The impact of the slump
Economically, Europe emerged from World War I much weakened, partly by the purchases that had had to be made in the United States. Even in 1914 the United States had been the world’s leading economic power. By 1918 profits had enabled it to invest more than $9 billion abroad, compared with $2.5 billion before the war. The Allies, meanwhile, had used up much of the capital they had invested in the United States and had accumulated large public debts, many of them to the U.S. Treasury.
American financial dominance and European debt overshadowed economic relations in the first decade after the war. The debts included those owed by the Allies to each other, especially to Britain, as well as those owed, especially by Britain, to the United States. A third baneful factor was reparations, the financial penalties imposed on Germany by the Treaty of Versailles.
Keynes described reparations as morally detestable, politically foolish, and economically nonsensical. Winston Churchill called them “a sad story of complicated idiocy.” Essentially, they meant demanding from Germany either goods—which would have dislocated industry in the recipient countries—or money. This the Germans could obtain only by contracting vast and almost unrepayable loans in the United States—to whom the European recipients of reparations promptly returned much of the cash in an effort to settle their own transatlantic debts.
In April 1921 the Allied Reparations Committee set Germany’s reparations bill at 132 billion gold marks, to be increased later if the Germans proved able to pay more. The first installment of one billion gold marks was due by the end of May.
Understandably resentful, the Germans wavered between two possible responses: refusal to pay, as urged by ultra-nationalists and some industrialists, and the so-called Erfüllungspolitik, or “policy of fulfillment,” advocated by Rathenau and Stresemann. They proposed to meet initial demands for reparations so as to reestablish trust and then negotiate for better terms. This was the policy adopted by the Weimar Republic.
Even so, Germany paid the first tranche only in August 1921, in response to a threat to occupy the Ruhr, and the money had to come from a bank loan raised in London. Thereafter, it paid in kind but not in cash, until at the beginning of 1923 it announced that payments must cease. The French and the Belgians, backed by Italy but opposed by the United States and Britain, thereupon occupied the whole of the Ruhr.
With the German government’s connivance, Ruhr industrialists and workers brought production to a virtual halt, and the Treasury printed a reckless flood of paper money. By 1924 the mark was almost worthless, enriching speculators and owners of real property but ruining rentier savers and others on fixed incomes. This removed an important stabilizer from German society, making it all the easier for extremism to triumph in the Nazi victory 10 years later.
For the moment, however, the Allies formed a committee of financial experts, chaired by the American Charles G. Dawes, to find a lasting solution to the reparations problem. It proposed, and the governments accepted, a two-year moratorium, the return of the Ruhr to Germany, a foreign loan of 800 million marks, and a new rate for reparation payments: 1–2.5 billion gold marks annually, which continued for five years. In 1929 a further committee, chaired by Owen D. Young, revised the Dawes Plan. Germany was to have a new loan of 1.2 billion marks and to spread reparations over the next 59 years. Although the German Parliament and people (by referendum) reluctantly agreed to the Young Plan, reparations finally ceased in 1932.
Germany’s was an extreme case, but it was not the only European country to suffer after World War I. The Allies also experienced inflation and were saddled with debts. While the United States was willing in the long run to write off the political debts of reparations, it would not do the same with the commercial debts contracted by Britain, Italy, and France: one by one, they had to sign agreements to pay.
Despite these obligations, Europe in the 1920s enjoyed a modicum of the economic growth that was so rapid and spectacular in the United States. In 1913, Britain’s income had been £2.021 billion. By 1921, it had fallen to £1.804 billion; but by 1929 it had risen again, this time to £2.319 billion. The corresponding figures for France (in 1938 francs) were 328 billion, 250 billion, and 453 billion. Even Germany, whose 1914 income had been 45.7 billion gold marks, had recovered enough by 1931 to be earning 57.5 billion.
Yet postwar prosperity was precarious. The American boom was a speculative affair. Fueled by optimism, production was soaring. To shift the accumulating goods, customers were urged to buy on credit or to borrow from the banks, which thereby earned large profits. The stock market was riding high. But at any sign of a credit squeeze or a loss of confidence, everything was likely to collapse. Demand would fall, goods would pile up, and prices would plummet. This was precisely what happened on “Black Tuesday,” October 24, 1929, the day of the Wall Street crash.
Its first foreign victims were in Latin America, which was dependent on the American market for selling raw materials. Europe was not affected immediately; American loans and investments there dwindled only slowly. By 1931, however, the flow of capital had virtually ceased, and direct investment dried up in the following year. Worse still, to pay their own debts, Americans repatriated huge sums of money. Germany, Austria, and Britain were the hardest hit. Between the end of May and the middle of July in 1931, the German central bank, the Reichsbank, lost $2 billion in gold and foreign currency. To compound Europe’s problems, on June 17, 1930, the United States enacted the protective Smoot-Hawley Tariff Act, increasing the average import duty level to about 50 percent.
The combined results were catastrophic. Highly respected banks failed, first among them the great Kreditanstalt of Vienna, which collapsed in May 1931. The Bank of England, at that time, was losing gold at the rate of £2.5 million a day. Everywhere, industrial production fell: by 40 percent in Germany, 14 percent in Britain, and 29 percent in France.
On June 20, 1931, U.S. President Herbert Hoover announced a year’s moratorium on all government debts. When it expired in June 1932, the secretary of state, Henry Stimson, proposed a year’s extension, but Hoover refused. The Europeans had meanwhile agreed to cancel their claims on German reparations but not to ratify this decision unless the United States wrote off their war debts. The Americans, seeing this as a European conspiracy, demanded continued payment. At this, all the European nations except Finland dug their heels in, exacerbating U.S. isolationism and making a global solution of the crisis still more unlikely.
In June 1933, nevertheless, a World Economic Conference met in London. Hoover’s successor as president, Franklin D. Roosevelt, made his secretary of state, Cordell Hull, the head of the U.S. delegation. Hull was a free-trader, but in July 1933 Roosevelt sent a message to the conference insisting that its main concern must be monetary exchanges, and in January 1934 the United States passed the Johnson Act, forbidding even private loans to countries that had not paid their war debts.
So there was no global solution: it was every man for himself. Some European countries—Germany in 1930–32, France until 1936—responded by deflation; they maintained the external value of their currencies but reduced their export prices by cutting wages and costs. The result was social unrest. In Germany, Chancellor Brüning’s 1930 decrees of the dissolution of the Reichstag and government by presidential order led to 107 Nazis and 77 communists being elected to Parliament that September. In France, Pierre Laval’s decrees led to the 1936 success of the left-wing Popular Front.
Other countries took to devaluation, leaving the gold standard to which Belgium, France, Italy, the Netherlands, and Switzerland still clung from 1931 to 1935. Britain devalued in September 1931, the United States in April 1933, and France in September 1936. This had the effect of making exports cheaper, but since it made imports more expensive it worked only if they could be discouraged by high tariffs (as in the United States) or if the country in question had access to cheap raw materials (as in Britain’s system of imperial preference).
A third option was to impose exchange controls to cut the economy off from world markets. This was the solution adopted by Germany in 1932 and by most of central Europe and the Balkans. It had the effect of creating German hegemony, since those central European and Balkan countries that needed to sell to the large German market were unable to repatriate their earnings and had to buy German goods. In 1932 Germany saw exchange controls and their effects as a temporary expedient. For Adolf Hitler and the Nazi party, however, they became part of a settled and sinister policy.
The trappings of dictatorship
Totalitarian dictatorship was a phenomenon first localized in 20th-century Europe. A number of developments made it possible. Since the 19th century the machine gun had greatly facilitated drastic crowd control. Public address systems, radio, and, later, television made it easy for an individual orator to move a multitude. Films offered new scope for propaganda. Psychology and pharmaceuticals lent themselves to brainwashing. Miniature cameras and electronic listening devices simplified surveillance. Heavy artillery, aircraft, and fast armored vehicles provided the means for waging a Blitzkrieg, or “lightning war.” Bullies and brutality, of course, there had always been.
The European dictatorships were far from identical. They differed in their historical roots, their social contexts, their ideologies, and their trappings. But they bore a family resemblance. Political analysis may underplay it; to their victims, it was all too obvious.
Europe’s first practical dictatorship was established in Russia by the Bolshevik Revolution of 1917. Its emblem, the hammer and sickle, represented physical labor in factory or field; there was no symbol for the scientist, the statesman, or the scholar. The aims of the revolution—liquidating the capitalist economic system, increasing public wealth, raising the material and cultural standard of working people—had wide appeal. But in its concern to industrialize and modernize a huge, backward union of republics with a long cultural legacy of tsarist domination that had been replaced by a centralizing socialist ideology, it relied on a one-party state, heavy censorship, the suppression of individual liberty, and the murder of awkward opponents. Theoretically, it foresaw “the withering away of the state.” For the time being, it embodied “the dictatorship of the proletariat”—or rather of a single leader, first Vladimir Ilich Lenin, then Joseph Stalin.
Two years after the Russian Revolution, in 1919, Benito Mussolini founded the fascist party in Italy. Its emblem, the fasces (a bundle of rods with an axe in the center), was a symbol of state power adopted from ancient Rome. Explicitly anticommunist, it was as opposed to the withering away of the state as it was to individualistic liberalism. “For the Fascist,” wrote Mussolini, “everything is the State.” His own regime, partially established in 1924 and completed in 1928–29, had its bullyboys and castor-oil torture, its murders and aggressive wars. But, for sociological and cultural, as well as political, reasons, it was both less systematic and less brutal than some other European dictatorships. Italy had a long tradition of regional diversity that resisted uniformity, and Italian society was permeated—in complex, sometimes contradictory ways—by the ubiquitous influence of the Roman Catholic church.
Forms of fascism took root in other Latin countries. In Spain in 1923 General Miguel Primo de Rivera seized power with the approval of the king. He dissolved Parliament, imprisoned democratic leaders, suspended trial by jury, censored the press, and placed the country under martial law. He tried to establish a fully fascist regime based on “Country, Religion, and the Monarchy,” but he met resistance from students and workers and abandoned the attempt in 1925, although he remained prime minister until 1930. In 1931 a republic was proclaimed, headed by a provisional government of republicans and socialists.
Meanwhile, in neighboring Portugal, António de Oliveira Salazar, a professor of economics, had been made finance minister after a military coup d’état in 1926; and, although he had resigned soon afterward, he had been recalled in 1928. After reorganizing the Portuguese budget, in 1932 he was offered the premiership. His conception of what he called the “Estado Novo,” or “New State,” was corporatist and fascist. Its authoritarian constitution, endorsed by plebiscite in 1933, allowed only one political party, the National Union (União Nacional).
In 1936 a general election in Spain gave a clear majority to the left. On May 10, Manuel Azaña, the Popular Front leader, was elected president, but two months later a group of army officers led by General Francisco Franco staged a fascist revolt. Supplied with arms, air power, and “volunteers” by Mussolini and Hitler, Franco’s forces won the ensuing Spanish Civil War—although it dragged on until 1939, when the U.S.S.R. finally cut off the aid it had given to the Republican government. The French and British governments pursued a policy of nonintervention, although an International Brigade of private volunteers fought alongside the Republicans. One significant feature of the Spanish Civil War was its use by Nazi pilots as a training ground for the dive-bombing tactics they later employed in World War II.
Nazi Germany, in fact, was Europe’s most elaborately developed dictatorship. Characteristically, Hitler took great care with the design of its emblem, a black swastika in a white circle on a red background; as iconography, it has long survived its regime. The swastika, originally the obverse of the Nazi version, was an Eastern mystic symbol brought into Europe in the 6th century—and Nazi ideology was no less mystical. It differed from fascism in at least two respects. It regarded the state as a means, rather than an end in itself; and the end it envisaged was the supremacy of what Hitler believed to be “the Aryan master race.” The final result—Hitler’s so-called Final Solution—was the systematic slaughter of at least six million Jews and millions of others whom the Nazis referred to as inferior peoples.
Born in Austria, Hitler had fought in World War I in the Bavarian infantry, twice winning the Iron Cross. In September 1919, six months after Mussolini founded the Italian fascist party, Hitler joined a German nationalist group that took the name of National Socialist German Workers’ Party (Nationalsozialistische Deutsche Arbeiterpartei), nicknamed “Nazi,” a truncation of Nationalsozialistische. Its policies included antisemitism and fierce opposition to the Treaty of Versailles. After his abortive Munich coup in 1923, Hitler was sentenced to five years’ imprisonment, of which he served nine months. While in prison, he wrote his autobiographical manifesto, Mein Kampf.
In 1930, with 107 seats, the Nazis became the second largest party in Parliament. On January 30, 1933, after three ineffectual chancellors, President Paul von Hindenburg appointed Hitler to the post, believing that the vice-chancellor, Franz von Papen, would counterbalance any Nazi excess.
Four weeks later the Reichstag building in Berlin was gutted by a fire probably started by a foolish young Dutch communist, but certainly exploited by the Nazis as evidence of an alleged communist plot. Hitler used the excuse to enact decrees that gave his party totalitarian powers. In the following June he eliminated most potential rivals, and when Hindenburg died on August 2, 1934, Hitler was proclaimed Führer, or leader of the German Reich.
Hitler’s foreign policy triumphs followed: the reoccupation of the Rhineland and the alliance with Mussolini in 1936; the Anschluss (“union”) with Austria and the occupation of Czechoslovakia in 1938–39; and in 1939 the German-Soviet Nonaggression Pact. Until Hitler’s invasion of Poland in September of that year, it sometimes seemed as if Europe’s democracies could only look on, prevaricate, and tremble.
