The Global Great Depression and the Coming of World War II 1612057527, 9781612057521

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The Global Great Depression and the Coming of World War II

U.S. History in International Perspective Peter N. Stearns, Thomas W. Zeiler, and Katherine A. S. Sibley, series editors

Titles in the Series Revolutions in Sorrow: The American Experience of Death in Global Perspective, by Peter N. Stearns From Alienation to Addiction: Modern American Work in Global Historical Perspective, by Peter N. Stearns Diverse Nations: Explorations in the History of Racial & Ethnic Pluralism, by George M. Fredrickson American Slavery, Atlantic Slavery, and Beyond: The U.S. “Peculiar Institution” in International Perspective, by Enrico Dal Lago The Global Great Depression and the Coming of World War II, by John E. Moser

The Global Great Depression and the Coming of World War II John E. Moser

Paradigm Publishers Boulder • London

All rights reserved. No part of the publication may be transmitted or reproduced in any media or form, including electronic, mechanical, photocopy, recording, or informational storage and retrieval systems, without the express written consent of the publisher. Copyright © 2015 by Paradigm Publishers Published in the United States by Paradigm Publishers, 5589 Arapahoe Avenue, Boulder, CO 80303 USA. Paradigm Publishers is the trade name of Birkenkamp & Company, LLC, Dean Birkenkamp, President and Publisher. Library of Congress Cataloging-in-Publication Data Moser, John E., 1966– The global Great Depression and the coming of World War II / John E. Moser.    pages  cm. — (U.S. history in international perspective) Includes bibliographical references and index. ISBN 978-1-59451-749-5 (hardcover : alk. paper) — ISBN 978-1-61205-752-1 (library ebook) 1. World War, 1939–1945—Causes.  2. Depressions—1929.  3. Economic policy— History—20th century.  4. International relations—History—20th century.  5. Depressions—1929—United States.  I. Title. D741.M64 2014 327.73009’043—dc23 2014026493 Printed and bound in the United States of America on acid-free paper that meets the standards of the American National Standard for Permanence of Paper for Printed Library Materials. 19 18 17 16 15 1 2 3 4 5

Contents d

Acknowledgmentsvii Introduction1 1 A Return to Normalcy? The United States, 1920–1928 9 2 The Victors Diverge: The “Haves,” 1920–1928 22 3 Liberalism and Its Discontents: The “Have-Nots,” 1920–1928 35 4 The Crisis Begins: The United States, 1928–1933 48 5 A Tale of Two Countries: The “Haves,” 1928–1933 63 6 Dancing on a Volcano: The “Have-Nots,” 1928–1933 77 7 Beggar Thy Neighbor: The United States, 1933–1936 93 8 The Unraveling of the Western Alliance: The “Haves,” 1933–1936107 9 Recovery through Nationalism: The “Have-Nots,” 1933–1936 120 10 Stumbling toward Internationalism: The United States, 1936–1939136 11 The Economics of Appeasement: The “Haves,” 1936–1939 149 12 Taking the Plunge: The “Have-Nots,” 1936–1939 162 13 War for Plunder, 1939–1941 177 Conclusion191 Notes195 References203 Index219 About the Author 229

v

Acknowledgments d

As with any undertaking of this nature, there are a number of individuals and institutions whose support must be recognized. The project has its origins in an essay on the Great Depression that I wrote for A Companion to World War II, published by Wiley-Blackwell in 2013. In that essay I suggested that a book-length treatment of the subject would be a welcome addition to the literature—which promptly led that volume’s editor, Thomas W. Zeiler, to suggest that I write one for the series he was helping to edit, U.S. History in International Perspective. I wish, therefore, to thank him, for both his encouragement and his recommendation of the project to Paradigm Publishers. The execution of the project would not have been possible without the financial support of the Earhart Foundation, as well as my home institution, Ashland University. The Ashbrook Center and the Institute for Humane Studies provided the funds for two talented and dedicated research assistants, Mariah Dunsing and Paul Hamilton, both of whom were of enormous help in working through a very lengthy reading list. Jeff Pinkham of the Ashland University Library was of tremendous assistance in helping me to track down sources. Robert Boyce of the London School of Economics subjected the original manuscript to a careful reading, and it has been inestimably improved as a result of his input. The editors of the series—Peter Stearns, Tom Zeiler, and Katherine Sibley—provided a great deal of useful feedback, as did Jennifer Knerr, Paradigm’s director of college publishing. My colleague Emily Hess also read sections of the manuscript and offered a number of helpful suggestions. Finally, I wish to express my thanks to my wife Monica and my daughter Constanze for their loving support during the entire process. To them I dedicate this work.

vii

Introduction d

This book attempts to demonstrate the connection between the Great Depression, which first struck parts of the industrial world in the late 1920s and lasted in some places until the end of the 1930s, and the global war of 1939–1945. It will argue that the economic crisis—and, even more importantly, the way governments chose to respond to it—played a critical role in bringing on World War II and in shaping the nature of that conflict. This is a subject that has received relatively little scholarly attention. Works on the international economic crisis of the 1930s, written largely by economists and economic historians, tend to mention the war only in passing, while histories of the war, normally produced by diplomatic and military historians, usually pass lightly over the Depression. Historian Robert Boyce has suggested a possible reason for this—that simplistic Marxist interpretations of the past, popular for a time in the 1960s and 1970s, soured many in the profession on the attempt to connect economic developments with other global trends. The central Marxist claim that “class struggle” lay at the heart of all history led to a series of contentions that have since been discredited—chief among them the notion that Italian fascism, German National Socialism, and Japanese militarism were all products of “finance capital.” That the connection between the Depression and World War II remains today so overlooked is odd, however, given that many world leaders of the time recognized its existence. The critical importance of economic policy to international affairs can be seen most clearly in the Bretton Woods Conference. The 730 delegates, representing forty-four nations of the Allied powers, converged on a small resort town in New Hampshire on July 1, 1944. With Italy already defeated and victory over Germany and Japan seemingly assured, they set about planning for the new order of international finance and trade that would be put into place at the end of the war. By the time the 1

2  d Introduction

conference concluded on July 22, they had reached agreement on a number of principles: that currencies must be readily convertible at a fixed rate of exchange, that closed trading blocs must be eliminated, that tariffs and other artificial barriers to trade must be reduced, and that all obstacles to the free movement of capital should be removed. The delegates also agreed to establish international mechanisms—the International Bank for Reconstruction and Development (later changed to the much simpler World Bank) and the International Monetary Fund (IMF)—to provide credit to central banks in cash-strapped countries. The decision of the Allied powers (primarily the United States and Great Britain, with the Soviet Union going along for the sake of preserving unity) to make such plans reflects their common understanding that the war raging in Europe and Asia had economic as well as ideological and political causes. They believed each of the major powers had responded to the Great Depression of the late 1920s and early 1930s by implementing a set of economic policies that, taken together, proved to be a major contributing factor to the outbreak of war. These policies, usually grouped together under the heading of “economic nationalism,” represented efforts on the part of the world’s leading industrial nations to escape the Depression by withdrawing from the global economy and emphasizing domestic markets and sources of raw materials. In an effort to pump more money into the economy they unilaterally pulled their currencies from the gold standard, which had for decades served the interests of international trade by making the world’s currencies easily convertible. They also raised trade barriers to protect domestic markets from less expensive foreign products. Certain powers went further. Germany, Japan, and Italy, which had sufficient industrial capacity to be regarded as great powers but which lacked the access to raw materials that countries such as the United States, Great Britain (via its empire), and the Soviet Union enjoyed, embarked on campaigns of conquest by which they hoped to obtain impor­ tant resources by force. All of these strategies reflected a desire to promote domestic recovery at the expense of the global economy, and of foreign nations in general. Bretton Woods, then, represented a common determination to make future wars less likely by restoring and sustaining a vibrant system of international trade and exchange. Institutions such as the World Bank and the IMF, by directing capital to central banks facing economic crisis, would presumably remove the temptation to repeat the mistakes of the 1930s. The policies to which the world’s great powers turned in their efforts to remedy the economic distress of the Great Depression were not new. Some, such as the use of tariffs to protect domestic industries, went back centuries. However, a set of policy prescriptions aimed at overcoming the ills of industrial society emerged in the era before World War I. They were championed by members of a rising professional middle class: men (and, particularly in the United States, women) who believed that technical expertise should be applied to serious social problems such as poverty and unemployment. In

Introduction  d 3

doing so they rejected economic liberalism, which held that government intervention in the economy should be kept to an absolute minimum. But they also had no use for Marxist socialism, which they feared would bring chaos through the abolition of property, the family, and national boundaries. Indeed, they tended to regard liberal capitalism and socialism as two heads of the same coin: as the former sharpened inequality it drove the masses to embrace the latter. What these reformers sought, then, was a “third way”—an alternative that would preserve the private property and individual initiative upon which liberalism rested, but would subordinate them to the welfare of the nation. Starting in the 1870s some would-be reformers thought they had found such an alternative in the newly unified nation of Germany. It would be difficult to overstate the fascination that Germany (and more specifically, Prussia, the state whose leaders were most responsible for forging the new country) held for educated Europeans and non-Europeans alike. Its army was regarded as the best in the world, having decisively defeated the French in 1870–1871. Significantly, that army was based on universal male conscription—the principle that every adult male was obliged to provide military service to the nation. Germany’s economy was also widely admired. The country had industrialized rapidly (originally in Prussia in the early to mid-nineteenth century) through partnerships between business and the state. Private business was allowed to function—indeed, it thrived—but it was carefully regulated by the government. In return businesses received special advantages from Berlin, particularly high tariffs to protect German industry from foreign (especially British) competition. Government agencies also worked hard to promote the interests of German firms abroad and fostered the development of enormous industrial cartels that competed more effectively on the world stage. In public administration, too, Germany appeared to lead the way. Prussian/German universities—the envy of much of the advanced world—were dedicated to educating young men in the emerging social sciences, preparing them for careers in government service. Graduates of these institutions filled the German civil service, making it the most admired in the world. Finally, in the 1880s, in order to undercut the appeal of socialism among the working class, the German government created the world’s first welfare state, providing unemployment, disability, and old-age insurance for its industrial labor force. In sum, Germany put forward the image of a well-ordered society managed by trained experts, in which the rights of individuals were subordinated to the greater good of the nation. The German example, therefore, emerged throughout the industrialized and industrializing world as a “third way,” an alternative model to liberal capitalism and the revolutionary ideals of Marxist socialism. Japan, a country whose exposure to foreign ideas had been minimal until barely thirty years earlier, in the 1880s built a modern army and civil service and adopted a modern constitution, all patterned after the German model. The example

4  d Introduction

of Germany also beckoned to many in France and Great Britain, although in a more defensive fashion. France had just suffered a humiliating defeat at German hands, an outcome that French nationalists blamed on “softness” brought about by liberalism. Some of these patriots turned to General G ­ eorges Boulanger, who combined a reformist agenda that included child-­labor laws, old-age pensions, and minimum-wage legislation with calls for a war of revenge against Germany. British nationalists, meanwhile, fulminated against what they saw as unfair trade competition from Berlin. In 1903 patriotic Tories followed Colonial Secretary Joseph Chamberlain, whose Tariff Reform League called for a system of “imperial preference” in which free trade would be reserved for Britain and its colonies. All outside trade would be subject to high duties in the hopes that the British Empire could become a self-­sufficient economic unit; only such a system, Chamberlain warned, would be capable of dealing with competition from Germany and elsewhere. Nor was the Liberal Party immune to such trends; the “national efficiency” wing of the party, which dominated Parliament on the eve of World War I, combined a faith in overseas imperialism with a call for social reforms such as old-age pensions. In the United States the movement to adopt German practices went by the name of Progressivism. Here professional women played an especially important role, championing reforms ranging from factory regulation to child labor and prohibition of alcohol. In the case of America there was some discomfort over the fact that Germany was a monarchy. But as Woodrow Wilson (a product of Johns Hopkins University, the first American university explicitly patterned on the German model) put it in 1886, “If I see a murderous fellow sharpening a knife cleverly, I can borrow his way of sharpening the knife without borrowing his probable intention to commit murder with it; and so, if I see a monarchist dyed in the wool managing a public bureau well, I can learn his business methods without changing one of my republican spots.”1 Wilson’s great rival for leadership of the Progressive movement, Theodore Roosevelt, felt much the same way, admitting, “I have actively fought in favor of grafting on our social life, no less than our industrial life, many of the Ger­ rogressive-era man ideals.”2 The German civil service became the model for P public administration, and agencies such as the Interstate Commerce Commission, the Federal Trade Commission, and the Food and Drug Administration laid the foundations for the modern US regulatory state. All of these manifestations of “third way” ideology employed, to some extent, the rhetoric of war. In some cases this was literal; for example, Boulanger advocated greater governmental control over society in expectation of renewed conflict with Germany. In Britain, Karl Pearson put forward the “scientific view of the nation,” which held that it was necessary “to limit the internal struggle of the community [i.e., the economic competition at the heart of liberal capitalism] in order to make it stronger for the external struggle” (namely, the ongoing struggle of nations).3 But even when meant figuratively the martial rhetoric is striking. In the midst of calling for greater

Introduction  d 5

federal control over corporations, Theodore Roosevelt in 1912 told the delegates to the Progressive Party convention, “We stand at Armageddon, and we battle for the Lord.”4 It is not difficult to see why such language was so widely used. Traditionally no human activity has inspired a sense of duty and self-sacrifice as much as war. In times of war private citizens will far more willingly submit to authority and do without comforts that otherwise seem indispensable. Even the philosopher William James, a self-described pacifist, regarded militarism as “the great preserver of our ideals of hardihood, and human life with no use for hardihood would be contemptible.”5 For this reason it should come as no surprise that the movement toward a “third way” reached its apogee during World War I. The demands that modern industrial warfare placed on the societies and economies of the European powers led governments to harness all of their nations’ strength in pursuit of the war effort. No longer would warfare be left solely in the hands of military commanders; this was the age of “total war,” in which entire populations were enlisted in the common cause of victory. Victory would go to whichever governments were most successful in marshaling available resources and subordinating the private interests of their citizens to the national effort. As John Dewey, a prominent American progressive, rejoiced, “In every warring country there has been the same demand that in the time of great national stress production for profit be subordinated to production for use. Legal possession and individual property rights have had to give way before social requirements. The old conception of the absoluteness of private property has received the world over a blow from which it will never wholly recover.”6 Although no two governments adopted “third way” policies in exactly the same way, nor were they equally successful in implementing them, their strategies tended to feature certain common elements, including these: • Centralization of political authority, away from cities and states to national governments • Shift in power away from legislatures and toward executives, who were presumably better equipped to make quick decisions • Bureaucratization, placing administrative functions in the hands of trained, allegedly objective “experts,” more or less insulated from democratic politics • Militarism, holding up the armed forces not only as defenders of the country but as models for how society at large might operate • Conscription, forcibly enlisting young men for service in the armed forces • Support for business amalgamation, organizing industrial firms into larger, allegedly more efficient, economic units • Regulation, prohibiting activities by individuals and corporations that were perceived as weakening the war effort

6  d Introduction

• Economic planning, ensuring that the war effort had first claim on all resources, including labor • Mercantilism, protecting domestic industries from foreign competition through tariffs and quotas • Monetary expansion, pulling national currencies from the gold standard to allow virtually unlimited government spending • Use of propaganda, emphasizing duty and sacrifice at the expense of individual liberty and self-interest There was nothing new about many of these measures; mercantilism and bureaucracy were features of European regimes at least as early as the seventeenth and eighteenth centuries. What distinguishes the early twentieth-­ century manifestation of these developments is that they were tied explicitly to an ideology upholding the sanctity of the nation as an entity whose interests trumped those of the individual. Moreover, these ideas were bound up with the mass politics that characterized the age. They were no longer connected merely with the priorities of a single monarch or family, but now with the will of the people as a whole. This was particularly the case during the war, when unprecedented sacrifices were demanded of civilian populations. The public, in return, demanded that governments take on new responsibilities; in particular, a wide range of powerful pressure groups charged them with protecting their economic interests. Farmers clamored for higher prices for agricultural products; labor unions for full employment and higher wages; industrialists for protection from foreign competition. Governments that failed to deliver lost legitimacy in the eyes of their people. By 1918, if not earlier, the pressures of war had caused nearly all of the industrialized powers to embrace the “third way” program. Most recognized that this was a temporary situation and that with the end of the conflict the belligerents would back away from the most draconian measures. The European powers in 1918 were at the point of exhaustion, and even in the United States—which had entered the war only in April 1917—the population was increasingly chafing against wartime controls. Nevertheless, the consensus was that the “third way” had served its purpose. Many economists had predicted before 1914 that it would be impossible for the great powers to sustain a long war. The international economy, the argument went, made the individual powers dependent upon foreign trade. If that trade were to be cut off domestic industries would find it impossible to produce war materiel in the necessary quantities. However, the actual experience of World War I proved them wrong. Government had regimented society to an extent previously unknown in the modern West, but citizens had been in large part willing to bear the necessary burdens. The industrial economy had been made to serve the state, producing the arms, ammunition, and other materials needed to wage modern war—the most destructive the world had ever seen—for more than four years.

Introduction  d 7

Figure 0.1 Per Capita GDP of the Great Powers, 1922–1941 9,000

8,000

7,000

1990 US Dollars

6,000

5,000

4,000

3,000

2,000

1,000

0 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 United States

Great Britain

France

USSR

Germany

Japan

Italy

Source: Data from Angus Maddison, 2014, “Maddison Historical GDP Data,” World Economics, www .worldeconomics.com/, accessed May 14, 2014.

When the war ended, most citizens across Europe and America sought a return to what US President Warren Harding called “normalcy.” However, because the experiment had been perceived as such a success, virtually no one believed that normalcy implied a complete return to nineteenth-century liberalism. As the following chapters will make clear, the industrialized world in the 1920s eased up on many of the controls imposed during wartime, but elements of the “third way” remained firmly in place. Moreover, a substantial proportion of that world’s intellectual, political, and business elites remained convinced that policies that had worked in time of war could and should be used again if another conflict, or some other grave crisis, were to occur. The “third way,” therefore, would make a dramatic reappearance in the early 1930s as a means of coping with the Great Depression. While this book seeks to explore the connections between the economic history of the 1920s and 1930s and the origins of World War II, it does not use a deterministic Marxist approach. It does not claim that the Great Depression was a sufficient cause of the war, but it does argue that it was a necessary one. Noneconomic factors, particularly the outcome of World War I and the nature of the Treaty of Versailles, no doubt deserve a large share of the blame for the ultimate breakdown of the international order. Economic distress alone does not explain why so many in the leading powers embraced nationalism over liberalism. Indeed, the ideology that shaped their response to the crisis—a belief system that this book will refer to as

8  d Introduction

the “third way”—had its origins in the late nineteenth century. However, it will be argued here that the war itself would have been unthinkable had it not been for the economic developments that occurred during the ten years preceding the German invasion of Poland. No government could afford to ignore the Great Depression, and in each country the pursuit of recovery came to trump every other consideration. This had at least four important implications for international affairs: (1) it fostered a worldwide resurgence of nationalism in reaction to ideas of economic and political liberalism; (2) it encouraged political forces in Germany, Italy, and Japan (what this book will refer to as the “have-not” nations) to seek the answers to economic problems through conquest rather than trade; (3) it poisoned relations among other powers—chiefly Great Britain, France, and the United States—who under other circumstances might have cooperated to resist aggression (referred to here as the “have” nations); and (4) it induced these “have” nations to stand aside or even to actively encourage the “have-not” powers in their aggression. It should be emphasized that this is not a work of economic history. It does not attempt to identify the causes of the Great Depression, nor does it argue that any particular country came up with the “correct” solution to the crisis. Also, while it identifies parallels in the methods that various governments used to combat the Depression, it certainly does not claim to find moral equivalence between, say, the brutal tactics of National Socialist Germany and the relatively benign coercive measures of Franklin Roosevelt’s New Deal. Nevertheless, neither Hitler’s program nor Roosevelt’s—nor those of any other power—was implemented in a vacuum. Decisions made in New York or Washington had clear implications for Paris and Tokyo; laws enacted to address unemployment in London had effects in Berlin. What this book seeks to demonstrate is how measures that may have made sense on a national level cumulatively served to undermine the international order, hence making war more likely. The book is divided chronologically into four periods: 1920–1928, when the world’s industrial nations sought—ultimately in vain—to restore something resembling the prewar economic order; 1928–1933, when the Great Depression engulfed the world, although affecting different countries at different times and with varying intensities; 1933–1936, when the great powers, through resort to nationalistic strategies (and with varying degrees of success), began to claw their way toward recovery; and 1936–1939, when the pursuit of economic nationalism arrived at its logical—and ghastly—conclusion. Individual chapters address themselves to different powers in each period, with the United States the subject of Chapters 1, 4, 7, and 10. The “haves” (primarily Britain and France) are the focus of Chapters 2, 5, 8, and 11, while Chapters 3, 6, 9, and 12 examine the “have-nots”—Germany, Japan, and Italy. A final chapter is devoted to the period from 1939 to 1941, when separate wars in Asia and Europe intersected in a single global conflict, and the alliance that would finally defeat the efforts of Japan and Germany to create self-sufficient zones of economic control came into existence.

Chapter 1 A Return to Normalcy? The United States, 1920–1928 d

In a campaign speech given in May 1920, Republican presidential candidate Warren Harding informed his audience that “America’s present need” was “not nostrums, but normalcy.” Contrary to popular belief, he did not coin the term “normalcy”—it had been around since at least the mid-nineteenth century—but it came to be identified closely not only with his administration, but with the entire decade of the 1920s. In some ways the term was perfectly clear. Americans had become exhausted by the pace of Progressive Era reform, and particularly with the myriad demands that had been made upon them during the nineteen months of direct US involvement in World War I. In this sense the move toward normalcy began immediately after the armistice was proclaimed in November 1918; conscription stopped on that very day, and in the following months a number of wartime boards had been dissolved and regulations lifted. Under Harding the pace would accelerate, as the new administration slashed both federal spending and taxation. The federal debt, which had stood at over $27 billion in mid-1919, would fall to less than $17 million by 1929. However, beyond a general reduction in the burdens of taxation and regulation, the meaning of normalcy remained vague. It could not be denied that during the previous twenty years the United States had changed in some important ways. The census of 1920 demonstrated that for the first time more Americans lived in towns and cities than in rural areas. Big business had grown bigger, in spite of (and in some ways because of ) Progressive Era regulation, fueled by wartime contracts awarded by the federal government. 9

10  d  Chapter 1

Moreover, even though conscription had been abruptly ended, the National Defense Act of 1920 kept the structure of a standing army intact, and the United States still possessed the world’s second-largest navy. But the most striking change was the expansion of the country’s economic power. The US economy had been growing rapidly long before 1914; indeed, more than a third of the world’s manufactured goods were produced in the United States in 1913. However, the war had brought unprecedented benefits to the American economy, particularly to the export trade. For four years the industrial economies of Europe had been forced to focus exclusively on the production of war materiel, allowing US firms to compete in new markets around the world. Between 1914 and 1918, the gross domestic product per capita grew by nearly 18 percent. Furthermore, the demands of war—as well as the physical destruction that it brought about—had so disrupted the economies of the leading industrial powers (Great Britain, France, and Germany) that they would continue to struggle through the 1920s. Between 1921 and 1928, therefore, per capita GDP expanded by nearly 30 percent (see Figure 1.1), and by the end of the decade the United States was producing nearly 45 percent of the world’s manufactured goods. Investment abroad by US firms and banks soared as well, with the value of foreign holdings skyrocketing from $2.7 billion in 1914 to $35.1 billion in 1929. American corporations such as IBM, Standard Oil, Goodyear, Firestone, and International Telephone & Telegraph established branches abroad, often buying out foreign businesses, so that the number of US-owned and -operated firms in Europe grew from fewer than 100 in 1914 to more than 1,300 by 1929. The United States, then, had emerged from the war as the world’s most powerful economy, leading some to conclude that it was the natural successor to Great Britain as the center of international trade and finance. One concerned British diplomat, comparing US economic power to that of his own country, gloomily recognized “a State twenty-five times as large, five times as wealthy, three times as populous, twice as ambitious, almost invulnerable, and at least our equal in prosperity, vital energy, technical equipment and industrial science.”1 However, predictions that the United States might take Britain’s place as leader of the global economy overlooked the fact that there were crucial differences between Britain’s place in the prewar economy and that of the United States after 1918. The former’s prosperity had always been based in foreign trade, and even during the 1920s—after it had lost its place as the chief trading nation to the United States—imports accounted for between 25 and 30 percent of net national product. By contrast, imports represented less than 5 percent of US gross national product. With the exception of a few types of raw materials, such as rubber and coffee, the United States remained to a great extent self-sufficient. The contrast between America’s newfound status as the world’s leading industrial power and the relative unimportance of foreign commerce to its national wealth created a deep division in public opinion regarding the coun-

A Return to Normalcy? The United States, 1920–1928  d 11

Figure 1.1 Per Capita GDP of the Great Powers, 1922–1928 7,000

6,000

1990 US Dollars

5,000

4,000

3,000

2,000

1,000 1922 United States

1923

1924 Great Britain

1925 France

1926 Germany

1927 Japan

1928 Italy

Source: Data from Angus Maddison, 2014, “Maddison Historical GDP Data,” World Economics, www .worldeconomics.com/, accessed May 14, 2014.

try’s role in national affairs. On one hand, a powerful internationalist elite had emerged in the northeast, particularly in New York City, centered on Wall Street banking firms, certain export-oriented industrial corporations, and the Federal Reserve Bank of New York. This group was cosmopolitan and deeply concerned about global affairs, both for self-interested and sentimental reasons. It was instrumental in directing American investment abroad for the purposes of postwar reconstruction. Its leaders were international bankers such as Thomas W. Lamont, Dwight Morrow, Russell Leffingwell, and J. P. Morgan Jr.; corporate executives such as Owen Young of General Electric; and the governor of the New York Federal Reserve Bank, Benjamin Strong. These men tended to possess a more expansive definition of the term “normalcy” than a mere return to the status quo ante; financier Paul Warburg explained that “the normal of the past is not likely to be the normal of the future, which raises the question of what the normal ultimately will be.”2 But while these individuals were wealthy and influential, they remained a tiny minority among the US population. The census of 1920 may have shown that less than half the population lived in rural areas, but the definition of “urban” included any location with more than 2,500 inhabitants. In fact, more than half of the American people lived in locations with fewer than 5,000 inhabitants, and well over two-thirds lived in places with fewer than 50,000. For small-town America, normalcy meant a return to the values of a day when the United States had practically nothing to do with the rest of the world. To the extent that residents of this “Main Street” thought about Wall

12  d  Chapter 1

Street they tended to distrust it, and during the 1920s they tended to elect to federal office men who shared this outlook. Both Warren Harding and his successor, Calvin Coolidge, had grown up in small towns. Neither had spent significant time traveling abroad, nor did they demonstrate any particular interest in doing so. “I always tell people,” Coolidge announced at a press conference, “that I have so many places still to go in the United States that I don’t know when those will be so much exhausted that I will arrive at a time when I can visit other countries.”3 Yet even Harding and Coolidge included in their administrations men who could safely be categorized as internationalists, and could from time to time even make tentative forays into world affairs. When they did so, however, they frequently encountered resistance from members of Congress. As a group, the nation’s legislators were, if anything, even more provincial than its presidents—particularly the legislators from farm states, which were heavily overrepresented in the US Senate. Agriculture had enjoyed a wartime boom no less impressive than that of industry, with exports of foodstuffs peaking at more than $2.6 billion by 1919. However, while industry continued to enjoy prosperity through the 1920s, farming seriously lagged. European agricultural production recovered quickly, so that world prices fell by nearly a third in the first half of the decade, and the value of US agricultural exports dropped by more than two-thirds. Far from seeking to expand the nation’s involvement with the rest of the world, therefore, they sought as far as possible to insulate agriculture from the fluctuations of the global economy. The farm bloc’s preferred remedy was a bill called the McNary-Haugen Act, which would have required that the federal government purchase surplus crops at an artificially high price and then dump them on world markets. McNary-­ Haugen came before Congress repeatedly between 1924 and 1928, passing both houses on two occasions, only to encounter presidential vetoes each time. Had it passed, it almost certainly would have generated substantial ill will from abroad as huge quantities of American foodstuffs would have flooded an already saturated world market. The dilemma of the Republican administrations of the 1920s—caught between the internationalism of Wall Street and the isolationism of much of the rest of the country—was personified in the secretary of commerce, Herbert Hoover, who would emerge as one of the most important public figures of the era. Although like Harding and Coolidge he hailed from a small town, he had spent much of his adult life abroad as a successful mining engineer. During the war he had won fame by overseeing food relief to German-­occupied Belgium, and in 1919 he was appointed head of the American Relief Administration, charged with overseeing food shipments to postwar Europe. In that position he won wide acclaim as an able administrator and humanitarian, and this led him to an unsuccessful run for the presidency in 1920. A longtime Progressive Republican—he had supported Theodore Roosevelt’s presidential bid in 1912—Hoover was a passionate advocate of “third way” policies, and

A Return to Normalcy? The United States, 1920–1928  d 13

had long sought to establish partnerships between government and leading businesses to solve pressing national problems. Hoover’s 1920 quest for the Republican nomination had been a disappointing experience. His international reputation had not been enough to win him domestic support. Quite the contrary: he found himself subject to blistering attacks from fellow Republicans, particularly senators William Borah of Idaho and Hiram Johnson of California, as well as certain press outlets, charging that his foreign experience had somehow made him un-American. Some political cartoons even portrayed him as a lackey of the king of England. Secretary of commerce was not a particularly prestigious appointment; indeed, the Department of Commerce had not even existed before 1903. Nevertheless, he accepted the post, determined to use it as a launching pad for another run at the White House. Specifically, Hoover would use his office to recast himself as a patriotic defender of the American consumer as well as US business interests overseas. Therefore, during a decade when nearly every government department faced significant budget cuts, the Department of Commerce grew larger, at times interjecting itself into matters normally handled by the departments of State and the Treasury (to the clear annoyance of Charles Evans Hughes and Andrew Mellon, the respective secretaries). The tension between an internationalist Wall Street and a nationalist Main Street had clear implications for US foreign relations in the 1920s. The financial clout of the United States meant that it was bound to play some role in world affairs, but Congress and the public generally stood in the way of anything that sounded like an actual commitment to a foreign country. Thus while France repeatedly sought guarantees of assistance from the United States in the event of attack from a revived Germany (see Chapter 2), Washington responded with a suggestion that the nations of the world simply make war illegal—an idea embodied in the Kellogg-Briand Pact, in which ­sixty-two nations, including all of the great powers, pledged to “renounce” war “as an instrument of national policy.” The other major priority in the 1920s was disarmament, with the United States repeatedly advocating and concluding arms-control agreements. At the Washington Naval Conference of 1921–1922 the United States, Great Britain, Japan, France, and Italy all agreed to place limits on construction of new battleships, and even to scrap some that had already been built. The great powers also promised to respect the status quo in the Pacific and to guarantee the integrity of China. However, since there was no enforcement mechanism for any of this—neither Congress nor the public would have accepted such a mechanism, even if Harding had been interested in pursuing one—these agreements could be easily violated when they became inconvenient. In short, the United States might have kept up an interest in global affairs, but it would play virtually no part in rebuilding the international order that had been shattered in 1914. Congress and the administrations of the 1920s would also demonstrate their essential isolationism by acting to keep out foreign goods and foreign

14  d  Chapter 1

people. The Republican Party had favored protection since its inception in the 1850s, and the United States remained a high-tariff nation throughout the period of Republican dominance in the decades following the Civil War. Woodrow Wilson, a Democrat, had presided over a sharp reduction in trade barriers, although the outbreak of war in 1914 did far more to protect US agriculture and industry from European competition than could tariffs. However, with the end of the war Americans feared that their markets might be swamped with cheap goods from Europe. Congress responded in 1922 by passing the Fordney-McCumber Tariff, with rates even higher than those of the late nineteenth century. Given the relative self-sufficiency of the United States and the comparative inefficiency of European industry during this period, worries over foreign competition were no doubt overstated, and it is unlikely that European manufactured goods would have found much of a market even without Fordney-McCumber. Nevertheless, foreigners regarded the new rates as a slap in the face and evidence that the United States was unwilling to play a constructive role in the global economy. It was a matter of trade—specifically concerning raw rubber, one of the very few natural resources for which the United States was entirely dependent on foreign imports—that gave Herbert Hoover his best opportunity to shed his image as an internationalist. Over a six-month period in 1925 the price of rubber tripled as the result of the Stevenson Plan, a British effort to control output from rubber plantations in British-owned Malaya, the world’s leading source of raw rubber. American tire companies, by far the largest purchasers of rubber, had reason for concern, but their preferred course was to negotiate with the British government. Hoover, on the other hand, opted for a massive public-relations campaign urging the public to repair rather than replace worn tires. Moreover, he played the anti-British card by ostentatiously promoting the use of the slogan “1776–1925”; once again Americans were fighting the tyranny of British colonial authorities. The effort paid off, and when the price of rubber fell slightly in early 1926, Hoover was quick to claim credit. The title of an article in the Washington Post read “Rubber Fight Won by Americans. . . . Hoover Attributed Cut in British Price to His Campaign.”4 Efforts to limit immigration went back almost as far in American history as trade protectionism, but it was not until the early 1920s that Republicans joined with Southern Democrats to pass meaningful legislation along these lines. The movement to restrict immigration had received a powerful boost in the early twentieth century from the growth of eugenics, a pseudoscientific “third way” idea that advocated managing a country’s population by checking the growth of groups deemed undesirable or “unfit.” Eugenicists criticized US immigration policy, under which foreigners, primarily “Slavics” and “Latins” from southern and eastern Europe, had accounted for more than 40 percent of the country’s population growth during the period 1890–1920. Indeed, in the ten years before the outbreak of World War I an average of more than one million foreigners had entered the country annually. The outbreak of war

A Return to Normalcy? The United States, 1920–1928  d 15

brought an end to the stream, but just as the return of peace conjured the specter of a flood of cheap foreign goods landing on American shores, it raised fears of a flood of impoverished foreign people watering down the country’s Anglo-Saxon stock. The Emergency Immigration Act of 1921, followed by the Immigration Act of 1924, reduced the flow to a trickle—no more than 160,000 were allowed to immigrate per year. Given that immigration had provided an important safety valve for countries in economic distress, these new laws were regarded as one more sign that the United States was not prepared to “play ball” with the rest of the world. But although US trade and immigration policy irritated world opinion, neither issue generated as much European ill will toward the United States as that of war debts. In the final months of World War I, as well as during the immediate postwar period, the US government had provided massive loans to the Allied powers, and in 1920 the total debt stood at roughly $10 billion—$5 billion from Great Britain, $3.5 billion from France, and the remainder from Italy and several smaller nations. The debtor countries suggested that the economic distress prevailing in Europe in the postwar era made it impossible to repay anything like the full amount. Some, particularly in France, argued that as a matter of simple justice the debts should be written off entirely, since they had been incurred as a result of the common effort against Germany. Wall Street and the export-oriented business community sympathized with this view, arguing that insistence on repayment of the debts would hinder Europe’s recovery, and thus hurt the global economy. Herbert Hoover, appointed to Harding’s World War Foreign Debt Commission in 1921, felt likewise. “Some sacrifices on our part,” he wrote to the president, “might bring definite economic compensations as well as a better world.”5 Neither Congress nor the public at large, however, seemed ready to consider anything close to cancellation of the debts. It remains unclear whether Calvin Coolidge ever uttered the phrase, “They hired the money, didn’t they?” but it was a fair summation of the prevailing attitude of Main Street. Progressive Republicans from the Midwest and West joined with Southern Democrats to insist on repayment, accusing Wall Street—with some justification—of advocating cancellation for self-interested reasons. The Allies also owed substantial debts to international banking firms such as J. P. Morgan, they reminded their colleagues, and cancellation of the debt to the US government would make it easier for them to repay their private loans. Congress made it clear that it did not trust the executive branch to set policy on this issue; Congress would need to be consulted on any final settlement. Such views dictated that the Harding and Coolidge administrations tread carefully in their negotiations over the financing of the debts. Cancellation was, of course, out of the question. The loans accounted for more than 20 percent of the increase in the national debt between 1916 and 1919, and their repayment was believed to be a precondition for reducing income tax rates, which was a top priority for Republicans during this period. Nor could they

16  d  Chapter 1

accept the argument, advanced by the French and British governments, that a single agreement be reached with the debtor nations, and that the size of the required payments be tied to the amounts received in reparations payments from Germany. The White House instead insisted on concluding individual financing agreements with each debtor nation, and the State Department refused to authorize private loans to any country that had failed to take part in these agreements. In practice, however, the White House demonstrated a high degree of flexibility on war debts. The first accord, concluded in 1923, forgave nearly a third of the British debt. Italy, Belgium, and France fared even better, seeing their obligations reduced by about 70, 60, and 40 percent, respectively; all in all, more than 40 percent of the total war debts were forgiven. Nevertheless, the administrations felt it necessary to reassure the public and Congress that they were taking a hard line with the Europeans. Hoover, who had clearly changed his tune since 1921, insisted on referring to reductions as “concessions,” and publicly denounced advocates of cancellation as “Americans who loved Europe more and America less.” Such rhetoric helps to explain why Europeans habitually referred to the United States during this period as “Uncle Shylock.”6 Since the Harding and Coolidge administrations were prevented by Congress and public opinion from playing a more constructive role in world affairs, it was left to the internationalist banking and business community in the United States to work on its own to promote global economic recovery. The first step in doing so was to offer encouragement and assistance to foreign countries wishing to return their currencies to the gold standard. The leader in this effort was Benjamin Strong, governor of the Federal Reserve Bank of New York. Strong was convinced that international trade would revive only when the world’s currencies were made easily convertible, and that only common adherence to gold would make this possible. An added benefit of the gold standard was that it would provide a brake on runaway spending. Governments around the world had spent well beyond their means during the war, and some of them (France and Germany in particular) were continuing to do so in peacetime. A gold-backed currency would force them to return to fiscal restraint—a necessary precondition, the financial community believed, to restoring confidence on the part of businesses and individual investors. But Strong and his allies also had a self-interested reason for pushing for gold. It is difficult for any country to maintain a gold standard unless other nations follow suit, since nations without a gold-backed currency had the option of inflating their money supply, thus making their exports cheaper on world markets. In this sense the gold standard might be compared to a heavy curtain hanging from a rod—as long as multiple rings keep it attached, then there is relatively little pressure on any of them individually, but the fewer rings there are holding it up, the greater the weight each must bear. The United States had been the only power to keep its currency tied to gold

A Return to Normalcy? The United States, 1920–1928  d 17

during the war, and was therefore eager to see others do likewise as quickly as possible. One prominent international lawyer, John Foster Dulles, warned the Coolidge administration that unless Great Britain returned to gold, “we could be left with a pile of yellow metal.”7 Fortunately for the United States, political and financial leaders in the other industrialized powers genuinely wanted to return to gold. The greatest impediment was the fact that in 1924 the United States held more than 40 percent of the world’s gold reserves. Other nations, holding much smaller reserves than they had possessed before the war, faced the likelihood of deflation—and therefore a contraction in business activity and a rise in unemployment—if they attempted to return to the gold standard at the same exchange rate as they had before 1914. In an effort to encourage an outflow of gold to the rest of the world, therefore, Strong lowered the discount rate—that is, the rate at which eligible institutions can borrow money from the Federal Reserve—and offered loans to assist other nations in making the transition. As a result, the campaign to restore the international gold standard was largely successful. Most of the great powers had returned to gold by the end of the decade—Germany did so in 1924, followed by Britain in 1925, Italy in 1927, and France in 1928. Ultimately, however, the gold standard would not function as the same source of stability in the interwar period as it had in the years before 1914, because the Federal Reserve and other central banks (particularly the Bank of France) failed to follow the rules that traditionally went along with it. Under a normally functioning gold-standard regime the amount of currency in circulation in any given country will be based on the size of that country’s gold reserves. As the money supply of a nation grows, prices will rise, causing exports to be more expensive and foreign imports less so. Gold will then flow naturally away from such countries and toward others where prices are lower. However, the proper operation of this process implies a willingness on the part of gold-standard nations to endure price fluctuations, and few governments in the 1920s were prepared to allow this to happen. Governments throughout the industrialized world had become more sensitive to public opinion than they had been before 1914, thanks in large part to the numerous sacrifices the public had been asked to make during the war. Rising and falling prices could threaten a government’s popularity, or even public order. Central bankers such as Benjamin Strong prided themselves on their independence from political pressures; indeed, they liked to regard themselves as disinterested experts concerned only with the health of the world economy. However, in practice they were unwilling or unable to ignore domestic considerations such as monetary stability; Strong himself asserted in a letter to Montagu Norman, his counterpart at the Bank of England, that “the domestic functions of the bank of issue are paramount to everything.”8 Because the volume of US exports so greatly exceeded that of foreign imports, gold flowed freely to the United States from the rest of the world—a flow that

18  d  Chapter 1

was made even greater through repayment of war debts. At the same time, Strong’s desire for stable domestic prices caused the Federal Reserve to “sterilize” gold—that is, to take steps to prevent the influx of gold from expanding the money supply. Although in 1924 he had been willing to reduce interest rates in an effort to encourage other nations to return to the gold standard, his fear of inflation led him to refuse to do so again until 1927, even though Great Britain suffered from high unemployment and serious labor difficulties throughout the mid-1920s. There was no political will to alter US trade policies (indeed, under Hoover the Department of Commerce was aggressively promoting US exports abroad even as the country maintained high barriers to foreign imports), to cancel war debts, or to jeopardize price stability by allowing the money supply to reflect the expansion of the gold stock. Any movement of gold out of the country, therefore, would take the form of private loans to and investments in foreign governments and businesses. Thanks to widespread economic distress in Europe there was little interest in purchasing foreign bonds in the immediate postwar period. Moreover, the State Department, as mentioned earlier, declined to approve private loans to countries that had refused to conclude financing agreements for their war debts. However, when the German hyperinflation of 1923–1924 (see Chapter 3) threatened to undo whatever progress had been made since 1920, the Harding administration worried that European instability would hurt US exports. Secretary of State Charles Evans Hughes sought the assistance of Wall Street, and in April 1924 a committee of financial experts headed by Charles G. Dawes, former director of the Bureau of the Budget, formulated a scheme to restore the German reichsmark. The Dawes Plan, as it was called, established a payment plan for German reparations and returned Germany to the gold standard for the first time since 1914, with the help of a $200 million loan, half of which was to be raised on the American bond market. The Dawes loan was an instant success, and soon the US portion of it was heavily oversubscribed by American investors. What followed was a massive outflow of American capital, and not just to Germany. From 1924 through 1927 Americans sent nearly $1 billion abroad each year in the form of purchases of foreign securities. Not only did these securities offer high rates of interest (as much as 50 percent greater than average domestic offerings), but the fact that they were offered by old established entities—the governments of Germany, Holland, Belgium, Japan, Italy, and so on, as well as major corporations in those countries—made them seem like safe bets. By 1927 the amount invested in overseas governments and businesses was three times what it had been in 1921, representing two-thirds of all the new foreign investment in the world. Investors from Great Britain, which before 1914 had been by far the world’s largest overseas lender, purchased fewer than half as many foreign securities during this same period.

A Return to Normalcy? The United States, 1920–1928  d 19

Although few in 1920 would have predicted it, another significant recipient of US capital during the late 1920s was the Soviet Union. The Bolshevik regime headed by Vladimir Lenin, which had seized power in Moscow and Petrograd in 1917, promoted a worldwide revolution that would create a global society based on the principles of Marxist socialism. For that reason it had been immediately denounced by all of the Allies, and Woodrow Wilson refused to recognize it as a legitimate government. Both Harding and Coolidge continued this policy, even after the Bolsheviks emerged victorious in the Russian Civil War, which continued until 1922. In line with the nonrecognition policy the State Department barred formal loans to the Union of Soviet Socialist Republics (the name it adopted in 1922) or any of its enterprises. To make such loans, Secretary of State Hughes declared, would be “to give encouragement to repudiation [of debts accrued under the earlier Tsarist regime] and confiscation [of private property].”9 However, none of the administrations of the 1920s were willing to interfere with contracts made between US businesses and the Soviet authorities, and over the course of the decade investment in and trade with Bolshevik Russia tripled. There were a number of reasons why investment in the new Soviet Union appeared wise, despite the regime’s constant public denunciations of capitalism. In terms of natural resources Russia was virtually self-sufficient, possessing ample stocks of oil, iron ore, coal, timber, and agricultural land. Moreover, although the civil war had left the economy in shambles—industrial output was less than 15 percent of what it had been before—nearly all of the country’s economic assets, both industrial and agricultural, had remained intact. The chaos of the early 1920s was the result mainly of two factors. The first was mismanagement on the part of the Bolshevik leadership, which knew nothing of practical economics; the second was the fact that nearly all of those who did know how to operate a modern economy—the professional middle class—had been killed or had fled the country. Lenin took steps to address both problems in 1921 with the launch of the New Economic Policy; not only did the policy grant significant economic freedom and property rights to small-scale enterprises, but it offered concessions to foreign companies, allowing them to operate mines, factories, and other businesses. Over the next few years Ford, General Electric, and other US firms sent money and technical experts to the Soviet Union, helping to revive and expand Russia’s industrial economy. Even Joseph Stalin, who emerged in the second half of the decade as successor to Lenin (who died in 1924), praised “American efficiency” as the force “without which serious constructive work is inconceivable.”10 This massive overseas lending and investment helped to offset the continuing influx of gold through trade and payment of war debts, but it raised eyebrows among some, most notably Herbert Hoover. While the commerce secretary was not opposed to loans per se, he believed that they should ultimately serve the national interest—for example, by allowing foreign ­countries to

20  d  Chapter 1

purchase US exports. Hoover’s concern was that too much US capital was being sent abroad for what he regarded as nonproductive purposes, such as the building of armaments or the support of deficit spending by governments. He advocated, therefore, the formation of a special board, consisting of representatives of the departments of Commerce, State, and the Treasury, to rule on whether any new foreign security should be allowed to be sold to the public. The proposal, however, went nowhere. The international business community fought it bitterly, arguing that in practice the new board might prohibit loans to any government with an unbalanced budget—and in the 1920s that meant nearly all of the industrialized world. Secretary of State Hughes added another objection: requiring that a government board approve foreign loans might imply that Washington was somehow guaranteeing repayment of a debt. Few in Washington, particularly in the parsimonious Coolidge administration, were willing to risk such an implication. The flow of foreign lending reached flood proportions in late 1927 and early 1928, after Strong finally reduced the Federal Reserve discount rate. Montagu Norman had been practically pleading for such a reduction since 1925, when Britain returned to gold at its prewar rate (see Chapter 2). While Strong was certainly sympathetic to Britain’s plight—declining gold stocks in the Bank of England had led to continuing economic contraction—he was likely more worried about signs of an economic slowdown in the United States. Agricultural prices in particular had been falling sharply since late 1926, leading to a chorus of complaints about Wall Street from America’s farm belt. Purchases of foreign securities, which already averaged $135 million each month in 1927, accelerated to $172 million a month in early 1928. As a result, more gold was now leaving the country than was entering it, so that by early 1928 US gold reserves had fallen by $500 million. The reduction of the discount rate also contributed to a great boom in stock purchases that had been taking place on Wall Street since 1926. On March 1, 1928, the New York Stock Exchange set a new record of four million shares sold in a single day. A number of public figures, most notably Herbert Hoover, began warning of an “orgy of speculation” that was diverting capital from productive enterprises in search of quick profits on the stock market. Worries over stock-market speculation, as well as fears that the Federal Reserve was losing gold too quickly, led Strong to reverse course. In spring 1928 he raised the discount rate back to its previous level, in spite of pleas from the governors of the Bank of England, the Bank of France, and the German Reichsbank to keep rates low. It was a momentous decision, although it had no immediate effect on the stock exchange, which continued to soar. There would be no fewer than 159 four-million-share days in the coming months, and on two occasions sales of shares approached five million. The significance of the rate increase lay in its effect on foreign lending, which fell in the second half of 1928 to an average of $63 million per month, only slightly more than a third of what it had been in the spring. Gold began flowing back into the

A Return to Normalcy? The United States, 1920–1928  d 21

country, causing Federal Reserve holdings to increase by $280 million between June 1928 and October 1929. For Americans there seemed no reason for concern, but the sudden withdrawal of US capital from world markets carried profound implications for the rest of the world—implications that would ultimately have devastating effects, both on the international system and on the US economy.

Chapter 2 The Victors Diverge: The “Haves,” 1920–1928 d

It was not only the United States that sought a return to normalcy in the 1920s. Both Britain and France looked back fondly on the prewar years, regarding them somewhat nostalgically as a time of prosperity, stability, and social harmony. The war may have required an unprecedented degree of state involvement in the economy and sharp restrictions on foreign commerce but it had represented a brief, albeit severe, disruption of the natural order. The return of peace, it was hoped, would bring with it the lifting of wartime controls and the restoration of the international economy. But normalcy was even less possible for the former Allies than it was for the United States. For one, they had suffered much greater human losses. Over 2 percent of the British population, and more than 4 percent of the French, had been killed during the war, and these losses came almost entirely from the segment of the population—men between the ages of twenty and forty—who not only accounted for most of the country’s productivity, but who would also ordinarily have been responsible for producing the next generation. The pensions paid to widows and invalids would prove a massive drain on resources throughout the interwar period. Finally there was the physical destruction that the war had brought. A large swath of eastern and northeastern France, the primary battlefield, lay devastated, and while Great Britain might have largely escaped such direct harm, it had lost a sizeable chunk of its merchant fleet to German submarines. In addition, as discussed in the preceding chapter, Britain had lost its status as the world’s leading overseas lender and investor. The different ways in which each country sought to adjust to the new realities of the 1920s 22

The Victors Diverge: The “Haves,” 1920–1928  d 23

go a long way in explaining why the former Allies fell out so quickly, and why until at least the mid-1930s Anglo-French relations were marked by considerable mutual distrust. For Great Britain normalcy, above all, meant rebuilding the international commercial ties on which the country’s economy had long depended. Of all the industrialized nations, prewar Britain had been least affected by “third way” ideology. Although it had established the rudiments of a welfare state and had imposed certain industrial regulations, Parliament had consistently rejected the sort of “imperial preference” policies that men such as Joseph Chamberlain had advocated at the turn of the century. Britain in the decades before 1914 had been the world’s leading practitioner of free trade. It was also the leading exporter of manufactured goods, as well as the largest importer of foodstuffs and other primary resources. Exports accounted for nearly a quarter of net national income, and imports for nearly a third. More than half the commerce that moved on the high seas did so in British vessels, and British firms were responsible for a similar percentage of global investment. The pound sterling was a truly international currency, regarded almost as highly as gold—on which the pound was based. Great Britain in the 1920s, therefore, was firmly committed to a policy of internationalism. Of all the great powers, it was the most consistent supporter of the League of Nations, and it led the way in working toward the recovery of Europe, especially Germany. In an era when most powers maintained or erected high tariffs, Britain returned—although not entirely, as we will see—to free trade. In particular the British governments of the 1920s, both Conservative and Labour, sought to promote good relations with the United States. At the 1921–1922 Washington Naval Conference (see Chapter 1) they abandoned, at America’s urging, the country’s long-standing alliance with Japan in favor of a multilateral agreement to defend the status quo in the Pacific. The British even agreed to give up their long-cherished naval supremacy, acquiescing to demands by “Big Navy” advocates in the United States for a fleet equal in size (in theory, at least) to the Royal Navy. The Foreign Office, it should be noted, resisted much of this. Britain’s diplomats remained very much part of the old balance-of-power tradition, skeptical of collective security, fearful of a revived Germany, and reluctant to “appease” the United States.1 However, because the issues that would dominate so much of Britain’s international relations during the interwar period—currency exchange, trade, tariffs, etc.—tended to be economic, the men of the Foreign Office usually found themselves overruled by other agencies. Increasingly, therefore, international affairs became the province of the Treasury, the Board of Trade, and the Bank of England. At the heart of any internationalist policy was a return to the gold standard. As early as 1919 the Cunliffe Committee—named for its chair, Lord Cunliffe, then governor of the Bank of England—insisted that a gold-backed currency was a prerequisite for Britain resuming its place as a leading center

24  d  Chapter 2

of international trade and finance. There was nothing surprising about this. Sir Isaac Newton himself had established the tie in his capacity as master of the mint in 1717, and it had served the British economy well for more than two centuries. Virtually every educated person, and all of the country’s major political parties, believed that the connection to gold should be reestablished, at its traditional rate (77 shillings, 101/2 pence per standard ounce, or US$4.86) as soon as possible. The problem was that the amount of currency in circulation in 1919 greatly outstripped the Bank of England’s gold reserves, and would have to be reduced dramatically before the connection could be restored. It was understood that this would require a balanced budget and higher interest rates, which would hurt the economy in the short run, and the immediate postwar period seemed like a particularly inauspicious time to do so. The sacrifices of the population during the war had been bought by the electoral promises of the prime minister, David Lloyd George, that postwar Britain would be “a country fit for heroes,” and when the end of the war failed to bring the expected economic rewards, the country was afflicted with a wave of labor unrest. The cabinet, therefore, agreed to maintain interest rates and the level of public spending as if the war were still going on. Any thought of balancing the budget, and thus of returning to gold, would have to be put off for the time being. Within six months the government reversed course. The budget was running a deficit of £326 million—greater than the total budget of 1914—and inflation had reached a rate of 50 percent. The chancellor of the exchequer, Austen Chamberlain, submitted a new budget that cut spending by 36 percent, and in the following year he reduced expenditures by another 30 percent. At the same time, the Bank of England raised interest rates to 7 percent and kept them there for an entire year. While this solved the problem of inflation, it brought on a serious economic downturn that made the prospect of an immediate return to gold seem even less appealing. Unemployment tripled between December 1920 and June 1921. There was some improvement during the second half of the year, but unemployment remained dangerously high—as it would for the rest of the decade. What had gone wrong? Certainly the deflationary policy followed by the cabinet and the Bank of England was a contributing factor since it suppressed demand at home. Even more fundamental, though, was the fact that Britain had grown rich in the late eighteenth and early nineteenth centuries by selling manufactured goods—especially textiles—to foreign countries that had no significant industry. The rise of new industrial powers such as Germany, France, the United States, and Japan challenged British economic dominance even before 1914. The war forced British industry to focus its attention entirely on military production, allowing the United States and Japan to move into global markets. Victory in 1918 gave Britain an opportunity to reestablish itself in those markets, but it faced a new problem. Many of

The Victors Diverge: The “Haves,” 1920–1928  d 25

the country’s best overseas customers owed their livelihoods to agriculture, and with the end of the war the prices for commodities such as wheat and cotton plummeted, making it difficult for these countries to afford British manufactures. Most British financial leaders continued to look to a return to the gold standard to revive international trade and restore the country’s economic leadership, and this required continual movement in the direction of balanced budgets and high interest rates. A new round of spending cuts took place in 1922. Named the Geddes Axe, after Sir Eric Geddes, who chaired a special government committee that recommended the reductions, it reduced spending by an additional £75 million. Since the armed forces represented the largest chunk of the budget, and reductions in defense spending were politically popular in a country exhausted by more than four years of war, the army and navy were hit particularly hard. In 1919 the government adopted the so-called Ten-Year Rule, which stipulated that all estimates for the armed services would be based on the assumption that the British Empire would not be involved in a major war for the next decade. It is not surprising, therefore, that the British delegation to the Washington Naval Conference proved eager to sign on to US proposals for international limitation of naval armaments. Then, in 1922 the Geddes committee recommended a further reduction of £20 million to the army’s budget, with a corresponding reduction of personnel to the tune of 50,000, and a cut of £21 million and 35,000 men to the navy. Total spending on the army and navy had fallen from £604 million in 1920 to £111 million in 1922. The country’s financial elites believed that the need for economy in government was particularly pressing given the roughly $5 billion in war debts that Britain owed to the United States. The United Kingdom had also loaned significant sums to its allies during the war, and the government believed that the global economy would recover more quickly if all such debts were forgiven, or at least substantially reduced. To this end, Arthur Balfour of the Foreign Office issued a statement in summer 1922 announcing that Britain would seek to collect from its debtors (including Germany, which owed substantial amounts in reparations) only as much as was needed to meet its obligations to the United States. The Balfour Note, however, generated outrage among Americans, who saw it as an attempt to draw the rest of Europe into a pressure campaign for debt cancellation. In the words of Under-Secretary of the Treasury S. Parker Gilbert, it was “as irritating a piece of nonsense as has been pulled in the whole discussion about inter-governmental debts.”2 Fearing that the flap over the Balfour Note might undermine the larger goal of harmonious relations with the United States, the government quickly moved to repair the damage. Even though no formal repayment agreement had been signed, the British made a goodwill payment of $100 million in the autumn of 1922. Early in the following year the new chancellor of the

26  d  Chapter 2

e­ xchequer, Stanley Baldwin, traveled to the United States along with Montagu Norman of the Bank of England, and after two weeks of negotiation they agreed to a plan to finance the debt at 3.3 percent interest over a period of sixty-two years. The deal came as something of a disappointment to the British government, which had been hoping for a considerably lower interest rate. Prime Minister Andrew Bonar Law even threatened to resign if the terms were accepted, but stepped back when he saw that the rest of his cabinet was willing to go along with the deal. Baldwin himself expressed his dismay, complaining to a colleague about “the worship of the God-Almighty Dollar in the United States,” but concluded that Britain could not afford to appear unwilling to meet its obligations.3 Although France faced a situation similar to that of Britain, the governments of the early 1920s reacted in very different ways. Most fundamentally, normalcy for France did not necessarily imply internationalism. France, like most of the powers of continental Europe, had turned to protectionism in the 1880s. Postwar France, therefore, had little interest in free trade. With the end of the war there was a brief return to pre-1914 tariff levels, but the result was a flood of imports that resulted in a highly negative balance of payments. The French government responded in July 1919 by repudiating all of its trade treaties, and over the next few years it signed new bilateral agreements that sought to balance imports and exports with individual countries. Those countries that refused to conclude such agreements—most notably the United States and Great Britain—faced steep duties. Nevertheless, France had experienced such devastation in the war that it was forced to import huge amounts of food and raw materials for the purpose of recovery. Even with the new tariff levels the value of imports exceeded that of exports by nearly two to one. This exacerbated the inflation that had been caused originally by massive wartime government borrowing. By 1920 the franc had lost two-thirds of its prewar value. Of course, it was easy to say that the solution was to deflate, or at least stabilize, the currency by reducing public spending and increasing interest rates; this is precisely what Great Britain did. However, with only three important political parties—none of which particularly extreme in its views—and a parliamentary tradition going back centuries, Britain enjoyed far greater political stability than did France. Deflation would have brought about the same sort of economic distress that it produced in Great Britain, and politicians in Paris feared that it could well lead to revolution. All of this helps to explain the importance the French placed on the reparations that Germany was required to pay under the Treaty of Versailles. The total amount was set in March 1921: 226 billion gold marks, with France receiving just over half. With the French government in debt (not only to the United States and Great Britain, but also to smaller countries such as Argentina, Uruguay, and Spain) to the tune of 30 billion francs, and a lack of political will to either slash spending or increase taxes, the prospect of forcing

The Victors Diverge: The “Haves,” 1920–1928  d 27

the costs of postwar reconstruction onto the defeated enemy had an obvious appeal. In fact, when Germany initially refused to pay reparations the French responded by sending troops to occupy three towns in the Ruhr Valley, Germany’s industrial heartland. But France’s need to collect reparations seriously hurt the country’s foreign relations, not only with Germany but also with Great Britain. The British economist John Maynard Keynes had written as early as 1919 that reparations payments would prevent the German economy from recovering, and that without German recovery the rest of Europe would face serious difficulties as well. The British recession of 1920–1921 convinced many in London, particularly those in the financial community and export-based industries, of the wisdom of Keynes’s predictions. In late 1921 Britain pressured France into accepting a reduction of the total amount owed to 132 million gold marks, and for the next eleven years successive British governments would consistently push for further reductions. French politicians, meanwhile, regarded this not only as prejudicial to French interests, but as ultimately driven by selfish concerns—after all, the total amount of reparations due to Britain was less than half of what was owed to France. The dispute over reparations also reflected a deeper disagreement about the treatment of Germany, one that went back to the drafting of the Treaty of Versailles. “The fact is that they [the French] wanted a stiffer treaty,” wrote British cabinet secretary Maurice Hankey, “and we wanted an easier one.”4 The British were inclined to believe that Germany’s defeat in 1918, and the replacement of the monarchy with a republic, meant that there was little to fear from that country, and that therefore a resurgence of German economic power was something to be welcomed. Any effort to stand in the way of German recovery—for example, through unyielding demands for reparations—would only destabilize the moderate forces in Germany and strengthen extremists on the left and right. The French regarded this as the height of naiveté, pointing to the fact that nationalists and monarchists continued to dominate the German bureaucracy and teaching profession, as well as to the widespread hostility to the Versailles treaty shared by virtually every segment of the population. The French assumed, therefore, that even a Germany governed by moderates would seek to overturn the status quo as soon as it had the strength to do so. The £600 million war debt that France owed to Great Britain further complicated relations between the two countries. London did not actively press for repayment until 1923, after it had concluded its own repayment agreement with the United States. Yet for the first half of the decade France failed to make even a single payment on the interest on the debt, let alone the principal, pointing to its own economic difficulties and German stonewalling on reparations. Successive British governments became increasingly irritated. Experts in the Treasury insisted that the French economy was fundamentally strong. Britain, they pointed out, was practicing fiscal discipline, even at the

28  d  Chapter 2

cost of high taxes and unemployment at home; France, meanwhile, had made little effort to put its own house in order, and indeed was extending sizeable loans to the countries of eastern Europe. To make matters worse, Paris was spending considerable amounts of money on the armed forces, while Britain’s army and navy had seen their budgets slashed to the bone. All of this generated serious anti-French sentiment among Britons. When French troops in 1920 briefly occupied the Ruhr Valley in an effort to coerce Germany into making reparations payments, British opinion reacted angrily to what looked like bullying of a helpless neighbor. The French, it was claimed, lacked the traditional British virtue of fair play, as seen in their treatment of Germany and their failure to pay their war debts. (They would not reach an agreement with Britain on repayment until 1926.) “There are moments,” wrote one Conservative member of Parliament, “when character and honesty of purpose produce in the French mind an effect not less than arsenic does on the human body.”5 The feeling was mutual. The French believed that the British were conspiring with the Americans to deny them their rightful fruits of victory and keep them in a position of economic subservience. They insisted on full repayment of war debts while seeking to water down German reparations (on Britain’s part) and maintaining high tariffs (on America’s part), denying France any reasonable possibility of making payments. Moreover, Britain and the United States were actively promoting German resurgence for no reason other than to serve their selfish commercial interests. In short, in the words of former minister of war Marshal Hubert Lyautey, the “two countries which complain most about the European situation, England and the United States, carry the most responsibility.”6 Given that the French believed that neither of the Anglo-Saxon powers could be counted on to uphold the international order, the government of Raymond Poincaré concluded that national security depended on French hegemony over the European continent. France would maintain an uncompromising line against Germany, backed up by the nation’s own military strength as well as its alliances with the states of eastern Europe. In addition, in order to reduce economic dependence on Britain and the United States, trade barriers would remain high and France’s overseas colonies would be developed as sources of raw materials and markets for French products. Consistent collection of reparations was central to this policy of hegemony, and it had been one of Poincaré’s main promises during the election campaign. It was not long before his will was tested in this regard. In summer 1922 a new government took power in Berlin and immediately began to avoid payment. And this was not the only worrisome development from across the Rhine: the German steel industry had by this time fully recovered while French mills—many of which had been damaged or destroyed in the war—were still operating at 50 percent of their pre-1914 output. Moreover,

The Victors Diverge: The “Haves,” 1920–1928  d 29

the German army seemed to be flouting the disarmament provisions of the Versailles treaty through the creation of paramilitary units. Faced with this challenge, Poincaré moved forcefully in January 1923, sending a force of French troops to occupy not merely a few towns, but the entirety of the Ruhr Valley. He defended the move by citing Germany’s failure to pay reparations and numerous other violations of Versailles. Failure to punish such transgressions, he insisted, would set a precedent for further acts of defiance. But while the move was wildly popular in France, the situation quickly became complicated when the government in Berlin ordered a campaign of passive resistance. Foreign troops may have occupied the mines and factories of the Ruhr, but when workers throughout the region went on strike there was little chance of their producing any wealth. The French responded with force, arresting local leaders (including the influential steel magnate Fritz Thyssen) and expelling some 100,000 Germans from the region. Sporadic rioting and sabotage followed, with French troops at one point firing on a group of striking workers, killing thirteen. In the long run France had the advantage, as passive resistance proved devastating to the German economy (see Chapter 3). A new government took power that summer under Chancellor Gustav Stresemann, who in late September formally called off the campaign. Workers returned to the mines and factories, and the fruits of their labor began to flow into France. But this proved a hollow victory given the international response to the occupation. Almost everywhere, Poincaré was denounced as a bully bent on dismembering Germany (which was true, to a certain extent, as his government was channeling funds and encouragement to separatists in the Rhineland) and dominating all of Europe. The British government claimed that France’s true aim was to create a massive cartel of French and German coal and steel producers that would work to close Europe to British exports. Even the American banking firm J. P. Morgan, which had furnished France with loans throughout the First World War, warned that although it very much wanted to assist with French recovery, no credit would be forthcoming as long as the occupation continued. Poincaré had good reason to take the Morgan warning seriously, for the Ruhr Crisis was also inflicting severe damage on the French economy. The costs of occupation combined with a meager yield in reparations exacerbated the country’s already high postwar inflation. In January and February 1924 the franc lost nearly half its value, and Poincaré’s attempt at a solution—a 20 percent increase in taxes—undermined his government’s popularity. Only an infusion of foreign capital, it seemed, could restore the situation; and none was forthcoming as long as Poincaré continued on his course. In the end, therefore, France had no choice but to submit to the will of the Anglo-Saxons. A Morgan-backed loan of $100 million was approved in mid-March, and this helped the franc to double in value in the course of a month. In return, however, Poincaré had to agree to the Dawes Plan, which

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substantially reduced German reparations payments. The recovery of the franc proved insufficient to save the French government, and new elections in May brought a center-left coalition to power. In August the new premier, Édouard Herriot, attended the London Reparations Conference, where he promised not only to evacuate the Ruhr within a year, but also to renounce France’s right to act unilaterally to enforce payment of reparations. Herriot, according to one observer, “looked as though he were having a tooth drawn.”7 The Dawes Plan also had important implications for Great Britain. Montagu Norman had hoped that the German currency could be stabilized by tying it to the pound, but the American financial experts rejected this out of hand; the reichsmark would instead be tied to the dollar, and thus to gold. Meanwhile Holland and Switzerland were seeking to return to gold; Sweden had already done so. There were increasing fears among British elites that if the pound failed to join these other currencies the international business and finance community would lose confidence in sterling. Further delay might even put the British Empire at risk—several of the dominions, particularly Australia and South Africa, were threatening to tie their currencies to gold even if Britain did not. Such a move, it was feared, would loosen their ties to London and draw them into the US economic orbit. It also seemed like an auspicious time to return to the gold standard. The months after the Dawes Plan saw a resurgence of international trade and capital transfers; clearly there was more confidence in the economy than there had been at any time since 1914. Parliamentary authority to prevent gold from leaving the country was due to expire at the end of 1925, and foreign banks and financiers fully expected that the embargo would not be renewed. They therefore began purchasing pounds, causing Britain’s gold reserves to swell. The Americans were also strongly supportive; not only did the New York Federal Reserve lower interest rates in 1924, thus encouraging the flow of gold out of the United States, but the Federal Reserve and J. P. Morgan jointly offered $500 million in loans to help with the transition to gold. By early 1925, therefore, financial and political elites had become convinced that sterling could be returned to its prewar exchange rate of US$4.86 to the pound without triggering large-scale deflation; it was time at last to take the decisive step. The Gold Standard Act, formally returning the pound sterling to gold at the old rate, was introduced on April 29. Two weeks later it became law. The return to gold did not yield the desired results. It certainly did nothing to solve the problems of Britain’s older export industries, such as mining and textiles. Indeed, the exchange rate of $4.86 to the pound meant that British currency—as well as British goods—was overpriced by around 10 percent. The balance of trade with the United States grew steadily worse, and speculators began selling their sterling in exchange for francs. By December the Bank of England had lost £13 million in gold, and Norman felt he had no choice but to raise interest rates. This led to increased unemployment as well as wage reductions, and when coal-mine owners cut miners’ pay the country

The Victors Diverge: The “Haves,” 1920–1928  d 31

faced the second general strike in its history (the first had been in 1842). Two and a half million union workers walked off their jobs for nine days in May 1926, and although the strike ended in defeat for the unions, it demonstrated how dissatisfied Britons were with the state of the economy. Indeed, unemployment remained above one million—well over 10 percent—for the remainder of the decade. The sputtering economy led to rising disillusionment with the internationalism that had characterized Britain’s policies since the end of the war. Sir Alfred Mond, the country’s most influential industrialist, claimed that those policies helped only the financial sector; they had been disastrous for the mining and manufacturing concerns that lay at the heart of the economy. In 1926 he joined forces with Sir Leo Amery, secretary of state for the dominions and colonies, and over the next several years the two men built a powerful force within the Conservative Party advocating “imperial preference”—that is, promoting free trade and investment within the nations of the British Commonwealth while erecting high trade barriers between the empire and the rest of the world. The only hope of competing with the United States, Mond and Amery insisted, was to marshal the immense population and resources of the British Empire in the national interest. In fact, the Conservative government of Stanley Baldwin took Britain in an increasingly isolationist direction during the late 1920s. In 1925 it restored the McKenna duties—tariffs of 33 1/3 percent on foreign automobiles, watches, and movies—originally implemented during the war. Over the next several years more and more items were added to the tariff list. In addition, a growing number of industrial firms chose to consolidate themselves into cartels, surrendering critical decisions regarding prices, marketing, and production to a central office. In the first half of the decade such organizations had been routinely denounced as monopolistic, but now they seemed a smart means of doing business in an increasingly cutthroat international environment. Mond himself led the way in this, bringing together four chemical companies in December 1926 to form Imperial Chemical Industries, Britain’s largest industrial conglomerate. By the middle of the decade France was reevaluating its international strategy in the wake of the disastrous Ruhr Crisis. The center-left governments of Édouard Herriot and Aristide Briand (which followed in late 1925) had become convinced that France could do nothing to prevent the resurgence of the old enemy across the Rhine. Germany’s industrial economy had more or less fully recovered, and its birthrate dwarfed that of France; moreover, Britain and the United States had successfully thwarted all attempts to enforce Versailles. The best move now was to make sure the country was able to protect itself from any future German onslaught by constructing a system of defenses along the common border. Planning began in 1925, and three years later construction was finally authorized for what became known as the Maginot Line, named for the minister of war at the time.

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At the same time, the Herriot and Briand governments sought to end France’s diplomatic isolation. The first opportunity to do so actually came from the German foreign minister, Gustav Stresemann, who in January 1925 suggested a security pact among the powers of western Europe. Stresemann saw this as a means of returning Germany to the international community; Briand regarded it as a step toward European integration, as well as a way to draw Great Britain more deeply into continental affairs. Representatives from France, Britain, Germany, Italy, and Belgium gathered at the Swiss resort town of Locarno that October. There they guaranteed the sanctity of the German, French, and Belgian borders and promised to submit any disputes among them to the League of Nations. Significantly, Germany would not guarantee its eastern frontier, nor did the other powers demand that Stresemann do so. It was an omission that France’s allies in eastern Europe did not fail to notice. The Locarno Conference did nothing to solve the problem of French inflation. The economy was doing well in many respects. Unemployment remained very low; in fact, several million immigrants, mainly from Spain, Italy, and Portugal, arrived in France in the 1920s in pursuit of work. Per capita GDP had increased by a respectable 15 percent since 1922 (see Figure 1.1), and by 1924 industrial production had returned to its prewar high. However, the value of the franc, which had momentarily stabilized in 1924 with the help of a loan from J. P. Morgan, fell by half over the course of the following year. Briand believed that the best chance of saving the nation’s currency lay in additional financing from the United States, but until an agreement was reached for repayment of France’s war debt no such loan was forthcoming. Previous negotiations had collapsed over French insistence on a clause stipulating that debt payments would be made only as long as Germany continued to honor its reparations payments under the Dawes Plan. This the United States would not accept, refusing to recognize any connection between war debts and reparations. The inflation of late 1925 led Briand to back away from this demand, and a new mission headed by Henry Bérenger arrived in Washington in February 1926. He and Treasury Secretary Andrew Mellon signed an agreement in April. Ironically, however, the same inflation that made a debt-financing agreement with the United States necessary made it impossible for such an agreement to be ratified at home. That spring and summer inflation spiraled out of control, and by late June a single pound sterling cost 173.25 francs—three times the exchange rate of 1924. A month later a pound was worth 240 francs. This contributed to a boom in tourism, and hotels, resorts, and casinos flourished by catering to a foreign, largely American, clientele. However, the sight of Americans taking advantage of the exchange rate to spend lavishly at a time when the French were suffering from skyrocketing prices triggered a nationalistic backlash. That summer saw frequent displays of hostility, some violent, against American visitors, to the point that extra police were assigned

The Victors Diverge: The “Haves,” 1920–1928  d 33

to patrol streets where tourists tended to congregate. In July 25,000 veterans staged a protest against payment of war debts to “Uncle Shylock.” In this climate the Mellon-Bérenger accord stood little chance of success in the House of Deputies; indeed, opposition remained so fierce that Briand dared not submit it for approval before his cabinet fell on July 20. The agreement would ultimately not be ratified until July 1929. Raymond Poincaré once again became premier at the end of July 1926, and he set before himself the task of stabilizing the French currency without American assistance. Working closely with Émile Moreau, governor of the Bank of France, he immediately announced both spending cuts and tax increases, so that over the next several months the budget began to show surpluses and the value of the franc began to climb. By December the exchange rate had risen to 120 francs to the pound, at which point Moreau pegged the franc to gold. He refused to do so at the much higher prewar exchange rate, fearing—not unreasonably—that doing so would have involved an amount of deflation that would have devastating effects on the economy. The revalued franc would hurt some elements of French society, most notably those who derived income from government securities or pensions. However, the policy worked well for French industry since it kept exports cheap on world markets compared to those of their British competitors. For the remainder of the decade the country would enjoy a level of prosperity not seen since before the war, and the franc Poincaré was made permanent by law in 1928. The pegging of the franc, however, had some harmful international side effects. Convinced that it was more appropriate to own gold rather than goldbacked dollars or pounds, Moreau in mid-1927 began to sell off the Bank of France’s foreign currency holdings. This, combined with renewed international confidence in the franc, caused gold to flow from the United States and Great Britain into France. Initially the effects on the former were negligible, as the Federal Reserve System possessed plenty of gold, but Britain’s reserves had reached the point that interest rates would have to be raised in order to stem the flow—and the British government feared an outright recession if this occurred. To address this problem representatives of the world’s largest central banks—the Federal Reserve, the Bank of England, the Bank of France, and the German Reichsbank—met on Long Island, New York, in July 1927. At this conference Benjamin Strong agreed to reduce interest rates in an effort to encourage the movement of gold from the United States to Great Britain. As explained in the previous chapter, under the prewar gold standard increasing gold reserves in the Bank of France would have resulted in an increase in the money supply. Poincaré, however, was well aware of the grumbling of many in France over the revalued franc, and feared a political backlash if prices were to begin to rise again. Therefore Moreau agreed to sterilize the gold inflows, just as Strong had done in the United States, and the influx of the metal continued. By June 1928 the Bank of France possessed £237 million in gold, along with £203 million in foreign currency that it was gradually selling

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off. At this point Strong became concerned about the health of the Federal Reserve’s gold stocks, leading to his fateful decision to raise the discount rate. In mid-1928 there seemed little sign of the massive economic storm that lay just over the horizon. Both France and the United States were enjoying unprecedented prosperity, and while Great Britain lagged behind, there was at least reason for believing that the worst of the economic doldrums of the 1920s had passed. Nevertheless, economic matters had created deep rifts among the three countries that only a few years earlier had been allied against Germany. Issues such as war debts, trade barriers, exchange rates, and gold flows generated serious friction because they threatened the economic well-being of important interest groups in each country. Over the next several years, as the Depression was taking hold, relations among them would deteriorate even further—at precisely the time when stirrings of militaristic nationalism were beginning to be heard from Germany, Japan, and Italy.

Chapter 3 Liberalism and Its Discontents: The “Have-Nots,” 1920–1928 d

Germany emerged from World War I as the principal loser, while Japan and Italy were members of the victorious alliance. The return to a global economy after the war imposed serious hardships on all three, as it did on all the industrial powers. But these nations’ problems were exacerbated by the fact that none of them possessed large continental land masses like that of the United States, or colonial empires like Great Britain or France, to serve as reliable export markets and sources for raw materials. As a result they were particularly vulnerable to developments in other countries, over which they had no control. In each country there emerged increasingly powerful interest groups committed not merely to turning away from the world economy, but also to attaining, through military conquest, the territory necessary to make isolation possible. Because the governing regimes in Germany, Japan, and Italy proved largely successful in managing the crises of the 1920s, these forces remained at bay for the time being, but in each instance an ominous question remained—what would happen if these economies faced complete collapse? Like all of Europe’s major powers, Germany emerged from the war exhausted, but faced a particularly difficult situation in that it was subject to the terms of the Treaty of Versailles. Its territorial losses to France, Belgium, and Denmark, as well as to the newly created states of Poland and Czechoslovakia, amounted to 13 percent of prewar Germany’s geographic area and 10 percent of its population. They also represented a loss of 15 percent of Germany’s agricultural land, 12 percent of its livestock, 19 percent of its productive 35

36  d  Chapter 3

capacity in iron and steel, 75 percent of its iron ore, and 26 percent of its hard coal. In addition, Germany lost all of its colonial empire (although, to be sure, this had never provided much in the way of economic benefit) and close to 90 percent of its merchant fleet, and was forbidden to use tariffs to protect its agriculture and industry from foreign competition. The Versailles treaty, drafted without input from the German government and presented as an ultimatum, was denounced by practically every German of whatever political persuasion. They regarded it as an unjust, dictated peace designed to eliminate Germany not merely as a military power, but as a competitor in the world economy. One of the most hateful provisions of the treaty in German eyes was the requirement that Germany pay reparations to its former enemies. The treaty did not stipulate a precise amount, however; this was the job of a Reparations Committee, made up of representatives of the former Allies, which in April 1921 set the total at 132 billion gold marks (£6.1 billion, or nearly $23.5 billion). The first payment of 20 billion gold marks was to be made by the following month. Unfortunately for the stability of interwar Germany, the country’s newly formed government—named the Weimar Republic after the city where the constitution was drawn up—would from the start be associated in the minds of most Germans with defeat in 1918 and the humiliating Versailles treaty of the following year. Weimar has often been called a “republic without republicans,” and while this may have been an overstatement, it is certainly true that genuine affection for the new regime did not run deep in the average German. What legitimacy it possessed was based on its ability to deliver tangible benefits to important constituencies. In the immediate postwar period the most important of these constituencies was organized labor, represented politically by the Social Democratic Party, the country’s largest political organization. As a result the Weimar government guaranteed labor’s right to organize, to bargain collectively with management, and even to participate in decisions regarding pay and working conditions that had traditionally been the sole domain of business owners. The new constitution, ratified in 1919, guaranteed “humane living conditions for everyone” as well as an eight-hour workday, compulsory government arbitration of labor disputes, and “a comprehensive system of social insurance” far beyond that which Bismarck had instituted in the 1880s.1 The favor shown to organized labor gave industrialists—particularly those representing heavy industry, such as coal and steel—reason to distrust the Weimar regime almost from the start. Not only did they chafe at the new regulations, particularly at the recognition they were forced to give to unions, but they were outraged when government arbitration almost invariably resolved disputes in favor of labor. Moreover, they resented being saddled with the additional tax burden necessary to fund the welfare system, on top of already high taxes to fund postwar recovery and the payment of reparations.

Liberalism and Its Discontents: The “Have-Nots,” 1920–1928  d 37

Yet industrialists, like other elites, were deeply divided on matters of foreign affairs. The German People’s Party (DVP) was the preferred party of owners of export-oriented industries such as chemical and electrical goods, and it agreed with the Social Democrats that Germany’s best course lay in full participation in the global economy. Prewar Germany, they argued, had been burdened by an agrarian sector that had remained unnaturally large and inefficient thanks to generous tariff protection. The key to success in the postwar economy, therefore, was to support the modernization of industry and, even more importantly, to reduce trade barriers. No doubt this would make agriculture less profitable and would cause some peasants to leave the land, but they would find ample opportunities for employment in the manufacturing sector. This would allow Germany to produce more for export, and the proceeds could be used to purchase less expensive imported foodstuffs to feed the population. A corollary to this internationalist strategy was referred to in 1920s Germany as the “policy of fulfillment” (Erfüllungspolitik)—that is, strict observance (at least publicly) of the terms of the Treaty of Versailles. While its supporters admitted that treaty adherence would be harmful for the economy in the short term, they hoped it would demonstrate to the Allies just how closely tied Germany’s economic recovery was to their own, and would therefore lead them to rescind some of the treaty’s more onerous provisions. This approach was most commonly associated with Gustav Stresemann, a business lobbyist and leading member of the DVP who briefly served as chancellor in 1923 and held the position of foreign minister from 1923 to 1929. The liberal internationalists encountered strong opposition from members of the German National People’s Party, which was favored by large landowners from the eastern part of the country, as well as by certain industrialists, mainly in old heavy industries such as coal and steel. Its members believed that the greatest weakness of prewar Germany lay not in its monarchy, but in what they saw as its excessive commitment to internationalism. Liberals had emphasized industrialization and foreign trade, but during the war Britain had blockaded Germany’s coasts, denying the country the advantages of either and ultimately leading to widespread starvation. The nationalists, therefore, preferred to pursue self-sufficiency; the basic task, they believed, was to ensure that Germany could produce enough to feed its population and fuel its industrial economy without having to rely on the uncertainties of the world market. Above all, the agrarian sector had to be preserved—even expanded. During the 1920s nationalists sought to defend agriculture through peaceful means. They exhorted the German people to consume locally produced foodstuffs—for example, bread made from rye flour over white bread from imported wheat, and apples rather than imported oranges or bananas. Tariff protection was another option; although they were forbidden to Germany under Versailles until 1925, the Weimar government restored prewar trade barriers as soon as it could. Liberals scoffed at such efforts; Stresemann, for

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example, claimed that “splendid isolation for a powerless people is the greatest lunacy that could exist in politics.”2 Nevertheless, it proved impossible to resist political pressure from large landowners and the German peasantry; indeed, by 1927 duties on imported foodstuffs were 60 percent higher than they had been in 1913. Over the long haul, however, nationalists realized that self-sufficiency could never be achieved unless Germany had reliable access to more land suitable for farming. German social scientists during this period became enchanted with the “science” of geopolitics, which held that nations lacking arable land in proper proportion to their populations would fall into inevitable decline. This meant that, at least as a first step, Germany would have to regain the territory it had lost in the Versailles treaty, and bring the German-speaking parts of the former Austro-Hungarian Empire within its borders. Moreover, the nation needed to have at least economic hegemony over east-central Europe. Nationalists regarded Mitteleuropa, a vast central European trade bloc acting under German direction, as not only achievable but inevitable given that new states such as Poland, Austria, and Hungary were suffering from chronic economic and political distress during this period. Of course, Germany’s forced disarmament under Versailles precluded any serious bid to dominate central Europe in the 1920s. Fortunately for German nationalists, however, General Hans von Seeckt, head of the Reichswehr (­Reich Defense), had found creative ways of cheating on the terms of the treaty. The German General Staff had been formally abolished, yet it continued under a different name. Although the size of the army was limited to 100,000, von Seeckt focused on making it into an elite force, the nucleus for what he expected would grow into a much larger army when the time was ripe. In addition, secret caches of forbidden weapons, such as military aircraft and heavy artillery, were scattered throughout the country—as well as in Russia, thanks to secret provisions in a treaty signed between Germany and the Soviet Union in 1922. Even the most fervent nationalists recognized that a revival of German military power was a distant horizon; in the meantime the country was largely helpless. Few developments highlighted this impotence as starkly as the Ruhr Crisis, when France and Belgium responded to Germany’s failure to make scheduled reparations payments by sending troops to occupy the Ruhr Valley in January 1923. With no hope of fighting the invaders, Berlin coordinated a campaign of passive resistance—a campaign in which more than 100 Germans were killed by the occupying forces. More significant from an economic perspective, however, was the effect that the crisis had on the German currency. Inflation was nothing new to the Weimar Republic; indeed, the reparations burden, coupled with the fact that the regime felt too insecure to alienate any important interest group, dictated that none of the budgets of the immediate postwar years would be balanced. Lacking the constraint of a gold-

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backed currency, the government’s answer was simply to print more money. While at the end of 1919 a single US dollar could be exchanged for 47 paper reichsmarks (RM), three years later the rate had increased to 270. The need to fund passive resistance placed a huge new burden on the budget, as thousands of German workers had been promised state subsidies when they were encouraged to leave their jobs in the region’s coal mines and steel mills. This, combined with increasing uncertainty about the Weimar government’s staying power, rapidly turned inflation into hyperinflation; by the fall of 1923 the exchange rate had reached roughly 8,000 RM to the dollar, and by mid-1924 Germany’s currency had become, for all intents and purposes, worthless. Economic distress conjured the specter of political extremism of the left and right. Workers faced with unemployment and soaring prices turned to the Communist Party, while members of the middle class, seeing their savings wiped out, became susceptible to claims from the new National Socialist German Workers’ Party that Jewish financiers and speculators had connived to bring on the crisis. The leader of the National Socialists, an Austrian-born war veteran named Adolf Hitler, took advantage of the crisis to stage an attempted coup—the so-called Beer Hall Putsch—in Munich in November 1923. For a time it appeared that Germany itself might disintegrate, with the help of the French, who openly backed a separatist movement in the Rhineland. The crisis was resolved through the intervention of an international committee of financial experts headed by the American banker Charles G. Dawes. Under the Dawes Plan, unveiled in August 1924, France promised to evacuate the Ruhr, and Germany’s annual reparations were reduced to one billion gold marks for the first year, rising gradually to 2.5 billion over the next five years. A new gold-backed currency—the Rentenmark—was established, with an exchange rate of 4.2 to the dollar. To help accomplish this, the committee arranged for an international loan of 800 million marks, half of which was to be raised through the sale of bonds in the United States. In fact, the bond issue proved wildly popular on American financial markets, and was oversubscribed by a factor of ten. By 1925, then, Germany was back on the gold standard, and the twin threats of hyperinflation and political extremism had passed. There was a general consensus among the center-right coalition that controlled the Weimar government at the time that the budget had to be balanced—spending had to be reduced and taxes increased. The result of this policy, however, was a sharp rise in unemployment. The hyperinflation may have had the benefit of eliminating Germany’s internal debt (although not the reparations burden, which was assessed in gold), but at the same time it also had wiped out the stocks of private domestic capital that were needed to produce a sustained economic recovery. Over the next several months, therefore, there came from virtually every group in German society demands for tax relief and increased spending on public-works programs to relieve unemployment. There seemed to be no political alternative to an unbalanced budget, but now that Germany once

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again had a gold-backed currency the Reichsbank no longer had recourse to simply printing more money. Ultimately it was foreign capital—mostly from the United States—that filled the gap. Over the next four years Germany borrowed from abroad the equivalent of a third of its gross national product. The Weimar government attracted foreign capital by offering interest rates higher than those prevailing in the United States and Great Britain. Aside from funding economic recovery, Stresemann saw an added benefit in such loans, in that they would make Germany’s health a matter of pressing interest to bankers overseas. This could certainly provide important leverage in future reparations negotiations. A provision in the Dawes Plan stipulated that reparations payments could be deferred whenever the Reichsbank’s reserves of foreign currency ran low; in practice this meant repayment of foreign loans took precedence over reparations. For the next four years, overseas borrowing by the Weimar government as well as by state and city governments allowed Germany to pay reparations under the terms of the Dawes Plan while still providing work for the unemployed. At the same time, loans to private German industrial firms made it possible to carry out a campaign of modernization and rationalization on the American model. They adopted new technologies, introduced assembly lines patterned after those of Henry Ford, and implemented the “scientific management” theories of Frederick Winslow Taylor. But above all the influx of capital brought about prosperity—or at least something resembling it. Per capita GDP expanded by nearly 16 percent between 1925 and 1928 (see Figure 1.1). National income rose from 54.3 billion reichsmarks to around 70 billion during that same period, while per capita income increased from 870 to 1,100 RM. Average wages rose by nearly a third, bringing with them growing consumption of luxuries such as sugar, meat, tobacco, and beer. Some in the United States began worrying about the influx of foreign capital into Germany. The State Department warned that the amount being borrowed exceeded what could reasonably be repaid, and that at least some of this money was being put toward unproductive purposes. S. Parker Gilbert, a former under-secretary of the US Treasury whom the Dawes Committee assigned to Germany as agent general for reparations, pointed out that large sums were being spent on “public amenities” like parks and swimming pools, “many of them of an extravagant nature.”3 Even Stresemann was concerned, and in late 1927 he predicted that an economic crisis was looming. In fact, ominous signs had begun to appear as early as the middle of that year. The Berlin Stock Exchange crashed on May 13, 1927—as a sign of things to come, Germans took to referring to the day as Black Friday. Construction began to fall off that summer, and manufacturing firms began cutting back on production of consumer goods in February 1928. And then the other shoe dropped: during the first half of 1928 the Federal Reserve of New York gradually increased its discount rate in an effort to curb stock-market

Liberalism and Its Discontents: The “Have-Nots,” 1920–1928  d 41

speculation (see Chapter 1). Immediately the flow of US capital to Germany began to decrease; by the end of the year it was a third of what it had been in December 1927. As the decade headed toward its close, Germany would find itself without the money that had sustained virtually all of its postwar economic progress—as well as its political stability. On the surface postwar Japan would seem to have little in common with Weimar Germany. While war and defeat had exacted a terrible toll on the latter, the former, by participating only nominally on the Allied side, enjoyed the benefits of both neutrality and victory. Japan, like the United States, was able to find new global markets for its products thanks to the temporary elimination of Great Britain, France, and Germany as competitors, and emerged from the war a creditor nation. The agricultural sector in particular benefited from rising commodity prices, with rice and raw silk—Japan’s most impor­ tant farm products—tripling in price between 1915 and 1919. At the same time, because Japanese forces in 1914 had helped to drive the Germans from their all-but-undefended empire in the East, Tokyo received some strategically important island chains in the Treaty of Versailles. Nevertheless, Japanese elites expected more from their participation in World War I; in particular, they anticipated that their country would finally be recognized as an equal to the world’s other great powers, specifically the United States and Great Britain. They had pressed at the Paris Peace Conference for the inclusion of a racial-equality clause, which neither the British nor the Americans were prepared to accept. At the Washington Naval Conference of 1921–1922 they learned not only that the British, at American urging, were abandoning their long-standing alliance with Tokyo, but also that neither power would accept a Japanese battle fleet any larger than three-fifths the size of its own navy. The final indignity came when President Coolidge signed the Immigration Act of 1924, which prohibited East Asians from settling in the United States. Japan, like the rest of the industrialized world, suffered from economic problems in the immediate postwar years. The soaring price of rice imposed hardships on the urban population, triggering riots in several Japanese cities in 1919. A recession followed in 1920–1921 as products from the former belligerent powers of Europe found their way back onto world markets. Average wholesale prices fell by more than 40 percent, and exports by nearly half. Japan remained, in theory, an absolute monarchy, although in practice its political life since the Meiji Restoration of 1868 had been dominated by a handful of elite “elder statesmen.” By the 1910s, as these oligarchs died off, the country began to develop, for the first time in its history, an effective legislative branch elected by a growing percentage of the population. The system also supported several organized parties, so that a fairly vibrant political culture existed by the early 1920s. The parties maintained close connections to Japan’s largest businesses—massive conglomerates called the zaibatsu, made up of a wide variety of industrial and financial firms. The leaders of

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these organizations believed that the solution to the country’s ills lay in full participation in the global economy. This meant that as soon as practicable, the country had to return to free trade and a gold-backed currency. Such a strategy also dictated a foreign policy based on cooperation with the two largest players in the international economy, the United States and Great Britain. This approach was most closely associated with Shidehara Kijuro, who served as Japan’s foreign minister from 1924 to 1927. Throughout these years, Japan abided strictly by the terms of the treaties signed at Washington in 1921–1922, accepting a smaller navy and respecting the status quo in East Asia and the Pacific. Tokyo also sought better relations with China by surrendering sovereignty over Shandong, a province that had been controlled by Germany before the war but seized by Japanese troops in 1914 and awarded to Japan in the Treaty of Versailles. The difficulties of the postwar period, fortunately, proved short-lived, and by 1922 the economy was growing again. Nevertheless, two powerful interest groups remained dissatisfied with the liberal internationalism associated with Shidehara and the party governments of the period. The first was the armed forces, particularly the army, which saw its influence over government decline sharply, along with its budget. The military had traditionally played a central role in Japanese politics, going back to the days when the samurai dominated society. It still had tremendous prestige, having won three impressive victories in recent memory—against China in 1894–1895, Russia in 1905–1906, and Germany in 1914–1918. But the civilian governments of the 1920s, in their quest for balanced budgets (with an eye toward returning to the gold standard), slashed spending on the army and navy. In 1920 nearly half of all government spending had gone toward the military; by the end of the decade that proportion had fallen to considerably less than a third. Moreover, in the view of the military the civilian government appeared willing to sacrifice vital national interests in the name of cooperation with the British and Americans. The outcome of World War I had convinced many Japanese army officers that in the future wars would demand the commitment of the nation’s entire resources, and that victory would go only to those that were able to satisfy all of their wartime needs without having to rely on trade with other powers. What Japan needed, therefore, was not greater commerce with the West, but expansion of its empire, particularly on the Asian mainland. The other disaffected group in Japanese politics was the agricultural sector. Even during the war, when commodity prices had been high, farmers were far more likely than their urban counterparts to live in poverty. Relatively few owned their own land, so they had little incentive to modernize, and as much as half their crop yield went toward payment of rent or taxes. And, of course, the high prices did not last. In response to the rice riots of 1919 the government encouraged the import of rice from Japan’s colonies, and by the mid1920s the quantity of imported rice had grown sixfold. This, combined with the government’s deflationary monetary policies, kept prices low through the

Liberalism and Its Discontents: The “Have-Nots,” 1920–1928  d 43

first half of the decade—and then went lower when world prices dipped in the second half. During most of these years, farm income averaged less than expenses, causing many peasant families to fall deep into debt. In an effort to build a coalition to oppose the civilian, party-based government, the army put itself forward as the champion of rural Japan. Both represented, in the army’s eyes, authentic Japanese tradition, threatened by unpatriotic city-dwellers who had embraced foreign ideologies such as capitalism, individualism, rationalism, and representative government. In particular, disaffected army officers pointed to the close relationship between the parties and big business. The economic and security interests of the nation, they claimed, were being sacrificed to the selfishness of the zaibatsu. As long as Japan’s economy continued to do well, the alignment between the military and the farmers could do little to undermine the ascendancy of the political parties and their business allies. But the goal of returning to a gold-backed currency remained elusive. Even those who supported the gold standard in theory feared the consequences of a premature return. Thanks to low labor costs, Japan’s exports were relatively cheap on world markets, but this advantage might be erased if the yen were tied to gold before the currencies of Great Britain, France, and Germany. Any thought of returning quickly to the gold standard was dismissed after the great Kanto¯ earthquake of September 1, 1923, which devastated Tokyo, Yokohama, and the surrounding area. The quake itself lasted no more than ten minutes, but was followed by fires, landslides, and a typhoon that, altogether, cost the lives of around 100,000, and left nearly two million homeless. The funds needed for recovery dictated an expansion of the money supply. As a result the yen lost 22 percent of its value between 1923 and 1925, falling to a low of ¥38.50 to the dollar. In addition, the needs of reconstruction created tremendous short-term demand for imports, and in order to preserve the gold and foreign exchange needed to finance them, high tariffs were imposed on items deemed nonessential, including 100 percent duties on 120 categories of foreign consumer goods. Another reason to delay a return to the gold standard stemmed from a desire to invest in China. Tying the yen to gold would likely result in a shortterm outflow of the metal from Japan. It was well known that the Chinese sought investment to build railroads and develop an industrial sector, and if Japan lacked the capital to provide it, Japanese elites feared that they would turn to the United States or Great Britain instead. This pointed to the one issue of foreign policy on which virtually all elites agreed—Japan must maintain and expand its influence in China. The Middle Kingdom had become increasingly important to Japan’s economy; not only did it supply Japanese industry with crucial raw materials, but by the mid-1920s nearly 28 percent of all the cotton cloth purchased in China came from Japan or from one of the forty-odd Japanese-owned textile mills located in China. From Tokyo’s perspective this meant that the two countries’ fortunes were linked. As one

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Japanese diplomat explained to the US secretary of state, “A civil war or collapse in China may not have any direct effect on other nations, but to Japan it will be a matter of life or death. A civil war in China will immediately be reflected in Japan, and the downfall of China means the downfall of Japan.”4 Tokyo had particularly strong interests in the northeastern part of China. Japanese firms owned a number of factories in Shandong, and even though in 1922 Tokyo had surrendered control of the province to a clique of local warlords, Japan reserved the right to send troops to the region if Japanese interests there were threatened. Even more important was neighboring Manchuria. Although a part of China since the mid-seventeenth century, Manchuria had been effectively under Japanese control since the Russo-Japanese War. Nominally the province was ruled by the warlord Zhang Zuolin, but the most powerful economic entity was the South Manchuria Railway Company (SMR), which dominated nearly every aspect of the local economy—not just the railroads, but mining, manufacturing, and shipping. Although the SMR was owned in part by private investors, it was in practice an agency of the Japanese government. Both economic and strategic considerations led Tokyo to regard Manchuria as vital to its interests. Japan consumed huge amounts of the region’s primary agricultural product, soybeans, for use as fertilizer and livestock fodder. It was also an important source of coal and iron ore, both of which were critical to Japanese industry. Moreover, the Japanese army had long regarded Manchuria as an important buffer zone to protect Japan from Russian expansionism, as well as a possible staging area for future operations against the Soviet Union or China. For this reason Tokyo stationed an elite military unit, the Kwantung Army, in the southernmost part of Manchuria. But while Japanese officials routinely spoke of the need for close cooperation with China, Chinese nationalists felt smothered by Tokyo’s embrace. They recalled only too well that Japan had participated in the “scramble for concessions” in the late 1890s, taking their place alongside the European powers to encroach on Chinese sovereignty. Indeed, during and after World War I the Europeans took far less of an interest in China, so that Japan seemed like the greatest threat to the country’s independence. On three occasions in the 1920s, therefore, nationalists organized boycotts of goods produced in Japan or Japanese-owned factories, which caused even Japanese industrialists and merchants—normally the leading advocates of a conciliatory policy toward China—to call on the government to defend their interests more vigorously. There was additional cause for concern in Tokyo when it began to appear that the Nationalist government, based in Nanjing, might succeed in subjecting the entire country to its centralized control. In the years after the Chinese Revolution of 1911–1912, much of the country had fallen under the domination of local warlords such as Zhang Zuolin, and many of these had proven responsive to bribes or other forms of pressure from Tokyo. However, in the late 1920s a National Revolutionary Army under the leadership of

Liberalism and Its Discontents: The “Have-Nots,” 1920–1928  d 45

General Jiang Jieshi conducted a “Northern Expedition” against the warlords of northeastern China, successfully securing—by diplomacy or force—their submission to Nanjing. Tokyo was sufficiently concerned by this that it sent troops to Shandong in mid-1927 to protect Japanese interests there, and in the following spring actual fighting broke out between Chinese and Japanese troops near the city of Jinan. Jiang chose at this point to bow to Tokyo’s demand for an apology rather than risk a larger conflict, but it was clear that the prospect of a united, revitalized, independent-minded China was a serious threat to Japanese interests. Particularly troubling was the rise of Chinese nationalism in Manchuria. As early as 1923 nationalists were publicly demanding that the South Manchuria Railway be turned over to China, and by the middle of the decade strikes and vandalism against SMR property were becoming increasingly common. Zhang Zuolin continued to cooperate with Tokyo, but in 1927 his position appeared to be in jeopardy as Jiang’s Nationalist forces marched into northern China. As Zhang retreated, officers of the Kwantung Army feared that he might sacrifice Japanese interests in Manchuria by cutting a deal with the Nationalists. A group of junior officers decided to act on their own authority, and on June 4, 1928, they detonated a bomb under the train car in which Zhang was traveling. They then attributed the murder to Chinese nationalist “bandits,” hoping that this would spur the government in Tokyo to authorize the Kwantung Army to occupy all of Manchuria. In this they were disappointed. Upon learning of the assassination of Zhang, the prime minister, Tanaka Giichi, reportedly exclaimed, “What fools! They behave like children. They have no idea what the parent has to go through.”5 The cabinet rejected any thought of military action, and control of Manchuria passed to Zhang’s son, Zhang Xueliang. For the moment the internationalists in Tokyo maintained the upper hand, and the civilian government in Tokyo had succeeded in restraining the most reckless elements of the Japanese Army. Indeed, businessmen and financiers were still advocating a foreign policy based on cooperation with the West, and pushing for full-scale participation in the global economy. Five years after the Kanto¯ earthquake Japanese banks held large surpluses for the first time since the war and looked to make major investments abroad, particularly on the US stock market. The only thing holding them back was fear that a fluctuating exchange rate might deprive them of their earnings from foreign investments. In 1928, therefore, pressure for a return to the gold standard was becoming impossible to resist. Ultimately it would prove to be the internationalists’ last great victory. Italy was in a unique position in the 1920s as the only power controlled by a regime that was, at least in theory, dedicated to “third way” ideology. Benito Mussolini and his National Fascist Party took power in 1922, capitalizing not only on the country’s postwar economic difficulties but also on a wave of frustrated nationalism over the failure of the Allies to grant Italy all the territory

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to which Italians believed their country was entitled for its participation in the war against Germany. Over the next five years he established a one-party dictatorship, and in 1925 he started calling himself Il Duce—“the leader.” Publicly Mussolini appeared to be a dedicated enemy of the international status quo, writing and speaking openly about the desirability of war and calling for the projection of Italian power throughout the Mediterranean region. His desire for military glory made him an opponent of economic liberalism, and he frequently blamed his country’s relative weakness on what he called “supercapitalism.” Early fascist ideology embraced the notion of “corporatism,” in which the economy would be dominated by large entities (called “corporations,” but which should not be confused with private stock-issuing firms) jointly governed by business owners, workers’ representatives, and government bureaucrats. All of these organizations would act in the name not of private business, but rather the state, the “legal incarnation of the nation” to which all individuals must be subordinate.6 Yet reality differed sharply from rhetoric. For most of the decade Mussolini did very little to interfere with either the international order or the autonomy of the business world. Indeed, he took pains to make his regime appear nonthreatening to businessmen; he even privatized certain enterprises that had previously been run by the government, and in 1924 he told an American newspaper that he and his party stood solidly “for the greatest economic liberty.”7 There seemed to be little need for state intervention, because at least until 1925 the economy seemed to be doing quite well. Exports enjoyed rapid growth, unemployment fell steadily, and in 1924 industrial production exceeded its prewar level. The dark spot on the horizon was inflation; like every other major power, Italy had abandoned the gold standard during the war and remained off gold during the immediate postwar period, since to do otherwise would have required a level of deflation that was deemed politically impossible. Therefore the lira lost a third of its value between 1922 and 1925, and from 1925 to 1926 it lost another 14 percent. The cost of living by the middle of 1926 was more than six and a half times what it had been before the war. If the country was to avoid a full-blown crisis, Italy’s leaders believed that it was necessary to stabilize the currency, and the first step in doing this was to bring the national debt under control. In 1925 Mussolini appointed as minister of finance Count Giuseppe Volpi di Misurata, a former governor of Italy’s North African colony of Tripolitania. By converting the domestic debt—held by Italian bondholders—from short-term to long-term obligations he effectively reduced it from 28 billion lire to 6 billion. He then concluded highly favorable agreements with Great Britain and the United States to dispose of the country’s foreign war debt. The deal with the United States opened up the US bond market to Italian loans, and over the next few years Americans invested nearly $900 million in Italy. J. P. Morgan took the lead in this; one

Liberalism and Its Discontents: The “Have-Nots,” 1920–1928  d 47

senior partner proudly referred to Morgan’s firm as the fascist regime’s “loyal and disinterested counselors on all external finance problems.”8 In at least one respect American capital limited Mussolini’s imperialistic ambitions: he and his government understood all too well that violent efforts to overturn the status quo would not be well received on Wall Street. As a result, Il Duce’s fulminations on the nobility of war and the aspirations of the Italian people were increasingly dismissed abroad as strictly for domestic consumption. On the other hand, foreign credit allowed the fascist regime to wage what Mussolini called the “battle for the lira,” employing martial, nationalistic rhetoric to promote an essentially liberal, internationalist policy. In a speech given in the summer of 1926 he announced that the regime would demonstrate its strength and determination by pegging the currency at 90 lire to the pound. Since inflation had been driven in part by the country’s negative trade balance, he waged a simultaneous “battle for grain,” promoting the domestic production of wheat so as to make the country less dependent on foreign imports. By the end of 1927 the former “battle,” at least, had been won, and the lira was formally returned to gold at Mussolini’s chosen rate. But this victory came at the cost of massive deflation. Italian exports, now overpriced on world markets, plummeted, and unemployment rose precipitously, even as most of the rest of the industrialized world was enjoying relative prosperity. By 1928 a full-scale economic crisis was looming in Italy, and when at the end of the year loans from the United States came to a virtual halt the situation grew worse. The fascist regime’s experiment with economic liberalism was about to end—and so was its willingness to respect the international status quo.

Chapter 4 The Crisis Begins: The United States, 1928–1933 d

The Great Depression dealt a mortal blow to the international order, as the major powers all sought to solve their economic problems through nationalistic “third way” policies that, in effect, pushed the costs of recovery onto other countries. But when did the Depression actually begin? For the sake of convenience, most use the dramatic crash of the New York Stock Exchange in October 1929 as the starting point. However, this overlooks the fact that some countries, particularly Germany and Italy, were experiencing significant difficulties in 1928. Indeed, Great Britain had suffered from sluggish growth and high unemployment for most of the decade. Only two countries—the United States and France—seemed to be truly prospering at the end of 1928. Nevertheless, during that year a number of signs pointed to an increasing sense of isolationism in America. This set in motion a cyclical pattern in which the breakdown of the international economy brought hardship to all of the industrial powers, which would in turn encourage them to pursue policies that promoted recovery at the expense of their neighbors. As noted in Chapter 1, most Americans, particularly those living in small towns and rural communities, had never shared the internationalism of Wall Street. However, by 1928 even New York’s financial sector seemed to be losing interest in the rest of the world. There were increasing concerns about the massive amounts that had been lent abroad, particularly to Germany, since 1925. Investors had been drawn to the high interest rates prevailing in Europe, considerably higher than those at home. But in 1928 the easy availability of credit from Wall Street made the stock market seem like a far more 48

The Crisis Begins: The United States, 1928–1933  d 49

profitable investment, and by early 1929 the amount of US capital going overseas had fallen by half. Most of this wealth went instead into the New York Stock Exchange. One immediate effect of the decline in foreign lending was that US gold reserves began to pile up. Overseas investments, after all, had been the primary avenue by which gold had left the country, offsetting America’s massive trade surplus. In addition, higher interest rates in the United States began to attract foreign investors. Thus while a net $404 million in gold left the country between November 1924 and July 1928, over the next fifteen months reserves grew by $268 million. This forced Great Britain, Germany, Italy, and a number of smaller European countries to raise their interest rates in an attempt to stop further losses, with devastating effects on their economies. Foreigners also noted that American politics seemed to be taking an even more isolationist turn. The first hint of this was the spectacular failure of the Geneva Conference of 1927, called to discuss extending to other types of vessels the limits on construction of new battleships, first set down at the 1921–1922 Washington Naval Conference. The American delegation returned convinced that the British were unwilling to tolerate a US Navy equal in strength to their own, and this briefly led to public enthusiasm for naval construction. In addition, Calvin Coolidge—by this time a lame-duck president—announced on Armistice Day that “the needs of our own people” must take precedence over any desire on the part of Americans to lend assistance to Europe.1 But more than any other factor, the landslide presidential election of Herbert Hoover in 1928 served as a warning abroad that the United States was turning inward. Foreign observers well remembered how, as secretary of commerce, Hoover had attempted to place a damper on overseas lending and had employed nationalistic rhetoric in his fight against the Stevenson Plan (see Chapter 1). During his campaign Hoover put himself forward as the candidate of small-town America, in contrast to his opponent, New York Democrat Al Smith. He promised to protect US farmers by raising tariffs on imported agricultural products, and to resist forces pushing for cancellation of the war debts. Internationalists were clearly worried about a Hoover presidency; as one Morgan banker put it, “he would be about the worst possible president from the standpoint of foreign affairs, and . . . there would be a real danger to our foreign policy if he should be elected.”2 Hoover’s early actions as president did nothing to allay these fears. When in early 1929 a new international committee of experts was formed to take up the issue of German reparations, he initially opposed any American participation, fearing that Europeans would take the opportunity to attempt to link war debts to the payment of reparations. He eventually relented, even allowing Owen Young, president of General Electric, to serve as chair. However, when the Young Committee proposed the creation of a Bank for International Settlements to promote cooperation among central banks to finance

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e­conomic development and world trade, Hoover smelled a rat. While he could not prevent private American banking interests from affiliating themselves with that proposed bank, he refused to permit the Federal Reserve Bank of New York to have anything to do with it. Even more troubling was the fact that Hoover seemed determined during his first year in the White House to live up to his campaign promise to raise tariffs. The president had only spoken of raising rates on agricultural imports; in fact, he had suggested that tariffs on manufactured goods were already too high. However, when Congress took up the matter in the spring of 1929, representatives of certain industries succeeded in getting increases on the rates for their products as well. By the time the Tariff Act of 1930—more commonly known by the names of its primary sponsors, Senator Reed Smoot and Representative Willis C. Hawley—reached Hoover’s desk the following spring it included rate increases for virtually every item that entered the United States. A wide range of economists, bankers, and representatives of export-oriented manufacturing firms wrote the president warning of the disastrous effects Smoot-Hawley would likely have for international trade, and Hoover himself expressed disappointment that the bill had been hijacked by industrial interests. Nevertheless the president signed it on June 17, concluding that further protection for manufacturing was the price he had to pay for farm relief. Hoover predicted that Smoot-Hawley would cause little reaction abroad; in this he could not have been more wrong. No fewer than thirty-four US trading partners issued written statements of protest. Countries all over the world retaliated with higher rates of their own, although many did not even wait for the final bill to be passed, suggesting that they might well have increased tariffs under any circumstances. Immediately the volume of world trade began to shrink; in 1929 the United States imported $4.4 billion in foreign products, but only $3.1 billion the following year. By early 1931 both exports and imports had fallen to less than half their 1929 levels. Farmers, whose interests were to have been protected by Smoot-Hawley, ended up suffering the most. American wheat growers had cheered when the tariff on imported grain was raised by nearly 50 percent, but they found that even with prices at historic lows they were unable to sell more than 11 percent of their crop in 1931. It is difficult to gauge the real effects of Smoot-Hawley, however, since the period when it was being debated, and the first two years after its passage, corresponds with a general deterioration of the global economy. Economic historians still have yet to reach any consensus on what was ultimately responsible for the downturn. It is certainly clear that there was little sign of trouble at the time of Hoover’s election. The stock-market boom, in fact, accelerated after the election of 1928; by the end of that year the Dow Jones Industrial Average for stocks had reached 300, nearly 50 percent higher than it had been at the end of 1927 and nearly five times what it had been in 1921. In late summer the Dow hit 380, with an average of 4.28 million shares being traded every

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day. An enormous sum of money was tied up in stocks—$67 billion in early 1929. In 1923 that figure had been $4 billion. But as the world was about to learn, the health of the New York Stock Exchange was not the best measure of the health of the economy. Overall industrial production likely reached its apogee in the spring of 1929, then fell off somewhat as consumption decreased. Automobile production dropped from its peak of 622,000 cars in March to 416,000 in September. By the summer the unemployment rate had ticked up slightly, to just over 3 percent, although this seemed little cause for concern given that Germany, a country with half the population of the United States, had nearly a half million more men out of work. The continuing boom on Wall Street led some to worry that the vast amount of wealth pouring into the stock market from all over the world was not being put to productive uses, but was merely inflating a massive speculative bubble. Montagu Norman begged the new governor of the Federal Reserve Bank of New York, George Harrison (who succeeded Benjamin Strong after the latter’s death in October 1928), for an additional increase in the discount rate. Harrison was sympathetic, but he lacked the power to raise rates on his own; he had to petition the Federal Reserve Board in Washington, DC, whose members feared that higher rates might produce an economic downturn. Starting in April 1929 he asked the board on nine occasions, but was rebuffed each time. Only on August 8 did the board agree to Harrison’s request, but two days later the Federal Reserve began buying up government securities from commercial banks, spending $261 million over the next couple of months in an effort to expand bank reserves. The rationale for this seemingly contradictory policy was that the board sought only to curb speculation, and did not want to slow the economy in general. However, banks responded by extending even more credit for stock purchases, so that the practical effect of the purchase of securities was to drive up prices even further. The policy was abandoned on October 19, and it did not take long for the effects to be felt on Wall Street. The stock market faltered in mid-October and a massive sell-off occurred on October 24, but the worst came on Tuesday, October 29—Black Tuesday—when 16.4 million shares were unloaded. By mid-November the market had dropped by nearly half. Hoover’s initial response was mild; he had been warning for some time about the dangers of a bubble, and saw the collapse of stock prices as just punishment for speculators. The real economy, he believed, remained sound. But the crash did not affect only those with money in the market. Banks and businesses quickly found themselves short of cash, experiencing what economists call a “liquidity crisis.” Banks responded by calling in loans, including mortgages, and a wave of foreclosures and business failures followed. Banks that failed to bring in sufficient capital in this manner simply collapsed. Businesses, meanwhile, canceled orders, causing industrial production to fall by more than 10 percent by the end of the year.

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The drop in automobile manufacturing was particularly sharp—319,000 cars were built in October, but only 92,500 in December. The Federal Reserve Bank of New York quickly began lowering its discount rate—at first to 5 percent on October 31. When that proved ineffective, it lowered the rate four more times during the first half of 1930, so that by June of that year it stood at 2.5 percent. It also purchased nearly a half billion dollars in securities. Hoover, after appreciating the extent of the crisis, moved as well, pushing through Congress $160 million in tax cuts and spending increases for federal public-works projects. State and local governments responded similarly, so that all together more money was pumped into the economy in 1930 than in any other single year in the decade to come. But while these measures helped to stop the bleeding, they did not bring recovery. By the end of 1930 2.5 million jobs had been lost, and per capita GDP contracted by nearly 10 percent (see Figure 4.1). Individual income had fallen by a quarter, and corporate income by well over a third. Prices for manufactured goods had dropped by 15 percent while farm prices were down by nearly 30 percent. There has been an enduring myth that Hoover was a “do-nothing” president who callously looked on as the economy collapsed, uttering bromides about “rugged individualism” while millions of ordinary people suffered. In fact, as seen in Chapter 1, Hoover had been a longtime advocate of “third way” policies. He believed strongly in what some historians have called “corporatism” or “associationalism”—that is, he was convinced that cooperation among enlightened, public-spirited managers, both in government and business, was the solution to the “anarchy” and “wasteful competition” that often resulted from a free-market economy. In line with this thinking, he held a series of conferences in 1930 in which employers promised not to reduce wages, while members of the financial community pledged to pump more capital into the economy. Moreover, those assembled kept their promises more often than not—at least until 1931. There were, however, limits to how far Hoover was prepared to go. Although he was willing to spend heavily on public works—indeed, spending by the federal government as a share of GDP doubled during his presidency—he regularly vetoed “pork barrel” proposals that he believed were more for the purpose of getting members of Congress reelected than improving the economy. Moreover, his version of corporatism emphasized voluntary cooperation over coercive methods, and in the final two years of his presidency he was increasingly challenged by those who believed that the government should plan and direct the economy as it did during World War I. Economists such as Stuart Chase and George Soule advocated a full-scale revival of the system of many of the old wartime agencies. Staffed by experts trained in the social sciences, these bureaus would have the power to channel capital and other resources toward whichever purposes best served the national interest.

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Figure 4.1 Per Capita GDP of the Great Powers, 1928–1932 8,000

7,000

1990 US Dollars

6,000

5,000

4,000

3,000

2,000

1,000

0 1928 United States

1929 Great Britain

1930 France

1931 USSR

Germany

1932 Japan

Italy

Source: Data from Angus Maddison, 2014, “Maddison Historical GDP Data,” World Economics, www .worldeconomics.com/, accessed May 14, 2014.

The best known among these schemes was advanced by Gerard Swope, president of General Electric. The Swope Plan envisioned a network of trade associations—dominated by the leading firms of each industry—responsible for regulating production, prices, and wages and subject to federal oversight. Meanwhile, labor relations in each industry would be handled by joint committees made up of representatives of labor and management. The same committees would administer a system of old-age, disability, and unemployment insurance. Hoover found Swope’s proposal objectionable on a number of levels: it would, for one, violate federal antitrust laws, leading to the creation of “gigantic trusts such as we have never dreamed of in the history of the world.” Moreover, he regarded it not merely as unconstitutional, but as an attempt “to smuggle fascism into America through a back door.”3 For a time Hoover’s emphasis on voluntary cooperation and limited spending on public works, combined with the Federal Reserve’s low interest rates and buoyed by a steady flow of gold into the United States, seemed to be working. Prosperity had by no means returned, but the second half of 1930 saw a series of confident predictions that the worst of the storm had passed and that 1931 would bring sustained recovery. Unfortunately this did not prove to be the case; 1931 would, in fact, bring disastrous new lows, thanks

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largely to a crisis in central Europe. The announcement in May of that year that the Creditanstalt, Austria’s largest bank, was on the verge of collapse soon sent ripples across Europe, and ultimately the world. This, and the events that followed in its train, turned what had up to this point been an ordinary, if severe, economic downturn into a full-blown Depression. In the short term, few believed that the failure of the Creditanstalt could have any significant effect on the United States. Hoover, in mid-June, boasted that America was “economically more self-contained than any other great nation.”4 Exports, after all, amounted to considerably less than 10 percent of gross national product, making the country more or less immune to foreign economic shocks. However, the spread of the crisis to several German banks called into question the massive amounts of capital that US investors had sent to Germany between 1925 and 1928. Hoover learned, to his dismay, that these liabilities amounted to some $10 billion. In addition, Reichsbank director Hjalmar Schacht was warning that Germany would be unable to make further reparations payments without outside assistance. While Hoover was ever loath to admit any connection between reparations and war debts, he recognized privately that the chances of collecting the latter from Britain and France depended in large part on their ability to collect the former from Germany. Both of these factors—along with Hoover’s belief that a bold initiative on his part would give a psychological boost to the economy—convinced the president that he could not remain aloof to Europe’s problems. He rejected a request from Paris to join Britain and France in a $500 million loan to ensure the solvency of the Reichsbank, arguing that Americans had already sunk too much money into Germany for “nonreproductive purposes.” He also resisted German calls for an international conference to discuss the matter, fearing that it would merely give Europeans another forum for complaining about war debts. Instead he proposed a one-year moratorium on all reparations and war-debt payments. Temporarily releasing European countries from these obligations, he reasoned, would make it possible for Germany to continue its payments to private investors. Hoover hoped to delay a public announcement of his moratorium proposal until he had finished consulting both congressional leaders and representatives of the European powers. However, his plans were spoiled when he learned that a senator had leaked the proposal to the press. Fearing that the newspapers might give a distorted account, he opted for a preemptive announcement on June 20. The initial reaction was enthusiastic, and businessmen and academics alike were effusive in their praise. The stock market surged, and most newspapers—even the notoriously isolationist Chicago Tribune—offered positive assessments of the moratorium. The British and French were more skeptical. Hoover had managed to secure agreement from the British prime minister, Ramsay MacDonald, before the announcement, although Austen Chamberlain no doubt represented the

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views of many Britons when he wrote that the moratorium was merely “a belated act of common sense dictated by self-interest.”5 But the French premier, Pierre Laval, learned of the proposals only in the newspapers, and he was not pleased. France, after all, was the principal recipient of German reparations, and French investors had not joined the Americans and British in their rush to extend loans to Germany in the late 1920s. The moratorium proposal, therefore, appeared in Paris as an attempt to protect Anglo-American financial interests at the expense of France. Moreover, Laval objected, up to this point any decisions regarding German reparations payments had been decided multilaterally at international conferences. This time the United States was proposing a major adjustment on its own. Paris, therefore, delayed in issuing any formal response—and in the meantime, the German economy grew worse. Only three weeks later did Laval reluctantly announce that his government was willing to accept the moratorium (see Chapter 5). In the end, the Hoover moratorium had little effect on the international economy. It did nothing to direct needed capital to the collapsing economies of central Europe, so the international payments situation would be no better when the moratorium expired a year later (and, as Hoover was well aware, there was no support in Congress for an extension). In addition, it did nothing to reduce the international tensions that were holding back recovery; indeed, if anything, it made them worse. Hoover (as did the British) blamed the French for the policy’s failure, accusing them of withholding their approval so as to inflict maximum damage on their traditional enemy across the Rhine. As the president saw it, he had sacrificed precious political capital at home in an effort to stabilize Europe’s economy, only to be betrayed; it was a mistake that he would not make twice. By late summer the crisis was no longer confined to central Europe. The gold reserves in the Bank of England had plummeted to dangerously low levels, leading Britain to abandon the gold standard in September (see Chapter 5). Immediately those holding dollars—the French in particular—grew fearful that the United States might follow suit, and began exchanging their dollars for gold at an alarming rate. On September 22—the day after Britain left the gold standard—the Federal Reserve lost $116 million, the largest single-day loss in the institution’s history. By the end of October gold reserves had declined by more than $750 million. Adding fuel to the fire was a series of bank failures as depositors worried about the future of the banking system began turning up to empty their accounts. By the end of the year nearly 2,300 banks had closed their doors. It is estimated that well over a billion dollars were withdrawn from the US economy in a little more than a month.6 The liquidity crisis had predictable effects on the rest of the economy. Between September and December gross national product fell by 7.7 percent while international trade dropped by half. The manufacturing sector lost $870 million, causing unemployment to surge to 25 percent. Business owners who had pledged to Hoover in 1929–1930 that they would not r­educe

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employee wages now found it impossible to keep their promises, so that even those fortunate enough to have jobs saw substantial reductions in pay. Rural America faced even worse trouble, as the prices for farm commodities dropped an additional 30 percent from their already low 1930 levels. At the end of 1931 farm prices had fallen to their lowest levels of the twentieth century. Efforts to deal with the crisis were hampered by the alarming flight of gold. Any progress that had been made in 1930 and the first half of 1931 had likely been attributable to the Federal Reserve’s policy of low interest rates and securities purchases. However, this policy could be sustained thanks only to the country’s massive gold reserves. With gold now fleeing the country, the only way it could continue would be if the administration decided to pull the dollar off the gold standard. This neither Hoover nor Federal Reserve officials were willing to do. The example of France and Germany in the 1920s had amply illustrated the dangers of inflation; to abandon gold might undermine whatever business confidence was left in the nation. Moreover, any hope of economic recovery depended on the willingness of banks and other financial institutions to issue loans. Any devaluation of the currency, the president feared, would make loans less profitable since borrowers would be able to repay in cheaper dollars. Since Hoover ruled out devaluation, the only other alternative was deflation. On October 8 the Federal Reserve Bank of New York raised its discount rate from 1.5 to 2.5 percent, and when this failed to stop the flight of gold, the rate was raised to 3.5 percent a week later. Predictably, this caused a contraction in credit—including lending to the federal government. Hoover had increased spending in 1930 even as tax revenues fell, so in June the president was forced to admit that the deficit for fiscal year 1931 would exceed $900 million, a figure unprecedented during peacetime. But while this seemed alarming, there had been no problem in financing that deficit through the sale of treasury bills. The flight of gold that autumn changed everything, as investors suddenly lost confidence in the government’s future ability to repay. This forced Hoover to do all he could to reduce the deficit, and he quickly secured from Congress $238 million in spending reductions. The armed forces were a particularly tempting area to cut, especially the navy, which was considerably larger than the army. At the London Naval Conference of 1930 Great Britain had accepted for the first time full equality with the United States in all types of naval armament (the Five-Power Treaty signed at Washington in 1922 covered only battleships). This meant that the United States under the London treaty could have built fifteen heavy and nearly twice as many light cruisers. The austerity program of 1931–1932 brought all such plans to a halt. Not until 1938 would the US Navy reach the limits specified in the treaty. Unfortunately, just as the Hoover administration was rejecting any possibility of expanding the size of the US Navy, a serious international crisis

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erupted on the other side of the globe. Japanese troops, in search of a quick solution to their own country’s economic woes, occupied Manchuria on September 18, 1931. The move was troubling on multiple levels. It was a direct violation of the Nine-Power Pact, signed at Washington in 1922, in which signatories pledged to respect China’s sovereignty and territorial integrity. It also went against the 1927 Kellogg-Briand Pact. More disturbing was the fact that it was the first violent effort by a major power during the interwar period to overthrow the international status quo. Many others would follow in the years to come. From the start it appeared highly unlikely that the United States would respond to the invasion of Manchuria with forceful measures. Secretary of State Henry Stimson noted that 3,600 US citizens lived in Japan, and that there were nearly half a billion dollars in American capital invested in the country. Moreover, although the economic crisis had reduced the flow of Japanese imports to a trickle, Japan continued to import large amounts of raw cotton, petroleum, scrap iron, and other items from the United States. By contrast, while Americans might have sympathized with China as the victim of aggression, US economic interests in the country were much less significant. China, after all, had been highly unstable since the 1911 revolution, so American investment had reached only $155 million—and since less than 10 percent of this investment (around $13 million) was actually located in Manchuria, the effect of the Japanese occupation would be negligible. The financial community, therefore, was not overly concerned, some comparing Japan’s actions in Asia with their own country’s history of intervention in Latin America. Even Hoover himself allowed that in staking out an empire in China, Japan was merely acting as “a faithful follower of the European powers” who had been at that game for years.7 It would, of course, have been unprecedented for the United States to use military force to defend China’s territorial integrity. But the attitudes of the administration and the business community made even trade sanctions problematic, as they feared that such a policy would place greater pressure on the US economy at a time when gold was already fleeing the country. The administration’s only response, therefore, was to put forward the so-called Stimson Doctrine, in which the secretary of state announced that the United States would refuse to recognize violent changes in the international status quo. Although most businessmen and officials understood that this was not likely to deter the Japanese from doing whatever they pleased in Manchuria, they believed that ultimately the United States possessed a more effective weapon: credit. Japan’s military efforts, many State Department officials believed, would increase the country’s demand for US investment. The policy, therefore, was to not encourage any further long-term loans. The financial community complied, particularly since Japan in the early 1930s did not appear to be a particularly good risk, although bankers remained willing to renew short-term credit.

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While the occupation of Manchuria was troubling, Hoover was clearly more concerned in late 1931 over the continuing flight of gold. Although he had been outraged by what he regarded as French obstructionism in the weeks following his moratorium proposal, he also believed that a financial understanding between France and the United States—the two most powerful nations remaining on the gold standard—might be useful in stabilizing the economy. French premier Pierre Laval traveled to Washington in October, but from the start it was clear that the two men had different expectations of the ensuing talks. As will be seen in Chapter 5, France had yet to experience the full force of the economic crisis, so Laval focused on matters that had preoccupied French governments since the end of the war: he sought formal recognition by Hoover that German reparations and war debts were inseparable, as well as a ten-year US guarantee of the political boundaries in western Europe. The president, however, was no more willing than his predecessors to give way on these issues. In response to the former, Hoover merely held out the possibility that there should be further discussions on war debts and reparations before the expiration of the moratorium. As for the latter, the president insisted that the best way to maintain peace in Europe was through disarmament. Since Germany had already been forced to disarm under the Versailles treaty, this meant that he expected France to do likewise. Neither Hoover nor Laval came away satisfied from their talks—Hoover described the French to Stimson as “rich, militaristic, and cocky”8—but they were willing to agree on the importance of the gold standard to the international economy. The two men issued a statement to that effect, expressing their mutual desire for Great Britain to return to gold. Furthermore, Laval pledged to put a stop to the Bank of France’s policy of redeeming its dollar holdings for gold, which had been the primary source of the gold drain from the United States since September 21. Sure enough, the outflow stopped in late October, and US gold reserves increased by nearly $600 million between then and the end of the year. However, in mid-January the Bank of France began selling off its dollars once again, this time in response to an article in a Paris newspaper announcing (falsely) that Hoover was considering inflationary policies to deal with the Depression. The central banks of Switzerland, Belgium, and the Netherlands began redeeming their dollars for gold as well. By July 1932, when the three countries had essentially exhausted their supply of dollars, US gold reserves had decreased by $1.1 billion. All of this led Hoover to redouble his efforts to balance the budget, believing that this was the only means of restoring confidence in the economy. Those government expenses that Hoover could not reduce he attempted to hide by shifting as many as he could off-budget. A classic example was the president’s signature initiative of 1932, the Reconstruction Finance Corporation, which was designed to channel much-needed capital to endangered banks and other financial institutions. Rather than have the corporation financed through government revenues or the sale of treasury bills, the agency

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borrowed its entire $1.5 billion budget in its own name, as if it were an independent entity. Hoover’s fear that the government would soon lose its ability to borrow also led him to propose a series of tax increases in his December 8, 1931, State of the Union message. Congress—under Democrat control since the previous year’s midterm elections—initially balked at this, but the legislators changed their minds in May 1932 after it was reported that the deficit stood at well over $2 billion with two months remaining in the fiscal year. The Revenue Act of 1932, passed in early June, raised excise and postal rates, doubled the estate tax, increased corporation taxes to nearly 15 percent, and implemented an across-the-board hike in income taxes. The rate for the top income bracket soared from 25 to 63 percent, thus entirely undoing the cuts implemented by Harding and Coolidge in the 1920s—and, of course, withdrawing still more money from the economy. Another factor contributing to the worsening economic climate, albeit in a far smaller way, was the sudden evaporation of the US export trade to the Soviet Union. That trade had reached its high point in 1930 as Stalin imported vast amounts of Western technology, particularly from the United States and Germany. His goal was rapid industrialization of the country, fueled by worries that the West, feeling the effects of what he was certain was capitalism’s final crisis, would lash out with its final reserves of strength to destroy the still-fragile socialist republic. In that year, therefore, the USSR purchased $111.3 million in US industrial equipment—including nearly three-­quarters of the country’s exports of foundry equipment and virtually all of its exports of turbines. In 1931, however, Stalin abruptly changed course. His intent had been to pay for imports of technology through the sale of grain, Russia’s traditional export. But although prices for industrial goods had been falling steadily since 1929, prices for commodities such as grain were falling even faster. The Soviet regime responded by upping its exports, but this only caused prices to fall even more rapidly—generating in the process international accusations of “dumping” cheap grain on already glutted world markets. (The increased level of exports also helps to account for the horrific Ukrainian famine of 1932–1933.) Faced with a mounting trade deficit, Stalin abruptly ended his policy of importing technology. Total US exports to the Soviet Union slipped to $103.4 million in 1931, but then tumbled to a mere $8 million in 1932—a level where they would remain for much of the decade. Although it is inappropriate to speak of a Great Depression in the USSR (after all, the Soviet economy grew at an average rate of more than 5 percent annually during this period) the Kremlin pursued a strategy that was strikingly similar to that of the United States and the rest of the industrialized world—of trying to seal off the country from the international economy. All of these factors combined to make 1932 the worst year of the Depression. By that spring per capita GDP had tumbled by nearly 30 percent (see Figure 4.1), bringing it below that of Great Britain for the first time since

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1917. Nearly every other important measure of economic activity had fallen by at least half from 1929 levels. International trade had plummeted by two-thirds, and in certain capital-intensive industries, such as automobiles, construction, machine tools, and mining, production had dropped by nearly three-quarters. Gross investment, which had stood at $16 billion in 1929, had fallen to $1 billion, and nonfarm unemployment rose from 3 percent to 36 percent. Even more ominously, economic distress produced domestic unrest, in both the cities and the countryside. There was a 50 percent increase in strikes, and in some cases—such as the Ford Motor Company’s River Rouge plant outside Detroit—violence. In New York City a rally sponsored by the Communist Party at Madison Square Garden drew roughly 6,000 attendees. Thousands of war veterans and their families converged on Washington, DC, in July, demanding early payment on bonus certificates that had been issued to them in 1924. In the rural Midwest agrarian radicals sought to drive farm prices upward by declaring a “farm holiday,” blocking roads in order to prevent agricultural goods from reaching the market. Having failed to produce recovery, Hoover cast the net of blame broadly. Britain had abandoned its international obligations by withdrawing from the gold standard. France had held Europe’s economy hostage by stalling on the moratorium, and then jeopardized the US economy by liquidating dollar holdings. The banks had kept Hoover from spending sufficiently to address the crisis; on the other hand, Congress, by talking too much about spending, had undermined business confidence. But if there was one scapegoat that everyone could agree on, it was Wall Street. In the popular mind, the vast “Money Trust” had manipulated the economy in pursuit of short-term gain before bringing the whole system crashing down in 1929. In April 1932 the US Senate opened an investigation of Wall Street firms that continued for the next nineteen months, with most of the major figures associated with the New York Stock Exchange facing pointed questions about their activities. Meanwhile a popular radio personality—a Catholic priest named Father Charles Coughlin—reached a huge national audience by attacking international bankers and the gold standard, all of which he regarded as part of a massive Jewish-directed conspiracy. Such ferment served as the backdrop for the presidential election of 1932, which pitted a discredited, dispirited Hoover against the popular Democrat governor of New York, Franklin D. Roosevelt. The economic crisis obviously gave a massive advantage to Roosevelt, an advantage that the candidate was unwilling to squander by making specific campaign pledges aside from promising to reduce government spending (and to end federal prohibition of alcoholic beverages). This strategy allowed a wide range of interest groups, as well as foreign observers, to believe that the governor shared their priorities. Certainly the British and French believed that Roosevelt would be a vast improvement over the nationalistic Hoover. For one, his party had traditionally favored free trade over protectionism, and the Smoot-Hawley Tariff

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was one of his most consistent targets on the campaign trail. Moreover, the candidate’s personal background suggested that he was an internationalist. He hailed from the northeast, historically one of the most internationally minded sections of the country. He was educated at Harvard, worked briefly for a Wall Street law firm, and had served in the Wilson administration. During his failed run for vice president in 1920 he had proudly championed the League of Nations. All of this was enough to give hope to the British and French, particularly after Roosevelt sent word via backdoor channels during the campaign that as president he would move to forgive those countries’ World War I debts to the United States. What foreign observers failed to recognize was that Roosevelt’s strongest supporters within the Democratic Party were midwestern and western progressives, historically those most opposed to international involvement. Conversely, his favorite political targets—the northeastern bankers and businessmen whom he routinely denounced as “economic royalists”—were the most favorable to internationalism. A deeper look into the candidate’s closest advisers (his famous “Brains Trust”) would have shown that men such as Raymond Moley, Rexford Tugwell, Henry Morgenthau Jr., and Henry Wallace had little interest in or knowledge of foreign affairs, and believed that the key to recovery lay in focusing on the domestic as opposed to the international economy. Anyone listening closely to Roosevelt’s speeches against Smoot-Hawley might have noticed that they did not include any specific promises to reduce tariffs—indeed, he rejected out of hand any notion of lowering rates for farm products. Even on war debts—his hints to the British and French notwithstanding—his views were hardly internationalist; privately he had attacked Hoover as a “cancellationist” who had proposed the moratorium at the insistence of Wall Street. The state of the economy made Roosevelt’s election a foregone conclusion, and in November he took 57 percent of the popular vote, as well as the electoral votes of all but six states. But because under the Constitution at that time the new president would not be inaugurated until March, there followed a four-month period in which the economic crisis grew even worse. Uncertainty over whether Roosevelt would pull the dollar from the gold standard— fueled by the president-elect’s refusal to issue a promise not to devalue—led to a renewed flight of gold from the country. The Federal Reserve Bank of New York lost more than 60 percent of its gold reserves between February 1 and March 4, and it responded, predictably, by raising the discount rate. Fear of devaluation also brought another round of bank closures. By the end of 1932 some 9,000 banks had failed, and depositors were rushing to withdraw funds from those that remained. On the day of Roosevelt’s inauguration nearly all of the nation’s banks were closed, and most of the ones that remained open were operating under special protection from state governments. It was in the midst of this greatest banking crisis in US history, during a presidential interregnum, that the first scheduled payment of war debts since

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the expiration of the Hoover moratorium came due. Over the summer Britain and France had essentially eliminated German reparations, and hoped for a corresponding revision of the war-debt financing agreements, asking that the December 15 payment be suspended until such a revision could be made. George Harrison of the New York Federal Reserve strongly supported the proposal, and Hoover suggested reconstituting the World War Foreign Debt Commission for this purpose. However, Congress and the public at large were uniformly hostile to the idea; after all, any reduction in war-debt payments would further increase the already massive federal deficit unless it were offset by even less popular taxes. As a lame-duck president, Hoover reached out to Roosevelt, but the president-elect had no desire to risk a fight with Congress even before his term of office began. Therefore he rejected any thought of bringing back the Foreign Debt Commission; any alteration in war-debt financing would have to come “through ordinary diplomatic channels.”9 Their hopes for revision thwarted, the British made their December 15 payment, but it would be the last they would make in full. The British economist John Maynard Keynes called the war debts “pure usury . . . [since] we borrowed nothing except for purposes of war.”10 France, meanwhile, defaulted altogether, as the French Chamber of Deputies refused to authorize payment. On February 13, 1933, Hoover gave an unofficial farewell address to the National Republican Club of New York City. He told his listeners, “the American people will soon be at the fork of three roads.” The first, he claimed, was that of international cooperation, which involved removing “obstacles to world consumption and rising prices.” Only this road promised “real stability” and economic recovery. The second road was that of “national self-­ containment,” involving tariffs and “economic isolation from world influences.” The third was to abandon the gold standard, inflating the currency and thereby triggering “a world economic war.”11 Hoover himself had already taken the country down the second path, yet his words were prophetic. His successor as president would eventually find his way to the first road, but only after spending much of his first term pursuing the second and third, with disastrous implications for the global economy.

Chapter 5 A Tale of Two Countries: The “Haves,” 1928–1933 d

By 1928 Britain and France both seemed to have weathered the economic crises of the immediate postwar period. France, benefiting from low prices for its exports on world markets, was experiencing an economic boom. The British economy, still suffering from an overvalued currency, grew more slowly, but unemployment had dipped somewhat in 1927–1928, and there was a growing sense that the worst of the mid-decade doldrums had passed. An improving economy also brought improved relations between the two powers, as well as with the United States. Even old irritants from the war seemed to be fading. The French Chamber of Deputies finally ratified the Mellon-Bérenger war-debt funding agreement (see Chapter 2) in July 1929. Moreover, regular reparations payments from Germany temporarily eliminated this as a point of contention between London and Paris. However, this happy situation was not to last. Great Britain would feel the first symptoms of depression in 1929, and two years later, when France was just beginning to suffer, Britain was in the throes of a full-blown crisis. In this environment Anglo-French relations were bound to deteriorate, as each side tended to regard the other as the primary architect of its misery. Understanding what happened in these countries between 1928 and 1933, therefore, goes a long way in explaining why the two would fail to cooperate effectively later in the decade to block German, Italian, and Japanese expansionism. For Great Britain the Depression in some ways represented the continuation of trends that had been going on since the war. Unemployment remained high, which led to the May 1929 election of a new Labour government u ­ nder 63

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Prime Minister Ramsay MacDonald. In that year Britain imported 20 percent more than it had in 1913, and exported roughly 20 percent less. By contrast, French exports during the same period had grown by nearly half, and Italy’s by nearly a third. The problem was that the products on which Britain’s export trade depended—textiles and coal—tended to be those for which global demand was growing the most slowly. At the same time, the need to protect the Bank of England’s gold reserves required high interest rates, particularly as the Wall Street boom in the United States drew in capital from all over the world starting in late 1928. On top of this, the US House of Representatives, in the same month that MacDonald became prime minister, passed the Smoot-Hawley Tariff, a development that Europeans universally regarded as an act of economic aggression. Under these circumstances, the Wall Street crash of October 1929 came as something of a relief. For the next several months there was a net outflow of capital from the United States, so much so that British bankers began extending large loans to Germany and other countries. In the final months of 1929 some were even predicting that London might be able to profit from America’s economic distress and reestablish its position as the world’s primary lender. However, the steady fall in agricultural prices, which had begun in 1921 but accelerated after the stock-market crash, quickly dashed any such hopes. Many of the country’s most important customers, after all, were agrarian, and as prices fell so did their ability to purchase British manufactured goods. Between 1929 and 1931, therefore, the value of Britain’s exports fell by half, and because the country still had to import many of its most basic necessities the balance of trade grew increasingly worse. All of this further sapped the Bank of England’s gold reserves, leaving sterling dangerously overextended. By the middle of 1930 Britain’s outstanding short-term liabilities added up to around £750 million, which was roughly double its liquid assets. While Great Britain was clearly sliding into depression in 1929, there was little sign of trouble in France. Unemployment remained very low and exports were surging, while throngs of foreign tourists attracted by favorable exchange rates flocked to the country. The Bank of France held more foreign currency than any institution in the world, and the French government was happy to use the country’s financial clout to help its international position. With US banks increasingly unwilling to invest abroad, French institutions stepped in as major suppliers of capital, particularly to central and eastern Europe. France, it seemed, had finally gotten beyond what one official called “the inferiority complex created by the war, devastated regions, fear of Germany, [and] the franc’s fall.”1 This newfound clout was reflected in the Young Plan for German reparations, which was adopted in August 1929. In one sense the plan looked like another victory for Berlin, in that it reduced the total amount Germany was obligated to pay and required the early evacuation of Allied troops from the Rhineland (where they had been stationed since the war as a guarantee of

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good behavior by Germany). Nevertheless Aristide Briand, who had been reelected premier earlier that summer, regarded it as a good deal for France—in contrast to the Dawes Plan, which the French had been practically coerced into accepting four years earlier. Whereas the Dawes Plan had made reparations payments dependent on economic conditions in Germany, the Young Plan specified that roughly a third of the payment was to be unconditional. This stipulation provided the French government with sufficient confidence to sell bonds based on future reparations payments. Not only would this provide the Treasury with an infusion of cash, but, the French hoped, it would give the private investors who purchased the bonds a clear interest in ensuring that Germany continued to make payments. France also sought to flex its financial muscle by increasing its supply of gold. In 1928 the Bank of France, in preparation for the franc’s formal return to the gold standard, had begun liquidating its holdings of foreign currencies in favor of gold. As a result, the Bank of France redeemed more than $400 million in sterling between 1928 and 1931, contributing to a major influx of gold into the country. By June 1932, in fact, the French central bank owned 28 percent of the world’s gold stock. This met with bitter resentment from Great Britain, coming as it did during a period when that country’s worsening balance of payments raised questions about how long sterling might be able to remain tied to gold. The French, however, defended the policy as nothing more than the normal operation of the gold standard. Great Britain’s balance of payments was growing more and more unfavorable, and British bankers had overextended themselves by making unwise foreign loans. It was only natural, then, that gold would move to France, whose economy was much stronger. Some went so far as to predict that Paris was on its way to reclaiming its prewar status as a rival financial center to Great Britain. Likewise, there were few tears shed in France over the economic distress of the United States. No sooner had the war-debt agreement been ratified than a new wave of anti-Americanism swept the country, this time on account of the Smoot-Hawley Tariff. The US ambassador, Walter Edge, noted that French industrialists were “openly resentful” during his travels through the country, and that France was considering retaliatory bans on all foreign automobiles and movies. In his efforts to improve relations between the two countries, Edge felt as though he “was driving against a stone wall.”2 Briand, no longer premier but still foreign minister of France, suggested a more subtle response than simple protectionism—one that he hoped would also improve France’s diplomatic position. America’s financial power during the 1920s, he claimed, demonstrated the importance of large economic units. Not only did the United States control huge territory of its own, but it exercised a virtual hegemony over Central and South America as well. In September 1929 he suggested a remedy in a speech before the League of Nations Assembly, and he unveiled a more specific proposal the following May. The Briand Plan called for the creation of a European economic union, a

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regional free-trade zone that would promote cooperation among the nations of Europe and enable them to compete more effectively against the United States. For Briand the scheme had the additional advantage of tying Germany’s economy more closely to that of France. Yet it quickly became clear that there was little support for the Briand Plan outside France. In early discussions with Briand, German’s foreign minister, Gustav Stresemann, seemed open to the idea, but Stresemann’s death in October 1929, followed in March 1930 by the rise of a new government under Heinrich Brüning (see Chapter 6) made German compliance unlikely. Moreover, the Labour government in Britain viewed any regional commercial agreement as a betrayal of the country’s historic commitment to global free trade. In any event, MacDonald was ultimately more interested in cultivating closer relations with the United States than with France, and feared that Washington would regard any European trade agreement as an unfriendly act. As an alternative the prime minister proposed an international tariff truce, but this quickly became a dead letter when, on June 17, Herbert Hoover signed the Smoot-Hawley Tariff into law. Such setbacks notwithstanding, France in 1930 presented itself as an island of economic strength and stability in a turbulent sea. The Bank of France held massive reserves of gold and foreign currency, the national budget was in surplus, and unemployment was virtually nonexistent. Certain journalists and economists even claimed that their country was immune to the slump that by this time was affecting the rest of the industrialized world. They boasted that the French economy was unique, based not on a handful of large corporations but rather on thousands of small businesses coexisting with an agricultural sector made up of millions of family farms. They were quick to remind foreigners that French bankers had been far less willing than their British and American counterparts to invest in Germany during the 1920s, preferring instead to extend loans to eastern European countries such as Poland, Romania, Czechoslovakia, and Yugoslavia. Significantly, these were also countries that seemed most likely to serve as potential allies in the event of future German aggression. On closer inspection it is clear that there were signs as early as 1930 that France was not immune to the effects of the worldwide slump. The collapse of international trade inevitably began to hurt French exporters, so that industrial output began to dip in June of that year. By 1931 per capita GDP had dropped by more than 10 percent (see Figure 4.1); overall industrial production had fallen by 17 percent, and steel production by 24 percent. The unemployment rate remained negligible, but this was because so many foreigners had taken jobs in France during the 1920s; as the demand for labor declined the government simply refused to renew some 400,000 work permits. The tourist trade dwindled as well, as falling international prices made travel to France far less of a bargain than it had been in 1929. In that year nearly two million foreigners had visited France; in 1933 the number was less than half

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that. The number of American tourists—notoriously the best spenders—fell by nearly two-thirds. As for the much-touted 720-million-franc budget surplus of 1930–1931, it was mainly the result of accounting tricks. There was, in fact, a substantial deficit in that year—one that doubled in 1931–1932 and hit 3.5 billion in 1933, at which point it was far too big to hide. Nevertheless, France was in much better shape than the United States and Great Britain, and far, far better off than Germany and Austria. But when in March 1931 the latter two countries announced their intention to form a customs union, Paris was outraged. There seemed little doubt that such an agreement was the first step toward Anschluss—that is, full political union between Germany and Austria, which was explicitly forbidden under the Versailles treaty. The announcement was a particular embarrassment for Briand, who only days before had publicly dismissed rumors that a customs union was in the works. The French government responded with a full-scale campaign of diplomatic pressure. It proposed as an alternative a Danubian Federation, a free-trade zone consisting of Austria, Hungary, and Czechoslovakia (but not Germany) while making it clear that an Austro-German union was unacceptable. By early May the pressure from Paris had become so intense that there were fears in Vienna of an impending French invasion. France had no intention of using military force to prevent the customs union—the fiasco of the Ruhr occupation was too fresh in the minds of French policymakers. However, the center-right government of Pierre Laval was willing to employ economic leverage, and the perfect opportunity presented itself in mid-May, when Austria’s leading bank, the Creditanstalt, made public a balance sheet that showed it deep in the red. Depositors immediately rushed to empty their accounts, and to prevent a complete collapse the Austrian National Bank offered a $10 million credit to cover its losses. But that bank, too, was deep in debt, and the effort to bail out the Creditanstalt succeeded only in triggering a run on the schilling. Increasingly desperate for aid, Vienna sought loans from abroad, and the Laval government was willing to oblige—as long as Austria abandoned the customs union. In the long run the gambit worked, and Austria acceded to French wishes, but France’s international reputation suffered. The British were particularly upset with what they regarded as blackmail; even Sir Robert Vansittart, permanent under-secretary for foreign affairs, who had a reputation for being pro-French, described tying a loan to the customs union as “the stronger man making conditions with the weaker one while his house was on fire.”3 In midJune Montagu Norman came forward with a loan of 150 million schillings, and while this was sufficient to save Austria from immediate bankruptcy, it did not prevent a new banking crisis from occurring in Germany—a crisis that would spread to Great Britain. The German banking crisis began days before Montagu Norman’s bailout of Austria with a massive run on the Darmstädter und Nationalbank, the country’s second-largest bank, and this called into question the viability of

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the entire banking system. Moreover, since so much foreign capital—primarily US and British—had found its way into Germany in the late 1920s, the crisis had obvious international implications. As Chapter 4 made clear, Herbert Hoover feared it could trigger the collapse of global capitalism, and this led him to propose his famous moratorium on war-debt and reparations payments. The British immediately embraced the idea, regarding it not only as a means of addressing the German situation but as a first step toward ending war debts and reparations altogether. The French were hostile, and for largely the same reasons—they feared that if reparations were removed from the German budget for even one year, no politician would dare to suggest resuming payments. Besides, France was facing mounting budget deficits of its own, making the revenue from German reparations more important than ever. Laval indignantly reminded the United States, Britain, and Germany of the terms of the Young Plan, adopted less than eighteen months previous— did it not specify that payments were to be made unconditionally? The British and Americans were now prepared to abandon this agreement in an effort to protect private investors who had recklessly extended loans to Germany. After two weeks Laval finally accepted the moratorium, but the decision came at a heavy price for France. Not only would Laval’s predictions about future reparations payments all prove correct, but Paris once again found itself the target of international hostility for withholding consent and allowing the crisis in Germany to worsen. Nervous investors continued to draw money out of the country in late June and early July. Fearing a complete collapse, Montagu Norman and George Harrison of the New York Federal Reserve hastily concluded an agreement whereby credit that had been extended to Germany by US and British banks would be frozen until such time as it could be liquidated without bringing down the entire German economy. This “standstill” agreement was ratified at an international conference in London in late July. In both the Austrian and German banking crises the Bank of England put itself forward as the white knight of capitalist internationalism, extending massive loans to maintain solvency while—in the case of the latter—agreeing not to withdraw funds already lent. Such measures, however, only served to heighten the pressure on the bank’s already overextended gold reserves. On July 13 the Macmillan Committee, a group of economists who had been charged two years earlier with determining the causes of the depression, published its final report, which publicly revealed for the first time the extent of the country’s foreign indebtedness. Fearing for the future of sterling, investors around the world began to dump their stocks of the currency. As a result, during the second half of July Britain lost $200 million in gold, despite an increase in the discount rate from 2 1/2 to 3 1/2 percent on July 23, and to 4 1/2 percent a week later. At this point Montagu Norman suffered a nervous collapse, and he spent the next two months convalescing in Canada.

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The crisis in Britain produced the last major act of cooperation among central banks for the next five years. On August 1 the Bank of France and the New York Federal Reserve announced a joint loan of $250 million to the Bank of England, but this did little to slow the flight of gold. Three weeks later the $250 million had been practically exhausted, and the two central banks indicated that they would extend further credit only on the condition that the British government demonstrate a commitment to balancing the budget. The desperate need for foreign credits led directly to a political crisis in London. By this time the deficit had surged to $600 million, and much of the increase was attributable to spending on unemployment benefits, which had nearly tripled since 1929. Parliament’s Committee on National Expenditure—better known as the May Committee, after its chair—published its report on August 1. It recommended cuts of more than $467 million, twothirds of which were to come from unemployment relief. The British financial community immediately endorsed the reductions, arguing that they were the only way to restore international confidence in sterling. On the other hand, cuts to unemployment benefits were anathema to the Labour Party, whose primary constituency had always been the working class. Nevertheless, Ramsay MacDonald was convinced that the only alternative was to abandon gold, but he feared doing so would produce a complete collapse of the currency. In this case, MacDonald believed that the interests of the nation as a whole had to trump those of the workers. However, most of his cabinet disagreed, and on August 24 the Labour government fell. In the resulting shuffle the Conservatives agreed to form a National Government made up of all the major parties, reasoning that workers would be more willing to swallow the necessary cuts if a few Labourites remained in the cabinet. MacDonald himself remained as prime minister. The new government acted quickly, securing a $400 million credit from US and French bankers on the promise of a balanced budget. On September 10 the cabinet introduced a budget that included $400 million in tax increases and more than $340 million in spending cuts. Just over a third of the cuts came from unemployment, with the standard benefit reduced by 10 percent. However, there were also major reductions in spending on education, government salaries, and defense. Cuts in spending on the armed forces, in fact, were nothing new; as mentioned in Chapter 2, it had been the politically easiest area for reductions even in the 1920s. By 1932 the annual defense budget was nearly 12 percent lower than it had been in 1928. Work on all military building projects ceased, and the army was unable to conduct large-scale maneuvers. Ultimately these drastic measures had no effect on the flight of gold from the country. Foreign investors had indeed been concerned about the government’s mounting debt, but they were just as worried about the continued fall in British exports (which resulted in an ever-increasing negative balance of

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payments) and the government’s ability to keep sterling tied to gold. Above all, there were fears that spending cuts could lead to unrest, and these appeared to be substantiated when on September 15 Royal Navy sailors based at Invergordon protested looming cuts to their already low pay. There was no violence, but fleet maneuvers were canceled, and British newspapers began referring to it as a “mutiny.” During the three days before the budget was introduced, an average of $11.7 million in gold left Great Britain each day; from September 11 through 15 the daily average increased to $14.6 million. On the 16th nearly $19 million fled, followed by $30 million more on the following day. In an atmosphere of mounting desperation British leaders lashed out at the French and Americans. For the past six years, they claimed, they had worked tirelessly and selflessly to rebuild the international economy, only to be thwarted again and again by the narrow nationalism of foreigners who insisted on keeping their money cheap and their tariff walls high. With the latest foreign credit exhausted and gold reserves at a dangerous new low, the cabinet bowed to the inevitable—on Sunday, September 20, Great Britain left the gold standard. In a speech the following day before the House of Commons the chancellor of the exchequer, Philip Snowden, defended the move. As important as the gold standard was, he intoned, it simply could not be maintained, since “America and France taken together have now acquired three-quarters of the entire gold in the world and have buried it in their vaults, where it is largely sterilized and useless for the purpose of promoting international trade.”4 The British departure from gold did not bring immediate recovery, mainly because fears of runaway inflation led the Bank of England to couple the move with an increase in bank rate from 4.25 to 6 percent. Nevertheless, there were dramatic international effects, as the value of sterling plummeted almost immediately by more than 25 percent. Foreigners who had not unloaded their pounds earlier suffered accordingly. Over the next several weeks no fewer than twenty-five countries followed Great Britain off the gold standard, leading to much comment about the formation of a new global economic unit called the “sterling bloc.” Most of these were countries with heavy sterling reserves, including nearly all of the British Commonwealth (Canada was the sole exception), plus most of the nations of Scandinavia and eastern Europe. Speculation quickly arose as to whether the United States might be next, leading to massive gold losses from the Federal Reserve in late 1931 and early 1932, and a bottoming out of the US economy (see Chapter 4). Meanwhile, the decline in the pound robbed French exports of the price advantage that they had enjoyed as a result of the lower-valued franc. By 1932 France had joined the rest of the industrialized world in the grip of full-fledged depression. The Conservatives who dominated the National Government regarded the departure from gold as simply a matter of cruel necessity. Their key to economic recovery lay in the empire. Throughout the 1920s a rising movement

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within the Conservative Party had called for greater coordination of the empire, turning it into an economic bloc capable of competing against the United States. Smoot-Hawley brought many more around to this way of thinking, most notably the press baron Lord Beaverbrook, who in July 1929 launched a campaign in his newspapers in favor of “Empire Free Trade”—that is, a system of free trade within the empire, but with high tariffs against goods from outside. There was particular fear that the influx of American products into Commonwealth nations was undermining the unity of the empire; unless something were done to arrest this trend the empire might collapse, with its constituent parts becoming virtual dependencies of the United States. By 1931 nearly every important interest group—bankers, industrialists, farmers, and even labor unions—favored some level of protection. MacDonald’s Labour government had remained hostile, but the formation of the National Government brought a significant number of protectionists into the cabinet, sitting alongside committed free-traders such as MacDonald and Snowden. The decisive turn toward Empire Free Trade, however, came in the general election of November 1931, which was an overwhelming victory for the National Government. Although MacDonald remained prime minister (as he would until 1935), the election results made clear who was the driving force behind the government—of the 497 seats won by National Government candidates, 472 were members of the Conservative Party. Snowden, who had decided not to stand for reelection, was succeeded as chancellor of the exchequer by Neville Chamberlain, who, like his father Joseph Chamberlain, was an ardent protectionist. Given these results, it was hardly surprising that between November 1931 and February 1932 Parliament passed a series of laws—the Abnormal Importations Act, the Horticultural Products Act, and the Import Duties Bill— which marked Britain’s transition from a predominantly free-trade nation to a predominantly protectionist one. In 1930, 83 percent of all the imports entering Great Britain did so duty-free; by the middle of 1932 only around 25 percent did. The crowning achievement of Empire Free Trade was to come at the Imperial Economic Conference held that summer in Ottawa, Canada. From Britain’s perspective, however, the conference proved a disappointment. Commonwealth nations such as Canada, Australia, and South Africa had little interest in Empire Free Trade, except inasmuch as it provided them with guaranteed access to the British market. Moreover, many Commonwealth countries had infant industries of their own, which they refused to abandon in order to produce raw materials for processing in the United Kingdom. It soon became clear that there was little hope of organizing the whole empire into a single economic unit, but because the Conservatives had based their entire strategy on the success of the conference, they were unwilling to walk away empty-handed. Therefore they returned to London having signed no fewer than twelve individual bilateral trade treaties, none of which lowered

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barriers to British goods. All that was agreed under the general rubric of “imperial preference” was an increase in tariffs on products from outside the empire. It is difficult to assess the economic effects of British protectionism. Defenders point to a significant short-term decline in imports, particularly of manufactured goods, and the fact that by the end of 1932 the country had entered a sustained period of recovery that would continue, with only one brief interruption in 1937, until the outbreak of the war. Detractors, meanwhile, show that exports fell even more sharply, part of a universal decline in international trade during the early 1930s that took place independent of British trade policy. Some economic historians have recently concluded that the expansion of trading blocs during this period had very little overall impact on trade.5 In any case, it was clear that imperial preference was regarded as a hostile act by foreign countries. It would prove a constant irritant in relations with France, and especially with the United States, throughout the decade. For this reason the Foreign Office resisted the policy, claiming that the increasingly unsettled global environment meant that now, more than ever, Britain had to demonstrate its commitment to internationalism. Rather than pursuing the chimera of self-sufficiency, it was time for the nation to assert international leadership in partnership with fellow democracies such as the United States and France. It even proposed a return to the gold standard, or at least an agreement to tie the value of sterling to that of the franc and the dollar. All of this was to no avail, as this period marked the low ebb of the Foreign Office’s influence on national policy. In the most pressing matters of the day—the gold standard, war debts, reparations, and trade—the Treasury and the Board of Trade reigned supreme. The Foreign Office was barely consulted, let alone listened to. The argument that Britain should try to regain its old position in the international system fell on deaf ears among a generation of policymakers who were more inclined to believe that theirs was a nation in decline. One indication of London’s diminished presence in world affairs was the reaction to the Japanese invasion of Manchuria, which occurred just two days before Britain’s departure from the gold standard. As mentioned previously, this was the first effort by a major power during the interwar period to overturn violently the international order, but the fiscal crisis precluded any kind of forceful response. Even during the 1920s it was clear that Britain could not afford to keep the Royal Navy at sufficient strength to protect the British Isles and the empire in East Asia at the same time. As the ambassador to Tokyo pointed out, any attempt to interfere with Japan’s ambitions ran the risk of a war in which colonies such as Hong Kong and Singapore would be defenseless, at least for the six weeks that would be required to move significant forces to the area. Nor was it clear that Britain’s economic interest in the region justified taking any such risks. After all, the country’s stake in China (outside Hong Kong) represented no more than 6 percent of overall investments,

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and trade with China constituted only about 1 1/2 percent of Britain’s total overseas commerce. Although the United Kingdom followed the lead of the United States in refusing to recognize the Japanese puppet state of Manchukuo, which was proclaimed in February 1932, no further sanction was even seriously considered. The invasion of Manchuria did have one significant effect on British policy, in that it led the cabinet in March 1932 to rescind the Ten-Year Rule, which had guided estimates of the needs of the armed forces since 1919. Even though Britain had done nothing to save Manchuria, Japan’s aggressive nationalism inevitably called into question any assumption that there would be no war, or no need for a British Expeditionary Force, in the next ten years. At this point the Royal Air Force, which eight years later would be the country’s main means of defense against Germany, was only the fifth-largest air service in the world. Moreover, the country’s system of coastal defenses had been outdated even before World War I, and the army had dwindled to insignificance since 1919. As has already been mentioned, even the strongest of the branches, the navy, was deemed incapable of meeting simultaneous threats to the empire. Yet the end of the Ten-Year Rule did not bring an infusion of funds to the armed forces; the most pressing need, according to Neville Chamberlain and the Treasury, was for a “period of recuperation, diminishing taxes, increased trade and employment.” Whatever the Japanese might be up to, “today’s financial and economic risks are by far the most serious and urgent that the country has to face.”6 This helps to explain why in 1932, with the end of the one-year Hoover moratorium in sight, the National Government was more interested in relieving Germany of its reparations burdens than it was in blocking Japanese aggression in Asia. The challenge, of course, was getting the French to go along with it. As Chamberlain wrote, “The foreigner could not be expected to be far-sighted on this matter, so it was Britain’s duty to make him see reason.”7 But at a conference held in Lausanne, Switzerland, in June, French premier Édouard Herriot proved remarkably pliable. The French government, after all, had concluded that there was little hope of collecting reparations once the moratorium had expired, and acquiesced in the cancellation of all German obligations under the Dawes and Young plans. Germany was still required to service two loans that the French government had issued to the public under the Young plan. Also, as a face-saving gesture Berlin pledged to pay £150 million to the Bank for International Settlements, but only under conditions that were ultimately never met, and that apparently no one at the conference expected to be met. At least part of the explanation for France’s willingness to abandon reparations was that Herriot seemed to believe that cancellation would induce the United States to forgive, or at least reduce, the war-debt burden. In fact, it was revealed soon after the Lausanne conference that Britain, France, Belgium, and Italy had concluded a “gentlemen’s agreement” stating that none

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of them would regard the Lausanne terms as formally ratified until they had been able to negotiate new terms with Washington. When Hoover learned of this deal he was incensed—the Europeans, he claimed, were ganging up on the United States. The fact that it was made public during Hoover’s already difficult reelection campaign made him even less willing to yield ground on the issue. After the election he hoped to work with Franklin D. Roosevelt on some kind of compromise measure, but as the last chapter made clear, the president-elect showed no interest. The first installment of war debts after the expiration of the moratorium was due on December 15, and neither Britain nor France was inclined to pay. The MacDonald government, however, concluded that default was too dangerous; not only would it encourage Britain’s own debtors to stop payments, but it might even call into question the legitimacy of debts incurred by private citizens. Therefore, Britain met its obligation, albeit with a great deal of sullenness—as Chamberlain wrote to his sister, “we have the misfortune to be dealing with a nation of cads.”8 By contrast, there was no hope of payment from France, although Herriot’s government resigned on December 18 rather than be associated with default. The French public believed that its sacrifice of German reparations merited, at the very least, suspension of the December payment and a reopening of war-debt negotiations, and Hoover’s failure to agree was greeted with outrage. The situation was made even more intractable by the fact that ordinary Frenchmen had by now begun to feel the effects of the Depression. The country had recently experienced its own banking crisis, occasioned in October 1931 by the government’s decision to bail out the Banque Nationale de Crédit, the nation’s fourth-largest bank. This immediately caused worries about the stability of all of the nation’s banks, leading depositors throughout the country to withdraw their funds. The government lacked the resources to bail out all of them, so some of the oldest banks in France collapsed. The timing of the crisis, so soon after the withdrawal of sterling from the gold standard, aroused widespread suspicion that the British were to blame. France’s own unhappy experience with inflation in the 1920s meant that following the British example and pulling the franc from gold was politically not an option in the early 1930s; political parties of every complexion explicitly rejected the idea. However, Herriot’s center-left government was more than willing to march further down the well-traveled road of protectionism, especially as the devaluation of sterling threatened France with a wave of l­ower-priced imports from Britain. Because tariff rates were already high, quota systems—that is, limits on the quantity of foreign imports that could be legally sold within the country—were particularly popular. In late 1931 import quotas were introduced for practically every type of agricultural commodity, followed in early 1932 by quotas on manufactured goods. By mid-1932 quotas applied to more than 1,100 items. Since imperial prefer-

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ence was being implemented in Britain during this same period, it began to appear likely that the two countries would soon be engaged in a trade war. The French Treasury, too, was facing crisis, as tax revenues fell and spending on social services increased. In spite of growing budget deficits the government in 1931 had extended more than a billion francs’ worth of loans to Hungary, Yugoslavia, and Poland, for largely political purposes. Nearly three billion francs were spent during that year on bailing out French banks. By the middle of 1932 the Treasury had fallen to below one billion francs, and at various points after that it declined to less than 100 million—barely enough to cover a single day of government spending. Under those circumstances, therefore, the French default on its war debt to the United States in December 1932 was entirely predictable. Since there was no political will to leave the gold standard, the only option was to increase taxation and reduce spending in the hope that a balanced budget would restore confidence in the economy. In 1932 and 1933 more than 3.1 billion francs in revenue were collected through new taxes and a crackdown on tax evasion, while government spending was cut by more than 5.6 billion francs. As was the case in Britain and the United States, defense spending proved to be the easiest area to cut—particularly since the Radical Party, on which all of the coalitions of the early 1930s relied for support, inclined toward pacifism. In 1930 Maxime Weygand, chief of the General Staff, had proposed spending nine billion francs over six years on a comprehensive campaign of modernization of the armed forces. Ultimately only 690 million francs were committed to the task. In all, defense spending declined by roughly a quarter between 1930 and 1933, forcing the dismissal from the army of some 500 officers and 28,000 soldiers. While France slipped deeper into depression in 1932–1933, the worst of the crisis in Britain seemed to have passed. However, it bears mentioning that at no point was the slump in the United Kingdom as serious as that which affected the United States and Germany during the same period. Between 1929 and 1932 US gross domestic product fell by nearly 27 percent while Germany’s dropped by nearly 16 percent; by contrast, Britain’s fell just over 5 percent. In terms of average real income, the United States lost more than a third and Germany a quarter, while Britain lost slightly more than a tenth. But after the departure from sterling the Bank of England began gradually lowering its rates, from a high of 6 percent in September 1931 to 2 percent by June 1932—a level at which it would remain until 1939. Unemployment peaked in the summer of 1932 at around 23 percent, then began to decline slowly but steadily. Private construction surged 70 percent from 1931 to 1933, and by the end of 1932 disposable income by British workers was £250 million more than it had been in the mid-1920s. But recovery, it seemed, came at the price of Britain’s relationship with France and the United States. Both countries blamed their own economic

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woes on the National Government’s abandonment of the gold standard and implementation of imperial preference. The British fired back that had it not been for the French and American refusal to play by the rules of the international economy, by raising tariffs and sterilizing gold, they never would have been forced to adopt such measures in the first place. Relations between the United States and France were even worse, with Washington denouncing Paris for defaulting on war debts, and Paris excoriating Washington for insisting on their payment. In the next few years all three countries would continue to seek their economic salvation in isolation from the world economy, doing so at precisely the moment when Germany, Japan, and Italy were beginning to seek theirs through conquest.

Chapter 6 Dancing on a Volcano: The “Have-Nots,” 1928–1933 d

The last two chapters have demonstrated that as global economic conditions deteriorated in the late 1920s and early 1930s, the United States, Great Britain, France, and the Soviet Union all turned inward, adopting policies designed to promote domestic recovery even at the expense of other countries. The governments of Germany, Italy, and Japan did likewise, but their relative lack of resources made self-sufficiency a practical impossibility. In each of those nations, therefore, the political balance of power shifted away from those advocating liberal economic policies and toward those who sought national salvation through foreign conquest. Of all the industrialized powers, Germany was the first to experience distress. Since 1925 national production had been growing at a respectable 4 percent per year, so that by 1927 the country was for the first time producing more than it had before the war. Unemployment in summer 1928 fell to around 650,000—a low point for the interwar period. These years saw an explosion of government spending at all levels; indeed, for the first time it even seemed feasible to spend significant sums on the armed forces. The high command of the Reichswehr (Reich Defense) put forward a secret plan that October to build a field army of twenty-one divisions. (The fact that this was three times the size allowed under the Treaty of Versailles seemed to bother the generals not at all.) However, many economic experts, both in Germany and abroad, warned that the country’s prosperity was illusory. It was built entirely on short-term capital from abroad, lured by high interest rates set by the Reichsbank. Short 77

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of accumulating a trade surplus of some 30 billion marks—and there was almost no chance of that—there was no means of repaying these obligations. If these credits were to be called in, or even if the flow of capital were suddenly to cease, there would be a general collapse. As Foreign Minister Gustav Stresemann put it, Germany was “dancing on a volcano.”1 Among those worried about German profligacy was S. Parker Gilbert, the agent general for reparations. The first full payment under the Dawes Plan was scheduled to be made in 1929, which meant Germany would be faced with a bill for 2.5 billion gold marks. However, the influx of foreign capital was beginning to slow as investors began to be lured instead by the boom on Wall Street. Gilbert worried that Berlin might invoke the provision in the Dawes Plan allowing deferral of payments if the Reichsbank’s reserves of foreign currency ran low. He was convinced that the Germans would never get their borrowing and spending under control as long as they had such an escape clause built into the reparations settlement. Therefore, at Gilbert’s request an international committee of experts—which included among its membership Owen Young of General Electric and the banking tycoon J. P. Morgan Jr.—assembled in February 1929. The negotiations that would result in the Young Plan offered a preview of the international tensions that would plague the 1930s. The main German delegate, Reichsbank president Hjalmar Schacht, demanded not only the early withdrawal of Allied troops from the Rhineland (which they had occupied since 1919 as a guarantee of reparations payments), but also the return of Germany’s colonies, which had been lost during the war. The French and British, meanwhile, bickered over how reparations would be divided; Britain also took the opportunity to complain about continuing French conversions of sterling to gold, which were already imposing a serious drain on the Bank of England’s reserves (see Chapter 5). Nevertheless, the delegates managed to hammer out an agreement by which Germany’s total reparations obligation was reduced to 112 billion gold marks ($8 billion), divided into 59 annual payments of 2 billion marks. While up to two-thirds of the annual payment could be deferred in the event of economic distress, the remainder was to be regarded as unconditional. Finally, the British and French agreed to withdraw their forces from the Rhineland in 1930. The Young Plan was immediately attacked in Germany from both the left and the right. Ever since the signing of the Locarno Pact the Soviet regime had feared that Berlin might break out of its diplomatic isolation and align itself with the West. For that reason Stalin ordered the German Communist Party to denounce the new reparations settlement as a means of tying the country to British, French, and American capitalism. Nationalists, meanwhile, saw the deal as yet another effort to keep Germany weak; for them nothing short of full repudiation of reparations would suffice. But most parties to the Young Plan—including all of the German political parties from the center-left to the

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center-right—found it satisfactory, regarding it as a realistic means of settling the reparations problem once and for all. The main problem with the Young Plan was that by the time its terms went into effect the situation in Germany had radically changed. The flow of foreign capital had slowed dramatically by the end of 1928, and in the following year foreign investors began calling in their loans. When Montagu Norman attempted to arrange a $300 million international loan to assist Germany in making its initial payments under the Young Plan, he found he had to offer deep discounts on shares before investors were willing to buy them. The lack of foreign capital had predictable effects on the overall economy. Production levels peaked early in 1929, but inventories by that time had already begun to pile up, leading industrial employers to cut back. By the summer there were 1.9 million unemployed—nearly three times as many as there had been one year earlier. All of this had a devastating effect on government finances, as declining tax receipts in 1929 produced a serious shortfall in revenues. Of course, deficits were nothing new to Weimar Germany, but this time foreign capital was not available to make up the difference. At the same time, the rising number of jobless was placing a heavy burden on the Weimar Republic’s generous unemployment insurance system—one that originally had been set up to handle no more than 800,000 unemployed. As a result, during the one-year period running from April 1929 to April 1930, the German government ran a deficit of more than 1.6 billion RM. Combined with deficits at the state and city level, the total public shortfall was more than 3.1 billion RM—more than 3 percent of the country’s net national product. The deficit produced a political crisis. Since 1928 the country had been governed by a “Grand Coalition” made up of the Social Democratic Party (SPD), the Catholic Center Party, and the two main liberal middle-class parties, the German Democratic Party (DDP) and the German People’s Party (DVP). The coalition had already suffered a severe blow on October 3, 1929, with the death of Gustav Stresemann—a leader of the DVP and arguably interwar Germany’s greatest statesman. But the government’s precarious financial position proved the death knell of the precarious political alliance. The DDP and DVP, already bridling against the country’s high levels of taxation, demanded that the deficit be reduced through sharp cuts to unemployment benefits. This, however, was unacceptable to the Social Democrats. Since before the war the SPD had been the main party of the working class, but its leaders were facing increasingly shrill attacks from members of the Communist Party, which, under direct orders from Stalin, had taken to denouncing them as “social fascists” who had betrayed German workers. Under the circumstances Chancellor Hermann Müller, who was also the chairman of the SPD, felt he had no choice but to resist any cuts. On March 27 he resigned, and his party dutifully followed him out of the coalition.

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As Müller’s replacement, the Reich’s president—World War I hero Paul von Hindenburg—tapped Heinrich Brüning, a soft-spoken Prussian Catholic and leading figure in the Center Party. Brüning had a reputation as a conciliator, but he began his chancellorship by enacting an “emergency ordinance” (Noteverordung) that cut spending dramatically—and when the Reichstag immediately rejected it he invoked his constitutional power to dissolve that body and call for new elections. The vote took place in September 1930, by which time unemployment stood at roughly three million, and it proved a disaster for the moderate parties. Brüning’s own Center Party made modest gains, but the SPD lost ten seats while the DDP and DVP suffered massive losses. The beneficiaries were the parties of the extreme left and right—the Communists gained 23 seats, for a total of 77, while the National Socialist German Workers’ Party (NSDAP) went from 12 seats to 107, making it the second-largest party in Germany after the Social Democrats. The new constellation of forces in the Reichstag left Brüning unable to form a majority coalition, so, citing the worsening economic situation and the rise of extremism, he invoked a clause in the Weimar constitution allowing him to rule by decree as long as he enjoyed the confidence of President von Hindenburg. President and chancellor alike believed the times dictated that “politics as usual” be suspended, and that the crisis could be met only through the patient work of dispassionate experts, men who stood above the petty realm of partisan politics. For the next year and a half, whenever Brüning failed to receive Reichstag support for an initiative, he would simply enact it by decree. A vote of “no confidence” could have removed him from power, but none of the moderate parties—including the SPD—were willing to take this step. As bad as Brüning might be, they reasoned, his successor might be even worse. For the chancellor the most pressing matter was the flight of capital from the country, which had accelerated in the months after the disastrous elections of September 1930. As long as the country remained on the gold standard the only hope for recovery was to attempt to reverse this trend, and Brüning and his cabinet believed that the only way to do that was to balance the budget. During his tenure as chancellor he repeatedly reduced spending and raised taxes in the hope of reassuring international financiers. In early 1931 it seemed as though Brüning’s deflationary policy was starting to pay off. There were hints of a large new international loan that would be raised to promote German recovery, a loan in which even French banks were indicating a willingness to participate. For the first time in two years, industrial production increased and unemployment fell. There was a positive balance of trade large enough to cover reparations payments, and capital began flowing into the country. For a few weeks it appeared that Germany was on its way to a genuine recovery. However, it was not to be, and the reason for this was that Brüning was intent on appeasing German nationalists. In part this was a political necessity,

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since the chancellor’s position was dependent on the goodwill of the camarilla—the coterie of agrarian conservatives surrounding President von Hindenburg. This helps to account for Brüning’s willingness to increase tariffs on agricultural products repeatedly, so that by 1931 the average rate was 82.5 percent. Yet he had an additional motive in that he sought to address the Weimar Republic’s lack of legitimacy (described in Chapter 3). The success of the National Socialists in the September 1930 elections was enough to convince Brüning that satisfying frustrated German nationalism would be an effective means of distracting Germans from their economic distress. Thus while he continued to press budget cuts, he managed to find money for expansion of the armed forces. Several German military contractors were likely saved from bankruptcy thanks to the regime’s military orders in 1930–1931; indeed, it was during this period that Germany activated its first squadron of military aircraft (prohibited under Versailles), and began construction on a new heavy cruiser for the navy. Moreover, while Brüning was not an advocate of autarky, he gave encouragement to nationalists—including a growing number of industrialists—who called for a turn away from the international economy in favor of the formation of an economic bloc in central and eastern Europe. Since the war the countries of these regions had been among France’s closest allies, but the collapse of agricultural prices made them particularly susceptible to German advances. In summer 1931 Romania and Hungary both concluded trade treaties with Berlin in which Germany promised tariff rebates of up to 50 percent on grain imports from those countries. As Brüning put it, “the strongest weapon Germany has for its foreign relations is the fact that we are an importer of agricultural goods.”2 In return the states of eastern and southeastern Europe purchased German manufactured goods, aggressively promoted by a network of commercial agents based in Leipzig. More provocatively, the chancellor authorized the Foreign Office to enter into negotiations with Austria for a customs union, a move that was widely seen—particularly by the French—as the first step toward a formal union between the two countries. Brüning’s foreign-policy moves raised the specter of a revived German nationalism, causing international financiers to wonder about the security of their investments in Germany. French public opinion erupted in outrage in March 1931 when plans for the customs union were revealed. Shortly thereafter, Paris announced that under no circumstances would any French bank participate in the loan unless the customs union were abandoned and all construction on a new heavy cruiser halted. The chancellor, fearing the reaction from German nationalists, refused any such concessions, but the worst came several weeks later, when he sought to use the country’s economic distress to eliminate reparations. In late May the chancellor unveiled his latest emergency budget decree, accompanied by a statement that further reparations payments would be “unbearable for the German economy.”3 The result was an immediate loss of faith in German financial institutions, triggering

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a massive sell-off on the Berlin stock market. Holders of reichsmarks, both at home and abroad, began redeeming them for gold and foreign currency, so that by the end of July the Reichsbank had lost 60 percent of its reserves despite the bank’s decision to raise its discount rate by two full points in midJune. Meanwhile there was a run on Germany’s banks, causing total deposits to fall by nearly a third. The country’s third-largest bank, the Darmstädter und Nationalbank (more commonly referred to as the Danatbank), collapsed altogether. The extent of the crisis led Herbert Hoover to fear for the massive amount of US capital that had found its way into Germany in the late 1920s. On June 5 he proposed his moratorium on all intergovernmental debts, although objections from France prevented it from being implemented until two weeks later. Even then it did little to stop the run on German banks, forcing the Reichsbank on July 13 to raise the discount rate a further three points, to 10 percent. The Bank of England was sympathetic but was too overextended to help, while the French continued to insist on political concessions before they would provide any assistance. Finally, on July 20, representatives of the major central banks met in London and concluded a “standstill agreement” in which Germany’s foreign creditors pledged no withdrawals of capital from the country for the next six months. The agreement would be repeatedly renewed over the next several years. Domestically the bank crisis led Brüning to intervene in the economy to an extent unprecedented in peacetime. In mid-July he ordered a three-day “bank holiday” during which every bank in the country was to be closed. The following month he began to impose restrictions on the export of gold and foreign currency, making it increasingly difficult for importers to purchase foreign goods, and even for Germans to travel abroad. At the same time, the chancellor refused to consider any formal departure from the gold standard—Germany’s experience with hyperinflation in the early 1920s made any thought of devaluation highly risky from a political standpoint. But because after August 1931 it was illegal to send gold or foreign exchange out of the country without special permission, Germany was left with a gold standard in name only—in the words of C. R. S. Harris, the editor of the Economist, a “gold standard on crutches.”4 Combined with Brüning’s protectionist trade policies, the imposition of export controls marked an almost complete turning away from the liberal world economy. Although these measures proved effective in addressing the flight of capital, none of them was particularly helpful in promoting recovery. Nor did the chancellor’s quest for a foreign-policy victory help him to win over German nationalists; if anything it only emboldened them in their opposition. In October the main party of the “mainstream” right, the German National People’s Party (DNVP), joined forces with other, more radical nationalist groups at a meeting at the Saxon resort town of Bad Harzburg. The “Harzburg Front,” which also included Hjalmar Schacht as well as a number of prominent rep-

Dancing on a Volcano: The “Have-Nots,” 1928–1933  d 83

resentatives of agriculture and industry, declared itself in opposition to the Brüning regime. Among those who participated in the Harzburg Front were the National Socialists, evidence of the fact that they had achieved a position of some importance in German politics. The DNVP, traditionally the party of agrarian interests, was in steady decline, with smaller farmers defecting to the NSDAP. The drop in agricultural prices hit this group particularly hard, and thousands of German peasants faced foreclosure—a process the National Socialists pledged to stop. The NSDAP also enjoyed the growing support of the Mittelstand, artisans and small-business owners who blamed their economic woes on big business and labor unions alike. Civil servants, who saw their pay cut by an average of one-fifth between 1930 and 1932, were also attracted to the party, which promised to enlist their expertise in the service of the nation, free from the burden of finance capitalism. The National Socialists made skillful use of the Depression, convincing each interest group that the Jews and the Treaty of Versailles lay at the heart of their economic problems. Adding to Brüning’s difficulties in late 1931 was the British departure from the gold standard. With the price of British exports in rapid decline on world markets, the large trade surplus that Germany had enjoyed in the first half of the year soon vanished. By mid-1932 the volume of exports had fallen by nearly a third. Unemployment, meanwhile, continued to soar; by December 1931 the number of jobless reached five million. Six months later nearly onethird of German workers were unemployed. In certain heavily industrialized regions of the country the jobless rate was even higher. Given these circumstances Brüning found himself in an increasingly impossible situation. His position had always been dependent on his remaining in the good graces of von Hindenburg, which meant, in practice, offering assistance to agriculture. At the same time he had to avoid a vote of no confidence from the Reichstag, and this meant not doing anything to throw the Social Democrats into open opposition. These two goals had become less and less compatible, since measures to help farmers, such as price supports or import quotas for agricultural products, would inevitably raise the cost of living for the urban working class that was the SPD’s primary constituency. The magnitude of the dilemma became clear in spring 1932, when von Hindenburg stood for reelection, with Adolf Hitler of the NSDAP as his main opponent. Although Brüning campaigned wholeheartedly for the president and von Hindenburg won by a comfortable margin (19 million to 13 million for Hitler), the latter was horrified to learn that he had to a large extent lost the backing of German conservatives. The basis of his support was instead the now-­insignificant middle-class parties, Brüning’s own Center Party, and, worst of all, the Social Democrats. The blame for this he placed squarely on the chancellor; seven weeks after the election von Hindenburg demanded his resignation. To succeed Brüning, von Hindenburg tapped Franz von Papen, a wealthy aristocrat whose “cabinet of barons” enjoyed the support of the DNVP but

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virtually no one else. Nevertheless, he benefited from the fact that the Lau­ sanne Conference took place within weeks of his appointment. At Lausanne von Papen met with Édouard Herriot of France and Ramsay MacDonald of Great Britain, who agreed not to press Germany for further reparations payments after the expiration of the Hoover moratorium. The chancellor agreed in return to service the part of the debt that, under the Young Plan, had been sold to the French public. The British and French fully expected that this gesture would be followed by American forgiveness of war debts—or, at the very least, their renegotiation. The lame-duck Hoover administration refused to oblige; nevertheless, there was no subsequent effort to collect reparations from Germany. In domestic affairs von Papen broke sharply with his predecessor’s deflationary policies, offering subsidies to businesses that promised to hire new employees. To avoid devaluation of the reichsmark these subsidies were to be paid not in currency, but in certificates that could be used to pay taxes in the future—by which time, it was hoped, the economic crisis would be over and the budget would be running a surplus. Meanwhile, to conserve the country’s reserves of foreign currency von Papen instituted a trade system in which imports could be paid for in “blocked marks”—special reichsmarks that could be used only to purchase German exports. Increasingly Germany’s foreign trade was moving toward a barter system in which the value of exports to and imports from any given country was more or less equal. This was an ambitious agenda, launched in a very brief period of time, but the actual results were meager. Von Papen had reason to believe that the Lausanne Conference would be hailed as a great victory; after all, the elimination of reparations had been a major goal of German foreign policy since 1919. However, nationalists were disappointed that he had agreed to pay anything at all (although ultimately Germany paid none of what von Papen promised), and in fact the matter of reparations had been the one issue on which virtually all Germans were agreed. Once they were off the table politics became more fractious than ever. Nor did the chancellor’s domestic initiatives bear immediate fruit. Only 167 million RM were spent subsidizing new hiring, and this created fewer than 30,000 new jobs. Meanwhile the volume of German exports continued to dwindle. In part this was the result of the British system of imperial preference established at Ottawa in July 1932. In 1931 Britain had imported German manufactured goods valued at 971 million RM; in 1932 that figure fell to 358 million. In addition, the Soviet Union had purchased vast numbers of machine tools from Germany in 1930–1931 as part of Stalin’s efforts to industrialize the country. In 1932 this trade dropped precipitously as the Soviet regime sought to conserve foreign currency (see Chapter 4). It was, therefore, in mid-1932 that the German economy hit rock bottom. By August of that year overall industrial production was only slightly more than half what it had been in 1929. Nearly half the industrial work force—more than six mil-

Dancing on a Volcano: The “Have-Nots,” 1928–1933  d 85

lion people—were unemployed, and average hourly rates for those fortunate enough to have jobs had fallen by more than 15 percent. Unfortunately, in the midst of all this bad news von Papen chose to call new elections in the hope of being able to form a majority coalition in the Reichstag. The big winners instead were the National Socialists, who in July gained 123 seats for a total of 230. This made them by far the largest party in Germany; their closest competitors, the SPD, held only 133. Von Papen tried again in November, and while the NSDAP’s showing that time was weaker (they lost thirty-four seats), their delegation remained the largest in the Reich­stag. At this point the chancellor felt he had no choice but to negotiate with the party’s leader, Adolf Hitler. When the negotiations went nowhere— Hitler demanded nothing less than the chancellorship—von Papen resigned in December. Of von Papen’s successor as chancellor, General Kurt von Schleicher, little need be said, as his term lasted less than two months. By the end of 1932 the economy was showing some signs of improvement, which almost certainly accounts for the declining fortunes of the National Socialists in the November elections. Moreover, von Schleicher acted more boldly than his predecessor in promoting hiring; rather than merely offering subsidies to businesses he created a Reich Commission for Work Creation, equipped with a budget of 600 million RM to spend on the military, public-works projects, and agricultural relief. But the chancellor angered agrarian interests by refusing to endorse still higher tariff rates, and when he proposed a program to create small family farms from bankrupt noble estates in East Prussia the conservatives surrounding von Hindenburg took to calling him the Red General. When it looked as if the Reichstag was about to approve a vote of no confidence, von Schleicher asked the president for permission to dissolve the body yet again— and when von Hindenburg refused, the chancellor stepped down on January 28, 1933. The president then gave his consent to a new cabinet, based on a coalition of the German National People’s Party and the National Socialists. The new chancellor, Adolf Hitler, was sworn in on January 30, and over the next eighteen months he would dismantle the last vestiges of the Weimar Republic. On its ruins he would construct his Third Reich. Although Japan did not experience as abrupt a change in regimes as Germany between 1928 and 1933, economic distress would trigger a pronounced shift in power from liberal internationalists to advocates of aggressive nationalism. The critical moment in this case was the determination of Japan’s business leaders and party politicians to return the yen to the gold standard at its prewar exchange rate of two to the dollar. As discussed in Chapter 3, throughout the 1920s they had pursued deflationary policies whenever politically feasible, and by 1929 the yen was trading at $0.48—in large part because speculators believed that a return to gold was inevitable. This was close enough to convince the newly elected prime minister, Hamaguchi Yuko, and his finance minister, Inoue Junnosuke, that it was time to take the decisive

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step. Inoue, himself a former governor of the Bank of Japan, was a close friend of Montagu Norman and Thomas W. Lamont, and spoke for those who believed that a gold-backed yen was critical to linking Japan to the global economy—specifically the economies of Great Britain and the United States—and hence building international confidence in Japanese finance. In November he announced that, effective January 1, 1930, the currency would be freely convertible to gold at its prewar rate. Particularly significant in retrospect is the fact that this announcement came just days after the stock-market crash in the United States, although neither Hamaguchi nor Inoue recognized the importance of this development at the time. In order to return to the gold standard it was necessary to reduce even further the number of yen in circulation, and to this end the Hamaguchi cabinet slashed government spending by more than a third between 1929 and 1931. Once again, the armed forces were a particularly attractive place to cut, as doing so served not only to reduce expenditures, but also to reassure the West that Japan intended a foreign policy based on peace and international cooperation. Significantly, Hamaguchi’s foreign minister was Shidehara Kijuro, whose very name had become synonymous with such an approach to international affairs. One of his first acts upon joining the cabinet was to signal that Tokyo was prepared to enter into another round of discussions for naval arms limitation. These negotiations soon resulted in the London Naval Conference of 1930, at which Japan, the United States, and Great Britain extended the Washington ratios on battleship tonnage and pledged no new construction of capital ships for the next five years. But it quickly became clear that Hamaguchi and Inoue’s strategy could not deliver on one of its main promises—that it would bring national prosperity by integrating Japan more closely into the world economy. The period when the yen was tied to gold, after all, was precisely the same period when global trade was evaporating. The onset of the Great Depression in the United States was particularly damaging; Americans purchased around 90 percent of all Japanese silk exports, but the demand for silk plummeted in 1930–1931. The newly enacted Smoot-Hawley Tariff, meanwhile, dealt serious blows to Japanese exports such as chinaware, canned foods, and cultured pearls, as the duties on these products increased by an average of 23 percent. Japanese exports to China declined by half during this same period, mainly because China’s silver-backed currency was rapidly losing value in relation to the goldbacked currencies of its primary trading partners. By late 1931 the United States had replaced Japan as the largest supplier of goods to China. The total value of Japanese exports in 1931 was more than 40 percent less than it had been two years earlier. Combined with the ordinary effects of deflation, the collapse of world trade had disastrous implications for Japan’s economy. Per capita GDP fell by more than 9 percent (see Figure 4.1), and there was a surge in industrial unemployment. However, the countryside was the hardest hit, as prices tumbled

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for the country’s most important agricultural products—rice and silk. Unable to make ends meet, Japanese farmers went deep into debt; a government report in 1932 suggested that rural debt had reached ¥4.7 billion, more than twice the total value of farm production, and a third of GNP. There were disturbing reports of peasant families selling their daughters into prostitution. This sort of misery, naturally, undermined support for the civilian government in Tokyo, and played into the hands of the armed forces, which had grievances of their own. The navy expressed outrage over the London Naval Conference, where a cabinet bent on slashing expenses and cooperating with the West had brushed aside the protests of the admirals, who had traditionally regarded themselves as subject only to the emperor’s personal authority. The army, meanwhile, was able to capitalize on the connections that it had built with farmers’ organizations in the 1920s. Army officials began making visits to some of the hardest-hit agricultural regions, conducting health surveys in rural villages, and even sponsoring their own public-works programs to alleviate unemployment among peasants. Army propaganda portrayed the countryside as the font of Japanese virtue, with peasants displaying “warm emotions between man and man” rather than the “cold intellect and calculation” that characterized the cities.5 At the same time that they praised the spirit of rural Japan, the leaders of the army and navy attacked the zaibatsu for pursuing their selfish interests at the expense of the nation. They professed to be outraged by revelations in 1930 that certain businessmen, convinced that devaluation of the yen was inevitable, began exchanging their currency holdings for dollars. Although this was perfectly legal, the sale of yen was denounced as unpatriotic, particularly as it contributed to the mounting drain on Japan’s gold reserves. The military also took aim at the political parties, which were alleged to be nothing more than servants of the hated zaibatsu. Indeed, the civilian government’s initial response to the economic crisis seemed to justify that criticism—the Impor­ tant Industries Control Law, passed by the Diet (Japan’s national legislature) in April 1931, mandated the formation of cartels in certain sectors of the economy, including chemicals, iron and steel, and cotton spinning. Since these cartels were dominated by the largest firms in each sector, the law inevitably worked to the benefit of the zaibatsu. It was not long before hostility toward bankers and businessmen exploded into violence. Army and navy officers, along with some civilians, began to form secret ultranationalist societies that advocated the use of force to bring about a radical restructuring of the nation; the most prominent among them, the Sakurakai (Cherry Blossom Society) was founded in 1930. In November of that year a member of one of these societies shot Prime Minister Hamaguchi as he stood on the platform at Tokyo Station. The assassin (Hamaguchi would eventually die of his wounds, but not until August 1931) defended his actions by citing both the plight of Japanese farmers and the humiliation of the London Naval Treaty, which had been signed just weeks earlier. In early

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1931 the Sakurakai planned a coup to overthrow the civilian government, but this was called off when the army high command refused to lend its support. A standard theme among ultranationalists was the need for Japan to abandon its reliance on the international economy and create an economic bloc over which Tokyo had political control. Not surprisingly, Manchuria was frequently mentioned as a necessary component of such a bloc. Nationalist propaganda regularly described Manchuria as Japan’s “lifeline”; its rich natural resources would liberate the country from its reliance on foreign imports, and because it was relatively lightly populated, poor Japanese farmers could be encouraged to emigrate there. All of Japan’s economic problems might be solved if Manchuria could only be pulled away from China’s orbit. However, this was unlikely as long as the province remained under the rule of Zhang Xueliang. Son of the murdered Zhang Zuolin (see Chapter 3), Zhang did not actually submit to the rule of Jiang Jieshi’s government in Nanjing, but he was hardly friendly to Japan—not surprisingly, as he suspected (correctly) that officers of the Kwantung Army had been responsible for his father’s death. Originally those officers hoped that Zhang might declare Manchuria’s independence, but they quickly came to regard this as unlikely. They were also bothered by his willingness to allow anti-Japanese propaganda from Nanjing to circulate freely in the province. By mid-1931 the commanders of the Kwantung Army were convinced that Manchuria had to come under direct Japanese control. On September 18 they made their move, setting off a minor explosion near one of the South Manchuria Railway Company’s lines outside the city of Mukden. They immediately blamed the incident on local “bandits” and used it as a pretext to occupy the entire province, in violation of direct orders from the high command in Tokyo. The occupation of Manchuria was an event of profound importance. It signaled the start of nearly twenty months of sporadic fighting between Chinese and Japanese forces (including a Japanese air attack on Shanghai), and would pave the way for equally brazen acts of aggression in the coming years by Italy, Germany, and the Soviet Union. Nevertheless, it was carried out without prior approval by the government in Tokyo. Indeed, the occupation posed a serious problem for the cabinet—now led by Wakatsuki Reijiro¯, since Hamaguchi remained incapacitated—but by this time the civilian-based regime lacked the moral authority to do anything beyond issuing a mild protest. The government’s standing was further weakened three days later by Great Britain’s decision to abandon the gold standard, which accelerated the rush of investors both at home and abroad to redeem their yen for gold. In the course of three months Japan’s gold reserves shrank by ¥675 million. Then in mid-October the Sakurakai attempted a coup in Tokyo; although it failed and its ringleaders were placed under arrest, Wakatsuki felt compelled to resign that December. The fall of the Wakatsuki cabinet did not signal the end of civilian government in Japan; Wakatsuki’s successor was Inukai Tsuyoshi, a veteran party

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politician who selected another known liberal, Takahashi Korekiyo, as finance minister. Ultranationalists, therefore, remained dissatisfied even though the new army minister, General Araki Sadao, was known to have ties to the Sakurakai. Inoue, the architect of Japan’s return to the gold standard, was assassinated in February 1932, and less than a month later an ultranationalist murdered Dan Takuma, director general of the powerful zaibatsu Mitsui. Finally in May there was another attempted coup, which took the life of Prime Minister Inukai. The government remained intact, but with each assassination and coup attempt the forces of liberalism grew less willing to stand in the way of the army and navy. When put on trial, the plotters were almost always given the opportunity to make long speeches in their own defense, justifying their actions on grounds of national honor and compassion for Japan’s rural poor. More often than not they managed to garner significant public support; indeed, it was not uncommon for the courts to receive petitions for clemency signed by thousands of supporters—frequently with signatures in blood. In fact, in the early 1930s the armed forces were increasingly finding allies among not only the public, but also the professional bureaucracy, as a new generation of “reform bureaucrats”—often with connections to ultranationalist groups—began to advocate a more chauvinistic foreign policy as well as greater government control over the economy. At the same time the influence of the zaibatsu was in rapid decline. Under relentless attack by militarists and ultranationalists, even many civilian political leaders began to distance themselves from Japan’s largest corporations. All of this sounded the death knell for “Shidehara diplomacy,” which had valued harmonious relations with the West and China. The new consensus among Japan’s leadership was that the liberal foreign policy of the 1920s had only made the country more vulnerable to market fluctuations in New York and London, while concessions to China had only emboldened and empowered the anti-Japanese government in Nanjing. Thus Tokyo’s foreign policy took on an aggressive new tone—one that manifested itself first in Manchuria. While “government by assassination” raged at home, the Kwantung Army was busy establishing Manchukuo, allegedly an independent government but actually a fig leaf for Japanese military control of the territory. It fooled no one, certainly neither the Chinese nor the League of Nations, which after months of investigation declared Japan an aggressor, leading Japan to abandon the organization in 1933. However, it was enough to induce the regime in Tokyo to extend formal recognition to Manchukuo in September 1932. Only seven other countries would do likewise. The Kwantung Army’s vision for Manchukuo reflected the new political realities. The American journalist John Gunther referred to the new state as “the great guinea pig of Asia,” where army officers could test their pet theories of government and economics.6 In particular they were determined that while investment capital from the zaibatsu would be welcome, their influence would not. The Manchurian economy would be planned by the government;

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all large-scale industry would be operated through publicly owned enterprises or state-controlled entities such as the South Manchuria Railway. Smaller enterprises would be allowed to remain in private hands, but subject to stringent state controls. The army’s ultimate goal was to create an economy without “capitalist oppression.”7 The shift from liberalism to ultranationalism could also be seen in the country’s economic policies. Takahashi’s first important act as finance minister was to announce that Japan was abandoning the gold standard, and within a year the value of the yen had fallen by half. The deflationary policies of the 1920s were abandoned accordingly: the Bank of Japan slashed its interest rates, and government spending rose by 50 percent. Unsurprisingly, nearly two-thirds of the increases went to the army and navy, but these moves seemed to bring recovery nonetheless. Exports, particularly cotton textiles, surged in 1932–1933, as the weaker yen translated into lower prices on world markets. Per capita GDP was nearly 7 percent larger in 1932 than in the previous year (see Figure 4.1), and in 1933 it would grow by another 8 percent. Japan therefore became one of the first countries to emerge from the Depression—and for that the ultranationalists would receive most of the credit. Italy’s government experienced less change during this period than either Germany’s or Japan’s, as Benito Mussolini’s Fascists maintained a firm hold over the country. Nevertheless, the global economic crisis did lead the regime to abandon the cautious foreign policy that it pursued in the 1920s, and to begin planning for a war that it hoped might bring recovery. The Italian economy had in fact shown the first signs of difficulty in late 1927, after the lira was returned to the gold standard at the prewar parity, and it grew worse the following year as US banks became more interested in lending to Wall Street than in extending loans abroad. From 1929 to 1931 exports sagged, per capita GDP dropped by 7 percent, production fell by more than 20 percent, and unemployment more than doubled. However, the fascist regime did its best to keep news of the deteriorating conditions out of the state-controlled press. Indeed, the government began promoting the idea that Mussolini’s “corporate state” had successfully inoculated the country against the sort of distress that was afflicting the rest of the industrialized world. Even some knowledgeable foreign observers were apparently fooled; for example, Paul Einzig of the Financial News wrote after a 1932 visit that “The Italian nation has become disciplined beyond recognition, and . . . has developed the mentality that places cooperation for the common good above selfish considerations.”8 Il Duce even began holding up fascism as a model to be copied abroad, going so far as to organize a multinational conference in Montreux, Switzerland, late in 1934. Yet even as the Fascist Party put forward the image of a depression-proof Italy, the regime was taking steps to deal with a crisis whose existence it refused to admit. Mandatory wage reductions were imposed in 1930 and again in 1934: industrial workers saw their pay decrease by 15 percent, state em-

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ployees by 12 percent, and farm laborers by more than 20 percent. Private businesses, for their part, were granted protection in the form of higher tariffs and import quotas. They were also encouraged—and eventually required by law—to unite to form massive industrial cartels in an effort further to reduce competition and prop up prices. To stimulate credit, in 1931 the regime created the Istituto Mobiliare Italiano, a public agency charged with offering medium- and long-term loans to businesses. To combat unemployment the state mandated a forty-hour-maximum workweek. It also tripled its spending on public-works projects, including a colossal effort to drain the Pontine Marshes south of Rome. As a result, in 1934 the Italian government, for the first time in the country’s history, spent more on public works than it did on the armed forces. In each instance, government propaganda was quick to deny that these measures were designed to address the country’s economic woes; each represented, rather, another step in the natural development of the corporate state. The move toward greater state intervention in the economy was accompanied by an increasingly aggressive tone in foreign affairs. In May 1930 Mussolini gave an incendiary speech in which he told his audience, “Words are beautiful things, but rifles, machine guns, ships, aircraft, and cannon are still more beautiful.”9 The immediate result of what was quickly dubbed the “machine-gun speech” was that the nervous middle class began cashing in their government bonds, producing a drain on gold reserves that temporarily dampened Il Duce’s enthusiasm for war. Another check to the dictator’s expansionist impulses came from his foreign minister, Dino Grandi, who believed that Italy’s status as a major power depended on close relations with Great Britain and France. But by early 1932 Mussolini was becoming impatient. Japan’s successful occupation of Manchuria the previous September made a sizeable impression on him, as did the growing power of Hitler’s National Socialists in Germany. When Grandi tried to convince Mussolini that spring to pursue an alliance with France, Il Duce refused outright. A few months later Grandi was dismissed as foreign minister, accepting a new assignment as ambassador to Great Britain. With Grandi’s departure, Mussolini felt free, for the first time since coming to power in 1922, to pursue an expansionist foreign policy—the only question was where. An expedition into the Balkans was dismissed as too likely to bring war with France. Ethiopia seemed a safer alternative. An attempt by Italian forces to conquer this East African state had met with humiliating failure in 1896, so another try would likely enjoy broad popular support. More importantly, access to Ethiopia’s untapped natural resources presented a potential solution to the country’s economic woes. The colonial ministry began discussions of an invasion as early as 1931, and presented Mussolini with a plan for the operation in mid-December 1932—just when the economy had reached its low point. Il Duce approved, ordering that preparations for the attack should begin no later than early 1934.

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The period 1928–1933 saw the discrediting of liberalism in Germany, Japan, and Italy. Hitler’s new regime in Germany was committed to aggressive expansionism. Japan had already demonstrated that the international status quo could be overturned without bringing meaningful retaliation from the League of Nations or the United States. Soon Italy would join Japan in seeking economic salvation through overseas conquest. None of this meant that war was inevitable by 1933, but it seemed more and more like a distinct possibility. What remained to be seen was whether the new militaristic regimes would prove any more successful than their predecessors in fighting the Depression, and whether the United States, Great Britain, and France could work together effectively to uphold the international order.

Chapter 7 Beggar Thy Neighbor: The United States, 1933–1936 d

Throughout the interwar period most bankers, financiers, and economists believed that international cooperation was necessary to guide and manage the global economy. But who would provide the leadership? In the early 1920s Great Britain had attempted to resume its prewar place as steward of the international economy, but had lacked the financial muscle to do so. Moreover, starting in 1931 British elites demonstrated, through policies such as departure from the gold standard and the imperial-preference system, that they were no longer interested in playing that role, even if they were able. In the mid- to late 1920s leadership lay in the hands of private US banking houses such as J. P. Morgan, working in conjunction with the world’s largest central banks. However, this position had rested on their ability to deliver economic prosperity; the depression undermined whatever authority they might have possessed. Indeed, by 1933 the very name of J. P. Morgan had become an epithet. The individuals and institutions that had worked so assiduously to promote economic internationalism in the 1920s now stood thoroughly discredited. The question now was whether the US government, which oversaw the world’s largest economy by far, would step in to pick up the pieces and arrest the slide toward autarky. Some believed that the 1932 election of Franklin D. Roosevelt would mark a pronounced shift from the economic nationalism of Herbert Hoover. In this they would be disappointed, for reasons first mentioned in Chapter 4. In the weeks before the election the candidate generally avoided making firm commitments on either foreign or domestic policy; his most repeated 93

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­ romises were to reduce the federal deficit and do away with Prohibition. p However, in his most revealing campaign speech, at the Commonwealth Club in San Francisco, he demonstrated that he fully embraced “third way” ideology. In that address he argued that the time of seemingly unlimited economic growth brought about by “the great promoter or the financial Titan” had come to an end. The current task involved planning for the wise use of natural resources, “adjusting production to consumption,” and redistributing wealth; in other words, the “day of enlightened administration has come.”1 The weeks after the election showed that Roosevelt regarded this task as something to be handled at the national rather than the international level. During the interregnum, the president-elect’s refusal to endorse Hoover’s efforts to revive the World War Foreign Debt Commission or to clarify his views on the gold standard caused dismay among the international banking community. His inaugural address, delivered on March 4, dashed hopes even further. “Our international trade relations,” he told his audience, “though vastly important are, in point of time and necessity, secondary to the establishment of a sound national economy.” The speech was replete with military imagery, promising action against the Depression as if it were a war, and asking for expanded executive authority “as great as the power that would be given to me if we were in fact invaded by a foreign foe.”2 Was FDR an internationalist? His foreign policies during the first years of World War II, when he fought hard to aid the Allies in their fight against Hitler’s Germany, would certainly suggest that he was. However, he seldom showed much concern with world affairs during his first years in the White House. The overriding purpose of his agenda, which he dubbed the New Deal, was to bring about domestic recovery. He appeared to give little thought to whether his chosen means for doing so might inflict harm abroad. An address he delivered before the Woodrow Wilson Foundation in December 1933 is revealing in this regard; speaking of the League of Nations, the president made his position clear: “We are not members and do not contemplate membership. We are giving cooperation to the League in every matter which is not primarily political and in every matter which obviously represents the views and good of the peoples of the world as distinguished from the views of political leaders, of privileged classes and of imperialistic aims.”3 In other words, he claimed to have a deep and abiding concern for the world’s people, but wanted very little to do with foreign political and economic elites. He had particular contempt for British leaders, whom he regarded as the natural allies of America’s “economic royalists” such as the bankers of J. P. Morgan and the Federal Reserve Bank of New York. He was convinced that Neville Chamberlain, then chancellor of the exchequer, was a tool of London financial interests, and he habitually referred to Montagu Norman of the Bank of England as “old pink whiskers.” As outlined in Chapter 4, Roosevelt’s closest advisers during the early years—Raymond Moley, Rexford Tugwell, Henry Morgenthau Jr., and Hen-

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ry Wallace, known collectively as the Brains Trust—were avowed nationalists who believed that domestic recovery meant sealing off the country as much as possible from foreign products and economic trends. Their primary opponent within the administration was Secretary of State Cordell Hull, who had been a consistent advocate of free trade and sound money since his earliest days as a US senator from Tennessee. Not only did such policies serve the economic interests of the United States, he claimed, but they promoted the forces of democracy and peace around the world. But Hull owed his cabinet position less to his political views than to his prestige within the Democratic Party, and his ability to push an internationalist agenda was limited by the president’s appointment of Raymond Moley, a Columbia University law professor who served as informal head of the Brains Trust, as assistant secretary of state with oversight over international economic policy. Moley’s stated purpose was to ensure “that foreign policy dovetailed with the requisites of domestic policy.”4 It was not long, therefore, before he and Hull were on a collision course, because the entire thrust of the New Deal ran contrary to the demands of international commerce. The president’s agenda was made up of a series of “third way” policies in which bureaucracies staffed by trained experts sought to organize the national economy. The administration’s key pieces of legislation for 1933—the Agricultural Adjustment Act (AAA) and the National Industrial Recovery Act (NIRA)—sought to raise prices for farm products and manufactured goods, respectively. The former offered payments to farmers for removing some of their lands from active cultivation, while the latter involved the drafting of codes of “fair competition” for various industries (it was, in fact, largely patterned after the Swope Plan, which Hoover had denounced as fascism). Both programs assumed that the US market would be protected from foreign competition; after all, efforts to raise prices could quickly be undone if cheap imports were allowed to enter the country. Therefore, even though Roosevelt had spared no opportunity to attack the Smoot-Hawley Tariff during the election campaign, he made no attempt to alter its rates. Indeed, both the AAA and the NIRA contained language authorizing the president to increase duties even further. Also, just as Roosevelt had employed military rhetoric in his inaugural address, there was no shortage of martial imagery involved in the New Deal. The National Recovery Administration, established under the NIRA, was headed by Hugh Johnson, a general in the US Army who oversaw a massive propaganda campaign—featuring posters, armbands, and parades, all displaying the ubiquitous symbol of a blue eagle—to encourage compliance with the codes. Anyone who refused to participate in what Johnson called the “great army of the New Deal,” he said, should be treated as a “slacker”—a term that had gained prominence during World War I. Another New Deal initiative, the Civilian Conservation Corps, was administered directly by the army. Young men were recruited from the cities for a variety of ­public-works projects, but they were required to live in camps under military discipline.

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The head of the program boasted that these men could be “turned into world-class fighting men at almost an instant’s notice.”5 But if this emphasis on martial rhetoric and symbolism represented militarism, it was of a far different sort from that which prevailed in Germany, Japan, or Italy, since it was not accompanied by any significant increase in the size of the actual armed forces. Indeed, Roosevelt was no less convinced than his predecessor that national defense was a safe place to reduce expenses. Total appropriations for the army and navy averaged only around $180 million each year between 1933 and 1937. Of these, the army was most heavily affected, and by the mid-1930s it numbered just over 150,000—that is, only 50 percent larger than the German army as limited by the Versailles treaty. The navy fared somewhat better, both because Roosevelt personally favored that branch of the service (he had served as assistant secretary of the navy during World War I) and because the construction of warships could provide jobs in politically important cities on the Atlantic Seaboard. Still, even the navy remained well below the tonnage limits established at the Washington and London naval conferences, and would remain so until 1938. Further, New Deal–style militarism—unlike its German, Japanese, and Italian counterparts—did not envision imperialist expansion. In fact, the United States during the early 1930s increasingly backed away from intervention abroad. The Good Neighbor Policy, unveiled during Roosevelt’s inaugural address, foreswore future military involvement in Central America and the Caribbean, and soon afterward US forces were withdrawn from long deployments in Nicaragua and Haiti. Meanwhile, Congress in 1934 approved the Tydings-McDuffie Act, which promised independence to the Philippines, a US possession since 1898. Therefore just when Japan was embarking on an expansionist policy in East Asia, Congress was signaling its intent to give up its only major colony in the region. Of course, with the US banking system on the verge of collapse, neither military nor foreign affairs were anywhere close to the top of the president’s list of priorities when he took office in March 1933. His decisive handling of that crisis, by ordering a nationwide “bank holiday” during which the soundness of each individual bank was to be tested before it could be reopened, helped to restore public confidence in the financial system. But one important element of that strategy had serious implications for the global economy—namely, FDR’s announcement on March 6 that he was placing an embargo on gold exports. His treasury secretary, William Woodin, quickly denied that the country had left the gold standard, and promised that the embargo would be only temporary. However, six weeks later the White House announced that it was permanent; and, for good measure, gold coins were withdrawn from circulation—henceforth private ownership of monetary gold would be prohibited by law. The reaction from the British and French governments was distinctly negative, as both London and Paris expected that this would further increase the

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price advantage of US exports on world markets. They were also puzzled as to why the devaluation was necessary, since the outward flow of gold had largely been stanched by the end of March, and US reserves continued to be very large. In addition, British and French leaders objected to the fact that they learned of Roosevelt’s decision only from the newspapers. Ramsay MacDonald, in fact, was on his way across the Atlantic with a delegation of financial experts to discuss the possibility of fixing the pound to the dollar when he learned the news. It was as if it had not occurred to the president that the value of US currency might be a matter of concern beyond the nation’s borders. The international effects of the departure from gold might have been minimized had Roosevelt followed up the decision with a commitment to stabilize the dollar’s price. Indeed, he told British and French officials that this had been his goal all along, explaining that devaluation had been forced on him by farming interests in Congress. MacDonald was eager to pursue some kind of agreement along these lines since he feared that the alternative would be competitive unilateral devaluation, in which Britain and the United States each kept undercutting one another in an attempt to win advantages for their exports. The end result of this, the prime minister feared, would be a return to the rampant inflation of the early 1920s. Stabilization, therefore, was high on the agenda for the World Economic Conference scheduled to be held in London in June 1933. The overarching goal of the conference was to promote international economic cooperation to end the Depression. However, Roosevelt’s choices for the US delegation suggested that he had other priorities. As secretary of state, Hull was tapped to lead it. However, the group’s two other most prominent members, Senators Key Pittman (D-Nevada) and James Couzens (R-Michigan) were die-hard protectionists. The president worked hard to persuade a third senator to join them: Hiram Johnson (R-California), an arch-isolationist who had been one of the leaders in the fight against US membership in the League of Nations. Johnson refused on the grounds that it would undermine his cherished status as an independent voice in the Senate; nevertheless, Hull would find himself with few effective allies in London. Complicating Hull’s task was the fact that during the weeks leading up to the conference Raymond Moley was making public pronouncements minimizing the importance of international economic cooperation. Recovery would come only through each country’s focusing on its domestic markets; the problems facing the industrialized world, he insisted, were “predominantly internal, not external.”6 Hull was outraged, arguing that it was an act of insubordination for an assistant secretary of state to issue statements that ran contrary to those of his superior. However, it soon became clear that Moley’s words had the support of the president. Far from repudiating them, Roo­ sevelt suggested to a dumbfounded Hull that he say something similar in his opening remarks at the London Conference. His written instructions to the delegation called on its members to incorporate both Hull’s and ­Moley’s

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­ riorities—apparently not recognizing that they were completely at odds p with one another. None of this boded well for the conference. Hull gave an eloquent address extolling the virtues of free trade, which other delegations found odd given that the Roosevelt administration had shown no signs of altering the Smoot-Hawley Tariff. As expected, currency stabilization was a major area of discussion, and in mid-June an agreement appeared to be in sight. However, Roosevelt suddenly lost interest. The value of the dollar had fallen by 17 percent since March, and during that same period the economy had been showing signs of recovery, with wages and prices slowly rising through the spring. The president concluded that the two phenomena were related; why, if devaluation was bringing domestic recovery, should he abandon the strategy now? If he had any lingering doubts, they were dismissed when, after news of the impending stabilization deal appeared in the press, stock and commodity prices fell sharply. Roosevelt rejected the agreement without even reading it. At this point Roosevelt took a further step seemingly calculated to undermine the conference—he sent Raymond Moley to London, although he never made clear what role the assistant secretary of state was to play there. Moley, for his part, did nothing to calm speculation about what instructions the president had sent with him, and gave nothing but vague answers to the press. He ruffled feathers further by announcing on his arrival that he would be staying not at Claridge’s Hotel with the rest of the US delegation, but at the US Embassy. However, the economic news Moley received in London caused him to reconsider his nationalist stance. By the end of June the dollar had fallen to $4.30 to the pound, and there was a run on the Dutch florin. The Dutch, Swiss, French, and Belgian delegations all informed him that without a stabilization agreement their currencies would be forced off gold within the week. Moley, while still shying away from stabilization, suggested a compromise— the United States might join Great Britain and France in a vague statement of principles, one of which was that gold ought to be the standard measure of international exchange, without committing the United States to return to gold at any particular time. He hoped that something that looked like an agreement might be sufficient to prevent a run on the currencies of western Europe. Moley’s compromise was acceptable to the Europeans, but not to the president. Roosevelt suspected that the whole impetus for stabilization came from banking interests (“economic royalists”), and that any sort of pledge along these lines would limit his ability to devalue to the extent necessary to bring about domestic recovery. Therefore, on the advice of Henry Morgenthau— who by his own later admission had little understanding of the international monetary system—Roosevelt responded with a telegram in which he chastised the delegates for pursuing the “specious fallacy” of stabilization, a mere

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“fetish” of “so-called international bankers” who stood in the way of efforts to impose effective national planning.7 Roosevelt’s message—which the press quickly dubbed the “bombshell telegram”—proved popular at home, particularly among the farmers and businessmen of the Midwest and West. It was far less well received internationally. It would be unfair to claim, as many world leaders did at the time, that Roosevelt’s message was solely responsible for the breakup of the conference; as the next chapter will show, the gulf between French and British views likely doomed the London proceedings from the start. Nevertheless, the telegram generated plenty of ill will. As soon as it became public the value of the dollar began to slide; by mid-July it had fallen by 11 percent against the pound and by 31 percent against the franc. Immediately there was talk of further devaluation in London, and of departure from the gold standard in Paris. Worse still was the undiplomatic tone of the message. Roosevelt had lectured delegates from around the world as if they were mischievous schoolboys, and some of those in attendance—most notably Neville Chamberlain—would never forgive him for it. One other tangible effect of the London Conference was that it enabled Hull to rid himself of Moley. The secretary of state had become so incensed by what he regarded as Moley’s interference and insubordination that he wrote to the president’s secretary hinting that he might resign. Roosevelt stalled him as long as he could, but thanks to Hull’s popularity among Southern Democrats the president understood what he had to do—the former law professor was assigned to a new post in the Department of Justice. By 1936 he would emerge as one of the administration’s fiercest critics. If Hull believed that Moley’s departure from the State Department meant the president was ready to embrace economic internationalism, he was soon to be disappointed. The goal of the New Deal from the beginning had been to promote recovery by forcing wages and prices upward, and for the first few months of Roosevelt’s presidency this seemed to be working. From March through July commodity prices had risen steadily; with the dollar at 69 percent of its March value, the price of cotton and wheat had roughly doubled, as had average prices on the New York Stock Exchange. However, starting in the late summer they had begun to sag once again. Cotton fell from a July high of nearly $1.20 per pound to around $0.80; wheat dropped from $1.24 per bushel to just over $0.90; and the stock market slumped. At this point Roosevelt and his advisers turned to George F. Warren, an agricultural economist from Cornell University, who argued that the best way of raising prices was to increase the dollar value of gold. Since the imposition of the gold standard in March, the price of an ounce of gold had risen from $20.67 (where it had been fixed by law since 1837) to $29.82. Starting on September 8, Roosevelt authorized the Reconstruction Finance Corporation to inflate the dollar further by purchasing gold at above-market prices.

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For the next six weeks the gold-buying strategy had no measurable effect on commodity prices, so the president went a step further. On October 22 he delivered a radio address in which he told his listeners, “our dollar is now altogether too greatly influenced by the accidents of international trade, by the internal policies of other nations and by political disturbance in other continents.” He pledged, therefore, to take “control of the gold value of our dollar.”8 From then through January 1934 he initiated a morning ritual in which he would decide himself, in the presence of Henry Morgenthau, George Warren, and a handful of other advisers, what the price of gold would be for that day. Morgenthau later recalled that often little thought went into the decision; on one occasion Roosevelt chose to increase the price by 21 cents for no reason other than that he regarded it as a lucky number. In pursuing this strategy the president seemed to give no thought at all to the international effects of a wildly unpredictable dollar. It triggered serious gold drain abroad, particularly in France, as foreign investors dumped other currencies in favor of a depreciated dollar. Montagu Norman predicted that the gold-buying scheme would produce global bankruptcy, while French politician (and future prime minister) Paul Reynaud likened it to a declaration of war. Even the British economist John Maynard Keynes, who had been one of the few foreigners to praise Roosevelt’s bombshell telegram, called the president’s policy “more like a gold standard on the booze than the ideal managed currency.”9 George Harrison of the New York Federal Reserve, as well as a number of veteran State Department officials, begged him at least to consult with the French and British before changing the price of gold. When the president dismissed their objections there was a wave of resignations among internationalists in the administration. But while Roosevelt was more than willing to risk the outrage of internationalists and foreign statesmen, he could not ignore the fact that the gold-buying program was not producing the desired effects at home. The dollar price of gold had been increased by more than 17 percent between late October 1933 and January 1934, but with little impact on commodity prices; indeed, the general index of farm prices had actually dropped slightly in November and December. He therefore signed the Gold Reserve Act of 1934, which fixed the price of gold at $35 per ounce. This was 40 percent greater than what it had been in March, but it would remain stable for the rest of the decade. Nevertheless, this did not amount to a return to the gold standard: private ownership of gold remained illegal, and under the Gold Reserve Act the president had the right to alter the price of gold whenever he felt it was necessary. Indeed, just before signing the bill the president reaffirmed his commitment to economic nationalism by tapping Henry Morgenthau to succeed the ailing William Woodin as treasury secretary. US monetary policy continued to have damaging international effects even after the price of gold had been stabilized. A powerful bloc of congressmen from farming and mining states in the Midwest and West were

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pressing for government action to raise the price of silver, which had been in steep decline since 1930. Many of these were calling for further inflation by issuing currency based on silver. Roosevelt and Morgenthau, having soured on devaluation, were unwilling to go this far, but in June 1934 the administration placed an embargo on silver exports. Two months later, in an effort to drive up the price of the metal, Morgenthau began purchasing it in large quantities, and continued to do so until late the following year. This time the injured party was China, one of the few countries whose currency was tied to silver. Chinese speculators—as well as Japanese forces stationed in northern China (see Chapter 9)—began exchanging their yuan for silver, then selling the silver at a profit on the world market. To protect its dwindling reserves the Bank of China raised interest rates, causing industrial production to drop and unemployment to soar. Of course, the main beneficiaries of this were the Japanese, who at the time were trying to carve a sphere of influence over the northeastern part of the country. The economic nationalism of the early Roosevelt administration also made itself apparent in its policies on trade. The Democratic Party had traditionally been antitariff but, as already mentioned, the efforts of the Brains Trust to bring about recovery by forcing prices higher militated against free trade. This helps to explain why, although Roosevelt had frequently denounced the Smoot-Hawley rates while campaigning in 1932, he made no effort to pursue tariff reform during his first year in office. Secretary of State Hull, however, was not about to let the issue rest. At the Pan-American Conference at Montevideo in December 1933 he gave a speech in which he denounced “useless and hurtful trade barriers,” assuring the delegates that the path to recovery lay in the revival of international commerce.10 The enthusiastic response of Latin American countries—and, perhaps, fear that Hull might resign if the trade issue were not taken up soon—encouraged Roosevelt in March 1934 to submit to Congress the most important trade bill of his presidency (and most likely of the twentieth century): the Reciprocal Trade Agreements Act. The act’s importance lay in the fact that it effectively shifted power over trade policy from Congress, which had traditionally set tariff rates, to the executive branch. It gave the president authority to negotiate bilateral trade agreements with other countries, in which the prevailing rates could be altered by as much as 50 percent. The bill by no means guaranteed tariff reduction; indeed, it empowered the president to raise rates as well as lower them. Moreover, even if there were reductions, it was not clear whether they would be automatically extended to other trading partners via the unconditional most-favored-nation principle. For Roosevelt the bill was a means of expanding US exports, not establishing any kind of new world order. He explicitly promised Congress that no American economic interest would be harmed by the new legislation. Roosevelt signed the Reciprocal Trade Agreements Act into law on June 12, 1934, but the ambiguity surrounding it was quickly reflected in its ­operation.

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Unsurprisingly, Hull sought to use unconditional most-favored-nation status to turn the bill into an instrument for promoting global free trade. However, he ran into resistance from George N. Peek, chief of the Agricultural Adjustment Administration and head of the newly created Export-Import Bank of the United States. While Peek favored the law, he feared that Hull’s application of it would undermine the competitiveness of US agriculture. He also believed that the bilateral agreements concluded under the new law should provide for rough equality between imports and exports; that is, they should be straightforward barter agreements in which neither side ran a trade surplus or deficit. The dispute between Hull and Peek soon became as intense as the secretary of state’s struggle with Raymond Moley the previous year. Behind their disagreement lay a deeper principle. Peek viewed world trade in purely economic terms, to be engaged in only when there was a clear benefit to the US economy. For his part, Hull was convinced that free trade would ultimately work to the benefit of US industry and agriculture, even if the country ran trade deficits with some of its partners. At the same time, though, he believed that world trade served a higher purpose than mere self-interest. As an old Wilsonian, the secretary of state held that trade encouraged world peace and cooperation and could even serve as a lever to promote proper behavior on the part of other nations. Liberal trade relations should, he believed, be extended to countries that respected the international order (even if this meant running a trade deficit) and denied to those that sought to overturn it, even if such trade seemed to be in the country’s narrowly defined economic interests. Whether Roosevelt favored Peek’s approach or Hull’s was far from clear in 1934, and the dispute manifested itself in a debate over trade with the new National Socialist regime in Germany. Indeed, in light of the president’s later reputation as an implacable foe of Hitler, his initial willingness to enter into commercial relations with Germany appears surprising. When the German finance minister and Reichsbank president, Hjalmar Schacht, met with Roosevelt in May 1933 to announce that his government was suspending payments to American bondholders, the president seemed unperturbed—after all, he reasoned, it would only hurt his political enemies, the “international bankers” of Wall Street. (Hull afterward convinced him that there were legitimate American interests at stake, and that therefore a formal protest should be lodged against the policy.) Nor did Roosevelt’s attitude appear to have changed in January 1934, when German ambassador Hans Luther met with the president to lobby for a trade agreement. Berlin’s commercial policy at the time did not fundamentally differ from Peek’s favored interpretation of the Reciprocal Trade Agreements Act; that is, it sought to conserve the Reich’s precious reserves of foreign currency by negotiating bilateral barter agreements in which imports were accepted from countries that purchased German exports of equal value. Nevertheless, the president responded to Luther’s request by announcing that he would happily agree to such a deal.

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Roosevelt’s response was certainly good news for Peek, who set about negotiating a bilateral agreement with Germany via his Export-Import Bank. He unveiled it in November—a deal in which Germany promised to purchase 800,000 bales of American cotton using special “blocked marks” that could be used only for the purchase of German exports. From Peek’s perspective the deal was an easy way to benefit US cotton farmers who had been suffering from low commodity prices. Hull, however, was horrified. Not only did it violate in every respect his own vision of the Reciprocal Trade Agreements Act, but he insisted that it would work against the country’s foreign-policy interests. After all, he argued in a letter to the president, this was the same German regime that was persecuting Jews and other minorities, and that had reneged on its debts to US bondholders. The proposed agreement would provide Hitler with a critical resource while allowing him to conserve foreign currency for other purposes—probably rearmament, at a time when disarmament was among Roosevelt’s most frequently stated goals in foreign affairs. Hull’s campaign against the German trade agreement had its desired effect; in March the president squelched the cotton barter scheme. As a result cotton sales to Germany dropped off dramatically. In 1933, 75 percent of Germany’s cotton imports came from the United States; by 1935 the figure had fallen to 25 percent. It marked the first time that Roosevelt chose to subordinate a potential short-term benefit to the domestic economy—and, just as important, the interest of an important electoral constituency (namely, cotton farmers)—to larger foreign-policy goals. In retaliation Berlin announced in 1935 that it was terminating Germany’s most-favored-nation treaty with the United States, and the two countries were engaged in a virtual trade war for the remainder of the decade. There was at least one instance in which the administration did not have to choose between the health of the economy and the needs of the international system. As mentioned in Chapter 4, although the Soviet Union had been a leading purchaser of US exports as recently as 1930–1931, the plummeting price of Soviet grain exports led Stalin increasingly to cut off his country from trade with the outside world in 1931–1932. However, the Japanese occupation of Manchuria and the rise of Hitler in Germany were deeply alarming to the Soviet dictator, who now sought to reach out to liberal democratic regimes in the West. Since the United States had not yet recognized the Soviet regime as a legitimate government, securing such recognition was a critical first step. In August 1933, therefore, the head of Amtorg, the Soviet purchasing agency in the United States, announced that he was authorized to buy $75 million in raw materials and $50 million in machinery if only Washington followed Great Britain and France in recognizing the Soviet Union. Roosevelt in this case was moved less by economic considerations than strategic ones; he regarded the Soviets as a potential counterweight to the rise of militant nationalist regimes in Berlin and Tokyo. Hull expressed reluctance, questioning whether Stalin’s regime was any more worthy of friendship than

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Hitler’s, but Roosevelt brushed aside his concerns and extended formal recognition in November. However, the desired benefits never materialized; Am­ torg never placed the promised orders, US-Soviet trade never came close to its 1930–1931 levels, and there was no cooperation between the two powers to resist either German or Japanese aggression. Relations were not much better with Great Britain, and the acrimonious World Economic Conference in London was only part of the reason for this. Another installment of Britain’s war debt came due on June 15, 1933, days after the conference had begun. The virtual evaporation of British exports to the United States (their value for 1932 amounted to a mere $76 million) made payment of the full $85 million installment unthinkable. However, the MacDonald government, hoping to avoid outright default, offered a $10 million payment “in acknowledgement of the debt, pending a final settlement.”11 Roosevelt accepted this, but getting Congress to do likewise was a different story. In May 1934 the legislature passed the Johnson Act (named for its sponsor, Hiram Johnson), which prohibited states that had defaulted on their war debts from selling their bonds in the United States—in other words, cutting them off from private loans. When the administration tried to argue that Great Britain did not fall into this category, Congress approved another resolution declaring that any country that was not submitting its full payments was in default. A greater obstacle to Anglo-American cooperation was Britain’s ­imperial-preference system, described in Chapter 5. Since its imposition in 1932 it had already had a measurable effect on the US export trade—in 1929 more than 16 percent of Britain’s imports came from the United States, but by 1934 that figure had fallen to just over 11 percent. Of course, to a committed free-trader such as Hull the system was objectionable on principle, a throwback to the British Empire’s trade policies of the eighteenth century. Still worse was the fact that in 1934 London concluded a bilateral commercial treaty with Germany in which the two powers agreed to trade on a barter arrangement—precisely the sort of deal Hull had so vehemently opposed when Berlin had suggested it to the United States that same year. Little wonder, then, that the secretary of state regarded Great Britain—even more than Germany—as the most formidable obstacle to the liberal world order that he was seeking to build. He would devote the remainder of his career to breaking down imperial preference. By the end of 1935 there was evidence that the administration was heading in a more internationalist direction. In October of that year it encouraged Jiang Jieshi’s regime to abandon the silver standard, at which point the Treasury Department’s silver purchases ceased to have a destabilizing effect on the Chinese economy. Indeed, they now even worked to China’s advantage, as they provided a reliable influx of US dollars at a time when the Japanese were dumping their yuan in an effort to bankrupt Jiang’s government. An even more noteworthy development would follow in late 1936, when the United

Beggar Thy Neighbor: The United States, 1933–1936  d 105

Figure 7.1 Per Capita GDP of the Great Powers, 1932–1936 7,000 6,000

1990 US Dollars

5,000 4,000 3,000 2,000 1,000 0 1932 United States

1933 Great Britain

1934 France

1935 USSR

Germany

1936 Japan

Italy

Source: Data from Angus Maddison, 2014, “Maddison Historical GDP Data,” World Economics, www .worldeconomics.com/, accessed May 14, 2014.

States and Great Britain joined France in signing an agreement in which the first two pledged to hold the value of their currency more or less stable while France would be permitted to devalue. In other words, the administration was finally willing to make the sort of promises that it had explicitly rejected in 1933–1934. More importantly, it was the first signal to the world—and particularly to Germany—that the three most powerful democracies were willing to cooperate on matters of mutual concern. A number of factors account for the administration’s move toward internationalism. Most important was likely the improvement of the economy in 1935. Aided by growing reserves of gold and foreign currency, per capita GDP had expanded by more than 14 percent since 1933 (see Figure 7.1), while unemployment had fallen—noticeably if not dramatically—from a 1933 high of 13.7 million to about 12 million. The administration’s strategy for coping with the Depression also shifted during this period, away from the national planning implied by the NIRA and the AAA (both of which the Supreme Court declared unconstitutional) and toward regulatory and welfare-state policies that had fewer negative implications for the global economy. Finally, Roosevelt was alarmed by the Italian invasion of Ethiopia in October 1935 (see Chapter 9). His effort to impose a “moral embargo”—that is, to call on US oil producers to refuse to sell their products to Italy—largely fell flat. However, he did begin seeking ways of cooperating with the League of Nations to check future aggression. It must be noted, however, that the administration’s turn toward internationalism was not a strategy shared by most members of Congress, who from

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1934 to 1936 were doing their best to ensure that the United States would never again be drawn into a foreign war. The push began with the formation of a special committee headed by Sen. Gerald P. Nye (R–North Dakota) to investigate the role of arms manufacturers and international bankers in bringing about US entry into World War I. This was an effort that the administration fully supported—after all, the targets were the very “economic royalists” that Roosevelt himself had been denouncing since the start of his presidency. Indeed, he was happy to see political enemies such as the DuPont family raked over the coals. As time went on, however, the investigation developed in a manner that became increasingly embarrassing for the administration. The British ambassador protested when Nye subpoenaed the secret correspondence between certain New York banks and his government. Southern Democrats took umbrage when the committee accused Woodrow Wilson of having lied about the Allies’ war aims. But the greatest difficulty emerged when the Nye Committee’s recommendations were put into practice in the form of the Neutrality Acts of 1935 and 1936. The first was a six-month prohibition on the sale of arms and other war materiel to any country in a state of war, while the second extended the first and added a provision banning loans to belligerent powers. Roosevelt raised concerns about the arms embargo, warning that it could actually increase the chances of US involvement in a war, and suggested instead that the president be given the option of placing an embargo on only one side in a war. When the bill’s supporters indignantly refused—arguing that for the chief executive to take sides in such a manner would be the opposite of neutrality—Roo­ sevelt felt he had no choice but to sign the Neutrality Act anyway. So great was the determination of Congress to stay out of war that any presidential veto would have almost certainly been overturned. He also feared angering Midwestern progressives such as Nye, whose support he needed to carry out his domestic agenda. As Roosevelt’s first term headed toward its close, then, there was some evidence that the president had abandoned his commitment to economic nationalism and was willing to work with other countries to contain potential aggressors such as Germany, Italy, and Japan. However, he would face an uphill fight against a Congress—and, to a large extent, a public—that was determined to keep the country aloof from overseas commitments. He would also have to work with foreign leaders who were deeply distrustful of the United States—thanks in part to policies that Roosevelt himself had pursued during his first years in office. The road to internationalism would not be an easy one.

Chapter 8 The Unraveling of the Western Alliance: The “Haves,” 1933–1936 d

In the wake of World War I, most of the hopes for a stable international order rested on cooperation between Great Britain and France. As we have already seen, such cooperation did not materialize, and the reason for this lies to a great extent in the fact that their economic cycles were almost entirely out of sync with one another. During the 1920s Britain’s economy remained stagnant while France enjoyed prosperity, and the British blamed this state of affairs on a devalued franc, high French tariffs, and the sterilization of gold by the Bank of France. In 1931, when the Depression put London in critical condition, Paris was experiencing only mild symptoms. Starting in 1933, though, the reverse was increasingly the case. Britain would experience a noticeable, if slow, recovery over the next five years, while France slid deeper into the Depression, which reached its nadir in 1936. Now France blamed its troubles on the devaluation of sterling and imperial preference, while Britons credited these policies for their own recovery and expressed their determination to stand by them. British recovery was clearly in evidence by early 1933. In that year, global uncertainty over the future of the dollar caused a massive movement of gold from the United States to Great Britain, and this, combined with a low (2 percent) interest rate, led to a surge in industrial activity. During the last quarter of 1934 Britain became the first major country to surpass its 1929 level of production. All told, between 1932 and 1936 per capita GDP expanded by more than 17 percent (see Figure 7.1), industrial production increased by nearly 46 percent, and gross investment went up by 47 percent. 107

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Leading the way were newer industries, particularly those producing consumer goods such as automobiles, processed foods, and industrial appliances. Unemployment fell from a high of around 17 percent in 1933 to just over 8 percent in 1937, and real income increased 17 percent. The recovery was reflected in the politics of the period. In spring 1935 an ailing Ramsay MacDonald stepped down as prime minister in favor of the leader of the Conservative Party, Stanley Baldwin. Parliamentary elections that November produced a solid win for Baldwin’s government, albeit a less resounding one than the National Government’s victory in 1931. In contrast to France and Germany, during this period Britain never saw the rise of extremist parties of the left or right. Before the election of 1931 the Communist Party had held 26 seats out of 615 in the House of Commons, while Oswald Moseley’s crypto-fascist New Party occupied 24; by the end of 1935 the Communist total had dropped to 2, while Moseley’s British Union of Fascists (into which the New Party had merged in 1932) failed even to run a slate of candidates in that year’s parliamentary elections. Under the leadership of the mild-mannered Baldwin, Britain projected an image of calm and stability, if not passivity, in an otherwise turbulent international environment. While the Baldwin government clearly benefited from the improved economic conditions, the recovery remained incomplete in the eyes of Neville Chamberlain, chancellor of the exchequer and the dominant figure in the cabinet. Although the value of British exports was rising, this was not enough to offset a surge in imports, so the country in the mid-1930s consistently ran a negative balance of trade. Part of this was the result of imperial preference. Although Empire Free Trade protected the nations of the Commonwealth from outside competition, it left Britain itself wide open to imports of raw materials from Canada, Australia, South Africa, and elsewhere, and the further recovery progressed, the more the demand for imports increased. At the same time, Britain’s older, traditional export industries—steel, shipbuilding, coal, and textiles—recovered far more slowly than the newer industries that produced largely for a domestic market. Moreover, as global prices for primary products bounced back in the mid-1930s, Britain, as an exporter of manufactured items and an importer of raw materials, saw its terms of trade steadily worsen. These realities—a growing trade deficit and a perceived need for an “­export-led recovery”—would have a profound impact on British economic policies during this period. They would have significant repercussions for the country’s foreign and defense policies as well, simply because the Treasury and the Board of Trade had come to exercise so much authority over those areas. The most significant of these involved the defense budget. As mentioned in Chapter 5, the MacDonald cabinet, in response to the Japanese invasion of Manchuria, rescinded the Ten-Year Rule, under which estimates for the armed services were based on the assumption that Britain would not go to war in the next ten years. This did not, however, imply any political

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willingness to increase military spending; indeed, the government spent no more on defense in 1933 than it had in 1931, when the Ten-Year Rule was still in effect. Nevertheless, the cabinet, alarmed by the rise of militant nationalism in Germany and Japan, established in 1933 a Defence Requirements Subcommittee consisting of Permanent Under-Secretary for Foreign Affairs Sir Robert Vansittart and the chiefs of staff of the army, navy, and Royal Air Force. Based on the assumption that a war could begin as early as 1939, the group was charged with determining what ought to be done to bring the armed forces into a state of readiness by that time. The committee met through the winter of 1933–1934, and submitted its recommendations that spring. The subcommittee’s final report recognized Germany as Britain’s “ultimate potential enemy” and called for a £76 million increase in the defense budget over the next five years.1 Most of the added funds would go toward the army, in the expectation that a substantial British Expeditionary Force would fight the Germans alongside the French army, just as had occurred during World War I. The Treasury, however, had other ideas. Chamberlain objected that this level of defense spending threatened to undermine Britain’s economic recovery. Rearmament at this pace would merely worsen the balance of payments by raising the demand for certain imports while diverting industrial capacity away from the production of consumer goods for export. While certainly good for the armed services, the subcommittee’s recommendations did nothing for what the chancellor called the “fourth arm of defence”—the ability of the government to finance a war over the long haul. On the basis of Chamberlain’s criticisms, the cabinet reduced the overall size of the increase to £50 million over five years, and cut the amount intended for the army by half. On the other hand, the Royal Air Force was to receive more than the subcommittee intended, to allow for the creation of an additional forty-one fighter squadrons by 1939. Defense of the British Isles against air attack, the chancellor had insisted, must be the country’s greatest priority. The 1934 battle over defense spending between the Foreign Office and the service chiefs on one hand and the Treasury on the other would play out repeatedly through the remainder of the decade. Time and again it was the chancellor’s views that won the day in the cabinet. This was in large part, it must be said, because his views were in accord with those of the British people as a whole, who favored neither the tax increases nor the cuts to social spending that larger defense outlays would imply. Nor was there any pressure to rearm from the opposition party, as Labour was even more opposed to expansion of the armed forces than Chamberlain was. It is true that as Germany’s military capacity expanded the chancellor proved increasingly willing to see additional funds devoted to defense, but he would not stand for any effort to match Hitler’s rearmament. The German economy would eventually burn itself out, he predicted; Britain’s must not do likewise. Therefore, while

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overall spending for the armed forces grew by more than 150 percent between 1934 and 1937, Germany’s military budget expanded by a whopping 1,400 percent during this same period. In 1937 Germany spent twice what Great Britain did on armaments. The British army in particular was neglected, in spite of evidence that the German and Soviet armies were outpacing the British in the development of modern tanks and other armored vehicles. Great Britain’s ability to dispatch an expeditionary force to the continent in case of war seemed questionable at best. The cabinet’s worries over the balance of payments also led to a revolution of sorts in Britain’s commercial policy. Traditionally the country had been the world’s leading champion of multilateral trade, but starting in 1934 London joined Germany in embracing bilateralism—precisely the sort of trade that Cordell Hull had rejected in the United States. The impetus for this change came from the German government, which, in an effort to conserve foreign exchange, had imposed an increasing number of controls on the import of certain materials, particularly wool, cotton, coal, and copper, that had traditionally been purchased from Britain. In the course of 1933–1934 British exports of cotton yarn to Germany dropped by more than a third. Worse news followed that June, when Berlin announced that its shortage of foreign currency had become so acute that it was no longer able to pay its foreign debts. The Baldwin government objected strongly (as did Germany’s other major creditor, the United States), but thereby faced a critical choice. It could join the United States in essentially cutting itself off from trade with Germany, in the hope that Hitler’s regime might be brought to its knees economically. The alternative was to negotiate on what amounted to German terms. London chose to negotiate, and a delegation headed by Sir Frederick LeithRoss, chief economic adviser to the cabinet, arrived in Berlin that September. Although Leith-Ross—like virtually all Britons—regarded Hitler with distaste, he concluded that Hitler’s hold on power was secure; Germans, he wrote, were “still hypnotized by Hitler’s personality.” Any effort to hurt Hitler’s regime through trade was bound to harm Britain more than Germany, so the best policy was to “maintain our trade with Germany, so long as we can do so without increasing our credit commitments to her.”2 His efforts bore fruit in the Anglo-German Trade and Payments Agreement, which was concluded in November. In exchange for a German pledge of £400 million to pay outstanding debts, Britain agreed to limit exports to Germany to 55 percent of British imports from Germany, with the understanding that the payments arising from the difference would be used to service German debts to British bondholders. Economically, the Trade and Payments Agreement had its desired effect— British exports to Germany revived (although they never returned to their pre-1914 levels) and Hitler’s regime dutifully made its debt payments until the outbreak of war in 1939. However, it was a powerful signal that the Baldwin government was prepared to make any agreement necessary in order to

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sustain the nation’s economic recovery—even if it meant playing by Germany’s rules. The agreement certainly aroused the ire of the United States, and would lead Cordell Hull to view British trade policies as the largest obstacle to his vision of an international free-trading order. Chamberlain dismissed what he saw as the “calm assumption . . . that Great Britain has nothing else to do but serve American interests.”3 Nevertheless, it is easy to view this agreement as the first in a series of steps that would eventually be called a policy of appeasement of Germany. In fact, only seven months later Britain and Germany would sign a treaty that limited the total tonnage of the German navy to 35 percent of that of the Royal Navy. This agreement amounted to a public admission by London that it would no longer enforce the far more stringent limits on German sea power set in the Treaty of Versailles. Chamberlain also hoped to come to some sort of understanding with Japan, recognizing the threat that Tokyo posed to Britain’s interests in China, as well as its colonies in East Asia. Since he was convinced that Britain would receive no assistance from the United States in containing Japan—the Americans, he believed, would not resist any Japanese action “short of an attack on Hawaii”4—he again dispatched the redoubtable Leith-Ross, who traveled to China and Japan in summer 1935. Leith-Ross proposed settling the long-standing issue of Manchuria through a complicated arrangement whereby Britain would extend a £10 million loan to Tokyo, which would be lent in turn to Manchukuo, then paid as an indemnity by the Manchukuo government to China. The Nanjing regime was, at the time, struggling with a serious monetary crisis induced by US silver purchases (see Chapter 7), and would use the money to leave the silver standard and introduce a new currency based on sterling. In return for Japanese cooperation, both Britain and China would recognize Manchukuo as an independent state. Leith-Ross’s plan was an ambitious one, but it went nowhere. The Japanese army objected to British “interference” in Sino-Japanese relations; it surely did not help London’s cause that during this same period the Board of Trade was doing its best to keep Japanese cotton goods out of Britain’s colonies (see Chapter 9). Meanwhile the United States announced its hostility to any move to recognize the legitimacy of Japan’s conquest of Manchuria. His efforts thwarted, Leith-Ross instead moved ahead with a straightforward loan to China, which allowed Nanjing to adopt a new paper currency—the fapi—in November. If British foreign policy during this period was subordinated to the effort to sustain the nation’s fragile economic recovery, France’s foreign relations were held hostage to an ongoing struggle to keep a bad situation from growing worse. Industrial production had reached its peak in 1931, and by 1935 it had fallen by 24 percent. (By contrast, production in Britain increased 20 percent over this same period.) Average wholesale prices dropped by nearly 25 percent. If unemployment remained low compared to Britain, the United States, and Germany—only 2.6 percent of the workforce was jobless even

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at the worst point of the French depression—it was only because so many foreign workers had entered the country in the late 1920s, and left when the economy began to contract. The ability of the French government to respond to the economic crisis was limited by the power of certain interest groups. Much of the middle class derived substantial income from government bonds and pensions; the introduction of the franc Poincaré in 1928 had inflicted serious harm to this group, and they were determined to resist any further devaluation of the currency. Indeed, the nation’s experience with inflation in the early- to mid-1920s was so traumatic that no political party was willing to advocate devaluation. This was not a problem so long as gold continued to flow into France, as it did as late as 1932. However, the influx stopped in 1933 and reversed in 1934. In that year $60.5 million in gold fled the country for the United States, mainly in response to Roosevelt’s devaluation of the dollar. In 1935 the amount increased to $934.2 million. The continued commitment to the franc Poincaré helps to explain why France’s delegation to the London Economic Conference in 1933 was so determined to pursue currency stabilization with Britain and the United States. When it failed in that effort France joined with six other countries—Belgium, Luxembourg, the Netherlands, Italy, Poland, and Switzerland—to form the “gold bloc.” All seven committed to keeping their currencies at a fixed rate of exchange, with gold and one another. The other interest group that French politicians dared not alienate was the peasantry, whom Édouard Herriot acknowledged as “our silent master.”5 Therefore, at a time when wages and wholesale prices were falling, agricultural prices were kept stable through the use of subsidies. Wheat, for example, was by 1934 selling for about four times the price that it commanded in the United States. Of course, this made it impossible for French agricultural products to compete on world markets, but further increases in tariffs and import quotas guaranteed that they would have the domestic market entirely to themselves. However, these policies also meant that the declining wages of the industrial working class were not matched by a corresponding fall in the cost of living. France also sought economic recovery by following the British example of strengthening economic ties with its colonies. From December 1934 to April 1935 the Conference économique de la France métropolitaine et d’outre-mer met in Paris to plan the development of the empire into a self-sufficient unit. France did make some progress in that direction. The proportion of French imports from the colonies nearly tripled in the early 1930s, and while some of this was no doubt the result of the general decline of international trade, Algeria, Indochina, and Senegal all became major suppliers of timber, rubber, coal, and fruit. Exports to France’s overseas possessions during the same period increased by nearly a third, so that by 1938 the colonial market absorbed more than 35 percent of French manufactured goods.

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Autarky, however, was an unreachable goal for France, which did not possess the land mass or the population of the Soviet Union or the United States, or an empire anywhere close to the size of Great Britain’s. As much as French nationalists might have wanted to deny it, France’s prosperity was dependent on the world market, and as long as the franc was overvalued in relation to the currencies of its two primary competitors (Britain and the United States), the export trade would suffer. In the late 1920s nearly 11 percent of all the world’s exports of manufactured goods came from France, but by 1936 this figure had fallen to 6 percent. Under the circumstances all the tariffs and import quotas in the world could not prevent a growing imbalance of trade. Throughout the period the value of French imports exceeded that of exports by anywhere from 25 to 45 percent annually. The economic crisis contributed to France’s chronic political instability. From 1932 to 1934 no fewer than six governments held office, none of which was capable of building a working majority in Parliament. There were signs of public anger over the government’s impotence as early as February 1933, when protests started to occur throughout France. Demonstrations turned into riots when the legislature adopted unpopular measures, such as voting to maintain their salaries, voting to lend $350 million to Austria, or even discussing making further payments on the war debt to the United States. Popular outrage exploded in January 1934 with the apparent suicide of Serge Stavisky, a former nightclub manager and pawnbroker who had defrauded thousands of investors by forging municipal bonds. Stavisky’s activities had long raised suspicions; in fact, he had first been arrested for fraud in 1927, but the trial was repeatedly postponed and he continued his activities while free on bail. It was widely believed that Stavisky enjoyed the protection of powerful men in government, and his death led to speculation that he had been killed by police to prevent him from implicating a number of prominent politicians, some of whom were ministers in the center-left cabinet of Camille Chautemps. Faith in the French government fell to a new low. As had been the case in Germany, economic crisis and political paralysis worked to the benefit of forces on the extreme left and right. Industrial workers moved toward the communists, who reminded the electorate that Stalin’s Soviet Union had managed to avoid the effects of the global depression that had gripped the capitalist world. Members of the middle class, meanwhile— particularly veterans of World War I—turned toward a variety of right-wing organizations with names such as Action Française, the Jeunesse Patriotes, the Croix de Feu, and Solidarité Française. All argued that France’s “rotten democracy” had proven an utter failure, and that only a dictatorship dedicated to the nation’s welfare could bring about economic recovery.6 The fact that Serge Stavisky had been a Jew, alleged to have been in league with liberals in the French government, gave apparent substance to their claims of the regime’s hopeless corruption. On February 6, 1934, these groups organized a

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march on the Chamber of Deputies that quickly turned bloody. Some 40,000 demonstrators participated, with 16 killed and 655 wounded in clashes with the police. The threat of a right-wing coup only accelerated the flight of gold from the country—$409 million worth left in February and March 1934. Since devaluation was regarded as politically impossible, the only other option was to deflate. The wholesale price index fell by 15 percent by the end of 1934. Declining tax revenues led to a serious budget shortfall, leading a center-right coalition government headed by Gaston Doumergue to issue a decree reducing spending by around 5.5 percent. Pensions, government salaries, and the armed forces were particularly targeted for cuts. Such cuts were unpopular, however, and served only to strengthen the political forces that were destabilizing the country. France’s domestic woes placed clear limits on its ability to project power abroad. In the late 1920s, and even as late as 1931–1932, the French government had effectively used both the Bank of France’s massive gold reserves and capital invested abroad as instruments of foreign policy. Loans to eastern Europe had helped to cement political relationships with the countries of that region, and, as seen in Chapter 6, Paris had successfully scotched the proposed Austro-German customs union by placing pressure on the Austrian currency. By 1934 this was no longer a possibility, leaving Berlin an increasingly free hand in the region. The US ambassador to France, while traveling through eastern Europe, noted a sense of “stark dread” on the part of the leaders with whom he spoke. If France’s fortunes did not change quickly, one Romanian official told him, they would soon face the necessity of “making their own terms.”7 The effect of the Depression on the French armed forces was equally striking. As was the case with the United States and Great Britain, defense was one of the few areas of the budget that could be cut without offending any politically important interest groups. Unsurprisingly, therefore, the amount spent on the armed services fell each year between 1931 and 1934, so that total spending dropped by a third during this period. After 1933 French cabinets were willing to put more resources into the air force, believing (as did Chamberlain) that the ability to defend against enemy bombers would offer the key margin of victory in future wars. Again like Britain—although perhaps more surprisingly, given the differences in the two nations’ geographic positions—the army bore the brunt of the cuts. Five thousand officers and a full quarter of the regular troops were released into civilian life. The effect of these cuts went beyond mere numbers, however. Morale in the army plummeted during this period, and plans to mechanize the army were scrapped. The latter proved impossible not only due to lack of funds, but for reasons concerning the country’s balance of trade. A mechanized army would, after all, require huge quantities of oil—a resource for which France was entirely dependent on imports. By contrast, the army’s traditional means

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of transport, the horse, required only fodder—something the nation possessed in abundance. As late as 1937, therefore, the French armed forces were spending more than four times as much on fodder as on petroleum. In other words, while Germany was building a modern war machine, the French army was becoming obsolete. There was one military project, however, that had no trouble acquiring the necessary funding—namely, the system of defenses along the ­Franco-German border known as the Maginot Line. Work had begun in 1930, and would continue until 1937. Virtually every political party and interest group in France supported the endeavor, and the legislature never hesitated to approve the massive quantities of money (some three billion francs overall) needed to complete it. For the pacifist-oriented parties of the left, which reliably opposed every effort to increase funding for the army, the line was a powerful message to the world that France had no foreign ambitions, but merely sought to defend its own territory. (Unfortunately, this was a message that France’s eastern European allies read loud and clear.) It was, moreover, an immense public-works project that generated thousands of jobs in a part of France that was particularly hard-hit by the Depression. French military commanders were dubious of its ultimate value; they would have much rather seen the money go toward tanks and artillery pieces. However, they kept their reservations private since they recognized that this was the only funding they were likely to get. French strategic doctrine evolved to adapt to the new realities. Ever since 1919 the French Army had expected that in the event of war with Germany it would immediately cross the border to occupy the Rhineland, where German troops and fortifications were forbidden under the Versailles treaty. This would ensure that the next war would be primarily fought not on French soil, as World War I had been, but on German. The Maginot Line, as its left-wing supporters understood, marked a shift to a defensive strategy. The Germans, military planners believed, would not dare launch a frontal assault against the fortified French border; they would be forced instead to advance through Belgium, as they had in 1914. The army would now deploy in the northeastern part of the country, ready to come to the aid of the Belgians. The likely result would be a repeat of the static warfare of 1914–1918, and, like Chamberlain, the French leadership was convinced that the German economy would not support a long war. Only if the Germans became bogged down in a war in eastern Europe would France consider going over to the offensive. By 1935 there was increasing pressure on France to leave the gold standard. Influential public figures such as the conservative politician Paul Reynaud came out in favor of devaluation, as did the former deputy governor of the Banque de France and the French commercial attaché in London, Emanuel Mönick. That spring the gold bloc began to unravel as the Belgian government announced that it was leaving gold. The result was a renewed sell-off of francs, with 6.3 billion francs’ worth of gold leaving the country over the

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course of ten days in May. A new conservative government under Pierre Laval took power in June 1935, and in the following month, after announcing that the national debt had reached 340 billion francs, it issued another series of decrees slashing public expenditure. Workers at the naval arsenals at Brest and Toulon, incensed over cuts to their wages, soon went on strike, and in August they rioted, leading to three deaths and many injuries from clashes with the police. Domestic unrest further polarized French politics and caused nervous investors to sell off their francs, thus accelerating gold flight and necessitating further budget cuts. The French republic appeared to be in a death spiral. The situation in France in 1935 was somewhat similar to that of Germany three years earlier, but France, unlike its eastern neighbor, did not succumb to fascism. That it did not may be explained in part by the fact that there was not one single fascist party, but numerous right-wing groups that fought among themselves as much as they did against the republic. More importantly, however, the failure of French fascism may be traced to a decision made by Stalin in 1934. The Soviet leadership, which exercised effective control over communist parties throughout the West, had, since the 1920s, forbidden any cooperation between communists and parties of the noncommunist left. Indeed, inasmuch as such parties were natural competitors for the support of the working class, they were usually regarded as the communists’ primary enemies. In 1933, however, Stalin grew alarmed by the vitriolic anti-Soviet rhetoric coming from Hitler’s Germany, and he became convinced that cooperation between the German Communists and Social Democrats would have prevented the Nazis from taking power. Word quickly went out to communist parties in the United States, Britain, and France that they should seek to collaborate with socialist and other left-wing parties in an attempt to enlist those countries in a multinational effort against fascism worldwide. The shift in policy had little impact in the first two, where communism was insignificant, but in France it led to the creation of a new electoral coalition: the Popular Front, consisting of the Communist Party, the Socialist Party, and eventually the moderate-left Radical Party. By the end of 1935 it was one of the most potent political forces in France, and seemed poised to bring down the Laval government. The timing of the Great Depression in the United States, Great Britain, and France—differences in when it first arrived, when it reached its most severe stage, and the pace of recovery in each—hampered the ability of the three Western democracies to work together to uphold the international order. Leaders in all three deplored the aggressive nationalist regimes emerging in Germany and Japan, expressed concerns about the implicit threat to the peace, and at least paid lip service to the principle of collective security. However, they all harbored suspicions that any actual steps their countries took along those lines would impose further economic harm domestically and, further, would not be matched by similar measures by their partners.

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The London Economic Conference of 1933 demonstrated how far apart the three powers were. The willingness of the French and British to blame the failure of that conference on Roosevelt’s “bombshell telegram” obscures the fact that the delegates were working at cross purposes from the start. The British were hoping above all for an end to war debts, with Ramsay MacDonald making this issue the centerpiece of his welcome address—even though the Roosevelt administration had made it clear that it had no intention even of discussing it. The French cared little about the war debts—they had already defaulted on them in December 1932—but were desperate for some kind of commitment from Britain and the United States that they would not further devalue their currencies. The American delegation was acting on instructions from the president that were so unclear it is hard to determine what goals the United States was pursuing. Secretary of State Cordell Hull personally sought to reverse the global trend toward protectionism, but the delegation was by no means united on this—and, in any case, France and Britain were both so committed to a high-tariff policy that there was no chance that they would agree to anything that smacked of free trade. Fear of being “left holding the bag” in international affairs was particularly strong on the part of Neville Chamberlain. By 1934, as a result of Roosevelt’s bombshell telegram, his gold policy, and the Johnson Act (see Chapter 7), the chancellor of the exchequer had acquired what one British diplomat termed “an almost instinctive contempt for the Americans.”8 Anglo-French relations were equally poor, as the two countries’ protectionist policies had brought them to the brink of a trade war. Chamberlain, witnessing the rise and fall of successive governments in Paris and the growing polarization of French politics, concluded that France was not a reliable partner in international affairs. The French, for their part, continued to blame their economic woes on Britain’s 1931 departure from the gold standard, and watched with horror as London concluded important agreements with Germany in 1934 and 1935. Attempts to enlist other powers in an anti-German coalition went nowhere. Mussolini at first seemed receptive, as he was concerned that Hitler might try again to annex Austria, as he had in 1934 (see Chapter 9). In April 1935 Il Duce met with Ramsay MacDonald and Pierre Laval at the Italian town of Stresa, where the three men jointly agreed to uphold the principles of the Locarno Pact. The following month Laval signed a treaty with the Soviet Union, pledging mutual support in the event of German aggression. But if anything, there was even less of a foundation of trust in these relationships than there was in the old Anglo-French entente. Mussolini felt betrayed when the Baldwin government concluded the Anglo-German Naval Agreement in June. The Soviet treaty was deeply unpopular among the French middle class—not to mention France’s eastern European allies—who were as frightened of Stalin as they were of Hitler. In any case, the Franco-Soviet Treaty of Mutual Assistance was fatally undermined by the French government’s refusal

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to sign a military convention committing the country to any particular joint strategy. The confusion in Anglo-French policy became evident when the two countries were forced to cope with another violation of the peace, not by Germany or Japan, but Italy. In October 1935 Mussolini’s army invaded Ethiopia (see Chapter 9). The League of Nations promptly declared Italy an aggressor and imposed economic sanctions, but these proved ineffective as they did not include a ban on the sale of oil, for which Italy was entirely dependent on imports. At the same time the governments of Stanley Baldwin and Pierre Laval refused to take any further steps to interfere with the invasion, fearing that to do so might drive Mussolini to abandon the pledges he made at Stresa just a few months before. In December Laval, along with Britain’s foreign secretary, Sir Samuel Hoare, proposed to mediate an end to the conflict by awarding Italy large chunks of Ethiopian territory. Mussolini suggested that he would be willing to accept such a deal, but when news of the Hoare-Laval Plan reached the press it was met with intense opposition in both Britain and France. In Parliament a significant number of conservatives joined the Labour Party in denouncing what they regarded as a cynical sellout of principle—indeed, Neville Chamberlain’s own half-brother, Austen, expressed his opposition. The measure was also defeated in the French legislature, when most members of the Radical Party sided with the Popular Front in demanding that France stand firmly against Italian aggression. Undeterred, Mussolini’s troops continued their advance, entering the Ethiopian capital of Addis Ababa in May 1936. The League of Nations voted to end sanctions against Italy soon thereafter. As Italian troops fought in Ethiopia, France’s economic circumstances were growing even worse. The Popular Front was gaining strength, raising fears among French conservatives and moderates that the country was headed toward a Stalinist dictatorship. The result was an accelerated outflow of gold, as wealthy French nationals moved their deposits out of the country and foreign investors dumped their francs. In January the treasury announced that it could secure no more loans domestically, and that the country was perilously close to bankruptcy. The Laval government fell, with a new one under Albert Sarraut taking power until new elections could be held in April. It was during this period of extreme instability in France that Hitler chose to send troops into the Rhineland (on March 7, 1936). It was a blatant violation of the Treaty of Versailles, his boldest act to date. The following evening Sarraut denounced the move in the strongest of terms; France, he said, would not “let Strasbourg once again come under the fire of German guns.”9 But the premier’s words triggered a further worldwide sell-off of francs. When Sarraut met with the high command on March 10 he learned the awful truth. A show of force would be necessary to force Germany to back down, but even the initial preparations for mobilizing the French armed forces were expected

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to cost around 30 million francs per day—enough to bankrupt the country. The news from London was no better: Baldwin made it clear that under no circumstances would Britain risk war over the Rhineland. France was unable to do more than protest, and Britain was unwilling. Hitler had won, and not for the last time.

Chapter 9 Recovery through Nationalism: The “Have-Nots,” 1933–1936 d

In both Germany and Japan, the Great Depression served to discredit liberal democracy and capitalism and bring to power political forces committed to militaristic nationalism and foreign conquest. It is important to note, though, that the worldviews of the German National Socialists and Japanese ultranationalists were not shaped in any meaningful way by the crisis. In fact, while each group had used the prevailing economic distress as a bludgeon against its political opponents, it is not much of a stretch to say that neither had given much thought to the concrete steps that would have to be taken to promote recovery. The National Socialists and ultranationalists intended to bring about fundamental changes, both to their respective societies and to the international landscape, but had comparatively little interest in what they regarded as technical matters such as reducing unemployment and increasing industrial production. Of course, once in power they could not ignore such questions, as they understood that they would likely have no opportunity to pursue their larger goals unless they first secured some measure of domestic recovery. Their approach, however, was marked by considerable improvisation, and the involvement of technocratic experts who were not always on the same ideological wavelength as their superiors. The remarkably quick recoveries experienced by Germany and Japan during this period would solidify their respective regimes’ hold on power, but the means they employed would create additional difficulties—problems that ultimately could be solved only through war. 120

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It can be difficult to identify consistent views on economics in the ideologies of German National Socialism or Japanese ultranationalism, mainly because the leading figures in both movements had little formal knowledge of the subject as an academic discipline. (The same might be said of Franklin Roosevelt and his Brains Trust.) The case of Hitler is especially complicated since he was notorious for avoiding any firm commitment to particular policies in his speeches, preferring to tailor his words to fit his audiences. Nevertheless, it is possible to identify certain strands of economic thought in their respective worldviews. In each case the “third way” ideology of the late nineteenth century provided the foundations for their thinking. First of all, it is important to note that there was nothing socialist about National Socialism, at least in the Marxist sense. Hitler and his followers utterly rejected fundamental socialist ideas such as the inevitability of class struggle and the ultimate elimination of national boundaries. It is true that, particularly early on, National Socialists embraced radical ideas such as abolition of “unearned” income (i.e., dividends), redistribution of wealth, and even nationalization of certain industries. Hitler himself was highly critical of the German bourgeoisie, which he believed had focused selfishly on its own material well-being at the expense of the nation as a whole. Nevertheless, he consistently defended private property, and frequently praised the work of individual entrepreneurs. For National Socialists the interests of the nation trumped all other concerns, whether individual or class-based. This meant not that business owners should be dispossessed or that large firms should be dissolved, but that they should be forced to serve the needs of the German people. The state would, therefore, be the dominant force in the economy—as it would be in society at large. Hitler sometimes offered the model of the army as an ideal social organization, with a top-down command structure whose merit was ultimately based on the extent to which it served the national interest. Capitalists who were willing to accept government regimentation would be permitted to profit handsomely, but those who refused would be destroyed. When questioned about his use of the term “socialist,” he admitted that it was “unfortunate” and that it should not be interpreted to mean that all “business must be socialized; it means only that they can be socialized if they offend against the interests of the nation. As long as they do not do that, it would be simply a crime to destroy business life.”1 Up to this point National Socialism sounds very much like any other “third way” ideology, practically indistinguishable from early twentieth-­ century American progressivism or the National Efficiency movement in Great Britain. However, two additional elements to Hitler’s ideology distinguished it from its intellectual half-siblings and help to explain why Germany under National Socialism would eventually unleash the most destructive war in human history.

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The first of these elements was Hitler’s desire to make Germany into a Volksgemeinschaft, a racially homogeneous “people’s community.” This meant eliminating social distinctions among Germans themselves so that service to the nation became the ultimate determinant of status. It also meant reducing to subservience—or eliminating altogether from German society—those who were not deemed racially “pure.” In some ways Volksgemeinschaft could be traced to the eugenics movement (see Chapter 1), which was popular in the United States and Great Britain in the 1910s and 1920s. National Socialism, however, grafted onto this a romantic dualism in which the honest, guileless peasant, connected organically to the blood and soil of Germany, was contrasted against the urban, cosmopolitan Jew. The Jew, in Hitler’s mythology, had been working for centuries to destroy the German race, using both Marxism and international “finance capitalism” as tools in this effort. The goal of Volksgemeinschaft was, first and foremost, the elimination of Jews from German national life. The second element stemmed from the first. If the Jews secretly controlled international capitalism, the country’s relative lack of natural resources placed it in a dangerous position. Germany lacked sufficient natural resources to support its large and growing population, and was thus dependent on foreign imports not only for strategic materials such as oil and rubber, but even for its food supply. Since the nineteenth century, therefore, the country had focused on industry, producing manufactured goods that could be exchanged for these imports. However, World War I demonstrated the danger of this dependence, as the British naval blockade had succeeded in starving the country into submission. The only way of avoiding such a fate in the future was to achieve national self-sufficiency—everything that the German people needed would be produced at home, using substitutes if need be. The problem with Hitler’s desire for autarky was that it could never be attained given Germany’s current borders, or even with the borders of 1914. In order to feed and supply the population, the country needed Lebensraum— living space. As early as 1928 Hitler specified that at the heart of the National Socialist approach to foreign affairs lay “a clear, farsighted policy of space,” focusing “all of its strength on marking out a way of life for our people through the allocation of adequate Lebensraum for the next one hundred years.”2 The land that he desired lay to the east—Poland and the Soviet Union—and it would have to be conquered and “Germanized”; that is, denuded of its current population and resettled with German farmers. In other words, National Socialism believed the country’s economic problems could not ultimately be solved without war. Of course, nobody—including Hitler—believed that Germany in 1933 was anywhere close to being ready to wage war. In the short term the new regime had to focus on creating Volksgemeinschaft while building the armed forces that would be necessary for the conquest of Lebensraum. An added complication was the fact that the NSDAP was neither large enough nor

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popular enough to run the country on its own. This meant that, at least for the time being, it had to cooperate with traditional German elites, such as those in banking, industry, and the army. In fact, only three of the members of Hitler’s initial cabinet were National Socialists (although, significantly, one of these was the minister of the interior, giving the party effective control over the police). In an effort to reassure business owners, for the post of Reichsbank president he tapped none other than Hjalmar Schacht, who two years earlier had resigned from the same post in protest against what he saw as the profligate spending of the Weimar government. If Hitler’s regime was going to achieve his long-term goals, it first had to demonstrate that it was capable of tackling the problem of mass unemployment—and for this National Socialist ideology offered no clear remedies. Recovery, therefore, would come in large part by continuing the policies that had been put in place by Brüning, von Papen, and von Schleicher. The exchange controls first enacted in 1931 continued under Hitler, and taxes remained high. Public spending nearly doubled, with some of the new spending going to finance the so-called “Reinhardt Program” of public works. A compulsory National Work Program was set up in which unemployed workers were sent to work camps around the country, where they engaged in land reclamation, road and railway construction, and other projects. But while such undertakings as the construction of a network of superhighways—the famous Autobahn system—were well publicized in National Socialist propaganda, they really represented the continuation of policies developed by von Papen and von Schleicher. It is worth noting that while overall public-works spending during this period was considerably higher than it had been during the final years of the Weimar Republic, it remained much lower than it had been in the 1920s. The regime was far more willing to spend on rearmament than on jobs programs, although the restrictions imposed by the Versailles treaty dictated that this be done quietly. In June 1933 Hitler’s cabinet began planning for a standing army of 300,000 men, to be augmented by a reserve force twice that size. To build this force Hitler approved the spending of 4.4 billion RM per year for the next eight years. This was a colossal sum, representing more than 10 percent of Germany’s gross domestic product that year, as well as three times what the government had spent on public works in 1932 and 1933 combined. It was also more than four times what the Weimar Republic had ever spent on the armed forces in any given year. Of course, the immediate question was how to pay for these projects—a question that was made more difficult by Hitler’s refusal to devalue the currency. In 1932 he had accused his opponents of planning to devalue, and he reassured his conservative allies that the stability of the reichsmark remained at the heart of his economic program. Not only had he experienced firsthand the disruptive effects of the hyperinflation of the early 1920s—indeed, the chaos of that period had encouraged him to attempt his 1923 Putsch—but

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he recognized that there was a certain advantage in sticking with Brüning’s “gold standard on crutches.” The decision by Great Britain (in 1931) and the United States (in 1933) to leave gold reduced the real value of German debts to those countries by as much as two-thirds; had Germany decided likewise it would have lost this important advantage. Since Hitler would not devalue, he was forced to find other means of paying for his expansion of the army, and for this he turned to Schacht. It was under von Papen’s chancellorship that Germany first began paying contractors with certificates that could be used for remittance of future taxes. Schacht built on this by creating a dummy company called the Metallurgische-­ Forschungsgesellschaft, Mefo for short, which issued what amounted to IOUs backed by the full faith and credit of the National Socialist regime. This bit of monetary legerdemain effectively created an alternate currency that allowed Germany to depart from financial orthodoxy without technically leaving the gold standard; by 1938 Mefo bills totaling roughly 12 billion RM had gone into circulation. Schacht could use Mefo bills as a substitute for reichsmarks, but not for the foreign currency that Germany needed to purchase foreign imports. Of course, service on the country’s commercial debts had been a constant drain on German reserves, but this had been manageable as long as Berlin was able to export its manufactured goods. The protectionist policies of Germany’s leading trading partners (see Chapter 6) dealt a crippling blow to those exports, and since the country still needed to import food and other vital resources the Reichsbank’s supply of foreign exchange had dwindled rapidly in 1931 and 1932. Already, under Brüning the government had begun rationing foreign currency so as to allow only the most vital imports, and von Papen had initiated the use of “blocked marks” for the purchase of foreign goods. The National Socialist regime kept these policies in place but then went a step further in May 1933, announcing that until such time as the country enjoyed a healthy trade surplus it could no longer spare foreign currency for service on Germany’s long-term debts. Instead payments would be made in blocked reichsmarks, deposited in special Reichsbank accounts that could be used only to buy German products. The new policy elicited protests from the United States and Great Britain, which led to concern in Berlin that the two powers might use the World Economic Conference in London as an opportunity to organize some kind of international effort against Germany. They need not have worried, as arguments over tariffs, war debts, and especially currency stabilization caused the conference to adjourn without having accomplished anything (see Chapters 7 and 8). Apart from a moment of awkwardness when a member of the German delegation, Economics Minister Alfred Hugenberg, imprudently circulated an inflammatory memorandum demanding the return of Germany’s colonies and land for settlement in eastern Europe, the conference could not have gone better from the regime’s perspective. The formation of

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an ­Anglo-American bloc would have posed a significant obstacle to Hitler’s plans, so the failure of the two powers to agree on any issue of substance came as a tremendous relief. The new debt policy did not solve Germany’s foreign-currency problem, however, since the country’s export trade continued to languish in 1933– 1934. The brutal nature of the regime, particularly its mistreatment of Jews, led to boycotts of German goods during this period, but the basic problem was that Hitler’s insistence on a gold-backed reichsmark meant prices for German exports were 30 to 40 percent higher than comparable products on the world market. The government established a program of subsidies to help reduce prices, but the paperwork involved ended up slowing down the process. Meanwhile, Hitler’s rearmament campaign diverted German industry from producing goods for export and at the same time caused increased demand for foreign imports, so that the country ran a significant trade deficit. As a result, Germany in 1934 faced a full-blown currency crisis. When Hitler took power in January 1933 the Reichsbank’s reserves of gold and foreign exchange stood at 964 million RM (in December 1930 they totaled nearly 3 billion RM), but by September 1934 they had plummeted to 79 million RM—barely enough to cover a week’s worth of imports. The regime took a variety of steps to cope with the crisis. For example, it organized German coal producers into a cartel charged with developing synthetic oil, in the hope of reducing the country’s dependence on petroleum imports. The leadership also altered its policy toward Jewish emigration. Up to this point it had sought to rid Germany of its population of roughly half a million Jews by encouraging them to emigrate voluntarily; 37,000 did so in 1933. However, German Jews held at least eight billion RM in personal property, and understandably they sought to take that property with them. The government, in an effort to keep wealth at home, imposed a high surtax on all wealth to be taken out of the country, and while this slowed the hemorrhage of foreign exchange, it also brought the flow of Jewish émigrés to a virtual halt—only 23,000 left in 1934, and 21,000 the following year. The National Socialists would ultimately have to resort to increasingly brutal methods to eliminate the Jewish population. More provocatively, Hitler hoped to replenish Germany’s stocks of gold and foreign currency through the annexation of neighboring Austria, which possessed considerable reserves of both. On orders from Berlin, Austrian National Socialists attempted a coup in late July, assassinating the conservative chancellor, Engelbert Dollfuss. Before German forces could occupy the country, however, Mussolini dispatched Italian troops to the Austrian border. Completely unprepared for war, Hitler backed down; most of Austria’s National Socialists fled to German soil, although a few remained to conduct a campaign of terrorism against the regime in Vienna. The regime’s most effective strategy for stopping the loss of foreign currency proved to be Schacht’s “New Plan” for trade, which he announced in

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September. Under this arrangement, a Supervisory Agency was established for each of thirty-five commodities for which Germany relied on foreign imports. No importer could purchase products from abroad without receiving a foreign-exchange permit from the relevant agency. The willingness of the agencies to do so would depend not only on how critical the import was to the country’s needs (with rearmament at the top of the list), but also on the willingness of the exporting country to increase its purchases of German exports. Schacht therefore accompanied his announcement with a new campaign to conclude bilateral barter agreements with Germany’s major trading partners. As Chapters 7 and 8 have already shown, the United States—at the insistence of Cordell Hull—refused to sign any such agreement, so although the demands of rearmament dictated that Germany remain a major importer of certain US primary products such as scrap iron and steel, oil, copper, and grain, imports of American manufactured goods, as well as US imports of all German products, dwindled to insignificance. Great Britain, on the other hand, chose to negotiate—and the result was the Anglo-German Trade and Payments Agreement of November 1934. The New Plan brought about a reorientation of German trade over the next several years. By spring 1938 Berlin had concluded barter agreements with twenty-five countries, most of them relatively poor states that relied on the export of raw materials and commodities. Trade with the industrialized world—even Great Britain, despite the 1934 agreement—declined, while commerce with Latin America, and particularly with southeastern Europe, increased dramatically. In a global economy that seemed to be dividing into regional trading blocs—the British-dominated sterling bloc, the French-led gold bloc, the Japanese yen bloc—a new reichsmark bloc emerged that included Hungary, Romania, Bulgaria, Yugoslavia, Greece, and Turkey. In the late 1920s only around 15 percent of those countries’ exports (mostly grain and other foodstuffs) went to Germany; by the late 1930s the figure was 40 percent. Growing German commercial ties to eastern Europe had the additional benefit, from Berlin’s perspective, of helping to undermine France’s alliances in that region. Another source of German imports during this period was the Soviet Union. On an official level relations between the two countries were actively hostile—Hitler and Stalin routinely denounced one another in the bitterest terms in their speeches, with Hitler frequently predicting a climactic war in which his people would save civilization by destroying “Judeo-Bolshevism.” Stalin, for his part, was pursuing a “popular front” strategy in an effort to unite with Britain, France, and the United States in an anti-German coalition (see Chapter 8). Nevertheless, a steady flow of Soviet resources (particularly oil and grain) came into Germany between 1933 and 1936. The reason was that the Soviet Union was the only power that actually owed Germany money, to the tune of 1.11 billion RM when Hitler took office as chancellor. For the Soviets, exports to Germany were a way of paying down this debt

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(as already mentioned, the Soviets had practically stopped importing foreign goods in 1932–1933); for the Germans these resources represented imports that did not hurt the country’s balance of trade. By 1935, in fact, the German economy had begun to grow dangerously dependent on these imports, and this became a serious problem when by the end of that year the Soviets’ debt had been wiped out almost completely. Stalin offered to continue selling oil and grain to Germany into 1936 in exchange for exports of weapons—­ aircraft and submarines in particular. When Hitler refused, the flow of Soviet imports stopped, with serious consequences for Berlin. Still, the regime’s program of improvisations and stopgap measures was effective, and according to most measures, by 1936 Germany seemed to have recovered completely from the worst features of the Depression. In four years per capita gross domestic product had grown by more than 35 percent, exceeding its 1928 precrisis high by nearly 9 percent. By 1935 the German economy had surpassed the French in terms of per capita GDP. Unemployment, which in 1932 had stood at nearly 6 million, was down to 1.5 million in 1936. Starting in 1935 there was a virtual halt of spending on job-creation projects; it was assumed that those still out of work would soon find jobs in the armaments industry. But while Germany appeared to be in overall good economic health— an image assiduously promoted in National Socialist propaganda—there remained some very serious problems. German GDP may have surpassed its 1928 levels, but this was almost entirely the result of government spending; private investment remained 22 percent lower than it had been in 1928. Moreover, while Schacht’s New Plan may have slowed the drain of foreign currency from the Reichsbank, it did not solve the underlying problem of the German trade deficit. Indeed, thanks to the recovery of world commodity prices in 1934–1935 Germany was forced to pay more for its imports, while exports during that same period kept declining. Since rearmament continued to have first claim on resources, any savings of foreign exchange had to come by reducing food imports. The situation was made even worse by a bad harvest in 1935. By the end of the year meat and dairy products were starting to disappear from the shelves of German shops, and queues for food were increasingly common in the cities. As a result, even though unemployment was becoming a thing of the past, the availability of jobs did not translate into improved living standards for ordinary Germans. In fact, death rates in Germany climbed even as the unemployment rate fell; by 1935 the mortality rate from childhood diseases and pneumonia was one of the highest in the industrialized world, most likely thanks to protein deficiency. Nevertheless, the recovery of Germany’s industrial sector was widely heralded as the first great success of National Socialist economics, giving a tremendous boost to the regime’s credibility, both at home and abroad. When, step by step, Hitler moved to secure absolute power in Germany—by claiming the right to rule by decree, abolishing all political parties aside from the

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NSDAP, and, finally (upon the death of von Hindenburg in August 1934), combining the positions of chancellor and president under the single title of Führer—there were few willing to stand in his way. Those who did were quickly and quietly dispatched to one of a growing number of concentration camps that had begun to spring up around Germany as early as March 1933. By early 1936 the economy had recovered sufficiently that Schacht and many other members of the German business and banking communities were beginning to call for a return to the international economy. The regime’s monetary, trade, and financial policies, they argued, had effectively given industry breathing space to help it get back on its feet. Now it was time for German firms to cut back on production for military purposes and return to manufacturing for export. A strategic devaluation of the reichsmark would bring the prices of German goods in line with the products of the rest of the industrialized world. German industry would be freed from the byzantine web of regulations that the regime had imposed on foreign trade, which had stifled entrepreneurial initiative. If exports did not rise, they warned, Germany would continue to hemorrhage gold and foreign currency until the value of the reichsmark could not be maintained—with runaway inflation as the inevitable result. The problem with this line of argument was that it assumed that Hitler was just like any other Depression-era politician—that he sought nothing more than economic recovery. In fact, recovery for him was only the first step, a necessary precondition for an eventual war for Lebensraum. Already in 1935 he had announced that Germany would no longer be bound by the arms-­ limitation clauses of the Treaty of Versailles, and unveiled plans for a modern air force. In that year military spending jumped from just over four billion RM to between six and seven billion, nearly a billion of which was earmarked for the Luftwaffe. In 1933 Hitler needed the support of the conservative elites of German industry, but three years later his power was sufficiently established that he was prepared to strike out on his own. Needless to say, he had no intention of returning Germany to the path of international trade. Although its major theorists would have denied it, Japanese ultranationalist ideology was in many ways similar to German National Socialism. Ultranationalists, who tended to be concentrated in the Japanese Army, liked to claim that their beliefs were rooted in authentic Japanese tradition and that they represented a repudiation of the Western ideas that had taken hold in Japan in the late nineteenth century. However, there were many points of agreement between Japanese and German nationalism. Both regarded individualism and rationalism as abhorrent, arguing that they had been responsible for the rise of dangerous nineteenth-century ideologies such as liberalism and Marxism. Both sought a radical transformation of society in which all citizens subordinated their personal interests to the community, as represented by a single leader—in the case of Japan, the emperor, who was held to be a god. Like the National Socialists, the Japanese ultranationalists believed in

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a national mission, in this case to liberate East Asia from Western imperialists (both capitalist and communist) and to form a self-sufficient bloc that was capable of competing with world powers such as the United States, Great Britain, and the Soviet Union. The ultranationalists did not share National Socialist racial theories, nor did they have any particular animus against Jews, but they did believe in the superiority of the Japanese “way,” which they intended to impose on the peoples of East Asia. While Hitler liked to speak of an inevitable clash between Germany and the Soviet Union, ultranationalists predicted a massive conflict with Britain and the United States. As one leading theorist, General Ishiwara Kanji, put it in 1933, this would be “mankind’s last war, to be fought for the unification of world civilization.”3 Control of East Asia, by freeing Japan from dependence on trade with the Anglo-Americans, would guarantee access to the resources that Tokyo would need to wage such a protracted war. But unlike Hitler, the Japanese did not have to wait to rearm before moving to make their dreams a reality, since they possessed a powerful army and one of the world’s best navies. Indeed, they had already taken a long step toward creating an East Asian bloc in the 1931 conquest of Manchuria. The Depression had discredited Japan’s financial community, zaibatsu, and political parties, leaving the army as the strongest force in national politics. However, the military did not yet dominate the country’s political life to the extent that it would later in the decade. In the meantime it had to work with certain civilian leaders whose reputations had not been tarnished by Japan’s disastrous experience with the gold standard. Chief among these was Finance Minister Takahashi Korekiyo, who more than anyone else was responsible for taking the yen back off gold in December 1931. The improvement in the Japanese economy that followed was able to keep civilian government alive for the next several years. Takahashi believed that increased government spending was needed to bring about recovery, and while the military captured the lion’s share of this new money (spending on the armed forces more than doubled between 1931 and 1935), the long association between the army and farming groups dictated that some of it would be directed toward relief for rural Japan. Army Minister Araki Sadao, a general with ties to several ultranationalist groups, was a strong advocate for aid to unemployed fishermen, as well as programs to diversify crops, promote small-scale industry in the countryside, and provide relief for indebted farmers. Much of the impetus for Japan’s recovery, however, came from its depreciated currency, since the yen had lost roughly half its value by the end of 1932. This afforded Japanese exports a significant price advantage over the country’s leading competitors, particularly in textiles and other consumer goods. Soon Japanese products were invading markets around the world—so much so that in 1933 the city of Osaka replaced Lancashire, England, as the world’s leading producer of cotton goods. The French, British, Dutch, and US colonies of Southeast Asia became major purchasers of Japanese manufactures, which

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were far less expensive than European-made products, not only because of the devalued yen but also due to lower shipping costs. By 1934 nearly a third of all imports coming into the Dutch East Indies were made in Japan—this was a greater portion than those of the Netherlands itself, Germany, and Great Britain combined. But Japanese market penetration went far beyond Asia— the country’s goods sold very well in India, the Middle East, and Africa. They were even showing up in Europe, where despite high tariffs they continued to undersell similar items that were produced domestically. For the industrial powers of the West this was a serious problem, and not merely because of the Depression-induced rush to protect domestic industries. The flood of Japanese imports into French, British, Dutch, and US colonies threatened the economic links that helped to bind the people of these areas to their colonial masters. The presence of manufactured goods from an Asian country in the markets of places such as the Philippines, Malaya, and Senegal demonstrated that there was an alternative to economic domination by the West. From the perspective of the colonial powers, this was reason enough to accuse the Japanese of underhanded trading practices and to erect further barriers against their products. From the United States and Great Britain came accusations that their East Asian competitors were subsidizing their exports, gaining an unfair advantage on world markets. But subsidization of exports had become extremely common among industrial powers during this period, and Japan’s subsidies were comparatively low. As one official of the British Embassy in Tokyo reported, “There is no question of selling at below production cost, nor is there any evidence to show that goods for export are usually sold cheaper than goods for the domestic market.”4 In fact, Japanese industry had achieved a high level of efficiency during the 1920s. That Japanese exports enjoyed the benefit of a depreciated yen is clear, but every country that devalued its currency during this period was guilty of seeking the same benefit. This made little difference to the industrial powers of the West, which one by one took steps to keep Japanese goods out of their colonies. In India, where by 1933 Japanese manufactures had captured half the market for imported cotton textiles, the British colonial authorities increased tariffs on non-British imports to 75 percent. That same year the government of the Dutch East Indies passed a Crisis Import Ordinance that set special quotas on the amount of Japanese goods that would be allowed to enter the country. The United States placed a quota on Japanese imports to the Philippines; even such a committed free trader as Cordell Hull was prepared to sacrifice his principles where the Japanese were involved. At the World Economic Conference in London, Tokyo’s delegation pushed for a treaty prohibiting economic boycotts and preferential tariffs, but it came away empty-handed. The move to check Japan’s export trade did not seriously hinder the country’s economic recovery, but it had some profound political effects. First, it

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forced hard choices on the cabinet in 1934–1935. Recovery had brought with it an increase in foreign imports, especially from the United States. To a certain extent this had been counterbalanced in 1932–1933 by the rapid growth in exports, but by 1934 this growth had begun to slow and Japan’s balance of trade turned sharply negative. At the same time, Takahashi was becoming increasingly concerned that the mounting national debt could trigger runaway inflation. On his recommendation the cabinet announced that total spending for 1934 would have to remain at 1933 levels. The army and navy found this completely unacceptable, but a crisis was averted when the cabinet agreed to increase the military budget by slashing programs for rural relief. The army, it seemed, was more than prepared to sacrifice the interests of the countryside when they threatened the course of rearmament. Second, the West’s discriminatory trade practices served to convince many Japanese industrialists that they could not entrust their fortunes to the vicissitudes of international trade. Gradually they came to abandon their economic liberalism and join the military in striving for a Japanese-dominated bloc in East Asia that would provide a secure overseas market for their products. By the middle of the decade nearly two-thirds of Japan’s exports were going to Asia—and over half of those went to Taiwan, Korea, and Manchuria, the three territories that were under direct Japanese control. The quest for a “yen bloc” spurred further aggression against China. Direct fighting between Chinese and Japanese forces ended in May 1933 with the signing of the Tanggu Truce, under which Jiang Jieshi agreed to withdraw his forces from a 100-kilometer zone south of the Great Wall. By this time the Kwantung Army occupied not only Manchuria, but virtually all of Chinese territory north of the wall. Two years later the commander of Japanese troops in Tientsin concluded an agreement with Jiang’s minister of war—the Ho-Umezu Agreement—in which the Chinese agreed to withdraw not only troops but all organs of the Nanjing government from Hebei Province, just outside Beijing. While local Japanese army commanders continued to promote economic development in Manchukuo—gradually diminishing the authority of the South Manchuria Railway in the process—they also set about creating an “autonomous region” in North China that would be subject to the army’s economic control. Jiang Jieshi felt powerless to resist any of this. Exhausted from long years of campaigning as part of the Northern Expedition (see Chapter 3) and engaged in sporadic fighting against a growing communist movement under the leadership of Mao Zedong, his forces were in no condition to take on the Japanese. At the same time, China was in the grip of its own economic crisis produced in part by US silver purchases (see Chapter 7) and exacerbated by the Kwantung Army’s policy of encouraging the smuggling of silver through the parts of the country that were under its control. The result was widespread deflation—farm prices fell by more than 40 percent from 1932 to 1934, bringing misery to much of the country’s peasant population. However,

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­ hina’s economic crisis did not last long. With assistance from Great Britain C (see Chapter 8) the Central Bank of China issued a new paper currency—the fapi—in November 1935, and within a year and a half the amount of money in circulation tripled. As the value of the fapi decreased, farm prices climbed and Chinese exports once again became competitive on the world market. Nationalists began to urge Jiang to stop giving in to Japanese demands and defend the nation’s sovereignty. Meanwhile Japan’s leaders were growing increasingly concerned about Japan’s reliance on US exports. In 1936 the cabinet moved to stop the importation of American automobiles by setting up two corporations—Toyota and Nissan—for which the state provided half the capital. However, Japanese manufacturing could not come up with a substitute for oil, for which the country was almost entirely dependent on the United States. The navy in particular grew worried about shortages of petroleum, without which the fleet would be paralyzed. In July 1935, therefore, the navy set up a committee to investigate the possibility of obtaining oil from Southeast Asia—by peaceful means if possible, but by force if necessary. By the end of 1935 war was becoming increasingly likely, although it was not yet clear whether the major theater of operations would be China or Southeast Asia (or both). The army and navy both demanded substantial increases to their budgets, but Takahashi had other ideas. Japan was nearing full employment; the Depression, he declared, was over. Heavy government spending had been a useful instrument for promoting recovery, but now it was no longer necessary. Prices had begun to creep upward, leading to fears of further inflation if spending were not reduced. In late 1935, therefore, he announced that the following year’s budget would contain a series of cuts— including a sharp reduction in military spending—and that the cabinet had rejected a proposal to increase taxes on business profits. Takahashi’s announcement was a bold attempt to reassert civilian influence over the government. However, the new budget never went into effect, for on February 26, 1936, a clique of young army officers attempted a coup d’état, their boldest effort yet. Small detachments of soldiers quickly moved to secure strategic buildings in Tokyo, including the Ministry of War. Others carried out assassination attempts against certain officials whom the officers had accused of attempting to weaken the army and navy. Although the prime minister managed to escape (the assassins mistook his brother-in-law for him), Takahashi was among those who did not. The eighty-two-year-old finance minister was shot and stabbed as he slept in his bed. To this day the extent to which the army’s top commanders were involved in the rebellion remains unclear. The generals were certainly reluctant to try to stop the uprising, and stonewalled even after the emperor issued a direct order to suppress it. However, they eventually mobilized forces, and with some assistance from the navy forced the rebels to surrender three days later. Nineteen of the plotters were eventually given the death sentence, and dozens

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of other young officers were sent to prison. Nevertheless, the army and navy proved to be the big winners of February 26. From then on, no cabinet would dare to oppose the wishes of the armed forces for fear of ultranationalist violence. Although certain civilians would continue to serve on cabinets, they all understood that the will of the military could not be thwarted. The era of civilian government in Japan had come to an end. Although both Germany and Japan were set on a path of foreign conquest by 1936, the most provocative act of aggression during this period came not from either of them, but rather from Italy. In 1933, 15 percent of the country’s workforce was unemployed, and the regime was resorting to increasingly technocratic measures in pursuit of recovery. It oversaw the creation of a new public agency—the Istituto per la Ricostruzione Industriale (Institute for Industrial Reconstruction), which took over struggling banks and firms. The regime spent considerable sums on public works—including a much-­heralded project to drain the Pontine Marshes just south of Rome—and in October it enacted a law limiting the workweek to forty hours in an effort to force businesses to hire more employees. None of these measures, however, could solve the problem of Italy’s declining export trade. Mussolini was determined that the lira would remain on the gold standard—at one point he swore to defend the lira “to the last breath, to the last drop of blood”5—making Italian products more expensive on world markets. But because Italy, like Japan, relied on imports for even the most basic industrial resources, the country’s reserves of gold and foreign currency plummeted in 1933–1934. The government responded by announcing that autarky was now the official goal of Fascist foreign policy; there would be new regulations limiting the export of foreign currency, and licenses would be required for the import of materials such as copper, coffee, and wool. The regime also moved toward a barter-based approach to international trade, negotiating bilateral treaties with Bulgaria, Romania, and Germany and placing additional tariffs on goods from countries that refused to grant most-­favorednation treatment to Italian products. Still, the country’s trade deficit grew— in 1934 the value of imports exceeded that of exports by nearly a third—and the Bank of Italy’s reserves continued to drain away. That, in turn, meant deflation: in April the government decreed that retail prices for foodstuffs be reduced by 10 percent and rents by 12 percent, with salaries for state employees reduced accordingly. Mussolini’s boldest attempt to relieve Italy’s economic distress was his invasion of Ethiopia, which after months of preparation was launched in October 1935. The regime’s propaganda portrayed the impoverished African country as a treasure house of untapped resources that would help to free Italy from dependence on foreign imports. This assessment was not entirely inaccurate; indeed, Japanese, British, and US firms had all sent delegations to Ethiopia in recent years in search of trade relations and even oil concessions. What remained unclear was where Italy would find the capital to develop these

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resources, particularly after waging a costly war to bring them under control. Leading businessmen and politicians—even King Victor Emmanuel III—­ expressed misgivings about the campaign, but these were swept aside. In fact, the very preparations for war helped to improve economic conditions in 1935. By that summer the number of unemployed had fallen 250,000 from the previous year’s high, and per capita GDP had expanded by nearly 9 percent (see Figure 7.1). Industrial production soared, as did profits, as a result of mobilization. These trends accelerated once the war began, with unemployment returning to pre-Depression levels. However, all of this came at a high price. Ethiopian resistance was unexpectedly tenacious, and Emperor Haile Selassie’s forces were even able to launch a counteroffensive in mid-December. Within days the country’s gold reserves had fallen so low that the government called upon the women of Italy to turn over their wedding rings, with Queen Elena among the first to do so. By the time Ethiopian resistance ended the following May—thanks in large part to the use of poison gas by Italian troops—the state’s budget deficit had tripled. Finally even Mussolini had to admit that the lira could no longer be tied to gold, and in October the Bank of Italy announced that henceforth it would be linked to the US dollar. Over the next six months the government managed to finance roughly a third of the public debt simply by printing money. The war also changed Italy’s patterns of trade. The League of Nations declared Italy an aggressor and imposed trade sanctions, cutting the country off temporarily from many of its traditional sources of strategic commodities. Italians would now, for a few months at least, get a small taste of autarky, and that meant widespread shortages—although the sanctions had no measurable impact on the war in Ethiopia. Nor was the sanctions regime complete: not only was oil exempted, but not all countries agreed to participate. Germany had left the League in 1933, so for Berlin the sanctions offered an opportunity to boost the nation’s exports, as well as to draw Italy away from its traditional alignment with Britain and France. Italian imports from Germany increased rapidly in a trend that was to continue even after the sanctions were lifted in July, so that 27 percent of all of Italy’s imports between 1936 and 1938 came from Germany. In fact, Germany’s interest in the Italian invasion of Ethiopia went far beyond trade. Up to this point Hitler’s foreign policy had been cautious; he had, as mentioned previously, pulled Germany out of the League of Nations in 1933, and in March 1935 he had repudiated the disarmament clauses of the Versailles treaty and announced the reintroduction of conscription. Neither of these elicited a serious response from Britain and France; indeed, in June 1935 the Anglo-German Naval Agreement was a strong signal that London was no longer interested in upholding the terms of Versailles. Thus in March 1936, while much of the world’s attention was focused on the war in Ethiopia, Hitler made his boldest move yet. He ordered his troops to reoccupy the Rhineland, German territory that under the Versailles treaty was supposed to

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remain demilitarized. But as discussed in Chapter 8, the Baldwin government made it clear that it did not regard the Rhineland as a vital national interest, while France, teetering on the brink of national bankruptcy, was unprepared to take on the Germans alone. The Führer’s gamble paid off handsomely, and in the next few years he would raise the stakes repeatedly.

Chapter 10 Stumbling toward Internationalism: The United States, 1936–1939 d

Toward the end of Franklin D. Roosevelt’s first term the president began to move away from the economic nationalism that had characterized his administration since 1933. Confident that the domestic economy was on the mend, and increasingly worried about the rise of militant nationalism in Europe and East Asia, he sent signals that the United States was prepared to stand alongside other democratic regimes in an effort to uphold world order against aggression. Serious obstacles remained in the way: resistance from Congress, skepticism on the part of Great Britain, and renewed economic distress in 1937–1938 all prevented the formation of an effective front against Germany and Japan that might have prevented the outbreak of global war. Still, the administration took constructive steps during this period that would help pave the way for ultimate victory in that conflict. The first serious indication that Roosevelt was reconsidering his previous nationalism came in late 1936 with the conclusion of the Tripartite Monetary Agreement with Great Britain and France. The origins of this document lay in France’s deep economic distress during the middle of that year, which led to a decision on the part of Premier Léon Blum finally to depart from the gold standard (see Chapter 11). The main obstacle to this was fear in Paris that any devaluation would lead Britain and the United States to follow suit—a legitimate concern given the administration’s behavior in 1933–1934—thus erasing any benefit that might come from the move. Indeed, it might lead to a series of competitive devaluations that could send all three nations’ economies spiraling into hyperinflation. Blum, therefore, sought an agreement 136

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whereby France might devalue unilaterally, and thereafter keep its currency tied roughly to that of the United States and Great Britain. France’s difficulties coincided with a rising chorus of voices within the Roosevelt administration calling for currency stabilization. The State Department had long objected that uncertainty regarding exchange rates was suppressing international trade, hence delaying recovery. Before 1936 the greatest obstacles to such a move were the president himself and Treasury Secretary Henry Morgenthau. Neither trusted Great Britain or its chancellor of the exchequer, Neville Chamberlain, whom they believed to be working with Wall Street bankers to destroy the New Deal. Nor did either possess much understanding of how the monetary system worked; the financial secretary of the US Embassy in Paris reported having little luck in explaining to Morgenthau what it meant for the franc to be “weak.” In response to calls from Cordell Hull and his subordinates to conclude an agreement with Britain and France, Roosevelt complained that “J. P. Morgan has as much influence in the State Department as he ever did.”1 Nevertheless, the extent of France’s distress—most notably its inability to resist Germany’s remilitarization of the Rhineland in March 1936—­convinced Morgenthau that a change in policy was in order. Negotiations for an agreement began that summer when Emmanuel Mönick, financial attaché to London, arrived in Washington. Although the treasury secretary rejected Mönick’s suggestion that the document include a statement asserting that the ultimate objective was a return to the gold standard, in September he signed on to an informal agreement that the dollar value of the franc would be allowed to fall to somewhere between $0.0475 and $0.0497. Neither the United States nor Great Britain would devalue in response unless price levels in those countries were to fall sharply. Morgenthau’s claim that the Tripartite Agreement was the “greatest move taken for peace in the world since the World War” was a massive exaggeration; nevertheless, the fact that the administration was willing in 1936 to do what it had refused to consider at the London Economic Conference three years earlier was a clear indication that Roosevelt was changing course.2 Interrupting this move toward internationalism, however, was the election of 1936. Although the economy was on the mend, the administration was not yet willing to campaign on a commitment to the global order, particularly since the Republican candidate, Kansas governor Alf Landon, was making protection of US industry and agriculture a major theme of his campaign for the presidency. By the time of the Democratic Party’s national convention that summer, Secretary of State Hull had concluded trade agreements with fourteen countries, and exports to those nations had increased by 14 percent over the previous year. Nevertheless he complained of having been shut out of the process of drafting the party’s platform. When it was released to the public, he was chagrined to find that, although it praised his ongoing efforts to negotiate trade agreements, it also expressed a commitment to protect farmers and

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manufacturers from “unfair” foreign competition. The plank on international trade, Hull claimed, was “Republican terminology almost word for word.”3 But while economic internationalism had been kept out of the party platform, Roosevelt’s landslide electoral victory over Landon (Roosevelt won with nearly 61 percent of the popular vote, carrying forty-six of forty-eight states) freed him to take bolder steps during his second term. Early in 1937 the president and Hull won a victory when the new Congress—in which the Democrats now held an even larger majority—overwhelmingly voted to renew the Reciprocal Trade Agreements Act of 1934. The secretary of state now turned his eyes toward the ultimate prize: an agreement with Great Britain. Imperial preference, he insisted, was hurting rural America, as the British turned to the empire to supply agricultural goods that had once been produced by US farmers. More importantly, it was encouraging foreign aggression: surely, he told British ambassador Sir Ronald Lindsay, the Italians would not have felt the need to invade Ethiopia if they had found sufficient outlets for their exports. Only a swift recovery of international free trade, he warned, would stop the drift toward another world war. The pressure on the British government for an Anglo-American trade agreement came not only from the United States, but from the Foreign Office as well. This represented something of a reversal on the part of Britain’s diplomats, who in the 1920s had been skeptical of efforts to appease the Americans through liberalization of trade. However, the new foreign secretary, Anthony Eden, was convinced that the threat from Germany and Japan—as well as the paralysis of France—made good relations with Washington a matter of paramount importance. Noting the efforts that Hull had been making on behalf of free trade, Eden warned in May 1937 that failure to conclude an agreement would cost Britain its best opportunity for bringing the United States more meaningfully into European and East Asian affairs. Eden, however, faced an uphill fight, as both the Treasury and the Board of Trade had strong misgivings about an agreement with the United States. Even though Britain’s economy had shown impressive growth since 1932, the price of recovery was a widening imbalance of trade—an imbalance that would only grow larger if the country was opened further to American imports. Of course, an agreement held open the possibility of larger quantities of British exports to the United States, but, as Neville Chamberlain liked to point out, the most Hull could offer under the Reciprocal Trade Agreements Act was a 50 percent reduction in rates—which, as long as Smoot-Hawley remained in effect, still meant higher rates than Britain placed on foreign goods even under the imperial-preference system. Moreover, there was the Commonwealth to think of. Opening Britain’s markets to American agricultural products would no doubt displease grain-producing countries such as Canada and Australia. Given America’s neutrality laws, Chamberlain argued, the friendship of Commonwealth nations would be more valuable than good relations with the United States in the event of war.

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These were the considerations that prevailed when negotiations for an ­ nglo-American trade agreement opened, just days after Roosevelt’s reelecA tion. In response to US prompting, Owen Chalkley, commercial counselor at the British Embassy in Washington, presented a list of British goods—mainly textiles—on which his government hoped for lower tariffs. The United States responded with a much longer list—termed the “must list”—that included hog products, grains, fruits, tobacco, and lumber. At first there appeared to be little hope that Britain might accept a deal, but some reasons for optimism appeared on the horizon in early 1937. One was that the US Senate in January passed a new Neutrality Act that, although it made the terms of the earlier acts permanent and even added a new prohibition on travel by US citizens on ships belonging to belligerent powers, also introduced a provision that Roosevelt eagerly supported. “Cash and carry” made it permissible to sell supplies and resources (although not arms or ammunition) to a country at war only if that nation could pay cash for it and could transport the materials in its own vessels. Although it appeared to be impartial, it would clearly give an advantage in any future European war to those countries whose naval power afforded them the ability to continue trading on the high seas—in other words, Great Britain and France. More good news came in May. A new Imperial Conference met in London, where the assembled delegates of the Dominions gave their consent in principle to revisions to imperial preference in the interest of winning a trade agreement with the United States. Finally, in the cabinet shakeup of late May, in which Neville Chamberlain succeeded Stanley Baldwin as prime minister, the Board of Trade came under new leadership. The outgoing president, Walter Runciman, had been a fervent supporter of the Ottawa system, but his successor, Oliver Stanley, was an outspoken advocate of a US trade deal. Such factors provided powerful headwinds, but they were insufficient to bring about an agreement. The negotiations moved slowly, complicated by the fact that the Dominions had to be involved in each step. The discussions wore on through the summer and fall of 1937 and into 1938, with no resolution. Leading administration figures grew increasingly frustrated; at one point even Hull said to one of his subordinates that he felt like telling the British “to go to hell” and have the United States withdraw into “our own shell.”4 Ultimately neither side proved willing to back away from its system of protective tariffs as much as the other would have liked—a fact that the German and Italian governments noted with satisfaction. The failure of the English-speaking powers to reach an agreement, their propaganda organs claimed, was a tacit admission that they recognized the superiority of trade systems based on barter and the pursuit of autarky. A large part of the reason why Anglo-American trade negotiations went nowhere was the state of the US economy (and, to a lesser extent, the British economy) in the second half of 1937. Evidence that the economy was recovering in 1935 and 1936 had helped Roosevelt coast to reelection.

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­ nemployment, which had stood at around 25 percent when he took office, U had fallen to just over 14 percent by early 1937. Similarly, per capita GDP had grown by nearly 35 percent over the same period (see Figure 10.1). Prices for both commodities and manufactured goods were climbing, and industrial production in late 1936 finally exceeded its 1929 levels. Some of this was the result of German, Japanese, and Italian rearmament, which bid up the price for raw materials that the United States possessed in abundance. Some was no doubt attributable to government spending, although it remained low compared to that of Germany and Japan. The most important factor was an influx of gold from Europe—particularly from France—as nervous investors, fearing war in Europe, sought a safe haven for their capital. The flow had begun in 1934, but accelerated in the weeks following the Tripartite Agreement as investors rushed to sell off their francs before France’s formal abandonment of gold. As a result, by October 1936 US gold reserves nearly doubled from their 1934 levels, from $6.8 billion to $11 billion. This allowed for a considerable expansion of the money supply, as banks and other institutions grew more willing to extend credit. By early 1937 there was roughly 20 percent more money in circulation than there had been three years earlier. The administration, however, started to worry in late 1936 that the money supply was growing too quickly and that it might carry the economy from depression to inflation. In December, therefore, Morgenthau instructed the Treasury to return to the policy of the 1920s—that is, sterilizing gold. The country’s gold reserves began to be stored in a new facility constructed at Fort Knox, an army base south of Louisville, Kentucky. They would not be used to expand the money supply; indeed, new regulations increased the reserve ratios that banks needed to maintain, effectively ensuring that they would tighten credit. In addition, in early 1937 Roosevelt ordered reductions in federal spending, particularly in the Works Progress Administration (WPA), the largest of his public-works programs. The deficit, which in 1936 had stood at $4.6 billion, was reduced to $3.1 billion the following year. As the economy appeared to gain steam in 1936, some skeptics pointed out that there had been no corresponding rebound in long-term private investment. The recovery, in other words, was sustained almost entirely through public spending and easy credit, and by early 1937 money was once again growing tight. Industrial production, which continued to rise into spring 1937, leveled off and remained more or less flat through the summer. In mid-August the stock market began to fall, and in October it plummeted. Industrial production declined by nearly 30 percent between April and December, while prices for farm products fell by nearly a quarter during the same period. By June unemployment was back up to 19 percent. The downturn, which economists began calling the “recession” to distinguish it from the Great Depression of 1929–1933, was merely one in a series of difficulties with which Roosevelt had to cope in his second term. It had already gotten off to a rocky start when in early 1937 he proposed to Congress

Stumbling toward Internationalism: The United States, 1936–1939  d 141 7,000

Figure 10.1 Per Capita GDP of the Great Powers, 1936–1939

7,000 6,000

1990 US Dollars 1990 US Dollars

6,000 5,000

5,000 4,000

4,000 3,000

3,000 2,000

2,000 1,000 1936

1937

1938

1939

1,000 1936 United States

1937 Great Britain

France

1938 USSR

Germany

1939 Japan

Italy

Source: DataUnited fromStates Angus Maddison, 2014, “Maddison Data,” WorldJapan Economics, Great Britain France Historical USSR GDPGermany Italywww .worldeconomics.com/, accessed May 14, 2014.

a plan to increase the number of justices on the Supreme Court. Coming so soon in the wake of a number of court decisions that had invalidated parts of the New Deal, it raised suspicions among members of both parties that the president was laying the groundwork for a dictatorship. The accusations today sound overwrought, but given the similarities of some elements of Roosevelt’s program to those of Mussolini and Hitler, and what seemed to be a worldwide movement away from liberal democracy, many Americans were on their guard. Indeed, even the vice president expressed his opposition to the bill. The Senate finally rejected it in July—at just about the same time when the economy began to fail. All of this had important implications for Roosevelt’s foreign policy. It certainly cooled any desire on the part of the administration to risk the ire of powerful interest groups, such as the textile industry, who opposed the significant trade concessions necessary to achieve an agreement with Great Britain. More broadly, though, it was a blow to Roosevelt’s reputation as “Dr. New Deal,” the man with the prescription for returning the country to prosperity. Just as had happened from 1929 to 1933, public interest turned away from international affairs and toward the domestic economy, and the president had little desire to risk his political capital by taking bold positions on foreign policy. Such considerations certainly affected the administration’s response to the resumption of large-scale fighting between Japan and China in July 1937 (see Chapter 12). Because there was no actual declaration of war, Roosevelt opted

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not to invoke the terms of the Neutrality Acts. Theoretically this meant that US firms could trade with either side, but since the Japanese navy established a blockade of China’s major ports there was little in practice that Jiang Jieshi’s government could import. Meanwhile, a series of stunning Japanese victories over Jiang’s forces in late 1937 and early 1938 raised concerns that Tokyo might do to China what it did to Manchuria—namely, incorporate it into the “yen bloc,” effectively sealing it off from Western trade and investment. Morgenthau, in particular, feared that a Japanese conquest of China might encourage Germany and Italy to attempt further acts of aggression. The war in China was undoubtedly on Roosevelt’s mind when he gave a speech in Chicago in early October 1937. Although he mentioned no country by name, he warned of an “epidemic of world lawlessness” and suggested that the “peace-loving nations” of the world take joint action to impose a “quarantine” to stop the aggressors.5 The president’s rhetoric was provocative, the boldest speech he had made yet on the subject of foreign affairs, but it was far from clear what, in practical terms, he proposed doing. Foreign governments asked for clarification, as did isolationists in the press and Congress, who feared that Roosevelt was on the verge of becoming another Woodrow Wilson. But in a press conference the following day he seemed to deny everything. When pressed as to what he meant by “quarantine” he immediately backpedaled, denying that he intended to call for economic sanctions, or any other coercive measure, or that he sought to revise the Neutrality Acts in any way. The whole episode confirmed for Neville Chamberlain what he had believed for years: “It is always best and safest,” he wrote soon after Roosevelt’s speech, “to count on nothing from the Americans but words.”6 In practice, the only support the administration was willing to offer Jiang Jieshi during the second half of 1937 was to expand on the earlier policy of silver purchases, which would provide the dollars necessary for the currency to remain tied to the dollar. The Treasury bought 50 million ounces of the commodity in late 1937, but this had no effect on the Chinese war effort, and by late fall the major cities of Beijing, Tianjin, and Shanghai were all in Japanese hands. Two events led the administration in late December to revisit the possibility of sanctions against Japan. The first was the sinking in the Yangzi River of a US gunboat, the Panay, by Japanese aircraft. The vessel had been escorting three tankers belonging to the Standard Oil Company, and the Japanese pilots claimed not to have noticed the American flags painted on its deck. Second, Jiang’s capital of Nanjing fell on December 13, and US public opinion was shocked by the atrocities committed by Japanese troops in and around the city in the following weeks. Cabinet members such as Morgenthau and Interior Secretary Harold Ickes pointed to Japan’s dependence on US imports, claiming that a trade embargo would force Tokyo to give up its aggression in China in a matter of months. One Treasury official suggested going so far as to freeze Japanese assets in the United States—as much as $200 million in

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cash and securities, plus roughly the same amount in goods, ships, and real estate—under a clause of the 1917 Trading with the Enemy Act. Ultimately none of these measures was adopted, and Tokyo was allowed to apologize and pay an indemnity for losses associated with the sinking of the Panay. While plenty of Americans were outraged against Japan, there was no demand for coercive measures; indeed, the most noteworthy response in Congress came from those demanding to know what a US gunboat was doing in Chinese waters in the first place. A more ominous message from Capitol Hill came in January 1938 when the House got within a few votes of bringing forward a proposed constitutional amendment mandating a national referendum before Congress could declare war, unless the country were directly attacked. The amendment had originally been proposed by Indiana Democrat Louis Ludlow back in 1935, and had languished in the House Judiciary Committee ever since. Nevertheless, it was popular—public opinion polls taken in the late 1930s showed that it consistently had the support of between two-thirds and three-quarters of those surveyed. Its popularity made Roosevelt reluctant to take a public stand on the issue, although he asked his postmaster general, James Farley, to lobby Irish American members of the House—normally among the staunchest isolationists—to oppose it. The push to bring the amendment to the floor of the House failed, but the 188 votes that it received illustrate the extent to which Americans in the late 1930s sought to insulate themselves from foreign conflicts. US foreign policy for much of 1938 was characterized by the president’s desire to play a role in the maintenance of world peace, tempered by his recognition that neither Congress nor public opinion would tolerate even the slightest risk of war. The end result was a series of admonitions from the White House, which foreign governments quickly discounted or ignored altogether. The administration enjoined world leaders to disarm, to embrace free trade, to uphold international agreements, to abjure aggression, and to solve international differences peacefully. Meanwhile Japanese forces advanced deeper into China, Germany and Italy continued their open involvement in the Spanish Civil War, and, in March, German troops occupied Austria. Roosevelt’s words had no measurable impact. While some in the administration, most notably Morgenthau and Ickes, pushed for economic sanctions as a means of deterring aggression, a group within the State Department proposed an alternate approach. Cordell Hull and his subordinates remained convinced that Germany, Japan, and Italy had embraced a policy of autarky only in response to the protectionism of the United States and Great Britain. According to Under-Secretary of State Sumner Welles, there were plenty of moderates in Germany, Japan, and Italy who supported free trade. Economic distress had brought about the ascendancy of militarists, and sanctions, by exacerbating that distress, would only put the warmongers more solidly in control. Welles was encouraged in his views by the German economics minister and Reichsbank president, Hjalmar

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Schacht, who repeatedly assured foreign leaders that Germany would surely rejoin the global economy if it were guaranteed access to the resources that it needed to feed its people and sustain its industrial economy. He was also likely encouraged by growing economic ties between the United States and Germany. Trade between the two powers may have been on the decline, but US investments in German industry, led by firms such as General Motors, International Business Machines, Du Pont Chemicals, and Standard Oil, grew by more than a third between 1936 and 1940. Therefore in October 1937, and again in January 1938, Welles suggested holding an international conference in the United States, at which the attendees would pledge to reduce tariffs and provide equal access to raw materials. The result, he promised, would be a quick return to international prosperity, which would allow the moderates in Germany, Japan, and Italy to reassert themselves and pull their countries away from the counterproductive policies of militarism and autarky. Welles briefly persuaded the president to give his ideas a try, and Roosevelt proposed just such a conference to Neville Chamberlain. However, the prime minister was pursuing his own plan for appeasement of Germany and Italy (see Chapter 11), and Welles’s suggestions went nowhere. Throughout these months Roosevelt remained primarily occupied with the economy, as well as the upcoming midterm elections. Reasoning that New Deal programs—particularly the WPA—had developed their own political constituencies, he temporarily abandoned his efforts toward a balanced budget and won congressional support for a new spending plan of $5 billion. That summer he bucked tradition by involving himself personally in the Democratic Party primaries, seeking to punish those members of his party who had voted against New Deal measures by stumping for more liberal challengers. The result was a disaster; of the ten incumbents he hoped to unseat, only one lost his bid for reelection. The other nine returned to Washington even more determined to oppose the president at every turn. But at least on the economic front there was some good news in the second half of 1938. In April the Federal Reserve Board lowered the reserve requirements for member banks by one-third, which allowed them to extend an additional $750 million in new loans. Three months later the Treasury reversed its gold-sterilization policies. As war in Europe grew more likely, the flow of gold to the United States accelerated—more than $1.4 billion in the second half of 1938, and $3.1 billion in 1939—and now the money supply increased accordingly. Unemployment began to decline in mid-1938, although it did not return to the level of early 1937 until after the United States entered World War II. Nor did the jobless rate decline quickly enough to help the president’s party in the midterm elections that November. Republicans gained eighty-one seats in the House and seven in the Senate, and while they were still far from the majority party, their numbers were sufficient that

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they would be able to work with Southern Democrats to block further New Deal programs. Roosevelt had turned his attention back toward foreign affairs in September, when a new crisis erupted in Europe over German pressure on Czechoslovakia (see Chapters 11 and 12). Once again prominent members of the administration were divided over an appropriate response, and the president ultimately opted to send personal messages to world leaders urging them to arrive at a peaceful settlement. However, the president was not pleased when he learned the details of the agreement worked out by Hitler, Chamberlain, and French premier Édouard Daladier at Munich in late September. Although he sent the prime minister a telegram congratulating him on averting war, he was disturbed by the fact that Czechoslovakia was forced to give up the Sudetenland. Germany would now dominate central Europe, while Britain and France “wash the blood from their Judas Iscariot hands.”7 Just over a month later came Kristallnacht, when German mobs rampaged against Jews all over Germany, causing nearly 100 deaths, the burning of 1,000 synagogues, and the destruction of thousands of Jewish-owned schools and businesses. Some 30,000 Jews were arrested and sent to concentration camps. Together the ­Anglo-French appeasement of Germany at Munich and the outrage of Kristallnacht had a galvanizing effect on the Roosevelt administration. By mid-November there was consensus that Hitler’s regime was beyond redemption. Efforts to identify and work with moderates in Berlin came to a halt; further negotiations with the National Socialist regime were to be regarded as a waste of time. The administration firmly believed that Hitler, emboldened by his successes in central Europe, would immediately seek other opportunities to expand, and Latin America seemed particularly vulnerable. At the State Department, Cordell Hull warned that Germany’s share of Latin American imports had increased from 9.5 percent in 1929 to 16.2 percent in 1938, while the US share had declined from 38.5 percent to 33.9 percent over the same period of time. If this trend were allowed to continue, he argued, the region could well come under complete German economic domination. One clear indicator that the administration’s views had changed was a new interest in spending on the armed forces. Until 1938 Roosevelt had devoted almost no resources to the army, and very few to the navy. In May of that year Congress passed, at the president’s urging, a bill authorizing a 20 percent increase in the size of the navy, and the pace of spending would increase in the coming months. Ironically, this policy likely received a boost from the results of the midterm elections that November. The new Congress was largely unfriendly to Roosevelt’s reform agenda; in fact, the Fair Labor Standards Act, which Roosevelt signed into law in June 1938, is generally regarded as the last piece of New Deal legislation. However, Northeastern Republicans, and especially Southern Democrats, were far less likely to oppose defense spending.

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(By contrast, progressives from the Midwest and West, who were generally supporters of the New Deal, often opposed spending on the armed forces.) It is perhaps unsurprising, then, that in his annual message to Congress in January 1939 Roosevelt would attempt to justify his “program of social and economic reform” as “a part of defense, as basic as armaments themselves.”8 Roosevelt’s belief that rearmament could simultaneously serve the cause of economic recovery and national security could be seen most clearly in the ambitious plans for aircraft production he put forward in the weeks after Munich. Hitler might be deterred from further acts of aggression, he reasoned, if he were sufficiently impressed by a display of economic might. Unfortunately the US aircraft industry was relatively small, and its capacity for producing military planes nonexistent. In late October, therefore, he told Morgenthau that he intended to create an aircraft industry out of whole cloth. His plan was to have the WPA build between eight and ten factories—preferably in or near cities with particularly high unemployment rates—which together could produce 15,000 aircraft per year. At a meeting in mid-November he upped the ante, calling for the creation of an industry capable of building 24,000 new warplanes per year. Most of the planes would remain at home, but some would be used to fulfill orders he anticipated from Great Britain and France. If produced quickly enough, they might demonstrate to the leadership of the Third Reich that its present course could only bring financial ruin; if not, the planes would be sold to France and Britain, who would use them to destroy Germany from the air. The altered international landscape also jump-started the stalled negotiations for an Anglo-American trade agreement. Now the proposed deal was about more than simply the exchange of wheat and textiles. Failure to conclude an agreement now would send a message to the world that the two countries were unable to cooperate at even the most basic level, even in the face of a clear German threat. Nor were US negotiators above using Munich as a means of wringing concessions out of their British counterparts. Why, they asked, was His Majesty’s government willing to take a tougher line with Washington than it was with Berlin? The deal was finally concluded on November 18. The United States lowered tariffs on textiles, metals, and metal products, and Britain reciprocated by abandoning altogether its duties on wheat while increasing import quotas and reducing rates on most other US products. It was less than either side wanted, but, as Foreign Secretary Lord Halifax (who had succeeded Anthony Eden in February) put it, “the political reasons . . . must outweigh trade and economic considerations.”9 Munich and Kristallnacht even produced a bolder US approach to the ongoing war in East Asia. By autumn 1938 Japanese forces occupied most of northeastern China, as well as all of China’s major ports, from Guangzhou (Canton) in the south to Tianjin in the north. Morgenthau, who believed that Germany’s bid for domination of central Europe and Japan’s aggression

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in East Asia were part of a single world struggle of totalitarianism versus democracy, warned that unless something were done to rally Chinese resistance the result would be a calamity at least as grave as Munich. At Morgenthau’s urging the president in December authorized a loan of $26 million to Jiang’s embattled regime, which had relocated to the city of Chungking, deep in the interior of the country. Moreover, in July 1939 the administration gave notice to Tokyo that the US-Japanese trade treaty of 1911 would be allowed to lapse at the end of the year, a warning that economic sanctions were now officially on the table. Nevertheless, the administration’s newfound determination to join with France and Britain in a worldwide effort to combat totalitarian aggression ran into some serious problems. For one, the massive aircraft orders expected from France and Britain did not materialize. The British government, concerned as ever about the nation’s trade deficit, preferred to equip the Royal Air Force entirely with domestically produced planes. The French, whose economic problems had delayed the start of rearmament, were more willing to purchase US-made aircraft, but here the Neutrality Acts interfered. The prohibition of arms sales to belligerents was finessed through a stipulation that the planes were to be sold without weapons, but the “cash and carry” provision was harder to deal with. If war were to break out suddenly, France would be obliged to pay for the aircraft in gold or US dollars, both of which were in short supply. Roosevelt briefly considered building factories in Canada (while still close enough to the border that the workers could commute from the United States), but this was politically a nonstarter. An even more fundamental obstacle, however, was that Roosevelt proved incapable of calling into existence a military aircraft industry within a few months via presidential fiat—perhaps an unsurprising development, given that Joseph Stalin, with virtually unlimited executive authority, had required years to develop a modern aircraft sector for the Soviet Union. By the time Roosevelt took his proposal to Congress he had already revised his estimate downward to a mere 3,000 planes, only 555 of which could be supplied to France in the first year. Nor did the thought of using the WPA to build the aircraft sit well with private aircraft firms, who finally convinced the president that they were better equipped to do the job themselves. Even the negotiation of the Anglo-American Trade Agreement was not without last-minute headaches. The dangerous international climate was not enough to deter a host of industries from lobbying the White House in the final weeks, demanding either continued protection or greater access to British markets. Indeed, only days before the signing was scheduled to take place, Morgenthau and Roosevelt nearly torpedoed the entire arrangement when they learned that London had decided to reduce the dollar price of sterling. Because this would have the effect of lowering the price of British exports, the president feared a domestic backlash if the trade deal were allowed to go

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forward. Only when he realized that a much-desired commercial agreement with Canada would be unattainable without a settlement with Britain did he finally agree to sign. Nor did the trade agreement, once concluded, guarantee harmonious relations between the United States and Great Britain. Hull viewed it as his crowning foreign-policy achievement, one that represented Britain’s abandonment of imperial preference and appeasement. In fact, it was nothing of the sort. The Ottawa system remained fully in place, and would not be dismantled until after World War II. Even more frustrating from the US perspective was that early in 1939 Chamberlain opened a new series of economic talks with Germany, which culminated in the Düsseldorf Agreement of March 1939 (see Chapter 11). The administration suspected that Britain and Germany were trying to form an economic bloc to keep US products out of Europe. The fact that the deal was concluded on the day after German troops occupied Bohemia and Moravia, marking the final destruction of Czechoslovakia, only made it appear all the more sinister to American eyes. But the biggest problem for Roosevelt—one that would plague the administration repeatedly over the next two years—was that most members of Congress did not share his interest in drawing the United States more deeply into European or East Asian affairs. The president, in his January 4 annual message, warned Congress that the Neutrality Acts as written could actually work to the benefit of aggressors by denying their victims the ability to purchase arms that might help them defend themselves. Then, in midMarch—just two days after the dismemberment of Czechoslovakia—Senate Foreign Relations Committee Chairman Key Pittman (D-Nevada) proposed a revision of the neutrality laws to allow the sale of arms and ammunition to belligerent nations on a “cash and carry” basis. However, the bill languished in committee until mid-July, at which point a majority of its members—two of them Democrats whom Roosevelt had campaigned against in the 1938 primaries—voted to postpone it until the following year’s legislative session. When war in Europe broke out less than two months later the United States would stand squarely on the sidelines. However, the stage was set for an ongoing battle to define the place of the United States in the world. ­Public-opinion polls taken between 1939 and 1941 consistently established two facts: first, that Americans wanted Germany to be defeated, and second, that the United States must stay out of the war. The country was soon divided between those who agreed with Roosevelt’s contention that aid to the Allies was the best means of keeping America out, and an active isolationist movement that argued any departure from strict neutrality would inevitably draw the country in. It was a fight that would never be truly resolved, but simply rendered moot when Japanese aircraft bombed Pearl Harbor in December 1941.

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In 1936 the British and French economies appeared as mirror images of one another. Great Britain had managed to make a more or less complete recovery from the Great Depression, while France teetered on the verge of national bankruptcy. Yet over the next three years the two powers would respond to the rising threat of Hitler’s Germany in strikingly similar ways. Policymakers in London and Paris alike followed a policy of appeasement—that is, they attempted to preserve peace by yielding to Hitler’s demands in the hope that a satisfied Germany might play a constructive role in international politics. Neither country felt confident in the size or readiness of its armed forces to risk another war. In addition, French leaders adhered to this policy because they believed that war would destroy the economy and might even lead to social upheaval. The British appeased Germany because they feared that to do otherwise would reverse the progress the country had made since 1932. Germany’s remilitarization of the Rhineland came less than two months before the French people were scheduled to go to the polls to elect a new legislature. The humiliation of the Rhineland crisis, combined with the continuing economic crisis, led to an overwhelming victory in late April for France’s left-wing parties. Members of France’s Communist Party gained ­sixty-one seats while the Socialists increased their representation by thirty. The big losers were moderates—the Radicals, for example, saw their delegation decline by fifty-one. Nevertheless, Radicals, Socialists, and Communists remained allied through the Popular Front strategy (see Chapter 8), and now possessed the necessary majority to form a new government. It was headed by the 149

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soft-spoken, scholarly Léon Blum, who had the distinction of being not only the first socialist to serve as premier of France, but also the first Jew. Blum’s government came to power promising far-reaching reforms, and a wave of labor unrest across the country in the wake of the April elections enabled it to move quickly. France’s largest labor organization, the General Confederation of Labor, called for a general strike in late May. To avoid being locked out of factories by employers, workers engaged in a new tactic, in which participants stopped working but refused to leave their work stations until their demands had been met. Thanks to these “sit-down strikes,” the French economy had ground to a virtual halt by the beginning of June, and the Popular Front government quickly stepped in—not by authorizing the expulsion of the striking workers, as employers demanded, but by passing a set of laws mandating a forty-hour workweek, two weeks’ paid vacation for all workers, and collective bargaining between employers and employees. On June 7 Blum brought an end to the strikes by mediating an agreement, which was signed at the Hôtel Matignon, the premier’s official residence. Employers, their backs to the wall, promised to support the newly passed labor legislation and recognize labor’s right to unionize and to strike, and pledged across-the-board wage increases of between 7 and 12 percent for all workers. The Matignon Agreements were welcomed as a Magna Carta for French labor, but the wealthy and middle classes regarded them with dismay. The participation of Communists in the Popular Front (although not a single communist sat in Blum’s government), and the new labor militancy demonstrated in the sit-down strikes were taken as evidence that Soviet-style socialization of the economy was just around the corner. Such predictions seemed to be borne out when Blum nationalized the railroads and reorganized the governing board of the Bank of France, so that all but two of its members were government appointees. “Better Hitler than Blum” became the new slogan on the French right, but even centrists were afraid. Hopes that the Matignon Agreements would stimulate demand for consumer goods did not materialize; instead operating costs soared, and employers responded by cutting back on production and laying off workers. Prices for French goods went up as well, causing the nation’s trade deficit to widen. Meanwhile investors had little faith in the newly reformed Bank of France, fearing that their deposits would simply be seized by the chronically cash-strapped government. The loss of gold, which had plagued previous French governments, accelerated in the spring and summer of 1936 as investors exchanged their francs for gold, which they promptly sent overseas. With its reserves dwindling, the Bank of France had no choice but to raise interest rates once again, placing further deflationary pressure on the economy. Increasingly desperate for liquid reserves, the Popular Front government tried to float new bond issues at a 3.5 percent interest rate, but the campaign raised no more than a paltry four billion francs before being abandoned.

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At the same time, the country had a nearly empty treasury, and it was anticipated that some ten billion in outlays would have to be made over the next six months. Half of this was to go toward the armed forces. Before 1936 Blum had been an ardent champion of disarmament, but the outbreak of civil war in Spain in July, followed soon after by Hitler’s decision to lengthen the term of service in the German army, convinced him that there was little choice but to rearm, even if this meant that there was less available to devote to unemployment relief or public works. In this he had the ardent support of the Communists—after all, it was to help check German expansionism that Stalin had agreed to the Popular Front strategy in the first place. Blum’s budget for 1937, therefore, allocated 21 billion francs to defense—a 12 percent increase over the previous year’s budget, and the largest increase in arms spending since 1930. The needs of rearmament made it even more important that Blum’s government find some means of restoring solvency. It tried several policies in an attempt to stem the flow of gold, such as restrictions on the purchase of foreign exchange and gold coins. The legislature even passed a law making it illegal to “knowingly spread rumors calculated directly or indirectly to shake the confidence of the public in the soundness of the currency,” or to incite “others to withdraw deposits or sell Government securities.”1 None of these worked, so by late summer there appeared to be only two courses open to Blum: either to ban the export of gold or to devalue the currency. Neither seemed appealing. Britain and the United States might interpret an export ban as an unfriendly move—those countries were the destination for nearly all of the gold that was fleeing France. On the other hand, there were grave domestic risks involved in devaluation. The French people remained terrified of inflation; even the Communists denounced devaluation as a means of robbing wage-earners, so the Popular Front had actively campaigned against it. And even if the currency were devalued, there was no guarantee that Britain and the United States would not follow suit, thus removing any benefit of the original devaluation. That summer Blum met with Emmanuel Mönick, financial attaché to the French Embassy in London, who advocated a return to a more internationalist strategy. Mönick dismissed exchange controls as a “German path” that would not only alienate the British and Americans, but would be impossible to enforce without resorting to totalitarian tactics. Instead he proposed a 25 to 28 percent devaluation of the franc in conjunction with an agreement with Great Britain and the United States pledging to maintain stable exchange rates among the three currencies. This would be followed by a reduction in tariffs to encourage greater trade ties with the English-speaking powers. Not only would this provide domestic political cover for devaluation, but it would send a signal that the three major democracies were prepared to work together toward a restoration of the international economy. Persuaded, Blum

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authorized his finance minister, Vincent Auriol, to contact the British and American governments. The actual negotiations were handled by Mönick himself, and the resulting Tripartite Agreement was signed on September 25. Armed with an international agreement to manage exchange rates, the Blum government immediately devalued the franc. Despite promising developments, predictions of a swift economic recovery went unfulfilled. The final months of 1936 saw a 12 percent increase in industrial production, and by the following March production had reached its highest point since mid1931. The number of unemployed workers, which in mid-1936 had reached a high of 470,000, fell to 380,000 by the middle of 1937. However, France’s fiscal crisis remained. The anticipated return of the capital that had fled the country in recent years did not materialize, as investors remained deeply distrustful of the Popular Front and were convinced that further devaluation of the franc was bound to follow. The British extended a loan of £40 million, which was exhausted almost immediately, and the country’s gold reserves fell to 50 billion francs. If it went any lower, French military planners warned, the armed forces would be unable to defend the nation from attack. Making matters worse for Blum was that his own government seemed to be falling apart. The Communists demanded that France become involved in the Spanish Civil War, sending aid to forces loyal to the Republic, whose enemies—Francisco Franco’s Nationalists—were receiving assistance from Germany and Italy. When Blum instead decided to follow Great Britain’s lead and adopt a policy of strict nonintervention in the conflict, the Communists took to the streets to denounce him. The Radicals, meanwhile, opposed his efforts to raise taxes. The final straw came in June 1937, when Blum asked the legislature for temporary power to rule by decree. The fiscal crisis, the cabinet announced, required drastic action against speculators and “deserters of the franc.” “If they wish to strangle us,” Auriol announced, “let them be sure that it will not be without a fight.”2 This sort of rhetoric was too much for the Radicals, who not only voted down Blum’s request but formally withdrew from the government. The Popular Front had collapsed after only slightly more than a year. Britain, meanwhile, continued to present an image of calm and composure. There were no abrupt transitions of power and almost no labor strife. Britain continued to be ruled by a National Government, theoretically a government of individuals rather than political parties; in practice, however, the Conservatives retained an overwhelming majority in Parliament, even after losing eighty-three seats in the general election of 1935. In that year the former Labour leader, Ramsay MacDonald, quietly yielded the premiership to the Tory Stanley Baldwin, and two years later it would pass to Neville Chamberlain. It is true that the Labour Party during these years moved leftward, openly advocating the nationalization of land, natural resources, and large industries. However, since its members held only a bit more than a quarter of the seats in Parliament the party had almost no influence over national policy.

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Steady, quiet Britain in 1936 and 1937 continued its steady, quiet economic recovery, and the ruling Conservatives were not prepared to risk their record by going in new directions. That meant that the nationalist policies that London had implemented in 1931–1932—namely, the switch to a “managed” currency and the establishment of imperial preference—remained firmly in place. When Emmanuel Mönick approached the government with his idea for an Anglo-Franco-US stabilization agreement, Chamberlain balked. He had no intention, he said, of placing “the pound at the mercy either of the franc . . . or of the dollar.”3 If he ultimately signed on to the Tripartite Monetary Agreement, it was only because he was convinced that it committed his government to absolutely nothing. For the chancellor of the exchequer it was a cost-free means of drawing the United States into European affairs. Imperial preference was defended with equal determination. In France Léon Blum had hoped that the Tripartite Agreement might pave the way for a return to free trade, and to that end his government unilaterally reduced tariffs and abolished a number of import quotas. Most of the smaller countries of western Europe—Belgium, the Netherlands, Luxembourg, Finland, Norway, Sweden, and Denmark—eagerly jumped on the bandwagon. These nations had been particularly hurt by the rise of Depression-era protectionism since their economies depended most heavily on foreign commerce. Dutch prime minister Hendrik Colijn gave a series of speeches in late 1936 and early 1937 calculated to encourage—perhaps even shame—Great Britain into following France’s lead. But while the United States hailed such moves, they met with a cool response from London. In fact, Britain’s trade deficit continued to mount during the period 1936–1938, in large part due to rearmament, and the Baldwin and Chamberlain governments put the promotion of exports very high on the list of national priorities. Moves in the direction of free trade would not, in their opinion, make this task easier; they would only invite more foreign imports. Not only did the British government refuse to take up Colijn’s suggestion, but it chastised the Dutch leader for suggesting that Britain jeopardize its own economic interests. Concern for the nation’s economic well-being also dictated a policy of nonintervention in the Spanish Civil War. Britain was Spain’s most important trading partner, purchasing a quarter of that country’s exports while providing 10 percent of its imports. In addition, some 40 percent of foreign investment in Spain came from British firms. The rise of a Popular Front government in Spain in February 1936 generated fears that this trade and investment might be in danger, and when that summer Franco’s Nationalists took up arms against the republic, British authorities suspected that they might be less dangerous to the country’s economic interests than the Republicans. The decision by Germany and Italy to assist Franco provided an additional impetus for neutrality, as the Foreign Office was attempting to mend fences with Rome in the wake of the Italo-Ethiopian War, and thus sought to avoid potential areas of friction. In any case, most in the Conservative government

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believed that a Franco victory was inevitable and that the new Nationalist regime would seek closer economic ties with Britain in its efforts to promote the inevitable postwar reconstruction. All of these factors made nonintervention a logical choice, although, as the Labour Party was quick to point out, the policy in practice favored the Nationalists by elevating an insurgent force to the legal status of formal combatant. The determination of the Baldwin and Chamberlain governments to avoid continental entanglements was strengthened by a sense of vulnerability. Assessments of Britain’s military capabilities carried out during this period emphasized that the country’s armed forces were insufficient to protect its farflung imperial possessions from the multiple potential threats of Germany, Italy, and Japan. It was only in 1936 that the cabinet sought to address this through a comprehensive program of rearmament, one that involved not only the development of weapons systems but also the industrial infrastructure to construct them in large quantities. The pace of rearmament was slow, however—almost leisurely compared to the frantic construction programs of Germany and Japan during this same period. Chamberlain, both as chancellor and as prime minister, held firm to his belief that Britain could face a repeat of the fiscal crisis of 1931 if it tried to rearm too quickly. Rearmament, he insisted, must not be allowed to inflict damage on other sectors of the economy, particularly the production of manufactured goods for export. Sir John Simon, Chamberlain’s successor as chancellor, estimated that the country could safely spend no more than £1.5 billion per year on defense. In addition, a disproportionate share of the new spending was directed toward the Royal Air Force. The period 1936–1938 saw the development of several new types of heavy bomber, as well as new fighters such as the Hurricane and the Spitfire. By contrast the navy and army saw almost no expansion. The cabinet’s priorities were a clear signal about Britain’s intended strategy in case of a war with Germany—to focus on defense of the British Isles, with intervention on the continent limited to strategic bombing of German cities. The meager army budget would not allow for the dispatch of a British Expeditionary Force, a message that was not lost on French policymakers. To be fair to Chamberlain and his allies, there were certain limitations on Britain’s ability to match Germany’s all-out campaign of armaments. For one, its heavy-industrial sector was smaller. Between 1935 and 1939 British industry produced only 60 percent of the quantity of steel and no more than 20 percent the number of machine tools that German factories were able to churn out during the same period. In addition, British trade unions had traditionally controlled the training of skilled workers, and until 1936 they had deliberately held down the numbers of such laborers in order to keep wages high. As a result Britain’s growing arms industry had a much smaller pool of skilled labor from which to draw. Finally, Hitler’s government did not have to worry about elections, so it rarely shrank from repressive measures against the German population if such methods served the cause of rearmament.

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By 1937 taxes in Britain were already at an unprecedented peacetime level, and Chamberlain understood all too well the likely political consequences of raising them further. The consequences of rapid rearmament were very much on the minds of French statesmen in late 1937. Blum’s successor was Camille Chautemps, a Radical who had twice briefly served as premier, once in 1930 and again in 1933–1934. Presiding over a new center-left coalition, Chautemps inherited his predecessor’s fiscal mess, which was now even worse thanks to the devaluation of September 1936, which lowered the purchasing power of the franc by roughly a third. A new series of taxes managed to bring in around 7.4 billion francs in additional revenue. However, without raising taxes still further—a step that Chautemps and his fellow Radicals refused to take—it was clear that defense spending, which by this time occupied roughly a third of the budget, could not be allowed to match German levels. Therefore the premier and his finance minister, Georges Bonnet, agreed that total spending on the armed forces for 1938 be capped at eleven billion francs. The budget for the army, which would bear the brunt of defense against foreign attack, was allowed to grow by 28 percent. The air force received slightly more as well, although far less than was necessary to carry out the campaign of modernization that its commanders had been planning. The navy fared worst, as its budget was 7 percent smaller than that of the previous year. But even this level of rearmament was jeopardized in late 1937, when, thanks to the recession in the United States, prices of manufactured goods on the world market dropped considerably. Blum’s devaluation of September 1936 had briefly made French products more competitive, but in the new economic landscape the increased costs of production brought on by the terms of the Matignon Agreements once again priced the nation’s goods out of the market. Recovery stalled, and even a second round of devaluation brought no more than temporary relief. Between September 1937 and April 1938 GDP fell by nearly 5.7 percent, and the number of French unemployed leaped from just over 332,000 to nearly 425,000 (by way of contrast, in 1931 there had been slightly more than 75,000 unemployed in France). Looking across the Rhine toward Germany, whose isolation from the global economy had apparently rendered it immune from the latest crisis, produced a profound sense of pessimism among the leadership of France. Hitler’s regime had produced national unity, a full economic recovery, and a powerful new military machine. France in early 1938 possessed none of these: the population was deeply divided along class and political lines, the economy was recovering only slowly, and rearmament continued to lag behind that of Germany. More worrisome still was the vulnerability of the country’s most important strategic resources, located in the northeast. Practically all of France’s iron and steel industry lay within striking distance of German soil. Meanwhile, French exports to Germany had tripled between 1936 and 1938, with huge quantities of iron ore crossing the Rhine each month to feed

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­ ermany’s steel industry. Perversely, then, the German arms buildup had beG come critically important to the French economy. All of this helps to explain why France was set on a policy of appeasement from 1936 to 1939. The only way to win back the capital that had been fleeing the country since 1934 was to restore investor confidence. The only way to do that was to keep expenses down, and this precluded any large-scale campaign of rearmament. However, without rearmament France would stand no chance in a war against Germany—hence such a war had to be avoided, and if that meant yielding to Hitler’s territorial demands in Europe, then so be it. France’s economic weakness also brought home the extent to which the country was dependent on Great Britain. A war against Germany was unthinkable without British support. Nearly a third of France’s imports, including its vital coal supplies, came from Britain and its empire, and more than a third of French trade was carried on British merchant ships. Only the Royal Navy was strong enough to enforce a blockade of Germany, the one tactic that might bring victory in a long conflict. There seemed to be little choice but to follow Britain’s lead in foreign affairs, and hope for the best. Following Britain’s lead, of course, ensured that appeasement would continue, as Neville Chamberlain—who had dominated British politics as chancellor of the exchequer—succeeded Stanley Baldwin as prime minister in May 1937. Chamberlain’s belief that rearmament must not be allowed to create dislocations in the rest of the economy dictated that any conflict be put off as long as possible. A war in the near future would be a disaster, for he believed that Britain had no reliable allies. France, of course, was near bankruptcy and unstable both economically and politically—and, like many British leaders, he believed that France’s anti-German policies were in large part responsible for Hitler’s coming to power in the first place. Chamberlain saw little point in trying to obtain some sort of commitment from the United States, since the Roosevelt administration seemed interested only in trying to get Britain to abandon imperial preference. American leaders, he complained in August 1937, were “too frightened of their own people” to be of any use in world affairs.4 Italy was rapidly moving into Hitler’s orbit, while Stalin’s Soviet Union was, in the prime minister’s view, even more objectionable than Germany. Britain, therefore, was a nation without friends, confronted with three potential enemies. The effects of the US economic crisis of late 1937 also encouraged Chamberlain to persist in a policy of appeasement. The recession’s effects were mild in comparison to those in the United States and France, but they fell mainly on Britain’s traditional export industries, such as textiles and shipbuilding. Naturally this widened the country’s negative balance of trade, which by the end of the year stood at £56 million, and magnified the importance of its commerce with Germany. As Britain’s fifth-largest foreign market, Germans purchased over £20 million in British goods annually, and this figure was expected to rise in the coming years. Germany was also a major consumer of

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products from the Dominions, so it was unsurprising when, in 1937, they issued a declaration asserting that “differences of political creed should be no obstacle to friendly relations between Governments and countries.”5 Beyond this, Chamberlain saw no reason why Hitler could not be appeased. The prime minister, it should be noted, had had very little to do with foreign affairs before 1937. His time in business and government had given him ample experience in the art of negotiation, but he was accustomed to dealing with businessmen, trade-union officials, and fellow politicians, not ideologues such as Hitler. When he encountered the German dictator’s words about Lebensraum he tended to dismiss them as campaign oratory; he could not bring himself to think that his true goals lay beyond establishing hegemony over eastern Europe and perhaps getting back some of Germany’s old colonies in Africa. Naturally, it was very much in Hitler’s interest that Chamberlain believe this, so when they met face to face—as they did on several occasions in 1938—the Führer repeatedly assured him of the reasonableness and the limited nature of his demands. All of this guaranteed that Britain would offer nothing but a mild protest when, in March 1938, Germany announced the annexation of Austria (see Chapter 12). France was, if anything, even less likely to make a firm response because at the moment that it happened the country was in the midst of yet another political crisis. Just days before German troops crossed the border, Camille Chautemps, like Blum before him, had asked the legislature for power to rule by decree. His request was no more successful than that of his predecessor, except that in this instance it was the Socialists and Communists rather than the Radicals who balked. Chautemps resigned, and for several days there was some doubt over who would follow. Ultimately it was settled through a revival of the Popular Front coalition, and Léon Blum found himself premier for a second time. Blum’s second term would be far less successful than his first. The international environment now dictated that France rearm as quickly as possible, and his cabinet issued an ambitious economic plan that in some ways tried to duplicate the Four-Year Plan that Hitler’s government had put into effect two years earlier (see Chapter 12). The strategy called for new taxes, including a special levy on capital, plus an expansion of the currency through the use of special non-gold-based credit notes. Realizing that such measures might cause even more capital to flee the country, Blum announced that exchange controls were needed. He approached US Treasury Secretary Henry Morgenthau about this, and concluded that the Roosevelt administration would not object. However, when he went before the Senate he received a stinging rebuff. Blum resigned in early April, to be succeeded by the Radical Édouard Daladier; Blum’s second government had lasted less than a month. Economic distress, military weakness, and political instability reigned through the summer of 1938, just as Hitler chose to provoke another crisis over the Sudetenland. The French army, although growing, was in ­disarray,

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and the air force possessed no more than fifty modern combat planes. “Should war break out,” the commander of the French air force confided to the French ambassador to Berlin, “there won’t be a single French plane left within a fortnight!”6 The Bank of France’s gold reserves continued to decline as investors searched for more secure markets outside the country. Nor was Britain in much better shape—with an army consisting of no more than two divisions, it had no effective means of projecting power onto the continent. Worse, over the summer depositors in the Bank of England started moving their gold out of the country, leading the British government to resort to a 10 percent devaluation of sterling over the next several months. Although negotiations dragged on for weeks, nobody—least of all Hitler—believed that Britain and France would declare war. The only question was whether Germany would win the Sudetenland through diplomacy or force. The former proved to be the case, and when Chamberlain and Daladier flew to Munich in late September the outcome was practically predetermined—at the Munich Conference Czechoslovakia was forced to agree to cede its mountainous border region to Germany. Chamberlain hoped that since Hitler’s most recent demand had been met, the way would now be clear for close economic cooperation between Britain and Germany. In October 1938, just weeks after the Munich Conference, Sir Frederick Leith-Ross approached a German trade delegation with wide-­ ranging plans to stimulate reciprocal trade and even to draw France and Italy into a European commercial agreement. Sounding much like Briand in 1929, he warned that unless the four powers worked together the entire continent might fall under US domination. These negotiations took place alongside talks with the United States, which yielded an Anglo-US trade agreement in November (see Chapter 10). But even as British policymakers hailed that agreement as a great demonstration of Anglo-American unity, they continued to press for a deal with Germany. British industrialists, particularly in the still-struggling export industries, remained convinced that their economic salvation lay not in liberalized trade with the United States, but in a partnership with Germany. Their efforts bore fruit with the conclusion in March 1939 of the Düsseldorf Agreement. In this understanding, signed by leaders of the Federation of British Industries and its German counterpart, the Reichs­gruppe Industrie, both sides pledged to avoid “dangerous competition” on world markets by coordinating their export activities.7 France, meanwhile, was in full recovery by late 1938. Daladier presided over a center-right coalition, many of whose members had been horrified by the Popular Front. They cheered when, in May, Daladier announced that the forty-hour workweek would not be enforced in any defense-related industry. Almost immediately the massive outflow of capital that had plagued the French economy for the past four years came to a halt. This, combined with a third devaluation of the franc, allowed the government to embark on the most ambitious rearmament program yet, with thirty-seven billion francs

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earmarked for the armed forces for 1939. That fall Daladier went further. At the beginning of November he brought a new finance minister into his cabinet—Paul Reynaud, who was neither a Socialist nor a Radical, but a member of a moderately conservative party called the Democratic Alliance. Reynaud immediately called for drastic action to undo the Matignon Agreements, including across-the-board abolition of the forty-hour week and reductions in overtime wages. The trade unions, outraged, planned a general strike for November 30, but after Daladier announced that he would call out the army to deal with any labor unrest French workers stayed at their jobs. The combination of high defense spending and the relaxation of the Matignon Agreements restored business confidence and sparked an economic revival that lasted right up to the outbreak of the war. Between November 1938 and September 1939 gold returned to France to the tune of 25 billion francs. Per capita GDP expanded by more than 7 percent (see Figure 10.1), while unemployment fell nearly 17 percent. Bank deposits, which had grown only sluggishly since 1936 (by 36 million francs in 1936–1937, and 640 million in 1937–1938) jumped by 4.3 billion francs. These statistics were matched by equally impressive ones in the area of armaments. France in 1939 produced 2,000 warplanes, twice the number that had been built in 1938, and production of tanks and heavy artillery increased comparably. Indeed, by mid-1939 French production of tanks and aircraft had exceeded that of Germany—although nobody in France knew it at the time. Still, France in the final months before the outbreak of war suffered from some serious limitations. The fact that France had exceeded German production of certain types of armaments did not make up for the massive head start the German armed forces had. France in 1939 had only the third-largest army in Europe, behind Germany and the Soviet Union. In terms of naval and air power it ranked fourth, behind Germany, the Soviet Union, and Great Britain. Of the 2,000 warplanes produced in 1939, fewer than 500 were ready for service when the war began; the Germans, by contrast, had more than 3,000. Also, thanks to lack of investment since the early 1930s much of French industry was obsolescent; France’s iron and steel industry, which in the 1920s had set the standard, was far less efficient than Germany’s. The same was true of armaments plants, some of which were still building tanks and aircraft using files and hammers. Worst of all, business confidence had been purchased at the price of labor discontent. Just as the French middle class had regarded the Popular Front as the vanguard of social revolution, French trade unions viewed the Daladier government as the epitome of reaction, the plutocrats who sought to rob workers of their hard-fought gains. France would go to war a deeply divided country. Daladier’s willingness to take bold steps to promote French recovery was driven by a belief in the weeks after the Munich Conference that war with Germany was inevitable. Chamberlain’s government continued to hope for some kind of arrangement, as evidenced by his support for negotiations ­between

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British and German industrialists. However, the chances for a meaningful settlement appeared to decline markedly on March 15, 1939, when, the day before the signing of the Düsseldorf Agreement, German troops marched into the Czechoslovakian provinces of Bohemia and Moravia. Already shorn of the Sudetenland, which had provided the country’s most defensible border, Czechoslovakia’s independence was snuffed out in less than a day. The occupation demonstrated once and for all that Hitler’s oft-repeated claim that he was interested only in bringing Germans “home” to the Reich was a lie, and it was followed almost immediately by German demands for concessions from Poland. Danzig, unjustly taken from Germany in 1919, had to be restored, along with much of the now-Polish territory surrounding it. At this point even Chamberlain was forced to admit that appeasement was no longer possible. Two weeks later the British and French governments pledged to support Poland in the event of a German attack. Britain’s newfound determination to resist German aggression was reflected in the pace of rearmament. In the face of Treasury protest, Chamberlain’s cabinet allocated an additional £1 billion to the defense budget for each of the next three years. Production of aircraft was stepped up significantly, so that Britain produced 5,797 warplanes between January and September 1939—far more than Germany was able to build during that period. And to the immense relief of the French, the cabinet in April announced plans for a massive expansion of the army, from five divisions to thirty-two. Faster rearmament, however, was only one of the demands placed on Britain in early 1939. Preparation for a possible war with Germany also meant trying to organize continental nations into some kind of coalition, so during the last months of peace His Majesty’s government was engaged in serious negotiations with countries such as Belgium, the Netherlands, Turkey, Greece, and Romania. All were interested in preventing further aggression, but needed weapons, resources, and, most of all, money. Eastern European nations in particular needed to be weaned from trade with Germany, and asked for British promises to purchase tons of wheat from Romania, as well as tobacco from Greece, Bulgaria, and Turkey. Most ended up getting far less than they had hoped; the Poles, for instance, asked for a loan of £60 million, but came away with only around £10 million plus some obsolete British aircraft. The main reason for this parsimony was that this massive campaign of rearmament and foreign aid took place against a backdrop of dwindling gold reserves. As mentioned earlier, investors began sending their gold out of the country in mid-1938, and they did so at an even faster rate after the Munich Conference—reserves fell by £100 million from October through the end of the year. The rearmament campaign led to even greater gold loss since so many of the resources that went into building new planes, tanks, and ammunition had to be imported, meaning another £188.5 million were drained away by the end of July 1939. All in all, the period from April 1938 to July 1939 saw the loss of 40 percent of the Bank of England’s reserves.

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All of this led Chamberlain to hope up to the last moment that Hitler might be deterred by British and French resolve. As late as July 30 Chamberlain wrote that the German dictator had decided to “put Danzig into cold storage” since he realized that it was now impossible to “grab anything else without a major war.”8 The prime minister believed that Germany, for all its military might, had no reasonable chance of winning such a war. It would fight without allies, for not even Mussolini seemed inclined to go to war to satisfy German ambitions in eastern Europe. Blockaded by the Royal Navy, Germany would be cut off from its major trading partners, so the National Socialist regime would find it increasingly difficult to feed its people. Best of all, negotiations were well under way for a military convention with the Soviet Union, which had been calling for unified action against Germany since 1934. Caught between France’s Maginot Line in the west and the Red Army in the east, it would be only a matter of time before Hitler’s armaments-based economy would collapse. Thirty-three days later Hitler proved him wrong. On August 24 the Soviet Union abruptly announced that it had concluded a nonaggression pact with Germany. On September 1 the German Army entered Poland, and two days later Britain and France declared war on Germany. The war that had been so long dreaded in London and Paris had finally begun.

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Although the rise of militant nationalism in Germany and Japan during the early 1930s certainly made war more likely, there was nothing inevitable about another global conflict. Both the ultranationalists in Tokyo and the National Socialists in Berlin were initially forced to share power with more moderate elements—in the case of the former, reformist civilian bureaucrats; for the latter, conservatives and industrialists. Had the regimes not done better than their more liberal predecessors in overcoming unemployment and other symptoms of the Depression, they likely would have shared their fate. Moreover, had the democracies been focused less on seeking domestic solutions to their own economic woes they might have cooperated to uphold the international order. Instead 1936 would mark a turning point for both Germany and Japan: the year when both regimes pushed aside their former partners in power and set into motion the process that would plunge the world into war only three years later. Although Hitler’s government had managed practically to eliminate unemployment by 1936, the country in that year was heading toward a new crisis. The breakneck pace of rearmament had drained Germany’s supply of raw materials as well as the foreign currency necessary to purchase them from abroad. In August the government estimated that even if imports were limited to the bare minimum necessary for the armed forces, the country would face a foreign-exchange deficit of 200 million RM; if the demands of the rest of German industry were satisfied the deficit would balloon to 750 million. Faced with a lack of iron ore, petroleum, and other vital resources, factories 162

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were unable to fulfill their military contracts, and in 1936 began laying off workers and reducing hours of operation. Hitler’s minister of economics, Hjalmar Schacht, as well as many industrialists, believed that the time had come for Germany to return to the international economy. This meant calling a halt to rearmament, directing resources toward the production of manufactured goods for export, reducing trade barriers, agreeing to the terms of the recently signed Tripartite Agreement (see Chapter 10), and devaluing the reichsmark so as to bring the price of German products in line with those of the United States and Great Britain. The army, however, had other ideas. A new plan issued in June 1936 called for a force of 3.6 million men organized into 102 divisions. Three of these would be armored (Panzer) divisions, each equipped with more than 500 tanks, while seven more would be motorized infantry or light mechanized units, each with more than 200 armored fighting vehicles. The total cost for this was estimated at 35.6 billion RM, to be spent over the next five years. Publicly Hitler appeared to vacillate between returning to the world economy and accelerating the pace of rearmament. Schacht concluded that the Führer might be more likely to be persuaded by a fellow National Socialist, so he recommended that responsibility for foreign currency allocation be placed in the hands of Hermann Göring. Hitler quickly took that step. A flying ace from World War I who already held the positions of minister of aviation, minister of forestry, and president of the Reichstag, Göring was one of the most powerful figures of Hitler’s inner circle. More importantly for Schacht, he had a reputation as a moderate. Göring knew almost nothing about economics; propaganda minister Joseph Goebbels called him “something of an amateur” while predicting that he’d “make a lot of fuss.”1 Perhaps Schacht believed that because of this ignorance Göring would rely on him for guidance. In any case, it was a mistake he would soon regret, for by the end of the year the vain and ambitious Reichspräsident would have almost complete control over the German economy. In the short term Germany would have to resort to temporary expedients to solve its raw-materials crisis, and an opportunity presented itself that summer. A civil war broke out in Spain in July, with Nationalist forces under General Francisco Franco rebelling against a Popular Front government that had been elected several months earlier. Hitler immediately offered assistance to Franco, and in the coming months nearly 17,000 German troops were dispatched to Spain, along with large numbers of aircraft, tanks, and other military equipment. By the time the war ended in victory for Franco in spring 1939, the cost of Germany’s intervention had come to more than 575 million RM. Why would Hitler have assumed this massive expense at a time when the country’s resources were already being stretched to their limits? There were several reasons, including a desire to provide German troops with battle experience and to prevent the establishment of another pro-Soviet regime in

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­ estern Europe. (Blum’s Popular Front government, it should be rememw bered, had taken office in France in June.) However, the economic motive cannot be ignored. Since the Loyalists held Spain’s reserves of gold and foreign currency it was impossible for Franco to pay for German aid in the traditional form. However, the Nationalists did control parts of the country that produced resources that Hitler very much needed—iron, copper, pyrite, and other mineral ores. The first shipment of Spanish copper ore arrived in Germany in August 1936. By 1938 the Reich was the leading foreign consumer of Spanish products, with over 40 percent of Spain’s exports going to Germany. Yet increased imports from Spain could never come close to satisfying Germany’s massive needs. The Reich produced less than a third of the iron ore consumed by its steel industry, and for other essential resources such as petroleum and rubber Germany was entirely dependent on imports. For Schacht the only course of action was to reintegrate the country into the global economy. Hitler and Göring had other ideas, and these were expressed in the Four-Year Plan, which was unveiled early in September. The publicly stated goal of the plan was for Germany to achieve self-sufficiency; as the Führer put it in his opening address at the annual NSDAP party rally at Nuremberg, the country “must be completely independent of foreign countries with respect to those materials which we are capable of obtaining ourselves in any way with the aid of German ability.”2 The means by which this goal would be achieved varied. The government would step up its campaign to develop synthetic versions of materials for which Germany had traditionally depended on imports. According to the plan, by 1940 such synthetics would address all of the country’s oil needs, as well as half of its rubber and a third of its textiles. Synthetic alternatives were to be pursued regardless of cost; if private industry would not rise to the challenge, then the state would step in. In fact, less than a year later the government established the Reichswerke Hermann Göring, an enormous industrial facility that specialized in processing the low-grade iron ore that was produced within Germany, which private steel firms judged uneconomical. Almost immediately the organization began taking over other companies and branching into other areas, so that by 1938 it was the third-largest concern in the country. Most of the burden of the quest for autarky fell on the German people themselves. They were exhorted to save and collect scrap metal, to feed themselves by planting gardens, and to find substitutes for favorite foods produced abroad: dark whole-wheat bread instead of white rolls, pork instead of beef, margarine instead of butter. There was a great deal of government coercion involved as well. To cope with the increasing shortage of labor, workers lost their freedom to change jobs, and were obliged to carry records of their employment with them wherever they went. To address the chronic shortage of foreign exchange, all gold and foreign currency was subject to confiscation by the state, with the SS (Schutzstaffel ), originally Hitler’s personal bodyguard

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but by this time a huge and growing “state within a state,” overseeing the collection. To withhold assets amounted to “economic sabotage” punishable by death; Hitler suspected that “international Jewry” was behind such activity, and promised that the entire Jewish community in Germany would be held responsible if it continued to occur. At the top of this gigantic endeavor was Hermann Göring, who was named plenipotentiary for the Four-Year Plan. In addition to his direct control over the Reichswerke that bore his name, Göring had the authority to raise or lower prices; to allocate labor, resources, and foreign exchange; and to dictate to farmers what they could grow. Most farms and businesses remained in private hands—only those whose owners were Jews or refused to cooperate were subject to expropriation—but the regime was fully directing the economy. As the National Socialist Party newspaper put it, National Socialism “lets capitalism run as the motor, uses its dynamic energies, but shifts the gears.”3 But while the publicly stated objective of the Four-Year Plan was self-­ sufficiency, the secret goal was foreign conquest. Hitler understood that Germany could never achieve autarky without Lebensraum, and Lebensraum could be obtained only through war. This meant that armaments would continue to be the regime’s top priority, to which all other areas of the economy would be subordinated. By 1940, Hitler insisted, the armed forces had to be fully prepared for war. Schacht and certain industrialists quickly understood the import of these developments. Up until this time they had been regarded as valuable partners in the New Order, and now they were being reduced to minor functionaries. Still holding the posts of economics minister and head of the Reichsbank, Schacht continued to wield some clout—or at least he thought he did. In August 1937 he warned that the Four-Year Plan was leading Germany toward disaster, and tried to organize an effort among the steel producers of the Ruhr and Rhine valleys to resist government controls. The movement went nowhere as Göring, with a combination of threats and promises of government contracts, cowed the industrialists into silence. When Schacht resigned as minister of economics that November, Hitler invited the Reichspräsident to add that to his long list of titles. In the short term, at least, Schacht’s predictions of disaster seemed overwrought. Indeed, the first half of 1937 saw a 25 percent increase in German exports, which temporarily alleviated the shortage of foreign exchange. However, as the global recession set in that fall, reserves of gold and foreign exchange dwindled to practically nothing. By the end of the year Germany faced a severe steel shortage since there was insufficient exchange to purchase high-grade iron ore from abroad, and the Reichswerke Hermann Göring’s efforts to refine low-grade ore had not yet borne fruit. The shortage played havoc with the arms industry: aircraft production stagnated, construction of vessels for the navy was delayed, and the army was forced to admit that its projections for expansion would not be met until 1941 at the earliest.

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The changed circumstances had a direct effect on Germany’s foreign policy. Up to this point Hitler had spoken of grandiose plans for massive expansion of all of the armed forces, including a modern battle fleet and a fourfold expansion of the Luftwaffe. Since none of this could be accomplished quickly, it appeared that his intended war for Lebensraum was to take place many years in the future. But now the Führer faced a conundrum—he had determined that only war could solve Germany’s long-term economic problems, but in the meantime preparations for war were making those problems worse. In late 1937, therefore, he altered his timetable. In a secret meeting in the Reich Chancellery on November 5 Hitler reiterated to the heads of the armed services his belief that only through war could Germany achieve self-sufficiency. Such a war might come in the near future if the opportunity presented itself—for example, if France were to fall into civil disorder or to be embroiled in a war against Italy. However, the war would have to be undertaken, at the latest, during the period 1943–1945; after that point the country might at any time be threatened with a crisis in which there would be no foreign exchange available for the importation of foodstuffs. Unless Germany’s “problem of space” had been solved by that time, 1943–1945 would mark the “waning point of the regime.”4 As it turned out, Hitler was prepared to move much sooner than that. Despite warnings by General Ludwig Beck, chief of the general staff, that the army remained incapable of waging war, he made a second bid for control of Austria. Rather than organizing a coup, as he had tried to do in 1934, he simply sent troops into Austria on March 12, 1938. He argued—correctly, as it turned out—that the situation was very different from four years ago. Mussolini, who had moved to block annexation then, was now a friend. Britain, the Führer predicted, was unwilling to risk war over Austria, and France was unable. The move, therefore, met with no resistance. The following day the Anschluss (union) was formally announced; Austria was erased from the map of Europe. There is little doubt that ideological factors impelled the act; Hitler, like most German nationalists, had been talking about an Anschluss between the two countries since the end of World War I. However, the annexation so perfectly addressed Germany’s immediate financial needs that an economic motive cannot be overlooked. Austria possessed certain important raw materials in abundance—wood, lead, coal, and zinc, but most importantly an annual output of 1.8 million tons of high-grade iron ore. The country had a highly developed, if underutilized, industrial plant that, when added to Germany’s, expanded the Reich’s productive capacity by just under 8 percent. Austria’s 400,000 unemployed workers helped to address Germany’s labor shortage. Best of all, the country held 230 million RM in foreign exchange, and a further 75 million RM in gold—enough to cover Germany’s needs for at least the next several months.

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Immediately after the Anschluss Hitler began making demands that Czechoslovakia cede its mountainous German-speaking border region, the Sudetenland. For several days in May, in fact, German forces were massed along the Czech border. The final directive to the army for the operation (codenamed Case Green) made it clear that this was no bluff, and that once again economic factors provided at least part of the motivation. The instructions specified that no industrial installations be damaged in the attack; these were to be integrated into the German economy as quickly as possible. The crisis of May 1938 passed when it seemed likely that Britain and France would fight for the defense of Czechoslovakia, but war was very much on the minds of the National Socialist leadership that summer. The seizure of Austria eliminated the bottleneck on steel production, allowing the regime to double the armed forces’ allotment of steel. In the expectation that Britain and France would be the leading adversaries in the upcoming conflict, Hitler ordered mass production of a newly developed medium bomber, the Ju-88, as well as construction of the Westwall, a defensive line along the border with France, which absorbed 5 percent of the steel and 20 percent of the cement produced in Germany that year. Göring in early July summoned leading industrialists to his estate for a meeting at which he announced that all other concerns must now be subordinated to the need to prepare for war. This would entail great sacrifice in the short term, but victory would bring the prosperity and profits that would naturally flow from German domination of the continent, if not the world. If anyone failed to cooperate, the Reichspräsident would not hesitate “to take away the shirker’s property and life with one stroke of a pen.”5 The dispute over the Sudetenland flared up again in September, and this time the British and French were prepared to apply economic pressure against the Reich. London cut off all shipments of copper, lead, zinc, and tin, while France stopped all exports of iron ore and scrap metal. The two powers also pressed Romania and Yugoslavia to stop selling Germany grain, oil, bauxite, and other resources. This, along with a last-minute peace proposal by Mussolini, likely caused Hitler to step back from war at the end of September, although Czechoslovakia was obliged to give up the Sudetenland after the infamous Munich Conference of September 29–30. Meanwhile another economic crisis had begun to develop that summer as the effects of the annexation of Austria started to wear off. Once again the Reich faced shortages—of raw materials, of foreign exchange, of labor—and given the demands of the armed forces inflation seemed inevitable. There appeared little chance that the optimistic goals for rearmament would be met. Once again Schacht stepped forward to warn Hitler that disaster beckoned unless the regime slashed spending and took steps to return to the global economy. The National Socialist government responded to this latest crisis as it usually did—through coercion and brutality—and Germany’s Jews would be the

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first victims. Three days after the Munich Conference, Göring announced at a secret meeting that “Jews must now be driven from the economy” by sending them to concentration camps or pressuring them to emigrate—leaving their assets behind for the regime to take, of course.6 Thus began a systematic persecution that culminated in Kristallnacht, a night of terror on November 9–10, in which all over Germany synagogues were burned, Jewish-owned stores looted, and Jews beaten or imprisoned. These measures had their desired effect: by the end of the year more than one billion RM in Jewish assets had fallen into the hands of the regime. By September 1939 more than 200,000 German Jews had fled the country. These would come to be regarded as the lucky ones. This influx of wealth allowed the resumption of the armament campaign, so that as early as mid-November Göring was talking about a fivefold increase in aircraft production and a threefold increase in munitions. In January Hitler suddenly decided that the impending war against Britain would require a much-expanded navy, and authorized a new campaign of warship construction. By 1945, he promised, the German Navy would be able to meet the British fleet with a force of ten battleships, four aircraft carriers, and hundreds of other vessels, including 249 submarines. When an exasperated Schacht continued to object, Hitler removed him as president of the Reichsbank. “You don’t fit into the National Socialist picture,” the Führer informed him.7 Schacht’s departure left no advocate of economic liberalism in any position of responsibility in the regime, and those industrialists who had remained skeptical of National Socialist planning quickly fell into line. Market competition virtually disappeared in Germany; what was most important was influence. Having connections to the regime meant receiving government contracts, and with them came allocations of scarce raw materials, foreign exchange, and labor. Failure to cooperate with the government meant isolation, and isolation meant bankruptcy—or worse. At Munich Hitler had settled for the Sudetenland, but there is little doubt that he always intended to bring the rest of Czechoslovakia under his control. He had long regarded it as an unnatural creation of the Versailles treaty, destined to be absorbed into the new Germany, but economic conditions in early 1939 made the quick seizure of the Czech lands imperative. On March 16 the German Army rolled across the border, encountering no resistance from the dispirited Czechs. Hitler declared Bohemia and Moravia to be a protectorate of the Reich, while the Slovaks were allowed to form a nominally independent satellite state. Like the Anschluss, the annexation of the Czech lands provided a rich haul. Their capture netted nearly 75 million RM in gold and £25 million sterling, in addition to stocks of copper, lead, nickel, aluminum, tin, and zinc. Bohemian and Moravian steel mills held a ten-month supply of high-quality iron ore. The added productive capacity of Bohemia and Moravia made Germany the world’s second largest industrial economy; 15 percent of the world’s productive capacity now lay within the Reich’s borders. Perhaps

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most importantly, before 1939 Czechoslovakia had been the world’s fourth largest exporter of arms—the Škoda Works outside Pilsen employed 150,000 workers—and enough weapons and munitions were sent back to Germany to arm at least twenty new divisions. But the conquest of Bohemia and Moravia could not help Germany with what was becoming one of its most pressing problems by 1939—its labor shortage. True, there were about 100,000 unemployed Czechs and roughly two-thirds of these were recruited for jobs in Germany over the next six months, but the country’s need for workers was much greater than that. In the previous December the Ministry of Labor revealed that the economy was short of about one million workers. The regime issued increasingly draconian labor regulations designed to keep employees from switching jobs, but these were largely ineffective. Armaments firms had little choice but to attract new workers by offering higher pay, so that industrial wages in 1939 were on average 10 percent higher than they had been four years earlier, and even higher than they had been before the Depression. (Although it must be said that the shortages brought about by tight import controls meant the higher wages usually did not translate into improved living standards.) It was in agriculture that the dearth of labor was most keenly felt, as farm workers routinely abandoned the countryside for better-paying industrial jobs. By 1938 there were nearly a half million fewer agrarian workers than there had been in 1933—an ironic fact given the way the German farmer was idealized and celebrated in National Socialist rhetoric. Equally ironic was the fact that although the regime spoke about achieving self-sufficiency under the Four-Year Plan, agricultural imports increased by 50 percent between 1936 and 1939. Nearly a third of Germany’s food supply now came from southeastern Europe (in 1932 that figure had been only around 10 percent). Even with these imports the Ministry of Agriculture was projecting food shortages for 1940, simply because there were not enough workers to bring in the autumn harvest. The German economy had become even more closely tied to that of southeastern Europe in the months following the Anschluss. In 1937 only 26 percent of Hungary’s imports and 32 percent of Yugoslavia’s came from the Reich; by 1939 those figures were 44 and 43 percent, respectively. But the point of Hitler’s agenda had been to avoid dependence on foreign trade, subject as it was to international economic conditions and the whims of other governments. To be sure, Berlin sought to use economic leverage to influence the region’s politics, sending agents abroad—ostensibly as part of trade missions—to disseminate propaganda. However, as the previous chapter illustrates, the countries of that region continued to look to Britain and France for economic and military assistance. Economic penetration, as it turned out, did not necessarily lead to political domination. Germany’s precarious position by mid-1939 inclined Hitler toward further aggression; mere weeks after the destruction of Czechoslovakia he renounced

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Germany’s 1934 nonaggression pact with Poland and began demanding the return of the Baltic port of Danzig, as well as a secure land corridor to the city. He understood that this could well bring war; indeed, the British and French guarantees of Poland issued at the end of March suggested that it was at least a strong possibility. If such a war occurred Germany would naturally be cut off from trade with those nations and their colonies. In addition, the Royal Navy could be expected to impose a blockade on German ports, just as it had in 1914. Germany, in other words, would be forced to rely only on central and eastern Europe for those resources that were not produced within its borders. Such considerations make it easy to see why the National Socialist regime made overtures to the Soviet Union in mid-1939, a development that was regarded as shocking at the time. As seen in Chapter 9, trade relations between the two countries had come to a virtual halt in 1936 because Hitler had refused to export weapons technology in return for shipments of oil, grain, and other materials from the Soviets. At the time he had held out hope that Britain might remain aloof from continental affairs and would thus be Germany’s primary source of strategic imports. By early 1939 he had realized that London would be an implacable enemy, making a partnership with the Soviet Union a natural choice. Talks between Soviet and German diplomats began that spring, but Stalin needed some persuading—since 1934, after all, he had been intent on forming a coalition with Britain and France to deter German expansionism. However, by late July he had concluded that the western powers were less interested in containing Hitler than they were in channeling his aggression eastward. In August the two sides concluded first a trade agreement and then a neutrality pact. The renewed trade relationship between Germany and the Soviet Union went a long way toward addressing Hitler’s economic needs. Over the next twenty-two months nearly a million tons of oil and other petroleum products crossed the border into Germany, along with massive quantities of timber, grain, soybeans, cotton, oil (from vegetables, fish, and whales), and metals such as chrome, manganese, molybdenum, wolfram, and nickel. The Soviets profited from the relationship as well. The Soviet armed forces had grown tremendously over the past ten years, but technologically they lagged behind those of the rest of the industrialized world. Under the August 1939 trade agreement Berlin pledged to export nearly sixty million RM in advanced weaponry to the Soviet Union. The very army that would eventually repel a German invasion would do so, to a great extent, with weapons systems based on the enemy’s technology. The economic and political agreements with the Soviet Union emboldened Hitler to order an invasion of Poland, knowing full well that Britain and France had guaranteed Polish sovereignty. He did so despite the fact that Germany’s armed forces were far from ready for war. The Luftwaffe had no heavy bombers, and the navy possessed only five battleships and fifty submarines. The army was better equipped, but was extremely short on ammunition.

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Moreover, most of Germany’s tanks were approaching obsolescence by 1939; there were only 300 available of the latest model, the Mark IV. As mentioned in the previous chapter, France would produce more tanks and aircraft than Germany in 1939. Given this lack of preparedness, why did Hitler willingly risk war? He did so because he recognized that it was a matter of economic necessity. Unless he wished to reintegrate Germany into the liberal world trading order—an option that he had rejected out of hand in 1936—the only way to prevent an economic collapse was through foreign aggression. “We must not allow the principle to prevail that one can accommodate oneself to the circumstances and thus shirk the solution of problems,” he told a confidant in May 1939. “The circumstances must rather be adapted to suit the demands. This is not possible without breaking into other countries or attacking other people’s property.”8 Once conquered, Poland would be a source of raw materials, food, and labor. And if Britain and France were to make good on their promise to fight on the Poles’ behalf, this was no cause for dismay. Germany was bound to have to fight the western powers eventually, and given the rate at which the British and French were rearming, the Reich’s prospects in a war would only grow bleaker with each passing year. The time had come to take the plunge. Hitler’s invasion of Poland on September 1 was the catalyst for war in Europe, but it was a war that, initially at least, Germany would fight alone. Although just a few months earlier Italy and Germany had concluded a military alliance—the “Pact of Steel”—Mussolini in August informed the Führer in no uncertain terms that Italy was unprepared for war—as indeed it was. The war against Ethiopia had been concluded well over three years earlier, but Italy remained economically exhausted and deep in debt. The war itself had been draining enough, resulting in a budget deficit of some sixteen billion lire, but the regime embarked in 1936 on a campaign of nationalization of failing industries. These businesses were purchased by the Istituto per la recostruzione industrial, which justified state control on the grounds that these industries were vital to national defense. By 1939 nearly the entire Italian banking system and half the iron and steel industry were under the direct control of the state. Of all the nations in Europe only the Soviet Union had a greater percentage of its economy directed by the government. In addition, when civil war erupted in Spain Mussolini immediately began funneling aid to Franco’s nationalists. Eventually some 60,000 Italian soldiers served in Spain, along with tanks and other vehicles, aircraft, artillery pieces, and warships. And whereas Hitler made it clear up front that he expected immediate economic advantages from Franco in return for German aid, Mussolini made no such demands. Only after the Nationalist victory in 1939 did Italy ask for repayment of the debt. Not all of Italy’s economic news was bad. The decision of the French government in mid-1936 to reduce the gold value of the franc forced Mussolini to abandon his stubborn opposition to devaluation, and in October the lira

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was allowed to fall by more than 40 percent. This move helped to sustain an industrial recovery that had first been encouraged by the regime’s preparation for war in Ethiopia. Between 1936 and 1939 Italy’s per capita GDP grew by nearly 12.5 percent (see Figure 10.1). Unemployment dropped accordingly, although wages remained low—the average Italian earned about half what his French counterpart did, or a third of what the average British worker made. Fascist Italy’s primary economic goal remained autarky, and the country continued to pursue this course even after the League of Nations lifted its trade sanctions in 1936. Self-sufficiency was no more possible now, however, than it had been in the early part of the decade. Certainly the Italian empire never lived up to expectations. The regime experimented with growing a variety of crops such as wheat, rice, coffee, and tobacco, and encountered some success, but there was never any possibility that the country’s possessions in North and East Africa could become major sources of food—indeed, they became a net drain on Italy’s food supply. Nor did the empire produce the resources that Italian industry needed most: petroleum, iron ore, and coal. While several corporations were awarded government concessions in Ethiopia, whatever profits they made came from state subsidies; once these were eliminated in 1940 the private sector quickly lost interest. In fact, autarky eventually became a code word for dependence on trade with Germany. In 1936, 18 percent of Italy’s imports came from the Reich; three years later the German share was 29 percent. Italy became an important purchaser of German coal and manufactured products, while exporting agricultural goods—grain, olive oil, and tropical fruits—in exchange. Eventually the country also began exporting workers to its northern neighbor, with half a million Italian “guest workers” arriving in Berlin early in 1939. The increasingly close trade ties between the two countries worried Italian businessmen, who feared that their nation would become an economic colony of Germany. Although Mussolini was no doubt tempted to join Hitler in overturning the international status quo, he recognized that the country in 1939 possessed nothing like the kinds of stockpiles of arms and resources that would be necessary to wage modern war. Moreover, if the British and French imposed a blockade, as they almost surely would, Italy would be cut off from most of the oil, coal, and iron ore necessary even to sustain its industrial sector. In August, therefore, Mussolini broke the news to Hitler: unless Germany could provide massive amounts of economic and military aid, Italy would have to remain on the sidelines. It should be noted that this decision had no impact whatsoever on the Führer’s plans; important military figures in Berlin had already concluded that they were better off having Italy as a neutral rather than a cobelligerent. Japan in the late 1930s found itself in much the same position as National Socialist Germany. Tokyo, like Berlin, believed in the inevitability of a major war, although there was disagreement over which country would be the enemy—for the army it was the Soviet Union, for the navy it was Britain and the

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United States. However, the preparations for that war involved the creation of a substantial zone of Japanese control on the Asian continent, and the pursuit of this threatened to embroil the country in war far earlier than policymakers in Tokyo hoped. At the same time, efforts to create a self-sufficient economic bloc had the perverse effect of increasing Japan’s dependence on foreign imports, at least in the short term. The February 26 incident (described in Chapter 9) had left the army and navy as the dominant forces in Japanese politics, and this reality was reflected in the budget issued by the new cabinet of Hirota Koki, who took power in the wake of the coup attempt. Finance Minister Baba Eiichi fully reversed Takahashi Korekiyo’s efforts to reduce the national debt through spending cuts; instead he increased expenditures by ¥700 million—about a third larger than Takahashi’s total. The armed forces were to receive everything they wanted, but the budget had disastrous effects on the rest of the economy. The flood of new currency onto the market produced immediate inflation, and military production quickly consumed available stocks of raw materials. It seemed for a moment that the country was on the verge of financial collapse, until Army Minister Terauchi Hisaichi resigned, bringing down the Hirota cabinet with him. A new cabinet was formed, headed by a general, Hayashi Senjuro, who began his tenure by denying that the army sought “a radical upheaval in the country’s economic organization.”9 All the army wanted, he claimed, was “a reform consonant with the times.” Hayashi’s finance minister, Yuki Toyotaro—significantly, president of one of Tokyo’s leading banks—unveiled a deficit-reduction package involving increases in taxes and postal rates, as well as ¥300 million in spending cuts. None of the cuts came from the armed forces, outlays for which now constituted more than half the government’s budget. To remedy the shortage of raw materials the military looked to Manchukuo and, increasingly, northern China. Ishiwara Kanji, chief of the Operations Division of the army’s general staff, advanced an ambitious plan to increase the nation’s military production. Much of this involved the expansion of heavy industry in Manchukuo, but it could not be carried out without access to coal, iron ore, and other raw materials from north China. The Hirota cabinet in August 1936 advocated turning northern China into a “special region” under Japanese domination. However, these plans were developed on the assumption that Jiang Jieshi would continue to tolerate Japanese aggression, and by 1936 this could no longer be taken for granted. The currency reforms enacted late in the previous year brought steady improvement to the Chinese economy, and with it came a revival of national confidence. There were growing demands across the nation for resistance to Japanese infringements on Chinese sovereignty. Initially Jiang seemed more interested in fighting communists within China, but his attitude changed after the bizarre Xi’an incident of December 1936, in which the Chinese premier found himself under arrest by forces loyal to

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Zhang Xueliang, the former warlord of Manchuria. Precisely what happened at Xi’an remains unclear, but after two weeks in Zhang’s custody Jiang announced a truce between his Nationalists and the Chinese Communist Party. Instead of fighting one another, the two from this point would join forces to resist further Japanese incursions. Tokyo’s desire for secure economic control over northern China, coupled with the newfound Chinese determination to resist, made a military confrontation inevitable. It occurred in July 1937 at the Marco Polo Bridge, just outside Beijing, when Chinese soldiers fired upon Japanese troops conducting nighttime maneuvers. A firefight ensued, and when both sides called for reinforcements the situation rapidly spun out of control. By the end of July the region from Beijing to Tianjin was a war zone, and the following month the Japanese escalated the conflict still further by sending troops to Shanghai. These developments marked the start of a war that would last until 1945— one that Tokyo euphemistically referred to as the “China Incident.” In the first year Japanese forces won a series of impressive victories, so that by late 1938 nearly all of China’s major cities were occupied, along with nearly all of its industry. Jiang’s capital of Nanjing fell in December 1937, followed by a monthlong rampage by Japanese troops in the city, which left at least 200,000 civilians dead. However, China’s sheer geographic enormity made it physically impossible for Japan’s army to overrun the country. After being forced from Nanjing, Jiang simply relocated his capital farther west and announced continued defiance. He was buoyed in his efforts by aid from abroad—some from the United States (in the form of $25 million in credits), but mainly from the Soviet Union. Between 1937 and 1939 Stalin sent some 1,000 aircraft, 500 military advisers, and substantial quantities of artillery, munitions, and gasoline. By the end of the decade the China Incident had become a stalemate and a source of great frustration in Tokyo. It was a conflict that nobody in Japan had wanted: certainly not the army and navy, who remained focused on a future climactic conflict with the Soviet Union, Great Britain, and/or the United States. Japanese industrialists and bankers would have preferred for the country to remain at peace. Nevertheless, none were willing to sacrifice the country’s interests on the mainland, so they believed they had no choice but to keep up the fight until Jiang came to his senses. However, this war—ostensibly being fought to protect Japan from a new economic downturn—quickly hurt the Japanese economy. The seemingly endless demand of the army for new recruits created a serious labor shortage, particularly in the countryside, so that not enough rice was being grown to support the urban population. The armed forces continued to rack up massive expenses, with military spending increasing by 40 percent between 1932 and 1936. Funded as this was through deficits, inflation soon set in: consumer prices rose by 8 percent in 1937, 10 percent in 1938, and 12 percent in 1939. Japan’s military effort on the continent had top priority for imports of raw materials, leaving little left over for the country’s export industries—

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which, as discussed in Chapter 9, had been the primary engine of recovery during the first half of the decade. As exports fell imports increased, so Japan’s trade deficit ballooned from ¥70.7 million in 1936 to ¥607.7 million the following year. Gold fled the country even more quickly than it had in 1931. The government in Tokyo responded to the looming crisis with more controls. The driving force behind these was a rising generation of reformers in the imperial bureaucracy, many of whom had worked in partnership with the Kwantung Army in Manchuria. Deeply hostile to Japan’s bankers and industrialists, they sought a new order in which selfless service to the emperor would prevail over private interest and greed. In 1937 the power to allocate imported raw materials was vested in a new Cabinet Planning Board dominated by the “reform bureaucrats.” In April 1938 the National General Mobilization Law vastly expanded the Planning Board’s scope, granting it the authority to allocate labor as well as to fix prices and wages. All capital was steered into war industries, while production for export—or even for domestic consumption—practically ceased. Rationing went into effect in 1939, with sugar, flour, matches, and charcoal as the first items affected. It did not take great powers of prediction to recognize the dilemma in which Japan would soon find itself. The continuation of the war in China depended on a steady flow of imports, particularly from the United States. With the country’s reserves of gold and foreign currency dwindling rapidly, such imports could not continue forever. There were, in addition, international political complications. US President Franklin Roosevelt, although he had not invoked the Neutrality Act, had no sympathy for Japan’s efforts on the Asian continent. In early 1939 the administration announced that it did not intend to renew the US-Japanese trade agreement of 1911, which was set to expire early in 1940. This raised the real possibility that the United States might choose to embargo all exports to Japan. Of all these exports, oil was unquestionably the most important. Japan had to obtain nearly all of its petroleum from abroad, and well over half of it (including all of the high-octane fuel needed for aircraft) came from the United States. Shortages of the commodity began almost immediately after the outbreak of the China Incident, and the supply of gasoline for nonmilitary purposes had vanished by the end of 1937. All of this led Tokyo to begin looking in a new direction—toward Southeast Asia. Some had been talking about a “southward advance” (Nanshin) as early as 1936, when a popular journalist wrote a book claiming that the solution of all of Japan’s economic problems lay in control of Indochina, Malaya, Burma, and the Dutch East Indies. If only these countries could be rid of their Western colonial occupiers they could serve as a reliable source not only of petroleum, but also of similarly scarce resources such as rubber and tin, as well as rice to augment Japan’s food supply. By 1938 the navy had drawn up plans for occupation of the region, and saw China’s southern port cities and offshore islands—many of which came under Japanese occupation in

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1938 and early 1939—as natural staging areas for an assault on what became known as the Southern Resource Area. The army became interested as well, as Southeast Asia had become an important avenue for Western assistance to Jiang. Japan was set to embark on a dangerous new course—one that ran the risk of war with Great Britain and the United States.

Chapter 13 War for Plunder, 1939–1941 d

On September 1, 1939, Hitler invaded Poland, unleashing a European war that represented the culmination of his military and economic planning since 1933. His goal was the acquisition of Lebensraum, which would free Germany from dependence on foreign trade for the materials it needed to feed its population and fuel its industrial economy. It was a war the Führer would have preferred to delay until his plans for a world-class military machine were complete, and as long as Britain, France, and the United States remained distracted by the economic crisis of the Great Depression, he believed he had an opportunity to do so. However, that crisis had begun to recede by the second half of the decade, and the former Allies of World War I gradually roused themselves to the growing German threat. At the same time, the German economy ran into economic difficulties of its own, forcing Hitler into a series of aggressive acts—the Anschluss, the annexation of the Sudetenland, the occupation of Bohemia and Moravia, and finally the invasion of Poland—designed to cope with the short-term crises brought on by the regime’s rapid campaign of all-out rearmament. With the attack on Poland he finally crossed the line. The conquest of Poland was completed in about a month, with Warsaw falling to German troops at the end of September. There was nothing surprising about this result. Between the overwhelming numerical and technological superiority of the German armed forces and the sudden entrance of the Red Army into the eastern third of the country two weeks after the start of the campaign (the result of a secret clause in the German-Soviet nonaggression pact), the outcome was virtually foreordained. The British and French, the 177

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Poles’ ostensible allies, were essentially spectators. With the exception of a minor nine-day French incursion onto German territory, they made no effort to interfere with the Polish campaign. Like Bohemia and Moravia had six months earlier, Poland offered rich opportunities for plunder. During their rapid advance German troops succeeded in capturing undamaged the coal fields of Upper Silesia and the steel industry of Teschen. This allowed for a 9 percent increase in Germany’s steel production, while the coal could be traded for imports of high-grade iron ore from Sweden. Even more important was the haul of Polish labor. By the end of the year some 300,000 prisoners of war had been sent to Germany to help bring in the harvest, and the Reich’s Ministry of Agriculture indicated that a further two million Polish workers would be available in 1940. Hitler understood by now that, like a drink for an alcoholic, the overall economic benefits of the Polish conquest would not last long. While trade agreements with the Soviet Union and the other countries of eastern Europe had gone a long way in addressing the needs of the Reich’s armaments industry, food and fuel for civilian consumption were in short supply. The regime had imposed rationing immediately upon the start of the war, and even as the campaign in Poland was winding down the German people received the news that their rations would be reduced. Hoping for a quick end to the war in the west, therefore, Hitler gave orders to his general staff to begin immediate preparations for an invasion of the Low Countries and France. The generals responded with shock; they had not even developed plans for such an operation. Worse still, they estimated that the army possessed sufficient munitions to support no more than a third of its divisions, for at most four additional weeks of campaigning. Its motorized units were dangerously short on fuel, and the Luftwaffe’s stock of bombs was nearly gone. Reluctantly the Führer agreed that the operation should be postponed—as it would be roughly thirty times over the next six months. In Great Britain, Germany’s economic woes produced a sense of optimism in Chamberlain’s cabinet. After years of limiting rearmament in the hopes of protecting the country’s finances—Britain’s “fourth arm of defense”—the cabinet had thrown caution to the wind in 1938. In addition to having the world’s largest navy, the country’s aircraft industry in 1939 produced more planes than did Germany. With the outbreak of war the cabinet began planning for a fifty-five-division army to help defend western Europe from German attack (although no more than ten would be ready by the following spring). The Allies, Chamberlain reasoned, did not have to deal their enemy a knockout blow; they merely had to prevent a German victory. By the spring, the prime minister predicted in November 1939, economic conditions in Germany would either force Hitler to come to terms, or bring down his government. Peace, he wrote, would give the German people “instant relief ” from their distress, and they would soon figure out that they would “not have to give up anything they really care about” in order to get it.1

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On the other side of the Channel, the government of Édouard Daladier did not share Chamberlain’s assessment. Although by this time the French economy had made a full recovery (per capita GDP had finally surpassed its pre-Depression high) and the country was rapidly rearming, even a war against the traditional enemy was not enough to heal the deep fissures that had developed in French politics and society since 1931. Organized labor despised Daladier’s regime as the tool of business, and the Communists—following the line set in Moscow in the days after the conclusion of the ­German-Soviet nonaggression pact—went into outright opposition, denouncing the premier for embroiling the country in an “imperialist” war. Meanwhile the middle and upper classes were terrified over the prospect (unlikely as it might have been) of a return of the Popular Front, while some on the far right feared that the war was inspired by Stalin as a means of softening up the West for an eventual Soviet invasion. Therefore, just as Chamberlain believed that a protracted war would ultimately work to his country’s benefit, the Daladier government looked to decisive action to bring the conflict to a quick end. The French armed forces first advocated a landing in the Balkans to disrupt the flow of grain, oil, and metals to Germany. The Soviet invasion of Finland in December—which, in its initial weeks, went embarrassingly badly for the Red Army—presented a more tempting opportunity. If British and French forces could land in Norway, they might cut off the German supply of Swedish iron ore (which had to be carried by ship along the Norwegian coast), and give aid and assistance to the Finns. Even the British saw some merit in this, but Hitler was sufficiently alarmed by this possibility that he preempted the Allied move with a daring sea- and airborne operation of his own. After three weeks of fighting, most of Norway was in German hands by the end of April. Because the Soviets had brought their “Winter War” against Finland to a successful conclusion in mid-March there seemed little point in continuing the campaign, although not until the end of May were the last Anglo-French forces withdrawn. The Scandinavian fiasco brought down the governments of both Daladier (in late March) and Chamberlain (in early May), but at this point few saw the magnitude of the German victory that loomed just over the horizon. Their successors—Winston Churchill in Britain, Paul Reynaud in France—had reputations as men of action. Hitler’s days of quick victories, they believed, were now at an end. He certainly had no hope of defeating France; indeed, he would be mad to try, since along Germany’s western border the Allies had 144 divisions to the Führer’s 141. Once denied further opportunities for plunder, the dysfunctional German economy would overheat and collapse, with no need for a repeat of the mass slaughter that characterized the western front in the last world war. Yet on May 10 the unthinkable happened. Not only did Hitler launch just the sort of offensive that the British and French regarded as impossible, but he won, overrunning the Netherlands and Belgium and forcing France to sign a

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humiliating armistice within a span of six weeks. The details of the campaign are beyond the scope of this work, inasmuch as it had almost nothing to do with economics. However, it has been one of the most intensely studied episodes in all of military history. Contemporaries saw this as the ultimate triumph of blitzkrieg, the successful integration of aircraft, tanks, and infantry that allegedly enabled the German armed forces to solve the problems of modern warfare. More recently historians have settled on a far more straightforward answer—the Germans, by concentrating their forces at the precise point where the Allies were least expecting an attack (the hilly, heavily forested Ardennes), succeeded in cutting off the bulk of the French and British forces from their lines of supply. Although carried out with ­twentieth-century weapons, there was little new or modern about the strategy; it would have been immediately recognizable by Hannibal or Julius Caesar. But whatever the reason for the German victory, it came as a tremendous shock to everyone, save Hitler and a few of his generals. It also entirely changed the landscape of the war, with effects that reverberated across the globe. The country most directly affected, of course, was France. Under the armistice of June 1940, two-thirds of the country would remain under German occupation, at least until the anticipated defeat of Great Britain. The country would remain nominally independent, however, under a new regime headed by Marshal Philippe Pétain, a military hero from World War I. The new government, based in the city of Vichy, soon announced that its foreign policy would be based on collaboration with Germany in the promotion of a new European order. In domestic policy Vichy France would follow the well-traveled path of the “third way.” Pétain and his followers believed that liberal capitalism and socialism were both foreign ideologies, and equally to be spurned in the new France. “Two basic principles will guide us,” Pétain announced. “The economy must be organized and controlled, and the state’s coordination of private activity must break the power of the trusts and their capacity for corruption.” That way the French economy would be “liberated from its shackles and subordinated to the national interest.”2 The fall of France presented the British government with a stark choice— either to conclude a peace with Germany that would leave that country as the dominant force on the continent, or to continue fighting without European allies. Hitler expected London to opt for the former, but Churchill insisted on continuing the war. As long as the Germans could not invade Britain—and given the strength of the Royal Navy it was hard to imagine otherwise—he saw no sense in negotiating. The worst that Hitler could do was to unleash his Luftwaffe against Britain, which he did that summer in a campaign that lasted until the onset of winter. However, given the German air force’s lack of heavy bombers, this would not be enough to knock the country out of the war. On the contrary, the fabled Battle of Britain ended up in humiliation for Germany as the pilots of the Royal Air Force proved more than a match for their Luftwaffe counterparts.

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If an actual military defeat seemed like a remote possibility, bankruptcy loomed as a much more immediate threat. Even before the fall of France the Treasury was warning that the demands of the war were rapidly draining Britain’s reserves of gold and foreign currency. In August Chancellor of the Exchequer Kingsley Wood informed the cabinet that the anticipated cost over the next year of all British purchases from Canada and the United States alone would amount to £3.2 billion, while London’s reserves amounted to no more than £490 million. Beyond the end of 1940, therefore, the country would have no way of sustaining its economy, let alone continuing to wage war against Germany. This led the prime minister to take a fateful step: to ask for help from the Americans. Chamberlain had never sought the assistance of the United States—“we should have to pay too dearly for that,” he wrote to his sister—but Churchill believed there was no alternative.3 Economically, the war thus far had worked to the benefit of the United States, just as had World War I. With most of the industrialized world producing exclusively for the war effort, and Germany cut off from its overseas trading partners, US trade and investment abroad expanded by nearly $400 million during the first year of the conflict. Moreover, though nearly all Americans were sympathetic to the Allied cause, very few saw any reason for the United States to become directly involved. Indeed, the administration’s priority during the war’s opening months was to seek to mediate a negotiated peace. All this changed, however, with the fall of France. Hitler’s rapid conquests that spring conjured nightmares of a victorious Germany closing off all of Europe to US exports. Indeed, even the Western Hemisphere might be in danger. In 1939–1940 the State Department had taken advantage of the British blockade of Germany to secure reciprocal trade agreements with the nations of Latin America. Yet by that summer disturbing reports were coming from US diplomats stationed in the region. German businessmen were predicting imminent victory for the Reich, and with it the restoration of trade. Given that before 1939 more than half of South America’s exports had gone to Europe, Cordell Hull worried that important trading partners such as Brazil and Argentina might join an emergent German trading bloc. Of course, the fall of France also raised serious questions about US national security. The army in May 1940 could field no more than five divisions (Belgium had possessed twenty-two), and while the US Navy was a significant force, it was almost entirely concentrated in the Pacific as a deterrent against Japan. All of these considerations led to a major reorientation of US strategy over the next year and a half, as the Roosevelt administration began preparing the country for possible entry into the war. A massive national-security bureaucracy emerged, consisting of a long list of new federal agencies such as the Office of Production Management, the War Resources Board, and the National Defense Advisory Commission, all dedicated to mobilizing industry and labor for the purpose of rearmament. Thanks to the institution of the country’s first peacetime draft in September 1940, the army grew rapidly—from fewer

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than 500,000 personnel in May to nearly 1.5 million by mid-1941. Spending on the armed forces, which during the 1930s had hovered around 1.5 percent of gross national product, soared in 1941 to more than 13 percent. At the same time, the administration actively began to assist the Allied powers. In autumn 1939 Congress finally acceded to the president’s request for a revision to the Neutrality Acts that would allow belligerents to purchase arms and ammunition under the terms of “cash and carry.” While on the surface this appeared to be nondiscriminatory, it clearly worked to the benefit of the Allies since, given the British blockade, the Germans had no way of purchasing US arms. In early June, as German forces were overrunning France, Roosevelt went further, declaring thousands of firearms and millions of rounds of ammunition obsolete and authorizing their transfer to Britain. Finally, in early September he transferred fifty World War I–era destroyers to the Royal Navy in exchange for the right to establish air and naval bases on several British possessions in the Western Hemisphere. In pursuing each of these measures, Roosevelt was able to improve relations with groups that had been most hostile to his administration. The business community, which the president had repeatedly blamed for the nation’s economic woes during the 1930s, now found itself being taken into partnership with the federal government and laden with lucrative war contracts. Southern Democrats, who had been livid at the president when he attempted to intervene in the 1938 primaries, were generally pro-British and sympathetic to military expansion. Roosevelt even began to court internationalist-leaning Republicans, tapping two leading GOP figures for positions in his cabinet; one of these was former secretary of state Henry Stimson, whom the Senate quickly confirmed as secretary of war in July. The rapprochement even continued, to a certain extent, during the presidential campaign of 1940. The Republican nominee, a corporate lawyer from Indiana named Wendell Willkie, went on record in support of the administration’s efforts to bolster the nation’s defenses and to assist Great Britain. Issues of foreign policy hardly came up at all until the final weeks of the contest, when Willkie, lagging in the polls, began to accuse the president of having a secret plan to bring the country into the war. Still, he never criticized any of the administration’s foreign-policy initiatives, and after the election—which Roosevelt won with nearly 55 percent of the vote—the Republican candidate became an outspoken supporter of increased aid for Britain. Roosevelt’s 1940 victory was in part the result of an improved economy. Government contracts and orders from abroad caused per capita GDP to expand by nearly 8 percent (it would expand by a further 18 percent in 1941). The surge in business, along with the draft, which drew thousands of young men into the armed forces, sent unemployment spiraling downward; by mid1941 it had fallen below 10 percent for the first time since 1929. At last, the country seemed to have gotten over the Great Depression.

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The results of 1940 encouraged Roosevelt to go even further in his support for Great Britain. Early in December Churchill sent him a long message in which he assured the president that if the United States were prepared to offer material assistance his nation was fully capable of continuing the fight against Germany. Churchill’s most pressing concern was Britain’s rapidly dwindling stock of gold and foreign exchange, which would make it impossible to keep purchasing US products beyond the end of the year. Roosevelt responded by sending Congress a bill to establish what he called “Lend-Lease,” in which he might transfer military hardware—and just about anything else—to any country whose defense the president deemed essential to national security. In the short term this meant that the US government would take over Britain’s outstanding orders from US industry. Isolationists bitterly resisted the proposal, which they argued would destroy any chance of the United States remaining neutral. However, opinion polls suggested that Lend-Lease was popular, and its supporters portrayed it as a means of keeping the country out of war by providing the British with the weapons to defeat Germany on their own. Congress passed the bill in early 1941, and over the next four years more than $30 billion in US goods were sent to Great Britain. The evidence suggests that Roosevelt did not have ulterior motives in proposing Lend-Lease; he did so because he genuinely believed a British defeat would be disastrous for the United States. Churchill agreed, claiming that the measure was “without question . . . the most unsordid act in the whole of recorded history.”4 At the same time, it is clear that Lend-Lease provided Washington with some important advantages. British orders since 1938 had amounted to around $605 million; had they terminated at the end of 1940 the economy might have plunged back into recession. Moreover, Britain’s dependence on US assistance handed the administration leverage over trade, and Hull’s State Department was quick to use it in an effort to coerce London into abandoning imperial preference. In the Atlantic Charter, signed in August 1941, both Roosevelt and Churchill pledged to work toward a global reduction in trade barriers; the following year Britain promised to eliminate its preferential policies after the war. The ripples from Germany’s spring 1940 victories were also felt in Rome. Even if Mussolini had been more determined to bring the country into the war in 1939, he did not possess the same authority in Italy that Hitler did in Germany. The king, Victor Emmanuel III, remained set on neutrality, while Marshal Pietro Badoglio, chief of the general staff, announced that the armed forces would not be ready for war before 1942 at the earliest. As France’s defenses crumbled in mid-May, however, the terms of the debate shifted dramatically. Mussolini argued that Italy could make significant territorial gains at French and British expense, both in Europe and in Africa, but could expect nothing if Germany were to win the war without Italian assistance. Within a week Badoglio had changed his mind, and the king withdrew his opposition.

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In early June Italy formally declared war on Great Britain and France, and ten days later Italian forces crossed the French border. The entry of Italy into the war proved little help to Germany. Within a year Italian armed forces had been dealt serious defeats in East Africa, Libya, and Greece, and in the latter two cases Hitler felt compelled to dispatch German troops in order to prevent a complete collapse. The effect of war on the Italian economy was nothing short of devastating. Britain’s control of Gibraltar and the Suez Canal effectively denied the country two-fifths of its peacetime imports, and trade with Germany was incapable of making up the difference—particularly when it came to petroleum. Further, Mussolini was unable to mobilize the country for war the way that other belligerent nations had done—indeed, of all the major powers in the war, Italy was the only one to see its tax receipts decline between 1941 and 1942. Il Duce had gambled that Italy could sustain itself through conquest, just as Hitler had been doing since 1938. Yet so long as a war for plunder remained beyond the country’s means, his dream of empire was doomed. On the other side of the world, Japanese leaders saw in the German victories an opportunity to bring the China Incident to a victorious conclusion. Although the Japanese army was stretched to the point that it could make no serious further advances into the country, the occupation of the coastal cities was wearing on the Chinese economy. Jiang Jieshi’s government, which was largely financed through taxes on the commercial and industrial sectors, saw its revenues fall by nearly two-thirds at a time when ongoing resistance to the Japanese required an increase of more than one-third in government spending. The United States stepped in to help, however, more than doubling its aid to China in late 1940 and early 1941. Surely, Tokyo reasoned, it was only the expectation of continued support from the outside that was preventing Jiang from pursuing the reasonable course and submitting to Japanese demands. The fall of France and the Low Countries altered the strategic landscape. With France and the Netherlands under German occupation and Britain fighting for its life, European colonies in East Asia—Indochina, the Dutch East Indies, Burma, Malaya, and Singapore—seemed ripe for the picking. If Japan were to control these areas China could be cut off from Western aid, and access to the rich resources of Southeast Asia would alleviate Tokyo’s dependence on imports from the United States. In September 1940, therefore, a new government headed by Prince Konoe Fumimaro pressured the pro-Vichy colonial government of French Indochina into allowing Japanese troops to occupy the northern half of the country. Days later Japan announced that it had concluded an alliance—the Tripartite Pact—with Germany and Italy. The purpose of the Tripartite Pact was to keep the United States from interfering in Europe and Asia by threatening Washington with the possibility of a two-ocean war. In fact, the alliance, coming so quickly on the heels of the occupation of northern Indochina, had the opposite effect. The administration was determined to retaliate with trade sanctions—the only

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really effective weapons it possessed in mid-1940. The Treasury Department recommended an embargo on oil as well as scrap iron and steel, but the State Department feared that such a drastic step would only provoke Japan into attacking British and Dutch colonies. In the end the administration opted to embargo only scrap iron and steel, as well as high-grade aviation fuel. This had little immediate effect on the Japanese economy or its war effort, but it was a clear indication that Washington was prepared to apply economic pressure on behalf of British interests in Asia—and that it would not be deterred by an alliance with Germany. It was on Germany that the world’s eyes were focused in the summer of 1940. Having made himself master of the European continent, what would Hitler do next? To be sure, the conquest of France brought rich rewards to the Reich. France was the world’s second-largest producer of iron ore, and a major supplier of bauxite, the primary component of aluminum. Also, in large part due to the rapid rearmament campaign of 1938–1940, it possessed a significant aviation industry, employing 230,000 people. Immediately the German occupiers set about plundering the country. Within a year Germany had taken thousands of tons of copper, lead, tin, bauxite, and aluminum, and well over a million tons of agricultural products, particularly wheat, oats, hay, and straw. The fall of France also helped to address the Reich’s chronic shortage of labor, as 125,000 French workers voluntarily moved to Germany in search of employment. Nevertheless, it was clear that control of western Europe could not, by itself, solve Germany’s fundamental economic problems. Metropolitan France, no less than Germany, had depended on imports to support its own economy. Ninety percent of its textile raw materials came from abroad, along with a third of its coal and all of its rubber and petroleum. Nor were any of the other countries that Hitler’s forces had overrun in spring 1940 able to feed themselves without imports—foreign foodstuffs accounted for 17 percent of total consumption in France, and 57 percent in Norway. Therefore, when Churchill announced in August 1940 that the Royal Navy would extend its blockade to all those parts of Europe under Hitler’s domination, these countries lost much of their economic usefulness to the Reich. Well before the end of 1940, while the German Army was still flush from its victories, National Socialist leaders were warning that as long as the British blockade remained in place, Germany would begin to starve within two years unless some other source of food could be found. It is little wonder, then, that in his speeches during these months Hitler chose to characterize the war as a form of international class conflict in which British capitalists sought to destroy Germany—where, under National Socialism, economic interests had been made subordinate to the people’s needs. Such considerations led to an even more intense focus on the development of synthetic substitutes. IG Farben, a chemical-industry cartel formed in 1925, took the lead in the development of synthetic oil and rubber. During

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the 1930s it had grown increasingly connected to the National Socialist state as the conglomerate dismissed its Jewish employees and began drawing its directors from among the party membership (many, in fact, belonged to the SS). Early in 1941 IG Farben announced plans for a massive industrial complex dedicated to the production of synthetics, to be constructed outside the town of Auschwitz in occupied Poland. The site was far enough east that it was beyond the range of British bombers; moreover, the complex would have access to slave labor from a nearby concentration camp. Over the next two years that camp would be significantly enlarged, and some 35,000 of its inmates would die in the cartel’s employ—a small fraction of the estimated four million Jews and other “undesirables” who would eventually be killed at Auschwitz before the camp was abandoned in January 1945. However, concerns over Germany’s food supply were foremost, and could only direct Hitler’s attention toward the Soviet Union. Stalin had never intended for the nonaggression pact with Germany to be permanent, or even particularly long-lasting. He hoped that it would free the Führer to engage in a protracted war in the West that would exhaust both sides while giving the Red Army breathing space to build up his military power. The rapid conquest of France, by leaving Germany without enemies on the continent, threw all those plans into disarray. In June 1940 Stalin ordered an emergency program of rearmament and took steps to seize certain territories along the border—Bessarabia, taken from Romania, as well as the Baltic states of Estonia, Latvia, and Lithuania—in order to maximize the amount of land that German invaders would need to cross before reaching Moscow. Aside from these measures, however, the Soviet leader was determined to buy time by doing nothing whatsoever to jeopardize the friendly relations that existed between the two powers. For his part, Hitler seemed to go back and forth on the idea of attacking the Soviet Union. He had long told his supporters that Germany’s salvation lay in the conquest of Lebensraum, and that this would have to come from the east—specifically the fertile plains of the Ukraine. Indeed, during the final days of peace in August 1939 the Führer indicated to the League of Nations high commissioner for the City of Danzig, Carl J. Burckhardt, that an eventual war against Stalin was very much on his mind. “I need the Ukraine,” he told Burckhardt, “so that no one is able to starve us again, like in the last war.”5 But during the first half of 1940 his tone softened, as he recognized that Germany would not be capable of waging war against Britain and France without massive Soviet deliveries of oil, grain, manganese, and rubber. In early March, in fact, he wrote to Mussolini that since the two powers’ economies complemented one another so well, there was no reason why Germany and the Soviet Union could not coexist indefinitely. By the end of 1940, however, Hitler had come to realize that the Soviets could not supply Germany with enough to overcome the country’s shortfall in foodstuffs, let alone to bring the war against Great Britain to a victorious

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conclusion. Moreover, Soviet shipments had begun to appear less as evidence of economic complementarity than of dangerous dependence. Trade with the Soviet Union had taken on such importance that in October Göring issued an order giving contracts with the Russians the same priority as contracts for the armed forces. If Stalin were to decide that his interests lay in cutting off the flow of resources, Germany would be unable to sustain the war effort for more than a few months—and could face starvation within a year. In December, therefore, Hitler issued a directive ordering preparations for an all-out assault on the Soviet Union. The plan envisioned smashing the Red Army along the border, then racing to the interior of the country to capture Moscow. Believing that Stalin’s regime represented nothing more than inferior “Judeo-Bolshevism,” he fully expected it to collapse in a few months. The goal of this war, of course, was the resource-rich Ukraine, which would provide a reliable source of food for Germany. This would necessitate, however, a war of particular brutality. Nearly all of the food grown in the Ukraine was sent to the cities of the Soviet Union to feed the new urban workforce called into existence by Stalin’s industrialization campaign. Feeding Germany, then, meant not only occupying the Ukraine, but preventing its produce from reaching Soviet workers. In other words, it meant implementing mass starvation as national policy. In May 1941 Herbert Backe, an agronomist working for the Reich’s Ministry of Food, put forward this goal in his “Hunger Plan,” by which at least thirty million people were to be systematically starved to death. Operation Barbarossa, Hitler’s invasion of the Soviet Union, was launched in late June 1941. Over the next five months the German armed forces inflicted millions of casualties on the Red Army, which remained equipped, for the most part, with obsolete weapons. German troops advanced deep into the Russian interior, so that by December Moscow lay within sight. Yet the outcome that the National Socialist leadership expected—a quick collapse of the Soviet regime—did not materialize. So effective had Stalin’s ruthless policies been at centralizing his control over the country and eliminating any potential rivals for power that his authority remained unchallenged even in the face of disastrous military setbacks. In December the Germans, already overextended and feeling the effects of the Russian winter, were stopped outside the capital. The illusion of an easy victory was dispelled. The war on the eastern front would no longer be decided by surprise attack and rapid advance—factors that clearly favored Germany. Victory, rather, would go to the side with the greater staying power, and here the Soviet Union, with its vast land mass and its huge population, held the advantage. In the coming months the Soviet government would draw on reserves of manpower and weaponry that Hitler had not known existed. New models of tanks and aircraft, which had existed only in small numbers in mid-1941, began to show up on the battlefield; many of these were based on military technology that had been imported from Germany during the period of the nonaggression pact. The Soviets also

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joined Great Britain as a recipient of Lend-Lease from the United States, with the first shipments reaching the Soviet Union in November. Slowly, the forces that would destroy the Third Reich were coming together. Meanwhile, Japan’s leaders were contemplating drastic steps of their own. Early in 1941 they sent a delegation to the Dutch East Indies to demand that its government sever ties with the Netherlands, conclude a mutual defense agreement with Japan, and agree to increase significantly its oil exports to Tokyo. By June it was clear that the Dutch authorities would not agree to this; the Japanese also suspected (correctly) that the United States was encouraging their resistance. After briefly considering joining the Germans in their invasion of the Soviet Union, the Konoe cabinet decided, therefore, to take another step in its campaign to bring the Southern Resource Area under its control. In July Tokyo presented fresh demands to the government of French Indochina that would allow Japanese use of naval and air bases in the southern part of the country—particularly Cam Ranh Bay, the best natural harbor in Southeast Asia. The French authorities, in no better position to resist than they had been in September 1940, once again submitted to Japanese demands. In the short term, the occupation of southern Indochina could allow Japan to place additional pressure on the Dutch East Indies. In the long term it would provide a convenient staging area for a combined air, land, and sea operation to seize Southeast Asia in its entirety. The problem was that the United States was equally aware of Tokyo’s motives in occupying southern Indochina, and the Roosevelt administration responded by freezing Japanese assets in the United States. The practical effect of this policy was that Japan would be unable to purchase US imports, including the oil that it so desperately needed to continue the war in China. When the governments of Great Britain and the Dutch East Indies followed suit, the Konoe cabinet was placed in a difficult position—if trade were not restored, Tokyo would have to find alternative sources of oil and other strategic materials or watch helplessly as Japan’s war effort, as well as its industrial economy, ground to a halt. For the next four months, therefore, Japanese policy pursued two distinct tracks. The first was a series of negotiations with the United States in the hope that the Roosevelt administration would lift the embargo. Throughout this period Roosevelt’s attention remained focused primarily on the war in Europe. By now ships of the US Navy were actively assisting the British by searching for German submarines in the Atlantic Ocean, leading to a number of instances of US and German vessels exchanging fire. The president hoped above all to delay any war with Japan for as long as possible, in the hope that Germany could be defeated and Tokyo thereby brought to see reason. As a result negotiations went nowhere, with each side refusing to make serious concessions while insisting that it was open to further talks. Frustrated by his failure to restore trade with the United States, Prime Minister Konoe stepped down in October. His successor was, appropriately

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enough, a general, Tojo Hideki. For even as negotiations were taking place, the army and navy had been secretly pursuing the second track: preparing for a massive military operation that would conquer Burma, Malaya, Singapore, the Philippines, the Dutch East Indies, and a number of island chains in the Central and South Pacific. And because the US Pacific Fleet was the only naval force in the region capable of interfering with these plans, a strike force of aircraft carriers was to be dispatched to Pearl Harbor in the Hawaiian Islands, to destroy the fleet from the air as it lay at anchor. Japan’s military leaders hoped that this would paralyze US forces in the Pacific for at least six months, giving Tokyo time to secure both the resources of Southeast Asia and a “strategic perimeter” of islands in the Central and Southwest Pacific. By the time the Americans had recovered from the initial blow, they would face Japanese forces so well entrenched that Washington would see no point in fighting on. In early November Japan’s ambassador to the United States came forward with a final offer to withdraw from Indochina if Washington would agree to resume trade and help to broker a peace between Japan and China. Still preoccupied with the war in Europe, the administration briefly considered accepting, but after consulting the British and Chinese concluded that this would constitute appeasement of Japan. In a sharply worded response sent on November 26, Cordell Hull indicated that the United States would be happy to resume trade once Japan had withdrawn its forces from China. Unsurprisingly, the Tojo cabinet regarded Hull’s message as a rebuff. As soon as the US reply was received, final orders were sent to Japan’s aircraft carriers, which had set sail across the Pacific days earlier. The task force took up a position roughly 250 miles north of Pearl Harbor early on the morning of December 7. At dawn more than 350 Japanese aircraft launched the attack that would bring the United States into the war. The first week of December 1941 would prove to be the pivotal week of World War II. On December 5 the German Army broke off its assault on Moscow—an admission that Operation Barbarossa had failed to bring about the intended collapse of the Soviet Union, and that the war would drag on at least into 1942. Two days later Japan attacked Pearl Harbor, followed four days afterward by German and Italian declarations of war on the United States. What had previously been two unconnected wars—Japan versus China, and Germany versus Great Britain and the Soviet Union—were now welded together into a single global conflict. It was one that resulted directly from the efforts of nationalists in the “have-not” countries to escape their economic difficulties through foreign conquest. It was further fueled by the determination of the leaders of the “have” nations to solve their problems by reducing their exposure to the global economy and focusing on internal, national recovery. At the same time, the events of December 1941 brought about the completion of what Churchill would call the “Grand Alliance” of the United States, Great Britain, and the Soviet Union. Three and a half years of warfare

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remained ahead, but few doubted the ultimate outcome. By any metric—­ access to resources, industrial production, gross domestic product, etc.—the economic power of the Allies outclassed that of the Axis by huge margins. As Churchill would write after the war, “Hitler’s fate was sealed. Mussolini’s fate was sealed. As for the Japanese, they would be ground into powder. All the rest was merely the proper application of overwhelming force.”6 The efforts by Germany and Japan to escape the global economy by building self-­ sufficient empires would fail. Whether a liberal, free-trade order would arise from the wreckage, however, would remain for the victorious Allies to work out.

Conclusion d

Cordell Hull was fond of citing a quotation that he attributed to the ­nineteenth-century French economist Frédéric Bastiat: “When goods don’t cross borders, soldiers will.” There is no evidence that Bastiat ever used these words, although he very likely would have endorsed them. They certainly are a fair summation of the policy that Hull himself pursued throughout his career, and that the United States advocated at the 1944 Bretton Woods Conference and practiced for nearly thirty years after the end of World War II. The idea behind the quote also is largely substantiated by the events of the interwar period. After World War I the governments of all the industrialized powers believed that the key to prosperity lay in a return to the trading order of the nineteenth century. At the same time, their need to appease important interest groups meant that the return could never be complete. No country, not even free-trading Britain, felt that it could dispense entirely with tariffs, and the desire of liberals to return to the gold standard was tempered with fears of deflationary pressures that would bring economic stagnation and high unemployment. Even when currencies returned to gold, worries over inflation led countries like the United States and France to depart from the rules of the classical gold standard. During the 1920s, then, governments followed economic policies that represented a curious blend of liberalism and “third way” measures that were necessary in order to satisfy various domestic constituencies. Yet when the Great Depression struck, nationalists were quick to identify the cause in the former and the cure in the latter. Thus while the specific policies pursued by industrialized countries varied widely, certain common elements could be found in all of them. As the crisis spread from country to country, global commerce and the gold standard increasingly came under attack. Once praised as the engine of economic progress and prosperity, international trade 191

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was now viewed as a source of foreign contagion. More than ever before, the nation’s economy had to be protected from cheap goods from abroad, and saved from reliance on foreign raw materials. Gold, once a symbol of soundness and stability, came to be regarded as “golden fetters” preventing national recovery; instead currency needed to be liberated from it so that the supply of money might be managed in the public interest. Each time a government raised its tariffs or devalued its currency, it increased the pressure on the others to do likewise. This generated considerable hostility, even among nations that had traditionally enjoyed friendly relations. The United States, Britain, and France all blamed one another for their economic problems and, to the extent that they were all guilty of implementing “beggar-thy-neighbor” policies, they were all correct. In one respect, however, there was a great gulf separating the approaches of the “haves,” such as the United States and Great Britain, from the “havenots,” Japan and Germany. While the former enjoyed ready access to most of the raw materials that they needed (either within their borders or in countries that they could more or less dominate economically) the latter could insulate themselves from the vicissitudes of the global marketplace only by conquering new territory. Ultranationalists in Tokyo began speaking of a “New Order” for East Asia, which would unite the countries of the region into a single trading bloc—dominated by Japan, naturally. Similarly, Hitler and his National Socialists claimed that Germany’s salvation lay in Lebensraum, in which central and eastern Europe would be brought under Berlin’s control. Both the ultranationalists and the National Socialists had gained control of their respective governments early in the decade, and by 1936 their success in promoting recovery enabled them to push aside all other domestic contenders for power. The way now lay open for their dreams of conquest to be fulfilled. Of course, under a properly functioning international order the United States, Great Britain, and France—by far the strongest powers even in the mid-1930s—would have cooperated to check aggressive acts by Germany and Japan. But the Depression had caused the governments of all three countries to turn inward and focus on internal recovery. In any case, the economic crisis had so poisoned the relations among the three that there was little hope of meaningful cooperation even if they had been less preoccupied with domestic affairs. The fact that the economic crisis affected the western democracies at different times contributed to their inability to work together. Even in the middle of the decade, when Great Britain had more or less recovered and the US economy was beginning to bounce back, France teetered on the edge of bankruptcy and civil unrest. As a result all three powers stood aloof while Tokyo launched its war against China, and Germany overran Austria and Czechoslovakia. Significantly, it was only in 1939, when France’s GDP finally returned to pre-Depression levels, that London and Paris chose to take a hard line over Poland. By then, however, it was too late to stop Hitler by any means short of all-out war.

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World War II, then, can ultimately be regarded as the logical culmination of efforts by all of the industrial powers to address the Great Depression in isolation from one another. In some ways this supports the argument of Charles Kindleberger, whose book The World in Depression, 1929–1939 attributed the length and severity of the crisis to the failure of the leading nations to develop a cooperative program for recovery. Kindleberger singled out for particular criticism the United States; the country’s economic power, he argued, meant that it was the natural candidate for leadership of the world economy, yet neither the Hoover nor the Roosevelt administration was willing to accept the international responsibilities that such leadership entailed. Had they responded to the crisis by lowering tariffs and acting as a lender of last resort to distressed central banks abroad, through a campaign of overseas lending to particularly distressed countries, he argued, the crisis would have ended far sooner than it did. Kindleberger’s thesis came under fire in 1992, when economist Barry Eichengreen published Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. For Eichengreen, the duration and severity of the Depression was less the result of any lack of international cooperation than it was the reluctance of so many governments to abandon the gold standard. Once individual nations made the decision to leave gold, they began to experience recovery within a year. Indeed, any regime of international cooperation that preserved the connection between currencies and gold would have made the task of recovery even harder than it was. As stated in the introduction, this book does not attempt to explain the Great Depression or to evaluate the effectiveness of the various tactics pursued by different countries to address the crisis. It seeks, rather, to assess the impact of those tactics on the international order. It holds that the failure to cooperate in the face of the economic threat of the early 1930s was a harbinger of the inability of the powers to work together to deal with the threat of aggressive nationalism in the latter part of the decade. Eichengreen may well be correct in his assertion that the gold standard was the primary impediment to recovery. However, each time a country unilaterally devalued its currency, it inflicted damage upon the others—damage that could be fixed only by abandoning gold. On one hand, given the circumstances it is not surprising that most of the world left the gold standard during this period (or, like Germany, found ways around it). Neither is it surprising that the individual decisions to do so generated considerable ill will and made the task of cooperation far more difficult. The system that was established at Bretton Woods and implemented in the wake of World War II, one based on liberal trading relations and stable, convertible currencies, was the creation of leaders who recognized the connection between economic distress and aggressive, militaristic nationalism. During the twenty-five-year period when the system operated—that is, from 1945 until the start of the 1970s—most of the industrialized world experienced

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unprecedented economic expansion. In the United States as well as in France, West Germany, Italy, Japan, and even up-and-coming economies such as Taiwan and South Korea, gross domestic product grew by an average of 4–5 percent every year. Moreover, even though the Soviet Union opted out of the Bretton Woods system, it was thanks in large part to it that the Cold War was also, to use John Lewis Gaddis’s phrase, the “long peace.”1 At no point during that period did industrial powers take up arms against one another. As Hull might have put it, because goods crossed borders, soldiers did not. All of this provides a cautionary tale for the unsettled economic climate of the early twenty-first century. When GDP slows or contracts and unemployment rises, people tend to lose interest in international affairs as all other considerations take a backseat to “kitchen table” issues. Understandably, politicians are inclined to listen to domestic public opinion and are therefore tempted to call for nationalistic measures such as trade barriers, subsidies, and currency devaluation. The economic crisis of 2008 has certainly fostered among Americans a desire to withdraw from overseas commitments, as seen in moves by President Barack Obama to bring an end to wars in Iraq and Afghanistan, and in the overwhelming public sentiment against even limited intervention in the civil war in Syria. On the other hand, the crisis has caused some governments, such as those of Russia and China, to assume more aggressive stances in foreign affairs. Moscow’s recent moves under Vladimir Putin have been particularly ominous and have been driven in part by economic concerns. Between 1998 and 2008 per capita GDP in Russia more than doubled, but the crisis struck harder there than anywhere else in the industrialized world. A third of Russia’s reserves of foreign currency vanished within the first few months as the government scrambled to protect the ruble, and the value of the Moscow stock exchange fell by roughly 80 percent. Putin’s invasion of Georgia in 2008 and his support for pro-Russian separatist movements in Ukraine in 2014 can be explained in part by a desire to exploit traditional Russian nationalism in an effort to distract attention from the country’s economic woes. However, Putin’s aggression against Ukraine has also been driven by fear that Kiev was moving away from its traditional economic dependency on Moscow in favor of closer trading relations with the West. If nothing else, an understanding of the Depression’s role in bringing about World War II reminds us that economic crises can pose grave dangers to the health of the international order. It also suggests that exclusive concern with domestic economic health is short-sighted. Policies that promise recovery at home by imposing costs on other countries may well bring about crises far deadlier than recessions.

Notes d

Introduction 1. Woodrow Wilson, “The Study of Administration,” in Woodrow Wilson: The Essential Political Writings, ed. Ronald J. Pestritto (Lanham, MD: Lexington Books, 2005), 247. 2. Quoted in Will Morrissey, “Theodore Roosevelt on Self-Government and the Administrative State,” in The Progressive Revolution in Politics and Political Science: Transforming the American Regime, ed. John Marini and Ken Masugi (Lanham, MD: Rowman and Littlefield Publishers, Inc., 2005), 71. 3. Karl Pearson, National Life from the Standpoint of Science (London: A. and C. Black, 1905), 54. 4. Theodore Roosevelt, “Confession of Faith,” TeachingAmericanHistory.org, accessed January 15, 2013, http://teachingamericanhistory.org/library/index.asp?document=613. 5. William James, “The Moral Equivalent of War,” Constitution Society, accessed January 15, 2013, www.constitution.org/wj/meow.htm. 6. John Dewey, “The Social Possibilities of War,” TeachingAmericanHistory.org, accessed January 15, 2013, http://teachingamericanhistory.org/library/index.asp?document=2330.

Chapter 1 1. Quoted in Michael Hunt, The American Ascendancy: How the United States Gained and Wielded Global Dominance (Chapel Hill: University of North Carolina Press, 2007), 81. 2. Quoted in Joan Hoff Wilson, American Business and Foreign Policy (Lexington: University Press of Kentucky, 1971), 4. 3. Quoted in Stephen A. Schuker, “American Foreign Policy: The European Dimension, 1921–1929,” in Calvin Coolidge and the Coolidge Era: Essays on the History of the 1920s, ed. John Earl Haynes (Washington, DC: Library of Congress, 1998), 291. 4. Quoted in Phillips Payson O’Brien, “Herbert Hoover, Anglo-American Relations and Republican Party Politics in the 1920s,” Diplomacy and Statecraft 22 (2011), 209. 5. Quoted in David Burner, Herbert Hoover: A Public Life (New York: Atheneum, 1978), 187.

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6. Quoted in Herbert Hoover, The Memoirs of Herbert Hoover, Volume II: The Cabinet and the Presidency, 1920–1933 (New York: Macmillan, 1952), 179. 7. Quoted in Roberta Albert Dayer, “Anglo-American Monetary Policy and Rivalry in Europe and the Far East, 1919–1931,” in Anglo-American Relations in the 1920s: The Struggle for Supremacy, ed. B. J. C. McKercher (Edmonton: University of Alberta Press, 1990), 171. 8. Quoted in Stephen V. O. Clarke, Central Bank Cooperation, 1924–31 (New York: Federal Reserve Bank of New York, 1967), 31. 9. Quoted in Herbert Feis, The Diplomacy of the Dollar, 1919–1932 (New York: W. W. Norton, 1950), 46. 10. Quoted in Hunt, American Ascendancy, 99–100.

Chapter 2 1. B. J. C. McKercher, “Old Diplomacy and New: The Foreign Office and Foreign Policy, 1919–1939,” in Diplomacy and World Power: Studies in British Foreign Policy, 1890–1950, ed. Michael Dockrill and Brian McKercher (Cambridge: Cambridge University Press, 1996), 83–87. 2. Quoted in Benjamin D. Rhodes, “The Image of Britain in the United States, 1919– 1929: A Contentious Relative and Rival,” in Anglo-American Relations in the 1920s: The Struggle for Supremacy, ed. B. J. C. McKercher (Edmonton: University of Alberta Press, 1990), 196. 3. Quoted in Robert Rhodes James, Memoirs of a Conservative: J. C. C. Davidson’s Memoirs and Papers, 1910–37 (London: Macmillan, 1969), 143. 4. Quoted in Anthony Adamthwaite, Grandeur and Misery: France’s Bid for Power in Europe, 1914–1940 (New York: St. Martin’s Press, 1995), 74. 5. Quoted in James, Memoirs of a Conservative, 145–146. 6. Quoted in Adamthwaite, Grandeur and Misery, 81. 7. Ibid., 105–106.

Chapter 3 1. “The Constitution of the German Empire of August 11, 1919 (Weimar Constitution),” German History in Documents and Images, accessed February 13, 2013, http://germanhistory docs.ghi-dc.org/sub_document.cfm?document_id=3937. 2. Quoted in Eric Sutton, ed., Gustav Stresemann: His Diaries, Letters, and Papers, Vol. II (New York: Macmillan, 1935), 272–273. 3. Quoted in C. R. S. Harris, Germany’s Foreign Indebtedness (London: Oxford University Press, 1935), 4–5. 4. Quoted in Peter Duus, “Introduction,” in The Japanese Informal Empire in China, 1895–1937, ed. Peter Duus, Ramon H. Myers, and Mark R. Peattie (Princeton, NJ: Princeton University Press, 1989), xxvi–xxvii. 5. Quoted in Alvin D. Coox, “The Kwantung Army Dimension,” in Duus, Myers, and Peattie, The Japanese Informal Empire, 405–406. 6. Quoted in Philip Morgan, Italian Fascism, 1914–1945, 2nd ed. (Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2004), 65. 7. Quoted in R. J. B. Bosworth, Mussolini (London: Arnold, 2002), 178–179. 8. Quoted in Michael Hunt, The American Ascendancy: How the United States Gained and Wielded Global Dominance (Chapel Hill: University of North Carolina Press, 2007), 100.

Notes  d 197

Chapter 4 1. Quoted in Stephen A. Schuker, “American Foreign Policy: The European Dimension, 1921–1929,” in Calvin Coolidge and the Coolidge Era: Essays on the History of the 1920s, ed. John Earl Haynes (Washington, DC: Library of Congress, 1998), 303. 2. Ibid., 304. 3. Quoted in David Burner, Herbert Hoover: A Public Life (New York: Atheneum, 1978), 234. 4. Quoted in Joan Hoff Wilson, “A Reevaluation of Herbert Hoover’s Foreign Policy,” in The Hoover Presidency: A Reappraisal, ed. Martin L. Fausold and George T. Mazuzan (Albany: State University of New York Press, 1974), 166. 5. Letter from Austen Chamberlain to Ida, June 21, 1931, in The Austen Chamberlain Diary Letters: The Correspondence of Sir Austen Chamberlain with His Sisters Hilda and Ida, 1916–1937, ed. Robert C. Self (Cambridge: Cambridge University Press, 1995), 371. 6. Lester V. Chandler, American Monetary Policy, 1928–1941 (New York: Harper and Row, 1971), 160. 7. Herbert Hoover, The Memoirs of Herbert Hoover, Volume II: The Cabinet and the Presidency, 1920–1933 (New York: Macmillan, 1952), 362. 8. Quoted in Geoffrey Warner, Pierre Laval and the Eclipse of France (New York: Macmillan, 1968), 48. 9. Quoted in Herbert Feis, 1933: Characters in Crisis (Boston: Little, Brown and Co., 1966), 35–36. 10. Ibid., 42–43. 11. Quoted in Lloyd Gardner, Economic Aspects of New Deal Diplomacy (Madison: University of Wisconsin Press, 1964), 7–13.

Chapter 5 1. Quoted in Anthony Adamthwaite, Grandeur and Misery: France’s Bid for Power in Europe, 1914–1940 (London: Arnold, 1995), 131–132. 2. Walter Evans Edge, A Jerseyman’s Journal: Fifty Years of American Business and Politics (Princeton, NJ: Princeton University Press, 1948), 165. 3. Quoted in Neville Waites, “The Depression Years,” in Troubled Neighbours: Franco-­ British Relations in the Twentieth Century, ed. Neville Waites (London: Weidenfeld and Nicolson, 1971), 133–134. 4. Quoted in Robert Boyce, “World Depression, World War: Some Economic Origins of the Second World War,” in Paths to War: New Essays on the Origins of the Second World War, ed. Robert Boyce and Esmonde M. Robertson (New York: St. Martin’s Press, 1989), 72. 5. See, for example, Joanne Gowa and Raymond Hicks, “Politics, Institutions, and Trade: Lessons of the Interwar Era,” International Organization 67 (2013), 439–467. 6. Quoted in Michael Howard, The Continental Commitment: The Dilemma of British Defence Policy in the Era of the Two World Wars (London: Temple Smith, 1972), 97–98. 7. Quoted in Boyce, “World Depression, World War,” 77. 8. Letter from Neville Chamberlain to Hilda, December 10, 1932, in The Neville Chamberlain Diary Letters, Volume 3: The Heir Apparent, 1928–1933, ed. Robert C. Self (Aldershot, UK: Ashgate, 2000), 366–367.

Chapter 6 1. Eric Sutton, ed., Gustav Stresemann: His Diaries, Letters, and Papers, Volume III (New York: Macmillan, 1935), 405–406.

198  d Notes

2. Quoted in Robert Mark Spaulding, Osthandel and Ostpolitik: German Foreign Trade Policies in Eastern Europe from Bismarck to Adenauer (Providence, RI: Berghahn Books, 1997), 246. 3. Quoted in Edward W. Bennett, Germany and the Diplomacy of the Financial Crisis, 1931 (Cambridge, MA: Harvard University Press, 1962), 116–117. 4. C. R. S. Harris, Germany’s Foreign Indebtedness (London: Oxford University Press, 1935), 27. ¯ uchi, “Rural Origins of Japanese Fascism,” in 5. Quoted in R. P. Dore and Tsutomo O Dilemmas of Growth in Prewar Japan, ed. James William Morley (Princeton, NJ: Princeton University Press, 1971), 208–209. 6. Quoted in Alvin D. Coox, “The Kwantung Army Dimension,” in The Japanese Informal Empire in China, 1895–1937, ed. Peter Duus, Ramon H. Myers, and Mark R. Peattie (Prince­ ton, NJ: Princeton University Press, 1989), 409. 7. Quoted in Nakagane Katsuji, “Manchukuo and Economic Development,” in Duus, Myers, and Peattie, The Japanese Informal Empire, 141–142. 8. Quoted in R. J. B. Bosworth, Mussolini (London: Arnold, 2002), 241. 9. Quoted in MacGregor Knox, Common Destiny: Dictatorship, Foreign Policy, and War in Fascist Italy and Nazi Germany (Cambridge: Cambridge University Press, 2000).

Chapter 7 1. Franklin D. Roosevelt, Commonwealth Club Address, September 23, 1932, Teaching AmericanHistory.org, accessed July 22, 2013, http://teachingamericanhistory.org/library /document/commonwealth-club-address/. 2. Franklin D. Roosevelt, First Inaugural Address, March 4, 1933, TeachingAmerican History.org, accessed May 29, 2013, http://teachingamericanhistory.org/library/document /first-inaugural-address-36/. 3. Franklin D. Roosevelt, Address before the Woodrow Wilson Foundation, December 28, 1933, The American Presidency Project, accessed May 29, 2013, www.presidency.ucsb.edu /ws/?pid=14593. 4. Quoted in Michael A. Butler, Cautious Visionary: Cordell Hull and Trade Reform, 1933– 1937 (Kent, OH: Kent State University Press, 1998), 26–27. 5. Quoted in Michael S. Sherry, In the Shadow of War: The United States since the 1930s (New Haven, CT: Yale University Press, 1995), 20–22. 6. Quoted in Butler, Cautious Visionary, 39–40. 7. Quoted in Charles P. Kindleberger, The World in Depression, 1929–1939, 2nd ed. (Berkeley: University of California Press, 1986), 216. 8. Quoted in Irving Fisher, Stabilised Money: A History of the Movement (London: George Allen and Unwin, 1935), 363. 9. John Maynard Keynes, “An Open Letter to President Roosevelt,” December 16, 1933, New Deal Documents, accessed October 2, 2011, http://newdeal.feri.org/misc/keynes2.htm. 10. Quoted in Butler, Cautious Visionary, 88–90. 11. Quoted in Sir Frederick Leith-Ross, Money Talks: Fifty Years of International Finance (London: Hutchinson and Co., 1968), 171–172.

Chapter 8 1. Quoted in B. J. C. McKercher, “Old Diplomacy and New: The Foreign Office and Foreign Policy, 1919–1939,” in Diplomacy and World Power: Studies in British Foreign Policy, 1890–1950, ed. Michael Dockrill and Brian McKercher (Cambridge: Cambridge University Press, 1996), 110–111.

Notes  d 199

2. Quoted in Peter Ludlow, “Britain and the Third Reich,” in The Challenge of the Third ­ eich: The Adam von Trott Memorial Lectures, ed. Hedley Bull (Oxford: Clarendon Press, R 1986), 151. 3. Neville Chamberlain to Ida, November 10, 1934, in The Neville Chamberlain Diary Letters, Volume 4: The Downing Street Years, 1934–1940, ed. Robert Self (Aldershot, UK: Ashgate, 2000), 99–100. 4. Neville Chamberlain to Hilda, July 28, 1934, ibid., 82–84. 5. Quoted in Harold James, The End of Globalization: Lessons from the Great Depression (Cambridge, MA: Harvard University Press, 2001), 84. 6. Quoted in Dietrich Orlow, “Relations between the Nazis and French and Dutch Fascists, January 1933–August 1934,” in The Impact of Nazism: New Perspectives on the Third Reich and Its Legacy, ed. Alan E. Steinwels and Daniel E. Rogers (Lincoln: University of Nebraska Press, 2003), 43. 7. Walter Evans Edge, A Jerseyman’s Journal: Fifty Years of American Business and Politics (Princeton, NJ: Princeton University Press, 1948), 238–240. 8. Quoted in Robert Boyce, “World Depression, World War: Some Economic Origins of the Second World War,” in Paths to War: New Essays on the Origins of the Second World War, ed. Robert Boyce and Esmonde M. Robertson (New York: St. Martin’s Press, 1989), 84–85. 9. Quoted in Maurice Baumont, “The Rhineland Crisis: 7 March 1936,” in Troubled Neighbours: Franco-British Relations in the Twentieth Century, ed. Neville Waites (London: Weidenfeld and Nicolson, 1971), 164.

Chapter 9 1. Quoted in Norman H. Baynes, ed., The Speeches of Adolf Hitler (New York: Howard Fertig, 1969), 111–112. 2. Gerhard L. Weinberg, ed., Hitler’s Second Book: The Unpublished Sequel to Mein Kampf by Adolf Hitler (New York: Enigma, 2003), 158. 3. Quoted in Akira Iriye, “The Failure of Military Expansionism,” in Dilemmas of Growth in Prewar Japan, ed. James William Morley (Princeton, NJ: Princeton University Press, 1971), 111. 4. Quoted in H. V. Hodson, Slump and Recovery, 1929–1937: A Survey of World Economic Affairs (London: Oxford University Press, 1938), 348–349. 5. Quoted in Franklin Hugh Adler, Italian Industrialists from Liberalism to Fascism: The Political Development of the Industrial Bourgeoisie, 1906–1934 (Cambridge: Cambridge University Press, 1995), 353.

Chapter 10 1. Quoted in John Morton Blum, Roosevelt and Morgenthau (Boston: Houghton Mifflin, 1970), 64–65. 2. Quoted in Stephen V. O. Clarke, Exchange-Rate Stabilization in the Mid-1930s: Negotiating the Tripartite Agreement (Princeton, NJ: Princeton University Press, 1977), 1. 3. Quoted in Michael A. Butler, Cautious Visionary: Cordell Hull and Trade Reform, 1933– 1937 (Kent, OH: Kent State University Press, 1998), 169. 4. Quoted in Ian M. Drummond and Norman Hillmer, Negotiating Freer Trade: The United Kingdom, the United States, Canada, and the Trade Agreements of 1938 (Waterloo, ON: Wilfrid Laurier University Press, 1989), 93. 5. Franklin D. Roosevelt, Quarantine Speech, October 5, 1937, Miller Center, accessed July 24, 2013, http://millercenter.org/president/speeches/detail/3310.

200  d Notes

6. Quoted in Robert Dallek, Franklin D. Roosevelt and American Foreign Policy, 1932–1945 (New York: Oxford University Press, 1995), 577n23. 7. Quoted in Harold L. Ickes, The Secret Diary of Harold L. Ickes, Volume II: The Inside Struggle, 1936–1939 (New York: Simon and Schuster, 1953), 468. 8. Quoted in Michael S. Sherry, In the Shadow of War: The United States since the 1930s (New Haven, CT: Yale University Press, 1995), 22–23. 9. Quoted in Ian Drummond and Norman Hillmer, “A Shaft of Baltic Pine: Negotiating the Anglo-American-Canadian Trade Agreements of 1938,” in Money and Power: Essays in Honour of L. S. Pressnell, ed. P. L. Cottrell and D. E. Moggridge (Basingstoke: Macmillan, 1988), 209.

Chapter 11 1. Quoted in H. V. Hodson, Slump and Recovery, 1929–1937: A Survey of World Economic Affairs (London: Oxford University Press, 1938), 412. 2. Quoted in Joel Colton, Léon Blum: Humanist in Politics (New York: Alfred A. Knopf, 1966), 270–271. 3. Quoted in Peter Ludlow, “Britain and the Third Reich,” in The Challenge of the Third ­Reich: The Adam von Trott Memorial Lectures, ed. Hedley Bull (Oxford: Clarendon Press, 1986), 153–154. 4. Neville Chamberlain to Hilda, August 29, 1937, in The Neville Chamberlain Diary Letters, Volume 4: The Downing Street Years, 1934–1940, ed. Robert Self (Aldershot, UK: Ashgate, 2000), 267. 5. Quoted in Michael Howard, The Continental Commitment: The Dilemma of British Defence Policy in the Era of the Two World Wars (London: Temple Smith, 1972), 99–100. 6. Quoted in André François-Poncet, The Fateful Years: Memoirs of a French Ambassador in Berlin, 1931–1938 (New York: Harcourt, Brace and Company, 1949), 264. 7. Quoted in Louis H. Orzack, “The Düsseldorf Agreement: A Study of the Organization of Power and Planning,” Political Science Quarterly 65, no. 3 (September 1950), 394. 8. Neville Chamberlain to Hilda, July 30, 1939, in Self, Neville Chamberlain Volume 4, 435.

Chapter 12 1. Quoted in Alex J. Kay, Exploitation, Resettlement, Mass Murder: Political and Economic Planning for German Occupation Policy in the Soviet Union, 1940–1941 (New York: Berghahn, 2006), 16. 2. Norman H. Baynes, The Speeches of Adolf Hitler (New York: Howard Fertig, 1969), 926–927. 3. Quoted in Peter Hayes, “Industry under the Swastika,” in Enterprise in the Period of Fascism in Europe, ed. Harold James and Jakob Tanner (Aldershot, UK: Ashgate, 2002), 31. 4. Summary of Hitler’s Meeting with the Heads of the Armed Services on November 5, 1937 (Hossbach Protocol of November 10, 1937), German History in Documents and Images, accessed September 24, 2013, http://germanhistorydocs.ghi-dc.org/docpage .cfm?docpage_id=2321. 5. Quoted in Edward L. Homze, Arming the Luftwaffe: The Reich Air Ministry and the German Aircraft Industry, 1919–39 (Lincoln: University of Nebraska Press, 1976), 157. 6. Quoted in Avraham Barkai, From Boycott to Annihilation: The Economic Struggle of German Jews, 1933–1943 (Hanover: University Press of New England, 1989), 135. 7. Quoted in Alan Bullock, Hitler: A Study in Tyranny (New York: Harper and Row, 1964), 491.

Notes  d 201

8. Quoted in Tim Mason, “Internal Crisis and War of Aggression, 1938–1939,” in Nazism, Fascism and the Working Class, ed. Timothy W. Mason and Jane Caplan (Cambridge: Cambridge University Press, 1995), 128. 9. Quoted in Arthur E. Tiedemann, “Big Business and Politics in Prewar Japan,” in Dilemmas of Growth in Prewar Japan, ed. James William Morley (Princeton, NJ: Princeton University Press, 1971), 303–304.

Chapter 13 1. Robert Self, ed., The Neville Chamberlain Diary Letters, Volume 4: The Downing Street Years, 1934–1940 (Aldershot, UK: Ashgate, 2000), 467. 2. Quoted in Richard F. Kuisel, Capitalism and the State in Modern France: Renovation and Economic Management in the Twentieth Century (Cambridge: Cambridge University Press, 1981), 131. 3. Self, Neville Chamberlain Volume 4, 492–493. 4. Quoted in Warren F. Kimball, The Most Unsordid Act: Lend-Lease, 1939–1941 (Baltimore, MD: Johns Hopkins University Press, 1969), 236. 5. Quoted in Lizzie Collingham, The Taste of War: World War II and the Battle for Food (New York: Penguin, 2012), 36–37. 6. Winston S. Churchill, The Second World War, Volume III: The Grand Alliance (Boston, MA: Houghton Mifflin, 1950), 607.

Conclusion 1. John Lewis Gaddis, The Long Peace: Inquiries into the History of the Cold War (New York: Oxford University Press, 1987).

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Index d

Abnormal Importations Act (Great Britain), 71 Action Française, 113 Afghanistan, 194 Agricultural Adjustment Act (AAA), 95, 105 Algeria, 112 Amery, Leo, 31 Amtorg, 103 Anglo-German Naval Agreement, 117–118, 134 Anglo-German Trade and Payments Agreement, 110–111, 126 Anschluss. See Austria: union with Germany Araki Sadao, 89, 129 Argentina, 26 Atlantic Charter, 183 Australia, 108 Austria, 38, 113; attempted coup, 125; banking crisis, 54, 67, 68; customs union with Germany, 67, 81, 114; union with Germany (Anschluss), 67, 81, 157, 166–167 Austrian National Bank, 67 Baba Eiichi, 173 Badoglio, Pietro, 183 Baldwin, Stanley, 26, 108, 139, 152 Balfour, Arthur, 25 Balfour Note, 25–26 Bank for International Settlements, 49–50, 73

Bank of England, 20, 23–24, 33; interest rates, 75, 107 Bank of France, 20, 33, 65, 114, 150 Bank of Italy, 133, 134 banking crises: in France, 74, 75; in Germany, 54, 67–68, 82; in other European countries, 54, 67, 68, 133; in United States, 55, 58–59, 61, 96 Banque Nationale de Crédit, 74 Bastiat, Frédéric, 191 Beck, Ludwig, 166 Beer Hall Putsch, 39 Belgium, 16, 32, 35, 38, 58, 73, 112, 115, 160, 179 Bérenger, Henry, 32 Bismarck, Otto von, 36 Blum, Léon, 136, 150, 157 Borah, William T., 13 Boulanger, Georges, 4 Boyce, Robert, 1 Brains Trust, 61, 101, 121 Bretton Woods Conference, 1–2, 191, 193–194 Briand, Aristide, 32–33, 65, 67 Briand Plan, 65–66 British Union of Fascists, 108 Brüning, Heinrich, 80–81, 83, 123, 124 Burckhardt, Carl J., 186 Bulgaria, 126, 160 Burma, 184, 189 Cabinet Planning Board (Japan), 175 219

220  d Index

Canada, 68, 70, 108, 138, 147, 148 “cash and carry,” 139, 182 central banks, 2, 17–18, 33–34, 49–50, 69, 82, 93, 193. See also names of individual central banks Chalkley, Owen, 139 Chamberlain, Austen, 24, 54–55 Chamberlain, Joseph, 4 Chamberlain, Neville, 108, 137, 139, 160, 178–179; and appeasement, 144, 148, 156–157, 158, 159–160; contempt for United States, 74, 111, 117, 142, 156; misreads Hitler, 178; mistrusted by United States, 94, 99, 137; as protectionist, 71, 138, 153; and rearmament, 73, 109, 154–155 Chase, Stuart, 52 Chautemps, Camille, 113, 155, 157 Chiang Kai-shek. See Jiang Jieshi Chicago Tribune, 54 China, 13, 57, 194; currency, 86, 101, 104, 111, 131–132, 142; Great Britain’s economic interests in, 72–73, 111; imports from Japan, 43, 86; Japan’s interests in, 42, 43–45, 89, 101, 173–174; nationalism in, 44–45; rise of communism in, 131, 173–174; Shandong province, 42, 44; and Soviet Union, 174; United States’ interests in, 57, 147, 184; war with Japan, 141–143, 146–147, 174, 175–176, 184. See also Manchuria Churchill, Winston, 179, 183, 189–190 Civilian Conservation Corps (CCC), 95 Colijn, Hendrik, 153 Committee on National Expenditure (Great Britain). See May Committee Communist Party (France), 113, 116, 149, 150, 151, 152, 157, 179 Communist Party (Great Britain), 108 Conference économique de la France métropolitaine et d’outre-mer, 112 Conservative Party (Great Britain), 23, 31, 69, 70–71, 152, 153 Coolidge, Calvin, 12, 15, 49 conscription, 3, 5, 9, 10 Coughlin, Charles, 60 Couzens, James, 97 Creditanstalt, collapse of, 54, 67 Crisis Import Ordinance (Dutch East Indies), 130 Croix de Feu, 113 Cunliffe Committee, 23–24

Czechoslovakia, 35, 66, 67, 160; annexation by Germany, 148, 160, 168–169; Sudetenland crisis, 145, 157–158, 167, 168 Daladier, Édouard, 157, 158–159, 179 Dan Takuma, 89 Darmstädter und Nationalbank (Danatbank), 67, 82. Dawes, Charles G., 18 Dawes Plan, 18, 29–30, 32, 39–40, 64–65, 73, 78 Defence Requirements Subcommittee (Great Britain), 109 Democratic Alliance (France), 159 Denmark, 35, Dewey, John, 5 Dollfuss, Engelbert, 125 Doumergue, Gaston, 114 Du Pont Chemicals, 144 Dulles, John Foster, 17 Düsseldorf Agreement, 148, 158, 159–160 Dutch East Indies, 130, 175, 184, 188, 189. See also Crisis Import Ordinance Eden, Anthony, 138 Edge, Walter, 65 Eichengreen, Barry, 193 Einzig, Paul, 90 Emergency Immigration Act of 1921, 15 Empire Free Trade, 71–72 Erfüllungspolitik, 37 Ethiopia, Italy’s war in, 91, 105, 118, 133–134, 138, 172 eugenics, 14, 122 Export-Import Bank, 102, 103 fascism: in France, 116; in Great Britain, 108; Hoover’s fear of, 53, 95; in Italy, 45–46, 90, 133, 172 Fair Labor Standards Act, 145 February 26 incident, 132, 173 Federal Reserve, 17–18, 20, 144; interest rates, 17, 20, 30, 40–41, 51, 53, 56 Federal Reserve Bank of New York, 11, 16, 30, 50, 51, 94; discount rate, 52, 56; loan to Bank of England, 69 Federal Trade Commission, 4 Finland, 179 Firestone, 10 Five-Power Treaty, 56 Food and Drug Administration, 4 Ford, Henry, 40

Index  d 221

Ford Motor Company, 60 Fordney-McCumber Tariff, 14 Fort Knox, 140 Four-Year Plan (Germany), 157, 164–165, 169 franc Poincaré, 33, 112 France: appeasement, 145, 149, 156; balance of trade, 26, 64, 112–113, 150; bank crisis, 74, 75; budgets, 66, 67, 75, 114, 116; civil unrest in, 113–114, 116; Communist Party, 113, 116, 149, 150, 151, 152, 157, 179; currency valuation, 26, 32–33, 112, 114, 115–116, 118, 151–152, 155, 158; defense spending, 75, 114–115, 151, 155, 157, 158–159; disarmament, 13, 58 ; fascism in, 116; foreign trade, 26, 28, 64, 65–66, 155–156, 167; gold reserves, 33–34, 58, 65, 66, 70, 78, 107, 112, 115–116, 118, 150–151, 152, 158, 159; gross domestic product, 7, 11, 32, 53, 66, 105, 141, 155, 159, 192; industrial production, 32, 66, 111, 152; inflation, 26, 29, 32–33; labor unrest in, 150, 159; Matignon Agreements, 150, 155, 159; nationalism in, 4, 32–33, 113; onset of the Depression, 74, 75; Popular Front, 116, 118, 149–150, 151, 152, 157, 158, 159; Radical Party, 75, 116, 118, 149, 152; reaction to Sudetenland crisis, 157–158, 167; Socialist Party, 116, 149–150, 157; taxation, 75, 155; trade protectionism, 26, 74–75, 112– 113; unemployment, 64, 66, 111–112, 152, 155, 159; Vichy, 180. See also French foreign relations; Maginot Line. See also under reparations; Rhineland; war debt Franco, Francisco, 152, 153–154, 163–164, 171 French foreign relations, 67, 114, 160; with Germany, 32, 118–119; with Great Britain, 27–29, 32, 72, 117–118 , 152; with Soviet Union, 117–118; with United States, 13, 28, 29, 32–33, 54–55, 58, 100, 137 French Indochina, 112, 175, 184–185, 188 Gaddis, John Lewis, 194 Geddes, Sir Eric, 25 General Confederation of Labor (France), 150

General Electric, 11, 49, 53, 78 General Motors, 144 Geneva Conference of 1927, 49 German Communist Party, 39, 78, 79, 80 German Democratic Party (DDP), 79, 80 German foreign relations, 32; with China, 111; with Great Britain, 110, 117–118, 134–135, 148, 158; with Soviet Union, 38, 84, 126–127, 170, 187; with United States, 102, 103, 145 German National People’s Party (DNVP), 37, 82, 83 German People’s Party (DVP), 37, 79, 80 Germany: acquisition of raw materials, 122, 162, 163–164, 165, 166, 167, 168, 170, 185; agricultural sector, 37, 38, 83, 85, 127, 169; annexes Czechoslovakia, 148, 160, 168–169; balance of trade, 80, 83, 84, 124–125, 126–127, 165, 169; banking crises, 54, 67–68, 82; British loans to, 64, 79; currency stabilization, 18, 30, 38–40, 123–124; Düsseldorf Agreement, 148, 158, 159–160; foreign investment in, 40–41, 54, 68, 77–78, 82, 110; Four-Year Plan, 164–165, 169; German Communist Party, 39, 78, 79, 80; German Democratic Party (DDP), 79, 80; German National People’s Party (DNVP), 37, 82, 83; German People’s Party (DVP), 37, 79, 80; gold confiscation, 164–165; gold reserves, 82, 114, 125, 128, 165; gross domestic product, 7, 11, 53, 105, 127, 141; Harzburg Front, 82–83; industrialists in, 36–37, 81, 158, 163, 165, 167, 168; invades France, 179–180; invades Poland, 161, 170–171, 177–178; invades Soviet Union, 186–188, 189; Jews in, 83, 103, 122, 125, 145, 165, 167–168; Kristallnacht, 145, 168; labor shortage, 164, 166, 169, 185; Lebensraum, 122, 128, 165, 166, 177, 186, 192; Mefo bills, 124; National Socialism, 83, 121–123, 127, 165, 169, 185; National Socialist German Workers’ Party (NSDAP), 39, 80, 83, 85, 122–123; nonaggression pact with Soviet Union, 161, 177, 179, 186; rearmament, 29, 38, 77, 81, 110, 111, 123–124, 126, 128, 140, 163, 165–166, 167, 168, 170–171, 177; rise of nationalism in, 37–38, 78–81, 82–83; Social Democratic Party (SPD), 36, 79, 80, 83; and Spanish civil war, 163–164;

222  d Index

Germany (continued): and the Sudetenland, 145, 157–158, 167; trade and tariffs, 37–38, 81, 84, 102–103, 110, 145; trade bloc, 38, 67, 81, 110–111, 126, 181; trade with Soviet Union, 84, 126–127; unemployment, 39, 77, 79, 80, 83, 85, 123, 127, 162; union with Austria, 67, 81, 157, 166–167; Volksgemeinschaft, 122; welfare state, 3, 36, 79. See also German foreign relations; Reichsbank. See also under reparations; Rhineland; Treaty of Versailles Gilbert, S. Parker, 25, 40, 78 Goebbels, Joseph, 163 gold bloc, 112, 115–116, 126 gold standard, 2, 16–18, 30, 60, 98, 191–192, 193; bankers push for, 16–18; in France, 17, 33, 58, 65, 75, 99, 112, 115, 136–137, 140; in Germany, 17, 18, 30, 38–40, 80, 82, 124; in Great Britain, 17, 23–25, 30, 55, 60, 69–70, 72, 76, 83, 88; in Italy, 17, 46–47, 90, 133, 134; in Japan, 42, 43, 45, 85–86, 89, 90, 129; in United States, 56, 58, 61, 62, 96–97, 99–100 Gold Reserve Act of 1934, 100 Gold Standard Act (Great Britain), 30 gold sterilization, 18, 33–34, 70, 107, 140, 144 Good Neighbor Policy, 96 Goodyear, 10 Göring, Hermann, 163, 164, 165, 167, 168, 187 Great Britain: appeasement, 111, 144, 145, 148, 149; balance of trade, 64, 69–70, 71–72, 108, 109, 138, 153, 156; budgets, 24, 25, 69; Communist Party, 108; Conservative Party, 23, 31, 69, 70–71, 152, 153; currency valuation, 23–24, 32, 70, 158; fascism in, 108; gold reserves, 20, 24, 30, 33, 55, 64, 65, 68–69, 70, 78, 107, 158, 160, 181, 183; gross domestic product, 7, 11, 53, 105, 107, 141; Düsseldorf Agreement, 148, 158, 159-160; imperial preference system, 4, 31, 70–72, 104, 108, 138, 139, 148, 153, 183; interests in China, 72–73, 111, 132; labor unrest, 24, 30–31; Labour Party, 23, 63–64, 69, 109, 118, 152; military spending, 25, 73, 108–109; onset of the Depression, 63–64; rearmament, 154–155, 156, 158, 160, 178; reaction to annexation of Austria, 157; reaction

to Japan’s occupation of Manchuria, 72–73, 108, 111; reaction to Sudetenland crisis, 157–158, 167; and Spanish Civil War, 153–154; trade with Germany, 110–111, 126, 148, 156–157, 158, 167; trade with United States, 14, 138–139, 146, 147–148, 158; unemployment, 24, 30–31, 51, 63, 75, 108. See also Bank of England; Great Britain foreign relations. See also under gold standard; reparations; war debt Great Britain foreign relations: with France, 27–28, 32, 72, 117–118, 152; with Germany, 110, 117–118, 134–135, 148, 158, 159-160; with the United States, 23, 137–139, 148, 183 Great Depression, as a cause for World War II, 7–8, 193; and nationalism, 2–3, 8, 120, 191–192; and “third way” policy, 7–8, 48; report on from Great Britain, 68; Wall Street blamed, 60. See also London Economic Conference Greece, 126, 160, 184 Gunther, John, 89 Haiti, 96 Halifax, Edward Frederick Lindley Wood, Lord, 146 Hamaguchi Yuko, 85–86, 87, 88 Hankey, Maurice, 27 Harding, Warren, 7, 9, 12 Harris, C. R. S., 82 Harrison, George, 51, 62, 68, 100 Harzburg Front (Germany), 82–83 Hawley, Willis C., 50 Hayashi Senjuro, 173 Herriot, Édouard, 30, 31, 73, 74, 84, 112 Hindenburg, Paul von, 80, 83 Hirota Koki, 173 Hitler, Adolf, 83, 85, 127–128, 185; attempted coup, 39; and National Socialism, 121–122; plans for war, 166, 168, 171, 172, 186–187; views on Soviet Union, 126, 186–187 Ho-Umezu Agreement, 131 Hoare, Sir Samuel, 118 Hoover, Herbert: advocates for “third way” ideology, 12–13, 52; election, 49; his fear of fascism, 53, 95; response to stock market crash, 51, 52–53, 54; as Secretary of Commerce, 13, 14, 18, 49 Horticultural Products Act (Great Britain), 71

Index  d 223

Hugenberg, Alfred, 124 Hughes, Charles Evans, 13, 18, 19, 20 Hull, Cordell: supports internationalism and free trade, 95, 97–98, 99, 101–102, 104, 110, 111, 117, 143, 191, 194; trade agreement negotiations, 103–104, 137–139, 148, 183; and trade with Japan, 130, 189; worries about German trading bloc, 145, 181 Hungary, 38, 67, 75, 81, 126, 169 IG Farben, 185–186 Ickes, Harold, 142, 143 Immigration Act of 1924, 15 Imperial Chemical Industries, 31 Imperial Economic Conference, 71–72 Import Duties Bill (Great Britain), 71 Important Industries Control Law (Japan), 87 Indochina. See French Indochina Inoue Junnosuke, 85–86, 89 International Bank for Reconstruction and Development. See World Bank International Business Machines, 10, 144 International Monetary Fund, 2 International Telephone & Telegraph, 10 Interstate Commerce Commission, 4 Inukai Tsuyoshi, 88–89 Invergordon, Royal Navy protest at, 70 Iraq, 194 Ishiwara Kanji, 129, 173 Istituto Mobiliare Italiano, 91 Istituto per la Ricostruzione Industriale (Institute for Industrial Reconstruction), 133, 171 Italy: balance of trade, 64, 90, 133, 134, 172; bank crisis, 133; currency valuation, 46–47, 171–172; disarmament, 13; economic conditions, 46, 90–91; enters World War II, 183–184; fascism in, 45–46, 90, 133, 172; gold reserves, 91, 133, 134; gross domestic product, 7, 11, 53, 90, 105, 134, 141, 172; nationalization of industries, 171; prevents Germany’s annexation of Austria, 125; protectionism, 133; rearmament, 140; and Spanish civil war, 171; “third way” ideology in, 45–46; trade sanctions imposed, 134; unemployment, 90, 91, 133, 134, 172; war debt, 16, 46; war in Ethiopia, 91, 105, 118, 133–134, 138, 171, 172. See also under Gold standard

J. P. Morgan (firm), 15, 29, 30, 32, 46–47, 49, 93, 94, 137 Japan: abandoned by Great Britain, 23, 41; agriculture, 41, 42–43, 87, 129, 174; budgets, 86, 90; currency valuation, 43, 90, 129; foreign trade, 41, 43, 86–87, 129–131, 131, 132, 174–175, 188–189; gold reserves, 87, 88, 175; gross domestic product, 7, 11, 53, 86, 90, 105, 141; interests in China, 42, 43–45, 129, 131–132; interests in Southeast Asia, 175–176, 184, 188–189; internationalists in, 41–42, 45; military spending, 42, 129, 132, 140, 173, 174; national debt, 131, 173; trade bloc, 88, 129, 131, 142, 173, 192; ultranationalism in, 87–90, 120–121, 128–129, 132–133, 173, 175, 192; United States investments in, 57; war with China, 141–143, 146–147, 174; zaibatsu conglomerates, 41, 43, 87, 89, 129. See also under Manchuria; Treaty of Versailles Jeunesse Patriotes, 113 Jiang Jieshi, 45, 88, 131, 132, 142, 173–174, 184 Johnson, Hiram, 13, 97, 104 Johnson, Hugh, 95 Johnson Act, 104, 117 Kanto¯ earthquake (China), 43, 45 Kellogg-Briand Pact, 13, 57 Keynes, John Maynard, 27, 62, 100 Kindleberger, Charles, 193 Konoe Fumimaro, 184, 188 Kristallnacht, 145, 168 Kwantung Army, 45, 88, 89, 131 Labour Party (Great Britain), 23, 63–64, 69, 109, 118, 152 Lamont, Thomas W., 11, 86 Landon, Alf, 137–138 Lausanne conference, 73–74, 84 Laval, Pierre, 55, 58, 67, 68, 116, 117, 118 League of Nations, 23, 32, 61, 65, 89, 94, 97, 105, 118, 134, 172, 186 Lebensraum, 122, 128, 165, 166, 177, 186, 192 Leffingwell, Russell, 11 Leith-Ross, Frederick, 110, 111, 158 Lend-Lease program, 183 Liberal Party (Great Britain), 4 Lloyd George, David, 24 Locarno Conference, 32

224  d Index

Locarno Pact, 32, 78, 117 London Economic Conference, 97–99, 104, 112, 117, 124, 130, 137 London Naval Conference of 1930, 56, 86, 87 London Reparations Conference, 30 Luftwaffe, 128, 166, 170, 178, 180 Luther, Hans, 102 Lyautey, Hubert, 28 MacDonald, Ramsay, 64, 66, 69, 71, 84, 97, 108, 117 Macmillan Committee (Great Britain), 68 Marco Polo Bridge incident, 174 Maginot Line, 31, 115 Malaya, 14, 130, 184, 189 Manchuria, Japan’s occupation of, 44–45, 56–58, 72–73, 88, 89–90, 111, 173 Mao Zedong, 131 Matignon Agreements, 150, 155, 159 May Committee, 69 McKenna duties, 31 McNary-Haugen Act, 12 Mefo bills, 124 Meiji Restoration (Japan), 41 Mellon, Andrew, 13, 32 Mellon-Bérenger agreement, 32, 33, 63 Metallurgische-Forschungsgesellschaft. See Mefo bills Moley, Raymond, 61, 94–95, 97–98, 99 Mond, Alfred, 31 Mönick, Emmanuel, 115, 137, 151–152, 153 Moreau, Émile, 33 Morgan, J. P., Jr., 11, 32, 78, 137 Morgenthau, Henry, Jr., 61, 94–95, 98, 100, 101, 137, 142, 143; concerns about totalitarianism, 146–147 Morrow, Dwight, 11 Moseley, Oswald, 108 Mukden incident, 88 Müller, Hermann, 79 Munich Conference, 158, 159, 167 Mussolini, Benito, 45–46, 47, 91, 117, 167, 171 Nanjing, fall of, 142, 174 National Defense Act of 1920, 10 National Defense Advisory Commission, 181 National Efficiency movement (Great Britain), 121 National General Mobilization Law (Japan), 175

National Government (Great Britain), 69, 70–71, 75, 108, 152 National Industrial Recovery Act (NIRA), 95, 105 National Revolutionary Army (China), 44 National Socialism (Germany), 83, 121–123, 127, 165, 169, 185 National Socialist German Workers’ Party (NSDAP), 39, 80, 83, 85, 122–123 Netherlands, 58, 98, 112, 160, 179–180, 179, 188 Neutrality Acts, 106, 139, 142, 147, 148, 175, 182. See also “cash and carry” New Deal, 94, 95–96, 99, 137, 141, 144–145, 146 New Economic Policy (Soviet Union), 19 New Plan for trade (Germany), 125–126, 127 Nicaragua, 96 Nine-Power Pact, 13, 57 Norman, Montagu, 17, 20, 26, 30, 51, 67, 68, 79, 86, 94, 100 Northern Expedition (China), 45, 131 Norway, 185; German invasion of, 179 Nye, Gerald P., 106 Obama, Barack, 194 Office of Production Management, 181 Ottawa Conference. See Imperial Economic Conference “Pact of Steel,” 171 Pan-American Conference of 1933, 101 Panay incident, 142 Papen, Franz von, 83–84, 85, 123, 124 Paris Peace Conference, 41 Pearson, Karl, 4 Peek, George N., 102–103 Pétain, Philippe, 180 Philippines, 96, 130, 189 Pittman, Key, 97, 148 Poincaré, Raymond, 28–29, 33 Poland, 38, 66, 75, 112, 160: Auschwitz, 186; invasion by Germany, 161, 170–171, 177–178 Popular Front (France), 116, 118, 149–150, 151, 152, 157, 158, 159 Progressive Party, 5 Progressivism, 4, 121 Putin, Vladimir, 194 Radical Party (France), 75, 116, 118, 149, 152

Index  d 225

Reciprocal Trade Agreements Act, 101–102, 103, 138 Reconstruction Finance Corporation (RFC), 58–59, 99 Reichsbank, 20, 54, 123; interest rates, 77, 82; reserves, 40, 78, 82, 124, 125–126, 127 Reichswehr, 38, 77 Reichswerke Hermann Göring, 163, 164, 165 Reinhardt Program, 123 Rentenmark, 39 reparations: Dawes Plan, 18, 29–30, 32, 39–40, 64–65, 73, 78; Germany’s views on, 36, 38, 81, 84; Hoover’s moratorium on, 54–55, 58, 60, 61–62, 68, 73, 84; Lausanne conference, 73–74, 84; owed to France, 26–27, 28–30, 38, 39, 54–55, 58, 62, 64–65, 68, 73–74; owed to Great Britain, 25, 28, 62, 73, 110; United States resists linking to war debt, 16, 32, 49–50, 54, 58, 73–74; Young Plan, 64–65, 68, 73, 78–79, 84 Revenue Act of 1932, 59 Reynaud, Paul, 100, 115, 159, 179 Rhineland: Allied troops in, 64–65, 78; France encouraging separatists in, 29, 39; France’s occupation of Ruhr Valley, 27, 28, 29–30, 38, 39, 78; remilitarization by Germany, 118–119, 134–135, 137, 149; strategic importance to France, 115 Romania, 66, 81, 126, 133, 160 Roosevelt, Franklin D.: advocates for “third way” ideology, 94, 95; his bombshell telegram, 99, 100, 117; his Brains Trust, 61, 94–95, 101, 121; election, 60–61, 93–94, 137–138; favors nationalist advisors, 94–95, 97–98, 101; foreign policy speech in 1937, 142; moves toward internationalism, 104–106, 137, 148, 183; plans for aircraft industry, 146, 147; his support for Great Britain, 183; and Supreme Court, 141; views on leading bankers, 94, 98–99, 102, 106, 137. See also New Deal Roosevelt, Theodore, 4, 5 Royal Air Force, 73, 109, 147, 154, 180 Ruhr Crisis, 29, 31 Ruhr Valley, 27, 28 Russia, 194 Sakurakai (Cherry Blossom Society), 87–88, 89 Sarraut, Albert, 118

Schacht, Hjalmar, 78, 82–83, 102, 123; advocates for internationalism, 128, 144, 163, 164, 165, 167; creates alternate currency, 124; dismissed from Reichsbank, 168; his New Plan for trade, 125–126, 127; and reparations, 54 Schleicher, Kurt von, 85, 123 Schutzstaffel (SS), 164–165, 186 Seeckt, Hans von, 38 Senegal, 112, 130 Shandong province (China), 44 Shidehara Kijuro, 42, 86 silver, 86, 101, 104, 111 Singapore, 184, 189 Smith, Al, 49 Smoot, Reid, 50 Smoot-Hawley Tariff Act, 50, 60–61, 64, 65, 66, 71, 86, 95, 138 Snowden, Philip, 70, 71 Social Democratic Party (SPD) (Germany), 36, 79, 80, 83 Socialist Party (France), 116, 149–150, 157 Solidarité Française, 113 Soule, George, 52 South Africa, 108 South Manchuria Railway Company, 44, 45, 88 “Southern Resource Area,” 176, 188 Soviet Union: control of Western communist parties, 78, 79, 116; foreign relations with France, 117–118; German invasion, 186–188, 189; gross domestic product, 7, 11, 53, 105, 141; industrialization of, 59, 84; interests in German politics, 78, 79; military aid to China, 174; nonaggression pact with Germany, 161, 177, 179, 186; trade with Germany, 84, 126–127; trade with United States, 59, 103–104; United States investment in, 19. See also Stalin, Joseph Spain, 26; civil war in, 143, 150, 152, 153–154, 163–164, 171 Stalin, Joseph, 19, 59, 126, 170, 187 Standard Oil Company, 10, 142, 144 Stavisky, Serge, 113 Stevenson Plan, 14, 49 Stimson Doctrine, 57 Stimson, Henry, 57, 58, 182 stock market, Berlin, 40, 82 stock market, United States, 48–49; boom, 50–51; crash, 48, 51–52, 53, 54, 64, 140; speculation in, 20, 51

226  d Index

Stresemann, Gustav, 32, 37–38, 40, 66, 79 Strong, Benjamin, 11, 16, 20, 33–34; advocates for gold standard, 16, 17–18 Sudetenland. See under Czechoslovakia Supreme Court (US), 105, 140–141 Sweden, 30 Switzerland, 30, 58, 112 Swope Plan, 53, 95 Syria, 194 Takahashi Korekiyo, 89, 90, 129, 131, 132 Tanaka Giichi, 45 Tanggu Truce, 131 Tariff Reform League (Great Britain), 4 Taylor, Frederick Winslow, 40 Ten-Year Rule (Great Britain), 25, 73, 108 Terauchi Hisaichi, 173 “third way” ideology, 3–6, 14, 48, 191–192; Hoover advocates, 12–13, 52; in Italy, 45–46; in National Socialism, 121–122; Roosevelt advocates, 94, 95; in Vichy France, 180 Thyssen, Fritz, 29 Tojo Hideki, 189 trade blocs, 2, 72; German, 38, 81, 126, 181; European, 65–66, 67, 112, 158; Japanese, 88, 129, 131, 142, 173, 192 Treaty of Versailles, 7, 26–27, 29, 31: German violations of, 29, 37, 38, 77, 81, 118–119, 128, 134; terms for Germany, 26–27, 35–36, 37, 58, 67, 111; terms for Japan, 41, 42 Tripartite Monetary Agreement, 136–137, 140, 151–152, 153 Tripartite Pact, 184 Tugwell, Rexford, 61, 94 Turkey, 126, 160 Tydings-McDuffie Act, 96 Ukraine, 194; 1932–1933 famine in, 59; German plans to invade, 186–187 United States: agriculture, 12, 14, 20, 50, 52, 56, 95, 99, 100, 103; arms embargo, 106; budget deficit, 56, 58–59, 62, 140; business interests abroad, 10, 18–19, 54– 55, 57, 144; communists in, 60; currency stabilization, 98–99, 137; Export-Import Bank, 102, 103; exports, 10, 12, 18, 57, 86, 132, 181; freezes Japanese assets, 188; gold and silver buying program, 99–101; gold reserves, 17–18, 20–22, 33–34, 49, 53, 55, 56, 58, 61, 70, 96–97, 112, 140, 144; gross domestic product, 7,

10, 11, 52, 53, 55, 59, 105, 140, 141, 182; immigration, 14–15; industrial production, 51–52, 55; isolationism in, 12, 13–14, 48–49, 97–99, 106, 142, 143, 148, 183; and Japan’s war with China, 142–143, 146–147, 175; labor unrest, 60; Lend-Lease program, 183; Main Street vs. Wall Street tension, 11–12, 13, 15, 20, 61; military spending, 96, 145–146, 181–182; money supply, 18, 140, 144; Neutrality Acts, 106, 139, 142, 147, 148, 182; protectionism, 13–14, 18, 49–50, 60–61, 62, 64, 95, 97, 101–102; response to Japanese occupation of Manchuria, 57; taxation, 9, 52, 59; trade policies, 101–103, 137–138; trade with Germany, 102–103; trade with Great Britain, 138–139, 144, 146, 147–148, 158, 183; trade with Japan, 130, 184–185, 188–189; trade with Soviet Union, 103–104; unemployment, 51, 52, 55, 60, 105, 139–140, 140, 144, 182. See also Federal Reserve; Hoover, Herbert; Reciprocal Trade Agreements Act; Roosevelt, Franklin D.; United States foreign relations. See also under banking crises; gold standard; reparations; war debt United States banking community, 39–40, 49–50, 61, 93, 94, 106; and gold standard, 16–17, 18; investment abroad, 10, 11–12, 46–47, 57, 64, 68, 90; Roosevelt’s views on, 94, 98–99, 102, 106, 137; and stock market crash, 51–52, 58–59, 60; and war debt, 15–16, 29. See also banking crises; Federal Reserve; Federal Reserve Bank of New York United States foreign relations: with China, 56–57, 142, 184; with France, 13, 28, 29, 32–33, 54–55, 58, 100, 137; with Germany, 102, 103, 145; with Great Britain, 23, 137–139, 148, 183; under Roosevelt, 94–95, 96, 141–142; and trade policies, 102, 103–104, 137; with Soviet Union, 19, 103–104. See also Kellogg-Briand Pact; Nine-Power Pact Uruguay, 26 Vansittart, Robert, 67, 109 Versailles, Treaty of. See Treaty of Versailles Victor Emmanuel III (king of Italy), 134, 183 Volpi di Misurata, Giuseppe, 46

Index  d 227

Volksgemeinschaft, 122 von Papen, Franz. See Papen, Franz von von Schleicher, Kurt. See Schleicher, Kurt von von Seeckt, Hans. See Seeckt, Hans von Wakatsuki Reijiro, 88 Wall Street crash, 1929. See stock market, US Wallace, Henry, 94–95 war rhetoric, in national economic policy, 4–5, 47, 94, 95–96, 146 war debt: France’s, 26, 27–28, 32–33, 54–55, 62, 63, 68, 73–75, 113, 117; Great Britain’s, 15, 25–26, 54–55, 61–62, 72, 73–74, 104, 110, 117; Hoover’s moratorium on, 54–55, 58, 60, 68, 74, 82, 84; Italy’s, 16, 46; owed to United States, 15–16, 18, 19–20, 46, 54–55, 58, 61–62, 75, 84, 104, 113; United States resists linking to reparations, 16, 32, 49–50, 54, 58, 73–74; World War Foreign Debt Commission, 15, 62, 94 War Resources Board, 181 Warburg, Paul, 11 Warren, George F., 99, 100 Washington Naval Conference, 13, 23, 25, 41, 49 Washington Post, 14 Welles, Sumner, 143, 144 Westwall, 167

Weygand, Maxim, 75 Willkie, Wendell, 182 Wilson, Woodrow, 4, 14, 19, 106, 142 “Winter War,” 179 Wood, Kingsley, 181 Woodin, William, 96, 100 Works Progress Administration (WPA), 140, 146, 147 World Bank, 2 World Economic Conference. See London Economic Conference World War I, 5, 6–7, 22, 106. See also Treaty of Versailles; war debt World War II: attack on Pearl Harbor, 189; Battle of Britain, 180; in Europe, 179; invasion of Poland, 161, 170–171, 177–178; in Soviet Union, 186–187, 189 World War Foreign Debt Commission, 15, 62, 94 Xi’an incident, 173–174 Young, Owen, 11, 49, 78 Young Plan, 64–65, 68, 73, 78–79, 84 Yugoslavia, 66, 75, 126, 167, 169 Yuki Toyotaro, 173 zaibatsu conglomerates, 41, 43, 87, 89, 129 Zhang Xueliang, 45, 88, 174 Zhang Zuolin, 44, 45

About the Author d

John E. Moser is professor of history at Ashland University, where he teaches courses on modern European, American, and East Asian history. His previous books include Twisting the Lion’s Tail: American Anglophobia between the World Wars (New York University Press, 1999); Presidents from Hoover through Truman, 1929–1952 (Greenwood Press, 2001); and Right Turn: John T. Flynn and the Transformation of American Liberalism (New York University Press, 2005).

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