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.