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1

What is revolution?

Revolution is not the uprising against preexisting order, but the setting up of a new order contradictory to the traditional one. 

=> essence of 19th cent.

2

Fundamental differences between 19th cent and previous cent 

  • Previous cent: life meant limitation, obligation, dependence => world of pressure => even for the rich and powerful, the world was a place of poverty, difficulty and danger 
  • 19th cent: does not compel man to limit himself in any fashion, it sets up no veto in opposition to him => world of increase 

3

Natural evolution from previous cent to 19th cent

the common man, finding himself in a world so excellent, technically and socially, believes that it has been produced by nature, and never thinks of the personal efforts of highly-endowed individuals which the creation of this new world presupposed.

will he admit the notion that all these facilities still require the support of certain difficult human virtues, the least failure of which would cause the rapid disappearance of the whole magnificent edifice. 

4

 Psychological chart of the massman of today 

Two fundamental traits

  1. the free expansion of his vital desires, and therefore, of his personality
  2. his radical ingratitude towards all that has made possible the ease of his existence.

=> These traits together make up the well-known psychology of the spoilt child. 

Developed by Jose Ortega y Gasset, The Revolt of the Masses, 1930 

5

How did countries precipitate towards the war?

  • Modern warfare leans towards machines => simultaneous investment which reveals enemies' reciprocal capability
  • Initial war plans took on mathematical rigidities 
    • e.g. Chief of French General Staff stated every day's delay in proclaiming mobilisation = surrender of 25km of territory to enemy (law of nature)
    • links with psychological chart - world of increasing

6

Pre-war economic structure

  • Int' division of labour = means to attain well-being and affluence to Europe and Western civilization
  • Economy dominated by Europe (especially Western) , US - without their empires, accounted for half a total production and trade 
    • Britain, Germany, France and US = world's leading industrial and commercial nations 
  • Some restrictions in form of protective tariffs, provate monopolies and int' cartel
  • Domestic and int' market regulated under basis of free market 

7

General characteristics of the wars

  1. Great: in terms of extension, casualties, contrast to the previous period of peace
  2. Industrial: clash between productive systems -> importance of planning and logistics
    • nations imposed direct controls on prices, production and labor allocation => stimulated some, restricted some 
    • loss of foreign markets. e.g. Germany cut off from overseas mkt 
  3. Democratic: interclass, egalitarian, levelling -> technocratic movement (the government or control of society or industry by an elite of technical experts.)
    • imposition of gov controls. e.g. Latin American and Asian countries established manufacturing industries and protected it with high tariffs => Asia suffered 
  4. Revolutionary: regeneration (F.T. Marinetti: “The World’s only hygiene”; C. Carrà: “Art with other means”); seedbed of revolutions
  5. Ideological: clash of civilizations -> importance of propaganda (fake news)
    • 1915: Germans submarine avoided British navy but attacked unarmed vessels leading to the sinking of British liner Lusitania 
    • 1917: Germany desperated to beat Britain => unleashed unrestricted submarine warfare => => US declared war with Germany 
    • Under Soviet regime, state = sole buyer and seller in int' trade as it bought and sold what its political rulers regarded as strategically necessary/expedient 
  6. Total: mobilization of resources towards different ends -> blurring distinction between war and peace
    • asserted nationahood in economics through means of self-sufficiency 

8

Consequences of the war: the “suicide of Europe” 

  • Casualties and decline of population
  • Destruction of physical capital
  • Economic decline of Europe
  • Political and social turmoil
  • Disruption of previous financial balances 

9

Paris Peace Conference and Treaty of Versailles

  • A type of Carthaginian peace
  • 1919-1920: postwar settlement that did not solve economic problems but exacerbated them
  • Created the League of Nations 
  • 2 major difficulties:
    1. growth of economic nationalism
    2. monetary and financial problems
  • Germany:
    • deprived of 13% of prewar territory
    • 10% of 1910 pop.
    • 15% of arable land
    • 3/4 of iron, zinc ore and coal 
    • surrender navy - merchant fleet, locomotives, railroad cars and motor trucks + accepted restrictions of armed forces 
  • => war guilt => justify claims to reparations for the Allies 
    • failure also owed to US' failure to ratify treaty, join the League 

10

The “Carthaginian Peace” 

  • the imposition of a very brutal "peace" achieved by completely crushing the enemy
  • conditions of the Armistice (formal agreement of warring parties to stop fighting. It is not necessarily the end of a war, since it may constitute only a cessation of hostilities while an attempt is made to negotiate a lasting peace): payment of war damages

  • conditions of the Treaty: payment of the costs of the war

  • capacity to pay: trade surplus

  • conditions of a just payment (and peace): equilibrium between requests and capacity

  • The Treaty puts Germany in the condition of not being able to pay (had to pay a sum twice greater than national income):

    • raw materials and productive plants... destroyed or taken

    • most-favored-nation clause unilaterally imposed

    • amount and modality of payment undetermined

    • Reparations Committee as an arbiter, not at all impartial 

  • despite the fact that they begun to pay as early as 1919 (before Treaty came into effect)

  • => Allies could only repay US if received reparations from Germany => internal weakness of Weimar + restrictions meant it did more harm than good => 1922: value of German mark declined and ceased payments altogether 

11

Pre-war balances

  • Different countries perform different functions and stick to the functions => compromise before the war
  • BP (balance of payments) = CA+FA+KA (current, financial and capital accounts)
    • CA = X-IM + NR (net rev) - from foreign inv
    • FA = FDI (long term) + PI (portfolio inv) - short term 
    • KA = the specie flow (affected by balance of trade - X-IM) - acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced
      • monitored by international gold standard
      • debt and capital exchanged in terms of gold 
  • UK = negative trade balance but positive NR owing to foreign investments 
  • Usually NR is used to pay interests on loans 
  • => system has an equilibrium; different actors play different acts and have different responsibilities 
  • UK = pivot of this system as
    • they are the main investor and pioneer in using gold => domino effect  
    • a rentier - lives off previously accumulated wealth 

12

Post-war balances

  • The war has ended with everyone owing everyone else immense sums of money. Germany owes a large sum to the Allies; the Allies owe a large sum to Great Britain; and Great Britain owes a large sum to the United States 
    • German merchant marine had to be handed over to Allies in payment of reparations
    • London and other E fin centres lost income from banking, insurance and financial/commercial services that were transferred to NY since its financial resources were exhausted (low NR from foreign inv + war finance)
  • Main creditor countries: US, UK, France
  • Main debtor countries: UK, France, Italy, Russia, Belgium, Serbia and Yugoslavia
  • Equilibrium is upset since increased demand for foodstuff and raw material happened at the same time when areas went out of production/cut off from markets
  • US increased acreage of wheat by buying new land at war-inflated price => when prices fell, many were unable to pay off mortgage (overproduction and falling prices)
  • Britain, France and Germany = most important investors but because imported more than exported during war => NR decrease
    • Germany's inv were all liquidated for reparations payments
  • Europeans saw US loans as in name only (expected to cancel since they are latecomer into war => contributed less in manpower and materials) but US regarded them as commercial propositions => Allies paid as much as Germans 

13

Causes of inflation post-war

Pressure of wartime finance forced countries off the gold standard (except US) => resorted to large scale borrowing and printing of paper money to finance expenditures => rise in prices, however, not in the same proportion (Germany > France > Britain > US) => great disparity altered values of currency that hindered international trade

For Germans, due to Carthaginian Peace, French and Belgium occupied Ruhr (1923) and took over coal mines and railroads => forced owners and workers to deliver coal => gov printed huge quantities of paper money for compensation payments to Ruhr workers => uncontrolled inflation led the mark to worth less than paper => authorities had to monetise the mark and substitute a new monetary unit 

14

Inflation effects on politics

  • growth of extremism on both right and left 
  • Due to Germany's inability to pay reparations to the French, the gov's extensive program of physical reconstruction of war-damaged areas deteriorated => stabilised the franc at about 1/5 of its prewar value by undertaking drastic economies and passing stiff increases in taxation
  • When franc stabilised, undervalued in relation to other major currencies => stimulated exports, hindered imports and led to inflow of gold => depression struck later 1931
  • 1936: Communists, Socialists and Radicals formed a coalition - Popular Front (Leon Blum) and nationalised Bank of France, railways and enhanced reforms regarding labor. Broke off in 1938 as foreign affairs increasingly dominated the political scene

15

Dawes Loan

  • stemmed from recommendations to scale down annual reparations and re-organization of Reischbank (Charles G. Dawes - American investment banker)
  • International loan of 800 million marks ($200 million) enabled Germany to resume reparations and return to gold standard 

16

Unemployment as a result from war

UK:

  • Lost foreign markets and inv and yet depended as much as ever on imports 
  • export, however, were idle due to mounted unemployment
  • => solution: dole - system of relief payments (1921-1922):
    • inadequate to support families of unemployed
    • heavy burden on already overstrained budget
  • => strong pressure to return to gold standard (exited initially as a measure of war finance) => to achieve pre-war parity, fall in wages is needed or else inv would be penalised due to lower rate 

17

Genoa Conference

  • 10 April – 19 May 1922 
  • discuss the economic reconstruction of central and eastern Europe and to explore ways to improve relations between Soviet Russia and European capitalist regimes.
  • interested in developing a strategy to rebuild defeated Germany
  • Negotiations foundered when France and Belgium, prerevolutionary Russia’s main creditors, insisted on the integral repayment of prewar loans and integral restitution of confiscated foreign-owned property in Soviet Russia.
  • discussion about economizing the use of gold by maintaining reserves in the form of foreign balances, such, for example as the gold exchange standard or an international clearing system => resume

18

Eichensreen on gold standard

  • built based on coordination and leadership
  • Britain enjoys the privilege of its own currency as international currency for the purpose of regulating these internation settings
  • large parts of payments not only paid in gold but in pounds thanks to the fact that pound is convertible into gold easily - believed to be as good as gold as int' payment and kept as reserves 
  • allows Britain to produce purchases in pounds (e.g. printing money as loans) - a means of international settlements - create international money
  • credibility of Britain is tied to its commitment to keep its promise of repayment and conversion 
  • only works if commitment is exercised regarding (re)payments => acts as a propellor for convertibility 
  • no exchange rate risks - fixed monetary system 
  • gold = fractional reserves but not a fixed variation but a variable one to assert confidence in convertibility 
  • => coordination and leadership gives rise to confidence 
  • if confidence is shattered, failure of standard

19

The roaring 20's

  • Only really happened after 1924, stagnating the years before, and skyrocketed after
  • The Dow reached its peak by the end of the decade 
  • Bull market associated with new era characterised by different series of inventions => age of growth  => can be confident that things will progress => optimism behind rising stocks seemed to be justified 
  • Not just a matter of new products appearing, but a rise of mass production and mass consumption (quantity) 
  • Increasing (both white and blue collar) earn enough to retrieve the goods they are producing 
  • Democratisation of finance as household gained access to stock market 
  • Innovation spree spread across wider sphere in the US. 
  • Also spread to Europe, esp Germany (who was hit the harderst after the war) but 1920 was still considered golden era 
  • 24th Oct 1929, abrupt interruption of this era's ascent, Dow Jones index was cut in half by the end of the day (market crash)

20

Real growth or financial growth in roaring 20's

Real growth (annual increases):

  • GDP: +3,4% (1923-29)
  • ind’l productivity: +5,3% (1919-29)
  • profits: +14% (1928-29)
  • for a country with a mature economy and a leading producer in multiple of industries, growth is still impressive

Stock market growth:

  • DJIA: +18,0% (1922-29)

Financial/real growth:

  • P/E ratio of ind’l shares: 10-15 - most impressive 

The problem is not the excess, but the impossibility of drawing a line. 

=> Considering all these facts, nothing exceptional occurred in the stock market in the 1920s. the market was being spurred by the real factorial growth of the era mentioned before, there are other monetary and financial factors which lead to this growth. These factors enhanced the bull market which appeared at the end of the 1920s

21

What made the bull market?

  1. gold exchange standard
  2. monetary expansion (owing to gold standard) - economising on the use of gold as assets
  3. margin trading - practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker (trade with leverage) 
    • what allows it to develop is the growth of stock mkt at a sustained rate => incentive for lenders to give out loans => democratisation of finance - small amount is substantial to make an investment
  4. financial innovation - investment trusts - trade on stock exchange through expert intermediaries with professional portfolio mgmt
  5. 1928: American investors began to cut down purchases of German and other foreign bonds to invest funds through NY stock market

growth of market = prerequisite of financial innovation. e.g. margin trading => paradox since we say margin trading = driver of stock mkt growth => loop => real growth OR financial growth => new era or orgy of speculation where there existed low interest rate, abundance of money through laxes of monetary policy and gold standard

1&2: abundance of money

3&4: interchangeability of money and assets  

=> both contributed to improved liquidity

22

JMK: The market as a "beauty contest"

  • According to Keynes, the stock market is, as in a beauty contest - no more than a guessing game where we should try to guess what other people guess we would choose.
  • => we try to expect the future price of a stock, one which is based on supply and demand.
  • The more demand exceeds supply, the higher the price of a stock, which ultimately depends on the choices of people who stand in our very position.
  • Markets function in this way, according to Keynes, as of its liquidity allowing for constant adjustments.

23

The fetish with liquidity

  • professional investor is forced to concern himself with liquidity - maxim of orthodox
  • positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. 
  • forgets that there is no such thing as liquidity of investment for the community as a whole. 
  • The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future.
    • The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow (relate back to beauty contest)

24

Animal spirits as a result of obsession with liquidity

  • spontaneous urge to action rather than inaction 
  • Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere (window dressing)
  • Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than (as reasonable as) hopes of profit had before.” 

25

Mitigation of speculation

  • These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets 
  • The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States 
  • The spectacle of modern investment markets has moved towards the conclusion that to make the purchase of an investment permanent and indissoluble,  investors are forced to direct his mind to the long-term prospects 

26

Dilemma of liquidity markets

  • For the fact that each individual investor flatters himself that his commitment is “liquid” => more willing to run a risk 
  • If individual purchases of investments were rendered illiquid, this might seriously impede new investment 
  • So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive 

27

Keynes, General Theory, ch. 12 “The State of Long-Term Expectation” 

  • Y = C + I
  • "The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him."
  • "It might be that, at times when he was more than usually assailed by doubts concerning the future, he would turn in his perplexity towards more consumption and less new investment"