by Adam Tooze
It was in Germany that the situation now became truly unbearable. It could not devalue because it was pinned down by its huge burden of foreign debt denominated in dollars, the weight of which would increase if the value of the Reichsmark fell. Unlike the Bank of England, the Reichsbank had no reserves with which to ward off the speculative attacks that were bound to follow a departure from gold. Furthermore, Washington made clear that it preferred to see Germany hunker down behind the exchange controls and debt moratoria put in place over the summer. That way it could at least continue to service its debts to Wall Street. Meanwhile, the consequences for German trade of upholding its gold parity whilst Britain devalued were nothing short of catastrophic. Up to September 1931 Brüning’s cabinet could at least claim that its harsh deflationary policy had produced a gain in export competitiveness. Now, clinging to the wreckage of a disintegrating gold standard, Germany’s exports suffered one blow after another. By the end of 1931, as unemployment surged from 4 to 6 million and a wave of bankruptcies shook German industry, the deflation consensus splintered. If there was no international system left to which to conform, what was the rationale for another wave of government-decreed wage and price cuts? Across Germany, cliques of experts, business interests and politicians began to rally around the call for a concerted policy of national economic salvation.
One wing of this debate congregated around the trade union movement, but another wing entertained increasingly prominent guests from the anti-Young Plan campaign and from Hitler’s National Socialist Party. In the summer of 1932 with a work-creation programme emblazoned on its banners, the Nazis swept to a dramatic election victory. Hitler’s party scored 37 per cent of the national vote, just short of the Socialist Party’s triumph in the National Assembly election of January 1919. The right wing was well short of a majority. The DNVP for its part was ailing. And in the second general election, in November 1932, the Nazi vote began to ebb. But it was this breakthrough over the desperate winter of 1931–2 that made Hitler into a candidate for the Chancellorship. When the effort to consolidate a conservative regime under Franz von Papen or a military directorate under General von Schleicher failed, in January 1933 it was Hitler who was next in line to head a nationalist coalition.42
But though the military class and economic groups such as agrarians might have little to lose in abandoning internationalism, other influential groups, notably big business, were slower to relinquish the promises of the 1920s. For countries such as Japan and Germany multilateral trade, underwritten by Britain, had been the bedrock of their economic development. Could one really contemplate a departure from such a foundational element of the world order? The Mukden incident in East Asia was clearly dangerous. But none of the parties had chosen to turn it into a casus belli. A new round of disarmament talks had begun at Geneva in February 1932.43 In Europe in June of that year the reparations issue had finally been resolved at the Lausanne Conference. France was upholding the monetary orthodoxy. Britain and Japan’s departure from the gold standard was serious, but perhaps not irrevocable. As of the summer of 1932 there were some signs of an economic rebound. A major conference was scheduled to meet in the summer of 1933 in London. On its agenda was the reconstruction of the world economy, and in addressing that issue one question was decisive: where stood the United States?
IV
In 1928 Herbert Hoover’s landslide election victory had seemed to put the final stamp of authority on the restored post-war order. Hoover was the great engineer of progressivism and his response to the initial shocks of 1929 was in character.44 In October he partnered with MacDonald in the cause of disarmament. At home he urged his contacts in America’s business circles and trade associations to respond to the crisis by bringing forward private investment. But such measures were unavailing in the face of a huge collapse in confidence and domestic spending. Hoover, the master of foreign disasters, the harbinger of American affluence, the emblem of progressive efficiency and self-satisfaction, found himself humiliated by a home-grown catastrophe, a devastating return of the instability that had plagued the US economy in the late nineteenth century.45 It was not that the President did not understand the basic rationale for countercyclical government spending. The problem was that the Federal government budget at 3 per cent of GDP was too small to exercise any stabilizing effect. Nor could Hoover prevent Congress passing the outrageous Smoot-Hawley tariff. Meanwhile, despite the urging of the White House, the Fed sacrificed the stability of the banking system to its pursuit of radical deflation. Following Britain’s departure from gold in September 1931, 522 American banks with deposits to the tune of $705 million failed. And even worse was to follow.
In early February 1933 as America awaited a new President, a menacing bank run started in Louisiana. By 3 March it had reached the heart of the world financial order in New York. In desperation, New York State appealed to Washington for federal action. But Hoover’s presidential powers expired that day and Franklin Roosevelt, his successor, refused to cooperate. Before daybreak on 4 March 1933, with no guidance from the national government, the Governor of New York took the decision to shut the centre of the global financial system. In the face of the worst global economic crisis in modern history the American state had absented itself.
The first priority of FDR’s new administration was to remedy that impression. Democracy must be seen to govern.46 The New Deal introduced a radically new conception of the role of the Federal government. After the revolution, and the Civil War of the 1860s, the United States was about to undergo its third moment of founding.47 Hoover himself had already taken dramatic steps to increase the scope of Federal government support for the economy with the creation of the Reconstruction Finance Corporation, which by the summer of 1932 had been authorized to borrow up to $3 billion. Further dramatic steps were to follow. But this turn to ‘constructive’ policy in the United States was, as elsewhere, associated with a throwing off of international obligations. It was not in the aftermath of World War I but in reaction to the disillusionment of the 1920s and the Great Depression that full-throated isolationism came truly to the fore in American politics.48 The nationalist turn of American policy in the first phase of FDR’s administration completed the process of disintegration set in motion by the shock delivered by Britain in 1931.
Since the 1870s the gold standard had been the flagship of respectable politics in America. The struggle over gold had defined the new breed of progressives in the 1890s, whose legacy both Wilson and Hoover had inherited. But by the spring of 1933 America’s gold reserves were so severely depleted and its banking system was so badly shaken that on 19 April Roosevelt announced America’s departure from the gold standard. The decision created a platform of financial stability for the recovery in the United States.49 But on top of exorbitant tariffs the sudden depreciation of the dollar made it extraordinarily difficult to export to the US.50 In addition, after investor confidence recovered, funds surged back into New York, draining liquidity from the rest of the world.
As the summer approached, America’s inward turn put in jeopardy the World Economic Conference that Britain and France were arranging in London, and it did so precisely at the moment when the situation in Germany was revealing its dangers. Publicly, Hitler’s coalition was espousing a message of peace and national reconstruction. It did not dare to make an immediate, barefaced break with the international order. But it was a badly kept secret that rearmament was as essential to Hitler’s government as roadworks. Meanwhile, Hjalmar Schacht, who had lent his expertise and authority to the anti-Young Plan campaign, returned as Hitler’s President of the Reichsbank. He immediately departed for Washington, where he hoped to arrange a suspension of Germany’s debt service. When he was rebuffed, on 9 June 1933, three days before the delegates of 66 nations were to assemble in London, Schacht declared a unilateral moratorium. As the conference convened, the head of the German delegation, Alfred Hugenberg, further embarrassed himself by making drastic demands for
the return of colonial assets and openly touting the idea of an anti-Communist pact against Stalin. But in the summer of 1933 Germany’s atrocious new government was a sideshow. The business of the World Economic Conference was dominated by the question of whether America, France and Britain could come to an agreement on how to manage the violent fluctuations of the dollar and sterling against the franc, now the lead currency on gold. Throughout June the negotiators moved close to a stabilization agreement. But on 3 July Roosevelt issued his ‘bombshell telegram’, denouncing any effort to stabilize the American currency as irrelevant to the business of achieving recovery. The dollar would float to whatever level suited the US economy, regardless of its impact on the rest of the world. Berlin took the hint. In October, Hitler withdrew the German delegation from the League of Nations disarmament talks and announced a near total default on all its outstanding international obligations.
As Germany and Japan simultaneously embarked on a comprehensive break with the post-war order – in strategy, politics and economics – who would oppose them? The formidable world-dominating coalition of 1919, which still seemed able to hold the ring as recently as 1930, had collapsed. In 1931 France and Britain had reluctantly accepted Hoover’s moratorium. In the summer of 1932 at the Lausanne Conference they had granted Germany a permanent end to reparations. They had done so on the understanding that there would be no further demands for inter-Allied debt repayment. But Congress had never approved Hoover’s moratorium. When he showed signs of wanting to make it permanent, Hoover was immediately reprimanded. In December 1931 American lawmakers decided to remind the world that it was ‘against the policy of Congress that any of the indebtedness of foreign countries to the United States should in any manner be cancelled or reduced’. Given that Hoover’s moratorium had been transparently motivated by the desire not to shield London and Paris, but to save Wall Street’s investment in Germany, and that his intervention discriminated one-sidedly against the reparations creditors, British diplomats were dumbfounded. In the words of the British ambassador to Washington, Sir Ronald Lindsay, the incident had been an ‘exhibition of irresponsibility, buffoonery, and ineptitude that could hardly be paralleled by the Haitian legislature’.51
A generation earlier it had been the irresponsibility of parliaments like the one in Haiti that had warranted interventions by US marines throughout the Caribbean. Now finding themselves at the mercy of what appeared to be an irresponsible legislature in Washington, it was London and Paris that did the unthinkable. By the end of 1933 the governments of both Britain and France, once pillars of the global financial system and eager members of a democratic alliance with the United States, had suspended payment on billions of dollars of debt they owed to the people of the US. Only tiny Finland continued to honour its debts to America in full. As Ramsay MacDonald, the most pro-American of British prime ministers, put it in his diary on 30 May 1934: ‘Payments that would upset [the] financial order (such as it is) would be treason to the whole world. We have to take upon ourselves the thankless task of putting an end to the folly of continuing to pay.’52
Conclusion
Raising the Stakes
World War I had seen the first effort to construct a coalition of liberal powers to manage the vast unwieldy dynamic of the modern world. It was a coalition based on military power, political commitment and money. Layer by layer, piece by piece, issue by issue, that coalition had disintegrated. The price that the collapse of this great democratic alliance would exact defies estimation. The failure of the democratic powers opened a strategic window of opportunity in the early 1930s. We know what nightmarish forces would tear through that window. In Berlin the Jewish pogroms began in the spring of 1933. Party government in Japan ended in the spring of 1932 after an all-out paramilitary-style assault on the headquarters of the Conservative Party, the Seiyukai. After years of posturing Mussolini finally slaked his thirst for blood in 1935 when he launched his assault on Abyssinia. But amongst the aggressive and insurgent members of the ‘chain gang’,1 Germany, Japan and Italy were second or third movers.
The first movers, as they had been since 1917, were the heirs of Lenin. Stabilization in Europe and Asia in the early 1920s had been built on the ground of their failure. In 1926–7, through their sponsorship the Great Northern Expedition, the Soviets delivered the first truly telling blow to the post-war order, making painfully obvious the failure of Japan and the Western Powers to come to terms with Chinese nationalism. When the Chinese Communists themselves were massacred by Chiang Kai-shek, a second process of transformation was initiated within the Soviet Union. Having crushed Trotsky and the domestic opposition, Stalin launched a programme of internal reconstruction without precedent. This process of collectivization and industrialization that uprooted tens of millions of people in a gigantic burst of development reveals something fundamental about the international order which had emerged in the 10 years since World War I. To those who sought to challenge that order, it seemed truly formidable.
Too often and too easily we write ‘interwar history’ as though there was a seamless continuity between the phase on which we have concentrated here, 1916–1931, and what came after in the 1930s. There were continuities of course. But the most important is that of a dialectical reaction and supersession. Not only Stalin, but the Japanese, German and Italian insurgents of the 1930s were impelled in their radical energy by a sense that at their first attempt they had failed. The Western Powers might squabble and prevaricate. Knowing the costs of full-scale war, both political and economic, they shrank from it. But they did not shrink from fear of failure. In a direct confrontation Britain, France and the United States were to be feared. In 1930 at the London Naval Conference, as they traded battleships, cruisers, destroyers and submarines, neither the Russians nor the Germans had a navy to barter with. The positions of Japan and Italy were second and third tier. As Stalin reiterated to factory managers in February 1931, at the height of the first, agonizing Five Year Plan: ‘To slacken the pace would mean to lag behind, and those who lag behind are beaten. We do not want to be beaten . . . We have lagged behind the advanced countries by fifty to a hundred years. We must cover that distance in ten years. Either we’ll do it or we will go under.’2
What Stalin articulated was not merely the common sense of an age of global competition. After World War I his was the characteristic perspective of those who had been made to feel what backwardness meant in the global power game, who had lived through the disappointment of the revolutionary elan, and witnessed the overwhelming force of Western capitalism mobilized against Imperial Germany, the main challenger of the nineteenth century. The men whom Lenin had hailed as the champions of organized modernity, Rathenau, Ludendorff and company, had put up a brave fight, but they had gone down to defeat. What was needed was something even more radical. Over the next generation Stalin’s refrain was to be reiterated by planners and politicians in Japan, Italy and Germany and – as decolonization began – in India, China, and dozens of other post-colonial states.
Once again we are, in some ways, too familiar with the story of the 1930s to appreciate the drama of what was occurring. We speak of an armaments race, as though what Japan, Germany and the Soviet Union were engaged in was akin to the dreadnought naval arms race of an earlier era. In fact, the rearmament drives of 1930s Japan and Nazi Germany were, like the efforts of Stalin’s Soviet Union, comparable to nothing ever seen in the three-hundred-year history of modern militarism. As a share of national income, by 1938 Nazi Germany was spending five times what Imperial Germany had spent during its arms race with Edwardian Britain, and the GDP at Hitler’s command by 1939 was almost 60 per cent greater than that available to the Kaiser. In constant prices the resources lavished on the Wehrmacht in the late 1930s were at least seven times greater than those received by Germany’s military in 1913. This was the compliment collectively paid by all of the insurgents of the 1930s to the force of the status quo. They knew the power arrayed against them
. They knew that during the era of World War I the more conventionally minded efforts of Japan and Germany to escape the limits of their national power had run aground (Table 15). It would take something unprecedented.
There were those of course who hoped that new technologies, notably the aircraft, might provide an avenue of escape from the inexorable logic of materiel. But as Japan, Germany and Italy were all to find to their cost, air war was pre-eminently a field of attritional combat dominated by economics and technology. Up to 1945 there were two global naval powers – Britain and the United States. With his famous announcement in May 1940 of a US airforce of 60,000 planes, Roosevelt made clear that in the age of airpower the United States would claim sole pre-eminence. The cities of Germany and Japan would feel its terrible force, followed by those of Korea, Vietnam, Cambodia and many more.
Table 15. The Rising Cost of Confrontation: Military Spending before World War I Compared to the 1930s1919
But the would-be insurgents had not only economics and military power with which to contend. The challenge was political as well. The lesson of the first decades of the twentieth century was not simply, as is so often asserted, that democracies were weak. Though they no doubt had their weaknesses, they were vastly more resilient than the monarchies or aristocratic regimes that they replaced. The more strategic point was that the advent of mass democracy appeared to make certain kinds of power politics increasingly problematic. The comfortable half-way and quarter-way houses of the late nineteenth century, the Bismarckian constitutions, the limited franchises of Britain, Italy and Japan, had all collapsed in on themselves in the course of World War I. Before they did so, the Reichstag and the Japanese Diet had acted as real checks on the ambitions of German and Japanese imperialists. The default that emerged everywhere as the norm, from Japan to the United States, was a comprehensive or near-comprehensive manhood suffrage and, in the case of new states, national republicanism. These constitutions were often still thin and weakly established. But the popular demands that they reflected were real and made it hard to sustain truly large-scale imperial expansion under anything approximating to liberal conditions.