The Deluge

by Adam Tooze

  Though the Washington Conference was regarded as a qualified success and Genoa was viewed as an unmitigated disaster, what both grand designs had in common was their tendency to underestimate the forces committed to disrupting the post-war status quo. London, Paris and Washington imagined that the nationalist urge could be tamed by financial hegemony. Consortia were constructed to oversee and supervise the finances and transport infrastructure of China and Russia.43 Great business opportunities no doubt beckoned. But without state guarantees of the old kind, secured by spheres of interest and promises of extra-territoriality, it turned out that private bankers were reluctant to extend substantial loans. For all the politicking around the China consortium, no money flowed. Without the participation of the United States, the idea of subjecting the Soviet Union to a capitalist consortium was stillborn. The Western Powers underestimated the force of nationalism in China. At Genoa, ironically, the Western delegations were concerned that if they pressed too hard they might precipitate the replacement of the Soviet Communist regime by an aggressively nationalist one.44 Though the situation of the Soviet regime was no doubt serious, this was nonetheless a misjudgement. Lenin’s New Economic Policy was a tactical adjustment rather than a strategic retreat. Moscow’s cynical exploitation of Herbert Hoover’s aid was not a sign of surrender, but a demonstration of its will to survive at whatever cost. It certainly had no intention of allowing London to orchestrate a unified capitalist consortium aimed at Russia’s subordination.45

  Though nominally professing its commitment to fulfilment, the German government was sorely tempted to throw itself in with the club of insurgents. The Rapallo Treaty with the Soviets was of a piece with Germany’s diplomatic ties to Republican China. It was loudly applauded by Ataturk in Turkey.46 Of course, Germany’s financial situation was grave, but to associate itself with the Soviet Union, Republican China or the insurgent Turks in the league of pariahs, was a self-indulgent nationalist fantasy. Versailles was built on the assumption of German sovereignty. In August 1921 Washington had formally ended the state of war by concluding a separate and extremely favourable peace with the Weimar Republic. Britain clearly wished for the reintegration of Germany into both the international economic and political system. France’s anxiety could easily have been exploited to Germany’s advantage. All Lloyd George needed was Germany’s continued commitment to the Versailles process. The side deal at Rapallo delivered the opposite. If it harkened back to the Realpolitik of the Bismarck era, this was Realpolitik without the substance. If Rapallo was something else, not a carefully calculated power play, but a rallying cry, a gesture of national resistance, it begged the question. How far were the Germans willing to go?47

  What it might mean was spelled out in blood on 20 June 1922 when a right-wing hit squad gunned down the industrialist Walther Rathenau outside his Grunewald villa. With pro-Republican demonstrators in the streets, the markets gave their verdict. In the week following Rathenau’s killing, the mark plunged from 345 against the dollar to 540.48 Would the German right wing risk civil war and economic chaos in a showdown with the Western Powers? This question had hung in the air since the Armistice. In the wake of Genoa it was precisely such an act of resistance that was to cost Lloyd George the premiership and demonstrate the vanity of any British-led attempt to restore order in Europe.

  IV

  In the weeks ahead of the Genoa Conference, Lloyd George had had to ride out the clash between his Secretary of State for India, Edwin Montagu, and his Foreign Secretary George Curzon over the arrest of Gandhi and the terms that London would propose to Turkey for a peace in the eastern Mediterranean. Weakened by the disaster at Genoa, London now faced a comprehensive crisis of its policy not only in Europe but also in the Near East. Already by the end of 1921 it was clear that the Greeks had no chance of defeating Ataturk’s nationalist forces. Seeking an escape from the Entente’s botched policy toward the Ottoman Empire, France had sought an accommodation with Ankara already in March 1921. London attempted to work out its own face-saving withdrawal. But with the French on the sidelines, the Soviets bolstered by their new alliance with Germany and the reconquest of Anatolia in his sights, Ataturk refused any compromise.49 In the late summer of 1922 the Greeks made an ill-judged attempt to restore their position by occupying Constantinople and holding the Ottoman capital to ransom. But Ataturk was not intimidated, the Ottomans had forfeited any claim to Turkish loyalty. On 26 August 1922 Ataturk began an advance towards the Aegean coastline that culminated on 9 September in the sack of Smyrna and the terror-stricken evacuation of the Greek population. The Turkish forces then wheeled north and drove to within a few miles of the Entente zone of occupation on the Turkish side of the straits. In mid-September 1922, with their Greek allies put to flight, 5,000 Entente troops stationed at Chanak on the western end of the straits found themselves facing the rampant Turkish Army.

  For London withdrawal was not an option. In the wake of the climb-down in Ireland, the uprising in India, challenges to its authority across the Middle East, and the fiasco at Genoa, London could ill afford any further loss of face. The British forces dug in and Curzon desperately appealed to France and to the empire. But when Curzon met Poincaré in Paris the two fell to trading accusations of betrayal.50 The reply from the Dominions was, if anything, even more crushing. South Africa failed to respond to London. As far as Canada was concerned, the Washington Conference had taken care of the fundamental strategic concerns of the empire. Australia was furious that London called on it for help only in the midst of a crisis and expressed no enthusiasm for a re-enactment of Gallipoli.51 The distintegration of Lloyd George’s grand strategy left Britain isolated not just in Europe but within its own empire.

  When, on 23 September 1922, a battalion-strength detachment of Turkish troops entered the neutralized buffer zone within full view of the British forces, London ordered an ultimatum to be delivered demanding their immediate withdrawal. Britain and nationalist Turkey were on the point of full-scale war.52 The prospect was daunting, not only because the Turks outgunned the British on the spot, but because behind Ataturk, as behind Germany at Rapallo, stood the Soviet Union. The Soviets were believed to have offered submarines with which to break the Royal Navy’s stranglehold of the eastern Mediterranean. On 18 September British naval forces were ordered to sink any Soviet vessels that approached them. To make matters worse, a week earlier the Greek Army rebelled against the ‘pro-German’ king they blamed for the disaster in Anatolia. This was no fascist takeover avant la lettre. The aim of the coup was to restore Lloyd George’s great ally, the pro-Western Prime Minister Eleftherios Venizelos. But this meant riding roughshod over the will of the Greek electorate.

  At no point, until the confrontation with Hitler over the Sudetenland, was Britain closer to entering a major war. And Lloyd George’s position was based on bluff. If fighting had broken out, the British would almost certainly have been overwhelmed.53 Perhaps not surprisingly the British commander on the spot chose not to deliver the aggressive ultimatum. On 11 October 1922 an armistice was negotiated. War was averted. But the government could no longer be saved. Just over a week later, on 19 October, restless Tory backbenchers toppled the Prime Minister, ending Lloyd George’s astonishing 16 years in cabinet. He was to be the last Liberal Prime Minister of modern Britain. The chief priority of the new Tory government was to disengage as far as possible from foreign entanglements. After six months of tortuous negotiations, the Eastern Question was finally put to rest with the Treaty of Lausanne in July 1923.54 The plans for the division of Anatolia originating in the London Treaty of 1915 and the Sykes-Picot agreement of 1916 were definitively abandoned. France and Britain settled their differences. The Turkish nation state was established as the only truly robust pillar of the disastrous post-war settlement in the eastern Mediterranean. Since 1919 the Greco-Turkish conflict had claimed 50,000 military fatalities and left tens of thousands more wounded. The civilian casualties of ethnic cleansing on both sides
ran into the hundreds of thousands. The peace set an ominous new precedent in requiring the ‘exchange’ of 1.5 million ethnic Greeks for half a million Turks.

  Even before the Chanak crisis, London’s European diplomacy had reached breaking point. With Germany on the brink of default and France under massive pressure from the United States, London made one last effort to maintain the initiative. In an uncharacteristically rash move the Foreign Secretary, Arthur Balfour, put his name to a unilateral, but conditional, offer to forgive all financial claims against former allies, except for the amount demanded by the United States from Britain.55 The unilateral British cancellation, which had been repeatedly suggested in 1920 and 1921, might well have sent a powerful signal. But the Balfour note of 1922 managed to look manipulative rather than generous. It made demands on France whilst putting America in the dock. It was rejected by both.56 In January 1923 the new Tory government abandoned the search for a comprehensive financial settlement. Leaving reparations to the French, London negotiated a bilateral settlement of its war debts with Washington. Britain would repay $4.6 billion to the US over a 62-year period at an average yearly interest of 3.3 per cent.57 The annual payment of over $160 million was more than it had cost to service the entire British national debt before the war. It was equivalent to the national education budget, or two-thirds of the cost of the navy, enough over 62 years to rehouse the entire city slum population of the UK.58 Prime Minister Andrew Bonar Law, who had lost two sons in the war, was so incensed at these terms that he withdrew from the cabinet discussion and threatened to resign.

  Though bitterly resented in London, this was considerably more generous than the tough guidelines laid down by the congressional committee in early 1922.59 It took very strong appeals from the Harding administration to persuade the Senate to agree even to this deal. As far as American policy was concerned, it confirmed the new order emerging in the wake of the Anglo-American naval agreement at Washington. As Hoover put it, the debt settlement with London allowed American policy to separate Britain, ‘a state of great paying power and pacific intentions’, from the policy to be pursued towards states of continental Europe, including France, ‘of low paying power, and still steeped in the methods of war’.60

  24

  Europe on the Brink

  Less than a week after the shocking news of the Soviet-German deal at Rapallo, the newly formed Congressional World War Debt Funding Commission presented Paris with an official request to submit plans for repayment of the $3.5 billion owed by France to America.1 Three days later, on 24 April 1922, Prime Minister Poincaré addressed a rally in his home town of Bar Le Duc.2 Whatever its desire for an Entente with Britain and America, he declared, France reserved the right to act against Germany and to do so if necessary with force. Over the summer the State Department dispatched Jack Morgan to Europe in the hope that a private loan might ease the reparations imbroglio.3 But Poincaré swept the bankers aside.4 If there was no movement on inter-Allied debts, there could be no concessions on reparations. Morgan did not judge. France might be right to prefer military action to a financial stabilization of Germany, but in that case there could be no question of further loans. American investors could not be expected to ‘buy into a quarrel’.5

  Whereas Lloyd George over the winter of 1921–2 had hoped to use economics to bridge the violent antagonisms that divided Europe, France was now bracing itself to use force to adjust the terms of the financial settlement. An act of state violence was cashed out in remarkably stark terms. Paris calculated that the cost of sending the French Army into the Ruhr, the heartland of West German industry, would be as little as 125 million francs. The return from the exploitation of the Ruhr’s coal mines could be as much as 850 million gold francs per annum. As it turned out, the military occupation of western Germany did offer France a substantial return.6 But it also provoked a crisis that pushed the German nation state to the brink of collapse and forced Britain and the United States to re-engage with European politics. There were risks to France as well. A confrontation with Germany would antagonize its allies and provoke speculative attacks against the French currency. But the status quo offered France no safety.

  I

  The French did not want to act alone. The Entente remained at least notionally the anchor of French policy. On Armistice Day 1922 Georges Clemenceau came out of retirement to embark on a last transatlantic voyage in the hope of gaining public support for an American intervention on France’s behalf. On 21 November, speaking to a New York audience, he asked ‘Why did you go to war? Was it to help others preserve democracy? What have you gained? You accuse France now of militarism, but you did not do so when French soldiers saved the world. There can be no doubt that Germany is preparing a new war. Nothing can stop that except a close entente among America, Great Britain and France.’7 Whilst Clemenceau struck a chord with the crowds of New York, behind the scenes American diplomats were seeking to pull France back to the negotiating table. But with Congress stubborn on the war- debt issue, the Harding administration was boxed in. On 29 December, following what he would later claim was ‘the voice of God’, Secretary of State Hughes addressed the meeting of the American Historical Association at New Haven, Connecticut.8 He offered the most that Washington dared. There would be no renewed political or financial engagement by America with its wartime associates. But America would send commissioners to attend a European meeting of financial experts to determine Germany’s capacity to pay.9 This was no longer enough for the French. By the end of November, Poincaré’s cabinet had resolved that on the occasion of the next German default the French Army would enforce the Treaty of Versailles.

  How would the other members of the Entente respond? Given Germany’s spoliation, the Belgians could be counted upon to support reparations enforcement. The British were standing back. As of October 1922 Italy had a new Prime Minister in the form of Benito Mussolini. Il Duce was a mercurial character, a former socialist and paramilitary gang leader. The activity of his squadistri since 1919 could not but be distasteful to anyone committed to the rule of law. But by 1922 Mussolini was distancing himself from the more disreputable elements of his own movement and he clearly enjoyed the backing of some of the most influential groups in Italian society. Whatever else one might say about them, the Fascists were solidly anti-Communist. Above all, from the French point of view, Mussolini’s entire career was built on his war record. No one had been more vocal in his railings against ‘peace without victory’. Worries about the aggressive impulses of Fascism would come later. In 1923 Mussolini was not about to stand in the way of French enforcement action against Germany.10 That was all that Paris needed to know.

  On 11 January 1923 crowds of resentful German civilians watched in ominous silence as the French Army of the Rhine, accompanied by a battalion of Belgian infantry and a token team of Italian engineers, marched into the Ruhr. The invasion was a dramatic statement of France’s military preponderance in Europe. The French advance guard included a substantial mobile contingent with tanks and truck-born infantry. The French general staff wanted the option of making a deep thrust across the north German plain. But instead of any such freewheeling military operation, upward of 60,000 French soldiers pitted themselves against the civilian population of the Ruhr in a brutal and unequal struggle. By March the Ruhr and Rhineland were isolated administratively from the rest of Germany. In the French parliament, André Maginot, himself a crippled war veteran, called for the Ruhr to be razed to the ground, to inflict on Germany what Germany had done to northern France.11 However, Poincaré was determined not to ruin the Ruhr, but to extract coal from it.

  The Germans responded with passive resistance. Miners refused to dig and the railways would not run. Of 170,000 Reichsbahn staff in the Ruhr, only 357 agreed to work for France. In retaliation, railway workers and public employees along with their families were summarily expelled from the zone of occupation, often with no more than a few hours’ notice – altogether 147,000 men, wome
n and children.12 Four hundred railwaymen were sentenced to lengthy prison sentences for acts of sabotage. Eight died in scuffles with the occupying forces. To deter attacks, handpicked German hostages were assigned to every train carrying coal to France.13 In total, at least 120 Germans lost their lives.14 This was a small fraction of the thousands of civilians executed by the Kaiser’s armies in Belgium and northern France during the war. But the violence of the occupation justified German observers in their contention that the new order was one in which the line between war and peace had become hopelessly blurred. What did it mean to be at peace, if an essential part of the German nation state could be occupied by military force and its population subjected to brutal reprisals? If this was peace, what was war?

  On 16 January 1923 the Berlin government declared official support for the Ruhr resistance. The consequences for the Reich’s finances and for the German economy were ruinous. The exchange rate plunged from 7,260 marks to the dollar to a low of 49,000. The price of imported essentials such as food and raw materials surged. To halt the slide, the Reich threw its last remaining foreign exchange onto the currency markets, buying up marks to sustain their value artificially. The major industrial groupings and trade unions were persuaded at least temporarily to suspend disbelief and to freeze their wages and prices.15 But Germany’s situation was evidently untenable. With the Ruhr out of action Germany needed foreign exchange even to import coal. On 18 April the dykes broke. The mark plunged, reaching 150,000 to the dollar by June. With bundles of currency being disbursed in the Ruhr, by 1 August the mark had reached 1 million to the dollar. Whereas double-digit inflation since 1921 had helped to keep Germany out of the global recession, the hyperinflation of 1923 caused paralysis (Table 11). Amidst the great steelworks and mineshafts of the Ruhr, the population starved as peasants refused to sell their crops for worthless money. Three hundred thousand famished children had to be evacuated to Germany from the Ruhr, where panic-stricken food riots left dozens dead and hundreds injured.16 But Germany itself offered no more than relative safety. As the mark plunged to 6 million to the dollar at the end of August, perhaps as many as 5 million workers, a quarter of the workforce, were either laid off or on short-time.