Studies in the Interwar European Economy

Derek H. Aldcroft

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429782336
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

First published in 1997, this book analyses some of the key economic issues facing Europe in the interwar period, against the uncertain international, political and economic background of the time. Among the subjects discussed are the legacy of the peace settlements, inflation, trade and reconstruction, international lending, depression and recovery, the position of Eastern and Central Europe, and the progress of the peripheral nations.

The book contends that the peace treaties raised more problems than they solved, while the policy mistakes of the Allied powers after the First World War, and their failure to devise an adequate programme of economic and financial reconstruction, weakened the already divided continent, contributing to its disintegration.

CHAPTER ONE

The Legacy of the Versailles Settlement

Though the First World War caused much loss of life, destruction and devastation which rendered Europe virtually destitute by the latter half of 1918, it can nevertheless be argued that the immediate consequences of more than four years of hostilities were less important than the postwar settlement in determining the longer-term future of Europe. Keynes, in his vitriolic denunciation of the peace treaty with Germany, recognised its defects in regard to the future of Europe (Keynes, 1920, p. 211), but the postwar settlement had far wider connotations than he envisaged at the time of writing. The term Versailles settlement used here therefore embraces not only the formal peace treaties with the enemy powers, but also the varied clearing-up operations which arose such as the question of reparations and war debts, the arrangements for relief and reconstruction, the establishment of the League of Nations, together with the role of the United States in postwar Europe. The position of the United States assumes significance because it emerged from the war as the most powerful nation in the world. While it replaced Europe as the potential leader in world affairs, in practice the United States exercised this role reluctantly, quickly making a political and military retreat from European affairs as isolation took hold, though maintaining an arms-length economic interest until the great depression. Europe, on the other hand, failed to recapture its former preeminence partly because the postwar settlement precluded that possibility, even though European leaders played a major role in designing that settlement, and partly because American policy indirectly worked against Europe’s revival.

This chapter concentrates on some of the features of the settlement deemed especially relevant in the context of Europe’s future: the redrawing of the map of Europe; the treatment of Germany; the machinery for reconstruction; and the equivocal attitude of the United States towards the problems of Europe. The following chapter takes up some additional themes and provides an overall conclusion.

The new Europe

The new postwar boundary arrangements constituted the biggest exercise in the reshaping of the political geography of Europe ever undertaken (Thompson, 1966, p. 626) and, according to some writers, possibly one of the most disastrous (Hobsbawm, 1994, p. 31). The process involved the greater part of the Continent and the only countries not affected were Holland, Spain, Luxembourg, Switzerland and Portugal. Large tracts of land and their populations and resources were reallocated, about a dozen new or reconstituted states were brought into being, while political frontiers were lengthened by some 12 500 miles (Gordon, 1941, p. 19).

The mundane details of the new geographical configuration need not detain us here. What is important is to assess the implications for the future stability of Europe. Possibly the most important factor was the power vacuum which arose in East-Central Europe. It was in this region that most of the new or reconstituted states emerged (Austria, Hungary, Czechoslovakia, Yugoslavia and Poland, for example) in place of the former Austro-Hungarian Empire. The latter was certainly a troublesome empire to administer and towards the end of the war it was in an advanced state of terminal decay. But for all its faults it did have a certain degree of economic coherence and during the nineteenth century it had acted as an important stabiliser in the European balance of power, one reason, no doubt, why the Allied powers were reluctant to witness its disintegration. Unfortunately they had very little choice in the matter since even before the end of hostilities nationalist groups were laying claim to territories, many of which were later confirmed by the Allied statesmen.

In the process the former equilibrium of Europe was destroyed. Most of the new states which emerged out of the ruins of the former empires (German, Romanov, Austro-Hungarian and Turkish) were chronically weak in every sense of the word and each suffered from acute political and social tensions. The resulting vacuum in the centre set the stage for later conflict. Newman (1968, pp. 27, 58, 105-6, 201) for example stresses the crucial role of the region in determining the subsequent distribution of power within Europe and ultimately the fate of the Continent. Given time the vacuum was bound to be filled by a predator nation since the states in question were ‘extremely weak reeds to place in the path of Germany, and they possessed few features that could lead to any hope of their being anything but satellites ... of Germany, Hitler or no Hitler’. Almost from the very beginning of the interwar period France and Germany were locked in battle for the control of the East, the final outcome of which paved the way for the Second World War.

This raises the question: why Germany? Conceivably another power could have filled the gap, though on reflection there was no obvious candidate. Perceptively it was Lenin who envisaged what might arise out of the ruins of the peace. He foresaw two major powers with but a single aim: Germany wanted revenge, Russia wanted revolution: ‘When our ways part’, he said, ‘they will be our most ferocious and our great enemies. Time will tell whether a German hegemony or a Communist federation is to arise out of the ruins of Europe’ (Flood, 1989, p. 259). In other words, Germany had the strength and the motives to achieve domination (see below), both of which were plainly visible before Hitler came to power. One should also bear in mind that during the First World War the Germans had conceived a definite plan to colonise the East by setting up a chain of puppet monarchies in the conquered states from the Baltic to the Black Sea (Summers and Mangold, 1987, pp. 274-5, 397). On this interpretation therefore, there is no need to invoke a deus ex machina in the guise of Adolf Hitler to explain the Second World War because the seeds of a future conflagration had already been sown by the postwar peace settlement. As Overy (1995, p. 289) writes, ‘Hitler played a part already written for him’.

The path of conquest was obviously facilitated by the weakness of the new configuration. It was also exacerbated by the lack of cohesion and cooperation among the new states, partly because of the frictions and rivalry arising out of the territorial changes and population displacements, and partly because of the activities of the major powers in the area for purposes of their own self-interest. Yet none of the European powers was prepared to back the new system fully or to promote the cause of Danubian federation, despite a British proposal for a Danubian customs union (Dockrill and Goold, 1981, pp. 128-30; League of Nations, 1932; Stambrook, 1963). Thus, in contrast to the position after 1945, national sovereignties dominated the scene in the 1920s, to the extent that there was little prospect of achieving unity and stability in Europe (Jacobson, 1983, pp. 603-4).

The new states in fact became little more than pawns in a game of European high politics and were allowed ‘to exist and function as sovereign units for reasons which had little in common with economic considerations’ (Momtchiloff, 1944, p. 84). It is true that the inherent weakness of many of the new states and their incompetent governments, together with the corruption of many politicians and state officials, left them highly vulnerable to loss of independence. Parliamentary democracy was a sham in many cases, though even when it thrived, as in the case of Czechoslovakia, it was no guarantee of safety. As Sontag (1971, p. 68) noted, the seeds of democracy fell on stony ground in Eastern Europe which lacked any real experience of political pluralism, and where political instability arising from graft, corruption, interethnic rivalry and nationalistic sentiments, was widespread and endemic from the start. It is not surprising to find, therefore, that most of the new states drifted towards authoritarian regimes during the course of the interwar period (Gilberg, 1992, pp. 278-83; Lee, 1987, p. 254). By 1938, 16 of the 28 European states had authoritarian regimes. Indeed, Schwartz (1973, pp. 11-12) is puzzled that anyone should have expected democracy to flourish in the region after the war because of so little past experience with democratic institutions coupled with the acute internal divisions based on class and nationality. Yet the European powers did little to ease the transition. It has been argued that the lack of understanding and foresight on the part of the Allied nations as to the significance of the region in terms of the future balance of power ultimately ‘paved the way for Hitler’s aggressive policy in Eastern Europe and eventually opened wide the door for Russian penetration’ (Kiraly, Pastor and Sanders, 1982, p. 43). In short, there were too few good Europeans (Ross, 1983, p. 53).

The weakness of the East European states bore testimony to past economic deprivation for which the new European configuration could provide little answer. Economically the new states were worse off than before the war since they not only inherited a ‘gigantic backlog of backwardness’ (Spulber, 1966, p. 75), but they also suffered from the chaos following hostilities, the loss of a large internal market and the impact of new boundaries. Komlos (1983, p. 6) reckons that the consequences of the destruction of the central European market for the splintered territories was little short of disastrous, and this view would seem to be confirmed by what we now know about the economic viability of the Habsburg Empire (Good, 1984, p. 256). The potential trade losses might not have been so serious had economic factors been accorded greater priority when redefining the new shape of Europe. They were not totally ignored of course, but they were certainly never at the top of the agenda. Nor were the treaty clauses drafted with the intent of promoting any pan-European objective, economic or otherwise. According to Friedman (1974, p. 12), they caused the maximum disruption to the European productive system.

Even a brief perusal is sufficient to show that the new territorial arrangements lacked any economic logic since their economic potential bore little relation to the inheritance of land, people and resources (Berend and Ranki, 1969, p. 170). Most of the states fared badly in this respect, apart from Czechoslovakia which acquired a large part of the industrial assets of the former empire. Each nation received whatever resources and equipment happened to be located in the territories assigned to it. The inexorable rise of nationalism fed by the collapse of the Habsburg Empire and legitimised by the selective application of Wilson’s Fourteen Points in the Versailles settlement, threw economic coherence out of the window (cf. Marks, 1976, pp. 15, 22). Frequently this meant the complete break-up of former trading patterns and lines of communication and the splitting up of mutually dependent branches of industry. Yugoslavia, for example, inherited five different railway systems with four different gauges; each system served different centres so that they were practically unconnected with one another and unifying the disparate parts took the best part of a decade. In the case of Austria the textile industry was literally split asunder. The spindles were situated in Bohemia and Moravia, which became part of the new Czech Republic, while the weaving looms were located mainly in and around Vienna (Pasvolsky, 1928, pp. 527, 548). Hungary’s main problem, on the other hand, was the excessive loss of raw materials which served her developing industries. She lost most of her iron ore, salt, copper and other non-ferrous metals, timber and water power. The loss of industrial capacity was less severe so that Hungary emerged from the war as a more industrialised country than hitherto (Berend and Ranki, 1974, pp. 92-3; Janos, 1982, pp. 205-6; Macartney, 1937, pp. 461-2). Regional concentration of industry also increased markedly, with Greater Budapest accounting for some two-thirds of those employed in manufacturing in 1920, as against only one-quarter before the war (Bencze and Tajti, 1972, pp. 19-28). In addition, the Treaty of Trianon (1920) destroyed Hungary’s integrated transport system, especially the waterway network, the major part of the management of which was transferred to Prague, Bucharest and Belgrade (Halasz, 1928, p. 26). Such changes did more to hinder than to promote economic recovery after the war, and in the longer term they created resentment and frustration which added strength to the forces of nationalism and revisionism in the interwar period.

One of the most difficult tasks arising out of the new territorial configuration was that the new states were faced with the problem of building new economic systems and integrating the different fragments of territory and populations which they had inherited. In the case of the losers this meant adapting their systems to the much reduced level of resources, whereas the major beneficiaries encountered the problem of assimilating territories at different stages of development, often with varied fiscal and monetary systems and different legal and administrative practices. In practice it entailed the creation of new administrative systems, new currency and fiscal systems, new lines of communication, and the forging of fresh economic and trading links to replace those that had been destroyed. Poland faced one of the most difficult tasks since she had to integrate three very different segments of territory previously owing allegiance to alien rulers into one single state. Zweig (1944, p. 13) described the situation in the following terms:

On the day of their political unification the three parts of Poland did not constitute a single economic unit. They had different systems of civil, commercial, and fiscal legislation. They belonged to differing customs units, to differing money and credit systems. Nor did they constitute a unity in the sense that they had developed after an organised pattern by constant and mutual testing. On the contrary some parts were over- and some under-developed.

The task was complicated further by the fact that Poland was in conflict with all her neighbours after the war, she had no natural frontiers, no government agencies to serve the whole country, very few established financial and monetary institutions to meet the needs of the new state and little in the way of highly developed industry except for that part of Upper Silesia awarded to her by the plebiscite of 1921 (Kitchen, 1988, p. 106).

Yugoslavia, or the new Kingdom of Serbs, Croats and Slovenes as it was originally called, faced an even greater diversity of interests to assimilate and consolidate: six customs areas, five currencies, five railway systems, three different banking systems and a host of different nationalities and religions (Lampe, 1980 p. 139). For Czechoslovakia the main task was that of reconciling the Czech lands with the less developed Slovak and Ruthenian territories, while Romania had to integrate its greatly enlarged domain. Austria and Hungary, on the other hand, had the reverse task of making sense out of the remnants left to them of their old empire, shorn of some of the most valuable assets. Only Bulgaria was spared major integration problems arising from territorial changes and ethnic heterogeneity, though she did have a large number of refugees from ceded lands to accommodate and a substantial reparations bill equivalent to one-quarter of her total national wealth (Bell, 1977, pp. 164, 194).

Ethnic divisions

However daunting the task of economic reconstruction and integration may have been, it was perhaps the social issue which was to prove the most intractable. Not that is the immediate social distress and disturbance arising from the war, but the long-term ethnic problem which was to haunt Europe for the rest of the century. As Hobsbawm (1994, p. 31) recently observed: ‘The national conflicts tearing the continent apart in the 1990s were the old chickens of Versailles once again coming home to roost.’ In all fairness the conflict and rivalry between dif...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• Dedication Page
• List of Tables
• Preface
• 1 The Legacy of the Versailles Settlement
• 2 Postwar Instability in the European Economy
• 3 Inflation, Currency Depreciation and Reconstruction in Europe
• 4 The Decline of Europe: Trade and Reconstruction in the 1920s
• 5 International Lending, Debtor Countries and the Great Depression
• 6 Europe in Depression
• 7 Coping with Depression in Eastern Europe
• 8 Europe’s Third World? The Peripheral Nations in the Interwar Period
• Index