Contemporary economic belief at the end of the First World War centred on the idea that it was entirely possible, indeed inevitable, that the world economy would return to the pre-1914 days of relative stability and growth. 19th Century freedom of unregulated business transactions were considered the ideal thus war tariffs were quickly dismantled and European leaders met at Brussels in 1920 eager to return their nations to the Gold Standard. This was widely held to be the bastion of a prosperous European economy and in the short term would check unprecedented inflation. Ultimately it thinned the economic ice Europe was floating still further by its failure to function. Importantly this failure highlighted the lack of political will for international cooperation. It was not enough to return to gold, with that greater imagination by bankers and politicians was needed to achieve the common economic goals all who where on it aspired to.
While many changes were expected, the war brought about new ones and accelerated others that would make the above impossible or difficult to maintain. An examination of the collapse of support for liberal economics requires a consideration of the power, attitude and policies of the USA. By 1913 it was the largest economy in the world approaching that Germany, France and Britain combined. World War I accelerated the international economy’s existing state of flux, with the USA taking the place of Britain as its centre. The former proved grossly insufficient or did not want to act as the global stabiliser as it had little need for the rest of the world. Britain, who had spearheaded a policy of free international trade and investment, could no longer afford to operate as the World’s financial cornerstone. The war had brought about vast shifts in the location of assets and liabilities. The USA was now Europe’s biggest creditor and investor, again replacing Britain whose investments fell by 25% during the war alone. The sums owed to the USA by France and Britain was comparable to the ludicrous sums they in turn demanded from Germany at Versailles (1919). Political difference of opinion between France and the USA led to an unworkable compromise over German reparations, itself authorized by the German nationalist gift of the ‘War Guilt Clause.’ In 1920 an insightful John Maynard Keynes understood how damaging this would be, ‘for without a restoration of the German economy the restoration of a stable liberal civilization and economy in Europe would be impossible’. France resolutely set against this but was too feeble to enforce its demands as can be seen by its failed occupation of the Ruhr in 1923. As a further compromise on the war debts issue the Dawes plan of 1924 fixed a sum for Germany to pay annually that was modified by Young in 1929. Both these plans still did not work on the rational basis of taking goods Germany’s economy could supply but on cash regardless of economic circumstance. Thus the key to Europe’s economic downfall was established by forcing Germany into heavy borrowing from the USA. This would do much to frustrate and focus the German people against these ‘liberal’ nations that were enforcing it.
Without going into the economics and reasons it is sufficient to say that the economy on both sides of the Atlantic was on precarious grounds during the 1920s. The loan circle of payments established by the USA rested solely on its own prosperity and specifically on its international lending ability. Even before this collapsed problems both new and old were emerging on a scale not seen before. Agricultural price slump, wage stagnation, consistently high unemployment across class and the percentage of country’s foreign investment that went straight out of them to pay debts were but a few of the cracks that were appearing in many European economies. When the 1929 Crash did occur and the Great Depression hit the house of cards collapsed rapidly. Deep existing debts meant Europe and specifically Germany could do nothing but default its entire portfolio of loans that America rapidly pulled in. Statistics across boarders and industries began to tell a shattering catalogue of economic ruin typified in the most politically potent economic indicator, unemployment. Historically unmatched economic ruin came at a time of similarly unmatched political power of the masses.
By 1933 the Great Depression left the foundations of Liberal economic thinking in ruins. Many, not least Keynes argued that orthodox economic policies were making the Depression worse. Thus Liberal governance in an age of increased importance of public opinion, itself a monument to liberalism’s success, was perceived as a farce. Political ramifications could be nothing but dramatic and rapid. Within a few short years the 1920s spirited attempt at returning the world economy to that of 1913 was now unthinkable. Outside of fascism and communism the only alternatives were in their infancy and while they could maintain democracy they would still see a big retreat of Liberalist economic thinking. No formal set of policies were in place for a thoroughly convincingly and effective move yet, merely an understanding that this can never be allowed to happen again. Sweden in its social-democratic policy after 1932 and Keynes’ General Theory of Employment, Interest and Money in 1936 laid foundation in this direction that would see wide acceptation and success only in post 1945 Europe.
Psychologically the Great Depression had a massive impact. Intellectuals, activists and ordinary citizens were united in the belief that something was fundamentally wrong with the liberalist democratic world they lived in. Confidence in this world and its institutions of traditional economic expertise was eroded in politically stable nations but collapsed and ended in those less fortunate. People this disillusioned could quite rationally turn to alternatives that only with modern day hindsight seem irrational. Be they communist, fascist or prudent but massive government intervention such as the National Conservative Government’s policies in Britain. Fuelling this disillusion with existing liberal systems was the USSR. In capitalism’s most dire period, 1929-33, the USSR’s index of industrial production doubled while Germany’s collapsed to 60%, the UK’s to 88%. Marx, in so far as his predictions towards capitalist society, was actively seen to be correct, especially concerning the growing concentration of capital. None however took this route during this period. While this essay’s concern is not with what direction a country’s politics took the question of why it took any new direction at all is still in part answered by it. A powerful fear of Communist revolution or Marxist orientated worker’s parties reaching government transcended through many nations’ middle-class, bourgeois, military, conservative and moderate left-socialist liberal leaders. Aggravating this fear was the misunderstanding, especially in Germany, that anything left of the centre was part of the greater Communist threat be they genuine Bolshevik style revolutionaries or socialist liberals. It was this whipped up fear typified n the reading of Lenin’s works that would cause a panic to the Right. The lack of any concrete threat, Stalin abandoned altogether ‘World Revolution’, was unnecessary. Pressure established across these class and national boundaries to move towards more autocratic economics would result in a turn by the existing elites to any alternative popular force that, while not necessarily an obvious ally was definitely against the ‘greater’ threat of communist parties.
This is most strikingly seen in Germany, a study of which must be at the cornerstone of any analyse of why Europe’s Liberal governments collapsed in the period. From the aftermath of the War through to 1933 Germany’s economic problems were among the most acute of Europe’s. German domestic debt surpassed all others. By 1918 it had grown tenfold from its 1914 figure. January 1919 saw German unemployment hit 6.6 million as soldiers flooded home from the front. These were but few of the problems a politically overhauled and unstable Germany, wrenched from a largely autocratic monarchy to parliamentary democracy based on proportional representation faced. Inflation and a shattered war economy did not complement the SPD’s impetus for social welfare reform demanded by the moderate left. Weimar’s liberal democracy however survived the immediate post war crisis and that of 1922-23 yet collapsed in the Great Depression. From this alone one can see it is too simplistic to assume economic trouble means the end of liberalist government. Internal economic trouble on its own does not necessitate their fall. Both the political issues and global economics of the time need to be examined.
Key to a European State’s survival in the 1919-23 periods of great inflation were its own and specifically the USA’s capability to solve its economic problems. In 1919 Germany large funds were made available for employers to rehire soldiers, launch industry for work creation schemes and co-ordinate unemployment relief payments. Jobless figures tumbled to 150,000 in late 1921, an achievement unrivalled anywhere. Success was short lived however, from Germany in the west to the USSR in the east Hyper-inflation in 1922-23 brought these countries to the verge of economic and political collapse. Weimar saw unemployment leap from 2% to over 23% and inflation hit 29,720% in October 1923. In isolation these figures are highly comparable to the disasters of the Great Depression in 1929-33, in the case of hyper-inflation they are more severe. Through stabilising and re-launching the Mark, the resolution of the Ruhr crisis and crucially international aid through the Dawes plan in Weimar or similar loans to her neighbours, a collapse was narrowly avoided and Europe entered a period of economic stability and hence political calm. Opposition groups sheepishly retreated to the sidelines or back to supporting the system they briefly felt could be overthrown.
The axiom for the collapse of a liberalist government is that there is an effective challenge to its power; economic ruin on its own is insufficient. Germany’s opposition to the SPD between 1919 and 1923 was heavily divided, nationally poorly known and immature in their organisation and policies. Extremist support collapsed during the ‘Golden Years’ apparently showing that economic success brought about a popularity for liberal government. As with the economic foundations, this political foundation was on poor ground, the NSDAP, DNVP and KPD had time to regroup, reorganise and gain public recognition in readiness for a more favourable time. Thus when that time came in the form the Great Depression their ability to capitalise on it was catastrophic for liberalist government. Neither a strong USA nor a weak opposition was evident come 1929. A striking show of the link between economic performance and the popularity of an anti-liberal party, in this case the NSDAP, can be seen in the very direct correlation between its vote and the percentage unemployed in Germany from 1928 to 1933. While this is an isolated example it does highlight the established agreement on the relation between the growing disillusionment of a people with liberal government at the time and its economic performance.
Economic strife resulted in a number of key retreats for Liberal Democratic government in Germany. 27th March 1930 saw the end of the coalition as members drifted to extremes. The new chancellor, Muller, used Article 48 to bring in the emergency power’s of the President to give Hindenburg direct control over the country. By September nearly 50% of the Reichstag was in favour of its abolition as consensus was reached that Weimar’s political form could not solve the economic ruin. NSDAP support soared but Hitler could only take power constitutionally through negotiation with the conservatives. As in Italy, they fatally believed that, while they had no choice, they could use fascism for their own objectives. Liberalism’s demise in Germany, while evident before January 1933, was made irreversible after. Hitler’s economic and political success would see other regimes copy his methods to notable effect in Austria’s fall from democracy in 1934. Within a few short years his government would take credit for turning the economy around at a rate unrivalled by Britain or France. Come the height of Hitler’s success in 1942 either occupation or alliance would claim further Liberalist governments across Europe.
Fascism alone was not the sole force behind Europe’s liberal retreat. If the existing liberalist government’s ruling mechanisms were in excellent working order (France, UK) or the government to take over from liberals was nationalist (Poland) Fascism was kept in check. Socialist or Marxist intelligentsia saw the Great Depression as the final end of Capitalism. It could no longer operate within the institutional framework of liberalist government. Only through force and authoritarianism could it maintain itself, fascism being one of several methods for this. Whether this was the case or not is generally irrelevant in an age of mass politics perception and belief became a greater force for change then fact and truth. In an age of both attempted proportional representation and an irreconcilable Left and Right it is not surprising to see Democracy in Austria, Germany and Spain fall under these pressures. In some otherwise stable democracies opposing ethnic, race or religious peoples within a state would see the demise of their governments as in the case of Czechoslovakia in the 1930s.
Economic trouble cumulating in the Great Depression was the fuel and more often then not the spark that set the stage for Liberal collapse. In the ensuing fire Liberalist economics had to jump, whether liberalist government jumped next was dependant on the formers ability to control the firestorm. Peaceful change rested on both the level of assurance afforded to the political system by its citizens and confidence in itself. Innate to Democracy’s legitimacy is its sense of evolution from within its own peoples and nations. Few of interwar Europe’s democracies enjoyed this level of establishment thus their citizens at best had a shallow affinity with it. Government’s existence rested solely on economic success as only that could reconcile a politically disenchanted people. The pillars of nineteenth Century economy had profound and system damaging effects on nation’s politics in the 1920s and 1930s. Government’s enshrined role to only check the power of institutions gave them no mechanism to take their command in peacetime. The attempt to return to a world built up on free trade, laissez-faire economics and minimal political intervention had little hope of functioning when government came to be required as the engine of society. It was designed as nothing more then the breaks. With the collapse of wealth in the Great Depression or at least the collapse of the framework to keep generating it the end of liberalist government was certain.
BIBLIOGRAPHY
Clavin, 2000: The Great Depression in Europe, 1929 – 1939
Kenwood and Lougheed, 1992 (third edition): The Growth of the International Economy 1820 – 1990
Hobsbawn 1994: The Age of Extremes
Hobsbawn 1994: The Age of Capital
Stachura 1986: Unemployment and the Depression Weimar Germany (selected essays).
Maier 1987: In search of stability. Explorations in historical political economy
The industrial north was the most heavily concentrated area of manufacturing in continental Europe in 1914; paradoxically the South was one of the sparest and poorest.
See ‘The Gold Standard reconstructed’ in Clavin, The Great Depression in Europe, pp. 46 – 58,
In Estonia an estimated 70% of foreign investment went straight out to service its loans. (Clavin, The Great Depression in Europe, 2000 p. 86)
Endeavours at doing so would be doomed - Britain’s Labour Party’s attempts at restoring 19th Century ideals (1929-31)
Hobsbawn, Age of Extremes, 1994 p. 102
The closest being the ascendancy of Sweden’s socialist government.
Clavin, The Great Depression in Europe, 2000 p. 16
Unemployment and the Great Depression in Weimar Germany, 1986 p. 9
This ambitious project would be instrumental in liberalist government retreat in the Great Depression.
Excluding the USSR as the collapse of it’s citizen’s of private savings was largely meaningless
NSDAP support was 2.5-3% in this period. Even the combined support of them, DNVP and KPD failed to reach 30%.
Unemployment and the Great Depression in Weimar Germany, 1986 Fig. 8.1 p. 188. Essentially rises and falls in unemployment coincide with percentage voting NSDAP.
By which time it becomes irrelevant that success can in part be attributed to von Papan’s and von Schleicher’s work creation schemes as well as the global economy’s upturn.
Hobsbawn, Age of Extremes, 1994 p. 139
