Introduction
This post was supposed to be the last section in a post about usury (interest-paying debt), but it developed and expanded beyond the limits of a section; so I decided to go ahead and finish it as a stand-alone post. The last section, the current post, was to discuss the thesis of using state usury in the form of sovereign credit to develop the internal market of a country. In particular it discusses Henry C. K. Liu’s article Nazism and the German Economic Miracle, which advocates using sovereign credit to develop the internal market as the Germans had done in the thirties of the last century.
Nazi Germany provided another example of successful inter-war economic planning.
Henry C. K. Liu, Nazism and the German Economic Miracle
Due to the particular history of this post it will be helpful to sum up the conclusions of the original post, which this one takes as given; it is enough to state the following points:
- Usury’s harm is persistent and long-term, while its benefits are transient and short-term.
- Usury will ultimately destroy the productive capacity of an economy.
- Usury’s benefits could be obtained, without its harm, by a small tax on net wealth that is spent on consumption-a wealth reducing tax that stimulates the market.
- By eliminating usury the harmful effect of deflation is eliminated, that in addition to the tax on net wealth will make the preference for deflationary currency (gold) instead of inflationary currency (paper).
The Russian Experience
In the Soviet Union, Josef Stalin’s planned economy had followed the New Economic Policy (NEP) of 1921-28. NEP was in essence a mixed market economy; the main part of the market was in state possession (banks, industries, foreign trade, etc), while the peripheral part was owned by collective or private entrepreneurs. NEP, while successful, did not give the Soviet economy sufficient growth in the capital-goods sectors (ie coal, steel and electricity, transportation, heavy industry, etc), nor did it provide adequate food for the urban population even as the middle peasantry managed to feed itself.
Henry C. K. Liu, Nazism and the German Economic Miracle
The Germans in the thirties imitated the Russians in many aspects; one of them was the economic reconstruction using sovereign credit. They did not imitate Stalin’s five year planned economy, but rather the New Economic Policy adopted by the Russians in 1921. The Russians had used sovereign credit to rebuild after the devastation of the civil war and the total ruin of the economy that they faced in 1920.
The NEP, actually, was very successful and it achieved exactly what it was meant to achieve. The NEP was never meant to build capital-goods sector and it is failure to provide adequate food for the urban population was the very sign of its success and also the sign to discontinue it and move forward. The planned economy could only have been adopted thanks to the success of the NEP.
The Russians not only had to physically rebuild the infrastructure and start capital formation from almost zero level, but they also had to do this from a lower industrial and cultural level than the Germans in the thirties. Their situation was compounded by an international boycott and economic embargo that almost toppled the new power in Moscow. To solve the myriad of problems they faced they decide to give up the system of state communism that they had adopted during the civil war and implement a fiat currency system that utilises sovereign credit. This worked very well as recounted by Anna Louise Strong:
Two years ago when Russia again began to use money and to need a gold basis for purposes of foreign commerce, the State Bank opened with ten million dollars worth of paper roubles, rapidly falling in value. In three months’ time, the value of the rouble had dropped to one third. Yet at the end of the year the State Bank had twenty million dollars in gold in its vaults.
……….
At the end of the first year it had twenty million dollars in gold; at the end of the second year one hundred and twentyfive million, half in gold and half in negotiable assets as sound as gold. And this was only part of the Bank’s success.
Anna Louise Strong,
The First Time in History: Two Years of Russia’s New Life,
IV. The Money Power in Russia
0 → 20,000,000 → 125,000,000: Remarkable! If this is not success then I don’t know what is. Of course we all know that we cannot create something out of nothing, so where did the millions of gold come from? The system was mainly a levy (or a poll tax) on the peasants and to a lesser extent the workers!
It worked like this: There exists two sorts of money; good money that keeps its value (gold) and bad money that loses its value (rouble). The bank would lend bad money to (state-owned) industry, they would pay their workers and the workers would buy food from the peasants with the bad money. The peasants would sell grain to the workers, who would sell labour to the industry. The industry would then sell the commodity produced; the value in the commodity is split like this:
Value = raw material + labour
Labour = human + sustenance
Sustenance = raw material + peasant labour
The commodities are exported and sold for definite value (i.e. gold), which is deposited in the vault of the central bank! To put it simply the 125 million dollar is raw material exported and unpaid labour and more importantly unpaid grain. At first the peasants accepted this situation. The country had experienced a cyclical famine in 1920 that killed million, the peasant revolts against the new government had been resoundingly crushed, this and the hope that soon things will improve allowed this situation to last a while.
By 1925 the peasants had enough; almost all the benefits of the NEP had gone to the urban areas and industry and not to the countryside. The peasants would sell their grain for a declining price, while the price of consumer goods was rising. The reason for this is that grain production recovered while commodity production lagged behind, this problem compounded by the fact that peasants were selling their grain for depreciating currency, which meant they couldn’t save their profits for future consumption, the rise of the NEP-men (private traders who played the role of the middleman between village and town) and finally the strengthening of the Kulaks in the villages (small farmers with capital who might employ farm-labourers, or in our present times they would buy a tractor).
All this meant peasants growing crops for the market were operating at a loss; the only logical thing to do was to cut production. The divergence between grain and consumer goods prices was called The Scissor: likening it to an open scissor and also because it was cutting the relationship between countryside and city (the union of the hammer and the sickle). The communist party had two options: either develop a consumer goods sector for the benefit of the countryside and let their political base in the cities take the burden of rebuilding the economy or put the burden on the peasants. The peasants refused to shoulder the burden and cut off the supply of grain to the cities. The NEP was a desperate measure for a desperate situation; in 1925 there were political difficulties but the spectacular success of the NEP had given the state a solid base to build on.
Now the political side played out inside the communist party itself, because wartime measures against political freedom were never lifted. In the party there was the left wing (Trotsky), the right wing (Bukharin) and the bureaucratic element (Stalin). At first the last two united against the left wing and ousted it out of the party, their support from outside the party came from the state bureaucracy and the Kulaks-both of whom would have lost if the left’s plans were adopted.
Bukharin, the theoretician of the ruling faction at that time, tossed to the peasantry his famous slogan, “Get rich!” In the language of theory that was supposed to mean a gradual growing of the kulaks into socialism. In practice it meant the enrichment of the minority at the expense of the overwhelming majority.
Leon Trotsky’s Revolution Betrayed, Chapter 2
In 1927 when the left was officially kicked out the party, the arrangement between the right and the bureaucracy started to unravel. The path of the right would have ended with a capitalist restoration, the Kulaks now in control of the economy wanted to have political control as well.
The Kulaks in 1928 initiated a grain-strike; they withhold grain from the market to increase the price. Although this action is economic, it has deep political implications; if the government can’t feed the workers then it will collapse and will be replaced by a government that can feed the workers, by surrendering to the demands of the countryside. Such a dramatic change after ten years of the revolution and only 8 years after the end of the civil war would have been very different from the capitalist restoration we see today in China, and that was not acceptable for the bureaucratic element in the party, once power was gained it was very difficult to let go of it-the trick of the Chinese is to slowly replace bureaucratic power with economic power.
The bureaucracy kicked the right wing out the party, forcibly collectivised the Kulaks and industrialized the country on a heavy industry basis. This entailed food shortages and decline in agriculture, also a return to fiat currency and ever-decreasing value; finally there was a severe shortage of light commodities; a shortage that was never really resolved. The use of sovereign credit was replaced by sovereign power.
The German Experience
The Germans, in imitation of the Russians, used sovereign credit to rebuild their industry, they had some advantages over the Russians: their infrastructure was not destroyed, their industry was not physically damaged, they had a higher level of culture and industry to build on and most importantly a smaller portion of the population was engaged in agriculture. Despite the Nazi’s adoration and idealization of the small farmers, they ultimately became victims to it (the same thing happened to the traditional family ideal) but unlike Russia they had little power to resist not only because of their smaller numbers but also because the Nazi’s were repressive from the first day, having learnt from the Russian experience where repression did not start in earnest until the end of the twenties.
China is still unable to accomplish in economic reconstruction what Nazi Germany managed in four years after coming to power, ie, full employment with a vibrant economy financed with sovereign credit without the need to export, which would challenge that of Britain, the then superpower.
Henry C. K. Liu, Nazism and the German Economic Miracle
That is certainly an accomplishment, but four years is too short. I, personally, have the preference for longer time spans-as I have shown elsewhere on this blog-say forty years, but I concede that forty years is too long to judge an economic program, which would take ten to twenty years. So let us judge the Nazi economic program after ten years of running, how was Germany faring in 1943-44?
In 1943-44 Germany was losing battles in North Africa and in Stalingrad, Germany was being bombed day and night by strategic bombers, German industry was being destroyed, the German people were going hungry, German currency was being inflated to destruction, Germany could only import supplies with gold, the end had arrived; that is what usury had accomplished in ten short years. Now let us take a look how the scheme was started:
Under the scheme of “pre-financing” with work-creation bills, the Reich Finance Ministry distributed these WCBs (three months, renewable up to five years) to participating credit institutions and public agencies. Contractors and suppliers who required cash to participate in work-creation projects drew bills against the agency ordering the work or the appropriate credit institutions. These credit institutions then accepted (assumed liability for payment of) the bills, which, now treated as commercial paper, could rediscount the bills at the Reichsbank (central bank). The entire process of drawing, accepting and discounting WCBs provided the cash necessary to pay the contractors and suppliers. The experience of successful rollover every three months quickly established credit worthiness. The Reich Treasury undertook to redeem these bills, one-fifth of the total every year, between 1934 and 1938, as the economy and tax receipts recovered. As security for the bills, the Reich Treasury deposited with the credit institutions a corresponding amount of tax vouchers (Steuergutscheine) or other securities. As the Treasury redeemed WCBs, the tax vouchers were to be returned to the Treasury. Hitler increased the money supply in the German economy by creating special money for employment.
Henry C. K. Liu, Nazism and the German Economic Miracle
Creating “special money” out of thin air will not solve the problems of an economy; it will only delay them and in the process increase them. This bad money was used to pay off the workers; they accepted this money because at first it was better than nothing. The first acts of the Nazi government was to suppress left parties, labour unions and the workers’ leaders; this situation left the workers without direction or leadership. Despite this decapitation of labour the situation could not have lasted forever, the German government was under a rising pressure, the inevitable result of this pressure was war:
Redeeming WCBs did burden the 1934-39 Reich budget, but the decline in Reich expenditure for welfare support and other tax subsidies as a result of full employment recovery more than offset the redemption payments. The surplus was then used to reduce public debt and taxes further.
Henry C. K. Liu, Nazism and the German Economic Miracle
If this was all there was to the story, then one must believe that you can create something out of nothing. The fact is there was more to this story than monetary and financial policy. This success of the German-NEP in its first few years is the clear signal that it must end and be replaced; like a petrol engine utilising an electric engine to start, it is disengaged at exactly the peak of its output. Let us take a look at the process of economic reconstruction in greater detail:
In 1933, Hitler sought to reassure Germany’s business leadership that Nazi rule was consistent with the preservation of the free-market system, because he needed the support of the industrialists. He could buy that support by keeping wages down during the recovery, but any rigorous effort to curb prices and profits would alienate the business community and slow down economic recovery. Instead, Hitler sought to restore profitability to German business through reduced unit cost achieved by increasing output and sales volume, rather than through a general increase in prices (Mengenkonjunktur, niche Preiskonjunktur - output boom, not price boom). Adoption of “performance wage” (Leistungslohn - payment on a price-rate basis) increased labor productivity, thereby driving costs down and profit up. Some upward price movements were permitted to adjust price relationships between agricultural and manufactured products and between goods with elastic and inelastic demands, also to prevent price wars and below-cost dumping. These principles of “output boom, not price boom” and “performance wage” could also work in combating inflation today in many economies generally and China specifically.
Henry C. K. Liu, Nazism and the German Economic Miracle
The Germans were balancing on a tightrope, the longer the act went on the more difficult it was to keep their balance. They needed cheap food to keep labour cost down, they needed cheap resources to keep manufacturing cost down, and they needed an export market to dump excess products (the natural result of “increased labor productivity”). Though they had some advantages over the Russian they also had severe disadvantages: they had no raw materials, their agricultural sector was limited and they started their recovery in the era of protectionism that followed the Great Depression.
They had to import food and raw materials, with real money and not special money, and they were unable to export their surplus manufactured goods to the world market. Although the rebuilding of the internal market consumed the initial impetus-how much autobahn does one really need?-they ultimately needed to export. For the first three years the scheme seemed to work fine:
Hitler saved the German farmers from their heavy debt burden through relief programs and through subsidized farm prices. The stable farm income came at the expenses of the middlemen institutions, but Hitler sustained popular support by the provision of living income to consumers. Had Nazi Germany been a member of the World Trade Organization (WTO), this option would have been foreclosed to it. Hitler sought price stability only in sectors critical to the national economy and to the ultimate goal of rearmament. Germany had no overall price policy until the 1936 Four Year Plan, which concentrated economic authority in the hands of Hermann Goering for war production and put an end to regulated free-market policies.
Henry C. K. Liu, Nazism and the German Economic Miracle
I will not dispute the advantages of not belonging to the WTO, but let’s consider the implications of this paragraph closely. The farmers were being paid off by subsidies, while taxes and welfare is reduced; the middlemen institutions-who are ultimately needed for the economy to function-were being destroyed; Hitler had no popular support, the living income kept the population under restraint and delayed the inevitable by compounding the problem.
Prices were not stable in sectors not critical to the national economy; these were not the chewing gum or ice cream sectors but rather consumer goods sectors, the same sectors that the NEP failed to build. These sectors are of the most importance to the national economy, they give value to the paper the population receives in for their labour a. The national economy is not functioning to the benefit of the individual if his salary will not buy commodities to satisfy his needs-East Germans destroyed the Berlin wall to buy jeans from West German stores.
By 1936 economic authority is concentrated in the hands of Goering, paralleling a concentration of economic power in the hands of the state that took place in Russia in the early thirties. Was this the result of war preparation or was war preparation the result of an economic plan that borrowed from the future to pay off the present.
Hitler made it clear that after 1936, a major rearmament program would make heavy demand on German durable-goods and capital-goods industries without the need to export. With that assurance, German industry could plan expansion with confidence.
Henry C. K. Liu, Nazism and the German Economic Miracle
A major rearmament program needs imported resources that could not be paid for by “special money”: German tanks needed Swedish iron ore, German engines needed Russian oil, German bread needed Ukrainian wheat; just to list a few examples. All this cannot be paid for with “special money” but must be paid for with exported goods manufactured in Germany or gold. Germany had to pay up; it had to resolve the structural imbalances of its domestic economy, in short Germany had to export!
To claim that capitalism could develop without the need for initial capital formation and subsequent market expansion is one claim too far; this lifting by the bootstraps is clearly not possible in the long run. The Germans, actually, replaced initial capital formation with depreciating “special money” that acted as a tax on the farmers and workers, as it did in Russia, this fait currency was initially welcomed in both countries but in the long term it was unsustainable. The Panzer divisions of the Wheremacht spearheaded the market expansion. The first four years of the Nazi economic program resulted in an “Economic Miracle”, on the other hand the first twelve years of the same program resulted in the destruction of Germany, the occupation of the fatherland by foreign foes, the death of five million Germans and, of course, hyperinflation; usury’s chicken came home to roost.
The New Russian Experience
Eighty years later the Russians had to go back to their old plans to rebuild their economy after ten years of democracy and capitalism, only this time it was a restricted form of capitalism instead of socialism. In this neo-NEP Russia exported oil and gas for dollars-Putin was more trusting than Lenin, but now has learnt his lesson and the central bank is actively hording gold-and then used sovereign credit to re-capitalise its industry and rebuild its infrastructure.
The old solutions brought with them old problems: inflation. Inflation is sizzling in Russia, but this time the agriculture sector employs only 11% of the labour force and political pressure from the population in these rudderless times is diverted into all kinds of sidetracks. The prosperity of Putin’s Russia has been confined to the metropolitan areas of Moscow and St. Petersburg, while the countryside resumed its decline that started in the sixties of the last century. People are even prevented from migrating to the capital by a soviet-era law. Outside of those two centres regional centres in autonomous republics, where the Russians are not an ethnic majority, are growing and expanding.
The Russian empire covered 16.5% of the world’s landmass, the Soviet Union declined to 15% and the Russian federation down to 11.5%, furthermore ethnic Russians are leaving Siberia and the ethnically dominated republics in droves and returning to their historical homeland. The total population is declining in Russia; non-Russian minorities are increasing at a high rate, so the ratio of Russians to non-Russians in declining.
Although it seems that Russia is recovering from the collapse of the Soviet Union, the reality is that tension is building up and once this tension is triggered it will have a seismic effect on Russia, just as strong as the collapse of the Soviet Union but this time it will be different. The crises of the late eighties had an internal character, change started in the centre and radiated outward, increasing in the process then reflecting back on the centre: it was the leadership of Gorbachev that caused the collapse of the Berlin wall and not the collapse of the Berlin wall that caused the downfall of Gorbachev. The coming crises, on the other hand, will have an external character, while the centre will hold firm the periphery will suffer.
The price Russia will pay for using usury will be high, economic and demographic trends of decline that are now, the good times, present will accelerate in the future; these will in time result in fractures in the integrity of the state, fringe republics will try leaving the federation (e.g. Chechnya), China might take over East Siberia, while rising central Asia can easily expand north to Siberia’s heartland (maybe driven by drought and warming Siberia due to climate change?).
China Next?
After two and a half decades of economic reform toward neo-liberal market economy, China is still unable to accomplish in economic reconstruction what Nazi Germany managed in four years after coming to power, ie, full employment with a vibrant economy financed with sovereign credit without the need to export, which would challenge that of Britain, the then superpower. This is because China made the mistake of relying on foreign investment instead of using its own sovereign credit. The penalty for China is that it has to export the resultant wealth to pay for the foreign capital it did not need in the first place. The result after more than two decades is that while China has become a creditor to the US to the tune of nearing China’s own gross domestic product (GDP), it continues to have to beg the US for investment capital.
Henry C. K. Liu, Nazism and the German Economic Miracle
Henry C. K. Liu advocates that China stop depending on export and instead builds its internal market, I wholly agree with this advice; he also advocates doing that with sovereign credit, i.e. state usury, I wholly disagree with that. What usury gives today it will demand tomorrow with interest, if the building of China’s internal market is based on usury the resulting horrors might put to shame those of Stalinism and Nazism. Better paths for developments are available, they might not be easily implemented or take longer to pay back, but such is the price that one has to pay.
China currently has all the negative aspects of fiat currency and usury, furthermore by pegging to the dollar and accumulating dollar reserve and buying half a trillion of treasury debt, China is having none of the benefits of sovereign credit that Henry C. K. Liu advocates; looking at the situation like that it seems wise for China to use sovereign credit for national development instead of subsidising the US current account deficit.
My argument is simply this: why should China follow the path of western development and not forge ahead and open a new path of development that builds on the latest achievements of the west? The Chinese, for example, have built great highways and encouraged their people to buy cars while this particular system of transportation is failing in the west; the Chinese seem to behave like lemmings: following the west into the abyss. They seem loath to enjoy the only benefit of late development, to forgo the mistakes of those who came before.
What China needs is not political reform to accommodate capitalistic democracy, but a restoration of its revolutionary ideological line in its political institutions and a renewal of populist commitment on the part of its leadership. Political reform driven by flawed ideology is institutional suicide.
Henry C. K. Liu, Nazism and the German Economic Miracle
I agree with the above statements, but does that mean that China has to go through the path of usury? Usury turned Russia into a totalitarian nightmare in the thirties, pushed Germany towards a war without end until it was totally destroyed, it has destroyed the industrial base of the US and turned the whole economy into one giant ponzi scheme and a return to usury in Russia is weakening the very base of the nation and setting the stage for future collapse; what might befall China if it, too, decides to follow this path?
