Those who have read my article ‘The euro, the stock market collapse and the future of Europe’ (The European Journal, Jan/Feb 2009) will agree that there were two major causes of the Wall Street crash in 1929, which have been insufficiently remarked upon. One cause was the adoption of a single value currency, namely the return to the Gold Standard, which undoubtedly made the financial world made more precarious while nations adapted to its constraints. But the principle cause was the resolve of a much stronger Germany than previously supposed, to secure political goals by financial manipulation in the new environment (by buying so much gold that the British government was forced to raise interest rates) and then suddenly destabilising the stock market by threatening to tear up the Treaty of Versailles and renege on reparations payments. Green shoots are appearing in the world economy in 2009 as they did in the spring of 1930 after the 1929 stock market crash. Yet many statisticians fear that the stock market will experience a double dip as it did in 1930. Looking deeper at the historical picture, we can provide some comfort, but also some reasons for anxiety.
The first goal Germany wanted to achieve in 1929 was the cancellation of reparations payments. Ever since the mid-1920s she had been campaigning against their payment. In 1929 she not only tightened the money supply and used propaganda to achieve that end but her funds seemed also to have been actively engaged manipulating the US stock market. On 7 March 1929, after the revelation of a huge net increase in brokers loans, the New York Times financial reporter declared, ‘The time has come when financiers of knowledge and repute will be forced into the open, to tell deluded Wall Street what situation it had actually created’ and Paul Warburg, who had been on the Federal Control Board in the past, and had connections in the banking capitals of Europe, claimed that control of the Fed had passed into the hands of Stock Exchange operators ‘who have now for many months governed the flow of money, not only in the United States but in the principle parts of the world.’ The American stock market collapsed in October 1929, but after a brief rally in the spring of 1930 its misery continued. The reason for this would eventually become apparent.
After German industrialist politician and newspaper magnate Alfred Hugenberg’s Freedom against the Enslavement of the German people petition to tear up the Versailles Treaty (and every other treaty since the war) was turned down by the German people in a national referendum on 22 December 1929, the American economy started to recover. Shoppers invaded the malls again and optimism returned to Wall Street. Banker, Paul Warburg, who had warned against the stock market’s unreasonable rise in 1929, congratulated the country’s leadership on its ‘prompt and courageous action’ in getting America through difficult times. Yet regrettably his words were premature. Wall Street suffered another collapse, while a new German Chancellor, Heinrich Brüning, came to power. Although he hated Hugenberg, Brüning was also opposed to paying reparations and felt he could use deflation to persuade America and the Allies to abandon demands, by ordering a savage squeeze on spending, while giving concessions to industry. As Germany had a far stronger economy than outsiders realised, Brüning’s deflation and predatory trading affected all the nations with which Germany did business, while creating millions of unemployed at home. Soon Germany became the most powerful exporter in the world. Yet Brüning’s squeeze created such dire unemployment in Germany that she was allowed to stop paying reparations altogether and allowed a measure of rearmament to protect her from a supposedly threatening France.
Germany’s modern-day leadership has been gunning for the elimination of the hedge fund system ever since 1998, when the American hedge fund company, LTMC, went bankrupt owing $4.6 billion dollars. In 2005 President of the German Financial Supervisory Authority, Jochen Sanio, went as far as to declare that hedge funds were the ‘black holes of the world financial system’ and the Süddeutsche Zeitung warned that they could trigger another LTCM-size disaster, which would ‘threaten the entire financial system of the globe.’ When Angela Merkel became Chancellor she immediately canvassed other governments to control them. Meanwhile, the German government’s economic actions bore more than a passing resemblance to those of Brüning in 1930. In 1930 concessions were made to industry while the man in the street had his wages cut and taxes increased. In 2007, the German coalition government also taxed its citizens more heavily, (by raising VAT by 3 per cent) which enabled concessions to be made to industry, so that it could compete at a higher exchange rate. The move did not seem threatening at the time because the workers were offered wage increases in compensation. Yet, almost immediately Bundesbank chief, Axel Weber, declared that wage inflation was getting out of control and the European Central Bank (ECB) needed to raise interest rates to control it.
Despite inflation in the euro zone the ECB had adopted a very low interest rate policy in 2002/3 but it had abandoned it after 2005 and rates had been creeping up ever since. In June 2007 it ignored French governmental complaints and bowed to German pressure by raising them yet again. Britain’s Northern Rock bank had to be rescued by the government. American banks bled too. By December 2007 all Southern Europe was suffering and pleaded with the ECB to cut rates. But Bundesbank chief Axel Weber maintained that the escalating price of oil and food meant that interest rates needed to be raised, not reduced. Meanwhile Angela Merkel tirelessly called for more hedge fund regulation, indeed regulation of the entire financial sector. In May 2008 even American Congressmen began to blame the hedge funds for the seemingly endless horrific rise in the price of oil. German ECB Chief Economist Jürgen Stark believed that interest rate rises were needed to stop them. In July 2008 the ECB bowed to German pressure and raised interest rates once more to curb ‘external inflation’. The power of the ECB and its most powerful state Germany was immediately revealed. Commodities crashed in value and a couple of months’ later America’s fourth largest investment bank, Lehmann Brothers, collapsed. Under the heading ‘I told you so’ Reuters reported that Angela Merkel had indirectly criticised the United States and Britain for thwarting her governments attempts to tighten controls on financial markets. On 22nd February 2009 European leaders agreed on draconian measures to crack down on hedge funds and all financial instruments.
Undoubtedly some bankers had been foolish, greedy and corrupt. They began to believe that the supply of cheap money would never end and took uncalled for risks lending to people that could not repay. Yet two vital ingredients of the 1929 stock market crash were still present in 2008, the arrival of a new currency, the euro, and heightening interest rates in an already tight money environment.
In 1929 Germany was motivated by the desire to rid herself of the reparations and persuaded Britain to raise interest rates to prevent a drastic loss of gold. In 2008 Germany managed to persuade the ECB to raise interest rates to curb ‘external inflation’ caused by rising commodity prices. The jury is out as to what caused the commodity price explosion in 2008 and hedge funds, which most people associate with Britain and America, have received a large share of the blame. It is inconceivable, however, that Germany wanted to hurt her old friends America and Britain in 2008, just to cut them down to size. So did Germany have deeper motives in raising interest rates and starting a campaign against the hedge funds and will she use more deflation to achieve her ends today?
German economists have lamented the fact that Germany is the European Union’s major paymaster, but gains so little benefit from the adoption of the euro. Professor Wilhelm Hankel wrote a book in 2007 called Die Euro Lüge, which complained that low inflation Germany had funded the profligate nations of Europe without commensurate benefits; the German people had been shortchanged in exchanging their precious currency for the euro. The message of Hankel’s book echoed the views of the influential Austrian economist Joseph Schumpeter who maintained that the approximately 300 million people in the euro zone needed to become ‘one people’ in terms of state debt, pensions and public expenditure for the euro to succeed long-term. Worryingly former German Chancellor, Helmut Kohl, also asserted that that without political union the euro was just a ‘castle in the air’.
No such aspirations for political union appear in the text of the Lisbon Treaty but for many it represents a further stage on the path to the sort of European Union that Hankel envisaged. Angela Merkel has long been the Lisbon Treaty’s champion and secured the Berlin Declaration in March 2007, which declared the aspiration of all EU member states for it to be ratified in time for the European parliamentary elections in 2009. Other EU Governments hastened to ratify. Yet Germany was one of the dilatory last four. This did not mean that she disliked it, however. In 1924 having angled for America and the Allies to give her the generous Dawes Plan reparations settlement, key conservative elements held up ratification until even more concessions were secured. In 2009 German political parties, the CSU and CDU, have only agreed to the Lisbon Treaty provided that the Bundestag gains access to all relevant documents on any subject the German government is discussing at EU level. Although, in theory, free to act, the government will also have to show the Bundestag ‘what it has done, what it has achieved … and where it has deviated from the express view of parliament.’ So on the face of it Germany will be able to run European political policy just as she has run ECB economic policy.
Meanwhile, for Merkel, a happy consequence of the current economic meltdown, is that nations like Ireland, who turned down the treaty last year in a national referendum, have hastened to ratify the unchanged document in 2009. Yet if Germany’s long-term aim is political union a lengthy period of sackcloth and ashes must surely await Ireland and every EU nation, which has previously had a higher inflation rate than Germany. Unfortunately other countries, outside the euro, will not be immune to Germany’s deflationary environment either, as Germany is a world power. Britain has her own currency; yet the EU is her greatest trading partner and she cannot remain impervious to ECB economic policies. Since 2006 Gordon Brown has foolishly ignored Germany’s deflationary zeal and increased government spending regardless. He has not even cut corporation taxes yet to help British business compete in 2009. Perhaps he is still under the popular misconception that Germany is not all that strong. Yet he cannot remain aloof from the fact that although China, where people work long hours for low wages, has had a huge effect on world trade, Germany, whose citizens work respectable hours for European wages, is once again the world’s largest exporter in 2009. Happily Germany’s imaginative scheme to help her car industry has helped the green shoots of recovery in the European Union. There is optimism for the future. But the anxiety remains that Germany may yet use deflation again to strengthen her hold over the EU. Historians have still not yet finally decided how far Germany was responsible for the terrible unemployment of the 1930s. Popular history books still blame the bankers. Meanwhile, Germany has once again become a firm and trusted friend of the City of London and bankers would prefer to be called greedy and foolish than to own that they were in any way deceived by their friend Germany. Yet, if times get worse economic historians may dig deeper into events in the 1930s, and draw unwelcome parallels. In 1928 funk funds sent over to Wall Street, after the arrival of a German socialist government, persuaded American bankers that the days of plenty had arrived, but they were deceived and the funds disappeared; after the arrival of the euro disenchanted Germans transferred their money to America, bankers thought that manna from heaven had arrived but they were deceived again as this article shows. Germany had once more taken the bankers for a ride – and gained an increasing dominant political position in Europe?
