But by 1929 the situation began to veer off the rails. The Young Plan was not as generous as expected, the “neutral” Reparations Agent was gone and America’s new Smoot-Hailey tariff made it harder for European debitors to fund their payments. American lenders found this new environment unsafe and their credit dried up. With American aid weakened Germany could seek confrontation or European integration, though for the moment it mostly remained in its Atlanticist path.
Political instability brought to power a string of conservative minority governments, starting with Bruening in 1930. He veered foreign policy in a nationalist direction, ordering two cruisers for the Navy, seeking bilateral trade deals in southeast Europe and proposing a customs union with Austria. The latter was received positively in America –proof the Atlanticist strategy had tangible geopolitical effects- but all three antagonized France.
As the French were by 1931 willing to lend to Germany, this was a great blunder. Since 1930 Germany couldn’t borrow enough and Bruening had to achieve a trade surplus to pay off debt. In the economic orthodoxy of the time this could only be done by reducing imports through austerity.
Massive budget cuts and tax increases skyrocketed unemployment and forced the government to nationalize a number of ailing industries. Fringe parties found fertile ground. But an export surplus of 2,8 billion RM (1931) was achieved, Germany was paying its debts and Atlanticism was still bearing fruits. In 1932 both reparations and inter-Allied war debts were frozen, leaving Germany only with its non-Versailles debts to deal with.
Previously, in June 1931 Bruening had aggressively demanded an end to reparations, setting off a chain reaction through the fragile world economy. In the end the Reichsbank’s foreign exchange reserves were precariously low, the pound sterling and dollar devalued and the franc and reichsmark lost their free convertibility. The Reichsbank tightly controlled all foreign currency in Germany and rationed it among importers, reducing the import side of the trade surplus.
But now the Reichsmark was valued higher than other currencies, lowering German exports as they became uncompetitive. The trade surplus was reduced to almost nothing. One solution was to devalue it. This option was repeatedly considered in the following years, so why was it avoided?
-Devaluation was associated with inflation, which Weimar-era Germans were wary of.
-It was risky given the Reichsbank’s limited reserves.
-A strong currency reduced the value of debts in terms of Reichsmarks.
-Under Hitler and Schacht both had pledged not to devalue, so there was prestige and political capital invested in the status quo.
So with Lausanne reparations were gone. The Atlanticist strategy was now spent. It could no longer go further for a series of factors:
-Under Roosevelt’s first years in office America turned inwards and didn’t exert influence in Europe
-America’s trade balance with Europe was unfavorable to Europeans
-The international scene was unfavorable to globalization, with increasing protectionism and political radicalism
The stage was set for Hitler.