Chapter Nine

The Great Depression and International Relations

The onset of the great depression

Economic analysis is by no means an exact science, and economists have produced an array of different explanations of the great depression, and why it proved so widespread, deep-seated, and long-lasting. There is, however, common consent that the onset of the depression dated from 1929. In that year, a number of economic indicators in various industrial countries took an ominous turn; notably in Germany, where unemployment rose to 1.9 million in the summer, and the USA, where car production fell sharply between March and September and building slackened off. Moreover, the harvests of 1929 in almost all kinds of agricultural produce were exceptionally good, resulting in a glut on the market which brought a sharp fall in prices, and therefore in the incomes of farming communities. To these signs of economic depression were added the abrupt and far-reaching effects of the collapse of the New York stock market in October 1929 — ‘the Great Crash’, in which share prices began to move downwards on 3 October and fell with dizzying speed on the 24th. This marked an almost total loss of business confidence in the USA, from which recovery was extremely slow. The immediate results were a sharp drop in American spending (because millions lost their savings and their incomes) and investment (for which there were neither the funds nor the confidence). There was a widespread move to get resources out of company shares and other forms of investment, and into ready cash. Mortgages were foreclosed and loans called in — including overseas loans, which had already diminished markedly during 1928. The consequences of the stock market crash were thus immediately felt abroad, and became rapidly more acute as the USA reduced its imports, and later its exports.

The effects of these events were cumulative and interlocking. Agrarian depression began in 1929 with a fall in agricultural prices, which was particularly sharp for cereals, and especially wheat, of which there was substantial overproduction in relation to demand. In the USA and Canada there was some attempt to meet this problem by stockpiling; but in Australia and Argentina there was neither the storage capacity nor the financial resources to attempt such a policy, and growers simply had to sell as best they could, driving prices down still further. The Soviet Union was just embarking on its policy of financing rapid industrialisation by pushing up wheat exports. Caught in the trap of falling world prices, the USSR found that to sustain even a modest value for its exports, their volume had to be greatly increased. In 1931, Soviet exports of wheat were 2.29 million tonnes, at a value of $150 million; in 1932, the amount was more than doubled to 5.22 million tonnes, but the value remained the same.¹ So the Soviet Union too pushed its grain on to the world market, lowering prices still further. The consequences were severe for all wheat-producing countries; and particularly so in eastern Europe.

In the 1920s, most of the new states of eastern Europe had embarked on ‘land reform’ — the expropriation of the estates of large landowners and the distribution of land among small peasant farmers. (This was often a nationalist measure. The peasant farmers were usually of the dominant nationality, the great landowners often aliens — in the Baltic states, for example, Germans.) The consequences in most cases were economically disastrous, notably in terms of the yield and quality of wheat. Rumania (where the estates of Magyar landowners were expropriated) never exported more than 270,000 tonnes of wheat in any single year in the 1920s, though its average exports (from a smaller area) in 1909–13 had been 1.33 million tonnes a year.² In consequence it was difficult even in favourable circumstances for east European countries to compete on world markets with their exports of wheat. The continuous fall in wheat prices from 1929 to 1932 was catastrophic for those farmers who produced for export; even when they could find a market, their income was slight. They were forced to join those who already practised subsistence farming, or merely local sale or exchange. Large numbers of the agricultural population were reduced to subsistence, barter, and poverty. The consequence was that the rural economy, which was predominant over most of eastern Europe, ceased to provide customers for other goods and services, so that industry, shopkeepers, the professions, and all providers of services suffered severely. Government revenue from taxation declined, forcing reductions in expenditure and even cuts in the civil service, that backbone of the state and fount of patronage for politicians. Moreover, without the foreign currency produced by agricultural exports, the states of eastern Europe could not service the debts they had contracted during the growth years of the 1920s.

Other crucial elements in the depression were the collapse of international trade, and the crisis in credit and banking. The collapse of trade was dramatic. The total imports of seventy-five countries, valued in US dollars, fell as shown in Table 9.1.³ Since everyone's import was another man's export, the contraction in the volume of trade was severe. The consequence in industrialised countries, where the recourse to subsistence agriculture available in eastern Europe was not open, was large-scale unemployment, amounting in 1932, in approximate figures, to 3 million in Britain, 6 million in Germany, and 13 million in the USA. Industrial recession brought a sharp fall in demand for raw materials for industry: the same was true for a wide range of primary products — timber, for example, suffered from the decline in building.

As prices of all commodities (foodstuffs, raw materials, and industrial goods) fell, business profits declined or vanished, share prices collapsed, and demand for services dwindled. Pressure grew on the banking system and all arrangements for credit. Banks and other creditors found it impossible to secure repayment of loans, or even sometimes the payment of interest. Some banks had lent very heavily; and some had themselves borrowed in order to conduct their business, and were being pressed for payment. There were occasional bank failures towards the end of 1930; and the crisis came in May 1931 with the failure of the Credit-Anstalt Bank in Austria, when for the first time an important and well-established bank could not meet its obligations because its own debtors could not meet theirs. After this, confidence was shaken, and there were runs on banks all over central and eastern Europe. Pressure was particularly severe in Germany, where memories of the great inflation of 1923 were vivid — the terms of the problem were different in 1931, but what mattered was that people had seen their savings and assets wiped out once, and had no wish to see it happen again. There were heavy withdrawals of gold from the Reichsbank in June, and in July the Darmstaedter National Bank had to close its doors. Several countries tried to check runs on banks by declaring ‘bank holidays’, and to prevent the movement of capital abroad by freezing deposits, imposing exchange controls, and delaying payments to foreign creditors. Such suspensions of payments were usually followed by the negotiation of agreements to resume them only out of a favourable balance of trade, i.e. by reducing imports from and increasing exports to the country concerned. Since every country was trying to do this at the same time, the result was to reduce international trade still further, and to channel much of what there was through a system of bilateral clearing arrangements, negotiated between states determined to control their external payments.

In many ways, the collapse of credit had the greatest impact of all the elements in the depression, because everything in the economic system -farming, industry, commerce, government activity — depended on credit. It also had profound effects on international currency exchanges. In 1931 and 1932, under the pressure of runs on the banks and the demand for gold, one government after another took its currency off the gold standard. The former monetary unity of most of the world, based on the gold standard, broke down.

The world rapidly divided into three main currency groups. First there were the countries which took their currency off the gold standard, devaluing considerably to try to assist their exports, and to reduce the pressure on the banking system and their gold reserves. Britain took this course (though out of necessity rather than choice) in 1931, and was soon followed by the Dominions (except Canada), Japan, several South American states, and a number of countries in central Europe. The USA left the gold standard and devalued in 1933, accompanied by Canada. Second, there was the Gold Bloc — countries which held their currencies on the gold standard, and maintained free exchange of currency. This group began to take shape in 1931, and came formally into existence in 1933. It was made up of France, Belgium, the Netherlands, Switzerland, and Luxemburg, with Italy as a partial member. (The Italian government kept to the gold standard, but did not operate free exchange of currency.) The Bloc began to split up with Belgian devaluation in 1935, and came to an abrupt end when the French, Swiss, Dutch, and Italians all devalued their currencies in rapid succession in September and October 1936.

Third, there were the countries which practised various forms of exchange control and blocked-currency regulations. These included the USSR (which had always operated such measures), Germany, and eventually some twenty other countries. The German arrangements were both remarkably complicated (there were at least thirteen different varieties of ‘blocked marks’ in 1936) and particularly important, because of Germany's economic and commercial significance; and they will be examined later in this chapter. But in practically all cases the principles of the clearing arrangements and blocked-currency accounts were the same. A firm in country A exporting its products to country B was obliged to spend its earnings in that country, whether there was anything it wanted to buy or not; if it made no such purchase, then its earnings remained, in country B's currency, in a blocked account. In these circumstances it mattered little whether a currency remained formally attached to gold (as some did) or not; its exchange was not free, and its export was forbidden except with government permission.

Naturally, these practices invited retaliation from firms which were losing their export earnings, and countries which were losing foreign exchange. Retaliation took different forms, notably blocking foreign earnings in one's own country, and the imposition of quotas on foreign trade. Such measures were widespread. Countries in the Gold Bloc took their own protective action against cheap imports from states which had devalued -for example, France imposed quotas on goods from Britain, which after the devaluation of sterling were cheap in terms of French francs. The whole complicated and fragmented set of devices caused constant friction, and imposed a series of restrictions on international trade.

The last chance (at best a slim one) of finding a way out of these difficulties by means of a general agreement on exchange rates and terms of trade was the World Economic Conference which met in London in June-July 1933. Such hopes as there were for the success of this conference were ended by President Roosevelt's determination to float the dollar, and his rejection of even a temporary stabilisation of the dollar against sterling for the duration of the conference. If such a temporary arrangement could not be reached, it was plain that a permanent agreement on exchange rates was out of the question. The conference broke up, and the USA devalued shortly afterwards. Nothing was left but an economic free-for-all, dominated by the search for self-sufficiency, sometimes within a single country, sometimes within an area or group of countries.

Reactions in Britain: devaluation, tariffs and imperial preference

Britain, as a major industrial and commercial country, was rapidly affected by the collapse in world trade; and in 1931 the country faced both a financial and a political crisis. Ramsay MacDonald's Labour government, without an overall majority in the House of Commons, clung to the economic and fiscal orthodoxies of free trade and a balanced budget, and found itself squeezed between falling revenue from taxation and rising expenditure, not least in unemployment payments. Sterling was on the gold standard, and British gold reserves came under heavy pressure as the European banks began to collapse from May 1931. Turning to American bankers for a loan, the government found itself unable to accept the terms they insisted on, involving an assurance of a balanced budget through reduction of government expenditure, including unemployment benefit. The Labour government fell in August, and was replaced by a coalition, or National government, dominated by the Conservatives, though including some Liberal and Labour members, and retaining MacDonald as Prime Minister. The Labour Party split, with the great majority rejecting the coalition and going into opposition. The National government, under various Prime Ministers (MacDonald, Baldwin, and Neville Chamberlain) remained in existence for the rest of the decade, becoming steadily less National and more Conservative with the passing years.

The new government began with the declared intention of defending the exchange rate of sterling and staying on the gold standard. Within a month of taking office it was compelled to devalue by continuing pressure on the gold reserves, culminating when news of the refusal of duty by a number of crews in the fleet at Invergordon (after a reduction in pay clumsily introduced among the economy measures) shook the remaining foreign confidence in sterling. If the Royal Navy was not safe, what was? Britain went off the gold standard on 21 September 1931. Within a few days the pound fell against the dollar by 25 per cent, and by the end of the month by 30 per cent (from $4.86 to $3.25). Since sterling was at the time still the most important international currency, this was a severe blow to international financial dealings, and of course to all those who were holding their assets in sterling. It was a long step towards economic nationalism and international confusion; but from a purely British point of view it allowed sterling to reach a realistic level on the foreign exchanges. Early in 1932 the pound began to rise again, and by the end of March reached $3.80. At that point the government began to use the device of an Exchange Equalisation Account to hold the pound roughly at that level; but made no attempt to return to gold. The effects were somewhat favourable to British exports, notably to countries which stayed on the gold standard. At the same time, in February 1932, the bank rate was reduced from 6 per cent to 2 per cent, encouraging domestic borrowing, which had a stimulating effect, especially on house-building; and the resulting semi-detached houses, in their avenues and crescents, are still to be seen up and down the land.

The other element in government policy, deliberately adopted in this case, was one of protective tariffs and imperial preference. In February 1932 the British government introduced a duty of 10 per cent on all imports except most raw materials and food, and a number of items imported from the Empire. In April the duty on manufactured goods was increased to 20 per cent, and in some cases more; and the trend in the following years was upwards. At the Ottawa Conference in July-August 1932 Britain agreed to give preference to foodstuffs imported from the Dominions, in return for preference for British manufactured goods in Dominion markets. The preferences were usually secured by raising the rates on foreign goods rather than by lowering them on Dominion goods; and they extended to some foodstuffs, notably wheat, butter, eggs, and cheese. Britain also imposed import quotas on foreign meat and bacon. The results were slender in terms of the volume of British trade but considerable in terms of its direction. Britain moved towards greater self-sufficiency within the Empire and Commonwealth, at the expense of trade outside it.

In economic terms, some substantial recovery followed these measures. The effects of devaluation on exports were real though short-lived, being overtaken by retaliatory measures by the countries of the Gold Bloc, and by devaluations by the Americans and others. Protection of the home market and low interest rates assisted domestic recovery; and by the end of 1934 Britain became the first major industrial country to surpass 1929 figures for industrial production. The recovery was patchy, with the old industries (textiles, coal, and shipbuilding) remaining stagnant, and other areas (cars, chemicals, light engineering, consumer durables, and housebuilding) making progress. Unemployment, which reached a high point of approximately 3 million at the end of 1932, declined to 1.7 million by the beginning of 1937; this was still just over 11 per cent of the insured population.⁴

Despite these substantial unemployment figures and the other strains of the depression, the normal processes of British political life continued to work. There was some movement towards political extremes. Small fascist groups sprang up, of which the most prominent was Sir Oswald Mosley's British Union of Fascists; but there was never the slightest chance of them winning a seat in Parliament, still less of posing a serious threat to the government of the country. The Communist Party won a seat in the House of Commons in the general election of 1935; and the widespread admiration for the Soviet Union which found expression in fellow-travelling was stimulated by the depression. The apparent breakdown of capitalism and the dreary waste of unemployment made the great light in the east shine ever more brightly. But the movement for a Popular Front made little progress, and the Labour Party resolutely rejected affiliation by the Communist Party. The general election of 1935 returned a solid Conservative majority, despite a substantial Labour recovery. But this basic political steadiness went along with some profound and bitter divisions. The Labour Party and trade unions found the government's economic policies wholly inadequate; and resentment against its administration of unemployment relief was deep and long-lasting. (The term ‘means test’ retained its bitter flavour long after the 1930s were past.) There was little chance of a bipartisan approach on any aspect of policy, whether economic or foreign; and there were those on the Left who thought that Baldwin and Chamberlain were enemies as dangerous as Hitler — and much nearer.

Government policies to cope with the depression had direct consequences on foreign policy. A Foreign Office memorandum put to the Cabinet in December 1931 warned that a high protective tariff along with imperial preference would separate Britain from European affairs and diminish British influence on the Continent. Such effects, however, were not unwelcome: isolation from Europe was by no means an unpopular prospect, and in any case considerations of foreign policy were firmly subordinated to those of economics. The consequences for foreign policy followed their predicted course. In 1933 and 1934 the Foreign Office urged the importance of Britain providing a market for bacon, eggs, butter, and timber from the Baltic states and Poland, which might otherwise come into the economic orbit of either Berlin or Moscow. Similarly, it was argued that Britain should buy cereals and other farm produce from Hungary and Yugoslavia, to prevent them from becoming over-dependent on the German market. In both cases the government refused, partly because it was tied by the Ottawa agreements, and partly because it disliked allowing political considerations to interfere with economic policy. In 1934, Vansittart, the permanent head of the Foreign Office, advocated competing with German influence in Austria by allowing tariff preferences for various Austrian exports, but his proposals were rejected by the Board of Trade and the Treasury. This attitude persisted for some years, and helped to open the way for German economic influence in central and eastern Europe.

Delayed impact in France

The position of France differed considerably from that of Britain. France was much less dependent on foreign trade, and was therefore largely sheltered from the immediate effects of the depression, and able to operate from a position of strength, taking the lead in the Gold Bloc. As it developed, French economic policy had three main strands. First, France kept its currency on the gold standard, giving it a very high exchange rate when Britain and the USA devalued in 1931 and 1933 respectively. This was almost a psychological necessity, because adherence to the gold standard had become ‘an article of faith in French political life’, but it created serious difficulties for French exports, which had to contend with a severe price disadvantage in many markets, as well as the tariffs with which most countries protected their own producers.⁵ Failure of exports led to problems in paying for imports; though this was not so grave for France as for some other countries because of the balance of the French economy — the country remained, for example, largely self-sufficient in food. The problem of imports was met by the second element in French policy: the imposition of quotas on imports, and a system of imperial preference more far-reaching and effective than the British equivalent. In July and August 1931 import quotas were introduced arbitrarily on nearly all agricultural products, followed later by quotas on industrial products which were usually negotiated with the countries concerned. French colonies were exempt from these quotas, and also had considerable tariff advantages over foreign countries. The third aspect of economic policy was deflation at home — the attempts to meet the problem of the price of French exports by reducing domestic costs. In fact, the wholesale price index fell by about a quarter between 1931 and 1935 (from 462 to 347: 1914 = 100); though this was more the result of low commodity prices throughout the world than of direct government policy. At the same time wages were reduced by about 12 per cent; and government expenditure was also cut.⁶

The worst effects of the depression struck France later than other countries. Agricultural production kept up, but income fell, with serious results for the domestic market. Industrial output showed two low points, in 1932 and 1935, with only a modest upturn in between. Foreign trade suffered drastically, with both exports and imports down by more than half in 1935 from the levels of 1930.⁷ The number of registered unemployed never reached substantial figures compared with Britain or Germany — the maximum was about 500,000 in February 1935. The official figures were misleadingly low, partly because large numbers of foreign workers were dispensed with, and partly because many townspeople who were out of work did not register, but simply went to live with relatives in the countryside. Conscription for the army also kept the figures lower than those in Britain. But even when all allowances were made, unemployment did not appear to be at crisis level.

The internal political effects of the depression, however, were more severe in France than in Britain. Under the Third Republic, governments had never been stable or long-lived — before 1914, their average life had been about a year. In the 1930s, this span shortened drastically, and a period of chronic ministerial instability set in, as a direct result of France's economic problems. Government revenue fell with the decline in foreign trade and domestic prices; yet governments were committed to balancing their budgets. They were therefore compelled to reduce expenditure, which meant holding down the service estimates, and also attacking civil service pay, pensions, and payments to ex-servicemen. In practice, measured against the movement of prices, these reductions did not damage spending power; but in psychological terms this made no difference. Payments made, for example, to the severely disabled from the First World War were reduced in cash terms; and the outcry may easily be imagined. The result was that successive Ministers of Finance proposed reductions in government expenditure, only to have them rejected in the National Assembly; and governments were repeatedly brought down on their financial measures. There were three changes of government in 1932, four in 1933, two in 1934, and two in 1935 — a total of eleven in four years. It appeared that the political system of the Third Republic, which had passed the stern test of war with flying colours, was breaking down under the less dramatic but more divisive strains of economic difficulty.

The combination of economic stagnation and political paralysis produced in France a marked movement towards political extremes. The fascist and conservative Right flourished in the middle 1930s. Their numbers were uncertain, but they thrust themselves into the public eye and showed their strength on the streets in the riots of 6 February 1934. On the Left, the Communist Party revived in 1935 and 1936, partly through the effects of the depression, and partly through the attraction of Popular Front slogans. On both Right and Left, opposition grew against the existing regime, which seemed unable to grapple with the country's problems.

The worst point in France's difficulties — the lowest level of foreign trade, the highest in unemployment, the resort to economic government by decree — came in 1935, at the time when the British economy was beginning to recover, and in Germany the Nazis were well established and producing a striking improvement in the German economy. At that stage, France made her own bid for change and improvement — the Popular Front. The Popular Front's programme was more social than economic in content — the forty-hour week without reductions in wages and holidays with pay were two important items. The government intended to end deflation, keep up expenditure on pensions and payments to ex-servicemen, and increase revenue by tackling tax evasion; they also hoped that extra purchasing power from higher wages would stimulate demand. They were pledged not to devalue the franc. In economic terms this programme failed entirely. Industrial production remained stagnant. Wages rose in money terms, but fell in purchasing power: in the two years from April 1936 to April 1938, the retail price index rose by 46 per cent.⁸ The wave of left-wing euphoria that accompanied the Popular Front victory — strikes, occupation of factories, demonstrations — alarmed investors and produced a flight of capital abroad, which in turn put pressure on the franc. This compelled the government to devalue on 26 September 1936. The devaluation was accompanied by a joint statement by the French, British, and United States governments, expressing their desire to minimise the disturbance to exchange rates caused by the French action — in less veiled language, Britain and the USA agreed not to retaliate by devaluations of their own currencies. The effects of the French devaluation were short-lived, because rising production costs soon cancelled them out. In general, the stagnation of the French economy continued, and no recovery was visible until the end of 1938. At the same time, the extreme fear of the Left aroused by the Popular Front victory embittered still further the political divisions within France.

These economic conditions and policies had various consequences for foreign policy. As with Britain, there was a conflict between economic and foreign policy in central and eastern Europe. France had a network of alliances with Poland, Czechoslovakia, Yugoslavia, and Rumania; and it was in her interests to strengthen these alliances by economic links. From 1934 onwards, the French Foreign Office was aware of the growth of German economic influence, and urged commercial concessions to combat it. But the preference given to imports from the French colonies (especially cereals) allowed little room for manoeuvre; and in any case the tendency of French commercial policy was to reduce imports. In December 1936 France agreed to make a purchase of wheat from Yugoslavia at a lower tariff rate than usual; but the Ministry of Agriculture insisted that this must not become a precedent. Another important influence of economics on foreign policy lay in the dependence on Britain and the USA, which was marked, in however veiled a manner, by the three-power statement on French devaluation. The independence of the early 1930s, when France was leader of the Gold Bloc and in a stronger economic position than Britain, was over. Devaluation would offer no advantages if the British and Americans retaliated by lowering their own exchange rates; and two further devaluations in 1937 and 1938 emphasised the degree of French dependence on Anglo-American co-operation.

Italy: fascism faces the depression

In Italy, the fascist state was put to the test by the depression. Parts of Italian agriculture remained very close to subsistence farming and so felt little effect; but the modern industry of the north and the banking system were seriously damaged — the more so since the Italian economy was already in difficulties in the late 1920s. There was a severe fall in foreign trade. Imports were valued at 21,303 million lire in 1929, and only 7,432 million in 1933; and exports fell in the same period from 14,767 million lire to 5,991 million. Industrial production also declined by one-third between 1929 and 1932.⁹ At the same time, earnings from Italian shipping and remittances home from Italian emigrants (notably in the USA) diminished, as did income from tourism; all of which contributed to a serious balance of payments problem. Unemployment was high, with 1,132,000 registered unemployed in December 1933. This figure was almost certainly too low, and in the winter of 1933–34 1.75 million families were registered for the free state distributions of flour, rice, and milk. The state took action to reduce the figures in 1934, when the working week was reduced from forty-eight hours to forty, with an accompanying drop in earnings.¹⁰ Under these pressures, a number of firms went into bankruptcy and banks failed. Government revenue fell, and expenditure rose; and budget deficits were serious between 1931 and 1934. The fascist economy was in as much difficulty as others; and the Italian people were subjected to unemployment, a lowering of wages, and rising prices.

In face of these difficulties, Mussolini rejected for a long time the devaluation of the lira. In 1926–27 he had declared ‘the battle of the lira’, fixed its value at 92.46 to the pound sterling, and held to the gold standard. His own prestige and that of the regime were committed to maintaining this very high rate of exchange, which as other currencies were devalued put up the price of exports and made life difficult for foreign visitors. This policy was accompanied from 1934 onwards by high customs duties, which severely restricted imports other than of vital raw materials (which were subsidised) and some foodstuffs.

Fascism tackles the Depression: Mussolini driving a tractor during the ‘Battle for Grain'.

Source: Ullstein Bild/AKG Images

For some commodities, a system of import licences was introduced. In 1934 also strict exchange controls were imposed. These measures were presented as an attempt at self-sufficiency, for which the Italian economy was almost wholly unsuited. Mussolini made great play with ‘the battle for grain’ (he liked to present economic questions in military terms); and indeed Italy became self-sufficient in wheat, though at the expense of other crops, and only by using imported fertilisers. Other measures included a search for oil in the valley of the River Po, and for bauxite in the south. Eventually, when the Gold Bloc disintegrated and its other members devalued, Italy followed suit with a drastic 41 per cent devaluation on 5 October 1936, which had a stimulating effect on exports and thus eased the purchase of imports.

In 1935 the Italian economic position was further complicated by the attack on Ethiopia, and the League of Nations sanctions that followed. The war was not primarily waged for economic reasons (despite talk of Ethiopia's potential resources of raw materials); but it had a number of economic consequences. The war provided a stimulus for industry, and production increased; and mobilisation for the army brought down the unemployment figures. On the other hand, the budget deficit was pushed up sharply in 1936, having been almost eliminated in 1935. League sanctions, often dismissed as totally ineffectual because they were half-hearted and failed to halt the Italian conquest of Ethiopia, had serious adverse effects on the Italian economy. The cost of imports went up, because they often had to be obtained from unusual suppliers or through states which did not apply sanctions; many foreign banks ceased to extend credit to the Italian government or firms; and governments blocked Italian accounts in their countries. One result was to give an added impulse to the idea of self-sufficiency; another was to push Italy into greater dependence on imports from Germany, which did not apply sanctions.

In 1934 Italy and Germany concluded an agreement by which all payments for trade between the two countries were to go through a single clearing account, in which export and import payments were to be kept in balance. The exchange rate between the two currencies was fixed at a rate favourable to Germany; and also 7.5 per cent of German exports to Italy were to be paid for in currency freely usable in international exchange -sterling, dollars, or Swiss francs. These terms were favourable to Germany; and in a further economic agreement of December 1937 Italy undertook to import industrial goods from Germany, and to pay for them in part by sending 30,000 agricultural workers to Germany in 1938, an arrangement which emphasised Italy's subordinate role as a mere provider of labour. Italy became particularly dependent on imports of coal from Germany. In 1932 over half Italian coal imports came from Britain; in 1936 the figure was reduced to 1 per cent, and the bulk of supplies (over 7 million tonnes) came from Germany. In 1938 the Germans agreed to increase this to 9 million tonnes. In that year, Italy drew 42.4 per cent of its European imports from Germany (including Austria), against only 3.6 per cent from France and 10.2 per cent from Britain. This was a marked change from the position ten years earlier, when the British and French shares together considerably exceeded the German and Austrian.¹¹ This was no small element in the making of the Rome-Berlin Axis, and in the subordination of Italian policy to Germany.

Germany: the advent of Hitler

Germany suffered particularly badly under the effects of the depression. The economic prosperity of the late 1920s was supported by short-term American loans, and the recall of this capital after the crash of 1929 had disastrous results. There was a rapid and continuous fall in industrial production from 1929 to 1932. A banking crisis of 1931 saw one big bank fail completely, and the government had to declare a number of ‘bank holidays’. Unemployment, which averaged about 11 per cent even in the years of prosperity, rose from 2.4 million in March 1930 to a peak of 6 million (30 per cent) in May 1932.¹² The severity of these effects was made worse by the policy of strict deflation applied by the government headed by Chancellor Heinrich Brüning, who refused any devaluation of the mark, insisted on balanced budgets, and tried to reduce prices.

Brüning fell from office in May 1932, to be succeeded in rapid succession by Papen and Schleicher, and in January 1933 by Hitler. In a simple yet accurate sense it is permissible to see the advent to power of Hitler as the most far-reaching political consequence of the depression. There was a close psychological link between the great inflation and the great depression: the large numbers of Germans with savings, insurance policies, or fixed incomes, who had seen all such assets wiped out once, cast round desperately for someone who could save them from a repetition of such events. They needed someone to offer them confidence; and Hitler at that stage was a most tremendous generator of confidence. Moreover, a number of German industrialists and bankers, who until 1929 showed no interest in the Nazi Party, began to offer it financial support during the years 1929–32, though usually hedging their bets by contributing also to the funds of other parties. The Nazi Party, which enjoyed only modest success in the late 1920s, flourished in the depression, at the same time as the trade unions, which might have been its most serious opponents, were weakened and demoralised by mass unemployment. Without the particular circumstances of the depression in Germany, it is at least likely that Hitler would have remained a fringe figure in German politics.

In the few months before Hitler came to power, the Papen and Schleicher governments reversed Brüning's policies, and began to encourage credit, increase government spending, and undertake public works. These were policies advocated by a number of critics of Brüning's government, including the trade unions as well as the Nazis. In the first instance, Hitler did nothing to change these policies. He did not put Nazis in charge of economic affairs. The Economics Minister was Hugenberg, the leader of the Nationalist Party, with an economic expert from the same party as the State Secretary; and Hjalmar Schacht, with his reputation as ‘the man who saved the mark’ after the collapse of 1923, was recalled as President of the Reichsbank in March 1933 as a guarantee, by his very name, that the government would maintain the value of the currency.

Hitler's own economic ideas, as developed in the 1920s, were fairly simple. It was the business of government to ensure for its people the best conditions for their life and development; and one vital condition was a secure food supply. To import large quantities of food meant putting the state and its people at the mercy of the world economy, the terms of trade, and the sale of exports. Hitler rejected this as a long-term policy, arguing that Germany must produce her own food on her own soil; since that was inadequate for a growing population, the solution was to conquer new territory in eastern Europe and above all in the USSR. The events of the depression bore out at least part of these ideas, demonstrating the unreliability of the world economy and the difficulty of paying for imports with exports. In a speech to the Industrial Club of Düsseldorf in January 1932, carefully designed to appeal to the audience of industrialists and businessmen gathered to hear him, Hitler argued that exporting countries, faced with declining markets, could only compete with one another by cutting prices; but in the long run they must protect themselves by aiming at self-sufficiency, which would itself be precarious if their area was insufficient. Germany, therefore, before organising a vast internal market, must gain more territory.

The idea of self-sufficiency was far from being peculiar to Hitler. It was practised within the British and French empires; and to a considerable degree it was also the policy of President Roosevelt, seeking to base recovery on the vast internal market of the USA. In Germany in the late nineteenth and early twentieth centuries extremely rapid industrialisation put the country in the position of being dependent on foreign trade, with a fear in many hearts that Germany could be strangled through this dependence, unable to feed its population or to keep its factories turning. The Allied blockade in 1914–18 brought such fears to life; and Germany was forced to rely on her own sphere of control in eastern and central Europe. By 1932–33, even those industrialists and entrepreneurs who were most committed to international trade and the world market were compelled to acknowledge that markets were being closed everywhere, and to turn to a German sphere which seemed marked out for her by history and geography. The idea of world trade was everywhere giving way to that of self-sufficiency and closed economic systems.

Hitler had one key economic idea, which he shared with almost everyone in the country: there must be no open inflation which would awaken fears of another disaster like the hyper-inflation of 1923. If some degree of inflation could not be prevented, it must be disguised from public view. Hitler was sure he could achieve these aims, because fundamentally he believed that economics would bend to his will. As Goering put it in 1936: ‘We do not recognise the sanctity of some of these so-called economic laws. It must be pointed out that trade and industry are servants of the people, while capital also has a role to play as the servant of the economy.’ There is a story that once, in an argument with Schacht, Goering banged the table and shouted: ‘if the Führer wishes it, then two times two is five’.¹³ In the long run, such doctrine proved difficult to sustain; but in the short run it produced some surprising results.

At the end of 1932 and in the first part of 1933 the German economy began to pick up; industrial production rose, and the total of unemployed fell. By the autumn of 1933, this very recovery was creating difficulties for German foreign trade and the balance of payments. As the domestic economy improved, imports rose; but exports did not keep pace, because of the increase in domestic demand, the high exchange value of the mark, and the imposition of trade barriers by other countries. It became increasingly difficult to pay for imports and service the country’s foreign debts. In October 1933 the new State Secretary at the Economics Ministry, Hans Posse, put forward proposals for a changed trade policy, of importing mainly from countries which were prepared to purchase equivalent amounts of German exports. If the USA and the British and French empires obstructed German exports, the answer was to concentrate on markets close at hand where German economic influence could be predominant; which meant primarily the countries of south-east, central, and northern Europe. These proposals were adopted by the German Cabinet on 4 October 1933; and there followed trade treaties and clearing agreements with Hungary (February 1934) and Yugoslavia (May 1934). These followed a common pattern. Germany undertook to import agricultural produce, and the other countries lowered their tariffs on German industrial goods, which they paid for from the proceeds of their exports. The terms were favourable to Germany, because in the circumstances of the time the Hungarians and Yugoslavs were happy to be assured of any market for their farm produce. Germany also hoped for political advantage, by weaning Hungary away from Italian influence and Yugoslavia away from France. A similar agreement was signed with Rumania in March 1935. There followed a marked increase in German trade with all three countries, and the junior partners became more dependent on it; though this was less true for Rumania than for the others.

The consequences for Germany’s total foreign trade, however, were limited. During 1934 the balance of trade deteriorated sharply, showing an excess of imports over exports of 284 million marks against an export surplus of 667 million in 1933.¹⁴ Schacht became Economics Minister in July 1934 (retaining his position as President of the Reichsbank); and in September he introduced his ‘New Plan’ for German foreign trade, based on the principles of buying nothing that could not be paid for by foreign exchange earned by German exports, and of making imports conform to national needs as decided by the government. All imports were subject to licences, which were used to differentiate between essential and nonessential items, with raw materials and food classified as essential. When-ever possible, imports were to be bought only from the countries which were willing to accept German goods in return; and any foreign exchange involved was to be paid into a clearing account, and not used freely by the exporting country.

This policy was not wholly welcome to German industrialists, who mostly believed that in the long run their future lay in trade with other industrial economies, and who wished to work out ways of re-entering the markets of the British Empire and the USA. Schacht himself regarded the New Plan as a temporary expedient, to be abandoned when world economic conditions improved. He was willing to seek raw materials and food in south-east Europe; but recognised that this policy could not create a self-sufficient system. As regards food, the Danubian states could provide cereals, meat, and dairy products which would go far to meet German needs. Of raw materials, Germany produced only coal and potash in sufficient quantities within her own borders. South-east Europe could provide oil (Rumania), bauxite (Yugoslavia and Hungary), nickel (Greece), chromium (Yugoslavia, Greece, and Turkey), and antimony (Czechoslovakia), in which Germany was entirely lacking; and make up a sufficient balance of timber, pyrites, and graphite. But this was far from enough to meet all Germany’s needs — it was calculated that German industry needed in all thirty-five raw materials, of which thirty-three had to be imported.¹⁵

In these circumstances, the New Plan and links with south-east Europe could offer only partial advantages; but these were still worthwhile. In 1934 and 1935 German rearmament began to get under way. The import controls of the New Plan were used to give priority to items needed for armaments; and for some commodities the Danubian states formed a good source of supply. German imports of bauxite (the raw material for aluminium) rose from almost nil in 1933 to 981,000 tonnes in 1936, largely to feed the new aircraft production programmes; and rather over half these imports came from Hungary and Yugoslavia.¹⁶ In the long term, too, south-eastern Europe offered sources of supply which were close to Germany and immune from naval blockade in time of war.

In the short term, the New Plan was successful in shifting the balance of trade in favour of exports. From an import surplus of 284 million marks in 1934, Germany developed an export surplus of 111 million in 1935 and 550 million in 1936.¹⁷ This success was only temporary. Germany’s need for imports was increasing rapidly. Domestic recovery pushed up demand, and armaments production required increasing quantities of raw materials. Germany began to be faced with the question of whether the rearmament drive could be continued at its existing (or indeed increased) momentum, or whether it would be better to pause, consolidate, and find some long-term solution to the problem of paying for imports and finding foreign exchange. At that point Hitler himself intervened seriously in economic questions for the first time. A new Four-Year Plan was launched, under the direction of Goering; there was a struggle for the control of the German economy between Goering and Schacht, with various groups in support of each; and the economy was set on a course which was more dominated by questions of armaments than hitherto. It was also a course which led to steadily deepening difficulties, which will be examined in the next chapter.

Eastern Europe

The countries of eastern Europe suffered severely from the economic depression. Nearly all were heavily dependent on agriculture, and therefore suffered from the fall in agricultural prices, which ruined many farmers and smallholders. Moreover, the foreign investments which had been so important to east European countries in the 1920s dried up, and were sometimes withdrawn, with the onset of the depression. (Czechoslovakia, with its strong industrial base and less dependence on foreign investment, was an exception in both these respects, and suffered less severely.) In these circumstances, governments reacted in similar fashion across the region, imposing higher tariffs and strict quotas on imports, controlling currency exchange values, and establishing bilateral trade agreements to secure markets for exports. As we have seen (above, pp. 161–2), the principal partner in such bilateral agreements was Germany, which secured in the mid-1930s an increased share of trade with Hungary, Yugoslavia, Rumania and Bulgaria. The Hungarians tried to escape from German predominance and to keep open other outlets for their exports by concluding a triple trade treaty with Italy and Austria in March 1934; but they found that this did not secure enough markets, and so in 1935 they had to turn to Germany after all.¹⁸

The social and political effects of the depression were felt throughout eastern Europe. Rural populations suffered severely; so did civil servants who lost their jobs when governments reduced their spending; and so did graduates who could not find jobs when they left university. Everyone blamed the government, as the natural scapegoat; many also blamed minority populations, especially the Jews. Nationalism, already strong in the 1920s, developed a sharper edge, and the disunity which constantly afflicted the region grew worse.

Recovery from the depression was uneven and slow, beginning in some countries in 1933, while the countries of the Gold Bloc were beginning their decline. In 1934 and 1935, industrial production, exports, and prices in several European countries were moving upwards, and by the end of 1936 and early 1937 raw material prices were demonstrating the extent of the recovery in demand — the price of tin rose by 50 per cent in six months, while copper, lead, and zinc doubled in price.¹⁹ What had been a world surplus of raw materials was replaced quite suddenly by an excess of demand over supply; and with several European countries in the process of rearmament, questions arose about access to raw materials, especially on the part of Germany and Italy in Europe, and Japan in the Far East. In the new circumstances created by economic nationalism and self-sufficiency, the revival of world trade lagged behind that of industrial activity; the League of Nations index of industrial activity (1929 = 100) stood at 111.3 in 1936, but that for world trade only at 85.9.²⁰ Recovery took place in semi-insulated compartments, which were in some ways restrictive; but their advantages were shown in 1937, when the USA suffered a further very serious depression (with unemployment back to 13 million). This American relapse had serious effects in the primary producing countries, but much less so in Europe, which had to a considerable extent protected herself.

The great depression itself did not lead directly to war, which came about after economic recovery was well under way. The influence of the depression on the origins of the war was indirect, and to a large degree intangible, though no less real for that. It destroyed the positive and encouraging economic and political developments of the years between 1924 and 1930. Franco-German co-operation and ‘the spirit of Locarno’ fizzled out. No more was heard of economic collaboration, and the World Economic Conference of 1933 broke up in disorder and recrimination. Self-preservation through some form of economic nationalism became the order of the day, and a climate of opinion was created in which conflict was both more likely and more acceptable by 1934 or 1935 than it had been in 1929 or 1930. Above all, the depression generated fear: fear that the mechanism of international trade would not deliver the necessary raw materials or foodstuffs, fear about jobs and livelihoods, fear of other states’ policies — sometimes fear of one’s own government’s policies. If wars begin in the minds of men, it is fair to say that men’s minds were shaken and disturbed by the effects of the depression.

References

1. Charles P. Kindleberger, The World in Depression, 1929–1939 (London 1973), pp. 93–94.

2. David E. Kaiser, Economic Diplomacy and the Origins of the Second World War (Princeton 1980), pp. 17–18.

3. Kindleberger, World in Depression, p. 171.

4. G. C. Peden, British Rearmament and the Treasury, 1932–1939 (Edinburgh 1979); B. R. Mitchell, Statistical Appendix to Carlo M. Cipolla (ed.), Fontana Economic History of Europe, vol. 6, part 2 (London 1976), p. 667.

5. Patricia Clavin, The Great Depression in Europe, 1929–1939 (Basingstoke 2000), p. 97.

6. Kindleberger, World in Depression, pp. 248–249; Derek H. Aldcroft, The European Economy, 1914–1970 (London 1978), p. 102.

7. Kindleberger, World in Depression, pp. 248–249; Henri Dubief, Le déclin de la IIIe République (Paris 1976), pp. 20–3.

8. Alfred Sauvy, ‘L’évolution économique’;, in René Rémond and Janine Bourdin (eds), Edouard Daladier, chef de gouvernement, avril 1938-septembre 1939 (Paris 1977) p. 87.

9. John F. Coverdale, Italian Intervention in the Spanish Civil War (Princeton 1975), p. 23; Shepard B. Clough, The Economic History of Modern Italy (New York 1964), pp. 246–7.

10. P. Milza and S. Berstein, Le Fascisme italien, 1919–1945 (Paris 1980), pp. 240–241; Coverdale, Italian Intervention, pp. 20–1.

11. Clough, Economic History, pp. 273–274; Denis Mack Smith, Mussolini’s Roman Empire (London: Peregrine Books 1979), p. 160.

12. Fontana Economic History of Europe, vol. 6, part 2, Statistical Appendix, p. 690; Karl Hardach, ‘Germany 1914–1970’, ibid., vol. 6, part 1, pp. 196–9.

13. Amos E. Simpson, Hjalmar Schacht in Perspective (The Hague 1969), pp. 124, 146.

14. Table in Kaiser, Economic Diplomacy, p. 319.

15. Bulletin of International News, vol. XIII, pp. 3–8.

16. Kaiser, Economic Diplomacy, pp. 137–138.

17. Simpson, Schacht, p. 98; cf. table in Kaiser, Economic Diplomacy, p. 319.

18. Zara Steiner, The Lights that Failed: European International History, 1919–1933 (Oxford 2005), pp. 668–70; Clavin, Great Depression, pp. 180–1.

19. Bulletin of International News, vol. XIII, pp. 839–841.

20. Ibid., vol. XIV, pp. 3–4.