With hindsight we date the onset of the Great Depression back to the Wall Street crash of October 1929. But that was not obvious at the time. At first it seemed the world economy might merely be entering a normal cyclical downturn. It was in 1931 with the sequence of the Austrian banking crisis, the shutdown of the German financial system and then Britain’s departure from the gold standard that it became clear that this recession was, indeed, a major turning point in world history.
The value of Swiss historian Tobias Straumann’s book is that it focuses our attention squarely on the drama of that year, the moment when the fragile political and financial order restored after the first world war came apart.
Germany is at the centre of the drama but Straumann takes an admirably international view. The options of Germany’s centre-right government, headed by Chancellor Heinrich Brüning, were limited first and foremost by external constraints. After war, revolution and hyperinflation, Weimar Germany had been stabilised in 1924 on the gold standard. This restored its financial respectability but limited the freedom of the central bank to expand credit, while permitting a massive outflow of foreign money when confidence collapsed.
Layered on top was the reparations regime, which was given its final form in 1929 with the negotiation of the so-called Young Plan. The Young Plan reduced Germany’s liability somewhat. But it stretched it to the distant future and made Germany responsible for paying regardless of the state of its balance of payments. The idea was to depoliticise and commercialise reparations by treating them like any other debt. With the onset of the recession, the effect was the reverse. As tax revenue plunged and unemployment insurance payments soared, the debt burden became ever more unbearable. Both domestic political and diplomatic tensions soared. After years in the wilderness following the failed Beer Hall Putsch of 1923, Adolf Hitler and his National Socialist movement leapfrogged to the forefront of nationalist politics as the most radical opponents of the Young Plan.
As Straumann shows, both the British and French governments were aware of the escalating crisis in Germany. But they had their own electorates to worry about. And Brüning’s government, clinging to power thanks to the support of Weimar’s president, the grizzled Paul von Hindenburg, made matters worse. To win support for his deeply unpopular austerity measures, Brüning chose to parade his nationalist colours, challenging the French over demilitarisation, offering customs union to the Austrians, anticipating Hitler’s Anschluss of 1938, and demanding a renegotiation of the Young Plan. Given the fragile state of Germany’s finances, this was spectacularly dangerous brinkmanship.
By raising the real value of debts, the deflation being forced through by Berlin inflicted crippling losses on borrowers. By June 1931 it was clear that the loan portfolios of Germany’s largest banks were riddled with bad debts. Deutsche and Commerz had enough capital to survive. Danat and Dresdner did not. As foreign investors withdrew their deposits and the banks turned to the Reichsbank for funds, the central bank too came under pressure. As the Reichsbank pumped liquidity into the system, it increased the claims against its dwindling gold reserves. By the end of June, it was clear that the central bank would either have to stop support for the banks or abandon its promise to exchange currency for gold.
To counter the crisis, Brüning’s government tried to work with the banks. But the financial elite were hopelessly divided. Over the fateful weekend of July 11-12 1931, the rival banks insisted that only Danat should be closed. Then, faced with a comprehensive bank run on Monday 13, the Reich was forced to shut down the entire financial system and to impose exchange controls to limit the outflow of currency. To all intents and purposes, Germany was shut off from the global economy. Goebbels and the propagandists of the Nazi party were delighted. The liberal order was consuming itself before their eyes.
Straumann’s is a fast-paced and elegantly constructive narrative. Anyone who wants to go deeper should consult Robert Boyce’s massive The Great Interwar Crisis and the Collapse of Globalization. But it is precisely the brevity and focus of Straumann’s narrative that gives it its force. This is a story that brings back memories, and not just of the distant past. I defy anyone who lived through the drama of the eurozone and the 2008 crises to read 1931: Debt, Crisis, and the Rise of Hitler without a shiver running down their spine. It is like witnessing a rerun of the Greek crisis, or an anticipation of the great Italian debt crisis that may yet come to be, but this time the story really does end with the coming to power of Adolf Hitler.
And Straumann leaves us in no doubt. This was a crisis of democratic policymaking. The solution was obvious: a comprehensive and simultaneous writedown of war debts and reparations. But American, British and French public opinion forbade making adequate concessions to each other or to Germany. When America’s President Herbert Hoover made a desperate effort to stem the crisis by offering a temporary moratorium on all inter-governmental debts, Paris dragged its heels. As Straumann acknowledges, the political cost for the French government was simply exorbitant. Meanwhile in Germany, Brüning resorted to rule by Hindenburg’s presidential decree. Germany’s first steps away from parliamentary democracy were taken not in 1933 under Hitler, but by Brüning in the name of austerity.
If John Kenneth Galbraith forever etched the 1929 crash into historical consciousness, with his classic 1955 account, Straumann has given us the narrative of 1931 that every decision maker in Europe should read. One can only regret that his history was not available 10 years ago. It would be good for Europe if it were to appear rapidly in a German edition. Perhaps a far-sighted Italian benefactor might be persuaded to sponsor a translation. It would be money well spent.
1931: Debt, Crisis and the Rise of Hitler, by Tobias Straumann, OUP, RRP£16.99, 272 pages
Adam Tooze is the author of ‘Crashed: How a Decade of Financial Crises Changed the World’
Get alerts on History books when a new story is published