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WW3 Watch: Now that’s what I call economic warfare

Seemingly unprecedented times call for unprecedented library searches... not least because those who do not learn history are doomed to repeat it.
Screenshot 2022-03-28 at 11.56.26

Seemingly unprecedented times call for unprecedented library searches… not least because those who do not learn history are doomed to repeat it.

On that front, I’m a little obsessed with the work of Paul Einzig. For those who don’t know him, Einzig — who hailed from Transylvania — was a very well respected politics and economic journalist/commentator at the Financial Times (as well as its precursor Financial News) from the post-war period until the early 1970s. As well as being the originator of the Lombard column, he was also a prolific author and go-to resource on all matters “money market”. In that capacity, he wrote the definitive books on the early formation of the Eurodollar and Eurobond markets. But he was also a specialist on gold, foreign exchange, primitive money and general world finance.

When strange things happen in markets, I often turn to the works of Einzig for insight – out of his 60+ works, there’s always one with some historical relevance or insight.

This is how I stumbled across his 1941 book: Economic Warfare 1939-1940. I’ve only just started reading it now, but Chapter 3 is already offering a lot of food for thought. I thought I would share some fractions of it (my emphasis):

During the first few months after the outbreak of the war, it was generally assumed that the blockade was as good as watertight. This was actually stated on repeated occasions by official spokesmen, including Mr. Ronald Cross, Minister of Economic Warfare, and Mr. Chamberlain himself. The public had no reason to doubt that the official statements were in accordance with the facts, and information to the contrary was, as the beginning at any rate, very scarce.

The government was doing its utmost to encourage the feeling of optimism about the effectiveness of the blockade, for it appeared to provide justification for its policy of inaction in other spheres. Month after month nothing was done on any of the battle-fronts and from time to time the public was beginning to grow restive, wondering how this war can ever end if both parties simply sit on both sides of the lines of defence. From time to time busybody MPs were inclined to pester the government about the inadequacy of its economic war effort and the slow progress of rearmament. It was obvious to everybody that the increase of Great Britain’s arms strength was proceeding at a snail-like pace. Unemployment remained well over a million in spite of the calling-up of various year classes. Working hours remained short, and week-end and bank holiday arrangements remained unaffected by the war.

A large number of firms, able and willing to take a hand in the rearmament effort, failed to obtain contracts which were reserved for the “inner circle”. Those in charge of various departments, from Ministers downwards, would not have dreamt of allowing anything to interfere with their Saturday golf.

The easy-going and comfort-loving British nation was not yet aroused by the realisation of the vital need for a more vigorous effort. The absence of imminent danger was by no means the only reason for its indifference towards the Government’s slackness. One of the main reasons why, apart from a few exceptions, MPs did not press vigorously for an intensified war effort, and why the public did not go beyond the stage of grumbling, was the government’s deliberate effort to disseminate optimism about the progress of economic warfare in general and of the blockade in particular. 

Official statements conveyed the impression that, as a result of the blockade, Germany was gradually being drained of her economic war potential, and that even in the absence of major battles she would sooner or later be forced to surrender.

The truth of the matter was that the blockade was leaking like a sieve. Indeed, it may be stated without much exaggeration that during the first eight months of the war Germany was able to import everything she was able to pay for, the only practical result of the blockade being that a relatively small percentage of her consignments were seized by the allied contraband control, and that the necessity of importing through devious routes or through the intermediary of middle-men increased the cost of the imports.

One of Einzig’s prevailing points in the book is that with every war, the official role played by economic warfare becomes more formalised.  In WW1, he notes, the UK boasted the Ministry of Blockdade — but this was mainly concerned with intercepting food supplies and starving out the Germans.

By WW2, the UK saw fit to create the Ministry of Economic Warfare, whose main focus was intercepting supplies but, most importantly, oil. In that role, the MoEW took on a pre-emptive and offensive role, not just a responsive one — helping to direct air assaults on vital fuel-generating infrastructure.

“The Air Force too acts largely upon suggestions coming from the Ministry of Economic Warfare concerning the choice of the objectives of air attacks in Axis countries. In past wars it would have been almost inconceivable that the High Commands should have allowed a civilian department to interfere with their plans. In the present war, however, they fully realise the decisive importance of weakening the enemy’s resistance in the economic sphere.”

While Britain’s formidable naval power proved a critical force in enforcing blockades and intercepting supplies both in WW1 and WW2, Einzig notes that in 1940 the government was still struggling with leaks in the system. This was particularly due to  the help provided by neutral countries. As he notes:

The following were the main leaks in the blockade during the first eight months of war:

  1. Shipments through Vladivostok.

  2. Blockade-running, mainly through the Norwegian territorial waters.

  3. Evasion through the intermediary of neutral firms lending their names to German transactions.

  4. Re-sale of essential materials by neutral countries under German pressure.

  5. Exemptions from the blockade through diplomatic concessions.

The fact that it took a while for the government to recognise these issues, led Einzig to observe the following:

His [Mr. Cross’s] statements in the House about the progress of economic warfare presented an extremely optimistic picture of a Germany that was rapidly becoming crippled by shortages in essential raw materials. It was these statements that earned his Department the name of the Ministry of Wishful Thinking. 

Another fascinating passage relates to the use of black-lists by the Allies to try and stop neutral firms acting as intermediaries for the benefit of Germany. As Einzig notes regarding the black list:

Its object was to prevent British firms from trading with firms, which, while technically neutral, were in reality German, or which through their close connections wtih Germany were likely to serve mainly German interests.

Einzig continues:

The process of black-listing was particularly slow as far as German-controlled banks were concerned… In many instances this delay was explained on the ground that it was necessary to enable London banks to collect their claims against these banks before placing them on the black-list.  Unfortunately the concession made to that end cut both ways. For months after the outbreak of the war there was nothing to prevent these banks from withdrawing their balances from London. It is difficult to form an opinion whether the total of such balances withdrawn was in excess of the total of credits repaid during the months of grace.

And regarding confiscations of German financial assets in general:

The blocking of enemy assets constituted another powerful means for reducing the foreign exchange resources at Germany’s disposal. British banks and other holders of German-owned assets were required at the beginning of the war to declare or to surrender these assets to the Custodian of Enemy Property.


As far as enemy assets in the form of securities are concerned the system is now reasonably watertight. On the other hand, it is still possible for enemy subjects to withdraw sterling balances held in the name of neutral banks.

As for the role United States authorities played:

… whenever Germany invaded a country the assets belonging to nationals of that country were promptly frozen by the United States authorities. By such means it was possible to save gold deposits and securities, amounting to over a £1bn from falling into German hands. Had it not been for the American measures the gold reserves of the Danish National Bank, the Bank of Norway, the Netherlands Bank, the National Bank of Belgium and even of the Bank of France would have fallen into German hands.

That last point seems particularly notable in light of the recent freezing of the assets of Russia’s central bank.  It suggests, at the very least, that central bank reserves have never been entirely free from political risk — and that the immunity they were perceived to carry for decades was largely a post-WW2 war phenomenon. That said, the WW2 moves still didn’t amount to outright confiscations, which is why the recent American directives against the assets of the Afghan central bank are so particularly notable.

One other interesting point of note, according to Einzig, was the role played by German agents in Lisbon, which apparently had by 1940 become the principal foreign exchange market in Europe after the occupation of Amsterdam, Brussels and Paris. These agents engaged enthusiastically in the selling of pound notes seized by the German occupation authorities, partly to secure dollars and partly to depreciate the pound exchange rate as an act of reciprocal economic harm. Swiss banks also helped to facilitate this trade as well, Einzig says, which was one of the reasons he speculated Switzerland had not been conquered. Within time most of Germany’s assets in New York were transferred to the names of Swiss and Swedish banks.

The introduction of rationing

As talk of global food shortages becomes ever more pronounced as a result of the current Ukrainian/Russian conflict, it’s worth looking to history to see how previous generations coped with similar pressures. Einzig once again offers some interesting insights.

For example, in the case of Britain, he notes that during the early phases of the war there was no sign of shortage in food supplies. To the contrary, if certain foodstuffs were rationed at an early stage this was not due to blockades by German submarines but rather due to a desire to economise in foreign exchange. It was only in late 1940 the economic warfare began to affect the British food position. Economic defensive measures taken in response included:

  1. Reduction of consumption through rationing.
  2. Limitation of the production of unessential goods.
  3. Limitation of building activity.
  4. Salvage of materials.

On rationing specifically, he notes (my emphasis):

Rationing of some essential foodstuffs was resorted to at a relatively early stage of the war. Butter, sugar, bacon, meat and subsequently margarine, cooking fats and tea were rationed during the course of the first year. The rations fluctuated according to the supplies variable. Petrol for civilian purposes was also rationed from the second month of the war. From time to time informal and unofficial rationing of various foodstuffs and other goods was adopted, either at the request of the Government or by the shops, anxious to satisfy all customers by making their limited supplies go round.

Official propaganda aimed at persuading the public to keep down its purchases adn consumption, though in this respect the official attitude was far from consistent. There were from time to time contradictory statements by members of the Government who were anxious that the taxation capacity of the nation should not suffer through a contraction of the commercial turnover and profits, and by other members who were anxious that the supplies of goods available for civilian consumption should not become exhausted.

Also fascinating was the Government’s alleged reluctance to go down the rationing path, especially compared to that of Germany’s:

The Government was, however, reluctant to follow the German example. From the very beginning Germany applied a very involevd and extensive system of rationing of foodstuffs and manufacturers for civilian consumption. The annual amount of textiles, shoes, etc., which any individual was entitled to purchase was fixed under that system. The British Government was not prepared to adopt similar arrangements. It preferred to tackle the problem by limiting the volume of production for civilian purposes. The number of lines covered by the limitation orders issued from time to time by the Board of Trade was, however, comparatively small. The supplies available for home consumption were affected to a much more considerable extent by the Government’s policy pursued regarding the allocation of essential raw materials. 

Eizing notes that the principles of laissez faire also contributed to some of  the broader delays in introducing food rationing.

Whether history repeats itself with respect to rationing policy will be a critical question to consider in the weeks and months to come. At this point a decisive settlement between Russia and Ukraine will have to be reached in a matter of weeks to avoid substantial global food shortages, as farmers need to start planting about now.


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