Money and Trade Wars in Interwar Europe

The First World War was characterized financially by a complicated web of loans between the Allied powers. At the end of the war (November 1918), total indebtedness amounted to around $21.6bn.¹ The defeat of Germany was followed by huge reparations imposed on her by the victors. However, payment of reparations was closely linked to the settlement of the war debts, and the attitude of the Allied powers towards Germany was strongly influenced by their respective debit-credit positions. The United States had the biggest net credit position, followed by Britain. The American position was one of credit for $7.1bn, with a debit of just $0.4bn. The United Kingdom had lent $9.3bn to other Allies (mainly Russia, France and Italy), but also borrowed $6.1bn, mostly from the United States.

Germany’s political situation worsened in 1923. Passive resistance in the Ruhr meant that whenever Allied troops moved into a factory, a mine or an office, everyone stopped working. Government payments to finance passive resistance in the region fuelled further printing of money and subsequent inflation. The government made huge amounts of credit available to firms in the region while funding welfare and unemployment benefits, wages for unproductive work, and subsidies to railroads and postal services. The economic importance of the Ruhr meant its loss had significant consequences for the entire national economy.¹ Real wages started to decline, and industrial unemployment, until then fairly subdued, leapt from 1.5 per cent in 1922 to 10.2 per cent in 1923.² National solidarity was severely strained as interest groups vied to belittle one another’s suffering. In 1923 hyperinflation reached its peak, with prices increasing by 29,525 per cent in a month.³ The political unity of the Weimar Republic started wobbling.

The following sections deal with one of the most explored topics in the study of economic history: the shortage of gold, and the international struggle for it, which in the interwar period led cooperation between countries to become weaker and increasingly bilateral, as domestic concerns were prioritized. One relevant question is whether a close examination of these developments might lead us to challenge the widely accepted notion that national sovereignty and international cooperation are complementary. In the debate on the gold standard, our particular focus will be on how the ‘arithmetic’ of the standard worked in the turbulent years that followed the First World War.

From May 1930 onwards deposits at German banks shrank, mostly because of the withdrawal of foreign capital. Capital outflows accelerated after the Reichstag elections in September, which substantially increased the Nazi party’s representation. The Reichsbank’s gold reserve also shrank as a result: by the end of 1931 it had fallen below RM1bn, and one year later it was only RM0.8bn.¹ Already in mid-1931, the event finally occurred that Schacht had feared the most: the reserve fell below the statutory threshold of 40 per cent of the amount of money in circulation. In this condition, the Reichsbank’s balance sheet could not expand, and banks were not legally permitted to rely on central bank support. British historian John Wheeler-Bennett relates his meeting in June 1931 with Schacht’s successor at the Reichsbank, Hans Luther: ‘[T]his is a historic day in German banking,’ [Luther] said quietly. ‘For the first time in our history² we have not enough gold to cover our paper.’³

The disappearance of the Concert of Nations in the aftermath of the First World War was accompanied by the abandonment of the old common monetary standard based on gold and by increasing economic fragmentation. The panoply of foreign economic and financial agreements which characterized the interwar years, and were mostly signed on a bilateral basis or by very small groups of countries, reflected the polarization of foreign policies through pacts, protocols, understandings and ententes, sometimes with bombastic names;¹ they were mutually exclusive and established bonds among their signatories that were as strong as they were potentially inimical to any outsider: This was the result of a petty, mean-spirited approach to international cooperation.

It has already been mentioned that in the mid-1930s, 7 out of 19 clearing agreements concluded by Germany were with Central and Southeastern Europe countries. These countries were either born as a consequence of the redrawing of the map of Europe after the First World War or had become independent of the Ottoman Empire in an earlier time, and they all had suffered badly during that war. After the war, international stabilization loans were extended under the auspices of the League of Nations in order to sustain their economies, stabilize their currencies, and, in some cases, help with the settlement of refugees following the huge dislocation of peoples. Equivalent to £80m (around $380m) in total, these loans were granted between 1923 and 1928 to Austria, Bulgaria, Greece and Hungary, in addition to the Free City of Danzig and Estonia. But these countries were hit by the international banking crisis that erupted in Central Europe in 1931; furthermore, the Depression contributed to a huge fall in the prices of agricultural products, the export of which was their main source of foreign exchange — particularly for the countries of Southeastern Europe. Their antiquated methods of production made their agriculture prey to American competition. In Western Europe, French self-sufficiency and the British Imperial Preference agreed upon in Ottawa in 1932 (which privileged trade with Commonwealth countries) closed two major markets to Balkan exports.

In early 1930s, the Italian government was concerned about the rapid shrinking of the currency component of the official reserve, as shown by Table 4.4. But even Germany, a trade creditor towards Italy, lacked the currency to pay for its imports. A bilateral clearing arrangement might prove — wrote the Bank of Italy — the lesser evil (‘il male minore’), if accompanied by a mechanism that would balance trade and provide a hedge against foreign exchange risks.¹ For a better focus on the arrangements that this general situation of currency shortage was to produce in the commercial relations between Italy and Germany, some background information on the main features of Italy’s foreign trade will be useful.

Before considering the drawing-up of the Funk Plan of summer 1940 it is necessary to briefly outline the Reichsbank’s attitude towards the main monetary issues dealt with in the plan. This attitude was affected considerably by military developments in the earlier phase of war.

Quite possibly, anyone who has this book will have found the following question unavoidable: Are there similarities to be found with certain current developments? I personally believe that history cannot dispense lessons to be learned. Any particular set of events has its own motivations rooted in its own time and place, of which we shall never see a replica. In particular, to infer conclusions from circumstances, similar to the present, which occurred in the past, is disingenuous at best and intellectually dishonest at worst. This is all the more true if we try to predict future economic developments from seemingly analogous past experiences. Historians are second only to economists in making wrong forecasts. With this caveat, it is nevertheless valid to wonder whether some similarity with those past experiences may contribute to a better understanding of current circumstances.