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A ‘Schloss’ in the air?

Article published by Bill Cash’s European Journal.

In 1991, Germany’s former Chancellor, Helmut Kohl, famously declared that European monetary union without political union was a ‘castle in the air’. Yet Germany now seems determined to realise Kohl’s ambition and its tool appears to be ‘austerity!’

There is no doubt that Lehman’s collapse in 2008 helped Germany’s aspirations. Angela Merkel had campaigned against the Hedge Funds for years before Lehman’s collapse. Devastated by the disaster, and stories of fraud and malpractice, American bankers shouldered sole blame for the tragedy, even though the arrival and departure of an indigestible flood of German money was a major cause.

After the arrival of the euro a flood of German money had hit the US. Then European interest rates started to rise. In 2007, under pressure from the German Bundesbank, the ECB raised interest rates yet again; American and British banks cracked under the strain and foreign money fled. In 2008, the ECB raised interest rates once more and Lehman’s Bank collapsed. There was no Anglo-Saxon money now to help the PIGS. So they became dependent on Germany.

The PIGS – Portugal, Italy Greece and Spain and Ireland – have now become Germany’s priority. They have been revealed to be idle, greedy and corrupt and newspapers have had a field day, exposing their bloated public sectors and how their citizens avoid paying tax. Yet, that is not the whole story. Following the euro’s arrival the PIGS were also showered with German money, nearly $1.5 trillions worth. After Lehman Brothers crashed, the tap was turned off and Germany demanded deep spending cuts. Employment has fallen to depths not seen since the Great Depression.

Why are the PIGS are so keen to cling onto euro zone membership? The answer is not hard to find. For years, around half of the EU’s budget has been spent on agriculture, and much of that has been spent in their countries. Southern European hillsides have been adorned with olive trees as Northern Europeans discover the delights of olive oil, pasta and wine. The PIGS don’t want to forfeit the finance, which helps some of their poorest citizens.

Unfortunately, the price of receiving it from Brussels is rising all the time. European President, José Manuel Barroso, is now calling for nations to sign over their fiscal sovereignty to Brussels, the aim being to create an ideal area, where corruption vanishes, taxes are paid and inflation is eliminated for ever. The model is Germany, where inflation has been low for years. Yet Germany could be accused of achieving low inflation at the cost of hyperinflation elsewhere.

Everyone remembers Germany’s 1923 hyperinflation. Pictures of destitute Germans, carrying bundles of waste-paper money, have been indelibly imprinted on our minds. Germany’s campaign against paying its ‘huge’ First World War reparations payments beggared the German people.

Germany won the argument that the war reparations demands were too high and the European Union’s premise now is that all European nations were responsible for the 1st World War. Yet no one has remarked on the fact that German industry gained an advantage from its Great Inflation because it wiped out the country’s internal debts and ‘taught the German people how to work’.

Germany also had hyperinflation after the 2nd World war and was given an advantageous exchange rate when its currency was stabilised. By the late 1960s, Vietnam-war-torn America was finding it hard to compete. Eventually Germany agreed to re-value its currency on condition that it could buy gas from the Soviet Union and be assisted to invest in Brazil, which had a previous history of high inflation and defaulting on loans. In the 1980s and 1990s many East European countries would suffer from hyperinflation before receiving German investment.

That era is over. Inflation is now an anathema everywhere. Indeed Germany is so keen to stamp out inflation at home that German workers have not had a pay increase, in real terms, for ten years. No wonder they are not keen to help Southern Europe! Meanwhile German industry has profited from the PIGS entry into the single currency because its exports to them have surged, rising strongly in Greece, doubling in Italy, and almost tripling in Spain!

Before the 1st World War, influential right-wing German politician, Heinrich Class, declared that German unification had been incomplete because it failed to include all Germans. He campaigned for an area, he called Mitteleuropa, which would comprise all those he considered of ethnic German stock, in Northern Europe, the Austro-Hungarian Empire and Romania. Mitteleuropa would be bound together initially by a customs union, and this would prepare the way for the creation of community-wide legal and political institutions.

Self-determination on the basis of language seems to rule today. Yet while some states (like Britain and Spain) seem to be splintering into ever-smaller countries, Germany has appealed to all the people in Russia who have had antecedents in Germany, to apply to become German citizens. It is also appealing to those beyond its borders, in East and Southern Europe, who can claim ethnicity and ethics like its own. Being German has become a brand. No wonder the French have become alarmed! Meanwhile German wrath seems to have become concentrated against France’s friends in Southern Europe. The French don’t want the European Union to be transformed into Mitteleuropa!

Knowing Germany’s previous ambitions to have a European empire should reassure us that the euro is not going to disappear. But whether Germany has ever envisaged creating a crisis in Europe, for political and economic ends, is another matter. It sabotaged the European Exchange Rate mechanism for its own ends in 1992; its capital flows, to and fro across the Atlantic Ocean, and down as far as the Mediterranean, massively distorted world markets before the Lehman crash. It therefore seems perfectly possible that it could cause chaos again for future purposes. Yet these won’t include the destruction of the euro, just the European Union’s transformation into the political and economic form it desires. And it already has a scapegoat – those bankers who created mayhem in 2008!

The City has decided to adopt a policy of appeasement towards Germany, in the worthy aspiration of being appointed to look after the European Union’s money. Yet Germany regards appeasement as weakness and many European politicians believe silence to be an admission of guilt. So it is not surprising that European President, José Manuel Barroso, declared to the European Parliament at Strasbourg on 12 September 2012:

‘We should not forget what was the origin of this crisis, and I have to say to Eurosceptics, no, it was not the Euro. No it was not the Euro! … it was not the Euro that created the problem; it was the irresponsible behaviour of the financial sector’!

José Manuel Barroso has reiterated this so often, people may be beginning to believe him. Yet he has forgotten the old German proverb, so appropriate on this occasion, ‘Who is responsible, the pig, or the one who fed it?’

The pigs in America, Britain and Southern Europe have admitted that they were almost criminally greedy and foolish. The one who fed them, seemingly, has got off scot-free!


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Are the bankers culpable?

Were they given enough rope to hang themselves?!

Have the bankers been foolish and criminal? Some have been criminal. Others have definitely been foolish! But their foolishness goes back much earlier than 2008. So many bankers names have a German ring, Goldman Sachs, Rothschilds, Barings, Warburgs, Lehman Brothers; most were originally from Germany and naturally felt close to their German cousins. Yet only friends and relations can be completely taken for a ride.

Although acutely distrustful of Germany after the Second World War, the bankers began to forge new friendships with their former homeland by the 1950s. Year after year of happy trading followed, until their relationship was completely cemented. Soon other countries began to put their faith in Germany, and in German investment policies, too!

The arrival of the euro seems to have promoted a mass exodus of cash from Germany. While productivity-adjusted wages actually declined between 2000 and 2008, and unemployment stood at nearly 12% in 2005, literally billions of German money went abroad. Masses of America’s sub-prime assets were bought by the Germans, whilst almost a Trillion German euros were showered on Portugal, Ireland, Greece, Spain, and Italy – the PIGS!.

The PIGS, and the bankers processing the transactions, should have turned down the cash. There were actually no viable investments left as safe havens for the money. But wasn’t it sensible Germans who were offering the funds? So the bankers succumbed to the temptation and bricks and mortar sprouted everywhere. Money was lent to people with doubtful reputations, who would surely have trouble paying it back if interest rates edged higher.

In December 2005, the ECB began to raise interest rates again. After that they inched up relentlessly, creating a ripple effect in other continents. In May 2007, after an increase in VAT, the German unions at last demanded more money. Then the Bundesbank alleged that the country was being drowned by inflation and, even more astonishingly, managed to persuade French ECB President, Jean-Claude Trichet, to raise interest rates for the whole euro zone – to curb it! Finally, despite banks already tottering, and some even going bankrupt in Europe and America, the ECB put interest rates up once more in 2008. Two months later Lehman Brothers collapsed.

It has been alleged that the Federal Reserve Board of Governors in Washington, commonly called the Fed, actually caused the Lehmans crash by tightening the money supply. But was not that move just defensive? In the year 2000 the US was sitting on a mountain of cash and could dictate interest rates world wide, but by 2008 it was sitting on a mountain of IOUs to Europe, terrified that the European funds would disappear. It was the ECB which caused the crash, not the Fed. And egging on the ECB was the Bundesbank.

If only the bankers had studied the 1873 crash more closely they might not have been taken in by their German cousins. The stock market crash of 1929 was coloured by the war reparations saga but the crash of 1873 is a close parallel.

After Bismarck’s unification in 1871, the 26 states and cities of the German Confederation decided to give up their currencies and adopt the Gold Standard. Germany was soon awash with cash, as France paid its war reparations straight away and Germany issued gold coins before calling in the silver ones, resulting in a tripling of the money supply.

After the states debts had been paid off there was no good home for the money but the bankers recycled it anyway and it flowed as far away as North America. Railways were the favoured investment of the time, but all kinds of foolish real estate and banking investments were indulged in. The world was awash with cash and it looked as though the party would never end.

Then interest rates rose and Germany removed silver from its coinage. Money suddenly become scarce. Stock markets crashed in Austria, Germany and North America and scandals of all kinds hit the headlines. The continuing odium against the bankers rolled on for years.

Even though economists now agree that the German expansion in the money supply was a mistake, Bismarck has escaped all blame for the 1873 crash. Yet who is the most to blame, the one who provides the excess cash or the one who processes it? Bismarck had hung the bankers out to dry and escaped all censure!

The Blame Game for the euro zone’s present troubles has already started. At the G20 summit, José Manuel Barroso, President of the European Commission, denied that Angela Merkel’s austerity policy was aggravating the depression in Southern European nations and laid the blame for their plight squarely on the Lehmans crash and the Wall Street bankers, who had, in his words, initiated the crisis with their ‘unorthodox practices’. The Libor scandal at Barclays has given weight to his
accusations. The future of Britain’s best industry, The City, is now in jeopardy and our country is snowed under by debt.

Yet what has happened to all that money that Germany lent Southern Europe? All those widows and orphans who have German bonds in their portfolios can sleep easy. When the ECB stepped in to bail out the PIGS, it enabled the German banks to bring their money home. So it is the European taxpayers now who are now shouldering the burden of Germany’s spending spree in the years before 2008, particularly in France. If the misery goes on for years, lets hope that they remember that it was Germany that got them into that long deep depression in the 1870s.

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The Untold Story of One of the Major Causes of the Great Depression

Great Depression – Great Omission

Cheap wheat from the Soviet Union flooded world markets in the autumn of 1930 and proved to be one of the most unreported but important causes of the Great Depression

Countdown to one of the major causes of the Great Depression:

Pre -WW1: Russia produced & sold over 25% of world’s wheat.

Post WW1: Russian wheat exports all but vanished in turmoil of revolutionary period.

America, Australia, Argentina & Canada responded to fill this gap and by the mid- 1920s there was more wheat available worldwide than was required.

American farmers were hit hard as they had been encouraged to expand their wheat production during WW1 and had taken out mortgage loans to finance this expansion.
By the end of the 1920s, they were campaigning for protectionist duties to safeguard their home market.

Germans help sow the seeds of one of the major causes of the Great Depression

1922 Krupp, the German armaments manufacturer, set up a huge 50,000 hectare farm in the North Caucasus for Vladimir Lenin (leader of Russia in its new guise as the Soviet Union) in return for Lenin allowing German troops to train, illicitly, on Soviet soil.

1928 Krupp became involved with Lenin’s successor, Joseph Stalin, in the creation of more giant farms to grow wheat for export, so that Stalin could obtain hard currency to buy German armaments.

Stalin exploited this opportunity to take revenge on his kulak peasants (relatively well-off farmers) who were driven off their farms and deported to the arctic wastes of Siberia, while he forced their former employees to work, in effect, as slave labour.

The Great Depression arrived with a vengeance

Autumn 1930: Soviet wheat deluged onto unsuspecting, already overprovided and frankly horrified world markets at slave-labour prices.

Stalin had the audacity to claim that his ability to export wheat at such a low price was a reflection of the superiority of the Communist economic model over that of the Capitalist one.

How the legend of the American ‘Dust Bowl’ began

The US government, unaware that farm-workers were treated like slaves in the Soviet Union, decided to blame its own farmers for their inability to compete on the price of wheat.

It claimed its farmers had mismanaged their soil: thus the legend of the American ‘dust bowl’ was born.

Other wheat-producing countries were battered too. The depression hit the whole world. Even Germany was grievously affected, despite having imposed a 100% tariff on wheat imports the previous summer.

Stalin’s wheat, one of the Great Depression’s major causes

The world economy was so much more dependent upon agriculture in those days – farmers went broke, banks went bust, while the world sank ever deeper into depression.

Like to know more about the German involvement in this major cause of the Great Depression?

Read Wikipedia’s Soviet-German Relations before 1941 under the subheading ‘Relations in the 1920s’

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Causes of the Great Depression

The Great Depression, could Germany have actually been the cause?

The Great Depression between 1929 and 1933 arrived after the introduction of a new currency. By 1929 all the major countries had returned to the Gold Standard, after abandoning it during the Great War.

Germany and the Wall Street crash

The depression kicked off with a stock market crash. Weimar Germany had been viewed as weak and unthreatening so America decided that it was safe to remove all the Allied controls over the German economy and to give it a generous new deal over paying its war reparations. During the negotiations there was a bubble in the stock market, but the week after it was agreed the market started to sag. Then prominent German politician and media magnate, Alfred Hugenberg, put Hitler on his petitions committee and campaigned successfully for a referendum against paying any war reparations at all, on the grounds that Germany was guiltless of starting World War I. The anxiety that America’s trust was misplaced and that Germany might renege, not only on paying war reparations, but also on all its foreign debts, helped cause a disastrous collapse on Wall Street.

Germany’s part in creating America’s ‘Dust Bowl’

By itself the Wall Street crash would not have caused a lasting depression but the agricultural slump of 1930/31 hit America hard. The inadequacy of American farmers has long been condemned for creating the legendary ‘dust bowl’ in the American heartlands. That is not the whole story. Germany was not as weak as its creditors believed and its former armament manufacturers were already secretly making armaments again and were willing to sell them to Stalin, with the proviso that they were paid for in hard currency. Russia was practically bankrupt in 1928 but had been a major wheat exporter before World War I; so Stalin sent his kulak farmers to
Siberia and created giant farms from their land. In 1930, with the help of, in effect, slave labour, the Soviet wheat arrived at rock-bottom prices onto an unsuspecting, already overprovided world market. Stalin obtained his modern German weapons and the factories to produce them, at the cost of death for his kulaks and bankruptcy and despair for American farmers. The question is why the German armaments makers helped Stalin. One answer could lie in the hold that Stalin had over the German Communists. Previously they had sided with the Socialists. Yet after Stalin’s agreement with Germany, despite fighting Hitler’s storm troopers on the streets, the German historian Erich Eyck1 reveals that German Communists faithfully voted with Hugenberg’s far-right DNVP and Hitler’s NSDAP in the German Bundestag, and the Russian historian AlexanDr Nekrich shows how the Communists helped Hitler’s electoral triumph in 1932.2

How Germany made its people suffer for political ends

An additional cause of the Great Depression, which has been overlooked, was Germany’s deliberate policy of deflation. When GermanChancellor, Heinrich Brüning, took office in 1930, he told his Labour Federation associates of his intention to cut wages, raise taxes and divert all the country’s energies into export, in order to
put pressure on America to allow Germany to renege on paying reparations and debt. By 1931 Germany was the world’s greatest exporter, with a mountain of cash in the Reichsbank. Yet although America and the allies gave Germany a moratorium on its war reparations payments, its policy of deflation continued in pursuit of further
objectives. After Hitler came to power America’s worst fears of 1929 were realised when Germany not only reneged on paying war reparations but also called for a moratorium on its foreign debts, inflicting further misery on Americans.

For a more in depth look at the causes of the Great depression, read our article: The Untold Story of One of the Major Causes of the Great Depression

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Is Germany using its jackboot, like Bismarck?

In January 1871, after the end of Bismarck’s successful war against France, a celebration was held at the Versailles Palace, near Paris, to mark the foundation of unified Germany.  It comprised almost exactly the same number of states as in the European Union today, and was similarly unequal in size, ranging from mighty Prussia down to tiny principalities. Like the present leaders of the European Union, Bismarck decided to have a new currency.


Bismarck and the stock market crash of 1873


It was much easier for Bismarck to whip the four kingdoms, six grand duchies, five duchies, seven principalities, and three republics, each with its own constitution and representative system, into a fiscal union than Mrs Merkel and President Sarkozy with the euro zone, because of his success in battle.


Germans indulged in a huge stock-market spending spree after their victory over France, sparking an investment flurry everywhere.  Then, flush with French gold from the spoils of war, Bismarck decided to raise interest rates, cease minting silver, and to institute the popularly named Goldmark only two years after unification.  This caused the international value of silver to plummet.  Money became scarce and the Vienna stock exchange collapsed, followed by Berlin and Wall Street.   Austrians would rant against the ‘unwise expansion, insolvency and dishonest manipulation’ of the Vienna stock exchange for years.


Germany in the depression after 1873


In the aftermath of the 1873 stock exchange debacle, Germany and the whole of the western world suffered a long depression.  Yet Bismarck realised that the foundation of Germany’s success would be a strong economy and he was prepared to help to enable it to succeed.  Although the private German banks lost their power after 1870, and many small banks collapsed, the newly founded Deutsche Bank emerged from the stock market crash unscathed and soon became the right-arm of industry.  Smiled upon by government, the years of depression eventually produced the triumph of German big industry on world markets, under Prussian dominance.


Germany and the 1929 stock market crash


The 1929 crash bore marked similarity with the 1873 crash in that it was associated with the return to the Gold Standard, huge capital flows from Europe to America, and rising interest rates.  In addition there was a political dimension, when insiders who had put their trust in Germany suddenly became aware that they had been deceived.

In the crash’s aftermath there was a deep depression.


The 2008 crash

There was no spending spree in Germany after the euro arrived.   As German wages stagnated, or were lowered, Germans invested their money abroad.  Indeed,  Britain’s former Prime Minister, Gordon Brown, asserted in his International Herald Tribune article, on 21st August 2011, that the ‘German banks were supplying the drinks’ for the stock market boom in America and Southern Europe.  Naturally others joined in the party.  Indeed it seemed as though the world was awash with cash.  Eventually, however, the European Central Bank started to raise interest rates.  Then the ECB, egged on by the Bundesbank, raised them yet again, first to eradicate internal, then external inflation.  Commodities tumbled worldwide, European money deserted Wall Street and Lehman Brothers collapsed.  Many, many books have since been written by the bankers, lamenting their foolishness and greed.


The future?

After 1873 and 1929 we had dreadful depressions.  It seems that we are going to have one now.  What is worrying is that Germany seems to be using deflation for political ends, as it did between 1930 and 1932. People don’t know exactly why Germany has chosen the present period in which to eliminate its budget deficit but it is making it almost impossible for the weaker euro zone countries to grow their economies, while eliminating their debts.  One also has to ask why Germany lent money so wantonly to the PIGS -Portugal, Italy, Greece and Spain – only to transform them into pariah states?


Echoes of the 1930s

The request to the IMF and the rest of the world to help the European Union’s finances is also worrying.  In the aftermath of the 1929 stock market crash it was popularly believed that Germany was weak.  Indeed, in 1930 and 1931, money was lent to Germany from impoverished France, Britain, Switzerland and America to help it pay its debts.  However, Germany was not weak in 1931, just using deflation for political ends.  Indeed, it was later revealed to be the greatest exporter in the world, with a secret mountain of cash in its coffers.  Meanwhile, the money lent to Germany from France, Britain, Switzerland and America at the time, merely made those countries poorer.


The European Union is regarded as weak today and has asked the whole world to help it with its problems.  Yet on the face of it, it does not seem so poor.  It has, as a whole, less debt than America.  It also has huge stocks of gold.  Italy, which is regarded as the next basket case after Greece, is the world’s 6th biggest industrial economy, France, which is being made to pay more for loans, is the world’s fifth wealthiest, Germany is even more powerful.  If Germany was not set on deflating in its own economy, it could give other euro zone states the chance to grow and sort out the debts, which were incurred, in part, because of its reckless lending.  The very least that it could do is to abandon its plan to eliminate its fiscal deficit by 2015.  Otherwise it will looks as though it wants shove the jackboot in, to pay off old scores and dominate, not unify Europe.


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Is a new Germanic empire set to rise?

In his 9th October article in Britain’s Sunday Times, ‘Filthy Fritz drops us in the financial doo-doo’, Michael Lewis maintained that Wall Street had duped ‘Stupid Germans in Düsseldorf’ into buying America’s sub-prime assets.  But, he inferred, the Germans had the last laugh.

Masses of ‘stupid Germans’ bought American sub-prime mortgage assets.  Indeed 50% of all sub-prime assets were sold to Europe.  Nevertheless, one set of Germans, namely those in the Bundesbank, seems to have been totally unaware of what other Germans were doing. The Bundesbank pushed the European Central Bank to raise interest rates till the interest-rate-sensitive sub-prime mortgage market cracked in 2007, and then pushed again until Lehmans and almost the entire American banking system collapsed in 2008.  Nevertheless, the happy result for Germany was that the liberal market system was discredited and henceforth everyone looked to Germany as its economic role model.

Deflation – a political weapon today?

In 2011 everyone wants to ape successful Germany.  And it has revealed its secret – thrift!  It is setting a good example of frugality and is flexing its muscles to ensure that Southern European eurozone countries cut their deficits too.  Germany boasts proudly that countries do not dare to question its policy, lest stock market operators turn against them and they lose their precious credit ratings. Yet to a historian Germany’s policy causes acute anxiety.  Few people knew that Germany was powerful in 1930.  So when German Chancellor Heinrich Brüning decided to use deflation to rid Germany of war reparations payments and the strictures of the Treaty of Versailles, foreigners were completely deceived

In 1930 Brüning told his associates in the German Labour Federation that his chief aim as Chancellor was to liberate Germany from paying war reparations and debt.  This would require an unpopular policy of tight credit and a rollback of all wage and salary increases for the last three years.  Foolishly they agreed.  Taxes were raised, construction projects axed and salaries lowered while the beleaguered international community spent its hard-earned cash to help ‘poor’ Germany. Unfortunately, however, their effort was fruitless and merely rendered them weaker and more impotent.

In March 1931 Germany and Austria declared a customs union in contravention with the terms of the Treaty of Versailles.  France threatened to withdraw its short-term loans if Austria persisted with the union.  Austria refused.  In the subsequent banking debacle, a German bank went bankrupt and Germany was given a moratorium on the payment of its war reparations and a ‘standstill’ on its foreign loans.  Yet it has recently been discovered that Germany was the greatest exporter in the world, in 1931, with an astonishing 40% cover for every Reichsmark in circulation.  Only a year and half later Germany managed to rid itself of all the shackles of the Versailles Treaty.  Unfortunately the effort had embittered the German people.

Modern Germany’s ambitions?

The European Union has less debt than countries like Britain America and Japan.  Yet Germany has exhorted all eurozone nations to save.  Its principle ire has fallen upon the tax-evading Greeks, who have been asked to make twice the savings of any other eurozone country.  Naturally, as the crisis has dragged on, and Greece is unwilling and ever more unable to pay, attention has shifted to France, which is the most exposed to Greek debt.

France has large gold reserves and an enviable economy, but the markets are now flagging up its exposure to Italian debt, making it more expensive for France to borrow money.  We have always talked of the Franco-German leadership of the European Union but now Germany is beginning to flex its muscles.  A shadow hangs over the world economy as the fight goes on.   Yet reducing the power of France in the European Union is surely not Germany’s only objective.  It is in sight of achieving a European empire, an objective it has had since before the 1st World War.


Pan-German League founder, lawyer and future NSDAP politician, Heinrich Class, declared before the 1st World War, that Bismarck’s unification was incomplete because it failed to include all Germans.  He envisaged the German Reich being enlarged to form a Mitteleuropa.  This would include all the members of the Austrian Empire, and all others Class considered of ethnic German stock in Switzerland, Holland, Luxemburg, Belgium, Romania and Transylvania.  It was to be bound together, by a customs union, which would prepare the way for the creation of community-wide legal and political institutions.  Eventually a Nationalstaat would come into being ‘impelled by the logic of ethnic solidarity, economic pressure, and, should it prove ultimately necessary military force’.

Modern Parallels

There is no way that Germany is going to use military force today.   However, there is plenty of opportunity to use economic pressure.  If  the 1930s are any guide, Germany will continue to use deflation until it is able to fashion the shape and political and economic structure of the European Union it wants. Yet deflation is a dangerous strategy.  In the 1930s it led to a banking crash.  Other nations in what racist Class would have called the Germanic bloc are becoming increasingly critical of Germany’s strategy.   One only hopes that Europeans don’t become embittered by its effects, as the German people did by the time they voted for Hitler.

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How Stalin helped Hitler’s rise to Power

Many people believe that Germany was crushed by unfair war reparations in the Great Depression and that was why the desperate people turned to Hitler. Yet the Soviet archives reveal a different story.  They show that although the German people may have been poor, Germany itself was rich and powerful.  Moreover its great industrialists secretly spent millions helping Stalin modernise his armed forces – for political ends – between 1929 and 1933.

The German army and the Bolsheviks

The German army was stung by the restrictions to its fighting force under the terms of the Treaty of Versailles.  In 1922, after the Treaty of Rapallo, the German army established a secret army officer training camp in Russia.   By the mid-1920s they had a tank school at Kasan, a flying school near Lipetsk, an air-firing training area at Woronesch and a poison gas experimental establishment at Wolsk.  The Germans found the discipline of Soviet soldiers impressive, but the Soviets had only a few elderly tanks, ancient machine guns etc.  Naturally they wanted better equipment.

In 1928, after six months negotiations, the German armaments makers agreed to modernise the Soviet Union’s armaments and provide a heavy industrial base to support it, on draconian conditions.  But Stalin agreed to them so German help flooded in.  The production of Soviet aircraft and machine guns soared, rifle production almost doubled and the manufacture of tanks, protected by Krupp’s special steel, rose tenfold between 1929 and 1932.  Germany also provided the heavy industrial factories so that Stalin could manufacture them himself.  But why did the German armaments makers decide to help Stalin and what was their price?

The price Stalin paid for a modernised army

The armaments makers and their friends had not respected the Russian army as a fighting force in World War I and could not believe that Russia would ever pose a threat to Germany.  Horrified at the arrival of a socialist coalition government in power in the German Reichstag, in 1928, they longed for the return of the monarchy, or if the German people would not accept it, a man of the people like Italy’s Mussolini, who would maintain their power and influence.  They decided to help Stalin on two conditions; the first was that he paid for his precious armaments in hard currency and the second, crucially, that the German Communists never voted again with the Social Democrats in the Reichstag.

How the American ‘dust bowl’ was caused?

Neither demand could have been fulfilled except by a man of Stalin’s iron will.  The Soviet Union was practically bankrupt.  There was no way of paying for Germany’s goods except through selling wheat on world markets and Russia’s kulak farmers refused to surrender their wheat to Stalin in return for worthless currency.  However, Krupp had already created a giant farm in the North Caucasus to help Lenin export wheat so that he could buy German trains.  So Stalin decided to expel his Kulak farmers to the icy wastes of Siberia and to create giant farms himself.  He was successful.  While the kulaks died of cold and starvation, an avalanche of Soviet wheat hit unsuspecting already overprovided world markets in 1930 and 1931, at rock-bottom prices, causing misery and bankruptcy in America’s important farming sector.

How the Soviet Union helped Hitler come to power

Stalin had an incredible control over world communism.  He also kept his promise to ensure that the German Communists never voted with the Social Democrats in the Reichstag again.

The German Communists faithfully voted with the parties of the extreme Right, Hugenberg’s Nationalists and Hitler’s National Socialists, between 1929 and 1932, even though they fought them on the streets.  Indeed, according to the Russian historian, Aleksandre Nekrich in 1997: ‘At Moscow’s order, the German Communist party pronounced the Social Democrats ‘enemy no.1, drove a significant proportion of the workers into the Nazi’s arms … and contributed to Hitler’s triumph at the polls’ in  the 1932 elections.

The ultimate victory?

Stalin paid the Germans for their weapons.  Hitler became dictator in 1933 but the German armaments makers had underestimated Stalin.  It was he who won the Second World War with the help of Krupp’s special steel to protect his tanks.

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The Wall Street Crash of 1929, Lehman Brothers and a banking crash like 1931?

The German people always say that without the 1929 stock market crash and Great Depression they would never have voted for Hitler.  But did not the German leadership bear a large responsibility for the Great Depression?  And are there not worrying parallels today?

There is an old saying in Chile.  ‘Who is responsible, the pig or the one who fed him?’  We have had thousands of books accusing the greedy ‘pig’ in his gilded city office of causing the Lehmans crash, yet, up to date, absolutely nothing has been heard about the one ‘who fed him’.  Now, at last we have the astonishing evidence, from no less than the Bank for International Settlements, that the one ‘who fed’ the pig before the Lehmans crash in 2008 was Germany.

History is the Lens of the Future

From the viewpoint of those who have watched German outrage and condemnation of City excesses this may be astonishing but to a historian with detailed knowledge of past upsets it is less surprising.  There are so many parallels between the 1929 and 2008 crashes.

In 1928 a socialist-led government came to power in Germany, to the horror of the rich and conservative in the country.  America’s stock market was suddenly awash with cash from Germany and it seemed that the flow would never stop.  In the spring of 1929, international banker, Paul Warburg, accused foreigners of manipulating the American stock market and predicted a ruinous crash.  However, by July, with a new deal over Germany’s war reparations in sight, he became an object of derision.  The American stock market soared to dizzy heights, while his warnings were ignored.

A remarkably similar story happened before the Lehmans crash, although this time mortgage bonds were bought rather than shares.   Germans were loathe to abandon their precious D mark.  Indeed the euro’s arrival caused consternation in Germany.  While workers scrimped and saved at home, there was a mass exodus of cash from Germany.  American bankers were delighted at the money’s arrival but perplexed as to how to find a good home for it.   As many sub-prime mortgages, bundled with those of better quality, provided a richer return, the normally cautious German investors decided to major on sub-prime mortgages.   Fifty percent of all sub-prime assets were sold on to Europe and the American housing market soared.

Unfortunately, however, having fed the ‘pig’ it seems that the Germans decided that it was time for him to be slaughtered.

Gutting the Markets

The stock market bubbles before October 1929 and 2008 were both associated with the arrival of new currencies, the Gold Standard in the 1920s and recently the euro.  Rising interest rates in both instances had a drastic effect.

In April 1929 strong Germany decided to raise its interest rates by a full 1% to 7.5%, prompting instant interest rate rises across Eastern Europe. Then Germany started to buy gold.  By August, an alarmed France started to purchase gold as well.  Faced with unprecedented withdrawals of gold, Britain raised its bank rate on September 25, while German money flooded back to Europe.  Less than a month later Wall Street crashed.

There was also a political dimension in 1929.  Prominent newspaper owner and politician, Alfred Hugenberg, and the leader of the minority Nazi party, Hitler, shocked the international community by mounting a petition for a national referendum to try the German President for treason for agreeing to pay any war reparations at all, on the grounds that Germany was guiltless of starting the World War I.  By the third week of October in 1929 the petition was predicted to succeed and on the twenty-third day of October 19,226,400 shares were sold.

Bringing It Back to Wall Street

There was no political catalyst for the Lehmans crash.  However, rising interest rates had an equally disastrous effect.  When the euro came into existence interest rates were kept low.  However, from December 2005 the European Central Bank started to raise them – until eventually they started to bite.  Then Germany put up VAT by three percent in January 2007 and the unions asked for increased wages.  Afterwards German Bundesbank President Axel Weber pushed the reluctant European Central Bank to raise interest rates again, to curb German wage inflation.  Money swept back across the Atlantic Ocean and soon the U.S. and U.K. financial systems began to crack.  But Germany was not content.  It demanded that the ECB put interest rates up once more to curb ‘external inflation’.  That was disastrous.  So much money had been put into risky American sub-prime properties, whose owners had no hope of paying the higher charges.  First commodity prices collapsed, followed by Lehmans Bank, and then, very nearly, the whole American banking system.

Who’s Really to Blame for the Global Financial Collapse

Who was to blame for the foolish sub-prime investments?  So far our condemnation has been concentrated on Wall Street.  It did not have to accept money it had no good use for but the temptation was too great.  Yet German investors were also to blame.  Had they not succumbed to the initial temptation to buy risky sub-prime investments, to help poor Afro-Americans in run-down neighbourhoods, the American stock market crash would not have occurred.

After the launch of the euro, Germany not only bought American sub-prime assets but also invested heavily in all those euroland countries, which are now being asked to tighten their belts. They put $1.5 trillion into Portugal, Ireland, Greece, Spain – often described as the PIGS! – and Italy.  No wonder those countries were overjoyed.  Money poured into housing projects, marinas and ‘yes’ they decided to pay themselves a little bit more too.  The trouble is that now is pay-back time and the Germans are demanding that they adopt ever more stringent savings, even though their unemployment rates are already over 20 percent.

Many commentators believe that the euro is bound to collapse because of the differences between the rich north and the poor south.  But Germany has wanted Europe under its wing since before the First World War and it is not going to lose it now.  The question is whether more control over Europe’s finances is all that Germany wants.  So far it has not spelt out exactly what its ambitions are or how much pain it is prepared to inflict on the world economy in order to achieve them.  Yet it is exactly in that desperate environment that people turn to an anti-semitic demagogue like Hitler.

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“Will Keynes Be Buried Once and for All” by Mark Littlewood – Comments from Sara Moore, Author of “How Hitler Came To Power”

Sara Moore, Author of How Hitler Came To Power comments on:

‘Will Keynes be buried once and for all’

by Mark Littlewood Director General of the Institute of Economic Affairs
11 July 2011

Sara Moore, Author of How Hitler Came To Power on 4 August

I am a historian. I have therefore only read the Economic Consequences of the Peace and Keynes’s plea for Germany to be given a smaller war reparations bill to pay under the new Young Plan reparations agreement of 1929. However, Wikepedia tells me that Keynes’s General Theory asserts that a market economy tends naturally to restore itself to full employment after temporary shocks.
I suppose that Keynes is referring to an open market economy in his General Theory. In the Great Depression strong Germany had a manipulated economy. In 1930 Chancellor Brüning stated his intention to increase taxes and lower wages in a bid to rid Germany of war reparations and debt. As Germany was so strong all its neighbours were subjected to deflation too, which was only abandoned after reparations bills were abandoned and Hitler came to power (defrauding all Germany’s former trading partners in his rush to full employment.)
No-one seems to know about Germany’s deliberate policy of deflation in the Great Depression. This is worrying as Germany’s new aim is to balance its budget by 2015. No-one has suggested that Germany has any political motives for its present zeal for saving but as Germany has used deflation for political ends before we are justified in asking: ‘Why now?’

Michael Petek on 5 August 2011

I looked at the Wikepedia entry myself a couple of days ago and I don’t remember that comment …. Don’t be too hard on the Germans, though – thrift is as much a national characteristic as the disposition to hard work.

Anonymous on 8 August 2011

On the contrary, I feel every sympathy for the German lower middle classes, whose income has till recently been squeezed.
In the Great Depression German wages were reduced and taxes hiked while the German Reichsbank was sitting on 40% cover for every bank note in circulation.
Outsiders had no means of knowing how rich the Reichsbank’s was so Germany was able to use its citizens misery in its propaganda campaign against paying its dues.
There is no modern equivalence for such drastic deflation. However, according to data from, Germany had over 12% unemployment in January 2005 and again in April 2006. Many Germans are, therefore, still poor and have scant sympathy with over-borrowed Southern Europe.
But that does not mean that Germany as a country is poor. In today’s more open society outsiders may have more of an inkling as to whether the German Bundesbank has enough money to tide over Southern European countries, such as Greece and Portugal – and even Spain and Italy – until they get their spending under control.
However, whether it has enough money to bail out the whole of Southern Europe or not, it is still using its deluded citizens in its campaign against payments until Southern Europe meets its requirements. After all if its recalcitrance leads to a another economic crisis (as it did in 1931) the hedge funds, the ratings agencies and the bankers will take the blame!

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Has Germany a hidden agenda?

One can sympathise with both the attitude of the previously pampered Greeks and the German people in this present crisis in Europe.  No sooner have the Greeks accepted one austerity plan than they have been asked to accept another, while the poorest 20% of German people, who have never been pampered, feel outraged at putting their hands in their pockets yet again.  Yet this long drawn out crisis is now coming to an ugly head.  The battered Greeks are protesting that they never received any war reparations for the devastation the Nazis caused in World War II, while Germany is refusing to back any EU or IMF plan for aid to the country unless it is on its terms.  How come that we never realised that Germany was so strong and capable of taking control of Europe before?!                                                                       

Neither Britain’s former Prime Minister, Gordon Brown, nor indeed American President, George Bush, realised the significance of Germany’s decision in January 2007 to increase VAT in order to reduce its fiscal deficit and then to push for a rise in European interest rates to curb possible domestic wage demands.  This was because Germany was considered to be the ‘sick man of Europe’.  Although it had hefty exports and a huge industrial base, its GDP growth had been the weakest in the EU up to 2004 and its unemployment had stood at over 11% in 2005.  Surely, people reasoned, if this sober country, with its aging population, decided on measures to put its house in order its policy could not affect other nations?   

Yet it did and there are worrying historical parallels.  Germany also had a strong industrial base and large exports at the onset of the Great Depression but as it declared it was too poor to pay its war reparations so many times people came to believe it, especially when German unemployment soared.  Yet, aided by a savage programme of rationalisation, its steel industry became more efficient than America’s by 1930 while the Economist reported on ‘a further remarkable increase in the output per man-shift’ in its coal industry.  Indeed Germany’s industrial rationalisation helped it become the world’s greatest exporter in 1931, with a mountain of cash in the bank.  It continued its deflation, however, till Hitler came to power and because it was so strong it caused misery and unemployment throughout the western world.

My book accuses prominent German politician and newspaper baron, Alfred Hugenberg, of being largely responsible for the 1929 Wall Street crash because of the horror caused by his successful petition for a referendum to try the German President for treason for accepting the latest war reparations agreement and the Treaty of Versailles.  The 2008 crash, in contrast, has generally been attributed to the failures of the open-market capitalist system.  Yet Germany’s economic policy today is becoming remarkably similar to the policy it adopted in 1930.       

Germany is resolved that its budget should be almost in balance by 2015 and is already planning heavy cuts in spending to achieve its aim.  Unfortunately, however, Germany is not acting in a vacuum.  Its policy will have wide repercussions, especially on its poorer neighbours in Southern Europe.  Indeed, with countries like Greece and Spain already reeling under their own budget cuts, its timing seems remarkably ill-judged.

 One worries at Germany’s deflationary policy today because German Chancellor Brüning revealed his intention in 1930 to use deflation for political ends.  He felt that the short-term misery of the German people was acceptable in order to achieve his long term ambitions.     

We do not know whether Germany’s present deflationary policy hides a political agenda.  As in 1931, however, it looks as though it will eventually result in a banking crash, even if the Greeks get bailed out in the present crisis.

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  • How Hitler Came To Power

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  • 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