The Deluge

by Adam Tooze

  I

  The stage was set by the Young Plan. With the shadows of a recession already in the offing, on 11 February 1929 a new round of reparations negotiations opened in Paris. They were presided over by Owen D. Young, Charles Dawes’s deputy in 1924. It was a triumph of Stresemannian diplomacy that the call for the talks had come not from the Germans but from the Americans. They had reason to fear that once Berlin’s reparations liability increased under the payments schedule of the Dawes Plan, this would crowd out Germany’s private debts to Wall Street. The negotiations that were concluded a year later in the Second Hague Conference of January 1930 were a mixed success.4 In form at least, the Young Plan promised to defuse the reparations issue by depoliticizing the payments system. But substantively, thanks to the refusal of Washington to allow any joint discussion of war debts and reparations, the outcome was a disappointment.

  Given Washington’s intransigence, which became ever more marked as the Hoover administration came into office in March 1929, France and Britain could concede a reduction of Germany’s reparations payments of no more than 20 per cent.5 Their room for manoeuvre was small. As reparations were reduced, the claims on them by the United States loomed ever larger. In 1919 the ratio of reparations claims to war debts owed to the US had stood at a comfortable 3:1. The effect of America’s dogged debt diplomacy and Germany’s revisionism regarding the Versailles Treaty was to reduce that cushion. Britain and France increasingly functioned as conduits for a cycle of payments that ran from the United States to Germany and back again. After the Young Plan, France retained only 40 per cent of its reparations payments, Britain barely 22 per cent. The rest was passed on to the United States for war debts. As Trotsky put it in typically drastic terms: ‘From the financial shackles on Germany’s feet, there extend solid chains which encumber the hands of France, the feet of Italy and the neck of Britain. MacDonald, who nowadays fulfills the duties of keeper to the British lion, points with pride to this dog collar, calling it the best instrument of peace.’6 It was more than mere coincidence that the sum of $2 billion paid to the United States in war debts by 1931 was almost exactly the total of credits advanced to Germany from the US by the early 1920s.7 Funds were being recycled. But it was precisely that cycle that was put under immense strain by the Young Plan. The result of the Plan was to normalize Germany’s debts, but by the same taken to make the burden more transparent and to pin responsibility more directly on Berlin.8

  The nationalist reaction was to rally around a protest referendum. This offered Adolf Hitler a chance to re-energize his movement, which after its disastrous setback in the Reichstag elections of 1928 seemed to be slipping back into obscurity.9 But once more the insurgents were defeated. The no vote gained only 14 per cent. Once more the nationalist Reichstag deputies voted shamefacedly to give the Young Plan the super-majority it needed for ratification. As Allied troops withdrew from the Rhineland five years ahead of time, it was another victory for practical diplomacy.

  It was congruent with this image of a returning normality that in restoring German sovereignty the Young Plan tightened the regime of financial orthodoxy. The transfer protection system, which had been overseen in Berlin since 1924 by an American reparations agent, was wound up. Henceforth Germany was responsible for managing its own balance of payments. It would make its payments not to the Reparations Commission but to a new international clearing house, the Bank of International Settlements. That would require a fresh fiscal discipline, but for German conservatives this was far from unwelcome. In March 1930, having shed the Social Democrats from the broad-based coalition that had taken office in 1928, the Centre Party government of Heinrich Brüning embarked on the long haul of restructuring the Weimar state.10 The ultimate goal was to overturn the Versailles Treaty, but the means of achieving that revisionist objective were conformist. Germany would escape the coils of political debt by restoring its competitiveness. From the purge of deflation it would re-emerge as it had been before 1914, a champion exporter in a world economy finally freed from the financial legacies of the war.

  While Germany was preoccupied with reparations over the winter of 1929–30, Britain and America were preparing for the renewal of global disarmament. On 21 January 1930 amid the splendour of the House of Lords, the major powers convened for the Second London Naval Conference. The opening ceremony was broadcast live by radio all over the world, causing a sensation in Japan 5,000 miles away. For the first time a truly global public participated simultaneously in a single media event.11 The timing was dictated by the expiration of the 10-year system agreed in Washington. In 1931, barring a new agreement, Britain, the US and Japan were poised to build a total of 39 battleships at an estimated price tag of $2 billion. The limitations of battleships agreed in Washington had not stopped the construction since 1922 of almost a million tons of cruisers, destroyers and submarines. A huge naval appropriation bill was before Congress. All this was flagrantly at odds with the deflationary demands of the moment. Instead, the Big Three agreed in London to go beyond battleships to adopt truly comprehensive naval arms limitations.

  The agreement by the Hamaguchi government on 2 April 1930, namely to accept a compromise ratio just short of 10:10:7 for cruisers and other auxiliary vessels, was the breakthrough of the conference. Even more than at Washington in 1921, this was a triumph for Japan’s civilian politicians and diplomats over the military, who by this point were preoccupied with China and had lost any confidence in America’s good faith. But whatever one’s strategic assessment, about the common deflationary imperative there was no doubt. Hoover’s administration estimated that the US had saved $500 million.12 Given the cruiser construction it had undertaken since 1921, for Japan the conference was tantamount to a complete naval holiday. In total over the next six years the Japanese Navy would add only 50,000 tons of new ships. The navy lobby was incensed. With the big-spending Seiyukai opposition in support, they turned the London Naval Conference into the ‘most significant constitutional battle’ since the beginning of the Taisho era in 1913.13 But despite the resignation of Admiral Kato- Kanji, the Naval Chief of Staff, and at least one ritual suicide amongst the junior officers, Prime Minister Osachi Hamaguchi stood his ground.14 The pressure for budget cuts was unrelenting. He had a large parliamentary majority at his back and could count on the support of the veteran, pro-Western liberal Prince Saionji as president of the emperor’s Privy Council.15 In the face of challenges from all sides, Hamaguchi’s government continued to align itself with London and Washington on security policy as well as the gold standard. To celebrate the ratification of the London naval treaty, on 28 October 1930 in a synchronized worldwide radio event broadcast to audiences in all three countries, Hamaguchi of Japan, Prime Minister Ramsay MacDonald and President Herbert Hoover took turns to praise this milestone in international peace.

  As had been the case nine years earlier, it was the French who were made to seem the uncooperative party at the London talks.16 But they had reason to fear that their security interests were being ignored. With a navy barely one-third the size of that of Britain or America, the French would be forced to choose between defending their Atlantic coastline and guarding the Mediterranean against Mussolini, who was openly scornful of the entire disarmament process. Not that France was asking to compete with Britain or the United States. On the contrary, its priority was to link disarmament to more specific security commitments than those offered by either the League of Nations or the Kellogg-Briand Pact. If London and Washington desired naval disarmament, France wanted what remained of the Royal Navy to be firmly committed to its defence.

  To the latter-day Wilsonians in MacDonald’s second Labour government, this was as distasteful as ever. As far as MacDonald was concerned, the Great War had been as much the result of Franco-Russian intrigue as of German aggression.17 It was imperative that Britain never again be placed in the position in which it had found itself during 1916, when entanglements in Europe caused the country to risk eve
rything in a fruitless clash with a progressive American President. Though the conference in 1930 was being hosted in London, it was the American delegation that decided its outcome. If the key to European security was the willingness of the British to back the force of the French Army with a smothering naval blockade, then America’s approval was indispensable. Britain would make no promises to France that would risk antagonizing America.

  On 24 March 1930, desperate to pull the conference back from the ‘brink of a precipice’, the American Secretary of State, Henry Stimson, offered that if France would consent to disarmament, the United States would consider a consultative pact, under which it would commit itself to making clear its position in advance of any Franco-British blockade.18 This went far further than Secretary of State Hughes had been willing to go in 1924, and Stimson acted without backing from the State Department or President Hoover. His proposal was never put before the Senate. But this minimal concession, which suggested at least the possibility of American approval for British action on France’s behalf, was enough to enable the French to agree not to derail the conference. The unfortunate effect of this struggle, however, was to paint France in dark colours precisely at the moment when it desperately needed British cooperation.

  In the wake of the frustrating Young Plan negotiations, the movement for European integration that had experienced a first flush of enthusiasm after the Ruhr crisis moved back to the forefront of discussion.19 In light of America’s uncompromising stance over war debts, in June 1929 at a meeting in Madrid, Briand and Stresemann had discussed a vision of a European bloc large enough to withstand American economic competition and capable of releasing itself from dependence on Wall Street.20 In a speech on 5 September 1929, using the League of Nations as his stage, Briand seized the initiative: The European members of the League must move toward a closer union. The toothless peace pact that bore his name was not enough. Given the obvious downward trend in the world economy and the looming prospect of further American protectionism, Briand’s first approach was to propose a system of preferential tariff reductions. But this economic approach met with such hostility that over the winter he moved to a different tack.

  In early May 1930, within weeks of the conclusion of the ticklish London Naval Conference, the French government circulated a formal proposal to all 26 of the other European member states of the League of Nations. Paris called upon its fellow Europeans to realize the implications of their ‘geographical unity’ to form a conscious ‘bond of solidarity’.21 Specifically, Briand proposed a regular European conference with a rotating presidency and a standing political committee. The ultimate aim would be a ‘federation built upon the idea of union and not of unity’. ‘Times have never been more propitious nor more pressing,’ Briand concluded, ‘for the starting of constructive work of this kind . . . It is a decisive hour when a watchful Europe may ordain in freedom her own fate. Unite to live and prosper!’

  II

  When news reached Briand on 3 October 1929, barely a month after his European speech, of Gustav Stresemann’s death, it is said that the French Premier exclaimed that they should order a second coffin for him. There was no doubt that Stresemann’s departure from the scene followed by Heinrich Brüning’s rise to the Chancellorship in Berlin at the head of a right-wing minority cabinet signalled an alarming development in German politics. Brüning was no Erzberger. The echoes of the days of the Reichstag majority were now very faint. The disappointment of the outcome of the Young Plan pushed more confrontational attitudes to the fore in Germany. But this might not have mattered if Britain had decided to throw its weight behind Briand’s proposal. At the London Naval Conference the cooperation of Britain and America had been enough to hold France and Japan in line. A Franco-British combination might have set the terms in Europe. Not only was Britain a naval superpower but unlike France it was a champion importer. Faced with America’s recalcitrant protectionism, access to the markets of Britain and its empire was a truly powerful bargaining chip.22

  But the face of the Labour government was set squarely against any cooperation with France, and it was this that let Germany off the hook. Despite the enthusiastic approval given to Briand’s proposal by 20 of its 26 recipients, including all the smaller countries of Europe except for Hungary and Ireland, both London and Berlin let the proposal drop. On 8 July 1930 Brüning’s cabinet concluded smugly that the most appropriate response to the historic French initiative should be to offer it a ‘first-class funeral’.23

  What London did not appreciate was that by stymying France it was opening the door to disaster. Again and again since 1918 the German political class had rallied itself to find a majority for painful but necessary acts of compliance. Rapallo and the Ruhr had demonstrated the disastrous consequences of confrontation. But in 1930 the willingness to conform began to fray once more. Stresemann’s successor as Foreign Minister, the Bismarckian nationalist Julius Curtius, had already declared that he intended to ‘rebalance’ Germany’s foreign policy toward the East. In 1931 a large export credit guaranteed by the Reich quadrupled German exports to the Soviet Union, making Germany into by far the largest trading partner of Stalin’s regime.24 In the summer of 1930 Berlin had strengthened its links to Fascist Italy, France’s main rival in the Mediterranean. In early July as the last French troops withdrew from the Rhineland, Curtius embarked on his masterstroke. He initiated top-secret negotiations with Vienna over a possible Austro-German Zollverein (customs union). Kept secret until the spring of 1931, it was to be this German initiative that unleashed the first true landslide of the Great Depression.

  That a government headed by Brüning should have initiated this disastrous train of events was tragic but predictable. Brüning was a nationalist but not unusual in this respect.25 He was certainly no fascist sympathizer. His aspirations for the Reich were conservative. His economics were liberal. His goal was to restore something like the Wilhelmine golden age. On the part of a rich and powerful nation this combination might have been innocuous. But given Germany’s vulnerable position, a vigorous national liberalism was a dangerous cocktail. The economic adjustment that the Weimar Republic had to undertake was severe. Between 1929 and 1931 Germany veered from a looming trade deficit to a substantial trade surplus largely by slashing domestic demand for imports. In the summer of 1930 the presidential decree powers of Field Marshall Hindenburg were invoked not to impose dictatorship, but to enforce deflationary compliance with the rules of the international game. The rise of unemployment to 4 million over the winter of 1930–31 was the predictable consequence. To offset the collapse in domestic demand Germany needed exports. It was not illogical to seek closer economic relations with Austria. But Briand’s European plan offered a far larger market. And to cushion the agony of the deflation, Germany needed all the help from the international community that it could get.

  Under such circumstances, for Brüning to have engaged in clandestine talks with Vienna, which violated if not the letter then the spirit of as many as three post-war peace treaties, was a high-risk strategy to say the least. To have done so as a sop to the nationalist far right, which after the Reichstag election of September 1930 was coming under the sway of Hitlerism, was deeply irresponsible. The essence of Stresemann’s strategy had been the subtle calculation that the best way to widen Germany’s room for manoeuvre was precisely to avoid open confrontation. Brüning’s more aggressive approach had the reverse effect. By dangling nationalist fantasies, rather than widening his room for manoeuvre he narrowed it, piling up on both domestic and international pressure.

  On 20 March 1931 the announcement of the Austro-German customs-union plan exploded onto the pages of the international press.26 Earlier in the year, to reward Germany’s conformity to the gold standard, France had been preparing to open the Paris money markets to German borrowing.27 Now Berlin seemed bent on confrontation. To make matters worse, neither the British nor American governments showed any sign of wanting to rein Brüning in. So
long as its Most Favoured Nation status was preserved, the United States had no objection to the consolidation of the fragile states of central Europe.28 This was alarming for Paris. But thanks to Poincaré’s policy of stabilization, it was now in a far stronger position. By 1931 France’s undervalued currency and strong balance of payments had enabled it to accumulate 25 per cent of the world’s gold reserves, second only to the United States, vastly more than Britain had ever held even in its pomp as the maestro of the gold standard orchestra. As financial speculation hit Austria in May and then spread to Germany, there were rumours that Paris was deliberately encouraging the sell-off. But there was no need for that. The deflation was taking its toll. The bankruptcy of the Viennese Kreditanstalt and the trouble that hit the Danat bank in Germany were dangerous but predictable side effects of a severe deflationary adjustment. Germany’s balance of payments was highly unstable. And Brüning himself seemed quite determined to spook the markets. On 6 June, having been invited to visit MacDonald at Chequers, the German Chancellor used the occasion to denounce the next instalment due under the Young Plan as a ‘tribute payment’.

  Under these circumstances it was not surprising that gold and foreign currency began to drain out of the German financial system. Since 1924 German policy had been waiting for this moment. Would the country be able to use its debtor relationship with America to unhinge its reparations obligations? There was no doubt that Wall Street was seriously exposed. All told, American investors had $2 billion tied up in Germany. Since January 1931 Stimson had been warning of the serious risk to America if there was a German collapse.29 But to imagine that the President was at the behest of the bankers was to repeat the mistake made by Berlin in their fateful U-boat decision of January 1917. Hoover was no friend of the Wall Street barons, and the voters of the Midwest were even less so. It was not until 19 June, with desperate telegrams arriving from London, that Hoover finally agreed to act. The next day he announced a plan to freeze all political debts, both reparations and inter-Allied war debts. Announced on a Saturday, on the following Monday 22 June the Berlin stock market was in a frenzy of bullish trading, only for the bubble to be abruptly pricked when France refused to fall into line.