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Finance and Foreign Policies

ISSUE:  Winter 1938

The existence of close links between international politics and international finance is a matter of common knowledge. There is ample evidence that throughout the ages the course of the world’s history has been largely influenced by financial factors. Today, also, we often come across striking instances of the influence of finance upon the trend of international events. Nevertheless, the exact nature of the relations between finance and politics is not generally understood.

There is a widely held conception that the foreign policy of governments is influenced to a large degree by a small group of bankers. This conception is particularly popular in left-wing circles, but it is also widely entertained in extreme right-wing quarters—one of the numerous instances in which the views of opposite extremes are identical. Democratic governments are often accused by their Socialist or Communist opponents of allowing their foreign policies to be guided by international bankers. The same accusation, couched in almost identical terms, is raised against the same governments from Fascist or ultra-nationalist quarters.

Doubtless it would be easy to quote instances from various periods of history to show that prominent financiers have been able to influence their governments and, at times, the governments of other countries. The power of financiers in the sphere of politics probably reached its culminating point during the nineteenth century, when banking houses such as the Rothschilds, by granting or withholding loans to governments, were said to have been in a position to decide between war and peace. But even during that period, the exertion of a major influence upon international politics by bankers was the exception and by no means the rule. Even then, financiers who pursued a political end in their international transactions were in most instances the servants of their governments and not the masters. They allowed their operations to be guided to a large degree by political considerations, determined by the Foreign Offices of their countries. Although in Great Britain the government did not make systematic use of the financial weapon for the ends of its foreign policy, in other countries, especially in France and Germany, the foreign loan transactions of the bankers had to conform strictly to the ends of the official foreign policy. In his preface to “Europe, the World’s Banker, 1870-1914,” Herbert Feis rightly remarks that “the financial transactions between Western Europe and other areas were an important element in political affairs. They became all the more important because the official circles of lending centres gradually came to envisage the foreign investments of their citizens not as private financial transactions but as one of the instruments through which national destiny was achieved. Financial force was often used to buy or build political friendship or alliance. It was often lent or withheld in accordance with political calculations.”

To what extent do bankers today play a part, active or passive, in influencing international affairs? Their influence as an active factor has been curtailed considerably by two diametrically opposite tendencies: the development of democracies and the development of dictatorships. In democratic countries the adoption of universal suffrage has made it more difficult than ever before for any small, unpopular clique to have undue influence upon foreign policy for any length of time. Even while the administration in office is in sympathy with Big Business, it has to take good care not to make itself unpopular by any evidence that its foreign policy is guided by the interests of High Finance. In fact, High Finance is losing ground even in its own sphere. There is a world-wide trend towards an increase of governmental control over banking activities, internal or international. In Great Britain, where the present Government is still reluctant to interfere with the freedom of industry, notwithstanding the urgency of the need to speed rearmament, it places without hesitation an official control upon lending abroad by banks. For years all the international banking houses in London, and their spokesman, Mr. Montagu Norman, Governor of the Bank of England, have spared no effort to induce the Government to remove this embargo on foreign lending, but all their persistent agitation to that end has been of no avail. Evidently, bankers are on the defensive even in their own sphere, and cannot afford to encroach upon the sphere of foreign policy.

Admittedly, even today there are isolated instances of bankers who are able to make themselves felt in international affairs. Mr. Montagu Norman, with his pro-German sympathies, has been and still is a factor to be reckoned with. Until 1929, while the official foreign policy of Great Britain, under the guidance of Sir Austen Chamberlain, was distinctly pro-French, Mr. Norman succeeded in influencing the British attitude in a pro-German direction. Again, since the advent of the National Socialist Government in Germany, he has been endeavouring, and not altogether unsuccessfully, to influence the British attitude in favour of Germany. Quite recently he openly backed the German claim for the appointment of a German to the post of General Manager of the Bank for International Settlements, in defiance of the violent opposition of French official circles, which were determined that the post should be filled by a Frenchman. In view of the fact that French and British interests are obviously identical, such diplomatic victories cannot, however, materially influence the course of British foreign policy.

Mr. Norman is one of the few survivals of the type of political banker; even he is fighting a losing battle against the world trend which points towards political interference with banking instead of banking interference with politics. Apart from him, it is difficult to think of any banker strong enough to attempt to influence the foreign policy of his country. The popular figure of the super-banker who is in a position to dictate to Foreign Ministers is a thing of the past. The conception has, however, taken deep root in the popular imagination, and dies hard. Even today it is by no means easy to convince people that the foreign policy of their country or other countries is not largely guided by “sinister” international bankers.

The eclipse of the super-banker as a factor in international politics has been even more complete in the totalitarian states than it has been in the democratic countries. For obvious reasons the question does not arise as far as the Soviet Union is concerned. In the case of Germany and Italy, it has often been stated by anti-Fascists that the dictators are mere tools in the hands of financiers or industrialists behind the scenes. Nothing could be further from the truth. Undoubtedly both Hitler and Mussolini owe a debt of gratitude to the financiers who assisted them in their advent to power as a means of fighting Socialism and Communism. That debt, like so many other debts in the more concrete sense of the term, has remained largely unpaid. The Italian and German financiers and industrialists, even when 5

they have not been removed from the scene of their former activities, are now little more than paid managers in their own offices. They are unable to prevent the growth of the influence of the authorities in their businesses, and would not dream of trying to influence the foreign policies of their political masters. Even Dr. Schacht, who succeeded in retaining considerable influence for some time, has now ceased to count as a factor in German foreign policy.


Evidently bankers have ceased to play an active part in international affairs. The question is, do they continue to play a passive part as tools of the foreign policy of their governments? Until a few years ago their importance as a passive factor in the trend of international politics was very considerable. The whole post-war history is largely a succession of financial manoeuvres for political ends. There is no evidence that the speculative attack on the French franc in 1924 was engineered by the German Government with the object of getting the French out of the Ruhr, but there is no doubt that the German banking house in Amsterdam which was mainly responsible for the attack rose high in official favour afterwards. On the other hand, the role played by French foreign policy in the Austrian Credit-anstalt crisis in 1931 is a matter of history. French bankers were not allowed to assist Austria unless the Austro-German customs union scheme was dropped. The extent of the influence of international politics on international finance is exemplified by the fact that the French branch of the Rothschild family was forbidden to assist the Austrian branch of the family, in order that the political manoeuvring carried out by the French Foreign Office by means of financial weapons should not be interfered with.

The Creditanstalt affair of 1931 provides probably the clearest example in recent history of an attempt to influence political developments by granting or withholding financial support. It is, at the same time, a good example of the limitations of financial power in the sphere of foreign policy. In that supreme game of cards the French Government held all the trumps. Austria was in the throes of a financial crisis, and it seemed as though, in the absence of French assistance, the country might relapse into the state of chaos and starvation from which it had emerged less than ten years earlier. Notwithstanding this, the Austrian Government refused to allow its foreign policy to be influenced by financial considerations. French political finance suffered a crushing defeat in Vienna. This was followed by a series of further defeats. Germany also was unwilling to buy French financial support at the cost of political concessions. When the pound was threatened and might have been saved with French support at the cost of a modification of British foreign policy, the British Government preferred to suspend the gold standard. Even amidst financial crisis and depression, hardly any country was prepared to modify its foreign policy in return for financial assistance. In 1931 and the following years, political finance as a factor in international affairs suffered a complete eclipse.

The Italo-Abyssinian affair provided yet another striking example of the limitations of financial power in the political sphere in the present day. The adoption of financial sanctions against Italy failed to divert Mussolini from his course. Those who predicted that once having conquered Abyssinia he would be unable to exploit it without the aid of foreign capital, and would therefore become dependent upon the goodwill of the countries in a position to supply that capital, have proved to be false prophets. They did not realize that the development of an authoritarian state with a highly disciplined economic and financial system has materially reduced the importance of the granting or withholding of foreign financial assistance.

We have seen in the case of Germany that it is possible for a large country to exist for years without any gold and without any externa), assistance; that it is possible for such a country to spend billions on rearmament and public works without any apparent immediate ill-effect. The development of a highly efficient internal exchange machinery, coupled with exchange control and the strict control of foreign trade, has made both Germany and Italy independent of external financial support. While a foreign loan would doubtless be welcomed by both, it is not of vital importance, and neither would now be prepared to modify her foreign policy for the sake of external assistance. With the aid of an iron discipline enforced in the economic system, the Fascist Governments are in a position to recover, in the form of direct or indirect loans, the amounts they spend, and to spend the same amounts again and again. The bulk of the profits made on rearmament in Germany and Italy find their way back to the Treasury as a result of the measure by which profits in excess of six per cent have to be reinvested in government securities. The bulk of wages paid in connection with rearmament eventually finds its way back to the Treasury through banks, savings banks, and insurance companies, whose assets are also invested in government securities.

The Italian and German Governments are thus in a position to spend billions without having to inflate to an undue extent. Internationally, they are able to continue to purchase the necessary food and raw materials by means of various devices such as subsidies to exporters, clearing and compensation agreements, et cetera. The system is virtually watertight, and this fact has reduced to complete impotence the financial factor in international politics as far as these countries are concerned. So long as there is confidence in the stability of the system there is no difficulty in financing it almost indefinitely, even in the complete absence of external assistance. The much-predicted financial collapse of Germany and Italy has failed to materialize, and seems, at the time of writing, to be as remote as ever.

While Italy would doubtless welcome the assistance of foreign capital in exploiting Abyssinia’s resources, she would certainly not be prepared to pay a political price for such assistance. With her disciplined economic system, she is able to exploit Abyssinia even without any foreign financial assistance. Mussolini is always in a position to send out labour divisions to build his roads and railroads, to explore and exploit oil-fields—if any—and to cultivate wide areas. The lira has been introduced as the currency of the conquered territory and, provided that the native population can be gradually induced to accept the notes, the financing of mining, industrial, agricultural, and commercial activities will meet with no difficulties.

Although the eclipse of the power of finance in international politics is glaringly evident, it is not yet adequately realized. Even among economic experts and statesmen there are many who still think in terms of the past epoch, in which bankers, acting upon the instructions of Foreign Ministers, were able to induce foreign governments to alter the course of their foreign policies. For example, many of those in England who are in favour of General Franco argue that there is no need for Great Britain to be concerned about his eventual victory, since the political influence which Hitler and Mussolini would thereby acquire in Spain could easily be counteracted by Great Britain’s financial influence. It is pointed out that, since by the time General Franco has succeeded in conquering the whole of Spain the country will have been utterly ruined, he will be dependent upon external financial assistance for the requirements of reconstruction. This assumption, however, ignores the German and Italian experience of recent years. Since Germany has been able to finance her rearmament, and Italy her Abyssinian undertaking, without any external assistance, as a result of the working of the watertight economic and financial system of the totalitarian state, it seems reasonable to assume that a Spanish totalitarian state would also be in position to reconstruct the devastated areas even in the complete absence of foreign loans. For this reason it is idle to build on General Franco’s dependence upon foreign financial assistance as a factor influencing the foreign policy of a Nationalist Spain.

The decision of the Italian Government last year to sell its holding of Mosul oil shares shows that Rome, at any rate, is fully aware of the eclipse of financial control as a political factor. Everybody knows the immensely important role which oil has come to play in national defense. In fact, if Prince Eugene of Savoy were living today, instead of saying that the three things required for the successful conduct of war were “money, more money, and still more money,” he would probably say that they were “oil, more oil, and still more oil.” Notwithstanding this, the Italian Government relinquished its financial participation in what may well develop into one of the world’s most important oil enterprises. The explanation is simple. Mussolini is well aware that since the oil-fields are situated in non-Italian territory, the continuity of supplies depends in time of war upon the military and naval position in the Mediterranean. Financial control would be of no avail if a hostile navy cut Italy off from the Iraq oil supply. It is now crude military strength that counts, and not skilful financial manipulations. The control of oil supplies in time of war is no longer determined in bank parlours.

The eclipse of financial power in the sphere of politics is also shown by the experience of China. Two years ago a British financial mission, headed by Sir Frederick Leith-Ross, paid a visit to Nanking to advise the Chinese Government regarding the lines of monetary reform which it should adopt. The change decided upon was resented by Japan, but nevertheless it was carried out and the reform worked successfully. It appeared as though British financial diplomacy had scored a victory. It was, however, of little use to be clever, since Japan had a big army and navy on the spot and was quite prepared to use them. She did use them in due course, and the guns are having the last word in the politico-financial controversy.

Examples could be multiplied, but those quoted are sufficient to show that High Finance has ceased to play an important part in international politics, either in an active sense or even in a passive sense. Once the significance of the new development is realized, those who have been loudest in their denunciation of the sinister influence of international finance on international politics must themselves admit that the change has been by no means for the better. Admittedly, financial manoeuvring, whether by powerful individuals or by governments, in the sphere of international politics was often fraught with danger. From an economic point of view it was an unmitigated evil, since the introduction of the political elements into the financial sphere often caused grave dislocations and crises, or at any rate delayed recovery and progress which would have been achieved had financial activities been determined by solely non-political considerations. Nevertheless, from a political point of view the use of finance for political ends was unquestionably not without its advantages. It compared very favourably with the present state of affairs, when financial manoeuvring for political ends has been replaced by crude Machtpolitik, virtually unhampered by financial limitations.

From an economic point of view it may have been inconvenient when two rival governments tried to out-manoeuvre each other in the sphere of finance. The damage done by the use of the financial weapon was, however, insignificant compared with the damage inflicted upon mankind by the reversion to the rule of the sword. Had Italy acquired control over Abyssinia by a series of skilful financial operations similar to those by which Great Britain during the last century secured control of the Suez Canal, there would undoubtedly have been much talk about the sinister power of finance. Nevertheless, there can be no doubt that it would have been a lesser evil than the acquisition of control over Abyssinia by armed conquest. These facts should be commended to the attention of those who, having made up their minds that bankers are the villians of the piece, continue to attack and abuse them, unaware of the eclipse of the political powers of finance in the sphere of foreign affairs.


It would be a grave error, however, to imagine that because bankers are no longer able to play an active, or even passive, role in influencing the course of international politics, finance as such has ceased to play a part in the international political situation. In one respect the financial factor can influence the trend of political evolution to a remarkable degree. While the granting or withholding of loans and credits, the acquisition of financial control over companies in key positions, and similar weapons of the past, are now largely useless, the power of monetary policy to affect the relative strength of the nations, and thereby to influence the course of history, is as strong as ever. Monetary policy is seldom, if ever, conducted with an eye to its effect on the international political situation. In spite of this—or possibly because of it—it is apt to produce profound political effects, usually in an unexpected and unwanted sense.

Thus the restoration of sterling, in 1925, to the pre-war parity led to the temporary eclipse of Great Britain’s international political influence. In order to be able to balance’ the budget in spite of the overvaluation of sterling, it was necessary to cut down national defence expenditure until the British navy was a mere shadow of its former self. The political effect of this mistaken monetary policy became glaringly evident in September, 1931, when drastic economy measures, taken for the sake of defending the pound, led to the Invergordon naval mutiny.

When it was decided at last to abandon further resistance to the pressure on sterling, Japan took the opportunity to embark upon the conquest of Manchuria, while Great Britain was too preoccupied with the slump of the pound to think of trying to prevent her. Had sterling been stabilized in 1925 at a reasonable level, the chances are that the circumstances which diverted the attention of Great Britain from Manchuria would not have arisen, and that Great Britain would have offered whole-hearted co-operation to the United States in preserving the status quo in the Far East. World history might have taken a totally different course.

The choice of the level at which the franc was stabilized by M. Poincare in 1928 had perhaps even more far-reaching consequences. Thanks to the deliberate undervaluation of the franc, the French authorities were able to accumulate a huge stock of gold and foreign balances. The possession of excessive financial power developed in Paris an aggressive spirit in relation to both ex-enemies and ex-allies. The French Government, being confident that it would be in a position to keep Germany down with the aid of financial weapons, adopted a rigid attitude towards Great Britain’s pressure in favour of a more conciliatory policy, at a time when concessions in regard to reparations might have saved the moderate regime in Germany. It was the rigid refusal to make concessions, in the hope that sooner or later Germany would submit to French dictation for the sake of financial support, that was largely responsible for the failure of the Bruning Government in 1932. Had France only yielded a few months earlier in the matter of reparations, the German Republic might have survived. Unfortunately, by the time France was ready to relinquish reparations at the Lausanne Conference, the power had passed to the extreme nationalists in Germany. As we have already seen, the French hope of being able to exert political influence over Germany by granting or withholding financial assistance proved to be without foundation; this hope would never have misled France into adopting a mistaken unbending attitude but for the fact that, as a result of M. Pom-care’s monetary policy, the French authorities had acquired an unduly predominant position in the sphere of international finance.

A mistaken German monetary policy was also contributory to the advent of the Hitler regime in Germany. When the sweeping crisis of 1931 threatened the stability of the Reichsmark, the German Government, instead of allowing the pressure to produce its effect, resorted to drastic deflationary measures in order to defend the stability of the exchange. The result was the increase of unemployment to something like six million, and the development of a widespread discontent with the regime. It was the growth of unemployment that swelled the ranks of the National Socialist and Communist parties; and it was fear of the lat-ter’s growing power that induced certain industrialists and politicians to throw in their lot with the former, securing the advent of Hitler in January, 1933. Had Dr. Bruning allowed the Reichsmark to depreciate to a reasonable degree in 1931, he might have been able to remain in office just long enough to benefit by the change of policy in France as a result of the general election of 1932.

An even more glaring example of the political consequences of monetary policy has been provided by Italy’s Abyssinian adventure. The stubborn deflationary policy adopted on the basis of Mussolini’s promise at Pesaro to “defend the lira with the last drop of his blood” was causing considerable economic difficulties and, by the end of 1934, was endangering the Fascist regime. Since it was impossible to continue defending the lira without unduly heavy sacrifices in the form of loss of gold and increasing trade depression, Mussolini decided to divert attention from the inevitable depreciation of the currency by embarking upon the Abyssinian campaign. Had the lira been devalued some time during 1934, the trade recovery that would have followed would have restored his popularity and obviated the necessity for resorting to a highly risky military adventure in order to make a diversion. He would have been able to continue his peaceful constructive conquest of marshes and other hitherto unproductive parts of Italy instead of jeopardizing world peace and placing Hitler virtually in a position of control over continental Europe.

The most striking example of all in support of our thesis is provided by the political consequences of the prolonged defence of the French franc. Ever since the spring of 1935 it had been obvious that a devaluation of the franc was a mere question of time. Nevertheless, the French Governments that succeeded one another did their utmost to postpone the evil day when they would have to face realities. Even after the complete failure of M. Laval’s desperate deflationary drive, his successor, M. Sarraut, continued to defend the franc. This engaged the full attention and energies of the Government and gave Hitler his chance, which he did not hesitate to seize. In March, 1936, German troops entered the demilitarized zones of the Rhineland in defiance of the treaties of Versailles and Locarno. Hitler would hardly have dared to risk the coup had it not been for the knowledge that the French Government was too much preoccupied with the death struggle of the franc to take energetic action. The experience of Japan and Manchuria in 1931 was repeated on a gigantic scale. A bold stroke was made on the assumption that monetary considerations would prevent a counter-stroke.

When the French Government had to decide whether or not to counter Hitler’s move by general mobilization, it was decided to abandon the idea, mainly because the increase of expenditure would have swept the franc off the gold standard. And yet it is now a matter of common knowledge that the German General Staff was prepared to undertake the reoccupation of the Rhineland only on condition that the troops would be withdrawn if any real danger of a clash with France should develop. Those who realize the immense strategic importance of a remilitarized Rhineland frontier will understand the extent of the political sacrifice made under the influence of a mistaken monetary policy. To a very large degree, France sacrificed her security against a German attack for the sake of prolonging the agony of the franc for another six months.

Nor is this the end of the story. It was the deflationary resistance to a depreciation of the franc that led to the advent of the Popular Front Government, as a result of the general election of 1936; and it was the utter lack of discipline during the early period of the Popular Front regime that led to the temporary eclipse of France as a predominant factor in European politics. The result was the Italo-German attempt to secure control over Spain by engineering and supporting General Franco’s campaign. The Spanish Civil War, pregnant with menace to world peace, would probably never have begun, or at any rate would never have assumed dangerous proportions, but for the weakening of France as the result of a mistaken monetary policy.

These examples could be multiplied almost indefinitely. There is ample evidence to prove the immense importance of monetary policy as a factor affecting the international political situation. Yet the existence of this influence is, generally speaking, not adequately realized by expert or official opinion, let alone by public opinion. In most countries, monetary policy continues to be guided entirely independently of any consideration of foreign policy. The course of monetary policy is decided largely on the basis of technical, economic, and internal political considerations. The latter have played a prominent part in determining the monetary policy of most countries, for few governments would care to assume responsibility for a monetary policy which was likely to lose them too many votes. Whether the effect upon the electorate of the monetary measures adopted is correctly guessed is a totally different question. Mistakes have been made in this respect by many governments. The restoration of the pound to its pre-war parity by a Conservative Government in 1925 led to the victory of the Labour Government in 1929. Lord Snowden’s orthodoxy was largely responsible for the crisis from which the National Government emerged in 1931. We have seen that both Dr. Bruning and M. Laval misjudged the effect of deflation upon public opinion. This shows that in shaping their monetary policies to the requirements of home politics, the governments are by no means infallible. Nor is there any reason to suppose that they would be infallible if they shaped their monetary policies to the requirements of international politics. Nevertheless, the fact that they are liable to err is no reason for governments not to attempt to allow for the international political effects of their monetary decisions.


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