The German Currency Crisis of 1930

Home , Hans Luther, October 1930, Reichsgericht, September 1930

Why the French said “non”: Creditor-debtor politics and the German financial crises of 1930 and 1931

Simon Banholzer, University of Zurich

Tobias Straumann, University of Zurich1

First draft

July, 2015

Abstract

Why did France delay the Hoover moratorium in June of 1931? In many accounts, this policy is explained by Germany’s reluctance to respond to the French gestures of reconciliation in early 1931 and by the announcement to form a customs union with Austria in March of 1931. The analysis of the German currency crisis in the fall of 1930 suggests otherwise. Already then, the French government did not cooperate in order to help the Brüning government to overcome the crisis. On the contrary, it delayed the negotiation process, thus acerbating the crisis. But unlike in 1931, France did not have the veto power to obstruct the rescue.

1 Corresponding author: Tobias Straumann, Department of Economics (Economic History), Zürichbergstrasse 14, CH–8032 Zürich, Switzerland, [email protected] 1

1. Introduction

The German crisis of 1931 is one the crucial moments in the course of the global slump. It led to a global liquidity crisis, bringing down the British pound and a number of other currencies and causing a banking crisis in the United States and elsewhere. The economic turmoil also had negative political consequences. The legitimacy of the Weimar Republic further eroded, Chancellor Heinrich Brüning became even more unpopular. The British historian Arnold Toynbee quite rightly dubbed the year 1931 “annus terribilis”.

As with any financial crisis, the fundamental cause was a conflict of interests and a climate of mistrust between the creditors and the debtor. The crisis could have been contained, if the French authorities had immediately supported the debt and reparations moratorium suggested by US President Herbert Hoover on June 20, 1931. They chose to tie political conditions to their support, but neither Germany nor the US nor any other country endorsing the Hoover moratorium had any understanding for the French procedure. On the other hand, the German government did not make it easier for the French to fall in line. In the end, the US forced the French to go along, but it was already too late. By early July, the German crisis had gotten out of control.

Why did the French delay the Hoover moratorium? Many economic historians put much blame on the foreign policy of the Brüning cabinet. Their main criticism is that by announcing the plan of a customs union with Austria on 21 Mars, 1931, they destroyed the growing French readiness to transform Germany’s foreign short-term debts into long-term debts. In his seminal study of Franco-German relations between 1928 and 1931 Knipping (1987, p. 215) writes: „It was not really a war that erupted between Germany and France in March and April of 1931… But the immediate consequence was a consolidation of the creeping crisis of the Franco-German relationship into a mutual political obstruction and paralyzation…”

Likewise, Ferguson and Temin (2003, p. 43) conclude: “Indeed, the cause of Franco-German cooperation, if not reconciliation, appeared to be making great strides forward. What destroyed it was the German government’s decision to pursue Drang nach Osten. It is all very well to say, as Duisberg and other apologists for the policy did, that this decision was a response to pressures for “imperial preference” among the allies. So it was. But the reckless pursuit of “Mitteleuropa” destroyed the possibility of French financing for Germany. 2

Stabilizing Germany by this means was clearly a goal of Briand’s policy, and he came heartbreakingly close to bringing it off.”

There is no doubt that the project of a customs union poisoned Franco-German relations. But as we will argue, it cannot fully account for the French reaction in the summer of 1931 that delayed the adoption of the Hoover moratorium, thus further escalating Germany’s crisis. We will show that there was an important antecedent that has not been thoroughly studied by economic historians. In the fall of 1930, the French government refused to help the German government to overcome the currency crisis following the September elections that increased the share of Nazi votes from 3 to 18 percent. At that time, the idea of a customs union was not in the air, nor did the German government question the Young plan. Thus, there must have been other reasons leading the Tardieu cabinet to stop French banks from helping Chancellor Brüning to deal with the currency crisis.

More generally, the Franco-German relationship was blocked by typical creditor-debtor politics, with the creditor underestimating the plight of the debtor and the debtor overestimating the room of maneuver of the creditor. France had enough time to solve the crisis before March 21, 1931, but hesitated because of domestic opposition. The same is true for Germany. Theoretically, a more collaborative approach would have been possible, but the deterioration of the economic and financial situation and the pressure of domestic politics precluded any major compromise.

The contribution of the paper is threefold. First, the analysis of Germany’s financial crises in 1930 and 1931 is based on a new dataset including daily quotations. Secondly, it goes beyond the existing literature by taking the 1930 more seriously. In the standard accounts, the 1930 crisis is mainly seen as part of the prehistory of the 1931 crisis. We believe that the 1930 crisis is a major turning point. Thirdly, we contribute to the literature on the coordination failure (Wolf 2013).

The remainder of the paper is structured as follows. Section 2 describes the currency crisis of 1930. Section 3 explains why the French refused to participate in the loan provided to Germany in order to contain the crisis. Section 4 interprets the first part of the 1931 crisis as a rerun of the 1930 crisis, except for one difference: while in 1930 France did not have a veto power, it had one in 1931 that ultimately brought down the German financial and monetary system. The paper ends with a short conclusion. 3

2. The German currency crisis of 1930

In September and October of 1930, Germany experienced a severe currency crisis. It started in mid-September and was ended by a loan from the US bank Lee, Higginson & Co. (LHC) signed on October 11 and by a set of austerity measures passed by the Reichstag on October 19.2 The fundamental problem was not solved, of course. Germany remained politically unstable, and the government continued to experience funding problems at the end of almost each month. But in contrast to the German crisis of 1931, crisis management was successful. Capital flight stopped, the Reichsbank was able to stabilize its gold and foreign exchange reserves.

The immediate cause of the crisis was the outcome of the Reichstag elections held on September 14, 1930. Many expected a victory of the radical parties. Yet, the result surprised almost everyone, including the winners themselves. Out of the 577 seats of the Reichstag, the National Socialists won 107 seats (+95), thus becoming the second largest party after the Social Democrats who won 143 seats (-10). The second winner was the Communist Party gaining 77 seats (+23). Of the parties forming the cabinet, only Brüning’s Catholic Centre Party did well by adding 7 seats. It was simply a fiasco. The only comfort was that the radical German National People’s Party (DNVP) led by the media tsar Alfred Hugenberg lost 32 seats.

[Table 1 about here]

The elections were held outside of the normal schedule. The last elections had been in 1928, the next ones were supposed to take place in 1932. The reason for the early elections was the end of the Great Coalition under Chancellor Hermann Müller (Social Democrat) in late March of 1930. It was the last cabinet of the Weimar Republic that was based on a majority in the Reichstag. Disagreements over austerity measures proved too divisive for the coalition. President Paul von Hindenburg mandated Heinrich Brüning, the leader of the Catholic Centre Party in the Reichstag, to form a minority government without the Social Democrats. Hindenburg wanted to have a technocratic government that was able to restructure public finances and to endorse the rearmament of the Reichswehr. Brüning succeded in the first round to pass parts of his austerity package, but ultimately failed to win a majority for his

2 Hardach (1976), p. 121. 4

financial program, just like his predecessor Müller. Not only the radical parties, the German National People’s Party (14.3%), the National Socialists (2.6%), and the Communists (10.6%), voted against the bill, but also the Social Democrats (29.8%). Brüning then asked President Hindenburg to convert the draft bill into an emergency decree on the basis of Article 48 of the Weimar Constitution, but the Reichstag came up with the votes necessary to overrule it. Again the Social Democrats joined forces with the radical Right and the radical Left. As a result, Brüning on July 18 asked Hindenburg to dissolve the Reichstag.

Not surprisingly, the radicalization of the German electorate unsettled investors. In the week following the Reichstag elections the price of the Young Loan in London dropped by several percentage points (see figure 1). It then stabilized, until another dramatic decline occurred, until the crisis bottomed out in mid-October. The Young plan recovered within one week from its lowest point, but did not climb back to its pre-crisis level. The weekly data of the Reichsbank’s gold and foreign exchange reserves confirm this picture. Following the election results, they declined for four consecutive weeks before levelling out in mid-October. Obviously, commercial banks were not able to cover the withdrawal of the foreign short-term funds.3

[Figure 1 about here]

What led to the convulsions of the German financial markets? The first important observation is that the event triggering the currency crisis was not the election result itself, but the spread of rumours of an impending “putsch” by the National Socialists (see table 2). The news broke on Friday, September 19, and was immediately embraced by London and New York newspapers. It took public denials both by President Hindenburg and Chancellor Brüning to stop the rumours. Towards the second week after the elections the young plan bond recovered. This short-term reversal was not visible in the weekly statements of the Reichsbank, however.

[Table 2 about here]

A second relevant point is that the price of the YPB (London) fell only temporarily after Hitler held a controversial speech at the Reichsgericht in Leipzig. Third, what really caused another fall of the YPB and a further reduction of central bank reserves was a combination of

3 Cf. Schäffer diaries, 4 October, 1930, p. 239. 5

an external shock and political problems within the Brüning coalition: Brazil experienced a financial crisis, and the Staatspartei, a part of Brüning`s coalition, broke apart in two small pieces. Only after the German government on October 11 signed the loan provided by the US bank LHC and the Reichstag on October 19 passed the so-called amortization law, the crisis ended. The YPB (London) never fully recovered, however. Before the elections it had been quoted at 85, after the end of the crisis at 79. Similarly, the Reichsbank did not succeed in replenishing its reserves back to the pre-election level.

Nevertheless, Brüning’s management of the crisis was remarkable. The Economist wrote under the headline “First round to Dr. Brüning”: “During the last two weeks, the first round has been fought in the German political struggle. As a conflict, waged in the key-country on the Continent, between responsible parliamentary representative government and the Fascist- Communist style of dictation, this something more than a drama in which the rest of us are mere interested spectators. It is an issue in which the political fortunes of many nations may be at stake; and it is a matter of profound satisfaction that, in this brief session of the Reichstag, which lasted from Monday, October 13th, to the small hours of Sunday the 19th, the Brüning’s Government has more than held its own.”4

How was it possible to end the crisis? Brüning succeded in combining three decisions at the same time. First and foremost, he secured the support of President Hindenburg immediately after the elections. On Monday, 15 September, he visited Hindenburg who assured him to continue with the current government.5 The cabinet met the following day and concurred with Brüning’s opinion that a collaboration with the radical Right, the NSDAP and the DNVP, was impossible.6 No single minister resigned.

Secondly, the Brüning cabinet made far-reaching concessions to LHC in order to secure a loan. In particular, it promised to introduce new austerity measures to be passed by the new Reichstag and to accumulate an amortization fund (Tilgungsfonds), a device that earlier German governments had rejected. The commitment to bring new austerity measures through the new Reichstag was risky. The Brüning cabinet had failed to pass austerity measures by

4 The Economist, October 30, 1930, p. 748. 5 Pünder diary, 16 September, 1930, p. 60. 6 AdR No. 114, Ministerbesprechung vom 16. September 1930, p. 429. 6

the old Reichstag in which the pro-Weimar parties were still in a large majority. They now controlled it only by a slim margin.

Thirdly, Brüning delivered on these promises by convincing the Social Democrats to vote for a new round of austerity measures. Their leadership recognized that a new phase in the history of the Weimar Republic had started in which they had to choose between Brüning and Hitler. It was a hard pill to swallow, but the Social Democratic deputies followed the advice of their leaders. Brüning also managed to find a majority that postponed the next session of the Reichstag for a year.

There was only one factor on which Brüning had no influence: Hitler’s communication with the Anglo-Saxon press. In the early stage of the crisis, it reinforced the panic among investors in London and New York. In a later stage, a few days before the austerity package was passed by the Reichstag, he reassured foreign investors when talking to the Times of London or the New York Times.7 This is an important element of the crisis resolution that conventional accounts have not taken into account.

3. The Lee, Higginson loan and the French “non”

Why did the French reject a participation in the loan organized by LHC? It was an essential part of the package that ended the currency crisis. French politicians knew that a full-fledged German crisis would backfire and question the existence of the Young Plan. It was also a way to support the Brüning cabinet that had been weakened by the elections results. The French side had good reasons to be part of the international rescue operation.

On the American side, LHC was free to conclude the loan with Germany. The US bank was the most obvious address for a loan, as it had prefinanced the loan from Kreuger and had offered a loan in August, 1930.8 At that time, the state secretary of the finance ministry Hans Schäffer declined, but he left a door open, in case Germany’s finances would further deteriorate.9 The crucial figure of LHC was George Murnane. It is not entirely clear why he

7 See Banholzer (2014), pp. 63-67. 8 Bennett (1962), p. 17. 9 Politik und Wirtschaft in der Krise, No. 134: 12.9.1930: Aufzeichnung des Staatssekretärs Schäffer über eine Unterredung mit Reichsbankpräsident Luther und Reichsbankvizepräsident Dreyse, p. 379. Cf. AdR, No. 115, 22 September 1930. 7

acted. Probably, he was aware more than any other Wall Street banker that a default would be highly detrimental to American investments in Germany. Murnane seems to be in contact with J.P. Morgan, probably because he had been a director of Bankers Trust which belonged to Morgan.10 And most importantly, no government official supported Murnane.11 The rescue of Germany was a purely private, perhaps even personal enterprise, although not only the stability of financial markets, but the fate of international relation depended on it.12

The process was started on Thursday, 18 September, when Schäffer visited Hans Luther, the president of the Reichsbank.13 The matter was discussed with Brüning on Monday, 22 September. There was no time for delay. One day later, the Finance Minister was authorized to ask the Reichsbank to start negotiations.14

The first official meeting between the representatives of the Reichsbank and the German finance ministry and managers of LHC took place on Friday, 26 September, 1930.15 LHC put forward a list with questions. He wanted to know everything about the financial situation of the Reich. In addition, Murnane brought J.P. Morgan in the negotiations to strengthen his position, while the German finance ministry and the Reichsbank seeked the help of Mendelssohn & Co. (Dr. Friedrich Kempner). State secretary Hans Schäffer duly answered. Chancellor Brüning agreed.16

Soon the idea came up to include French banks in order to have broader political basis. Apparently, the initiative came from the Paris subsidiary of LHC.17 On October 1st, Schäffer mentions the French side for the first time in his diary.18 On October 3, the French side responded positively to the initiative.19 Nothing came out of it, however. On the contrary, the

10 Cf. AdR, No. 127. 11 Burke (1994), p. 93. 12 Burke (1994), p. 93, cites an interesting report by Harris, Forbes that is very optimistic towards Germany. Cf. The New York Times, 21 September, 1930: interview with Walter W. Ross, of the foreign department of Harris, Forbes and Company. 13 Politik und Wirtschaft in der Krise, No. 138, 18.9.1930: Aktenvermerk des Staatssekretärs Schäffer über eine Besprechung mit Reichsbankpräsident Luther, pp. 386-388. 14 AdR, No. 116, 23.9.1930, p. 438. 15 Bachmann (1995), p. 213. 16 AdR, Brüning, Volume I, 2. Oktober 1930: Nr. 127 Aufzeichnung des Staatssekretärs Pünder über Anleiheverhandlungen (einschliesslich Anlage). 17 AdR, No. 131, p. 502, footnote 2. 18 Hans Schäffer diaries, 1st October, 1931, p. 235. 19 Bachmann (1995), p. 216. 8

French behavior delayed the conclusion of the negotiations with LHC. Brüning wanted to sign on October 5.20 The French maneuver delayed this moment until October 11. It was precisely in this week in which the YPB suffered from another sharp drop (more than 6 percent). There were other reasons than the delay of the LHC loan, but the delay contributed to the uncertainty of investors, depositors and citizens.

Why were the French officials opposed to a participation of French banks in the rescue loan? It was surely not due to German resistance. On the contrary, the German government was interested in having the French on board. From the beginning, state Secretary Hans Schäffer, the key figure in the negotations with LHC, was strongly in favor.21 Even Bernhard von Bülow, the state secretary of the Foreign Office, who had always been against a rapprochement with France, endorsed a French participation, even though for tactical reasons. Schäffer noted in his diary that Bülow endorsed the idea to send a high German official to Paris when negotiations were stalled.22 Chancellor Brüning who was not involved in the negotiations did not oppose Schäffer’s endeavor to find an agreement with the French, although he wished a fast conclusion of negotiations.

It was thus entirely the French side that made a deal impossible. The main reason seems to have been domestic politics. On October 14, 1930, three days after the signing of the loan contract with LHC, Schäffer reported that Émile Moreau, the former governor of the Banque de France, had told a German banker in Paris that the French banks had favored a loan to Germany, but they feared that demonstrators would have smashed their windows. Furthermore, according to Moreau, the Tardieu cabinet would have fallen, if it had endorsed a loan to Germany. “You cannot imagine how agitated the atmosphere in France has become.“23

The march of the Stahlhelm in Koblenz, a city located in the part of the Rheinland that had only recently been handed back to Germany, took place on October 5. The speeches were chauvinistic, giving the French public the impression that the day of reckoning was not very distant anymore. Schäffer also noted in this diary on 6 October, 1930 that Pierre Quesnay, the

20 AdR, Nr. 130: Ministerbesprechung vom 4. Oktober 1930, 9.30 Uhr, 4. Ausserhalb der Tagesordnung: Anleihe-Verhandlungen, p. 498. 21 Schäffer diaries, 1st October, 1930, p. 234. 22 Schäffer diaries, 5 October 1930, pp. 240-242. 23 Schäffer diaries, 14 October, 1930, p. 254. Cf. The statement by Flandin supporting French cooperation: Frankfurter Zeitung, 5 October, 1930: „Französische Beteiligung am Überbrückungskredit?“. 9

general secretary of the BIS and a former director at the Banque de France, had transmitted the message to Berlin that “in political circles the French fear that the money will possibly benefit Hitler.“24

Of course, the official argument against a participation had a different wording. In the first phase, the Banque de France delayed the process. On October 3, it sent a telegram to the Reichsbank, demanding that the German parliament first passes the financial program before obtaining the loan.25 Luther sent a kind response, but Clément Moret, the governor of the Banque de France was not satisfied.26 Brüning and his cabinet then considered sending two officials to Paris, most likely Schäffer and Vocke of the Reichsbank, and made a list defining the statements the two officials were allowed to make vis-à-vis Moret. They were supposed to emphasize that the German government did not intend to ask for a moratorium of the Young Plan, and they needed to emphasize that an official link between the financial program and the loan would make it impossible to pass the program in the Reichstag. Both statements were true. Brüning, however, hesitated to send German senior officials, fearing that domestic politics would interfere. He suggested to wait another day before a decision would be taken.27

On the next day, the Banque de France suddenly dropped its reservations and signaled that two banks – Lazard Frères and Crédit Lyonnais – would participate in the loan.28 But then, only two days later, the French government blocked an agreement. It wanted more guarantees.29 After a high official of the German embassy in Paris, the chargé d’affaires Rieth went to the French foreign ministry to explain the good intentions of the German government, the French side made a new demand that Schäffer considered a clear sign of a veto.30 The German government now had to choose between a further delay of the negotiations and a definite renouncement of French participation in the deal. The decision was not difficult to take, as Brüning had always favored a quick agreement. The French

24 Schäffer, diaries, 6 October, 1930, p. 243. 25 Schäffer diaries, 3 October, 1930, p. 237. 26 Schäffer diaries, 4 October, pp. 237-239, and 5 October, 1930, pp. 240-242. 27 AdR, No. 131, pp. 502-504. 28 AdR, No. 131. p. 503; Schäffer diaries, 6 October, 1930, p. 243. 29 Schäffer diaries, 8 October 1930, pp. 245-246. 30 Schäffer diaries, 10 October, 1930, pp. 247-248. 10

government at least contributed to the political resolution of the crisis: Briand told the German Social Democrats to support Brüning’s financial program in October 1930.31

A survey of French newspapers confirms the impression that the public was frightened by the victory of the extremist parties, fearing that further concessions would only strengthen their position.32 At the same time, the editorials and statements make it clear that many French did not understand the depth of Germany’s economic and political problems. And most of them did not even pay attention to the loan negotiations, because they did not recognize their crucial importance for the containment of the currency crisis. They rather focused on the personality of Hitler and the National Socialists. For example, when the Reichsbank increased the discount rate to 5 percent, the left leaning daily newspaper Le Petit Parisien wrote: „Le succès des fascistes de Hitler et consorts se traduit déjà, pour l’ensemble du peuple allemand, par une tension des taux d’escompte et par une augmentation des prix correspondants.“33 Obviously the paper believed that Hitler was the cause of the currency crisis. At the same time, there was no word about the potential role of France in the crisis and the idea of participating in the loan to Germany. Only the nationalist newspaper L’Écho de Paris dealt with the question whether or not France should provide a loan to Germany. Of course, the answer was negative, fearing that the money would eventually strengthen those forces that wanted to revise the Young Plan. The conclusion was: „Toute la politique de Locarno et du plan Young fut atteinte par les élections hitlériennes du 14 septembre. Verser de l’argent au Reich en détresse, c’est infuser à cette politique une dose d’oxygène, lui permettre de se soulever sur son grabat.“34

4. The 1931 crisis as a rerun

The German crisis of 1931 differed in several ways from the one in the fall of 1930. First, the 1931 crisis was triggered by the June 6 statement of the Brüning cabinet saying that “the limits of the privatisations we have imposed on our people have been reached.”35 The 1930 crisis, by contrast, was a consequence of the Reichstag elections, whereas the Brüning

31 Heyde (1998), p. 96. 32 See Banholzer (2014), pp. 53-54. 33 Le Petit Parisien: La Bourse de Berlin a enregistré de gros tassements, 10 October, 1930, p. 3. 34 L’Écho de Paris: Devons-nous prêter de l’argent à l’Allemagne?, 12 October, 1930, p. 1. 35 Cited in Bennett (1961), p. 128. 11

government kept quiet regarding reparations. Secondly, the 1931 was more severe than the 1930 crisis. Thirdly, the 1931 crisis was fought in another way than the 1930 crisis. Most importantly, there was no loan by foreign banks that helped to end the crisis. Fourthly, Franco-German relations had further deteriorated since the 1930 elections. Most importantly, the March 21 announcement of the plan to form a customs union between Austria and Germany made it even more difficult to find an agreement.

Yet, as we will argue in this section, these differences were not as relevant as they may appear at first sight. The real difference that mattered was that in 1931 the French government had a kind of a veto power over the process, while in 1930 its obstructionist policy did not delay the process long enough to make the containment of the crisis impossible. We emphasize this point, because the 1931 crisis was nothing but a rerun in two important respects. First, the 1931 crisis was the same type of crisis in the crucial first phase lasting until the announcement of the Hoover moratorium (20 June), namely a currency crisis. Banks were losing deposits because of political instability. Second, the combination of austerity measures and the help by the US ended the crisis. In 1930 it was the loan by LHC, in 1931 it was the Hoover moratorium.

In the following, we will discuss all these points in more detail. First, we focus on the differences. We then try to show that they are of minor importance. In the next step, we explain the similarities. Finally, we compare the French position vis-à-vis the Hoover moratorium with the reluctance to commit to the LHC loan in October of 1930.

The 1931 crisis was triggered by another event than the 1930 crisis. In 1930, the Reichstag elections held on September 14 brought a strong rise of extremist parties and made it more plausible that the Nazis were about to seize power by a coup d’etat. In 1931, the crisis began because the Brüning government publicly expressed its conviction that a new round of austerity measures announced on 6 June was putting too much pressure on the German population: “the limits of the privatisations we have imposed on our people have been reached.”36 Political instability increased when the Social Democrats opposed further austerity measures in late April. Without the support of the SPD Brüning had no majority in the Reichstag.

36 Cited in Bennett (1961), p. 128. 12

Many have doubted the wisdom of Brüning’s move, not least Herbert Hoover. When hearing the statement for the first time, he railed against it, believing that it „seemed to knock all our plans into a cocked hat.”37 Given the strong domestic opposition to further austerity measures and the Young Plan, it was not entirely unreasonable. The statement was the result of a longer process that dated back to December of 1930. A crucial meeting was held on March 6, 1931, when finance minister Dietrich and state secretary Schäffer informed the Chancellor of the rapidly deteriorating fiscal position.38 Luther, the President of the Reichsbank, confirmed this assessment.39 Brüning responded with a strategic change: „The German people does not tolerate a further compression in the financial domain without being offered crucial steps in the reparation issue.” He was determined to act in early May and asked his ministers to keep silence as to this new strategy.”40 State Secretary Pünder, aware of the break with the past, noted in his diary that his meeting may once turn out to be of historical importance.41

In May, the cabinet agreed on linking the announcement of new austerity measures with a statement signaling that the cabinet was aware of the additional burden it put on the shoulders of the German people. In this period, Brüning also accepted the invitation by the British Prime Minister Ramsay MacDonald for a meeting in early June. Finally, in early June, the cabinet decided to announce the austerity measures when Brüning and foreign minister Curtius were in England and to combine it with the statement that the “limits of privations” had been reached. Curiously, Brüning thought he could confine the effects of this statement to the domestic political arena, but, of course, it also unsettled foreign diplomats and investors. It triggered a currency crisis that ultimately sent shockwaves across the whole world economy.

A second difference was that the 1931 crisis even in its first phase, on which we focus in our comparison, was more severe than the 1930 crisis. As explained, it began on 6 June and lasted until 20 June when US president Hoover announced the moratorium. The second phase following the French reluctance to go along triggered further capital outflows. Finally, a panic escalated on Monday, 13 July, when the doors of the Danatbank remained closed. On 15 July, Germany introduced capital controls, thus prompting an international liquidity crisis.

37 Cited in Heyde (1998), p. 201. 38 AdR, Nr. 255, pp. 926-927. 39 AdR, Nr. 255, p. 927. 40 AdR, Nr. 255, p. 928. 41 Pünder diary, 9 March, 1931, p. 93. 13

Possibly, the second part of the crisis was a twin crisis as the Danatbank and the Dresdner Bank suffered from losses on their asset side stemming from the problems of the Nordwolle in Bremen. But we will not deal with the second phase of the crisis.

We have collected data of exchange rates (daily), the prices of the YPB (daily), the changes of the gold and foreign exchange reserves of the Reichsbank (weekly), the share prices of the major banks (daily) as well as their balance sheets (monthly). We always compare the evolution of these data from the start of the crisis. As for the fall of 1930, the start of the crisis is on the day after the elections, i.e. on Monday, September 15, with the last day before the elections serving as benchmark date (100). As for 1931, we start on May 26, when the Berlin stock exchange dived following rumours of an impending moratorium.42 The benchmark date is thus the day before.

The comparison shows that the two crises are similar with regard to the YPB price (Amsterdam) plotted in figure 2. In the first three weeks the 1931 crisis took a similar course as the 1930 crisis. The price fell by roughly 15 percent relative to the day immediately before the crisis. The big difference is that afterwards the 1931 crisis took a completely different course. In 1931, the YPB price steeply recovered in the fourth and fifth week, going back to the pre-crisis level, but then completely collapsed, whereas in 1930 it slowly went back upwards.

[Figure 2 about here]

Yet, when we turn to the evolution of central bank reserves on a weekly basis it is clear that the 1931 crisis was more dramatic than the 1930 crisis. In 1931, within five weeks the level of reserves was reduced by 40 percent, in the fall of 1930 reserves decreased by 20 percent over six weeks and then levelled off.43 In addition, in 1931 the Reichsbank went with a lower cover ratio into the crisis than in 1930, mainly due to the reduction of foreign exchange reserves by 50 percent since September of 1930. This undermined its ability to provide the banking system with foreign currencies and gold reserves.

[Figure 3 about here]

42 Bennett (1961), pp. 116-117. Cf. VZ, 26. Mai 1931 (Abend-Ausgabe), p. 5: „Neuer Kurseinbruch.“ 43 Hardach (1976), p. 128; AdR, 15.6.1931, Nr. 330: Ministerbesprechung vom 15. Juni 1931, 11 Uhr, p. 1193, footnote 9; AdR, 15.6.1931, Nr. 332: Besprechung mit Parteiführern vom 15. Juni 1931, 16 Uhr, p. 1199. 14

Third, the 1931 crisis was fought by different means than the 1930 crisis. In 1930, a foreign loan and austerity measures rammed through the Reichstag were sufficient to stop the drain of reserves. In 1931 the crisis started when austerity measures were announced, together with the statement that the “limits of privations” were reached. And there was no foreign loan, for various reasons. One reason was that Germany’s economic and political outlook had deteriorated even before June 6 so that foreign banks became reluctant to lend. Figure 4 illustrates the correlation between political instability and foreign deposits at the large Berlin banks. Political instability is measures by the share of votes for extremist parties in Germany’s local, regional and national elections between 1929 and 1931. Clearly, the increasing polarization of the German electorate weakened the liability side of the large banks.

[Figure 4 about here]

It did not help that the US market was drying out anyway. There is some controversy of how strong this effect was. But there is no doubt that in 1931 it was harder to get foreign funds than in 1930, not only for Germany, but for other countries as well. Ritschl (2002) argues that the difficulty to obtain foreign loans was also linked to the seniority of reparations over private debts as stipulated by the Young Plan, whereas the Dawes Plan had an implicit guarantee of private debts relative to reparations. This change further undermined Germany’s credit rating. Yet, not only foreign investors had become more reluctant to Germany, but also the German government had decided to renounce foreign loans. Starting in December, Brüning argued that it would weaken the German position when it came to renegotiate or abandon the Young Plan, if Germany were still suffering from short-term funding crises. He wanted to reorganize Germany’s public finances as soon as possible.

A fourth difference between 1930 and 1931 was that Franco-German relations had further deteriorated between the two crises. Most importantly, the plan to form a customs union with Austria, announced on March 21, 1931, further undermined the confidence of France in the spirit of cooperation. As a result, foreign minister Aristide Briand, increasingly isolated because of his pro-German policy stance, almost completely lost his influence within the cabinet. It also led to his defeat in the presidential elections held on.

These four differences were certainly relevant. But were they crucial for what happened in June and July of 1931? We argue that this is not the case. The first phase of the 1931 crisis was rather a rerun of the 1930 crisis than a genuinely different event.

First, both crises were triggered by political changes occurring in Germany: the increase of radical seats at the elections in September of 1930 and an austerity package combined with a statement that further austerity would not be tolerated by the German people. And both these events had the same effect: they made investors nervous about Germany’s solvency. Accordingly, both crises were of the same type, namely currency crises.

Second, the first phase of the 1931 crisis may have been more severe than the 1930 crisis, but the difference was gradual, not fundamental. In June of 1931, the Reichsbank was able to maintain the gold standard and was not yet forced to start curtailing its discount policy when Hoover announced the moratorium on 20 June. And in both cases, the Reichsbank felt itself forced to increase the discount rate when the crisis gained momentum: on October 9, 1930, from 4 to 5 percent and on June 13, 1931, from 5 to 7 percent.

Third, there was a similar combination of rescue measures. The first element was political. In both instances, Brüning needed to win a majority for his austerity measures. In 1930 the austerity measures were a consequence of the currency crisis. The German government needed to commit to them in order to get the loan from LHC. In 1931 Brüning needed to prevent the Reichstag from reconvening in order to preserve the main elements of the Second Emergency Decree. The second element was outside help, and in both instances it came from the United States. In 1930 it was private help in the form of a loan from the US investment bank LHC, in 1931 it was public help in the form of the Hoover moratorium.

Fourth, there is no doubt that the plan of customs union between Austria and Germany was a big political blunder. However, it is hard to argue that it changed the whole equation. For Anglo-Saxon investors, the customs union was not a major problem. Accordingly, the YPB did not dive when customs union was announced, and the Reichsbank reserves remained stable. A conversation between Philippe Berthelot, general secretary of the foreign ministry, and Leopold von Hoesch, the German ambassador in Paris, showed the extent of Franco- German mistrust existing before the announcement of a customs union. Bennett (1961) summarizes the conversation in the following words: “In his interview with Hoesch on February 23, 1931, Berthelot had extolled the merits of a comprehensive Franco-German

settlement, and various proposals were discussed in the days before the customs union announcement. But as Hoesch pointed out to Berlin, such financial discussions, envisaged as a way around the insoluble political problems, always came at least to grief on just those problems, the French government was always compelled to make assistance conditional on German abandonment of political aims, while the German government could not give up revision.”44

Ferguson and Temin (2003) believe that the participation of French banks in a foreign loan for Germany in late January of 1931 were turning points. They joined LHC in a credit over RM 100 million to Germany. But this was an exception, due to the relative small size of the credit, the participation of Swiss and British banks and the political support of Briand who convinced the French cabinet to allow the credit. In principle, the French position did not change at all. French officials made an offer, but always tied it to political conditions that were not acceptable to the German side. Accordingly, the French reluctance to go along with the Hoover moratorium was not surprising at all. It was the same type of “non” as the one expressed in October of 1930, and again, it was not a plain rejection, but came in the form of demanding a series of additional conditions that delayed the process and escalated the crisis. The French side knew exactly that questioning the Hoover moratorium would worsen Germany’s currency crisis. Evidently, this was a risk the French government was ready to take, just as in October of 1930. In the first response (June 21) France wished “a delay of a few days”. Secretary of State Stimson reminded the French ambassador in Washington, Paul Claudel, of the need to act quickly:

“I told him that time was of the essence, the crisis was one of confidence and credit, and therefore the psychological element played a large part in the run of it. I said that if France met us with quick, generous appreciation of the President’s spirit and at once professed herself to be in accord with his general proposition, even if she necessarily reserved certain details and technicalities for discussion, it would have a great effect in curing the situation. I, therefore, expressed my hope that France would not delay long and would express herself as being in accord with the general proposition.”45

44 Bennett (1961), p. 93. 45 FRUS 1931/ Volume I/0007, pp. 42-43: Memorandum by the Secretary of State of a Conversation with the French Ambassador (Claudel), Washington, June 21, 1931. 17

As in 1930, the French ministers were afraid of strong domestic opposition, if they readily agreed to the Hoover moratorium. Finance minister Flandin in his first informal reaction “demonstrated plainly his fear of domestic political difficulties”, as the American ambassador in Paris, Walter Edge, informed Stimson.46 And in fact, prime minister Laval and foreign minister Briand were not strong enough to convince the cabinet to endorse the Hoover moratorium and to wait until the technical questions could be discussed.47 Likewise, the parliament in the session of June 26-27 was pressing for a hard line against the US initiative. One major argument was that the economic situation of Germany was not alarming at all.48 Again, this view was also in the center of the debate that the parliament held after the German elections in the fall of 1930.

5. Conclusion

Why did the French say “non”, when President Hoover proposed a moratorium in June of 1931? Some economic historians think that it was due to short-term changes in the Franco- German relationship. In particular, Germany’s plan of forming a customs union with Austria is said to have ended a rapprochement that had been in the making since early 1931. We disagree with this view based on the analysis of Germany’s currency crisis in the fall of 1930. Then as in 1931, France was not willing and able to participate in the containment of the crisis.

The reason for the uncooperative stance was domestic politics. French politicians believed that they could not afford to extend financial help to Germany without demanding political concessions. In addition, after the September elections of 1930 they feared that the money would eventually end up in the hands of a right-wing government. Nevertheless, the strategy not to participate in the rescue was short-sighted. The failure of the Hoover moratorium to contain the crisis led to a financial crisis that undermined the French position. But, from the perspective of domestic politics, it was rational to let Germany fail. French politicians could blame the Germans for the crisis.

46 FRUS 1931/ Volume I/0007, pp. 43-44: The Ambassador in France (Edge) to the Secretary of State, Paris, June 21, 1931, 8 p.m. 47 Heyde (1998), p. 213. 48 Heyde (1998), p. 214. 18

If our view is realistic, then the Young Plan was doomed to fail, once the depression started. It is true that it foresaw the possibility to postpone parts of the reparation payment or even to reassess the economic capacity of Germany. But all these devices aimed at making the Young Plan more flexible could only work, if France was willing to be cooperative. Given that Paris felt constrained by domestic politics, international diplomacy proved helpless in the face of the deepening crisis. When failed institutional arrangements are in conflict with economic forces, the former eventually collapse.

References

Bachmann, Ursula (1996), Reichskasse und öffentlicher Kredit in der Weimarer Republik 1924-1932, Frankfurt etc.: Peter Lang.

Banholzer, Simon (2014), Die Weimarer Republik in der Finanz- und Regierungskrise von 1930: Die Wirkung politischen Risikos auf das Vertrauen der Finanzmärkte, MA Thesis, University of Zurich.

Bennett, Edward (1961), Germany and the Diplomacy of the Financial Crisis 1931, Cambridge and New York: Cambridge University Press.

Burke, Bernard V. (1994), Ambassador Frederic Sackett and the collapse of the Weimar Republic, 1930-1933: the United States and Hitler's rise to power, Cambridge and New York: Cambridge University Press.

Ferguson, Thomas, and Peter Temin (2003), “Made in Germany: The German Currency Crisis of July 1931”, Research in Economic History 21, pp. 1-53.

Hardach, Gerd (1976), Weltmarkorientierung und relative Stagnation: Währungspolitik in Deutschland 1924-1931, Berlin: Duncker Humblot.

Heyde, Philipp (1998), Das Ende der Reparationen: Deutschland, Frankreich und der Youngplan, 1929-1932, Paderborn etc.: Ferdinand Schöningh.

Knipping, Franz (1987), Deutschland, Frankreich und das Ende der Locarno-Ära 1928- 1931: Studien zur internationalen Politik in der Anfangsphase der Weltwirtschaftskrise, München: R. Oldenbourg Verlag.

Ritschl, Albrecht (2002), Deutschlands Krise und Konjunktur 1924-1934 : Binnenkonjunktur, Auslandsverschuldung und Reparationsproblem zwischen Dawes-Plan und Transfersperre, Berlin : Akademie-Verlag.

Rödder, Andreas (1996), Stresemanns Erbe: Julius Curtius und die deutsche Aussenpolitik 1929-1931, Paderborn etc.: Ferdinand Schöningh.

Wolf, Nikolaus (2013), "Europe's Great depression: Coordination Failure after the First World War", in Nicholas Crafts and Peter Fearon (eds.), The Great depression of the 1930s. Lessons for Today, Oxford and New York: Oxford University Press, pp. 74-109.

Table 1: Results of Reichstag elections, September 1930

Party % Seats +/–

Social Democratic Party 24.53 143 –10

National Socialist German Workers Party 18.25 107 +95

Communist Party of Germany 13.13 77 +23

Centre Party 11.81 68 +7

German National People's Party 7.03 41 –32

German People's Party 4.51 30 –15

German State Party 3.78 20 –5

Reich Party of the German Middle Class 3.90 23 0

Christian-National Peasants' and Farmers' Party 3.17 19 +10

Bavarian People's Party 3.03 19 +2

Christian Social People's Service 2.48 14 New

German Farmers' Party 0.97 6 –2

Conservative People's Party 0.83 4 New

Agricultural League 0.55 3 0

German-Hanoverian Party 0.41 3 –1

Total 100.00 577 +86

Registered voters/turnout 82.0 – –

Table 2: Key events

14 Sept. Reichstag elections: NSDAP wins 18.5% of seats

19 Sept. rumours of „Putsch“

23/24 Sept. denial of „Putsch“ by Brüning and Hindenburg

25 Sept. Hitlers speech at Reichsgericht in Leipzig

29 Sept. publication of fiscal restructuring program

4/5 Oct. revolution and financial crisis in Brazil

11 Oct. Lee Higginson loan signed

14 Oct. interview of Hitler with London Times and NYT

19 Oct. Reichstag passes Schuldentilgungsgesetz, Brüning government wins no confidence vote

88 3100 Young Plan Bond London (left hand scale) 86 3000 Weekly reserves of Reichsbank (right hand scale)

84 2900

82 2800

80 2700

78 2600 Millions of Reichsmark of Millions

76 2500

74 2400

72 2300 30.08.1930 09.09.1930 19.09.1930 29.09.1930 09.10.1930 19.10.1930 29.10.1930

Figure 1: Price of Young plan bond quoted in London and weekly reserves of Reichsbank. (Source: Frankfurter Zeitung and Verwaltungsbericht der Reichsbank.)

105

100

85 Crisis of 1930 80 Crisis of 1931

60 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67

Figure 2: Daily index of YPB prices after September 13, 1930, and after May 22, 1930. (Source: Frankfurter Zeitung.)

120

100

0 1 2 3 4 5 6 7 8 9 10

Crisis of 1930 Crisis of 1931

Figure 3: Weekly index of gold and foreign exchange reserves of Reichsbank after September 13, 1930, and after May 22, 1930. (Source: Frankfurter Zeitung and Verwaltungsbericht der Reichsbank.)

% Millions RM 60,00 14000

50,00 12000 10000 40,00 8000 30,00 6000 20,00 4000 10,00 2000 0,00 0 26.7.29 3.11.29 11.2.30 22.5.30 30.8.30 8.12.30 18.3.31 26.6.31 4.10.31 12.1.32 votes for extremist parties creditors of Grossbanken

Figure 4: Shares of votes for extremist parties and foreign deposits (creditors) of the German big banks. (Source: http://www.gonschior.de/weimar (retrieved 2015-07-10) and Vossische Zeitung.)