The Deluge

by Adam Tooze

  With the future of the Weimar Republic hanging in the balance, all sides in Germany looked for support abroad. Since America seemed determined not to intervene, by the end of 1921 it was Britain that came to be seen as Germany’s saviour. In December both Walther Rathenau and Stinnes visited London to discuss options. Stinnes had extended his domestic vision of privatization to an extraordinary scheme under which an international syndicated loan would draw on Anglo-American capital to carry out a wholesale reorganization of the entire central European railway network.10 In a system reminiscent of the foreign-operated railroads in China, Stinnes envisioned a privatized German Reichsbahn at the heart of an ‘East European railroad community’ incorporating Austrian, Polish and the Danubian main lines.11 In discussions with Lloyd George, Stinnes and Rathenau widened their vision to take in Russia as well.12 Since 1920, Soviet trade negotiators had been touting huge orders for railway equipment throughout Europe. Krupp had already secured a lucrative contract.13 With Lenin having approved the allocation of 40 per cent of all Soviet gold reserves for the import of railway equipment, there was talk of the purchase of 5,000 new locomotives and 100,000 wagons. It was an import programme that dwarfed even the huge wartime contracts of the Tsarist era.14 Beyond Hoover’s food parcels, restoring the transport system was crucial to reintegrating Russia with the European economy. German industry could build the locomotives, but what it could not supply in 1921 was credit. For this they needed London.

  The German appeal was well judged. By December 1921 the British cabinet had convinced itself that if reparations were allowed to tip Germany into crisis, the consequences for the whole of Europe ‘would be disastrous beyond calculation’. With America on the sidelines, Britain would have to take the initiative.15 The prospect of this British-German convergence was enough to trigger Paris into action. On 18 December 1921 Aristide Briand, the French Prime Minister, followed the Germans to Downing Street.16

  Perhaps the impasse over reparations could be broken if Britain returned to the offer first made by Lloyd George in March 1919. Britain would revive the guarantee of French security that had lapsed when Congress failed to ratify the Versailles Treaty. France would make sufficient concessions to Germany to satisfy the Americans and the flow of credit would resume. A disaster would be avoided. The problem was to define the price that Britain would have to pay. What would be the scope of its security commitment to the French? London would not commit to coming to France’s aid if it chose to intervene in a Polish-German war. Nor was there much enthusiasm in Britain for a bilateral military alliance with France. Briand had returned from the Washington Conference inspired by the idea of a regional pact for Europe akin to the four-power pact agreed with Japan regarding China’s integrity, a solution he hoped would appeal to Washington.17

  Lloyd George was moved to an even grander design. If the sticking point between Britain and France was the insecurity of France’s allies in the East and the problem with Germany was reparations, Lloyd George proposed a scheme to stabilize and restore the economies of eastern Europe, including Russia. The insistent and claustrophobic French demand for a comprehensive bilateral security guarantee would be opened into a pacification of the entire continent.18 In a single grand diplomatic bargain the Soviets would be persuaded to accept the conditions for economic assistance worked out at Brussels. On that basis, hundreds of millions of pounds would flood into the ruined Soviet Union, simultaneously bringing Russia back within the capitalist fold and funding a revival in German exports. Germany would earn the hard currency it needed to reliably service reparations, which in turn would restore France’s credit in America. A regular payment by Germany to France of £50 million ($200–250 million) from the Russia trade should enable Paris to raise a loan of £700–800 million (c. $3.5 billion), which would go a long way toward resolving France’s financial difficulties.19 The unproductive struggle between Germany and France would be transformed into an expansive engine of continental economic growth. In a characteristic blend of opportunism and progressive ambition, Lloyd George also calculated that a diplomatic triumph would allow him to call a snap election, win a handsome victory for his wing of the Liberal Party, and escape the dependence on the Conservatives that had constrained him since the Khaki election. With Europe at peace, Lloyd George would outflank the rising Labour Party and re-establish himself as the master of the progressive centre ground.

  With the British Empire holding the ring, the European economy would be restored, the spectre of Communism lifted, the conflict between Germany and France assuaged, and the political balance shifted back toward the centre-left. Lloyd George’s breadth of strategic vision is all the more startling when we place it in its global context. His European initiative coincided over the winter of 1921–2 with the global naval agreement at the Washington Conference and the simultaneous resolution of multiple crises within the empire. As Lloyd George well understood, taming Gandhi, containing the Irish, and neutralizing Egyptian nationalism would remain tactical and short-lived successes if the wider strategic challenges of the Atlantic, Pacific and Eurasia were not addressed. What he was attempting was nothing less than a global fix for the post-war crisis of liberalism. One might, however, also turn this point on its head. The scope of Lloyd George’s design indicates the dizzying scale that any truly comprehensive re-establishment of a liberal order would in practice have required. Nothing like this had ever been attempted. Given Britain’s limited resources, the task was daunting.

  II

  On 4 January 1922 the Supreme Allied Council convened in Cannes and Lloyd George took the lead in asking for an economic and financial conference to be held within a matter of months to include both Germany and Russia. With regard to the Soviet Union, the Cannes Conference passed a series of resolutions that amounted to the statement of a new vision of international order. States, the conference boldly declared, would not dictate to each other their internal systems of ownership, internal economy or government. But foreign investment depended on recognition of property rights, governments must acknowledge public debts, there had to be impartial legal systems and secure currency conditions, and there must be no subversive propaganda. On the basis of this manifesto for neutering any threat to the capitalist order, the Soviets would be readmitted to the international community.20 On 8 January 1922 Moscow agreed to accept an invitation to a European conference. Side-stepping the failed Wilsonian construction of the League of Nations, of which neither Germany nor the Soviet Union was a member, the British and French invited the other interested powers to a summit meeting in the Italian city of Genoa.

  Germany was delighted with the British approach. Chancellor Wirth exclaimed to the British ambassador Lord D’Abernon that ‘Germany is England’s advance post on the continent, or I shall say an advance post of Anglo-Saxon civilization. Like you, like America, we must have exports, only by trade can we live. That must be the policy of all three countries.’21 But the German idea of a benign Anglo-American financial hegemony over Europe was a fantasy. Washington had no intention of providing any encouragement for Lloyd George’s vision. Food aid was one thing, but Washington regarded the idea of direct talks with the Soviets as anathema and refused the invitation to Genoa. In France as well the manner in which British power was being exercised was hugely sensitive. To the critics of Prime Minister Briand, the British idea of a general European security pact seemed less suited to protecting France than to offering Germany immunity against any vigorous enforcement of the Versailles Treaty. The invitation to the Soviets remained controversial so long as France’s loans remained unpaid.22 To invite both of the pariah states to the same conference on friendly terms seemed nothing short of suicidal.

  On 12 January 1922 the restless centre-right majority in the French Chamber of Deputies ousted Briand in favour of Raymond Poincaré. The new French Prime Minister is often caricatured as a narrow-minded chauvinist. He soon became the object of a concerted propaganda campaign sponsored by Germany and the
French Communist Party to paint him as a warmonger, whose secret diplomacy with Imperial Russia had been the true cause of war in August 1914.23 This historical interpretation found eager adherents amongst latter-day Wilsonians in the anglophone world.24 For Poincaré, however, no less than for Clemenceau, Millerand and Briand, the pursuit of an Entente with Britain was the priority. His vision of European security, however, was different from the Washington Conference model.

  On 23 January 1922 Poincaré presented London with the proposal for a 30-year military convention offering mutual guarantees against Germany. From Lloyd George’s point of view this was a disaster. As he reminded Poincaré, he had always been committed to the alliance between France and Britain. Even at the height of imperialist tension at the time of the Fashoda crisis in 1898, Lloyd George had denounced the folly of conflict between the ‘two democracies’. Now Lloyd George warned Poincaré of the hostility of the opposition Liberals and Labour in Britain, who were set firm against any continental entanglement.25 If the British and French democracies were to turn against each other, it would set the stage for the ‘greatest disaster in the history of Europe’.26 Lloyd George’s pleas, however, were in vain. Poincaré knew that the British Prime Minister had staked his reputation on the conference that was now scheduled for Genoa in April. This gave him leverage.

  As the clock ticked toward the Genoa Conference, with France desperately fending off claims from its foreign creditors and Germany on the brink of bankruptcy, Europe’s financial impasse was reaching a new crisis point. As Poincaré came into office, the Reparations Commission granted Germany a provisional postponement of payments, but only on the condition that Berlin submit a comprehensive programme of fiscal consolidation for approval by the Commission.27 Overriding the violent opposition of German business, the Wirth government complied with the Allied demand. It agreed to raise taxes, levy compulsory internal loans, collect customs duties in gold, raise the domestic price of coal and hike rail rates, grant autonomy to the Reichsbank and impose currency controls to prevent capital flight.28 A major element of the fiscal consolidation was the long-promised cut to food subsidies, which would save billions of marks but would require a crunching 75 per cent increase in bread prices. The political costs were obvious.

  Table 11. Germany’s Slide into Hyperinflation, 1919–23

  In early February 1922 Chancellor Wirth faced the only major strike by public-sector workers in German history. Initially, he wanted to take a tough line by deploying the emergency powers provided by the Weimar constitution. But even Carl Severing, who had mastered the Communist uprising in the Ruhr in 1920 and was now serving as Prussia’s tough Interior Minister, shrank at the prospect of nationwide confrontation. ‘The consequence will be food shortages and plundering. The Reichswehr will then have to be employed as a last resort, and then civil war will be at hand.’29 Though this was avoided, the reparations instalment due on 18 March 1922 drained the foreign-exchange reserves of the Reichsbank to the barest minimum. On 21 March 1922 the Reparations Commission announced that Germany could suspend all payments until 15 April, but in return it must now agree to fiscal consolidation within a matter of weeks. An additional 60 billion marks in taxes were to be voted through the Reichstag by the end of May. Germany’s public finances were, in effect, placed under international supervision. From Paris, the German reparations negotiators warned Berlin that it should not overreact. The threats issued on 21 March were in fact a watered-down version of even more far-reaching demands made by the French. In Paris there was once again talk of ‘ottomanizing’ Germany.30 But that was exactly what the German government took the new demands to be – a fundamental assault on German sovereignty, a renewed threat to relegate Germany to the second or third rank, in what had once been politely dubbed the family of nations. If it was, in fact, Poincaré and not Lloyd George who was setting the terms, the entire rationale that had led Rathenau and Stinnes to London in December 1921 was in question.31

  With increasing desperation Stresemann and Rathenau looked across the Atlantic to the United States. As Rathenau put it in the Reichstag, ‘never before has a nation held the fate of a continent so inescapably in its hand as does America at this moment’.32 But Rathenau’s appeal elicited no reaction from Washington. The Harding administration refused to budge from the position that Hoover had first outlined for the Wilson administration in May 1919. The best way to force the Europeans to come to a satisfactory resolution was American non-intervention. Europe’s reparations crisis, like the deflationary economic crisis of 1920, would have to run its course before the logic of business-led reconstruction could take hold.33

  III

  By contrast with the sensational opening to the Washington Conference, Lloyd George’s conference in Genoa began anti-climactically. The complex bargain to be brokered did not lend itself to the kind of startling offer with which Secretary of State Hughes had surprised the world. America’s absence and Poincaré’s decision to stay away gave leadership to Britain, but it also endangered the negotiations from the start. Lloyd George was reduced to opening proceedings on 14 April 1922 with the rather lame quip that since it was a Genoese citizen, Christopher Columbus, who had once discovered America for Europe, ‘he hoped that this city might now rediscover Europe for the Americans’.34 Relations between France and Britain were strained, with Poincaré insisting that there could be no discussion of reparations. Italy was no substitute for France as a partner in power. With Fascist squads running rampant across the countryside, a dangerous power vacuum had opened in Rome, which within the year would open the door to Benito Mussolini’s ascent to power. Meanwhile Japan was invited to Genoa as a matter of course, but unlike at Washington no vital Japanese interests were engaged. The Germans were resentful and tactless. The Soviet delegation was the real sensation of the conference.

  There was much talk at Genoa that the international gathering marked a new era in European politics, the first genuine, all-inclusive peace conference since the end of the war. But if this was the case, it was profoundly disillusioning. There was no hiding the distaste that many in London felt for the compromises they were themselves proposing.35 In private letters and diary entries, the British delegation vented their alienation in visceral terms. Rathenau, the head of the German delegation and one of the leading lights of the Weimar Republic, was dismissed as a ‘bald-headed Jewish degenerate’. The Bolsheviks appeared to the British as though ‘they had stepped out of a Drury Lane pantomime . . . Chicherine looks the degenerate he is, and of course except for himself and Krassin . . . they are all Jews’. ‘It is very unpleasant,’ another remarked, ‘to reflect that the main interest here is centered on the future relations between them and ourselves.’36

  In the opening exchanges of the conference Chicherin set out to embarrass his hosts by claiming for the Soviet Union the mantle of an advocate of peace and disarmament.37 It was a softer line of internationalism than that pushed by the Comintern when it had demanded that its European affiliates prepare for civil war.38 But when it came to the negotiations over the terms of Soviet readmission to the international community, the bargaining was hard. The Western Powers insisted on the rights of their creditors. The Soviets countered by delivering a reparations bill for 50 billion gold roubles ($3.6 billion) to cover the damage done by Allied intervention in the civil war. The Cannes agenda, with its contradictory promise of non-interference combined with the demand for the protection of property rights, was enough by itself to have derailed the Genoa Conference. But the question of how fresh capitalist investment could be reconciled with socialism was never seriously broached. The discussions never got past the problem of outstanding international debts. Would Russia pay? Some compromise seemed possible on the basis of trading forgiveness of inter-Allied war debts in exchange for the acknowledgement of pre-war Tsarist liabilities. But the Soviets were, in any case, not committed to reaching a deal. The radicals in the delegation headed by Adolphe Joffe were more than h
appy to fall back on the Leninist formula of ‘divide and conquer’.

  Moscow’s fundamental objective was to forestall Lloyd George’s fantasy of a British-French-German consortium to hegemonize Russia. They found a partner in the Germans, whose confidence in Lloyd George’s grand bargain had been profoundly shaken by the reparations crisis of March and who were themselves haunted by the fear that the real purpose of the conference was not to broker a general peace, but to rebuild the encircling anti-German alliance. This idea had been nourished by conservative elements in the German Foreign Office who favoured a Russo-German agreement.39 At Genoa these fears were heightened by alarming reports that France and Britain might help Russia to repay the Tsarist debts by backing Moscow’s reparations claims against Germany. When news reached Rathenau of exclusive conversations between the Russians and the Western Powers, this was enough to panic the German delegation. At all costs they must forestall a new anti-German coalition.

  Early on the morning of Easter Sunday, 16 April, Rathenau abandoned his previous advocacy of an agreement with the West and accepted an invitation to join the Soviet delegation for separate talks at their villa on the outskirts of Genoa.40 By 6.30 that evening, having signed the so-called Rapallo Treaty, the German and Soviet delegations had derailed the entire conference. Lloyd George’s bold initiative, rather than producing a Europe-wide security order, had opened the door to a treaty of mutual recognition and cooperation between the two pariahs, Germany and the Soviet Union. As Lloyd George himself acknowledged, ‘With an aggregate population of over two hundred millions the combination of Germany’s technical skill with Russia’s resources in raw materials and man-power’ posed a ‘terrible danger to [the] peace of Europe’.41 For France it was a truly terrifying prospect. It is indicative of the mistrust suffusing Genoa that Paris immediately jumped to the conclusion that London had plotted this Russo-German alignment from the start.42 In fact, it was a catastrophe for Lloyd George. The grand design of reconciling Germany and France by way of Russia had exploded.