May 1917

Economics and The Great War

By Jacopo Calussi

The father of my dearly loved Elisabeth was at that time a prominent, almost a celebrated hat-maker. The war came at a not unwelcome juncture for my future father-in-law. He was already too old to have to serve, but still young enough to make the leap from a respectable solid hat-maker to a dashing manufacturer of those army caps that bring in so much more profit and cost so much less to produce than a topper. (...) [H]e was just back from a highly satisfactory meeting at the War Ministry of War. He had been given a contract to make half a million army caps.

--

..I just watched my mother and ate and drank the things she had prepared for me, had probably in a hundred different ways managed to acquire. Lots of things that were completely unattainable in Vienna: salted almonds, white bread, a couple of bars of chocolate, a miniature of cognac and proper coffee. She sat down at the piano. (...) She probably wanted to play Chopin for me. (...) Her fingers slid over the keys, but there was no sound from the interior of the instrument. (...) I tried a few notes myself. Nothing. It was ghostly. In curiosity, I lifted the lid of the piano. It was hollow inside. The instrument was empty: there weren't any strings.

From The Emperor's Tomb by Joseph Roth (English translation by Michael Hofmann); the two excerpts relate to episodes in Vienna in 1915 and 1918, respectively.

As the first war on such a massive scale, the Great War had the effect of disrupting national systems of production, consumption and exchange of services and goods. The duration and scope of the conflict must therefore be interpreted as exceptional for the European continent, compared with the military experiences of the previous century and previous years. The need to arm and supply a huge mass of men mobilized for the front influenced the strategies of governments, which ended up imposing radical changes on the nation's entire economic structure. This process is often identified as the "national mobilization", which is a revolutionary economic structure from the point of view of production and distribution of goods, whereby every national resource is directed to the war effort, to the general detriment of domestic consumption.

Taking a step backwards, the exceptional nature of the circumstances brought about by the outbreak of the conflict was grasped belatedly by the economic ministers and in general by the governments of the warring states. Indeed, there were very few indications in the first year of war of the catastrophic outcomes that would affect most of the continent.

The conflicting colonial ambitions of the belligerents and rivalries related to the global financial market must be seen (not exclusively) as factors underlying the general causes of the conflict: the global economic integration process - often termed "globalization" - was abruptly interrupted by the outbreak of hostilities; furthermore, the result of the conflict would impose a general change in the economic and financial roles of the nations involved after the war, to the benefit of neutral or non-European economic powers. However, the nature of economic integration of the two decades prior to the conflict would come to bear on the lack of understanding of possible war outcomes. Globalization in fact assumed a number of economic ties between states that did not envisage the future alliances of the Great War. The dominant economic thinking in the first decade of the 20th century simply did not deem it possible that a state of general mobilization could be maintained for a multi-year period: the financial and general economic resources for the "war machine" would be lacking, while the destruction of goods, men and resources would produce radical changes to the economic, social and political structure of the nations involved.

The most noteworthy economic development regarding the Great War was an exceptional expansion of state prerogatives concerning the organization of national production. The war had the effect of directly comparing the different industrial systems of the states involved in the conflict, as well as their endurance vis-à-vis internal consensus or crisis. The governments of the belligerent countries gained almost complete power over the management of industrial contracts and the distribution of agricultural products to an extent that foreshadowed a policy that would become the norm in successive models of a single party totalitarian state and, with necessary differences, in the western democracies in the period following the 1929 crisis. Through agreements and pressures applied to the different social parties, governments or military commands would directly manage the amount and deadlines of the production of weapons and other goods for war purposes. National mobilization of the economy thus had the effect of enormously increasing the size of certain industrial companies.

In Italy, starting in December 1915, several strategic companies were identified to support the war effort. Such companies were defined as "auxiliaries" and would obtain all war commissions from the military ministries. The exponential growth of government demands influenced the internal structure of large industrial companies, such as Ansaldo, which went from 6,000 pre-war employees to 110,000 workers employed in various capacities in 1917. In the last two years of war in Italy, auxiliary facilities employed 900,000 workers, mostly militarily; this militarization can be seen as the extreme of a general strengthening of state control over society. On the other hand, all the nations involved in the conflict saw the first definite numerical growth of female workers, who were employed in factories and fields to fill the gaps left by the mass mobilization of men in the army.

To finance this effort, all the governments of the countries involved abandoned the gold standard in favour of the so-called "forced circulation". The threat of depletion of gold reserves led to "artificially" indicating the exchange rate of the national currency so as to overcome normal public spending limits, which laid the foundations for an exceptional increase in inflation. The latter was fuelled by the upswing of the national production system, directed almost exclusively to cover military needs, both in the industrial and agricultural sectors.

Some authors have stressed a fundamental difference in the relationship between governments, military commands and major domestic economic sectors in wartime. Generally, we may say that the differences in the management of economic resources allocated to military needs cut across the two sides. The European empires, in particular, experienced "segmented" economic management or, more precisely, one that was not integrated into the existing relationship between the home front and the military front. The governments of Berlin, Vienna and St. Petersburg entrusted the management of war production and supplies for the armed forces directly to the supreme commands, almost completely excluding political actors from the goods distribution framework. The most obvious consequence of this situation was the collapse of the standard of living of the civilian population of the "three empires", in which a growing shortage of foodstuffs corresponded to a new "privilege" system that saw the army and its senior officers take a dominant role. On the other hand, in France and the United Kingdom, the ministers responsible for economic matters were able to impose their own strategy on the commands of the armed forces, creating an "integrated" economic system, which was then able to reconcile the needs of the military front with those of the civilian population.The result of this difference may generally coincide with the more stable maintenance of internal consensus by the "democratic" countries of the Entente. The different relationship between the home front and the military front would directly affect the outcomes of the conflict, leading in the last two years of war to epochal disruptions in countries where the economic integration strategy was completely lacking. The position of Italy stood in this context was that of a middle way, in which the prerogatives granted to supreme command underwent a clear limitation during the two-year period 1916-17. The partial change of conduct did not prevent the outbreak of workers' protests due to the collapse of the standard of living in the summer of 1917, which was brutally suppressed by the Royal Army.

Methods used to finance the war effort took three directions, generally indicated by the British economist John Maynard Keynes in the 1920s. The "German way" involved massive monetary manoeuvres. French and Italian policies, on the contrary, concentrated on a massive state debt: the raising of capital was thus addressed both to "domestic" investors in these nations, through various campaigns for the sale of special government bonds, and to foreign countries, specifically traditional creditors such as Great Britain and the United States. In 1918, Italy saw its public debt increase to 24.2 billion lira/gold, while the French Republic quadrupled its debt to foreign investors, going from 32,974 francs in 1913 to 124,338 francs in 1918. The "third way" was identified by Keynes in the expansion of the UK taxes, which characterized a particular economy like that of London, traditionally characterized by the role of creditor-power.

The economic policy adopted to deal with the conflict depended on the characteristics of national economies (in particular in relation to the different degree of industrialization) and, on a different level, on the geopolitical position of the belligerents. The German Empire quickly tried to "finish off" France, simply because it could not support a military effort on multiple fronts. The failure of the Schlieffen plan and the British intervention led to the Wilhelmian Reich being surrounded on three sides by the powers of the Entente. During the first months of the war Austro-German merchant fleets disappeared from the naval routes of the Mediterranean and Atlantic, thus making the inflow of goods transported by neutral ships vital. At the same time, the German navy command orchestrated a progressively reinforced strategy of aggression against British merchant fleets. Between 1914 and 1917 there were three "all-out" German submarine offensives against British merchant routes.

From the end of 1915, the Royal Navy and the navies of the Entente reacted by launching a "total blockade" of the Austro-German coasts, also imposing the stopping of ships and seizure of products sold to the Central Empires on neutral countries. At the same time, the British strategy of attrition also signified a "financial" offensive against Berlin and Vienna, with the exclusive acquisition of extensive market shares of the trade in agricultural products and raw materials. The German Empire saw the collapse of the quantity of food available during the war years: grain imports into the Reich went from 20,063 tons in 1916 to 3,089 the following year, while the purchase of foreign meat fell by 87% over the same period.

The consequences of the naval blockade took the form of a malnutrition crisis that plagued hundreds of thousands of civilians in the two empires. In fact, it has been estimated that 770,000 German civilians died as a result of the blockade. Immediately following the Armistice with the powers of the Entente, it was estimated that about 10% of the population would not "survive the winter" in the Hapsburg capital.

 Supply difficulties thus stemmed from the enemy military strategy and the lack of internal coordination for resource management, notably strengthened in Austria-Hungary by both political decision and by the marked economic and ethnic differences within the Empire. Moreover, food shortages were aggravated by the devastation that, in the case of central and eastern Europe, mostly hit the regions with the highest agricultural output, such as Galicia. Unlike in the Second World War, the occupation of enemy territory and the resulting exploitation could not even partially cover the demand for agricultural goods and commodities of the Austro-German occupiers. Similar difficulties were also felt by the Russian Empire, which, together with a condition of partial national industrialization (which, however, was not unique to the Tsarist empire), had a system of transport and distribution of goods absolutely inadequate and insufficient to cover the distances of the Tsar's territory. Such economic and production failures had a direct consequence on the events of 1917, which saw the forced abdication of Tsar Nicholas II, insurrection and the taking of power by Lenin's Bolsheviks. In the same year, however, US intervention rebalanced the military forces on the ground strategically and militarily. As already mentioned, the Entente had been able to make use of the economic and financial potential of the United States since the early years of the war: to the increase in the financial resources requested by countries like Italy, Washington added a reserve of raw materials and industrial products far outmatching the economic potential of the Central Powers.

Rather than defeat on the battlefield, the causes of the collapse of the Central Empires may be seen as the result of economic factors such as the shortage of goods and the deterioration of the entire economic and production structure. The waste of resources similarly burdened the victors, who, in the clauses imposed on the vanquished, deliberately resolved to make the defeated powers pay the incalculable cost of the war. The notorious "reparations" imposed especially on Germany were calculated in 1921 at 132 billion marks/gold, an impossible amount to pay for the German economy, already on its knees after four years of war and the territorial losses of 1919.

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