♦
It is easy to sum up the conventional wisdom that quickly emerged in response to the problems of the global economy. Everything that was moving across national boundaries—whether capital, goods, or people—really had no business to be doing that and should be stopped. If it could not be stopped, it should be controlled, in accordance with a definition of national interest. At every population conference, delegates accepted that sovereignty involved the choice of who might be admitted to a particular country, in accordance with the national interest. Trade was to be regulated so as to maximize domestic employment. Central banks began to redefine their job of monetary management in accordance with national priorities.
The central bankers, and others, interpreted the large sums that flowed as a response to the signals they sent as “capital flight,” a term with moral overtones, implying desertion and national betrayal. Estimates of capital flight for Germany in 1930 amounted to a sum equivalent to an eighth of national income, in France for 1938 of a quarter. These short-term capital movements were so substantial that they endangered regulators’ ability to control the national economies. Such flows created the basis for a myth that “mobile international capital” was undermining the national economies.
In the 1920s and early 1930s the nature of the discussion became even more radical. Adolf Hitler excoriated attempts by Weimar politicians to explain away the German depression as an outcome of international factors. In the election campaign of July 1932 he stated: “They can’t say that the crisis is a result of international economic factors. Now the international is supposed to be dangerous. But they always had such good international relations, why don’t they use them for Germany? There’s so much international, so much world conscience, so many international contracts; there’s the League of Nations, the Disarmament Conference, Moscow, the Second International, the Third International—and what did all that produce for Germany?”1
Why was internationalism so dangerous? Because governments and central banks attached so much prestige to the reestablishment of the fixed parities of the gold standard, they opened a window for the speculators who did not believe that their policies might be successful. In the nineteenth century there had been few cases of abandonment of the gold standard: once the system had already collapsed in 1914, once governments faced the intractable budgetary difficulties of the postwar era, short-term movements began to follow a quick-entry, quick-exit strategy.
The logic of the attachment of prestige to a difficult economic objective was that the speculator became a state and national enemy. Sometimes the attacks were linked with class conflict: the left in France attacked the “deux cent familles” who frustrated the reforms of the center-left coalition (cartel des gauches). The British Labour party believed that it had been undermined by a “Bankers’ Ramp.” The national resentments of the wartime era were frequently transferred to discussion of peacetime social relations. In wartime Russia, speculators were thought of as Germans. At the beginning of his 1922 novel To Let, John Galsworthy describes his “man of property,” Soames Forsyte: “the habit of condemning the impudence of the Germans had led naturally to condemning that of Labor, if not openly at least in the sanctuary of his soul.”2
Sometimes the objections to speculation were racially based: speculators were identified as cosmopolitan, Jewish, or alien. Such racial identifying of the sins of speculation intensified with a geographic progression eastward across the European continent. Since the middle of the nineteenth century, with the evolution of a new, dynamic, and unstable sort of market economy, Jews had been identified with finance capitalism. At the beginning, the critique often came from the political left. In France the left-wing revolutionary Alphonse Toussenel in 1845 wrote Les Juifs, rois de l’époque: Histoire de la féodalité financière. In Germany the Saxon revolutionary Richard Wagner wrote in “Jewry in Music” (1850): “In the present state of affairs, the Jew is already more than emancipated. He rules, and will continue to rule, as long as money remains the power before which all our actions lose their force.”3
With the First World War, price controls, inflation, and the evolution of a black market, large numbers of people were obliged to take up speculative, illegal, or semilegal activities simply in order to survive. Such actions conflicted with traditional ideas of what business conduct was legitimate. One powerful argument on why anti-Semitism flared up so poisonously during and after the First World War is that Germans widely took up activities that had previously been defined as Jewish, that they hated themselves for the breach of traditional values, and that they responded by transferring their hatred to the members of the ethnic group associated with the stereotype of bad behavior.4 The new anti-Semitism then sought an external target with ever-increasing aggression. One example of such a transition, in someone who played a crucial role in the development of the Nazi state’s anti-Semitic policy, is Joseph Goebbels, who seems to have learned Jew-hating as a clerk with the Dresdner Bank during the great inflation of the early 1920s.
The stereotypes and the behavior of the vulnerable minorities reinforced one another. Faced by mounting anti-Semitism, Jews tried to move their capital out of many central European countries; and as they fell foul of new legislation to control speculation, they reinforced the stereotype of the “Jewish” speculator. (For instance, in Hungary, in the year before the introduction of anti-Semitic legislation in 1938, 112 of the 187 currency offenses prosecuted were committed by Jews.)5
After the outbreak of the major financial crises of 1931, central banks transformed themselves once more: no longer apostles of internationalism, they secured a happy bureaucratic raison d’être as the implementers and invigilators of increasingly complicated schemes for exchange control. This role was facilitated by a turnaround in economic thinking, not just in Nazi Germany—where autarky became a guideline for policy—but in almost every country.
One detailed case should suffice to show how worry about capital mobility interacted with security concerns to produce a doctrine of economic control, as well as a deeply divided political culture. Nowhere was the debate about capital flight and its link to national strategic weakness conducted more intensely, even paranoiacally, than in France. France after 1931 was hit by successive waves of capital inflow (as central European capital looked for a secure haven) and outflow (as investors became nervous about France’s political, social, economic, and military stability). A secure military defense was needed in an increasingly insecure world. However, through its effect on the budget and thus on financial confidence, rearmament rocked the already unsteady French boat yet further. By early 1936 it had become very difficult to sell French government bonds to the public.6 Policymakers had to weigh the relative merits of military preparation and financial stability: excessive military spending might actually make France more vulnerable because of a financial threat to influence politics.
This was not new in 1935 or 1936. Germany had already used economic diplomacy in 1932 as a way of maneuvering France into accepting the Lausanne reparations settlement. German efforts to use finance to influence French policy became more intensive after Hitler’s seizure of power. Already in December 1933, during one of the early runs on the franc, the French domestic intelligence agency, the Sûreté Générale, presented evidence that Germany was launching a speculative attack. It reported that
Dr. Schacht and the Berlin bankers Fritz Mannheimer and Arnold formed a syndicate for a bear speculation using two brothers in France, Zélik and Grégori Josefowitz (alias Zebovik), who “had received a mission from the Führer to especially work the Paris market.” French banks in their turn joined in the attack with the motive of overthrowing the ministry. They sent treasury bonds and commercial paper to the Banque de France for discount and used the proceeds to buy gold.7
In March 1936 a new speculative attack on the franc followed the remilitarization of the Rhineland and accompanied the Popular Front elections (the first round was held on 26 April, the second on 3 May). The army general staff anxiously surveyed a large range of German newspapers to try to establish how German propaganda was working against the French position; the German press, the French soldiers discovered, was proud to announce that the Banque de France discount-rate increase of 28 March showed that “the confidence of French capital has been shattered.”8 As in previous speculative attacks in central Europe, rate rises were read by the market as a sign of weakness, not of strength.
The military and security aspects made it much more urgent for France to attempt to obtain a currency stabilization. In 1935 and 1936 the Banque held frequent talks with the Bank of England about ways of preventing currency speculation.9 In March and April 1936 the panic was so great that the Banque de France lost control of the money market altogether.
In 1936 a new center-left government, the Popular Front, under Prime Minister Léon Blum, took power after the April elections. But its financial policy dilemma had already existed for over a year before the elections that put it in power, and had been exacerbated by German action in March. To make their problems worse, the Popular Front leaders, in the course of the political campaign before the elections, had made promises that tied their hands on the issue of devaluation. The Communists campaigned against devaluation, claiming it meant an expropriation of wage earners for the benefit of capitalists. There was, they said, a conspiracy between French capital and foreign interests. One of the most emotive headlines of the party newspaper Humanité read: “The Fascists Organize the Hemorrhage of Gold.” The Communist leader, Jacques Duclos, wrote: “The evil-doing potentates of the Bourse and the Banque, having robbed the country through deflation, now wish to rob her through devaluation.” Devaluation meant a way of avoiding a property tax on the rich.10 But the (non-Socialist) Radicals took a similar line. Edouard Herriot, scarred by his memories of the financial crises of 1924 and 1932, announced in an election speech in Lyons: “Devaluation, that would be I know not what dangerous road toward zero.”11 The Socialist leader, Léon Blum, accommodated the beliefs of his allies by keeping to a slogan, “Neither Devaluation nor Deflation,” which seemed to give no room for policy maneuver. In public Blum had always opposed the idea of devaluation. Instinctively he preferred capital controls: in late 1934 he had told the Chamber of Deputies in response to a pro-devaluationist speech by Paul Reynaud that devaluation could be prevented by putting an end to “the worst of the scandal,” foreign-exchange speculation.12
In private, however, he and other Socialists had contemplated devaluation, but only in an internationalist setting that would not leave France humiliated or on its own.
After April 1936 the financial panic demanded some kind of action, and it became apparent that the choice lay between franc devaluation and exchange control. Both possible choices had unpleasant aspects: devaluation was humiliating, but exchange control distorting. There were also non-economic, security, aspects. This debate formed the core of a famous and influential conversation between Blum and Emmanuel Mönick, the French financial attaché in London. Mönick argued powerfully that exchange control presented a “German path” that would bring France close to the German war economy, whereas an agreement with the United States and Britain would prepare a path for a parallel political collaboration of democracies against dictatorship. “If we follow the German path, we are beaten from the start, because our country does not possess the same resources in manpower and raw material that our neighbor across the Rhine enjoys.”13
For a considerable time there existed uncertainty between these two courses. In the early summer, devaluation seemed certain. In late June, Mönick went to Washington to negotiate a new parity,14 and in July Blum visited London to agree the basis for a devaluation and a tripartite currency pact.
In fact nothing happened until a new franc crisis in September. Many policy measures implied a preference for exchange control rather than devaluation. The position of the Banque de France in particular was highly ambiguous. One of the most important steps taken by the Popular Front was the reform of the Banque de France, which effectively ended its autonomy. The governor (whose appointment had already been highly political) was replaced. A new statute ended the role of the regents of the Banque, who had represented the old financial and banking oligarchy, which had been vigorously attacked by the Popular Front. As the regents departed, the new governor, Ernest Labeyrie, gave them a lecture on how it was the duty of the Banque to obey the elected government of the Republic. Labeyrie also believed that money markets and speculation should be controlled; by the summer of 1937 he was being described as a “victim to his anti-speculation mania.”15
Labeyrie adopted a corporative approach to the issue of capital flight, obliging Roger Lehideux, the representative of the French banking association, to send out a circular instructing French banks not to give credits for speculative purposes. The Banque de France also began extensive investigations into the mechanisms of capital flight, seeking an answer to the question that obsessed central bankers in the 1930s: who did it?
The Banque now kept a day-to-day account of the gold transactions on the Paris market. A surprisingly large amount came from just one bank, Lazard Frères, which accounted for 16 percent of the movement to London, 9.5 percent to New York, and 13 percent to Brussels in the second half of May 1936.16 At the same time, we know from other sources that Lazards already began in 1935 to exercise some pressure on the government to devalue the franc;17 in other words, the bank was moving its money in a bet against the French franc. The Banque’s inquiry of 1936 went much deeper: it looked at regional variations in capital flight. The police started to attack the speculators. One inspector examined activity in the Lille-Tourcoing-Roubaix area (on the frontier with Belgium). He found plenty of small-scale activity, thousand-franc notes being taken across the Belgian frontier, but also much more systematic movements. Most of the textile businesses ran down their current accounts during the franc crisis; and at the same time the leading banks (Banque Nationale pour le Commerce et l’Industrie, Crédit Commerciel, Banque Joire, Lloyds Bank) gave large credits to the textile owners, which allowed purchases of raw material in foreign exchange.18
Such police operations were intended to prepare the way for an exchange control, which could be implemented only on the basis of a great deal of local and particular knowledge. In June 1936 Vincent Auriol, the new Popular Front finance minister, issued a decree imposing penalties for the nondeclaration of capital held abroad, and authorizing the government to take action against those who attacked the state’s credit (that is, those who organized the flight of capital). In an address to the Chamber on 20 June he ruled out the possibility of devaluation. On 11 June the French financial attaché in Berlin had sent in a memorandum drawing on Germany’s experience with exchange control since 1931, and explaining in detail how it could be applied.19
Then came more dramatic foreign political events: the eruption of the Spanish civil war, German lengthening of military service, and a need to prepare a new French armaments program.20 The result was devaluation after a new franc crisis. Auriol now defended devaluation as a better alternative than exchange control.21
But the devaluation did not guarantee stability or make the franc immune to further attacks. The recognition that the best way to restore stability lay in permitting capital flows (because illegal exchange operations would continue anyway) required a change in the leadership of the Banque de France, and indeed in the whole direction of French economic policy (a reversal of policy that would not really be achieved until the late 1950s). Pierre Fournier, the deputy governor of the Banque, replaced Labeyrie, and represented a much more traditional style of management. He had argued that a large proportion of French capital was now abroad in the aftermath of the franc panics, about a third being in the United States and half in Britain.22 The only way of getting it back would be a liberalization and a revocation of the Lehideux circulars.
The fundamental cause of French instability, the massive public deficits, partly the result of armaments spending, remained, and consequently there was little chance of a long-lasting stabilization; 13.8 billion francs in treasury bonds were written off, but there was still a new legal ceiling on government spending, and the military budget went on rising. When new budget deficits were predicted for 1937, the outflow of capital began once more. On 13 February the government was forced into retreat.
A £40 million British loan provided temporary relief, while Blum declared a “pause” in the radical social and economic program of the Popular Front. Traditional liberals such as Jacques Rueff (who had become general director of the debt administration in November 1936) took the lead in directing the policy not just of the Finance Ministry, but also of the nationalized Banque.
No policy measure brought respite for France: not the devaluation of the franc to a new parity (the “franc Auriol”); not the Tripartite Pact with Britain and the United States that accompanied it, which promised coordination of monetary policies; and not the liberalization of capital movements and the encouragement of flight capital to return through tax incentives and the issue of reserved government paper on favorable terms.23 The monetary crises continued, and as a result France suffered from financial instability, continued worries about the instability of the franc, and restrictions on military spending imposed by the need to keep the franc stable and respect the sentiments of small investors as well as foreigners.
The U.S. government left no doubt that it considered that French arms spending lay at the bottom of French troubles. U.S. Treasury secretary Henry Morgenthau told Roosevelt: “The world is just drifting rapidly towards war. We patch up the French situation every so often but with the constant increased percentage of their budget going for war purposes we really cannot help them. The European countries are gradually going bankrupt through preparing for war.” At the same time Morgenthau asked the British chancellor of the Exchequer for “suggestions whereby he and I might make some start to stop the arming that is going on all over the world.”24
The franc continued to jitter. In March 1937, after the Blum pause, the Germans attempted once more to destabilize the franc by massive sales on the Amsterdam market.25 The instability of the government increased international anxiety about France.26 In June, new drains brought down the Blum government, and a new administration under Georges Bonnet carried out a further devaluation and a floating of the franc. It also cut defense spending, and the new air force program was severely pruned.27
By 1938 the United States estimated French capital flight at $2.5 billion, $1 billion of which had gone across the Atlantic. Morgenthau now proposed to help France by locating where exactly this money had gone, since the movements “may gradually undermine the basis of the Tripartite Pact [while increasing] the danger of a movement toward autarky and political dictatorship.” He thought that France should simply “make it a jail offense not to take your money back.”28
Blum came back in March 1938 with a government formed just before Hitler’s Anschluss of Austria. He intended to use rearmament as an economic stimulus, and the result was a new franc panic. Within a month, Edouard Daladier succeeded him with an administration still committed to arms, but also now to the removal of the limitations on production imposed by the forty-hour week (the most spectacular social achievement of the Blum government).
In July 1938 a memorandum from the office of the prime minister explained the grounds for the new attack on the franc. The immediate cause was an article written by Charles Rist and published in London that presented a grimly realistic account of the state of French government finance: the reaction was such that “the capitalists once more doubt the stability of our money.” But once again the Italian and German radio and press devoted their attention to the embarrassment of the franc.29 The author recommended a drastic budget reform involving an end to the amortization of the national debt and an increase in the efficiency of tax collection through the strengthening of the Finance Inspectorate and the publication of tax returns.
The rather more conservative reign of Georges Bonnet and later Pierre Marchandeau in the Finance Ministry, the presence of Fournier in the Banque de France, and the new strength of the Banque’s position made for greater calm. The Banque now worked no longer through direct pressure on the government but through a new and intimate relation with the leading firms in the Paris market. A large part of the influence operated through personal connections with the leading Paris banks. By mid-1937, of the great banks only the Société Générale had no former governor or deputy governor in a prominent management position. Whereas at the time of the German Anschluss in March 1938, and during the May war scare over Czechoslovakia, there had been financial panics in France, the markets remained rather steady during the Sudeten crisis in September 1938 and before and after the Munich Agreement. By early 1939 a large part (around 30 billion francs) of the flight capital had returned.30 The returning capital was mobilized for defense purposes through a new institution set up in 1938 by Marchandeau, the Caisse Autonome des Investissements de la Défense Nationale.31
It was only after the two devaluations and the removal of the Popular Front’s major social legacy that greater sums could be devoted to armaments without causing an immediate panic. But this was in 1939, and it was then rather late. The price of maintaining gold too long through the 1930s involved the security, and eventually indeed the existence, of the French Republic. The lesson learned from the experience was that controls were needed to defend France’s national interest against the security dangers posed by hot money flows. The experience of the 1930s convinced many observers, not just in France, that speculative money was immoral and dangerous. By the late 1930s, and especially in the war years, a consensus emerged that the instability of the 1920s international economy, and thus also the way in which the financial sector served as a transmitter of depression, was a consequence of unstable capital flows. This is not a particularly popular view today, when the orthodoxy among economic historians (expressed most powerfully by Barry Eichengreen in Golden Fetters) now holds that the fixed exchange-rate regime (rather than the mobility of capital) provided the chief systemic vulnerability.
In the 1930s, both the positions on the causes of the financial sector vulnerability and the depression were argued in serious and highly intelligent and persuasive books. The best interpretations on both sides were published by the League of Nations. The modern argument was presented very skillfully by Gottfried Haberler in Prosperity and Depression. The best exposition of the view that capital flows were destabilizing comes later—in Ragnar Nurkse’s Interwar Currency Experience—and this view also decisively shaped the deliberations about the postwar monetary order in Bretton Woods.32
Why did Nurkse’s interpretation win the debate (for the moment), when really, at least judged from the modern perspective, it should not have? The answer is not to be found simply in economic debate, but in the way in which political and security concerns became mixed in with the economic analysis.
In the world of the 1930s, everything was to be national—labor and goods, but also capital. John Maynard Keynes brilliantly described this development in his 1933 essay “National Self-Sufficiency,” which was quickly translated into German: “I sympathise, therefore, with those who would minimise, rather than with those who would maximise, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.”33
The collapse of the economy now brought a turning away from the market. Even moderate and pragmatic analysts, such as the director of the League of Nations’ Economic and Financial Section, Sir Arthur Salter, believed that the future lay in regulation and control.34 With the encyclical Quadragesimo Anno in the crisis year 1931, the Catholic church looked for a “third way” between capitalism and socialism.
Increasing regulation and planning encouraged those who saw the function of the state as being to externalize the costs of economic adjustment: to impose those costs on those outside the national community. The state’s duty lay in protecting its citizens and in ensuring that the inhabitants of other national communities suffered as much as possible. This was of course quite the opposite of the traditions of classical economic liberalism, in which there is a mutuality of gains.
The path away from the market and toward control was frequently also a path to political dictatorship. The most obvious examples were in Russia and Germany. But the sentiment that democracy had failed in fulfilling a basic social need was widely shared by many democrats. In his diary in February 1940, for instance, André Gide noted: “One must expect that after the war, and even though victors, we shall plunge into such a mess that nothing but a determined dictatorship will be able to get us out of it.”35
Military spending appeared to be the most effective way of breaking out of the vicious circle of depression economics. This was the basis of recovery policy in both Germany and Japan, although in each case the rearmament was complemented by civilian-oriented programs: the expansion of motorization in the German case, and a strikingly successful export offensive, aided by the sharply devalued yen, in the Japanese case.
One of the most obvious lessons of the depression seemed to be that the state should sponsor an industrial drive in the strictly planned setting of a national economy. The hyperindustrialization of Stalin’s Russia was only the most extreme example. This lesson appealed especially to economists who experienced personally and directly the mixture of power and pressure in 1930s trade relations: so that Raúl Prebisch, who had helped negotiate the Anglo-Argentine agreements, or Thomas Balogh, who thought about the consequences of German-Hungarian trade, learned then taught that trade was manipulative. The healthiest development required import substitution, and Prebisch and Balogh were eager to sell this message in quite inappropriate contexts in the postwar world. Prebisch became the chief proponent of import-substitution industrialization as a way of dealing with terms of trade that would otherwise be hopelessly set against the developing world.
Balogh serves as a prime (if somewhat extreme) illustration of how the economic lessons of the Great Depression were mislearned, with often disastrously inappropriate conclusions. In the late 1930s he studied the German economy and realized that it had not become as autarkic as its propagandists would have liked. He therefore concluded that its economy could not stand the strain of major conflict, and would collapse quickly in the event of a war. In 1947 he predicted a permanent dollar shortage which the Europeans would not be able to overcome and which would stymie any chances of a European recovery. When Germany in 1950 adopted a stabilization program that laid the basis for the trade-sustained Wirtschaftswunder of the 1950s, he foresaw that it would bring the quick collapse of the West German economy. In the 1970s and 1980s he predicted a new great depression of the 1930s type.36 All these prognoses appear in retrospect quite risible. All followed from the same logic.
At this time the nation-state with its control mechanisms was supposed to provide guarantees against threats from the world economy. But was not the protection more dangerous and destructive than the threat?
In the nineteenth century there had been a rapid process of globalization, which met almost immediate resistance. The interventionist state derived a great deal of its legitimation from the process of globalization, and became increasingly an impediment to integration. It was in the Great Depression that those who opposed the freedom of migration, and of goods and capital transactions, saw the opportunity to move the pendulum back. The strong nation-state and the free flow of capital now stood as polar opposites.
Three underlying economic propositions justified the new policy stance:
• That international trade was in a process of secular decline. This proposition had been formulated by Werner Sombart in 1903. It became commonplace in the 1930s.
• That international financial flows were destabilizing.
• That economic development required social change and mobilization, which could best be achieved through the intensification of solidarity based on awareness of common ethnic features. In practice, a sort of racism underlay much of the doctrine of development elaborated at this time, for which the term “national socialism” (understood more widely than in respect to the specifically German phenomenon of “National Socialism”) seems appropriate.