The Deluge
Page 45
In Britain too, as debt service and social spending rose, and as budgets plunged, it was military spending that was targeted.34 The first round of budget cuts in April 1919 reduced UK spending on the army from £405 million to under £90 million. Imperial military expeditions and peace-keeping in Europe had to make do with £48 million.35 Army manpower was slashed from 3.5 million to 800,000. By 1922 the army budget was down to £62 million. Sir Henry Wilson, the Chief of the Imperial General Staff, who had once deployed huge armies, found himself juggling battalions between Ireland, the Rhineland and Persia to meet one emergency after another.36 Britain of course looked to its empire to make a contribution, but attempts to offload the cost of the imperial army on India met with fierce resistance.37 In the Middle East, Britain’s infamous policy of ‘policing’ insurgencies by means of aerial bombardment was adopted above all because it was cheap. The initial estimate for the military garrison of the Iraq Mandate had run to 30 battalions at a cost of £30 million. After the Cairo conference of March 1921, Winston Churchill decided he could manage with a budget of only £10 million so long as four infantry battalions based in Baghdad could be backed up by eight squadrons of bombers. The de Havilland DH9A bombers used in these operations could be had for as little as £3,000 apiece.38
These, however, were tactical adjustments. It was with regard to the navy that truly strategic decisions had to be taken. In the spring of 1919 as Britain and America clashed at Versailles, the Royal Navy had estimated its financial requirements for the coming year at £171 million. This was denied both on grounds of austerity and to avoid antagonizing the Americans. On 15 August the cabinet instructed the service departments to make their plans on the assumption that ‘the British Empire would not be engaged in any great war during the next ten years’. For the navy this meant that spending was to be slashed to £60 million by 1920–21. The consequences were drastic. As the Admiralty pointed out: ‘It must be clearly understood that Great Britain will no longer be supreme at sea . . . we shall be supreme in European waters, but as regards the seas as a whole the supremacy will be shared with the United States.’39 Shared supremacy as the basis for a lasting global pacification had been the basic aspiration of the Lloyd George government since 1916. The Wilson administration had refused any such agreement, but given the financial legacy of the war, it was now being built into British strategy willy-nilly.40
III
The re-establishment of financial stability, symbolized by the restoration of the gold standard, was tied directly to policies of pacification, repressing expansionist energy on the right as well as the left. If the premise of conservative stability was accepted, it exerted discipline on every aspirant member, the United States and Britain no less than France or Japan. And in the crunching deflation of 1920–21 that pressure was certainly felt in America as well as Britain. But despite this basic symmetry, the position of the leading duo was nevertheless unique. They were setting themselves apart precisely by their willingness to make an investment in the creation of a new status quo. As the Versailles negotiations had made painfully evident, even amongst the victorious powers the starting conditions for the aspirant members of the new order were anything but equal.
France had suffered devastating war damage, leaving it dependent as never before. In 1920 the French Minister of Public Works estimated that thanks to the destruction of its northern mines France would have to import 50 million tons of coal, out of its annual requirement of 70 million. This was at a time when Britain had cut its supply to the world market from 80 million to only 33 million tons, of which France could count on at most 18 million, at escalating prices compounded by the depreciation of the franc.41 French control of the Saar would provide it with 8 million tons annually. To make up the difference, Paris demanded 27 million tons from the German mines in the Ruhr in reparations. But when German deliveries began in the spring of 1920, they yielded less than half what was expected. Less tangible but no less pressing was the question of war debts. France’s relations with Germany are too often seen in simplistic terms as a struggle between two rival nationalisms on either side of the Rhine. In fact reparations politics were determined by a complex web of influences that entangled Paris with London and New York. The fact that this complex web remained largely out of sight was itself an effect of Washington’s power. Since the Paris peace conference, Washington had used main force to keep the question of linkage between reparations and war debts off the agenda. But from the European point of view the question could not be dodged. Over the summer of 1920 Paris had been seriously embarrassed by its inability to repay minor credits owed to Spain and Argentina. Far more menacing were the $250 million owed as its share of the first Entente loan contracted through J. P. Morgan in 1915. To raise the necessary funds France found itself borrowing on Wall Street at the humiliating rate of 8 per cent.42 Whilst Washington stood back, for several weeks in early 1921 Paris teetered on the edge of default.
Since 1919 the policy preferred by the British government was for a collective write-down of inter-Allied claims. But this had been vetoed by the Wilson administration. In February 1920, despairing of any concessions from the US, the senior civil servants at the UK Treasury began to think in radical terms. Britain should unilaterally implement its side of the Keynes cancellation plan. Whilst honouring its debts to America, London should renounce its claim on its former allies. Washington would surely have no option but to match such a beau geste. The Foreign Office applauded the suggestion, which would win goodwill for Britain ‘for a generation to come’ and establish its ‘incontestable moral leadership of the world’. But the diplomats were too uncertain about the likely response in Washington if London tried to ‘shame the US into following our example’.43 The British certainly received no encouragement. The Wilson administration did agree to extend the deferral of interest on Britain’s loans. But it made this conditional on a prior settlement of reparations and a formal commitment to abstain from any future discrimination against America in the British Empire’s trade policy.
Chancellor Austen Chamberlain reacted with indignation. The British Empire would accept no conditionality on its credit. Between the governments of Britain and America, such terms should never have been put in writing. Britain must retain its absolute freedom of action. Sovereignty was paramount.44 ‘The American people are living in a different continent – I might say in a different world.’ Chamberlain concluded: ‘It is useless and worse than useless to criticize their insularity, blindness and selfishness, and it is not compatible with our dignity to appear as suitors pressing for a consideration which is not willingly given.’45 Instead, by the end of the year a negotiating team was readied for bilateral debt talks in the American capital.
France did not have the financial cushion that allowed Britain to weigh up its options. The domestic costs of rebuilding northern France could, if necessary, be raised domestically through taxes, borrowing, or if this proved most expedient, by inflation, a tax on savers. The huge burden of France’s foreign debt – $3 billion to America, $2 billion to Britain – had to be repaid in gold or dollars. Barring a miraculous surge in exports, which the US and the UK with their policies of aggressive deflation were doing nothing to promote, or a ruinous cut to essential imports, this foreign currency could only come from reparations. It was to consolidate France’s claim to compensation that, following Millerand’s accession to the presidency, Aristide Briand took the premiership in January 1921.46 Like Millerand, Briand had started political life as a reform-orientated socialist and had since been ostracized by the left for his willingness to govern. By temperament an internationalist, as wartime premier he had been identified with the most aggressive French war aims. In 1921 he returned to power determined to impose the peace. This seemed all the more necessary since the Centre Party government that had taken office in Germany after the debacle of the Kapp putsch and the election of June 1920 seemed bent on provocation, encouraged it seemed by America’s failure to back it
s former associates. When reparations talks opened in March 1921, Germany began with an absurdly low offer of 30 billion Goldmarks. From that point no compromise could be reached.
The Entente reacted with its last concerted display of power. On 13 March 1921 both British and French troops occupied bridgeheads in the industrial cities of Duisburg, Ruhort and Dusseldorf, and a customs boundary was erected separating the Rhineland from the rest of Germany. The French general staff had plans at the ready for an occupation of the entire Ruhr, but Briand wanted British backing before making any such move. Conscious of the risk they were running, the Germans responded by raising their offer to 50 billion Goldmarks, to which the British and French replied on 5 May with the London reparations ultimatum of 132 billion Goldmarks. Superficially enormous, the gap between the two offers was less than it at first appeared, since the Allied demand above 50 billion was to take the form of so-called Class C bonds. Barring a miraculous recovery in German exports, these would not be issued until 1957. On reasonable assumptions, the net present value of the settlement was 64 billion Goldmarks, or just over $15 billion.47 At the same moment the Entente’s collective indebtedness to the US stood at $10 billion. Unless America’s claims were stretched out over a similarly long time period, this implied a painfully small margin to cover the up-front costs of reconstruction. For Germany the implications were undeniably dramatic. It would face enormous immediate payments and even if it managed to uphold the schedule for the next 35 years, its international credit would be questionable for generations to come. It had just one week to respond.
Since Wilson’s ostentatious refusal to back French intervention in Frankfurt at the time of the Kapp putsch in March 1920 and the Senate’s refusal to ratify the Versailles Treaty, Berlin’s foreign policy had concentrated on luring America into returning to Europe to arbitrate a true ‘peace of equals’. But faced with the crisis over reparations and the looming issue of Silesia, the boundaries of which were to be determined in 1921, the incoming Secretary of States Charles Evans Hughes had no desire to risk the role that Wilson had attempted to play. Two days before the ultimatum was to expire, on 10 May 1921 the German government collapsed.48 As there had been in 1918 and 1919, there were now loud voices on the German right calling for a policy of confrontation. Their cynical calculation was that an Allied invasion of western Germany would trigger an upsurge of patriotic resistance and accomplish what the Kapp putsch had failed to do a year earlier. But in 1921, as it had done twice before, raison d’état prevailed. On 11 May, with 24 hours to go before the Allied deadline, a new coalition took office in Berlin. Again it was headed by a Centre Party politician, Joseph Wirth, the heir to Matthias Erzberger, as the leading voice of the popular wing of the party. His first order of business was to come to terms with the Entente. But this begged the question. Even if ‘fulfilment’ was politically desirable, could Germany pay? (Table 9).
Table 9. What Germany Paid, 1918–31 (billion 1913 marks)
total peace treaty payments
national income
treaty burden (% national income)
1913
52
1918
1.3
37
3.3
1919
1.1
32
3.1
1920
1.3
37
3.4
1921
3.4
40
8.2
1922
2.2
42
5.2
1923
0.9
36
2.4
1924
0.3
42
0.6
1925
1.1
48
2.2
1926
1.2
46
2.5
1927
1.6
54
2.8
1928
2.0
55
3.5
1929
2.3
56
4.0
1930
1.7
53
3.2
1931
1.0
47
2.1
1918–31 average
1.5
45
3.4
1924–31 average
1.4
50
2.8
NOTE (sources given in List of Figures):
Annual estimates are derived by reconciling Webb and Schuker and cross-checking against Bresciani-Turroni.
1918
Armistice deliveries from Schuker
Residual of total 1918–24 costs from Schuker after subtraction of itemized payments for 1918 and 1920–24
Quarterly treaty costs from Webb
Ruhr occupation charges from Schuker
Reparations item in the German balance of payments account (includes cash transfers, payments in kind and all other charges)
Includes transfer of Young Plan loan
1919
1920–22
1923
1924–31
1929–30
There was no straight line leading from reparations to the Ruhr crisis and hyperinflation of 1923. In the spring of 1920 following the defeat of the Kapp putsch, the Goldmark had strengthened against the dollar. Between March and July prices fell by 20 per cent and then stabilized. For a brief moment it seemed as though the Weimar Republic might be on the point of following the rest of the world in a deflationary financial consolidation. Given what was to come next, this cannot but appear attractive.49 But with unemployment soaring in Britain, in the early 1920s an end to the post-war boom was regarded in Germany as a distinctly mixed blessing. There was great fear that Germany’s precariously balanced political system would not withstand the kind of mass unemployment the British and American governments were inflicting on their populations. In any case, the reparations crisis of the spring of 1921 undid this temporary stabilization. After months of price stabilization, inflation resumed in June of that year and surged to double-digit figures in August. Nationalist economic opinion now insisted that excessive levels
of reparations made any thought of stabilization absurd. France’s real intention was to ‘Ottomanize’ Germany, to reduce it to the kind of international debt-slavery used to subordinate the bankrupt Chinese and Ottoman empires.
Nor can it be denied that successive demands on the reparations account were to play a major role in tumbling Germany into chaos. The frontloading of the reparations schedule in 1921 and 1922, reflecting the desperate French need for cash, put huge pressures on the Weimar Republic.50 But to argue that there was nothing that Germany could do to improve a bad situation reflected not a realistic assessment but the unwillingness of nationalist opinion to come to terms with defeat.51 Those who were most sincerely committed to the Republican project argued that Germany should put Britain and France in the wrong by pursuing responsible financial policies, thereby demonstrating the practical impossibility of fulfilment. As Allied experts, including Keynes, repeatedly pointed out, even if Germany could not restore pre-war conditions, then like Japan, France or Italy, it could certainly halt any further slide. Its price level would remain high, but at a suitably depreciated exchange rate it would be internationally competitive. This would provide a solid platform from which to renegotiate. If, on the other hand, Germany did not comply, what was there to hope for, but a descent into chaos, foreign occupation and civil war?