The German Currency Crisis of 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.

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