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.
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.