intimate association of the ecclesiastical system with the 
existing arrangement of rural landholding. 
Page 1236
     Credit became more important than intrinsic personal qualities, 
and credit was based on the appearance of things, especially the 
appearances of the external material accessories of life. Old values 
such as future preference or self-discipline, remained, but were 
redirected. Future preference ceased to be transcendental in its aim 
and became secularized. 
Page 1237
     Middle-class self-discipline and future preference provided the 
savings and investment without which any innovation - no matter how 
appealing in theory - would be set aside and neglected. 
     The middle-class character is psychic insecurity founded on lack 
of secure social status. The cure for such insecurity became 
insatiable material acquisition. From this flowed attributes of future 
preference, self-discipline, social conformity, infinitely expandable 
material demand, and a general emphasis on externalized impersonal 
values. The urge to seek truth or to help others are not really 
compatible with the middle-class values. 
Page 1238
     One of the chief changes, fundamental to the survival of the 
middle-class outlook, was a change in society's basic conception of 
human nature. This had two parts to it. The traditional Christian 
attitude was that human nature was essentially good and that it was 
formed and modified by social pressures and training. The "goodness" 
of human nature was based on the belief that it was a kind of weaker 
copy of God's nature. In this Western point of view, evil and sin were 
negative qualities; they arose from an absence of good, not from the 
presence of evil. Thus sin was the failure to do the right thing, not 
doing the wrong thing. 
     Opposed to this view was another which received its most explicit 
formulation by the Persian Zoroaster in the seventh century B.C. It 
came in through the Persian influence on the Hebrews, especially 
during the Babylonian Captivity of the Jews, in the sixth century and 
more fully through the Greek rationalist tradition from Pythagoras to 
Plato. The general distinction of this point of view from Zoroaster to 
William Golding (in Lord of the Flies) is that the world and the flesh 
are positive evils and that man, in at least this physical part of his 
nature, is essentially evil. As a consequence, he must be disciplined 
totally to prevent him from destroying himself and the world. In this 
view, the devil is a force, or being, of positive malevolence and man, 
by himself, is incapable of good and is, accordingly, not free. He can 
be saved in eternity by God's grace alone and he can get through this 
temporal world only by being subjected to a regime of total despotism.
     The contrasts can be summed up thus:
 Orthodox;
Puritan.
 Evil is an absence of Good;
Evil is a positive entity.
 Man is basically good;
Man is basically evil.
 Man is free;
Man is a slave of his nature. 
 Man can contribute to his salvation by good works;
Man can be saved only by God.
 Self-discipline is necessary to guide or direct;
Discipline must be external and total.
 Truth found from experience and revelation interpreted by tradition;
Truth is found by rational deduction from revelation. 
     Luther, Calvin, Thomas Hobbes, Blaise Pascal and others believed 
that truth was to be found in rational deduction from a few basic 
revealed truths in sharp contrast with the orthodox point of view 
still represented by the Anglican and Roman churches which saw men as 
largely free in a universe whose rules were to be found by tradition 
and consensus. 
Page 1240
     The Puritan point of view led directly to mercantilism which 
regarded political-economic life as a struggle to the death in a world 
where there not sufficient wealth or space for different groups. To 
them, wealth was limited to a fixed amount and one man's gain was 
someone else's loss. That meant that the basic struggles of this world 
were irreconcilable and must be fought to a finish. This as part of 
the Puritan belief that nature was evil and that a state of nature was 
a jungle of violent conflicts. 
     One large change was the Community of Interests which rejected 
mercantilism's insistence on limited wealth and the basic 
incompatibility of interests for the more optimistic belief that all 
parties could somehow adjust their interests within a community in 
which all would benefit mutually. 
     Above all, the middle-class which dominated the country in the 
first half of the 20th century were a small group of aristocrats. 
Below were the petty bourgeoisie who had middle-class aspirations. 
Below these two were two lower classes: the workers and the 
Lumpenproletariat. 
Page 1242
     In America, as elsewhere, aristocracy represents money and 
position grown old, and is organized in terms of families rather than 
of individuals. Traditionally it was made up of those families who had 
money, position,and social prestige for so long that they never had to 
think about these and,above all, never had to impress any other person 
with the fact that they had them. They accepted these attributes of 
family membership as a right and an obligation. Since they had no idea 
that these could be lost, they were self-assured, natural but distant. 
Their manners were gracious but impersonal. Their chief characteristic 
was the assumption that their family position had obligations. This 
"noblesse oblige" led them to participate in school sports (even if 
they lacked obvious talent) to serve their university (usually a 
family tradition) in any helpful way, and to offer their services to 
their local community, their state, and their country as an 
obligation. 
Page 1243
     Another good evidence of class may be seen in the treatment given 
to servants who work in one's home: the lower classes treat these as 
equals, the middle-classes treat them as inferiors, while the 
aristocrats treat them as equals or even superiors. On the whole, the 
number of aristocratic families in the U.S. is very few, with a couple 
in each of the older states. A somewhat larger group of semi-
aristocrats consists of those like the Lodges, Rockefellers, or 
Kennedys,who are not yet completely aristocratic either because they 
are not, in generations, far enough removed from money-making, or 
because of the persistence of a commercial or business tradition in 
the family.
     The second most numerous group in the U.S. is the petty 
bourgeoisie, including millions of persons who regard themselves as 
middle-class and are under all the middle-class anxieties and 
pressures but often earn less money than unionized laborers. As a 
result of these things, they are often very insecure, envious, filled 
with hatreds, and are generally the chief recruits for any Radical 
Right, Fascist, or hate campaigns against any group that is different 
or which refuses to conform to middle-class values. Made up of clerks, 
shopkeepers, and vast numbers of office workers in business, 
government, finance and education, these tend to regard their white 
collar status as the chief value in life, and live in an atmosphere of 
envy, pettiness, insecurity, and frustration. They form the major 
portion of the Republican Party's supporters in the towns of America, 
as they did for the Nazis in Germany thirty years ago.
Page 1244
     Eisenhower himself was repelled by the Radical Right whose 
impetus had been a chief element in his election although the lower-
middle-class had preferred Senator Taft as their leader. Eisenhower 
however had been preferred by the Eastern Establishment of old Wall 
Street, Ivy League, semi-aristocratic Anglophiles whose real strength 
rested in their control of eastern financial endowments operating from 
foundations, academic halls, and other tax-exempt refuges. 
     As we have said, this Eastern Establishment was really above 
parties. They had been the dominant element in both parties since 1900 
and practiced the political techniques of J.P. Morgan. 
Page 1245
     They were, as we have said, Anglophile, cosmopolitan, Ivy League, 
internationalist, astonishingly liberal, patrons of the arts, and 
relatively humanitarian. All these things made them anathema to the 
lower-middle-class and petty-bourgeois groups who supplied the votes 
in Republican electoral victories but found it so difficult to control 
nominations (especially in presidential elections) because the big 
money necessary for nominating in a Republican convention was allied 
to Wall Street and to the Eastern Establishment. The ability of the 
latter to nominate Eisenhower over Taft in 1952 was a bitter pill to 
the radical bourgeoisie.
     Kennedy was an Establishment figure. His introduction to the 
Establishment arose from his support in Britain. His acceptance into 
the English Establishment opened its American branch as well. Another 
indication of this connection was the large number of Oxford-trained 
men appointed to office by President Kennedy. 
Page 1246
     In the minds of the ill-informed, the political struggle in the 
U.S. has always been viewed as a struggle between Republicans and 
Democrats at the ballot box in November. Wall Street long ago had seen 
that the real struggle was in the nominating conventions. This 
realization was forced upon the petty-bourgeois supporters of 
Republican candidates by their inability to nominate their 
congressional favorites. Just as they reached this conclusion, the new 
wealth appeared in the political picture, sharing petty-bourgeois 
suspicions of the East, big cities, Ivy League universities, 
foreigners, intellectuals, workers and aristocrats. By the 1964 
election, the major political issue in the country was the financial 
struggle behind the scenes between the old wealth, civilized and 
cultured in foundations, and the new wealth, virile and uninformed, 
arising from the flowing profits of government-dependent corporations 
in the West and Southwest. 
     At issue here was the whole future face of America, for the older 
wealth stood for values and aims close to the Western traditions of 
diversity, tolerance, human rights and values, freedom, and the rest 
of it, while the newer wealth stood for the narrow and fear-racked 
aims of petty-bourgeois insecurity and egocentricity. The nominal 
issues between them, such as that between internationalism and 
unilateral isolationism (which its supporters preferred to rename 
"nationalism") were less fundamental than they seemed, for the real 
issue was the control of the Federal government's tremendous power to 
influence the future of America by spending of government funds. The 
petty bourgeois and new wealth groups wanted to continue that spending 
into the industrial-military complex, such as defence and space, while 
the older wealth and non-bourgeois groups wanted to direct it toward 
social diversity and social amelioration for the aged and the young, 
for education, for social outcasts, and for protecting national 
resources for future use. 
Page 1247
     The outcome of this struggle, which still goes on, is one in 
which civilized people can afford to be optimistic. For the newer 
wealth is unbelievably ignorant and misinformed. 
     The National parties and their presidential candidates, with the 
Eastern Establishment assiduously fostering the process behind the 
scenes, moved closer together and nearly met in the center with almost 
identical candidates and platforms although the process was concealed, 
as much as possible, by the revival of obsolescent or meaningless war 
cries and slogans. 
Page 1248
     The two parties should be almost identical so that the American 
people can "throw the rascals out" at any election without leading to 
any profound or extensive shifts in policy. The policies that are 
vital and necessary for America are no longer subjects of significant 
disagreement, but are disputable only in details of procedure, 
priority, or method: we must remain strong, continue to function as a 
great World power in cooperation with other Powers, avoid high-level 
war, keep the economy moving, help other countries do the same, 
provide the basic social necessities for all our citizens, open up 
opportunities for social shifts for those willing to work to achieve 
them, and defend the basic Western outlook of diversity, pluralism, 
cooperation,and the rest of it, as already described. 
     Either party in office becomes in time corrupt, tired, 
unenterprising and vigorless. Then it should be possible to replace it 
every four years by the other party which will be none of these things 
but will still pursue, with new vigor, approximately the same basic 
policies. 
     The capture of the Republican National Party by the extremist 
elements of the Republican National Party in 1964 and their effort to 
elect Barry Goldwater with the petty-bourgeois extremists alone, was 
only a temporary aberration on the American political scene and arose 
from the fact that President Johnson had pre-empted all the issues so 
that it was hardly worthwhile for the Republicans to run a real 
contestant against him. Thus Goldwater was able to take control of the 
party by default. 
     The virulence behind the Goldwater campaign, however, had nothing 
to do with default or lack of intensity. Quite the contrary. His most 
ardent supporters were of the extremist petty-bourgeois mentality 
driven to near hysteria by the disintegration of the middle-class and 
the steady rise to prominence of everything they considered anathema: 
Catholics, Negroes, immigrants, intellectuals, aristocrats, 
scientists, and educated men generally, cosmopolitans and 
internationalists and, above all, liberals who accept diversity ad a 
virtue. 
     This disintegration of the middle classes had a variety of 
causes, some of them intrinsic, many of them accidental, a few of them 
obvious, but many of them going deeply into the very depths of social 
existence. All these causes acted to destroy the middle-class by 
acting to destroy the middle-class outlook. 
Page 1250
     In the earlier period, even down to 1940, literature's attack on 
the middle-class outlook was direct and brutal, from such works as 
Upton Sinclair's "The Jungle" or Frank Norris's "The Pit," both 
dealing with the total corruption of of personal integrity in the 
meatpacking and wheat markets. These early assaults were aimed at the 
commercialization of life under bourgeois influence and were 
fundamentally reformist in outlook because they assumed that the evils 
of the system could somehow be removed. By the 1920s, the attack was 
much more total and saw the problem in moral terms so fundamental that 
no remedial action was possible. Only complete rejection of middle-
class values could remove the corruption of human life seen by 
Sinclair Lewis in Babbitt or Main Street. 
Page 1252
     The Puritan point of view of man as a creature of total depravity 
without hope of redemption which in the period 1550-1650 justified 
despotism in a Puritan context, now may be used, with petty-bourgeois 
support, to justify a new despotism to preserve, by force instead of 
conviction, petty-bourgeois values in a system of compulsory 
conformity. George Orwell's 1984 has given us the picture of this 
system as Hitler's Germany showed us its practical operation. Barry 
Goldwater's defeat moved the possibility so far into the future that 
the steady change in social conditions makes it remote indeed. 
Page 1253
     For generations, even in fairly rich families, the indoctrination 
continued because of emphasis on thrift and restraints on consumption. 
By 1937, the world depression showed that the basic economic problems 
were not saving and investment but distribution and consumption. Thus 
there appeared a growing readiness to consume, spurred on my new sales 
techniques, installment selling and the extension of credit from the 
productive side to the consumption side of the economic process. As a 
result, an entirely new phenomenon appeared in middle-class families, 
the practice of living up to, or even beyond, their incomes - an 
unthinkable scandal in any 19th century bourgeois family.
Page 1255
     Middle-class marriages were usually based on middle-class values 
of economic security and material status rather than on love. More 
accurately, middle-class marriages were based on these material 
considerations in fact, while everyone concerned pretended that they 
were based on Romantic love. Even when the marriage becomes a success, 
in the sense that it persists, it is never total and merely means that 
the marriage becomes an enslaving relationship to the husbands and a 
source of disappointment and frustration to the wives. 
EUROPEAN AMBIGUITIES
Page 1300
     In the old days, the merchant bankers of London controlled fairly 
well the funds that were needed for almost any enterprise to become a 
substantial success. Today, much larger funds are available from many 
diverse sources, from abroad, from government sources, from insurance 
and pension funds, from profits from other enterprises. These are no 
longer held under closely associated controls and are much more 
impersonal and professional in their disposal so that on the whole, an 
energetic man (or a group with a good idea) can get access to larger 
funds today, and can do so without anyone much caring if he accepts 
the established social precedents. 
Page 1303
     Lycurgus renounced social change in prehistoric Sparta only by 
militarizing the society. 
CONCLUSION
Page 1310
     Tragedy and Hope? The tragedy of the period covered by this book 
is obvious but the hope may seem dubious to many. Only the passage of 
time will show if the hope I seem to see in the future is actually 
there or is the result of mis-observation and self-deception.
     The historian has difficulty distinguishing the features of the 
present and generally prefers to restrict his studies to the 
past,where the evidence is more freely available and where perspective 
helps him to interpret the evidence. Thus the historian speaks with 
decreasing assurance about the nature and significance of events as 
they approach his own day. The time covered by this book seems to this 
historian to fall into three periods: the 19th century from 1814 to 
1895; the 20th century after World War II, and a long period of 
transition from 1895 to 1950. 
     The 20th century is utterly different from the 19th century and 
the age of transition between the two was one of the most awful 
periods in all human history. Two terrible wars sandwiching a world 
economic depression revealed man's real inability to control his life 
by nineteenth century techniques of laissez-faire, materialism, 
competition, selfishness, nationalism, violence, and imperialism. 
These characteristics of late nineteenth-century life culminated in 
World War II in which more than 50 million persons were killed, most 
of them by horrible deaths. 
     The hope of the twentieth century rests on the recognition that 
war and depression are man-made, and needless. They can be avoided in 
the future by turning from the 19th century characteristics just 
mentioned and going back to other characteristics that our Western 
society has always regarded as virtues: generosity, compassion, 
cooperation, rationality, and foresight, and finding an increased role 
in human life for love, spirituality, charity, and self-discipline. 
     On the whole, we do know now that we can avoid continuing the 
horrors of 1914-1945 and on that basis alone we maybe optimistic over 
our ability to go back to the tradition of our Western society and to 
resume its development along its old patterns of Inclusive Diversity. 



Electronic edition by John Turmel
http://www.cyberclass.net/turmel/quig00.htm



 

