The War of the World: History's Age of Hatred (61 page)

As we have seen, British officials worried a great deal about Britain’s shortages of labour and hard currency. But in both respects the German position was far worse. Did contemporaries not realize this? One way of seeing the Munich crisis afresh is to view it from the vantage point of investors in the City of London. It is sometimes claimed that the Munich agreement lifted the London stock market. Little evidence can be found to support this. The market was in any case depressed by the recession of 1937. To make matters worse, there were substantial outflows of gold, amounting to £150 million, between the beginning of April and the end of September 1938. It is significant that Munich did nothing to arrest these outflows: another £150 million left the country in the months after the conference. The Chancellor of the Exchequer attributed these outflows to

the view [that] continues to be persistently held abroad that war is coming and that this country may not be ready for it, and lying behind that anxiety is, of course, the further anxiety created by the obvious worsening of our financial position, by the heavy increase in the adverse balance of trade, and by the growth of armament expenditure.

On this basis, the Treasury was able to make its usual argument that rearmament could not be accelerated any further. But it could now equally well be argued that Britain might as well fight sooner rather than later, when her reserves might be still further depleted. By
July 1939, Britain’s gold reserves were down to £500 million; in addition the Bank had around £200 million in disposable foreign securities. The drain on British reserves by this stage was running at £20 million a month. In the face of widening current account deficits, the pound could no longer be kept at a rate of $4.68. As Oliver Stanley, President of the Board of Trade, put it: ‘The point would ultimately come when we should be unable to carry on a long war.’ This is the key. What it means is that
Britain would have been better off financially, as well as militarily, if there had been a war in 1938
. Not only would war have come sooner. It would almost certainly have been shorter, given the weaknesses of the German position described above. This gives the lie to the old claim that appeasement bought Britain precious time. For Britain, time was at a discount.

Under the circumstances, the stock market was hardly likely to be buoyant. It is nevertheless revealing to see the preferences of investors as reflected in the differentials between the various bonds and stocks quoted on the London market. A rational investor who believed appeasement was working would presumably have held on to continental bonds, including those of Central European countries, up until the German occupation of Prague. He would not have sold off his shares in the Cunard shipping line and taken long positions in the Vickers armaments company until the spring of 1939. But in reality the spreads between continental bonds and British bonds – traditionally the most secure financial asset from the point of view of a British investor – widened steadily from the mid-1930s onwards. The effect of the Sudetenland crisis, including the Munich agreement, was fairly minimal. Moreover, investors shifted out of what may be regarded as peace stocks and into war stocks from as early as 1933. The City, which had been so badly caught out in July 1914, was not to be fooled twice. Investors in London evidently anticipated some kind of war in the second half of the 1930s. Their uncertainty seems to have been about how general such a war would be – hence the singular absence of correlations between the bond yields of individual countries.

Historians have long sought the economic foundations of appeasement. They have looked in the wrong place. No doubt it is true that
businessmen did not want war. But investors expected it nonetheless. There was thus no economic advantage to appeasement. With the City fundamentally pessimistic about the international outlook, it was Churchill not Chamberlain who had the economically rational foreign policy. What the situation called for was pre-emption, not deterrence, much less detente. Hitler simply had to be stopped before Britain’s financial ‘fourth arm’ of defence got any weaker. The markets were braced for war in 1938; the situation, as
The Economist
pointed out in its post-Munich edition, was the very reverse of 1914, when war had come as a bolt from the blue. For one thing, the City was far less exposed to continental commercial bills, which had shrunk in importance as a financial instrument as a result of the Depression. For another, the financial community was ‘prepared to face the blow of an outbreak of war’. And the authorities would not respond, as they had in 1914, by raising the Bank of England’s discount rate to punitive heights. ‘In the last few weeks,’ the magazine’s editors noted, ‘there can have been few people in the City who did not envisage the strong possibility of an armed conflict in which Great Britain would be heavily involved… The outbreak of war would not have taken the financial markets by surprise.’ The markets might not have rallied if war had come, but they would not have collapsed either. Even the price of German bonds traded in London – for example, those issued to finance the Young Plan – did not decline significantly during the crisis months of the summer. It was in 1939 that they fell through the floor (see
Figure 10.1
). This was because investors understood that Britain stood a good chance of beating Hitler, the serial defaulter, in 1938. A year later the tables had been turned, and it was the defaulter who looked like winning.

The extraordinary thing about the aftermath of Munich is the relatively leisurely pace of British rearmament. As late as August 1939 Britain still had only two divisions ready to be sent to the continent. Far from using the peace he had bought as an opportunity to speed

Figure 10.1
The price of German Young Plan bonds in London, 1935–1939

up preparations for war, Chamberlain was equivocal. ‘It was… clear’, he conceded on October 3, ‘that it would be madness for the country to stop rearming until we were convinced that the other countries would act in the same way. For the time being, therefore, we should relax no particle of effort until our deficiencies had been made good. That, however, was not the same as to say that as a thanks offering for the present détente, we should at once embark on a great increase in our armaments programme.’ Lord Swinton, the former Air Minister, offered Chamberlain his support, ‘provided that you are clear that you have been buying time for rearmament’. ‘But don’t you see?’ Chamberlain replied, ‘I have brought back peace.’ He opposed the Admiralty’s request for new convoy escort vessels. He resisted Churchill’s demands to create a Ministry of Supply. He clung to the policy of appeasement and the dream of disarmament. ‘All the information I get seems to point in the direction of peace,’ he declared in February 1939, ‘and I repeat once more that we have at last got on top of the dictators.’ Rearmament did accelerate, as we have seen, but
it did so against the wishes of the Treasury and with little support from the Prime Minister. When Inskip also began pressing for the creation of a Ministry of Supply, Chamberlain sacked him. It was only gradually that the Treasury’s resistance was overwhelmed by the burgeoning demands of the armed services, and particularly the air force; it was only with difficulty that it could be persuaded to raise the ceiling for the Defence Loan from £400 million to £800 million; it rejected Keynes’s contention that higher borrowing, with so much slack still in the economy, would boost growth and therefore the volume of savings available to fund the debt. Only slowly and painfully did the harsh truth sink in: in the event of a protracted war, Britain would need the financial support of the United States at an earlier stage and on a larger scale than in the First World War. Given the terms of the Neutrality Acts of 1935, 1936 and 1937, this seemed a distinctly remote prospect.

Si vis pacem, para bellum
: ‘If you wish peace, prepare for war’ runs the old Latin adage. There was no necessary contradiction between appeasement and rearmament; Chamberlain could have continued trying to accommodate Hitler’s demands for
Lebensraum
while rearming at full speed. He chose not to do so. Worse, he simultaneously sought to relieve the pressure on the German economy. From Berlin, Henderson wrote reassuringly to him that Hitler was ‘determined democratically to respect’ popular anti-war sentiment; ‘The Germans are not contemplating any immediate wild adventure,’ he reported in February 1939, ‘and… their compass is pointing towards peace.’ Nevertheless, fearful that economic difficulties might make Hitler more rather than less ready to gamble on war, Chamberlain suggested a new Anglo-German trade agreement that would have reduced Germany’s dependence on bilateral trade agreements with the Balkan states and increased her access to sources of hard currency. The Governor of the Bank of England, Montagu Norman, even travelled to Berlin to discuss a possible British loan to Germany. Business leaders joined with the Bank and the Treasury in arguing that trade with Germany must be maintained and even stimulated, for the earnings from German exports to Britain were being used to pay off some of the outstanding German debts to British lenders. The fact that British exports to Germany were predominantly raw materials for the
German arms industry had to be pointed out by the Foreign Office. To no avail; the government continued to extend export credit guarantees to companies selling to Germany. Total short-term credits under this scheme rose from £13 million in January 1939 to more than £16 million on the eve of the war. If Hitler had been interested in economic concessions from Britain, he could probably have had more. But as Göring’s unofficial emissary Helmut Wohltat admitted after he met Horace Wilson and other British officials in July 1939, ‘to his sorrow he thought that [economics] played very little part in the Führer’s mind.’ In Chamberlain’s mind, as we have seen, economics loomed larger. It was unfortunate that he so completely misunderstood the significance of Germany’s economic weakness. The Americans at least had the wit to impose a punitive tariff on German imports after the fall of Prague.

There may have been no necessary contradiction between appeasement and rearmament, but there was a contradiction between appeasement and deterrence. Britain and France now faced a dilemma. If they gave in to Hitler’s next demand so easily, where would it all stop? But if they threatened to fight, why would anyone believe them? It was not just honour that was lost at Munich. It was also credibility. This helps to explain the surprising eagerness with which Chamberlain began to issue guarantees to other European countries as it transpired that he had, after all, been duped over Czechoslovakia. The first step in this direction came even before the fall of Prague, when rumours (if not misinformation) began to circulate of a German plan to strike west against the Netherlands. It was agreed that this would be a
casus belli
. Moreover, the prospect of such a war in the West was enough to force a change of policy towards the army. It was now decided to construct a six-division continental army and to increase the size of the Territorial Army. There followed an unequivocal public commitment to France. So far, this was not much more than a return to the posture of 1914. Within a few short weeks, however, Britain’s continental commitments ceased to be confined to the western half of the continent; they became truly pan-European. In response to bogus claims by the Romanian ambassador that the Germans were about to turn his country into an economic vassal, the Cabinet began to contemplate some kind of commitment to Bucharest. Further suspect
intelligence – this time of an impending German attack on Poland – led to the fateful guarantee of that country’s integrity which Chamberlain announced in the Commons on March 31, a guarantee that was extended to Romania and Greece two weeks later following the Italian invasion of Albania.

None of this did anything to enhance Chamberlain’s credibility, however. The Chiefs of Staff pointed out that ‘neither Great Britain nor France could afford Poland and Roumania direct support by sea, on land or in the air to help them resist a German invasion’, and that therefore ‘assistance from the U.S.S.R.’ would be indispensable if the guarantees were to be more meaningful than the earlier sham guarantee to the rump Czechoslovakia. The more or less simultaneous doubling of the Territorial Army (March) and introduction of a watered-down form of conscription (April), as well as the belated creation of the Ministry of Supply (May), also made a minimal impact, since the new forces seemed destined to spend the better part of the coming year either in training or manning air defences. In any case, Chamberlain declined to appoint the increasingly popular Churchill to the new department, choosing instead the uninspiring former Minister of Transport, Leslie Burgin. Even Chamberlain’s most loyal supporters do not deny the ‘fumbling’ quality of his policy by this stage. A leader in
The Times
, published the day after the guarantee to Poland was announced, gave the game away: Britain was not guaranteeing ‘every inch of the current frontier of Poland’ since there were ‘problems in which adjustments are necessary’. In other words, this was just appeasement by other means; Chamberlain’s hope was that by sprinkling guarantees around Europe he could somehow lure Hitler back to the negotiating table.