By Sara Moore
Dr. Richard E Ebeling’s interesting Cobden Centre article of 29th August 1923 called The Great German and Austrian Inflations revealed that Germany’s powerful19th century Historical School had insisted that the country’s monetary system should be subservient to its wider interests.
In the early 1920s inflation was perceived to be in Germany’s national interest to rid the country of the costs of the First World War. The difference between Germany’s and other European nations hyperinflations was that Germany completely wiped out the value of its currency in a conflict with its miners over the issue of the socialists ideal, the 8-hour working day.
After the currency became utterly worthless and the workers threatened with bankruptcy, they capitulated and returned to the 10-hour working day above ground and eight and a half below, enabling the German mine owners to compete successfully with Britain’s mining industry in the mid-1920s.
After the currency was stabilised, deflation was deemed to be in the national interest. Germany’s interest rate settled at 6.5% and remained at that level until 1929. Soon Governor of the Bank of England, Montagu Morman, was complaining to the President of the Reichsbank, Hjalmar Schacht, of the ‘of the continuous drain of gold from this market to Berlin,’ and even asserting that Germany was borrowing money from America which it did not need.
The countries which had previously fought on the Allied side during the First World War had accused Germany of ‘war guilt’ and insisted on the payment of large reparations. Although Germany paid quite substantial reparations ‘in kind’ and through tariffs during the period between 1924-29, little ‘actual cash’ was forthcoming. Therefore, a new reparations agreement called the Young Plan was negotiated in 1929 to produce enough ready cash for France to start repaying its war debts to America.
It was during these negotiations that Germany put up its interest rates by a full 1.0% to 7.5% in April 1929. Its rise soon impacted on its neighbours. Although the new Young Plan reparations agreement was not finally accepted until after the Allies agreed to remove their troops from the Rhine in August, European interest rates started rising immediately after Germany raised its rates in April. Vienna, Warsaw and Budapest increased theirs instantly, followed by Bucharest in May, Brussels in June and then Belgrade. In August the Federal Reserve of America’s discount rate was raised to 6%. Finally in September Britain increased its interest rate to 6.25%. High interest rates in a deflationary environment can be deleterious to the world economy and there is no doubt that by the time that Britain raised its interest rates the western world was in deflationary mode.
The American stock market had reached a ‘dizzy’ high’ on Friday 31st August after the new reparations plan was agreed at The Hague. On 5th September the New York Times noted a sudden downturn on the 4th. It fervently hoped that it was merely a correction, but the market continued to fall and at the beginning of October, prominent German politician and newspaper owner Alfred Hugenberg produced a petition which asserted that the German President Hindenburg and all his cabinet should be tried for treason for agreeing to pay any reparations at all on the grounds that Germany was guiltless of starting the First World War.
The German government maintained that all the European countries had ‘fallen into war’ in 1914 and it did not see why it should pay for the war costs of the rest of Europe. Therefore, it continued with its policy of deflation after the Wall Street crash. New Chancellor Heinrich Brüning was nick-named Hungerkanzler after he put up taxes and reduced wages. His policy produced export success, however, as the Economist revealed on 4th April 1931: ‘In prewar days, it was estimated that about ten percent of production was exported … But according to recent investigations … the share that export bears to total sales varies from twenty to fifty percent. …(revealing) the gradual conquest by German industry of foreign markets.’
Unfortunately, Germany’s export success did not preclude the country from following Austria and experiencing a banking crisis, during which it was given a year’s moratorium on paying war reparations. The 19th century Historical School had insisted that the country’s monetary system should be subservient to its wider interests. Brüning continued with his deflation in 1932 in the hope that he could achieve the cancelation of the war reparations altogether. But his policy was dangerous. The unhappy German people, stripped of their savings, and rendered unemployed, turned to Hitler.
America had counted Germany as a Triple A Customer by the 1930s. She had a large balance of trade surplus with Germany and held 40% of its debt. However, after Hitler’s arrival, Germany declared it could not pay in cash for the valuable cotton that it had ordered from America. From now on goods could only be paid for by barter. Moreover, it could pay no more war reparations and wanted a moratorium on the payment of its hefty debts.
Some cynics might have thought that Germany was targeting America economically because it did not want America to become involved in another European war. However, the American people did not see it that way. So many were of German ancestry. They were deluged by, in some estimates $3,000,000 a year in propaganda in the 1930s over the causes and consequences of the Great War and came to believe that their former homeland had been cruelly treated, and that the Allies reparations were the cause of all their misery.
Although the Americans would fight on the Allies side in the Second World War, they subsequently wanted to make atonement to Germany for its dreadful sufferings before Hitler, so they encouraged the establishment of the European Union so that France and Germany would never resort to war against each other again.
Yet there was another aspect to the historical legend of how the two World Wars began which they had not considered. In 1996, after Germany’s reunification, German historian, Volker Berghahn wrote in the Introduction to his book, Quest for Economic Empire, European Strategies of German Big Business in the Twentieth Century,
‘Following the collapse of communism and after German reunification, it has become increasingly become clear that Germany, which twice in the first half of the twentieth century vainly attempted to establish by force a formal empire stretching from the Atlantic coast to the Ural Mountains and beyond, now at the end of this century finds herself on the verge of acquiring an informal empire of similar dimensions without having fired a single shot.’
Commentators should therefore show more sympathy when criticising former American President Franklin D Roosevelt for the shortcomings of his New Deal in the 1930s. A greater realisation of the perils and propaganda that America was faced with in the period before the Second World War will help us understand his predicament.
