The interwar German economy was truly a “basket case.” Most people know this because of the anecdotes from the Weimar Republic’s bout with hyperinflation during the early 1920s. What student of economics or finance has not seen the photos of German children playing with stacks of worthless German currency?

But a much less known event was the major financial crisis in Germany that followed less than a decade later. This dearth of common knowledge prompted Tobias Straumann to write 1931. Straumann is an associate professor of economic history at the University of Zurich who specializes in the study of 20th century European finance and economic history. In his preface he explains that the idea for the book came from his conclusion “that the wider public has little knowledge of the 1931 German financial crisis and its key role in Hitler’s sudden electoral success.” My own research had made me aware of a major debt-moratorium that the large New York banks adopted in 1931, the so-called “standstill agreement” negotiated by Albert H. Wiggin, who was chairman of Chase Bank. That agreement was intended to give the German government breathing room by reducing its immediate repayment obligations. Needless to say, the moratorium made life difficult for the U.S. banks in the midst of the Depression.

Reparations / As Straumann explains, the Treaty of Versailles, which ended World War I, assigned blame for the war to Germany and its allies and imposed general compensation mandates for the damage done. It was left to the diplomats to work through the details of that compensation.

Straumann writes that the reparations saga began in earnest in 1921:

The London Ultimatum of May 1921 was supposed to resolve the issue, but only made things more complicated by fixing the final bill at the extremely high level of 132 billion gold marks…. Economically, Germany could have paid the reparations, but politically, such a scenario was simply unenforceable, as most German citizens were convinced that their country had not lost the war. Thus, when the cost of the reparation bill became known in Germany, a sort of tax boycott ensued.

In the end, there was a large shortfall in receipts and the Reichsbank monetized the excess, boosting an already lofty inflation rate and leading to the widely known example of “full-blown hyperinflation.”

After the hyperinflation, rescheduling of debts was addressed in the Dawes Plan (named for Charles Dawes, later Calvin Coolidge’s vice president) and a new German currency was put in place. The German and the global economy improved for a time through most of the 1920s. But as with nearly all such plans, the Dawes Plan also had its flaws, resulting in its replacement with the Young Plan (named for American industrialist Owen Young) of 1930. The struggle with the implementation of the Young Plan is where the story of the 1931 financial crisis really starts.

There are four major overlapping historical lines at work in 1931: the diplomatic efforts to address reparations; the instability in the banking systems in Austria and Germany; the intervention of the United States, primarily through the efforts of President Herbert Hoover; and the political dynamics in Germany, which ultimately led to the ascension of Adolf Hitler to the position of chancellor.

Diplomatic efforts / The Young Plan was signed in the Hague in January 1930. The diplomatic agreement tried to resolve the previously unresolved: “it redefined the terms of the reparations payments and was thought to be a complete and final settlement” on the subject. The plan reduced the yearly payments for Germany, reduced foreign financial control, and committed the Allies to withdrawal from the Rhineland. But it also required Germany to make payments for 58 years (into the late 1980s) and that gave the Nazi Party fuel for arguments that the agreement imposed massive burdens on the nation for “three generations.”

The plan also altered the priority of payments for Germany’s foreign debts. Political pressures from each of the stakeholder nations immediately caused tension in the implementation of the Young Plan, solidifying decades-old animosities on all matter of diplomatic, financial, and strategic issues.

Financial instability / By early 1931, German finances began to unravel: “The Reich’s revenues were deteriorating rapidly. Brutal measures will be unavoidable.” The financial systems in Germany and Austria showed signs of instability.

The crisis started with the failure of Credit–Anstalt, the largest financial institution in Austria, in May 1931. Austrian Chancellor Otto Ender announced a bailout plan that involved a capital injection by the government, supplemented by funds from the central bank and the renowned Rothschild family. Notwithstanding the government’s effort to prop up the bank, a run ensued, carrying off a full 30% of deposits.

By early June, the second-largest German bank, Danat, was being hurt on the funding side by withdrawals of foreign deposits and was being dragged down by write-downs on bad debt for one of its biggest clients, textile manufacturer Nordwolle. The bank was headed by Jakob Goldschmidt, who led the bank into a universal banking existence that was a mix of commercial and investment banking with a thin level of capital supporting these risks. By July, Danat was ready to close its doors, which it did temporarily with the government guaranteeing all deposits and liabilities. A broader run on a number of banks was triggered, leading to a general bank holiday. Three other large German banks that survived into the 21st century, Deutsche Bank, Dresdner Bank, and Commerzbank, held firm with stronger capital positions to support operations, although Dresdner did have its share of troubles.

America gets involved / The popular narrative of the U.S. Great Depression is that Hoover was unwilling to get the government involved to counteract the Great Contraction. History tells a different story: Hoover was quite the activist by 1931. Very late in the game and as Straumann describes it, “out of the blue” Hoover got personally involved in trying to foster economic recovery in the United States and Europe. At home he proposed the bureaucracy known as the Reconstruction Finance Corporation (RFC) to bolster troubled financial institutions. For Europe, in June 1931 he proposed “a one-year moratorium on all war-related debts” to support Germany, which included intergovernmental debts, reparations, and relief debts. After weeks of multilateral negotiations delayed by France’s initial slow response, a moratorium was agreed to.

Neither of Hoover’s remedies, the RFC nor the moratorium, had much effect. In Germany, capital outflows later in June and the instability of its banking system overwhelmed any benefit that might have come from temporarily easing payment mandates. The final standstill agreement went into effect for six months, but it was later extended into early 1933.

The Nazis and Hitler / Early on in 1931 Straumann cites a clear beneficiary of the turmoil flowing from the Young Plan:

One figure profited enormously from the campaign against the Young Plan: Adolf Hitler…. Before the vote [on the Young Plan], hardly anybody outside of the radical Right took notice of this hysterical politician with the comedic moustache and the strident voice.

The turmoil from the Young Plan facilitated Hitler’s coming to power. The book’s jacket emphasizes this by including his image. Less than a year after the Young Plan was signed, the Nazi Party leapt from a 3% share in the Reichstag to 18% in September 1930; by July 1932 it had grown to 37%. “In his very first campaign speech … Hitler singled out the Young Plan as the symbol of failure of the Weimar elites,” Straumann notes. German Chancellor Heinrich Brüning was stunned by the 1930 election results, as he had hoped the vote “would widen his political support.”

That election was a key turning point as the economy began to turn and “markets were in a manic-depressive mood.” Hitler was politically successful because

he managed to monopolize the widespread criticism of the post-war order established by the Versailles Treaty and the Young Plan. Relentlessly, he had made the link between Germany’s debt and the economic crisis…. He sensed that blaming foreign powers for domestic misery was extremely effective and enjoyed broad support across all parties and all classes in society.

The worst of the crisis in 1931 coincided with the further rise of the Nazi Party.

Conclusion / Straumann’s book is well-researched and the story well-told, with one exception. He argues that the instability in Germany led to the global and U.S. banking crisis:

Germany’s 1931 crisis not only gave the Nazis the opening they needed, but also triggered an international liquidity crisis, throwing banks and financial markets across the globe into chaos…, prompting a wave of devaluations in such distant places as India and Japan, a run on the dollar, and a banking crisis in the United States.

He presents no evidence for this statement about cross-border contagion, including a contribution to the U.S. economic collapse. The National Bureau of Economic Research puts the beginning of the Great Contraction that ushered in the Depression at August 1929, well before the instability discussed in this book. A banking crisis was underway in the United States before 1931. Some spillover from the instability in Germany no doubt made the situation here somewhat worse, but it is not at all clear that it triggered the U.S. banking crisis.