Manufacturing industries, which were slowing down anyway before the crash, now found themselves with warehouses full of goods that nobody could afford to buy, and employers began to lay off workers. Before the crash, there were 1.5 million Americans unemployed, or 3.3 per cent of a workforce of 45 million. By 1932, that had risen to 15 million, or a third of the workforce. Inevitably, recession in the wake of the crash and the collapse of the American domestic economy quickly began to affect the rest of the world. Overseas companies that sold to America found orders were cancelled or not renewed. If Detroit was not making cars, then it did not need rubber to make tyres, and so there was a slump in the rubber plantations of Malaya, then a British colony. Much the same applied to those exporters of tin, oil and European luxury items. One of the first things that people or companies do when faced with a liquidity crisis is to call in outstanding debts, and this is what American banks began to do.
In these days, when goods cross borders with ease, it is sometimes forgotten that free trade, now accepted by most advanced nations, was still hotly argued about in the interwar years. The USA was protectionist – that is, she imposed tariffs on goods imported from abroad, in order to protect domestic producers. Had tariffs not been imposed, then foreign goods might undercut those produced at home and would drive the price of the latter down, and the wages of those who made them down too. Up to the time of the crash, these tariffs were not a serious obstacle to international trade and even those imposed on goods in direct competition with those made at home were not onerous. All that was to change in 1930 with the imposition of the Smoot– Hawley Act, which imposed swingeing import duties on a wider range of foreign goods, raising some of them by an unprecedented 50 per cent.
Now foreign countries could no longer export with ease to the United States, and some began to impose retaliatory tariffs on US goods. If commodity producers could not export to the United States, then neither would they import American wheat and meat. Grain, unsold and so unharvested, rotted in the fields of the Midwest and cattle were slaughtered because it was not worth bringing them to market. Rightly or wrongly, America was widely blamed for exporting recession: foreign governments argued – with some reason – that, if they could only be allowed to export to America, they could earn dollars and thus repay loans owing to the USA, while American exporters argued that, even though US exports were but a very small part of GDP, foreigners were deliberately driving them out of business. Either way, a crisis of global proportions was in the making.
At home, while America was protectionist, she was also non-interventionist. It was unthinkable then for the federal government to finance a public works programme (which might have solved, or at least massively reduced, unemployment) and impossible for it to direct the banking system. There was a Federal Reserve, but it had little real influence and the plethora of banks, many of them badly managed and mainly confined to one state, were generally uncooperative with it. There was no strong central bank with the power to intervene and offer a lifeline to financial institutions in trouble. It was up to the private sector to get itself out of its own mess, and that the private sector was unable to do. Domestically, President Hoover got little thanks from his countrymen for his handling of the recession. Hard though he tried to stimulate recovery – against all his own principles and those of his party, which saw rescue as being the prerogative of the individual and not the state – he could not succeed, largely because the recession was worldwide and deepening, but also because the machinery whereby he could intervene decisively simply did not exist. Then, in the summer of 1931, Hoover announced a moratorium on foreign debts owed to the government, but it was beyond his – or anyone’s – power to stay debts owed to private investors and private banks, and it was those non-public debts that would prove critical.
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The first spark that would ultimately ignite the Second World War was struck when Kredit Anstalt collapsed in May 1931. The largest bank in Austria and probably the most important bank in Europe, or at least in Central and Eastern Europe,* it had been in trouble in 1929, but such an institution could not then have been allowed to fail and it had been bailed out by a consortium of banks that included JP Morgan (America), Schroeder (UK) and Rothschild (Austria). Then, in March 1931, Austria turned to her natural ally, Germany, and formed a customs union or free trade area. To France, this was completely unacceptable – the enemies of 1914–18 were getting together again – and French loans to Germany and Austria were immediately called in. Two months later, in May, a run on the bank again brought support, this time from the Bank of England, the Austrian government and the Federal Reserve, but it was not enough. The bank collapsed and Austrian governmental credit had run out. Shortly afterwards came the collapse of virtually the entire German banking system – and this too had been underwritten by the Bank of England. Then, in September 1931, Britain went off the gold standard. Most of Europe went off it too, but for the Bank of England no longer to back sterling with a guarantee to change it into gold on demand inflicted far-reaching and chaotic effects on the global economy. The Bank of England had been effectively the world’s banker, with sterling in wider use as an international currency than even the dollar. Many countries, including France along with most of Europe, kept their national reserves in sterling, which was regarded as totally safe and realizable against gold. Now there was no certainty that these reserves would keep their value.
In America, there was little interest in what was going on in Europe, at least from the general public. The country’s own problems – economic, industrial, social – were quite sufficient without having to worry about what effects the slump might be having elsewhere. Besides, despite the fact that they showed a net profit from their involvement in the first war, many Americans had a sneaking suspicion that the wily British and the mercurial French had somehow conned them into entering it, and given that the United States had refused to ratify the Treaty of Versailles, which brought the war to an end, there was little incentive to become embroiled again in the doings of Europeans.
Across the Atlantic, however, the view was very different, and that France called in her loans to Germany and Austria in 1931 so peremptorily should have come as no surprise. Of all Germany’s erstwhile opponents, France had more reason to fear and hate her than most. Prussia had played a major part in the downfall of Napoleon and she had defeated and humiliated the second Napoleon’s* empire in 1870: as a crowning insult, William of Prussia was declared emperor of a united Germany in the Hall of Mirrors in Versailles. This, combined with the fact that France had to pay a very large indemnity and lost Alsace (which was largely German-speaking) and one third of Lorraine (with rather less justification), left no great love for the Germans in French hearts – indeed, they were probably disliked almost as much as the British, who at least were no threat to metropolitan France on land.
Almost half a century after the indignities of the Franco-Prussian War, France was to emerge on the winning side in 1918, but at fearful cost. With a population 7 million less than that of the United Kingdom, she had suffered twice as many military deaths, and as she already had a declining and ageing population, one in which men of military age comprised a much smaller percentage than they did in Britain, the effects were even worse than the bald statistic might indicate.4 It was France that was the moving spirit behind the harsh terms of the Versailles Treaty, and she was determined to brook no deviation from them. Suggestions by the British and Americans that payment of reparations might be modified cut no ice with successive French governments and, while Britain had some – even considerable – sympathy with the fledgling Weimar Republic, she was not prepared to break with France.
While Britain, and to a lesser extent the United States, had spent large sums in prosecuting the war, America herself suffered no damage to the homeland and, apart from the occasional air raid or shelling of a coastal town, neither did Britain. In France, however, at least 300,000 dwelling places were destroyed or damaged so badly th
at they had to be completely rebuilt and 20,000 factories or manufacturing establishments were rendered unusable. The country was faced with the huge problem of reconstruction while at the same time she could make few savings from disarmament as, unlike Britain, which rushed to get rid of her soldiers, sailors and airmen as quickly as possible, France, even with a defeated and disarmed Germany as a neighbour, felt unable to drop her guard completely. Furthermore, France, like Germany, had opted to finance the war from domestic and international loans rather than from increased taxation and these now had to be paid back. The cost of rebuilding and the repayment of international loans would, the French government hoped, be met from German reparations and any suggestion by the British or the Americans that Germany might not be able to pay were brusquely dismissed. To begin with, even with reparation money coming in, outgoings were only partly covered, and, when reparations lessened and then stopped altogether, serious currency inflation was inevitable. By 1925, the franc was worth only one tenth of its 1914 value, which meant that domestic investors found their wartime loans to the government repaid with a greatly reduced purchasing power. While French inflation was not nearly as bad as Germany’s, it caused serious economic, social and political dislocation nevertheless.
Initially, the weak franc helped exports, but this was short-lived. The Wall Street Crash and the Great Depression hit France, with her less advanced industrial and financial base, later than the rest of the developed world, but much French overseas trade depended on the export of relatively expensive items – wines, cognacs, leather goods, textiles – and luxury goods were amongst the first savings to be made by foreign importers. From 1929 French exports fell dramatically, and from a situation of full employment, and in some sectors a shortage of labour, in 1920, unemployment soared to nearly half a million by 1933.5
During the first war, the normal political processes of competing parties trying to persuade the electorate to favour them over others had been in abeyance, and the Union Sacrée (‘Sacred Union’) had maintained a more or less stable support for the war. Once peace came, however, the in-fighting began again and many of the strains inherent in the Third Republic* reappeared. In very broad terms, French politics between the wars saw a somewhat incongruous alliance of the rich, the aristocracy, conservative peasant smallholders, small businessmen and investors, and much of the lower middle class – this latter previously a staunch supporter of the republican state – set against the proponents of a welfare state, socialists, communists, radical workers, civil servants and intellectuals.* These groupings were not absolute – there was considerable overlap and the influence of the left was reduced by splits in the socialist and communist ranks between those who wanted to follow Moscow’s line (most, but not all, communists) and those who saw themselves as republican patriots (most, but not all, socialists). While supposedly part of the left but in practice in the centre was the Radical Socialist Party, which drew its support from white-collar workers, the lower end of the professions and some of the peasantry. On the right were a number of fairly unpleasant organizations that were opposed to the whole concept of the Republic. These included L’Action Française, which had grown out of the debacle of 1870 and was monarchist, Catholic and anti-Semitic, taking the Church’s side in the old struggle between secular and clerical influence in government and sending its strong-arm squads out to beat up communists. Allied with them, although not quite so extreme, was the Croix de Feu (literally, ‘Cross of Fire’), an ex-servicemen’s organization, and other bodies whose beliefs varied from a vague feeling that the Third Republic was not working to outright fascism. The actual membership of these organizations was not large, but they wielded considerable influence, particularly amongst those French men and women who looked for stability in an increasingly chaotic world.
The French Army had borne the brunt of the fighting in the war of 1914– 18 and had been more involved than any of the Allies in trying to prop up the White Russians after it. Hundreds – perhaps thousands – of individuals had served with military missions, in training teams, as advisers or providing logistical support to the anti-Bolshevik forces, and it was the French navy that provided naval support in the Black Sea and eventually evacuated the last of the White Russian armies along with large numbers of civilians fleeing the new Soviet regime. In the minds of many – perhaps most – professional officers of the French Army, opposition to the Bolsheviks in Russia was, after 1920, translated into fear and hatred of communism in France. To them, it was an alien philosophy imported from abroad and owing allegiance not to France but to its puppet masters in Moscow. It had been the communists and the communist-controlled press that had fanned the flames of the army mutinies of 1917, and, when the French Army marched into the Ruhr in January 1923 in order to enforce reparations, the high command saw the voluble opposition of a section of French public opinion as being symptomatic of defeatism and treason encouraged by the communists. Professional armies tend to be uninterested in politics except where it affects them directly, but in a conscript army, which the French Army was, it was inevitable that political opinions held in civilian life were carried on into the military. Tracts condemning the Ruhr occupation began to circulate amongst the soldiers and stern action was taken against such inflammatory activity. The leftist newspaper L’Humanité was banned and men spreading propaganda critical of the army or of the occupation were arrested and subject to courts martial. Meanwhile, operations in North Africa in the 1920s – against the Moroccan rebel Abd-el-Krim and in putting down incipient nationalist agitation in Algeria and Syria – cost the army 12,000 dead with little thanks from those at home.6
As the twenties wore on, many French officers, and a sizeable section of the French right, became increasingly distrustful of the institutions of the Republic, but, just as France was beginning to see some signs of peace and prosperity, the Wall Street Crash and the Depression seemed about to plunge her into chaos. It appeared to many Frenchmen that in America unregulated capitalism and democracy were failing, while at home ministerial crises, financial scandals and unemployment were all symptomatic of the failure of the state. Much military and some civilian opinion lurched to the right, and the evident failure of the attempt to institutionalize the universal brotherhood of man in the shape of the League of Nations intensified the view that only by doing away with the Third Republic and rebuilding the nation anew could a prosperous, stable and powerful France re-emerge.
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Once the British had decided in 1914, somewhat late in the day, that they would, after all, make a major contribution to the war on land, they had to expand their own tiny (by European standards) army and, in most cases, turn token Dominion and colonial armies into contingents large enough to be effective.* It was the most intensive war in which the British had ever been engaged, and casualties in the inexperienced and under-trained Territorial Force and New Army units created from volunteers in the first two years of the war were inevitably far heavier than anyone imagined they might be. Despite this, the British learned, and they ended the war with the most technologically advanced and best-equipped army in the world, the most powerful navy bar none and the world’s first independent air force. On the face of it, Britain emerged victorious with her Empire and her economy intact. But Britain’s national debt had increased tenfold since 1914, much of her overseas investments had been liquidated to pay for the war, and the pre-war international trade network that was the basis of British prosperity had been ruptured and could not easily be reassembled. American industry, and to a lesser extent Dominion and Indian industry too, had been stimulated by the war and would now be competitors in the servicing of world markets.
Immediately after the war, there was a short-lived boom as goods not available during the war reappeared on the shelves, but this quickly collapsed. The war had meant full employment; now wartime industries were closing down and demobilized soldiers were swelling the labour pool. In 1918 Lloyd George’s Liberal–Conservative coalition government had grante
d universal suffrage to males from the age of twenty-one and to females from the age of thirty* and this increased the power and influence of the trades unions through the fledgling Labour Party. Britain was the first nation to industrialize and now she would be the first to feel the pains of post-industrialization. As the economy slowed and went into recession followed by depression, a population accustomed to a steady improvement in living standards was not prepared to accept reductions in wages – after all, said many, we won the war, didn’t we? Britain received virtually no reparations from Germany and watched anxiously as the German economy began to improve, financed by American loans. Lloyd George’s coalition hung on until 1922, by which time one fifth of the workforce was unemployed, and it was the last time the once great Liberal Party held office until the coalition of 2010. The party had never recovered from the Asquith–Lloyd George wartime split and would now be eclipsed by the Labour Party. There were two weak Labour governments, in 1924 and from 1929 to 1931; otherwise, for the rest of the interwar period Britain would be managed, or mismanaged, by Conservative or Conservative-led governments.
Britain lurched from economic crisis to economic crisis. A plan to create a tariff-protected market within the Empire foundered on the Dominions’ reluctance to be mere suppliers of raw materials to and importers of finished goods from Britain. Taxes rose and wages were cut. There were strikes by workers and a mutiny in the navy; the Geddes Axe scythed great swathes through public sector employment (including the armed forces) and cut state subsidies. In 1926 a dispute between the coal miners (and Britain was still hugely reliant on coal, which was privately owned) and the mine owners led to a general strike when workers in other industries came out in sympathy with the miners.* The strike was broken: the army, police and volunteers manned essential communications and supply services, but, while the miners took a cut in pay, the strike did force the government to ameliorate some of its recessional recovery policies.
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