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German Economic War Reparations - Cyprus Is The Start

Politics / Eurozone Debt Crisis Mar 19, 2013 - 07:31 PM GMT

By: Andrew_McKillop


It was also not good for Germany - in the end. For other "players" it started bad, and got worse. Major spinoff from war reparations won by a triumphant Germany in 1871 included a worldwide stock market crash starting in Europe, and a Long Recession which was especially strong in Europe - but among today's differences we already have a "relatively weak and manageable" European recession. Already set and ready to spin entirely out of control.

The roots of the 19th century crash and following depression in Europe can be traced to the 1870 Franco-Prussian War that forced the French to make large war reparations payments to Germany. Many people are familiar with the German Reparations after World War I, because they are often presented as a direct cause of the German Nazi Party gaining huge voter support, and because they were loudly opposed by Keynes. Later Keynesians often claim that Germany's forced payment of repearations was a major factor contributing to the Great Depression as well as the rise of Nazism.

The main difference between France's payment of reparations after its defeat in the Franco-Prussian War and its earlier "Napoleonic reparations", after its defeat at Waterloo in 1815, is that these repearions were paid in full and on time. After 1918, Germany only partly paid the massive repearations demanded - especially by France, with the UK often dithering on amounts it wanted. The US for its part often urged slower and lower payments by Germany of "war damages" and by 1924, with the Dawes Plan, then in 1929 with the Young Plan the US advocated "partial debt forgiveness".

The post-1815 and post-1871 French reparations were unlike the largely uncollected post-World War I German reparations. Not once, but twice the French paid in full and on time. A very simple and likely explanation for what the UK and US often called the "impossibly intransigent" stance of the French at the Versailles Treaty summits after 1918, the full programme of reparations demanded from Germany was in fact almost certainly impossible to pay. This is exactly like the PIIGS debt explosion and the "reparations" demanded from the unemployed millions in Greece, Spain, Italy and Portugal today, and from Cypriots who are menaced by a pure and simple collapse of their entire bank sector.

In 1919, John Maynard Keynes said the post-World War I reparations demand of (at its highest) 133 billion gold marks, about $33 bn in 1921 dollars were: "A policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness". Critics of Merkel today can say: Germany remembers!

In 1871 the Prussians under Prince Otto von Bismarck imposed an indemnity of 5 billion gold francs (at a gold price of $19 per Troy ounce!) on the defeated French. At the time an extraordinarily heavy sum, it was however paid off by the French in less than 4 years. The temptation for newly created Germany to increase the value of its gold booty and treasury - including a strategy of demonetizing silver - is often used by monetary historians to explain the near total collapse of world silver prices by 1874. To be sure, other factors were in play including US monetary policy regarding silver, increasing silver mine output (as well as gold mine output), increasing paper bank credit, and rapid economic growth.

What counts is France paid its war reparations in full and ahead of schedule. The inflow of gold to Germany very surely triggered, or at very least bolstered Germany's decisions to set a new gold standard of the German Empire. This was inaugurated on July 9, 1873 when the new gold coin, the Gold Mark made its debut. The action was preceded by the closing down of all German Mint coinage of silver Taler or Thaler coins in 1871, the first overt step towards demonetizing silver.

By 1873 the new German Empire existed, with a strong gold money and an expanding industrial economy. Silver had also been demonetized in the United States through a highly politicized and complex series of Congressional Acts, and by State initiatives, for example by and against the silver and gold mining States. Speculators dumped silver in large quantities and sold it short, in a process of which the outriders had started as early as 1870.

Many US politicians and jounalists accused the speculators of operating in collusion with Germany.

With highly unstable monetary conditions, but strong economic growth driven by new scientific and industrial inventions and development, notably the US railroad boom and later by electric power production, the scene was set for frenetic speculation of all kinds. European stock markets, banks, brokers and finance houses enjoyed boom times. The wave of optimism which drove the boom, shown by extreme high stock prices in central European markets - which in some cases were not reattained for 10 years - reached its limits in Vienna in late April of 1873. The collapse of the Vienna Stock Exchange began on May 8, 1873 and after three days of massive losses the exchange was closed on May 11. It was reopened, but by that time trading was "low volume subdued". Stock market players elsewhere in Europe hoped the panic had faded or was circumscribed to Austria-Hungary.

Financial panic arrived in the US in Sept 1873. The celebrated collapse of the Lehman Bros of the time - another private banking banking house, called Jay Cooke & Company - is usually cited as the marker event, with its main "underlying security" of US railroad stocks, hopelessly overpriced. The collapse of Jay Cooke & Co was shortly followed by a wave of major bank collapses. Panic spread in every direction in New York's business district as prices "fell off the wall". The New York Stock Exchange closed for ten days from Sept 20 in an attempt to limit the damage.

Current German-approved, even German-ordered action in Cyprus can be clearly seen as a "panic limiting attempt", regarding finance sector sentiment, but in 1873 the newly founded, rich and powerful Germany was helpless in the face of market panic. Following the US stock exchange panic of Sept 1873 the financial crisis returned to its European hearth, firstly through a new panic in Vienna, then further failures right across continental Europe. The UK, which had experienced earlier and recurring crises ever since the 1815 war reparations programme following Napoleon's defeat, almost on a 10-year cyclic basis since 1820, was at first little affected. It was however the last European economy to recover from the "crisis of '73", and experienced very slow growth until the late 1880s.

France experienced the worst effects of the crisis. Having been defeated in the Franco-Prussian War, the country was in the process of paying reparations to the Germans and its economy weakened, when the 1873 crash occurred. The French took a policy of deliberate deflation while paying the reparations, but the Paris Bourse crash of 1882 sent France further into recession - intensified by a range of factors including decline of the Bordeaux wine and Lyon silk industries, affected by bad weather and by disease. The Union Générale bank failed in 1882, prompting the French to withdraw three million gold pounds from the Bank of England. French stock prices collapsed.

Possibly hard to predict given the circumstances - very large increases in amounts of both silver and gold circulating in Europe and the US - the depression of about 1873–1895 that affected most European countries was accompanied and driven by a drastic fall in prices. All kinds of factors - including industrial productivity gains and early market saturation effects - were in play, for example industrial production increased by 40% in Britain but increased by about 125% in Germany in 15 years.

Germany's strategy, then as now, especially featured mercantilism or running a trade surplus at all possible times, and continued industrial investment and industrial production growth, also including military materiel. Strong money was central to German policy. Conversely, the British approach was to accept economic defeat, contract, deflate domestic consumption and allow market-led devaluation of the money. The international context, then as now experienced falling rates of trade growth, increasing sovereign debt, and for Germany soon created major problems. Chancellor Bismarck was forced to veer away from classic liberal economic policies by the late 1870s, and applied domestic economy safeguarding policies including higher tariffs for electricity and transport, nationalized railroads, national preference purchasing, and compulsory social and unemployment insurance.

In the 1870s and following World War I, French "revanchism" was a recurring accusation by Germans against the French - the first time however, it was France which had to pay. Today's de facto European crisis context, where euro currency strength and stability of the Eurozone are treated as critical goals in every single German-French bilateral summit, no longer reflects the real goals of most European states, nor unfolding reality in Europe, or the world. In Europe today, Germany now calls the tunes and pays the piper. France is drifting further into PIIGS-style debt and deficit, has ever rising unemployment and a large trade deficit - and wants a lower valued euro. Germany may or may not want this, and at present no single coherent political line is coming out of Berlin.

Germany above all wants monetary stability and banking sector stability - but this does not rhym with the euro money, or the Eurozone as presently organized, structured and governed.

Massive differences exist between the 1870s monetary and economic context, and today's. In particular, the Crisis of '73 came amidst an era of very strong economic growth, and featured the demonetization of silver as one clear trigger. Today's potential equivalents could or might include the abandonment of sovereign debt in Europe (and by the US!), and the radical devaluation of the euro. However, this would only be "an alternate route" to financial market collapse, due to the either-or nature of the almost certain economic result: very deep recession and net contraction of the economy.

Economic implosion is the most likely result whatever "strategy" is applied by Europe's powerbrokers and Technocrats. Their action, always confused, too little and too late, will almost surely and certainly trigger global economic recession.

The major similarities between the Long Recession of about 1873-1888 and today's European, American and global macro context are however impressive. In particular, the geopolitical drivers of crisis in the late 19th century, from a European crisis hearth, most surely set the gameplan for and the future belligerants of the coming 1914-18 war. The monetary-then-economic crisis of the 1870s spurred intense rivalry and new alliances between the major powers. Effects ranged from German-decided de facto assumption of Turkish Ottoman sovereign debt, resulting in Turkey's military alliance with Germany in World War I, to French and British hostility against Germany, and US attempts at neutrality and fence-sitting. Russia's hostility against Germany, and its participation on the Allied side in the war, until the 1917 Bolshevik revolution can also be traced to the lasting effects of the Long Recession.

As we know, Russia is very surely and directly implied in the Cyprus bank crisis of today. All major international banks are also implied, including US banks. Within Europe, public opinion has quite rapidly become openly anti-German in several countries, including the UK and France, directly because of the euro and Eurozone crisis. As their Me Too political leaders however say, when or if they "pull the plug on Europe", the Eurozone is cut to perhaps 6 or 7 member states, and each state cuts away and deals with its own sovereign debt crisis - the result will inescapably include the worst economic crisis that Europe has ever experienced.

The 1930s Great Depression will be a quaint historical interlude of relative economic decline, by comparison. Germany will certainly not be unscathed!

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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