Dark Continent: Europe's Twentieth Century (19 page)

Four years of total war had completely destroyed the traditional monetary foundations of nineteenth-century bourgeois confidence and economic stability. The war had forced countries to suspend the convertibility of their currencies and to abandon those basic principles of Victorian capitalism: the gold standard and free trade. Governments had accumulated enormous debts to finance the war, and Europe’s main creditor powers had ended the conflict in debt to the United States. The war had also boosted the power of organized labour, and made it harder to keep down wages. It had destroyed old trading networks on the Continent itself, and it had encouraged new centres of industrial and agricultural production outside Europe, so that as the war ended Europe’s producers faced increased global competition.

At the same time, the success of the Bolshevik Revolution and the emergence of the Soviet Union presented European capitalism with an unprecedented challenge. “Russia is no Africa, Mexico or Java,” insisted a Russian artist in 1922. “We and western Europe live in the same times and are no longer distant from one another.” In the aftermath of the “global social revolution,” he continued, it was the Soviet Union which was teaching the rest of the world its future and the possibility of a “new beginning.” In the early 1920s, in particular, such a prospect made European statesmen shudder, and propelled them to take the task of reconstructing the continent’s economy seriously.

In this task, however, there was something of a paradox. Bringing Europe back to the “normalcy” of the world before 1914, as so many wanted, meant trying to return to free trade, fixed exchange rates and minimal state involvement. This was a world in which the state kept out of economic affairs and left investment decisions to private businessmen and the mass of individual bondholders. The task of fighting a world war had, of course, forced the state to intervene more heavily than before in economic affairs in order to “organize” economic life; but few in Britain or France, the two countries which would take the lead in Europe’s economic reconstruction, wanted to see such wartime state activism continue long into the peace. Thus the first plans drawn up for continental recovery involved statesmen relying
heavily on the private sector for backing—with predictably unfruitful results.

Lloyd George and Aristide Briand, the British and French premiers at the start of the 1920s, both activists by temperament, agreed that Europe’s problem was common to East and West, and therefore needed an overall approach. As they wrote in a preparatory memorandum:

The markets of Central and Eastern Europe are essential to the well-being of European industry. If those markets cannot be reconstituted, Eastern and South-Eastern Europe will lose millions of their population and reconstruction will become progressively more difficult; and the conditions which produce misery and starvation in the East will doom the industrial population of Western Europe to a long period of under-employment during which they will compete with each other in markets incapable of taking more than a part of the goods they are anxious to produce. In such circumstances, the economic rehabilitation of Europe will be impossible. Inflation will continue, the cost of living will rise, the standard of life will be depressed; and in the West of Europe as in the East, starvation and under-feeding will waste the fibre of the wage-earning and the professional classes …
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What the British and French proposed was to set up an international investment consortium which would inject private capital into central-eastern Europe. Needless to say, this precursor of the European Bank of Reconstruction and Development (which was entrusted with a similar task in the 1990s) was not a great success: western bankers were not going to lend money until there was some order in eastern Europe; they would follow stability and could not be relied upon to create it. The capitalist equilibrium of the continent had been shattered, but European capitalism itself was capable of only a halfhearted response.

The failure of the Lloyd George-Briand scheme underlined the weakness and hesitancy of post-war market forces and the necessity for some kind of government action if capitalism was to be successfully
rebuilt. For this purpose, the British and French turned to their intergovernmental creation, the League of Nations, which did play an important part in the reconstruction effort in the mid-1920s. Not merely a diplomatic forum, the League took an active part in brokering financial deals between impoverished governments and western bondholders. In Austria, Estonia, Hungary, Greece and elsewhere it raised money for governments on condition they stabilized their budgets, and it insisted upon the foundation of independent central banks. Just as eager Harvard economists rushed into eastern Europe after the fall of communism, so seventy years earlier western bankers and financial experts helped redesign these war-ravaged and impoverished economies on the approved liberal lines. Westerners acted as supervisors of central banks, inspectors of tax revenues and even chaired powerful committees resettling millions of refugees.

Although the League of Nations’ key Financial Committee had members drawn from a number of countries, it was the prominent part played by British delegates which attracted comment and suspicion. Given London’s traditional eminence as an international capital market, it was perhaps not surprising that the Bank of England should be accused of financial imperialism and of wishing to bring about “some sort of dictatorship over the central banks of Europe.” Sir Otto Niemeyer, the most powerful and energetic British delegate, who sat on the Financial Committee from 1922 to 1937, also just happened to be a director of the Bank of England. It was easy to see the League as the cat’s-paw of City plutocrats, stretching out over the rich pickings of a defenceless continent.
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In fact Montagu Norman, the eccentric Governor of the Bank of England, did have some vague, long-term pipe-dream of a free-trading Europe with central banks linked to sterling. He hoped to preserve London’s pre-eminence as a centre of international banking through, for example, the idea of “an Economic Federation to include half a dozen countries on or near the Danube.” Yet this was very much a
liberal
dream, and was undermined by the British government’s reluctance to involve itself in economic affairs. In the long run, in fact, the laissez-faire tradition in British economic diplomacy undermined all the plans of Niemeyer and Norman, and made Britain a very halfhearted architect of capitalist revival: the market was more sacrosanct
in London than perhaps anywhere else. With the exception of Lloyd George, the British government was not convinced that central and eastern Europe really mattered, given the small fraction of British trade and investment the area attracted compared with the USA, western Europe or the empire. The Foreign Office was suspicious of the League of Nations and unimpressed by the work of its Financial Committee. There were thus clear limits to Whitehall’s willingness to foster a new economic order in Europe.
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Capitalist reconstruction was also weakened by the tensions which surfaced between the Entente powers over the desirability of fostering recovery in Germany, a question discussed largely in relation to the issue of reparations. Britain had little sympathy with what it saw as French anti-Germanism and Paris’s efforts to saddle Weimar with a massive reparations bill. The French, in turn, felt let down by London. In early 1923 the tussle across the Rhine reached its climax when, provoked by German non-payments, the French and Belgian governments sent in troops and occupied the Ruhr. In fact, the occupation of the Ruhr was a humiliating fiasco which only served to underline the limits to French power. In Germany itself inflation spiralled out of control, and by December prices were 126 trillion times higher than before the war. The French faced strong pressure from both the British and the Americans to negotiate a way out, just as a budgetary and financial crisis in France itself underlined the country’s own fragility. All this helps explain why these events have been seen as “the end of French predominance in Europe.”

The hard lesson learned from the Ruhr crisis was that the Versailles victors could not win the peace except by joint action. More important, it demonstrated that the capitalist reconstruction of Europe could not be brought about by Europe alone. Among its major economies—France, Britain and Germany—there was simply too much ill-feeling: the USA, turned by the war into the world’s greatest creditor power, also had to be involved. Private American loan capital had in fact been flowing into western Europe from the end of the war; American relief organizations had been coping with famine in the Ukraine and refugee resettlement in the Balkans. It was the American
government
that needed to be cajoled out of isolationism. The Ruhr crisis and the resulting diplomatic impasse provided the catalyst, and
the Americans were brought back in. For five brief years, an American-brokered deal brought peace on the reparations issue and American capital propped up Europe’s recovery.

America’s re-entry into Europe’s affairs, however, intensified the Old Continent’s fears of a transatlantic takeover and reflected all the anxieties and fears that the war had provoked about the decline of European values. For the first time America’s economic supremacy challenged its own economic and cultural strength. England’s roads, warned J. B. Priestley in his
English Journey
(1934), now “only differ in a few minor details from a few thousand such roads in the United States, where the same tooth-pastes and soaps and gramophone records are being sold, the very same films are being shown.” Books like André Siegfried’s best-seller,
America Comes of Age
(1927), warned of the challenge ahead.
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In fact, American multinational expansion abroad may have been faster between 1924 and 1929 than any time in the post-1945 era. Politicians of all hues, unionists and businessmen worried about Europe’s inability to compete and drew a now-familiar moral. As British Labour leader Ramsay MacDonald warned: “The United States has already developed as a super-national power. Unless Europe can do the same, the doom of her economic pretensions is certain. The recognition of these facts is dawning on the Continent … The goal is still very far-off … But there are signs that a movement towards it has begun, which may prove the decisive issue of the twentieth century.”
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Pushed ahead by the French, encouraged by the upswing of the mid-1920s, the proponents of pan-European economic cooperation gathered heart. Signing the 1925 Locarno treaties, which ushered in a new era of Franco-German cooperation, Aristide Briand heralded them as “the draft of the constitution of a European family within the orbit of the League of Nations … the beginning of a magnificent work, the renewal of Europe.” The 1927 International Economic Conference in Geneva, gathered at French initiative, met—according to its chairman—to move towards “an economic league of Nations whose long-term goal … is the creation of a United States of Europe.” This he envisaged as “the sole economic formula which can fight effectively against the United States of America.” Leading
British industrialists shared this confidence in the inevitability of the emergence of “an organized European bloc.” But, as the future was to show, the French lacked the strength, the British the will, to realize such a venture. Whitehall was torn between Europe and Empire, and increasingly plumped for the latter. The first time round, the cause of European unity was stillborn; it would require heavy American involvement, a Western-oriented Germany and the Cold War to make it work.
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From some points of view, the mid-1920s were a period of prosperity, stabilization and success. One after the other, currencies were brought under control; Britain, Italy, Germany and France all fixed their currencies to gold. Wild fluctuations in exchange rates and hyperinflation were succeeded by a period of gentle inflation which stimulated business and encouraged growth. New central banks started operating, speculation was dampened, investor confidence revived and the main money markets started lending on a large scale throughout Europe. It is an indication of the attractions of this revival of capitalism, and the rewards that apparently lay ahead for those who joined the club, that Yugoslavia returned to the gold standard as late as June 1931.

Yet the recovery was a fragile one and even before the Wall Street crash of late 1929 there were warning signs of what was to come. German and British trade figures remained lower than they had been in 1913. Few countries took advantage of the relatively prosperous mid-1920s to reduce tariffs. They were more concerned to shelter their own producers from the pressure of world markets, where prices for basic commodities were already
falling
from the middle of the decade. “Today more or less everywhere—in the Far East, India, South America, South Africa—industrial regions are in being, or coming into being,” wrote an alarmed Oswald Spengler, “which, owing to the low scale of wages, will face us with deadly competition. The unassailable privileges of the white races have been thrown away, squandered, betrayed … The exploited world is beginning to take its revenge on its lords.”
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In addition to this new global competition with its harshly deflationary impact, Europe’s recovery in the 1920s was also constrained by its own economic policies and theories. The simple fact was that
the existing rules of the game were not designed primarily to boost production or to provide work. The overwhelming priority attached to returning to gold required doses of deflation to bring down wage and price levels, and savage welfare cuts. The political consequences could be seen graphically in Britain, where this policy was pursued especially vigorously: it was sterling’s return to gold in 1925, driven through by the Chancellor, Winston Churchill, which led directly to the General Strike the following year; and if the crisis of 1929–31 had less impact there than in Germany it was only because unemployment in Britain remained at high levels through the 1920s.