The euro, the stock market collapse and the future of Europe

The European Journal
Jan/Feb 2009
The euro, the stock market collapse
and the future of Europe

Sara Moore asks if the role played by the euro and Germany’s continuing wish for a dominant role in Europe will lead inevitably to a ‘Closed Bloc’ Europe? The astonishing similarities between political developments, the events leading up to the 1929 stock market crash and the Great Depression, and the events following the introduction of the euro require us to pause and ask ‘whither Europe’.

It seems that the arrival of a new currency often leads to stock market crashes. In 1873, two years after Germany adopted the Gold Standard, the Austrian and US stock markets crashed and the new German Reich was plunged into a lasting depression.

Between 1924 and 1929 Germany, Britain, France and Japan adopted the Gold Standard. In 1929 Germany’s and later France’s gold purchases caused a fall in Britain’s gold reserves and a rise in her bank rate. Money became scarce and in October 1929 the American stock market crashed.

Following the European Union’s adoption of the euro, the European Central Bank (ECB) kept its interest rates at 2% to help re-unified Germany. Money poured into Britain and America distorting money markets. After December 2005 the ECB inched up interest rates seven times. In January 2007 Germany raised VAT by 3% and the German unions asked for increased wages in compensation. German Bundesbank President, Axel Weber, sought and secured another ECB interest rate rise to curb German wage inflation. Higher interest rates then caused funds to sweep back to Europe and soon the US and UK financial systems began to crack. After a further ECB interest rate rise in July 2008 stock markets round the world collapsed.

From this one can see that countries must proceed with great caution in dealing with the far-reaching consequences of falling and rising interest rates after a new currency is introduced.

In 1929, however, while Germany’s return to the Gold Standard did affect currency flows, it was principally German political moves in relation to the payment of war reparations that contributed to the Wall Street crash.

The US stock market swept to dizzy heights in 1929, until the Young Plan reparations agreement (in which America and the Allies agreed to remove their untrustful controls over the German economy and give her a generous new financial deal) was finally concluded on Saturday 31 August. The first instalment was to be paid almost immediately, even though the agreement had yet to be ratified.

Five days later, on Thursday 4 September, the American stock market dived. The following Monday the New York Times consoled investors that money markets were guarded against old-time panics, both by their accumulation of gold and by their fund of available foreign credits. However, the stock market kept falling and the German funds, which had come in quantity since the beginning of the year, began to ebb away.

Across the ocean in Germany, bellicose Alfred Hugenberg, right-wing leader of Germany’s second largest political party and owner of over 500 newspapers, also revealed that Americans trust in him had been misplaced. He had sent a much-publicised letter to 3,000 prominent American Senators and governors in the spring, asking them to give Germany a generous reparations deal. Yet, after the Americans had done as he had suggested, he suddenly campaigned against Germany paying any reparations at all. He also put the minority party leader, Adolph Hitler, onto the committee he had set up to promote his new petition. He and Hitler then called for President Hindenburg and the whole German cabinet to be tried for treason for accepting the Young Plan reparations agreement and all treaties signed since the war, including the Treaty of Versailles.

The German socialist government was appalled. On 13 October 1929 it declared that Hugenberg’s petition was ‘a monstrous attempt to incite the German people against the government and to annihilate the ten year goodwill policy of the republic with Germany’s former enemies’.

On 17 October the two-week process of counting Hugenberg’s petition began. The New York Times reporter declared ’… no other post-war political issue has contained an equal amount of mischief in its make-up’. Yet it believed that the petition would gain sufficient votes for Germany to have to hold a national referendum.

On 21 October ‘perpendicular’ falls were recorded on Wall Street after the dollar fell sharply against the mark on Berlin’s money market.

The final straw for the market was the discovery that Swedish match king, Ivar Kreuger, could no longer honour his side of an agreement with the German government, under which he received a monopoly of the German match industry in return for loaning it $125,000 to help pay the initial Young Plan reparations instalment. On the evening of 22 October Americans read with horror that indebted Kreuger was trying to raise money on Wall Street to help pay the initial instalment; this called into question, not only Germany’s ability or willingness to pay war reparations, but also whether the allies reparations-dependent war debt repayments or indeed any of the copious loans made to Germany would ever be repaid.

On 23 October 1929 the American stock market crashed – 19,226,400 shares were sold but no one criticised Germany in case their fears proved unfounded.

In 2008 stock markets have not fallen nearly as far as in 1929 but the banks are in a bad state and a deep recession is feared. It is therefore worth looking at the Great Depression to see if there are lessons to be learned.

Upon becoming Chancellor in 1930, ascetic ex-gunnery officer, Heinrich Brüning told the (ex-military) civil service unions that his chief aim was to free Germany from paying war reparations and foreign debt. He would have to lower their wages and tighten credit so that German exports could conquer foreign markets. They agreed ‘as long as … all classes of the German people’ suffered equally. So the German agony began. Only 1.2 million people were without jobs in June 1928 but 6 million became unemployed in the Great Depression.

Eventually Germany was let off paying reparations. Yet there is ample evidence that she was less poor than she made out. Germany’s economy had been disrupted by political unrest after the war but she owned the most profitable coalfields in Europe. By 1931 she was the greatest exporter in the world with reserves in the Reichsbank covering an astonishing 40% of the banknotes in circulation. So when she closed down her economy and diverted all her energy into export, she caused misery and despair throughout Europe and America.

Germany’s secret exports to the Soviet Union also upset the world economy because Stalin was prepared to sell wheat at any price in order to buy German armaments. After expelling his Kulak farmers to the Arctic, Stalin exported their wheat to the already overprovided market in North America. The resulting collapse in the world wheat price brought the ‘dust bowl’ to America.

Today there is no chance of world agricultural prices collapsing in a similar fashion. Nevertheless, there are disquieting parallels with the 1930s. Germany is once again the greatest exporter in the world, she is also cutting public expenditure. This year she has been able to generate a satisfactory budget surplus. Next year, despite the world economic downturn and the threat of dramatically increased unemployment in Europe, she is planning on saving even more money. In view of this we have a right to ask, has she any political moves?

Angela Merkel has had popular support in her campaign against the hedge funds. Yet there is one anxiety about German policy which foreigners have not articulated, the goal of an economic ‘fortress Europe’. Mrs Merkel gave a sterling defence of open markets at the World Economic Forum in Davos on 24 January 2007. But she also declared

The positive thing is that today’s economic potential rests on many more shoulders, the downside is that industrial investment can ruthlessly be removed from one country to another, affecting poor countries well-being …So what would be more obvious for Europe than for it to just hold its ground and cut itself off from the rest? We know that even in 2011 the European Union will still contribute four times as much to the world economy as China. Would it not be a successful strategy to exploit our strengths ruthlessly, secure the global resources necessary for our own prosperity just in time and build a few walls to conceal our own weakness? My short sweet answer is no.

Angela Merkel then went on to outline her answer to the threat globalisation posed to the European Union. Yet it is interesting to note that the idea of a ‘fortress Europe’ had crossed her mind at all. Most people attribute European desires for protectionism to France. Nevertheless, in 1912 the Germans talked menacingly of a ‘closed economic area to secure our need for raw materials and our exports’ and one historian even declared of the Second World War, ‘from an economic perspective … the war amounted to to a gigantic struggle between two diametrically opposed views on how to organize the future world market: Closed Blocs vs. the Open Door’.

We appreciate the fear that Germany and the European Union has of the escalating power of China and the Far East but destroying the wealth of Western Europe and America in order to create a Closed Bloc economy to exclude them, is not the way forward. The arrival of the euro did cause an unfortunate flight of funds to America and back again and helped cause an upset in the world economy. But if the recession gets worse we shall look for a parallel in history and, understanding the role that Germany has played historically, take the necessary steps to ensure that Europe does not become a ‘Closed Bloc’ economy by default.

One Comment

  1. Posted July 31, 2011 at 4:38 am | Permalink

    Got it! Thanks a lot again for hleipng me out!

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  • How Hitler Came To Power

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    "I recommend this book" Charles P Kindelberger, (Emeritus Professor of Economic History, M I T)
  • How Hitler Came To Power Press Release

              How Hitler Came To Power describes how what amounted to a conspiracy of the German military and industrial cliques, manipulated Allied leaders and misrepresented the Treaty of Versailles to further their ambitions, with zero regard for the human cost.
             Germany was far stronger economically by 1929 than she had been before the First World War. How Hitler Came To Power makes the case that she was primarily responsible for the Wall Street crash. By 1931 she was the greatest exporter in the world, with a mountain of cash in the bank. Yet the German people were subjected to high taxation, mass unemployment and misinformation in the cause of ridding Germany of the shackles of Versailles and returning the country to dictatorship