A new book I got hold of feeds my fascination for pre-1945 European History. The book is “1931:Debt, Crisis and the Rise of Hitler” by Tobias Straumann, an economic historian at the University of Zurich. It is well known that after the Armistice and the Peace of Versailles, Weimar Germany and the new Austrian Republic struggled with the huge load of war reparations imposed by the victors. The fledgling democracies also had to contend with new right-wing pressures that talked darkly of the betrayal by suing for peace, and the rise of communism in Europe. And then the world slid into the Great Depression after the crash of the Stock Market in October 1929.
The reactions of most countries to the Depression were bewildering, largely because nothing in any economic orthodoxy of the day gave them any understanding of the forces at play. The War had wrecked the finances of the European powers, all of whom had been on the Gold Standard. The huge expansion in costs resulted in all powers except the United States to abandon the Gold Standard. In order to rein in post-war inflation all countries went back on the Gold Standard, including Germany.
As the Depression took hold, countries found it impossible to maintain confidence in the currency on the basis of gold and to expand credit to the economy. Germany, reeling from the punitive load of reparations, saw its economy collapse. An outflow of gold resulted from the economy thanks to the gold standard leading to a further collapse in confidence. By 1931 Germany was in full economic collapse as businesses failed, jobs were lost and credit dried up. The collapse of banks followed. At this point the Chancellor Heinrich Bruning closed the German banking system.
The collapse played into the hands of the Nazi Party. They had been at the periphery of power since the early 1920s with their position that Germany had been betrayed in 1918. Since the Jewish community had always been involved in banking and financial services, it was easy to allege that international Jewish bankers had conspired to engineer the collapse of the German economy. The narrative around the “Betrayal of 1918” was reinforced by this commentary. The facts, of course, were irrelevant. The Hundred Days Offensive by the Allies from June 1918 onwards pushed German forces way back from their positions. On October 8 1918, British First and Third Armies breached the formidable German mainland defences on the Hindenburg Line at the Second Battle of Cambrai. A mutiny of the German Navy followed which spread as riots throughout the country. At this point the German High Command sued for peace. All these facts were dressed up in the language of Jewish Conspiracy to a distressed German public. That the Jewish German Emissary to the Peace Conference, Otto Landsberg, found the terms so humiliating that he committed suicide, was irrelevant to the narrative. As was the fact that the the German Foreign Minister Walther Rathenau, also Jewish, was assassinated in 1922.
Or the fact that the German officer who recommended that Private Adolf Hitler be awarded the Iron Cross for bravery in combat, was Hugo Gutmann – a Jew.
There is nothing inevitable about history, but sadly, the paths available for better outcomes are not known at the time events take place. The years from 1929 onwards was a time that required the best and the brightest to be in charge. Nationalism and parochialism are easy forces to give in to. Keynes had the great insight that falling demand is the reason why these economies were not recovering from the sudden collapse in wealth due to the crash. He knew that the Gold Standard was a mistake, and repeatedly warned the Bank of England to abandon the standard. There were sane voices asking that the reparations also be made further easy for Germany. These voices fell on deaf ears. In the case of Germany, Bruning effectively stopped observing the Constitution by resorting to rule by decree. The failure of the German Left to come together to stop the Nazi Party from taking power meant that by January 1933 Adolf Hitler was Chancellor of Germany, and the rest is history.
Is there an economics lesson in all this? May be better people than I can answer this question but here is my take. Economic orthodoxy must always take second place to the need to make sure individuals, communities and businesses are able to work and earn a decent return on their investment (labour in the case of individuals, capital in the case of businesses). Reduced to its basics, I believe this must lie at the heart of any political dispensation. I am not competent to try and simplify the dismal science, and neither do I believe that the giant forces that sweep through the world of finance are fictitious or less powerful than they are. But think of the suffering German, who sees his world collapse. Or more from today – think of the rural resident in West Virginia who has seen coal mining collapse and does not understand the forces in play that have taken away his source of employment. All he sees are Jews (in 1931) and foreigners (in 2016), responsible for his sad state of affairs.
The role of communities and societies in economics is often ignored by policy makers and governments. The results can be disastrous.