Annus Horribilis
Although most scholars put the focus of
the Great Depression on events in the United States, Swiss historian Tobias
Straumann turns his keen eye on the role Germany had in making the Great
Depression “Great.” In fact the 1932 annual report of the Bank for
International Settlements noted “In the circumstance of the German problem-
which is largely responsible for the growing financial paralysis of the world –
call for concerted action Governments alone can take.” To Straumann there is a
straight line from the May 1931 failure of the Credit Anstaltt, to Germany
suspending convertibility in the wake of bank runs in July, to Britain
abandoning the gold standard in September which was followed in September and October
by the Federal Reserve raising its discount rate for 1.5% to 3.5% in the teeth
of the depression.
He tells part of his story through the
eyes of Viennese economist and Swiss banker Felix Somary. As early as 1926
Somary was warning about the unsustainability of the reparations regime
establish after the Dawes Plan and as the 1920s roared on he became even more
bearish. Unfortunately to be right early is sometimes viewed as being wrong.
Trust me, I have experience with this. As a result his warnings went unheeded,
even from Keynes.
Although the title of this book is 1931,
it really starts in 1930 with the adoption of the Young Plan which modestly
reduced German reparations, but made the payment structure more rigid. The plan
was predicated on a growing world economy that was quickly turning into a tailspin.
From the outset both Hitler and the Communists became severe critics of the
plan.
The man caught in the middle was German
Chancellor Heinrich Bruning, a centrist. Straumann is more sympathetic to
Bruning than many historians. Simply put he had limited options and was hemmed
in by the gold standard which left him only one choice, austerity. As a result
in the September 1930 elections the Nazi Party received 19% of the vote and
becomes the second largest party in Germany. Although we now think of Hitler
with his militaristic racist screeds, in 1930 he was offering very serious
criticism of the Young Plan in his speeches. Hitler’s electoral gains terrify
foreign investors leading to a run on Germany’s gold reserves. Put bluntly,
Bruning was in a box and the countdown began.
By 1931 the downward spiral continued
with even more austerity coming from Bruning. To maintain domestic popularity
Bruning plays the nationalist card in returning the Rhineland to German control
and proposing a customs treaty with Austria. Of course the French go crazy and
that limits the availability of banking credits from France. Hence both German
and French politicians were prisoners of their own electorates. The lesson here
is that international agreements must have domestic support in order to work.
After the July 1931 banking collapse the
way was open for Hitler. In the October election the Nazis receive 37% of the
vote and become the largest party in Germany. With the Communists achieving 15%
of the vote, the two extremist parties work hand in glove to bring down
Bruning. And the rest as they say is history.
Straumann has written an important
history that should be required reading in the capitals of Europe. Although the
EU succeeded in Greece, at least for now, it might not be so lucky with Italy.
It should heed the lessons of “1931.”
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