by Adam Tooze
This French veto caused outrage in London and Washington, and the sounds of protest have echoed down to the present through historical writing. According to the most influential interpreter of the Great Depression, France’s unwillingness to cooperate with Hoover’s rescue effort in June 1931 revealed the true weakness of the interwar system. What was at fault ‘was not lack of US leadership. It was the failure of cooperation, specifically French unwillingness to go along.’30 At the time, the language was less restrained. In London, gallophobic conspiracy theories were rife. Prime Minister MacDonald raged that ‘France has been playing its usual small-minded and selfish game over the Hoover proposals. Its methods are those of the worst Jews . . . Germany cracks while France bargains.’ In Washington, Under-Secretary of State William Castle concluded ‘that the French are the most hopeless people in the world’.31 Hoover hinted darkly that for the future he could see only the possibility of an Anglo-German alignment, possibly including the United States, against France.32
The expostulation was all the greater for the fact that the net cost to America of Hoover’s moratorium was larger than it was for either Britain or France. Since those countries made up through the cancellation of war debts much of what they lost through the cancellation of reparations, their net contribution amounted to no more than one-third of the total. According to one set of contemporary calculations, Germany was relieved of £77 million per annum in reparations payments, whilst the United States forfeited £53.6 million in war-debt payments. But to the French this political arithmetic was lopsided. If America was footing most of the bill, this reflected the fact that France had made round after round of concessions on reparations not reciprocated by Washington. Nor were reparations merely a matter of money. If that was what they had become, this was thanks to the Dawes Plan and the Young Plan, each of which had been a French retreat. Again and again France had called for the creation of an international security system to replace the provisions agreed at Versailles. But this had been vetoed by Washington. Instead, Britain and America had collaborated to found a new order on nothing but disarmament and the rules of the international financial markets. As France had experienced during its time of crisis between 1924 and 1926, the force of those constraints was real, certainly as far as any cooperative player of the system was concerned. Whether Germany was a cooperative player remained an open question. France for its part had fallen into line. With the stabilization of the franc in 1926, the agreement to the Young Plan and the Mellon-Berenger war-debt deal in 1929, it had paid the price. Now, as the result of a crisis that the Germans had brought upon themselves, America was unilaterally asserting its right to declare an emergency and overturn the rules of its own game. In Paris the reaction was one of disbelief and shock. Hoover had acted without prior consultation. He was, one newspaper screamed, treating France like Nicaragua.33 This time, however, unlike in 1923–4, it was France that could afford to bargain, transferring the risk to Germany and its creditors. It was not until 6 July that France agreed to allow the Reich to take shelter under Hoover’s moratorium (Table 14).
In the meantime Germany’s financial system had collapsed. Its banks were closed. A moratorium was imposed on its short-term trade debt to Britain, Holland and Switzerland. The Reichsbank continued to uphold the parity of its currency in terms of gold, but to all intents and purposes Germany had been driven off the gold standard. The Reich had nationalized all private holdings of gold and foreign currency and imposed exchange controls. Brüning could credit himself with having forced the suspension of reparations, but in every other respect this first effort to assert national interest and to escape the constraints of the international order had ended in catastrophe. To obtain Hoover’s financial protection Brüning even had to publicly announce Germany’s abstention from any new military spending for the duration of the moratorium.34 What Brüning had demonstrated was that for a country as vulnerable as Germany an assertive nationalist posture was incompatible with membership in the international economy. One could draw two conclusions. Conservatives shrank back to conformity. In December 1931 Brüning used decree powers to force through another round of compulsory wage and price cuts. But this strategy was not only agonizing. It begged the question of how much longer there would be an international economic or political order to which to conform. More radical nationalists drew the conclusion that if nationalism and economic liberalism could not be combined, then the reassertion of national interest would have to be truly comprehensive – economic, as well as strategic and political.35
Table 14. The Effects of the Hoover Moratorium on ‘Political Debts’, June 1931 (000 £)
suspended receipts
suspended payments
net loss/gain
United States
53,600
–
(53,600)
Great Britain
42,500
32,800
(9,700)
France
39,700
23,600
(16,100)
Italy
9,200
7,400
(1,800)
Belgium
5,100
2,700
(2,400)
Romania
700
750
50
Yugoslavia
3,900
600
(3,300)
Portugal
600
350
(250)
Japan
600
–
(600)
Greece
1,000
650
(350)
Canada
900
–
(900)
Australia
800
3,900
3,100
New Zealand
330
1,750
1,420
South Africa
110
–
(110)
Egypt
90
–
(90)
Germany
–
77,000
77,000
Hungary
–
350
350
Czechoslovakia
10
1,190
1,180
Bulgaria
150
400
250
Austria
–
300
300
III
In Japan too the struggle over the strategy of conformity was heating up. Prime Minister Hamaguchi’s commitment to the disarmament talks at the London Naval Conference had outraged the navy lobby. Now, in Geneva, the League of Nations was preparing a second round that might curb the army too. Was the deflation of 1930, like the Anglo-American retrenchment of 1920–21, to usher in another lost decade for imperialist ambition? Since the politicians seemed so terrifyingly blind to the peril in which Japan found itself, for the nationalist radicals the moment for action had come. In October 1930 Hamaguchi was mortally wounded by an assassin. Over the following months other prominent representatives of establishment internationalism were killed, including the liberal Finance Minister, Inoue Junnosuke, and the head of the Mitsui business conglomerate, Dan Takuma.
But assassination was not enough. The key was China. In 1928 the radicals had assassinated northern warlord Chang Tso-lin without triggering the sought-for crisis. In 1931 they would go one better. They would stage a Chinese attack on Japan. On 18 September a bomb, planted by Japan’s own renegade soldiers, exploded under a Japanese railway line immediately adjacent to one of the military bases commanded by the ‘Young Marshal’. Within 24 hours the Japanese Army had launched its response. Some 500 radical nationalist troops seized the regional capital of Mukden in Manchuria. Having brought the rest of the Kwantung army behind them, within weeks three entire Chinese provinces were under Japanese control. The right wing had broken into the open. If they had their way, Japan’s strategic dilemma would be resolved by force, severing the territory north of the Great Wall from China proper. Furthermore, if Japan’s mainstream political parties would not cooperate and if the newly democratized electorate would not fall into line, then there would have to be a comprehensive ‘reconstruction’ at home as well.
But despite the upheaval in Manchuria, the desired escalation once more failed to materialize.36 The Chinese Nationalists withdrew from the challenge and Japan’s diplomats swarmed out to limit the damage. Japan’s government enjoyed considerable goodwill. Unlike Brüning’s Austrian customs-union proposal, the Mukden provocation was clearly the work of rogue soldiers. In any case, there was merit from the point of view of the Western Powers in Japan consolidating its grip on Manchuria – rather than Stalin. Moscow for its part showed every sign of wanting to avoid a clash. Even as the economic crisis escalated in 1931, a handful of right-wing extremists were not yet capable of shaking loose the international system. Germany could be quarantined. It would take a further shock to the heart of the global financial system to open the door to disaster. As deflation ate its way across the world, precisely such a crisis was brewing.
Over the weekend of the Mukden incident on 19–20 September 1931 the eyes of the world were focused less on North-East Asia than on London. Following the disaster in Germany, pressure had begun to build on the Bank of England.37 Since 1929, despite a new wave of misery across much of industrial Britain, Ramsay MacDonald’s Labour government had conformed without question to the imperatives of the gold standard. With sterling under pressure the demands of the Bank of England and the City of London were remorseless. In August, out of a budget of £885 million they recommended cuts of £97 million, of which £81 million were to come from unemployment and social services. The dole, on which millions of unemployed and their families subsisted, was to be cut by 30 per cent. New York and Paris rallied round, but the Bank of England wanted a showdown with the Labour cabinet and secretly encouraged potential American and French lenders to stiffen their conditions. Though there was unanimity on the principle of upholding the gold standard, MacDonald acknowledged to his colleagues that what they were being asked for was the ‘negation of everything that the Labour Party stood for’.
When the cabinet failed to achieve complete unanimity, MacDonald resigned and formed a cross-party National Government, which, shorn of the dangerous socialists, announced large tax increases and spending cuts. It was not enough. On Friday 18 September, despite assistance both from the New York Federal Reserve and the Banque de France, London gave up the fight. The Bank of England was far from being in the position that had confronted Berlin over the summer. But it had no desire to end up there either. Even with the help of an emergency loan from New York and Paris, by midday on Monday 21 September the Bank of England would have been forced to contemplate truly drastic action. Instead, MacDonald agreed to make the humiliating admission that sterling was departing the gold standard.
Unlike the Mukden incident, this was a truly global event, causing banks to fail in America and panic in Berlin. For a day, it displaced the Manchurian scandal from the headlines even in Tokyo. The gold standard was the frame of discipline and coordination that Washington and London had made into the anchor of post-war stabilization. As sterling plunged, Britain was followed by the empire and all of its smaller trading partners. The initial reaction to the suspension of the gold standard was one of shock. But, within a year as the pound stabilized at a new and far more competitive level, Britain’s National Government, still headed by MacDonald, would discover that for a country with some degree of international credibility, a free-floating exchange rate offered not disaster but the possibility of a creative reinvention of economic liberalism.38 With its banking system intact, low interest rates delivered an effective stimulus to the British recovery. When compared to either the US or continental Europe, the British experience of the 1930s was far from dismal.
But Britain’s discovery of what Keynes was to dub ‘real liberalism’ had wider consequences. Sterling’s plunge put huge pressure on Britain’s trading partners. And the pressure was only further increased when the empire adopted protectionism in February 1932. This was not the first protectionist move. Nor was it the worst. The justly infamous Smoot Hawley tariff had been log-rolled through Congress in June 1930. But from the Americans protectionism was to be expected. Britain’s devaluation and tariff signalled a regime break. Since the repeal of the Corn Laws in the 1840s, Britain had been the pillar of free trade. Now it was responsible for initiating the death spiral of protectionism and beggar-thy-neighbour currency wars that would tear the global economy apart. As a senior British official admitted, ‘no country ever administered a more severe shock to international trade’ than Britain did with its combination of devaluation and the turn to protectionism.39
On top of the wave of assassinations and the desperate aggression of the Kwantung army, it was this spectacular and sudden collapse of the framework of the international economy that undid the efforts by Japanese liberals to hold the line. As 1931 came to a close, in the Diet the Foreign Office official, Manchuria-hand and fascist sympathizer Matsuoka Yosuke demanded to know: ‘It is a good thing to talk about economic foreign policy but we must have more than a slogan. Where are the fruits? We must be shown the benefits of this approach.’40 If even the British Empire was turning inwards, Japan must take urgent steps to create its own trade bloc. If in Ramsay MacDonald’s Britain the end of the gold standard had brought low-interest mortgages for suburban home-building, in Japan the stakes were higher. The decision to return to gold in 1930 was directly associated with disarmament. As soon as Japan abandoned the gold standard in December 1931, Finance Minister Korekijo Takahashi came under huge pressure from the military. Facing a resurgent China and the menace of Soviet industrialization, with the Japanese public stirred by the Mukden incident into a patriotic fervour not seen since 1905, the military were determined to break the constraints of the 1920s. Between 1930 and 1934 the defence budget doubled. In 1935, when Takahashi refused a further increase, he was hacked to death by right-wing zealots. By 1937, having ruptured
the naval limits agreed in London, Japan’s military spending had risen to five times its level in 1930.41
In the super-heated strategic environment of East Asia, the link between the financial crisis of 1931 and the military escalation that was to follow was remarkably direct. In Europe and across the Atlantic the breakdown was more incremental. After 1931, France and Italy remained on the gold standard. The result was not to ‘activate’ policy, as in Japan, but to confine France and Italy within an ever-tightening deflationary straitjacket. The fact that this was combined in Mussolini’s case with expansive foreign-policy ambitions was one of the truly disabling irrationalities of his regime. Largely as a result, the Italian armed services never came close to getting what they needed to fulfil the Duce’s dreams of conquest. Given its enormous gold holdings, France for its part had little reason to leave the gold standard, despite the deflationary pressure. The deflation did not begin to take a really severe toll until 1932.