Financing the Nation: The Polish State and Economic Growth, 1918-1939

Abstract

This dissertation explores the interrelationship between the development of the Polish Second Republic (1918-1939) as a state and its economic policy. The goal is to assess the state on its own terms, to take seriously the growth and development of its roles as a way to understand the nature and purpose of that state. The formation and limits of every state are predicated on its ability to collect taxes and deploy these resources. Tax revenues can be seen as a percentage of the production and wealth of the society. The country's ruling class appreciated that state revenues embodied the limits of the state, in fact its ability to continue on as a state. At the same time however, tax policy in Poland was both timid and inappropriate for the country. Politicians never undertook the necessary steps to create a tax system that would allow the marshaling of resources commensurate with their needs. Taxes always overburdened urbanites (about one quarter of the population) over farming, and thus most of the country was undertaxed.

Interwar Poland faced the particular challenge of creating a new state out of three disparate empires, Germany, Russia and Austria-Hungary. These three countries took apart Poland at the end of the eighteenth century and ruled formerly Polish territory until the end of the First World War. When a new Poland emerged in the years after the war, the economy was integrated into imperial supply chains and different legal traditions persisted. The complexity and diversity of Poland's problems required radical solutions, but political deadlock prevented serious change at the outset.

From 1918-1923, political groupings jockeyed for position repeatedly and cabinets rose and fell by the month. Very little could be done and no major legislation passed or was implemented until Wfadysfaw Grabski was given a special mandate to overhaul the country's financial system. Over a relatively short period, he introduced a new currency and overhauled the tax system. Grabski remained in power from 1924-1925 and needed no parliamentary approval for the radical changes he introduced. In May 1926 J6zef Pifsudski led a coup d'etat which ended the parliamentary order entirely. The president was given powers to create legislation by decree and ministers were granted control over their fiefdoms. As a result, the focus of this dissertation is on a relatively small group who conjured up policy ideas and put them into practice.

After Pitsudski's 1926 coup, governing elites attempted to employ the power of the state to improve the economy, to drive a positive business cycle, bring more of the population into the economy as consumers and increase tax revenues. At the same time, Polish ethnic nationalism was a force creating and developing interwar Poland. In general ethnic Poles did not participate in commerce, trade or crafts, but rather occupied the rural gentry or urban and rural lower classes. About two-thirds of the population of Poland was engaged in agriculture and the vast majority of those people were poor farmers. In order to make room for the unemployed Polish intelligentsia and pull the Polish peasant masses out of poverty, the state was used to "Polonize" the economy. At first tax policy was used to dislodge non-Poles from key positions and later direct intervention in the economy served the dual purpose of growing the overall economy and creating a Polish middle-class. Interventionist policy was also directed towards this goal. However, the strength of this economic program was severely limited by an anachronistic commitment to orthodox monetary policy. At a time when many countries in the world moved away from the gold standard and the principle of balanced budgets, Poland maintained both. In September 1939, Germany and the Soviet Union attacked Interwar Poland provides a uniquely rich window with which to view the processes of building a new state in the middle of Europe, to understand how its purpose and content changed over time, and why it ultimately failed.