Chapter 20: Global Tempest
From Hamburg to New York, the fast ship runs twice a week. With good weather, the round trip takes only 12 days. In the relatively short spring of 1929, Zhang Hainuo took a total of four trips. The reason for such frequent travel between Europe and America was the increasingly strong scent of the world's economic crisis. Despite the optimism prevailing on Wall Street and among most Americans and their government about the prospects, many articles warning of a crisis could already be seen in the newspapers. As usual, regardless of how insightful and excellent these articles were, whether they were from famous economists, securities analysts, or writers, most people either regarded them as alarmist rumors or sensationalist reports.
Through these mainstream or non-mainstream newspapers, Zhang Hainuo noted the names of these scholars and analysts who put forward "crisis theories." In the face of the impending economic crisis, they were undoubtedly far-sighted individuals. Initially, Zhang Hainuo tried to communicate with these people through letters to exchange views, and depending on the identity of the recipient, he used different pseudonyms—such as the head of a special project group in the German Naval Staff, an investor in the New York financial market, or an honorary director of All-America Coffee. This "differentiated treatment," along with the "small gifts" he attached to the letters, made it highly likely for him to receive replies. For those who were truly talented, he would make the effort to visit them—in ordinary times, the multitude of economic theories made it dazzling to select talent from them, and those who could keenly detect anomalies before the storm arrived, even if they were not yet famous, were more capable than those who only talked big.
Zhang Hainuo befriended these economists not to recruit them all at once. As theoretical scholars, they were no match for Calaiber in marketing, and Graham was by no means comparable to him in navigating the stock market, but they could potentially become "architects" at the national economic level. Zhang Hainuo continuously made connections with such individuals, gradually deepening his understanding through friendship, to distinguish between those who were truly talented masters and those who only blabbered with shallow theories, the latter of which was obviously not worth his effort to recruit.
In the early 20th century, most economists in Europe and America were primarily university professors. Some had long been famous and respected, and could even secure prestigious positions as senior advisors in government departments. However, most of them were just ordinary university instructors, receiving a fixed salary every month, occasionally supplementing their income by publishing papers in academic journals or writing for certain newspapers. Among the people Zhang Hainuo met, the latter situation was more common—those who were famous were not interested in a wealthy admirer, and their replies were often arrogant, even disdainful of Zhang Hainuo's correct judgments as a future figure, a situation that Zhang Hainuo always included in his blacklist of contacts.
Although Germany had no shortage of excellent economic talent, Britain, which established the financial market earliest and long played the role of the world's financial center, was more deserving of the title "abundant talent" in this regard. Similarly, the United States, which had made significant progress in the economy over the past century and gradually replaced Britain's position in the world financial arena, also had a large number of outstanding talents. However, Zhang Hainuo initially did not expect that the person he admired most was neither British nor American, but a young man teaching at the University College Dublin in Ireland.
In a café near University College Dublin, Zhang Hainuo met this Irish youth named Alrad Clayton Rader Blythe for the first time, but they had been exchanging letters for three months before that. Alrad graduated from the Business School of University College Dublin, worked as a securities analyst in the London Stock Exchange for a period after graduation, and later returned to his alma mater to teach at the call of his mentor. His mentor was Dr. Burke, a famous Irish economist, who was also the dean and honorary professor of the Business School of the university.
Zhang Hainuo noticed Alrad among many scholars because of his article published in The Times called "Imbalanced Prosperity." In this article, Alrad analyzed the post-war prosperity, where the United States flourished by lending to Germany and domestic credit consumption, France prospered by huge reparations and trade protection, Britain's economy declined in international competition, and fragile and uncompetitive Japan oscillated in one crisis after another. Although Germany had to pay huge war reparations abroad and lost Alsace and Lorraine domestically, with social unrest, it relied on huge external debt to renew industrial equipment and once again became the world's second-largest industrial power. This imbalanced prosperity would eventually achieve a natural balance through an economic depression.
Just over a week after this article was published, Zhang Hainuo began exchanging views with Alrad through letters. Compared to his clumsy spoken English, Zhang Hainuo's written English was relatively fluent, and he quickly established a relationship of mutual understanding and respect with Alrad, leveraging his advantage of foreknowledge of the economic crisis erupting in 1929 and the subsequent trends in world economic development.
Not long ago, the German Navy's high command passed a secret plan aimed at rebuilding a modern navy, which included establishing a small-scale submarine force consisting of eight medium-sized submarines. These submarines would be built by the overseas project department of the General Staff of the Navy in a secret partnership with Schneider Shipyard in South America. The UB-901 type submarine designed by Dr. Krayt was approved by the Navy's Ministry of Technology and was selected as the original design for the first batch of three submarines, namely U-1, U-2, and U-3. The Navy then allocated 2.3 million marks as start-up capital for the construction of these three submarines, which were expected to be completed by 1931, at which time the German Navy's submarine force would usher in its rebirth.
To promote the approval of this secret submarine construction plan, Zhang Hainuo continuously shuttled between the top echelons of the Navy, and Rader's influence in the Navy also played a significant role. Before the plan was finalized, Zhang Hainuo personally accompanied the Navy's specially formed project team to Brazil to inspect Schneider Shipyard's technical capabilities. The shipyard even disclosed to them a part of its secret submarine research and manufacturing facilities—the naval technicians were quite satisfied with the equipment here.
When the funds allocated by the Navy were in place, Zhang Hainuo finally emerged from his busy schedule. During this period, Alrad published three more articles in The Times, based on an examination of the current situation, effectively exposing the enormous crisis hidden behind the economic development of various countries. With the recommendation of his mentor, he embarked on a lecture tour of several prestigious colleges in England and expounded his views at gatherings of some elites.
For a scholar under 30, such opportunities were rare, but youth was often a double-edged sword because people tended to judge a person's abilities based on age and qualifications subconsciously. Zhang Hainuo soon learned that Alrad's carefully crafted lecture series was commented on by the mainstream media in Britain as "shocking," and he himself was labeled the "reckless ignorant Irishman" by British newspapers. At a gathering of elites, he was even ridiculed by personnel from the London Securities Commission to his face.
"The truth is often considered fallacy by the world before it is proven!"
Zhang Hainuo tried to comfort this promising economist with this, but Alrad seemed too disappointed by the public's perception. He even prepared to resign from his current teaching position and enter the business world, saying, "Whenever I think of people's comments about me, I can't stand on the platform and teach wholeheartedly. Sometimes I even feel that students have a hint of irony in their eyes!"
For Zhang Hainuo, who was intent on recruiting talent, this was not bad news. He subsequently visited Dr. Burke, Alrad's mentor, who agreed with Alrad's decision to improve his theoretical knowledge through practice and to accumulate his own reputation. In this situation, Alrad quickly accepted the job Zhang Hainuo offered him: Chief Financial Advisor to All-America Coffee.
In the summer of 1929, thirteen years after Zhang Hainuo crossed into this world, though four months earlier than expected, the global economic crisis eventually descended like a violent storm. The root cause of this crisis, as Alrad's "imbalanced theory" suggested, lay in the enormous imbalance in economic development after the war—post-war America flourished by lending to Germany and domestic credit consumption, France prospered through huge reparations and trade protection, Britain's economy declined in international competition and stagnated, Japan's economy was fragile and uncompetitive, oscillating in one crisis after another. Although Germany had to pay huge war reparations abroad and lost Alsace and Lorraine domestically, with social unrest, it relied on huge external debt to renew industrial equipment and once again became the world's second-largest industrial power.
Technologically, the prosperity after World War I seemed to have a solid foundation. Automobiles, chemicals, and electricity were the leading forces of this technological revolution. The production of automobiles in the United States tripled from over 1.5 million in 1919 to an average of one car per six people, accounting for 8% of the national total output. Electricity production increased by more than double, and various electric motors and appliances became increasingly popular, with refrigerators and washing machines becoming everyday items. The output value of household appliances increased from $10.6 million in 1921 to $416 million in 1929. The chemical industry became very large. The refining industry developed rapidly, with gasoline production increasing from 86 million barrels in 1919 to 439 million barrels in 1929. The demand for automobile tires drove the development of the rubber industry. Emerging industries such as synthetic silk and fertilizers also rose rapidly.
However, the United States shipbuilding industry still lacked international competitiveness, and the ship market was mainly occupied by Britain and Germany. Labor-intensive industries such as shoemaking and textiles began to lose their international competitive advantage, with production stagnating or even decreasing. Agriculture was also in a long-term depression—on the one hand, this was due to the protective tariffs established by various European countries to protect their own agriculture, and on the other hand, countries such as Argentina and Canada, which relied on cheap labor, poured large amounts of grain into the international market, causing a continuous decline in US agricultural exports and falling agricultural prices. In 1929, the value of US wheat exports was only one-third of that in 1919, and meat was only one-ninth. The depression in agriculture ostensibly promoted the modernization of American farms, with many small farms dependent on manual labor being merged, and many small farm owners becoming laborers or forced to move to big cities, laying the groundwork for the staggering 52% unemployment rate in the United States during the economic crisis. The prosperity of the United States was not only built on the vigorous development of emerging industries but also on the sacrifices and credit growth of competitors. From 1924 to 1929, installment sales increased from $2 billion to $3.5 billion. In 1926, 70% of cars were sold on credit. More importantly, American industrial products were cheap and of good quality, with strong international competitiveness, and the export of industrial products increased year by year, with trade surpluses accumulating year by year, ranging from three to four hundred million dollars to one billion dollars, accumulating strong capital surplus.
Correspondingly, Britain's economy stagnated, with industrial production increasing by only 12% from 1924 to 1929, far behind the United States. Traditional industries such as coal, steel, and textiles were in deep trouble. Although the automobile, electrical, and chemical industries developed rapidly, they were still not as good as the United States. Britain's trade volume continued to rank first in the world, with annual trade volumes exceeding 9 billion pounds from 1921 to 1929, but Britain's share in international trade decreased from 13.9% in 1913 to 10.8% in 1929, and its share of industrial exports decreased from 26% to 22%, with trade shifting from surplus to deficit, reaching as much as £400 million at its peak.
The trade deficit continued to rise, strengthening trade protectionism within the UK. By 1915, Britain had imposed a 33.3% ad valorem tax on imported goods such as automobiles, watches, musical instruments, and films, citing the need to raise funds for the war effort. This tariff was only terminated by the Labour government in 1924, but reinstated by the Conservative government in 1925, with an expanded scope. Another significant reason for the lack of competitiveness in British industry was the overvaluation of the pound during the restoration of the gold standard. Despite this, due to international investment returns, Britain's balance of international payments barely maintained equilibrium.
France, in contrast, was in a particularly favorable position. They received war reparations of 8.151 billion gold marks from Germany, regained the coal and steel-producing regions of Alsace and Lorraine, obtained a 15-year trusteeship over the Saar coal region, and acquired control over German colonies in Togo, Cameroon, Syria, Lebanon, and more. Additionally, strict trade protectionism fostered rapid development in French industry and agriculture in the 1920s.
Comparatively, French heavy industry progressed notably. Pig iron production increased from 1.33 million tons in 1919 to 10.36 million tons in 1929, while steel production grew from 1.29 million tons in 1919 to 9.72 million tons in 1929. Emerging industries such as automobiles, electricity, and chemicals saw even faster development, with automobile production rising from 40,000 units in 1920 to 250,000 units in 1929. Significantly, French exports surged, surpassing imports by more than five times by 1923, with total trade increasing from 27 billion francs in 1918 to 108.3 billion francs in 1929. The substantial trade surplus, combined with investment returns, led to a massive influx of gold into France. After 1928, France possessed the second-largest gold reserves after the United States. France's share of global industrial production rose from 5% in 1920 to 8% by 1930.
Italy also saw progress, with industrial production in 1925 reaching 157% of the 1922 level. Cotton textiles, steel, and automobile industries all progressed rapidly, although Italy's economic development lagged significantly behind France and even Japan. By 1929, Italy's annual automobile production had only reached 54,000 units.
Germany, however, faced a different situation. Until 1924, massive reparations payments and the loss of significant industrial and transportation facilities left Germany in economic chaos. In 1924, the Dawes Plan, aimed at maintaining the balance of power in continental Europe and utilizing Germany's industrial capacity for profit, provided Germany with an 800 million gold mark loan. Encouraged by this plan, international capital flowed continuously into Germany, with foreign investment totaling 32 billion gold marks from 1924 to 1929, primarily led by American capital followed by British capital.
During this period, with more capital inflow than reparations outflow, Germany's industrial equipment was extensively modernized, and its production technology leaped to the forefront globally. Furthermore, most of the foreign capital received by Germany went to its powerful industrial monopolies, enhancing the degree of industrial monopoly in Germany. Corporations like Thyssen, Krupp, Siemens, Mannesmann, and Farben became even more formidable. However, as a nation, Germany accumulated significant debt and had to pay substantial reparations. Despite the rapid recovery of industrial production capacity, the standard of living for the people remained challenging. As long as Germany delayed debt repayment for political stability or could not realize investment profits, the international economic cycle would immediately be disrupted.
The situation in Japan bore similarities to Germany's. Despite being on the winning side of the war, Japan's industrial capabilities were weak and could not withstand the impact of the industries in the United States and Europe. While initially benefiting from substantial orders from the United States for silk textiles and ships after World War I, Japan faced severe economic crises as European and American goods flooded its markets, leading to a significant economic downturn.
From 1920 to 1921, Japan's industrial output decreased by 19.9%, with shipbuilding down by 88.2%, mining by 55.9%, and machinery manufacturing by 55.9%. Prices of major industrial products fell by 55% to 82%. Exports decreased by 40.3%, resulting in a trade deficit of 350 million yen and a reduction in foreign reserves from 1.3 billion yen to 600 million yen.
Due to Japan's lack of international competitiveness, its trade deficit reached 3.3 billion yen from 1920 to 1929. Agriculture also suffered, with 3,500 silk mills shutting down and 2 million silkworm farmers facing dire straits. Additionally, Japan experienced a significant influx of cheap imported food, coupled with a stagnant domestic market, leading to a continuous decline in food prices. Consequently, rice and wheat production remained stagnant for an extended period.
On September 1, 1923, the Great Kanto Earthquake struck Japan, destroying most buildings in Tokyo and Yokohama, causing colossal property damage amounting to 10 billion yen. This exacerbated Japan's already deep economic woes. In the aftermath, from 1923 to 1927, the Japanese government borrowed massive amounts of foreign debt from the United States, Britain, and other countries, totaling 910 million USD. With borrowed funds and wartime profits, the Japanese government provided relief loans of up to 1.3 billion yen to major financial conglomerates. Thus, Japan gradually emerged from the depression into a period of slow development.
However, in 1927, Japan experienced another financial crisis. Some banks faced liquidity problems due to a large number of unprocessed earthquake-related bills, leading to a run on banks. This was followed by an economic crisis and depression. The government allocated 1.2 billion yen to rescue major banks such as Mitsui and Mitsubishi.
Before Japan could recover fully, a more significant crisis erupted in the United States. This process led to two profound consequences: first, Japan accumulated massive international debt, becoming a crucial link in the international debt chain that triggered the Great Depression. Second, numerous small and medium-sized enterprises went bankrupt, leading to a high degree of industrial monopoly in Japan. The economic conglomerates controlled by monopolies in Japan implemented both technological upgrades and trade protectionism. Moreover, this situation facilitated the further strengthening of political forces advocating militarism and debt relief. From this perspective, the significance of the Great Kanto Earthquake for Japan resembled the impact of World War I's defeat on Germany, while Germany and Japan's massive debts were linked to America's prosperity.
After the outbreak of the 1929 economic crisis, the United States, as the beneficiary of debt prosperity, naturally became the biggest victim of the debt chain's collapse. Over the next four years, the US gross domestic product plummeted from $203.6 billion to $141.5 billion, a decrease of 30%. More than 86,500 industrial and commercial enterprises closed down, industrial production fell by 55.6%, and imports and exports sharply declined by 77.6%. Corporate profits plummeted from $10 billion to $1 billion. At the peak of the crisis, major industrial enterprises in the United States virtually ceased operations. The automobile industry had a capacity utilization rate of only 5%, and the steel industry 15%. Agriculture also suffered greatly, with grain prices dropping by two-thirds, and total agricultural income decreasing from $11.3 billion in 1929 to $4.74 billion. The banking system was hit hard, with bankruptcies reaching 10,500, accounting for 49% of all banks. Gold flowed out of the country, and bank deposits were withdrawn, leading to the paralysis of the entire banking system by March 1933. The unemployment rate reached as high as 25%. After 1933, the US economy entered a prolonged period of so-called "special depression." Despite measures like the New Deal to alleviate the crisis, the US economy remained sluggish until after the outbreak of the next war, when the GDP surpassed its pre-crisis level of 1929.
Germany was both the main epicenter and a major victim of the crisis. From 1929 to 1932, Germany's industrial capacity utilization fell to 36%, industrial production as a whole dropped by 40%, foreign trade volume decreased by 60%, and prices fell by 30%. The decline was even more pronounced in key industrial sectors, with iron production decreasing by 70% and shipbuilding by 80%. The industrial crisis in turn led to a financial crisis. In July 1931, the Darmstadt Bank in Germany collapsed, triggering a wave of bank runs. The country's gold reserves decreased from 2.39 billion marks to 1.36 billion marks, and the nine major banks in Berlin were reduced to four. Unemployment surged, reaching 43.8% in 1932, with an additional 22.6% partially employed, meaning two-thirds of the German workforce were either fully or partially unemployed.
The crisis also hit Japan hard. From 1929 to 1931, Japanese exports plummeted by 76.5% and imports by 71.7%. Numerous banks and industrial enterprises went bankrupt, with major industrial sectors operating at only 50% capacity. Industrial output decreased by 32.9%, with coal down by 36.7%, pig iron by 30.5%, steel by 47.2%, ships by 88.2%, and cotton textiles by 30.7%. Agricultural output also declined by 40%, with silk prices collapsing and 40% of silkworm farmers suffering severe losses. Japan's response was to militarize its economy from top to bottom. Starting in 1931, the government implemented a series of economic control laws, led by the "Important Industries Control Law," to control various sectors including industry, agriculture, finance, and trade. Cartels and trusts were forcibly organized in various sectors, placing small and medium-sized enterprises under the control of financial conglomerates. Massive military orders were then issued to monopolistic enterprises, totaling 5 billion yen from 1931 to 1936.
During this period, the government also invested over 1 billion yen in constructing, expanding, and reorganizing state-owned military industries. The biggest beneficiaries of Japan's militarization of the economy were both old and new financial conglomerates. By 1937, the eight old financial conglomerates (Mitsui, Mitsubishi, Sumitomo, Yasuda, Okura, Asano, Kawasaki, Furukawa) and five new financial conglomerates (Nissan, Nitrogen, Nissho, Mori, Riken) had a combined capital of 4.17 billion yen, accounting for 27.2% of the total capital of all companies nationwide. Among the 110 companies receiving military orders, the vast majority of the capable factories belonged to a few conglomerates such as Mitsui, Mitsubishi, Sumitomo, Okura, and Kyuuhara. Under conditions of economic monopolization, Japanese companies maintained high monopoly prices in the domestic market while implementing low-price dumping in foreign markets to obtain necessary foreign exchange for purchasing strategic resources and industrial equipment. From 1931 to 1934, Japan's exports increased from 1.15 billion yen to 2.18 billion yen. Among them, the output of cotton textiles surpassed that of the UK in 1933, making Japan the world's largest producer and shaking European and American countries.
The crisis in Britain was relatively mitigated due to several factors: the British economy had long been stagnant or slow-growing, with surplus capital mainly invested abroad, and post-crisis Britain strengthened trade protection, expanding the relative market share of British industry. From its peak in 1929 to its lowest point in 1932, British industrial production only fell by 32%, much lower than in the United States. However, major industrial sectors also suffered severe blows, with steel production down by 46%, pig iron by 53%, textile production by two-thirds, and coal production by one-fifth. Before implementing protectionist policies for agriculture in 1932, British agriculture was severely affected by the crisis. Foreign trade also declined significantly, with exports decreasing by 30% from 1929 to the third quarter of 1931, and the trade deficit increasing from £390 million in 1930 to £410 million in 1931. Meanwhile, investment profits flowing back decreased from £410 million to £300 million, leading to Britain's first international balance of payments deficit.
The crisis prompted Britain to eventually abandon its policy of free trade and establish the Imperial Preference System, as well as to abandon the gold standard, resulting in a significant devaluation of the pound. The former protected the domestic market, while the latter enhanced the competitiveness of British products in international markets. The combination of these measures made Britain a relative beneficiary of the Great Depression.
The French economy remained relatively independent. It neither held significant debts from Germany nor engaged in corresponding exports of industrial equipment. The prosperity of the 1920s in France relied mainly on capital expansion for production provided by German reparations and expanded exports facilitated by the low-priced franc. Thus, when the US economic crisis broke out, France was still at the peak of its prosperity. However, in 1930, due to a double blow of overheated domestic investment and a shrinking foreign market, the collapse of the "Union Générale" bank in France brought the economic crisis to the country. Even so, the depth of France's crisis was lower than that of the United States.
Comparing the highest point before the 1929 crisis with the lowest point in 1932, French industrial production decreased by 36.2%. Metallurgical industries fell by 47.4%, machinery manufacturing by 42.6%, and construction by 55.6%. The crisis in light industry seemed even more severe. French light industry decreased by 64% in 1932 compared to 1928. However, due to France's ineffective crisis response, the crisis lasted the longest in France. While the pound and the dollar were devalued successively, trade barriers were erected, Japan and Germany militarized their industries, and engaged in dumping abroad, France continued to maintain the gold standard, with its industry remaining relatively dispersed. As a result, the competitiveness of French industry declined significantly. French exports almost decreased by three-quarters from 1929 to 1937, and France's share of world trade fell from 6.4% in 1929 to 5.1% in 1937.
At the same time, income from French foreign investments decreased by over 50% due to the bankruptcy of foreign debtors, leading to an increasingly widening international trade deficit for France, which reached 5 billion francs in 1932. Financially, France not only did not adopt an expansionary policy but also emphasized fiscal balance and insisted on deflation. It wasn't until September 29, 1936, that France was forced to devalue the franc by 29%. From then until April 1937, French exports increased by 12% and industrial production by 13%. However, this measure came too late, as the US experienced another economic crisis from 1937 to 1938, largely offsetting the devaluation of the franc.
This global economic crisis significantly altered the political landscape of European and American countries. Britain and France, trapped by fiscal constraints, adopted conservative strategies in industry and military affairs, while Germany and Japan escaped the crisis through militarization of their economies, but the most direct consequence was that war became inevitable.
In Germany, the extremely high unemployment rates caused by the economic crisis provided fertile ground for Hitler's rise to power. In 1930, Hitler managed to appeal to almost every voter - farmers, workers, students, patriots, racists, and middle-class citizens. By late summer of that year, Germany's unemployment had reached 3 million, worsened by Chancellor Brüning's austerity policies. The urgent situation that Hitler had long awaited to politically control Germany finally arrived. His appeal to the workers was articulated in the language of the Communists: "Workers of Germany, awaken! Break your chains!"
For farmers, Hitler proposed adjustments to taxation and import tariffs. The lower-middle class, without unions to support them, found hope, while the middle class, ashamed of their poverty, found dignity. To idealistic young people inside and outside universities, Hitler promised - an ideal new world.
In 1930, Hitler also brought something new to the Germans - a sense of unity. He welcomed everyone to join the expedition without class boundaries; the only condition was that they must voluntarily follow Hitler, fighting to the last breath against Jews and Communists, and fighting for living space and German interests.
Apart from people's associations and workers, Hitler did not insist on anti-Semitism - especially the issue of "cleansing" Jews. For those with higher cultural levels and idealists, this issue was only whispered about or mentioned casually.
That summer, to implement his comprehensive plans, Hitler labored tirelessly, delivering 20 important speeches in the last six weeks alone. Hitler was a born politician. He found that being with the masses, shaking hands, patting babies' cheeks, bowing to women, not only felt natural but also inspiring. He often dined with workers or lower-middle-class followers rather than with the upper class, and his egalitarian attitude towards small employees, small merchants, and laborers was attractive.
In order to approach every kind of person, Hitler adopted the method of sending separate letters, but he never forgot the lesson he learned in Landsberg: he had to win over the masses. Therefore, he did not allow himself to take a domineering stance on minor matters. He repeatedly attacked millionaires, Reds, Marxists, and the "system" that brought unemployment, lowered agricultural prices, and emptied the savings of the middle class. He did not confront class against class. He united them all.
To the surprise of most people, including Hitler himself, the Nazi Party won more than 6 million votes in the summer elections of 1930, becoming the second largest party in parliament, whereas just two years earlier, they were the smallest party in parliament.