The Rise and Fall of the Great Powers (57 page)

Finally, the financing of the war had caused economic—and later political—problems of unprecedented complexity. Very few of the belligerents (Britain and the United States were among the exceptions) had tried to pay for even part of the costs of the conflict by increasing taxes; instead most states relied almost entirely on borrowing, assuming that the defeated foe would be forced to meet the bill—as had happened to France in 1871. Public debts, now uncovered by gold, rose precipitously; paper money, pouring out of the state treasuries, sent prices soaring.
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Given the economic devastation and territorial dislocations caused by the war, no European country was ready to follow the United States back onto the gold standard in 1919. Lax monetary and fiscal policies caused inflation to keep on increasing, with disastrous results in central and eastern Europe. Competitive depreciations of the national currency, carried out in a desperate attempt to boost exports, simply created more financial instability—as well as political rivalry. This was all compounded by the intractable related issues of intra-Allied loans and the victors’ (especially France’s) demand for substantial German reparations. All the European allies were in debt to Britain, and to a lesser extent to France; while those two powers were heavily in debt to the United States. With the Bolsheviks’ repudiating Russia’s massive borrowings of $3.6 billion, with the Americans asking for their money back, with France, Italy, and other countries refusing to pay off their debts until they had received reparations from Germany, and with the Germans declaring that they could not possibly pay the amounts demanded of them, the scene was set for years of bitter wrangling, which sharply widened the gap in political sympathies between western Europe and a disgruntled United States.
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If it was true that these quarrels seemed smoothed over by the Dawes Plan of 1924, the political and social consequences of this turbulence had been immense, especially during the German hyperinflation of the previous year. What was equally alarming, although less well understood at the time, was that the apparent financial and commercial stabilization of the world economy by the mid-1920s rested on far more precarious foundations than had existed prior to the First World War. Although the gold standard was being restored in most countries by then, the subtle (and almost self-balancing) pre-1914 mechanism of international trade and monetary flows based upon the City of London had not. London had, in fact, made desperate attempts to recover that role—including the 1925 fixing of the sterling convertibility rate at the prewar level of £1:$4.86, which badly hurt British exporters; and it also
had resumed large-scale lending overseas. Nonetheless, the fact was that the center of world finance had naturally moved across the Atlantic between 1914 and 1919, as Europe’s international debts increased and the United States became the world’s greatest creditor nation. On the other hand, the quite different structure of the American economy—less dependent upon foreign commerce and much less integrated into the world economy, protectionist-inclined (especially in agriculture) rather than free-trading, lacking a full equivalent to the Bank of England, fluctuating much more wildly in its booms and busts, with politicians much more directly influenced by domestic lobbies—meant that the international financial and commercial system revolved around a volatile and flawed central point. There was now no real “lender of last resort,” offering long-term loans for the infrastructural development of the world economy and stabilizing the temporary disjunctions in the international accounts.
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These structural inadequacies were concealed in the late 1920s, when vast amounts of dollars flowed out of the United States in short-term loans to European governments and municipalities, all willing to offer high interest rates in order to use such funds—not always wisely—both for development and to close the gap in their balance of payments. With short-term money being thus employed for long-term projects, with considerable amounts of investment (especially in central and eastern Europe) still going into agriculture and thus increasing the downward pressures on farm prices, with the costs of servicing these debts rising alarmingly and, since they could not be paid off by exports, being sustained only by further borrowings, the system was already breaking down in the summer of 1928, when the American domestic boom (and the Federal Reserve’s reactive increase in interest rates) sharply curtailed the outflow of capital.

The ending of that boom in the “Wall Street crash” of October 1929 and the further reduction in American lending then instigated a chain reaction which appeared uncontrollable: the lack of ready credit reduced both investment and consumption; depressed demand among the industrialized countries hurt producers of foodstuffs and raw materials, who responded desperately by increasing supply and then witnessing the near-total collapse of prices—making it impossible for them in turn to purchase manufactured goods. Deflation, going off gold and devaluing the currency, restrictive measures on commerce and capital, and defaults upon international debts were the various expedients of the day; each one dealt a further blow to the global system of trade and credit. The archprotectionist Smoot-Hawley Tariff, passed (in the calculation of aiding American farmers) by the only country with a substantial trade surplus, made it even more difficult for other countries to earn dollars—and led to the inevitable reprisals, which devastated American exports. By the summer of 1932, industrial
production in many countries was only half that of 1928, and world trade had shrunk by one-third. The value of European trade ($58 billion in 1928) was still down at $20.8 billion in 1935—a decline which in turn hit shipping, shipbuilding, insurance, and so on.
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Given the severity of this worldwide depression and the massive unemployment caused by it, there was no way international politics could escape from its dire effects. The fierce competition in manufactures, raw materials, and farm produce increased national resentments and impelled many a politician, aware of his constituents’ discontents, into trying to make the foreigner pay; more extreme groups, especially of the right, took advantage of the economic dislocation to attack the entire liberal-capitalist system and to call for assertive “national” policies, backed if necessary by the sword. The more fragile democracies, in Weimar Germany especially but also in Spain, Rumania, and elsewhere, buckled under these politico-economic strains. The cautious conservatives who ruled Japan were edged out by nationalists and militarists. If the democracies of the West weathered these storms better, their statesmen were forced to concentrate upon domestic economic management, increasingly tinged with a beggar-thy-neighbor attitude. Neither the United States nor France, the main gold-surplus countries, were willing to bail out debtor states; indeed, France inclined more and more to use its financial strength to try to control German behavior (which merely intensified resentments on the other side of the Rhine) and to aid its own European diplomacy. Similarly, the “Hoover moratorium” on German reparations, which so infuriated the French, could not be separated from the issue of reductions in (and ultimately defaults on) war debts, which made the Americans bitter. Competitive devaluations in currency, and disagreements at the 1933 World Economic Conference about the dollar-sterling rate, completed this gloomy picture.

By that time, the cosmopolitan world order had dissolved into various rivaling subunits: a sterling block, based upon British trade patterns and enhanced by the “imperial preferences” of the 1932 Ottawa Conference: a gold block, led by France; a yen block, dependent upon Japan, in the Far East; a U.S.-led dollar block (after Roosevelt also went off gold); and, completely detached from these convulsions, a USSR steadily building “socialism in one country.” The trend toward autarky was thus already strongly developed even before Adolf Hitler commenced his program of creating a self-sufficient, thousand-year Reich in which foreign trade was reduced to special deals and “barter” agreements. With France having repeatedly opposed the Anglo-Saxon powers over the treatment of German reparations, with Roosevelt claiming that the United States always lost out in deals with the British, and with Neville Chamberlain already convinced of his later remark that the American policy was all “words,”
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the democracies were in no
frame of mind to cooperate in handling the pressures building up for territorial charges in the flawed 1919 world order.

The Old World statesmen and foreign offices had always found it difficult either to understand or to deal with economic issues; but perhaps an even more disruptive feature, to those fondly looking back at the cabinet diplomacy of the nineteenth century, was the increasing influence of mass public opinion upon international affairs during the 1920s and 1930s. In some ways, of course, this was inevitable. Even before the First World War, political groups across Europe had been criticizing the arcane, secretive methods and elitist preconceptions of the “old diplomacy,” and calling instead for a reformed system, where the affairs of state were open to the scrutiny of the people and their representatives.
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These demands were greatly boosted by the 1914–1918 conflict, partly because the leaderships who demanded the total mobilization of society realized that society, in turn, would require compensations for its sacrifices and a say in the peace; partly because the war, fondly proclaimed by Allied propagandists as a struggle for democracy and national self-determination, did indeed smash the autocratic empires of east-central Europe; and partly because the powerful and appealing figure of Woodrow Wilson kept up the pressures for a new and enlightened world order even as Clemenceau and Lloyd George were proclaiming the need for total victory.
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But the problem with “public opinion” after 1919 was that many sections of it did
not
match that fond Gladstonian and Wilsonian vision of a liberal, educated, fair-minded populace, imbued with internationalist ideas, utilitarian assumptions, and respect for the rule of law. As Arno Mayer has shown, “the old diplomacy” which (it was widely claimed) had caused the World War was being challenged after 1917 not only by Wilsonian reformism, but also by the Bolsheviks’ much more systematic criticism of the existing order—a criticism of considerable attraction to the organized working classes in
both
belligerent camps.
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While this caused nimble politicians such as Lloyd George to invent their own “package” of progressive domestic and foreign policies, to neutralize Wilson’s appeal and to check labor’s drift toward socialism,
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the impact upon more conservative and nationalist figures in the Allied camp was quite different. In their view, Wilsonian principles must be firmly rejected in the interests of national “security,” which could only be measured in the hard cash of border adjustments, colonial acquisitions, and reparations; while Lenin’s threat, which was much more frightening, had to be ruthlessly smashed, in its Bolshevik heartland and (especially) in the imitative soviets which sprang up in the West. The politics and diplomacy of the peacemaking,
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in other words, was charged with background ideological and domestic-political elements to a degree unknown at the congresses of 1856 and 1878.

There was more. In the western democracies, the images of the First World War which prevailed by the late 1920s were of death, destruction, horror, waste, and the futility of it all. The “Carthaginian peace” of 1919, the lack of those benefits promised by wartime politicians in return for the people’s sacrifices, the millions of maimed veterans and of war widows, the economic troubles of the 1920s, the loss of faith and the breakdown in Victorian social and personal relationships, were all blamed upon the folly of the July 1914 decisions.
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But this widespread public recoil from fighting and militarism, mingled in many quarters with the hope that the League of Nations would render impossible any repetition of that disaster, was not shared by all of the war’s participants—even if Anglo-American literature gives that impression.
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To hundreds of thousands of former
Frontsoldaten
across the continent of Europe, disillusioned by the unemployment and inflation and boredom of the postwar bourgeois-dominated order, the conflict had represented something searing but positive: martial values, the camaraderie of warriors, the thrill of violence and action. To such groups, especially in the defeated nations of Germany and Hungary and in the bitterly dissatisfied victor nation of Italy, but also among the French right, the ideas of the new fascist movements—of order, discipline, and national glory, of the smashing of the Jews, Bolsheviks, intellectual decadents, and self-satisfied liberal middle classes—had great appeal. In their eyes (and in the eyes of their equivalents in Japan), it was struggle and force and heroism which were the enduring features of life, and the tenets of Wilsonian internationism which were false and outdated.
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What this meant was that international relations during the 1920s and 1930s continued to be complicated by ideology, and by the steady fissuring of world society into political blocs which only partly overlapped with the economic subdivisions mentioned earlier. On the one hand, there were the western democracies, especially in the English-speaking world, recoiling from the horror of the First World War, concentrating upon domestic (especially socioeconomic) issues, and massively reducing their defense establishments; and while the French leadership kept up a large army and air force out of fear of a revived Germany, it was evident that much of its public shared this hatred of war and desire for social reconstruction. On the other hand, there was the Soviet Union, isolated in so many ways from the global politico-economic system yet attracting admirers in the West because it offered, purportedly, a “new civilization” which
inter alia
escaped the Great Depression,
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though the USSR was also widely detested. Finally, there were, at least by the 1930s, the fascistic “revisionist” states of Germany, Japan, and Italy, which were not only virulently anti-Bolshevik but also denounced the liberal-capitalist status quo that had been reestablished in 1919. All this made the conduct of foreign policy inordinately
difficult for democratic statesmen, who possessed little grasp of either the fascist or the Bolshevik frame of mind, and yearned merely to return to that state of Edwardian “normalcy” which the war had so badly destroyed.