The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class (52 page)

Nevertheless, although in many ways the plight of the German people in the years after 1945 would have appeared much worse than that of the previous generation, this proved not to be the case. Five years after the Second World War, in 1950, Germans found themselves in a far more stable, improving and generally hopeful situation than they had at the equivalent stage following the First War. In precisely that year, 1923, the Ruhr had been occupied, the hyperinflation had just reached its height, unemployment was rocketing, the economy trembled on the point of collapse and coups and uprisings were still part of the everyday political picture.

Nothing of that sort applied to Germany a few years after the end of Hitler’s war. The country was divided by the Iron Curtain, and there was much political pain. All the same, during the 1950s, with a stable West German currency, and a world market rapidly recovering from war, the international demand for the high-quality capital goods, machinery and machine tools and consumer electricals – the German specialities – seemed inexhaustible. The export-led West German ‘economic miracle’, which lasted with only minor hiccups well into the 1990s, led to something like permanent full employment. Remarkably, capitalist economic vigour was combined with a welfare system and a social safety net that became the envy of the world, and certainly far beyond the dreams of even the most optimistic German politician during the 1920s.

Moreover, none of this was achieved on the back of inflation, let alone hyperinflation. In fact, the German government, under the watchful eye of the all-powerful
Bundesbank
(Federal Bank) – part of whose formal remit became precisely the prevention of inflation – pursued, and continues to pursue, strict deflationary policies. An industrious, skilled workforce has been prepared to make sacrifices where necessary to ensure that Germany remained ‘export world champion’, as the saying went, and that relatively low unemployment continued to be the modern German norm. Even the vast expense of absorbing and modernising the decrepit Communist German Democratic Republic, following the collapse of the Iron Curtain, appeared manageable. Germany from the 1950s onwards came to be seen as the ‘gentle giant’ of Europe, eager to prosper peacefully and to abjure any suspicion of domination. The country entered her seventh post-war decade solvent and quietly powerful.

What could possibly go wrong?

The First World War was, above all, a human tragedy. It cost many millions of dead, disabled, widowed and orphaned. Ancient monarchies were toppled, states that had existed for centuries were suddenly consigned to history. It was, however – and perhaps more lastingly – a socio-economic catastrophe, with the violent, unhappy Germany of the hyperinflationary years as its ominous exemplar.

The situation after 1918 was that almost all the major powers, hitherto (apart from Russia, the eternal exception) prosperous members of a global community based on free trading and free movement of human beings, owed money. Cripplingly enormous sums of money. France, Britain, Belgium and Italy’s external debts were owed mainly to America, while Germany’s were mainly the result of the punitive financial clauses of the Versailles Treaty (her huge domestic debt was, as we have witnessed, a different matter).

Looked at in this way – that is, without the moral question of whether reparations were right or wrong – the situation in the early 1920s was of a debt merry-go-round. America, playing the role of ‘Uncle Shylock’, refused to forgive the debts of its erstwhile allies, insisting that normal commercial terms, and the rigours of the financial market place, be applied. As we have seen, in good part because of this refusal, the other victorious countries – especially the French, who owed the most – were therefore unwilling to back down on the question of German reparations, no matter how harmful the international situation created by this stubborn insistence. The Americans insisted on their money. The French, their stance further stiffened by anxieties about a future German national resurgence, in turn insisted on theirs.

The Germans had signed the Versailles Treaty, admittedly under duress (as one side in a peace treaty generally does), but then, it might be said, resorted to systematic inflationary behaviour as the only way of avoiding a commitment whose legitimacy, deep down, they could not acknowledge. However, if the Germans were in many ways right to hate Versailles, the French were also right to take the view that Germany was deliberately making herself incapable of paying reparations. And so it went on, until the Ruhr invasion in January 1923 transported the whole situation into the realms of madness.

In the end, no one really got their money, not even the Americans. Germany used the American loans it received under the 1924 Dawes Plan to pay reparations to the French and the British, who in turn used the money to service their own debts to the USA. Then, during the Great Depression, all the major powers, including Germany, France and Britain, effectively defaulted on what they owed to America, and into the bargain the Germans defaulted on reparations. In the meantime, of course, immeasurable political, social and economic damage had been done, and a toxic inheritance stored up for the brutal edification of the next generation.

When defeat was visited on Germany once more in 1945, initially the victors’ urge for revenge seemed even stronger than it had in 1919. The miracle, however, was that, for both negative reasons (fear of losing Germany to Communism) and of positive insight (the realisation that America could not pull out and leave Europe to its devices, as it had after the First World War), America remained as guarantor of stability and financier of European reconstruction – including energetic support for the second German democracy, founded in the three Western-occupied zones in 1949.

Though compensation was imposed, the new post-Hitler Germany was not, in the final analysis, burdened with crippling reparations as she had been a generation earlier. In fact, under the Marshall Plan she received generous aid. Economic and political collaboration with France, Italy and the Low Countries began as early as 1952 with the European Iron and Steel Community, leading in 1957 to the establishment of the European Economic Community, which would later become the European Union.

Germany actually still owed a considerable amount, including money from the First World War, in fact. Or, rather, she owed the debt to America that had been incurred under the Dawes Plan (1924) and later the Young Plan (1929), in order to pay off what was left of the reparations bill. However, under an international debt agreement signed in London in February 1953, following tortuous negotiations, Germany was forgiven half her pre-war and immediate post-war debts, while the rest was restructured to ensure that the recovering second German Republic would not suffer as her Weimar predecessor had done. The West needed a prosperous, peaceful Germany (though not so peaceful that she could not fulfil a useful industrial and military role in NATO). Much, including the arrears of interest on the money borrowed in the 1920s from America, would become payable only after German reunification, at that point a rather remote prospect.

So it was that over the next half-century, West Germany (as it was until formal reunification in 1990) punctiliously repaid up to $100 billion in total reparations and reparations-related debt (including many billions to Israel and to individual Jewish victims of the Holocaust).
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When the two post-war Germanys finally became one, the remaining arrears that thus became due under the London agreement were turned into bonds that matured on 3 October 2010, the twentieth anniversary (not coincidentally) of the country’s formal reunification. Newspaper articles across the world celebrated the ‘final end of German reparations’.

With the 2010 settlement, Germany finally repaid its obligations from more than ninety years earlier. The Cold War was over. Trade was booming. Having passed through the reunification crisis and reformed her labour market, she had retained her position as a peaceful, prosperous country in a peaceful Europe. A book written, say, five years ago, would have had only a happy ending to relate. Unfortunately, at the time of writing (April 2013), Germany finds itself widely hated and resented in the very Europe she played such a determined role in creating. At the root of the problem is, once more, a currency in difficulties.

Germany gave up her own currency on the first day of 1999, but not because it was unstable or unreliable. On the contrary. The Deutschmark was generally admired as among the very hardest of hard currencies. The transition from the mark, controlled by the monetary martinets of the
Bundesbank
, to the euro, was at base a result of increased national strength, not weakness. The project of a single European currency had been a French pet, and the story goes that President Mitterrand of France, made nervous by the prospect of an overmighty Germany, extracted as his price for approving German reunification in 1990 German commitment to a new level of economic and financial integration in Europe, including the adoption of a common currency – something which had been often discussed, but which would almost certainly never have occurred so quickly without the changes of attitude that followed reunification.
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In effect, the acceleration of monetary union was yet another stage in the apparently endless French struggle to limit, by force or persuasion, the ability of its powerful eastern neighbour to damage the interests of
la Grande Nation
. No war, no Ruhr occupation, no crippling reparations bill to keep Germany tame, but instead ever more internationalisation of the German state and economy within a European context. The common currency made obvious sense in terms of ease of trade and general convenience, but it was also a political construct. Many Germans saw membership of the euro (and the abandonment of their precious mark) as yet another sacrifice for the sake of a peaceful continent.

All nonetheless seemed to work fairly well, despite doubts about some of the other members of the monetary union, particularly those on the Mediterranean periphery. The European Central Bank looked much more like the
Bundesbank
than originally planned – the German Chancellor, Helmut Kohl, had managed to gain a few concessions on the way to the euro’s launch – but the economies, and fiscal and financial arrangements, of the seventeen countries that eventually made up the euro bloc could not have been more different. In the case of Greece, especially, it was clear that the criteria for membership (a manageable national deficit, and a minimum level of financial probity) had been stretched to their limit and beyond, again for political reasons. Suddenly countries that had traditionally experienced problems borrowing on the international markets on affordable terms could borrow at much lower rates. Roughly the same rates, in fact, as if they were Germans. But without the discipline.

The banking crisis that first made itself felt in 2007 may have had its origins in runaway American debt, but in Europe, as the financial tide went out, the underpinnings of much of the continent’s banking and investment system were shown to be equally, perhaps even more, unstable than those of Bear Sterns, Lehmann Brothers, Freddie Mac and Fanny Mae. German banks lost money as a result. Although restricted in their domestic market by laws designed to prevent the kind of ‘casino banking’ that had been the downfall of banks in America, Britain and elsewhere, German financial institutions had eagerly joined in the lending spree going on outside Germany’s borders. Thus when the Spanish and Irish real estate booms, and the Greek government’s heedless spending on an extraordinarily generous welfare system and a bloated public sector, hit the buffers, German bankers were threatened with huge losses in the same way as their French and Italian colleagues.

The so-called ‘bail-outs’ that followed were often described as ‘saving’ the countries involved. In reality, they mostly saved the foreign financial institutions that had lent the money, including German banks. This was a fact not lost on populations who were now expected to pay higher taxes, tolerate reduced welfare benefits and wages, and to suffer increased unemployment, in order to pay back the money their governments had unwisely borrowed. In Greece, it became a political cliché to show German Chancellor Angela Merkel as a Nazi oppressor, often kitted out in an SS uniform. There were mutterings about demanding proper reparations for the money and resources the Germans had stolen from Greece during the Second World War. In debtor countries, commentators darkly contrasted German rigour with the ‘soft’ treatment of Germany after the Second World War, which had made possible her dramatic recovery.

To most Germans, however, it was just a matter of hard-learned prudence. In the 1920s, Germany too had maintained a bloated public sector, partly as an employment-creation scheme (the German railways at that time, like the Greek railways in the twenty-first century, were a notorious money pit), had introduced the eight-hour day, thus undermining badly needed productivity, had failed to collect taxes fairly or efficiently, and had attempted to maintain a welfare system that she could not actually afford. The fate of the Weimar system had taught Germans many hard lessons, and a key`one had been that financial stability was vitally important. From Heinrich Brüning at the beginning of the Great Depression to Angela Merkel eighty years later during what has been dubbed ‘the Great Recession’, Germany’s politicians (with the great exception, in this and almost all else, of Hitler) had kept the purse strings tight, no matter the short-term political cost.

When the mighty cost of integrating the so-called ‘new provinces’ (
neue Bundesländer
) of East Germany after 1990 had threatened to destroy the post-war ‘economic miracle’, the country had reluctantly submitted to heavy extra taxes, plus extensive labour market and welfare reforms. The experience was painful. However, if practical results are any guide, these sacrifices successfully relaunched Germany as ‘export world champion’. Those countries that had thrown away the genuine development opportunities presented by the euro system, and instead awarded themselves inflated welfare benefits and real estate profits, would now also have to suffer pain in order to achieve gain, as Germany had during the period around the turn of the millennium.