The Deluge
Page 57
But however determined this programme of domestic consolidation, following the Reichstag election results of May 1924, not even the votes of the SPD were sufficient to carry the constitutional amendments necessary to ratify the Dawes Plan, which included an international mortgage on the Reichsbahn. Over a quarter of the German electorate had voted for the far right – 19 per cent for the DNVP, almost 7 per cent for Hitler’s NSDAP. Almost 13 per cent had opted for the Communists. The two-thirds majority would have to include at least some deputies from the DNVP, intransigent foes of the Versailles Treaty and the progenitors of the ‘stab in the back’ legend. So concerned were the foreign powers that the American ambassador Alanson Houghton intervened directly in German party politics, summoning leading figures in the DNVP to explain bluntly that if they rejected the Dawes Plan, it would be one hundred years before America ever assisted Germany again. Under huge pressure from their business backers, on 29 August 1924 enough DNVP members defected to the government side to ratify the plan. In exchange, the Reich government offered a sop to the nationalist community by formally renouncing its acceptance of the war-guilt clause of the Versailles Treaty.
Nevertheless, on 10 October 1924 Jack Morgan bit his tongue and signed the loan agreement that committed his bank along with major financial interests in London, Paris and even Brussels to the 800-million Goldmarks loan.73 The loan was to apply the salve of business common sense to the wounds left by the war. And it was certainly an attractive proposition. The issuers of the Dawes Loan paid only 87 cents on the dollar for their bonds. They were to be redeemed with a 5 per cent premium. For the 800 million Reichsmarks it received, Germany would service bonds with a face value of 1.027 billion.74
But if Morgan’s were bewildered by the role they had been forced to play, this speaks to the eerie quality of the reconfiguration of international politics in 1924. The Labour government that hosted the final negotiations in London was the first socialist government elected to preside over the most important capitalist centre of the old world, supposedly committed by its party manifesto of 1919 to a radical platform of nationalization and social transformation. And yet in the name of ‘peace’ and ‘prosperity’ it was working hand in glove with an avowedly conservative administration in Washington and the Bank of England to satisfy the demands of American investors, in the process imposing a damaging financial settlement on a radical reforming government in France, to the benefit of a German Republic, which was at the time ruled by a coalition dominated by the once notorious annexationist, but now reformed Gustav Stresemann.
‘Depoliticization’ is a euphemistic way of describing this tableau of mutual evisceration.75 Certainly, it had been no plan of Wilson’s New Freedom to raise Morgan’s to such heights. In fact, even Morgan’s did not want to own the terms of the Dawes settlement. Whereas Wilson had invoked public opinion as the final authority, this was now represented by the ‘investing’ public, for whom the bankers, as financial advisors, were merely the spokesmen. But if a collective humbling of the European political class had been what lay behind Wilson’s call for a ‘peace without victory’ eight years earlier, one can’t help thinking that the Dawes Plan and the London Conference of 1924 must have had him chuckling in his freshly dug grave. It was a peace. There were certainly no European victors.
25
The New Politics of War and Peace
In June 1927 Gustav Stresemann, then the German Foreign Minister, rose before the packed Aula of Oslo University to deliver his Nobel Peace Prize acceptance speech.1 His words were broadcast to audiences across Norway, Sweden and Denmark. Stresemann was honoured along with Aristide Briand and Austen Chamberlain for their collective efforts in steering their countries toward what was widely hailed as the first true peace of the post-war era – the Locarno Security Pact which had been negotiated within a year of the Dawes Plan and ratified at Geneva on 14 September 1926. Locarno was a status quo pact, solemnly guaranteeing the borders of western Europe. Stresemann made no secret of the fact that it was harder for the vanquished to accept than for the victors. It was precisely his track record as a standard-bearer of German imperialism and cheerleader for unrestricted U-boat warfare that made the occasion so significant. But his rhetoric was sincere. Locarno meant, he declaimed, the realization of a common European dream, the Carolingian vision that ‘Treuga Dei, the peace of God’ might prevail on the Rhine, ‘where for centuries bloody wars have raged . . .’. And he assured his audience: ‘The youth of Germany can be won over to the same cause. Youth sees its ideal of individual physical and spiritual achievement in the peaceful competition of the Olympic Games and, I hope, in technical and intellectual development as well . . . Germany faces this future with a stable nation . . . based upon hard work . . . and upon a vital spirit which strives for peace in accordance with the philosophies of Kant and Fichte.’
In the second half of the 1920s such post-political visions were not the stuff of ridicule. They counted as Realpolitik.2 What other lesson was one to draw from the decade-long crisis between 1914 and 1924? The era in which great-power war could be reckoned a reasonable tool of policy, other than in self-defence, was surely over. What did anyone have to show for the lives lost and the billions spent since 1914? Britain had won a great victory but then frittered away its credit in a disastrous series of post-war affairs at Amritsar, in Ireland, in the Middle East. The Italians had raged against their mutilated victory. Mussolini had attacked Corfu but could not hold it. The Japanese had been presented with a heaven-sent opportunity to fulfil their imperialist dreams in Russia and China, but had been unable to capitalize on them. The Germans had won a great victory in the East, but had been unable to consolidate a legitimate peace. In the West they had been forced to accept defeat not once but three times. And what did the French, who had defeated them most recently in 1923, have to show for their victory?
There was not one single reason for this frustration of power. But there were certain patterns. Whether on the battlefield or on the home front, whether on the docks of Shanghai, the fields of Ukraine or the steel mills of the Ruhr, war was no longer contained. The costs, even of victory, were exorbitant. Self-determination might be hard to define and harder to realize, but pretensions to imperial overlordship were quickly resented and loudly denounced. At home, resources for imperial adventures had always been scarce. The war had made them scarcer and democracy had imposed real constraints, both in terms of the priorities of government expenditure and the legitimation of rule. Finally, the competition between the powers in military, economic and political terms acted as a fundamental countervailing force. The fetters that shackled the international ‘chain gang’ together were real.3 As Britain found to its detriment in the Middle East, seemingly low-cost acquisitions in one arena could come at a very high price in another strategic venue, whether that be on the Rhine or in Bengal.
But if there was one common denominator in all these frustrations it was the overshadowing of the European power states – a model originating in seventeenth-century Europe and imported to Asia by Japan – by the challenges of a new era and the rise in the form of the United States of a different focus of economic, political and military authority. As a memo compiled by the British Foreign Office put it in November 1928: ‘Great Britain is faced in the United States of America with a phenomenon for which there is no parallel in our modern history – a state twenty-five times as large, five times as wealthy, three times as populous, twice as ambitious, almost invulnerable, and at least our equal in prosperity, vital energy, technical equipment, and industrial science. This state has risen to its present state of development at a time when Great Britain is still staggering from the effects of the superhuman effort made during the war, is loaded with a great burden of debt, and is crippled by the evil of unemployment.’ However frustrating it might be to search for cooperation with the United States, the conclusion could not be avoided: ‘in almost every field, the advantages to be derived from mutual co-operation ar
e greater for us than for them’.4 If this was true for Britain and its empire, it was all the more so for all the other, once great powers. The question it posed for all of them was the same. If confrontation was not an option, what would be the terms of ‘mutual cooperation’ under this new dispensation?
I
One of the decisions of the ill-starred Genoa Conference that was overshadowed by the eclat of the Rapallo Treaty in April 1922 was a resolution to return to a common gold-exchange standard. Washington’s engagement with the Dawes Plan and the establishment of the new Reichsmark on gold in 1924 demonstrated that this was now a common transatlantic priority. Gold was the anchor of normalcy restored, a guarantee of the financial order. But as experience since 1920 had shown, the consequences were bound to be painful.5 Any settlement of the monetary order was tied to an agreement on both domestic and international debts. Germany’s situation, in this respect, was peculiar in that its domestic debt burden had been evaporated by hyperinflation. Though it was burdened with reparations, the country’s international balance sheet was otherwise a clean slate. It was not, like Britain, France or Italy, saddled with heavy inter-Allied debts. Meanwhile, Germany’s once prosperous businesses and its well-run cities offered plenty of first-class collateral.
The result was that the stabilization of the Weimar Republic was underpinned after 1924 by a dramatic influx of American credit, offered to private business and all levels of government other than the bankrupt Reich.6 The fact that this influx of capital implied a deficit on the trade account, upward pressure on prices and wages, and an uncompetitive exchange rate was of little concern, so long as the money flowed. The fact that there might in due course be a reckoning was not even unwelcome from Stresemann’s point of view. In the event of a crisis Berlin hoped to be able to play its new American creditors against the reparations claims of Britain and France. Debts owed to America would become a lever of revision.7 As Stresemann remarked in an unbuttoned moment in 1925: ‘One must simply have enough debts; one must have so many debts that, if the debtor collapses, the creditor sees his own existence jeopardized.’8
In the wake of the fiasco of Lloyd George’s European policy in 1922, Britain had washed its hands of the European debt and reparations imbroglio. The war debt settlement with the United States in January 1923 was painful, but it restored Britain’s credit. Since 1920, the Treasury and Bank of England had been applying sustained deflationary pressure. From the point of view of the US, after Germany was secured under the Dawes Plan, pushing Britain back to the gold standard was the next priority. If Britain rejoined, the empire and much of the rest of the European and Latin American economy would follow. Ramsay MacDonald’s Labour government hesitated, hearing evidence from critics such as the former Chancellor Reginald McKenna and his chief advisor John Maynard Keynes. Unless there was a pick-up in inflation in the United States, the final convergence to parity between the British and American price levels would be agonizing. Though the UK had recovered from the depths of the 1920–21 recession, and the trade unions were quiescent by October 1924, Britain was in the grips of a full-blown Red Scare. The left wing of the Labour Party called for the nationalization of the Bank of England and the right-wing Daily Mail circulated rumours of Soviet subversion.
On 29 October 1924, Britain’s first Labour government was ousted by a Conservative landslide led by Stanley Baldwin. With the City of London looking for a system that was permanently ‘knave proof’ and the United States threatening to lever away Canada and South Africa, on 28 April 1925 Winston Churchill, as Chancellor of the Exchequer, made the announcement that Britain would resume gold-convertibility.9 By the end of the year 35 currencies worldwide were either officially convertible into gold or had been stabilized for at least a year. As one of its contemporary critics observed, it was the ‘most comprehensive’ effort at concerted international economy policy ‘the world had ever seen’. Fragile peripheral economies such as Austria, Hungary, Bulgaria, Finland, Romania and Greece ‘literally starved themselves to reach the golden shores’.10
In Britain, the effect was not quite so severe, but the return to gold at the pre-war rate further reduced the competitiveness of the export-oriented staple industries, notably coal mining. Over the winter of 1925–6 a rancorous dispute between mine owners and workers sparked British industrial militancy back into life. On 4 May 1926 the TUC dared to do what it had shrunk from doing in the aftermath of the war. It declared a general strike. On the first day 1.75 million workers stayed away from work. It was a huge stoppage by any standard and it sent ripples of excitement through the international socialist movement. Back in 1920 it might have been enough to force the government’s hand. But the Tories in 1926 had a solid parliamentary majority. Britain was no longer the supplier of last resort to all of Europe. Coal was now coming plentifully out of German and Polish mines. The Conservatives had had many months to prepare for the confrontation with the miners. The trade unions were weakened by six years of mass unemployment. Their solidarity was fragile. With workers drifting back to work en masse, already by 11 May the TUC was suing for peace. It was to be the final spasm of the great wave of labour unrest that had begun in the years before World War I. In Moscow the defeat was seen as a clear sign of the passing of the post-war phase of revolutionary activism.11
With Britain leading the deflationary drive, the question was posed to its former partners in the Entente. In 1920 Italy, Japan and France had chosen not to follow Britain and the US in their deflationary push. Would they conform to the restored gold standard? Italy’s war debt burden relative to its income was the heaviest of all the Entente powers. Prime Minister Francesco Nitti and the other struggling liberal governments of the post-war period had pleaded for concessions from Washington, but in vain. By contrast, Mussolini’s regime could count on considerable sympathy in the State Department and on Wall Street.12 In November 1925 Italy’s well-connected Finance Minister, the industrialist Guiseppe Volpi, concluded an extremely favourable war debt deal, opening the door to a flow of new credit from Wall Street (Table 12).13 This allowed Italy to ride out the turbulence in foreign exchange markets in 1926 and to peg the lira to the pound at 90 in August 1926, the prevailing rate at the moment when Mussolini had taken power four years earlier. Fascism had stopped the slide. And unlike in Britain, in Fascist Italy there was no general strike to fear. Mussolini’s squadristi had done their work in the street battles of 1920–22. In 1927 the full force of the dictatorship was used to impose a 20 per cent wage cut.
Table 12. Coming to Terms with Washington: War Debt Agreements, 1923–30
Japan’s return to the gold standard was ill-starred.14 In 1923, after three years of deflation, the yen had come within striking distance of its pre-war exchange rate against the dollar, only for Japan to be hit on 1 September by one of the most devastating earthquakes in modern history. With 140,000 dead, half a million homeless, and a large part of urban Japan in ruins, the Bank of Japan was forced to respond with emergency credit measures. Foreign currency drained out of the country and after ten years of accumulating foreign assets, Japan was forced in January 1924 to resort to a loan brokered by J. P. Morgan at the punitive rate of 6.5 per cent. Reminiscent of pre-war terms, it was dubbed the ‘national humiliation loan’.15 No less clearly, the loan marked the definitive shift in Japan’s source of finance from London to New York.16 Three years later the general move toward gold-standard restoration took Japan once more back to the pre-war rate only for disaster to strike again, this time in the form of a major banking crisis that forced the closure of three dozen banks. In 1927, with the currency trading at a comfortable discount to its pre-war parity, the new expansively minded Seiyukai government decided to suspend any further attempt toward a gold-standard return so that it might concentrate on the growing Nationalist challenge in China. Japanese national development, if necessary with state involvement, was the priority. As in Mussolini’s Italy, Wall Street interests led by J. P. Morgan f
ell into line with remarkable complacency (Table 13).
France’s experience was rather more painful. In November 1924, as the Dawes loan for Germany was pushed through, J. P. Morgan asked the State Department for permission to consolidate Prime Minister Poincaré’s short-term loan of $100 million. But Washington had other priorities. There would be no more credit for France until it had put its domestic finances in order and settled the repayment of the $3.5 billion owing in inter-Allied debts. As of April 1925 the Coolidge administration imposed a complete loan embargo, starting with the cancellation of a large loan to the city of Paris. That same month Édouard Herriot’s ill-fated Cartel de Gauche government was defeated in the French Senate, ushering in a period of political and financial instability that ended only at the end of November 1925 when Aristide Briand returned as Prime Minister. He promptly sought a debt agreement with Washington. The resulting Mellon-Berenger accord provided for complete repayment over 60 years at a concessionary rate of 1.6 per cent. The initial annual payment would be $30 million.
Anxious to secure the deal, Andrew Mellon had the proposal approved by the US House of Representatives, but when the plan was put before the French public in the early summer of 1926 the patriotic backlash was dramatic. The Mellon-Berenger accord was denounced as ‘servitude with hard labour and for life’. Briand was accused of having ‘put a noose around the throat of France’. In July, 25,000 French veterans marched in silent protest against the ‘vultures of international finance’.17 The US ambassador Myron T. Herrick reported that American bankers were evacuating their families from Paris for fear of a hot summer of anti-Americanism. On 21 July, as nationalist protest surged across Paris, with thousands modelling themselves on Mussolini’s blackshirts, the franc, which in 1914 had stood proudly at 25.22 to the pound, plunged to 238.50. In annualized terms, in July 1926 French inflation hit 350 per cent.18 With rumours circulating of a right-wing coup possibly to be led by Marshal Pétain, the Republican political class rallied. Poincaré took office once more at the head of a cross-party coalition including his predecessor Herriot and four other former prime ministers.19 Briand returned as Foreign Secretary. A constitutionally autonomous public debt agency was established to guarantee repayment to France’s domestic creditors.20 Confidence rebounded and on 17 August the franc hit 179 to the pound and continued to rise.