“Schumpeterian” risk: “all banks could do it”

by Alin Voicu

Ferguson & Roubini in The Financial Times of 8 June state that “Berlin is ignoring the lessons of the 1930s” and say that they “find it extraordinary that it should be Germany, of all countries, that is failing to learn from history…how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy.” That year, 1933 being “the year democracy died” in contrast to 1923 “the year of hyperinflation”, (see, for instance, A. Fergusson’s When Money Dies: The Nightmare of the Weimar Republic, Kimber (1975) for some details) the latter being the one upon which, in the authors’ opinion, Germany is (wrongly) “fixated” today.

But the whole idea of the euro itself is perhaps no more than an effort to avoid any future “European Civil War”[1], as Keynes termed it, through economic control. Interestingly, the crisis in Greece may be an effect of the same–a decades-old effort to drown any possibility of social unrest with a deluge of money.

 First, the “year of hyperinflation” was caused at least in part by a foreign currency issue–the Versailles imposition on Germany to pay war reparations in gold marks or foreign currency (the London ultimatum, per Article 231 of the Versailles Treaty, a.k.a., the “Guilt Clause”, authored by Davis and Dulles), not in paper marks. The amount imposed, perceived by Germany as seeking revenge rather than justice, by “the Prime Minister” as an election trump card and by “the President” as a way to avoid a quarrels with the other Allies, according to Keynes,[2] was recognized even then as far higher than the total German gold and foreign exchange reserves. Germany was thus forced to buy these at any price, as it were; and it did. Can you say “vicious inflationary circle” quickly 4,000,000,000-times while drinking a glass of beer?

And can you imagine the paradise this created for mark short-sellers–an almost sure chance that the mark would fall! This process can easily serve to justify Schumpeter’s statement (in 1911, i.e., before the First War) that although no one bank can cause this kind of a mess, “all banks can do it”:

Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.[3]

Second, the crash “two years before 1933” hit the Weimar republic by stalling US loans designed to help rebuild Germany[4] or, rather, to help keep German industry going since the war had been carried out mostly outside Germany leaving the infrastructure and most of the industrial power intact.[5] The long shadow of this dearth of credit may have grounded subsequent German political economy–hence the euro, again.

Germany encountered similar problems when it tried to rebuild its sphere of influence post-1933. Its shortage of foodstuffs and raw materials aimed in large part at rebuilding its armaments industry implied heavy imports. It needed foreign currency or credit for that which the countries at its West (a.k.a., “the Great Powers”) were reluctant or unable to provide.

Turning to what was a far less industrialized East, Germany sought to build a Lebensraum through economic dominance at first–exporting its finished goods for (a lot of) raw materials using its own credit granting and currency as much as possible, from Romanian oil to Yugoslavian copper. [6] (Policies which seem to find some resonance with Chinese political economy today around the yuan.[7]). Limited success there even led to pressuring their counter-parties to clearing trades in nature at some point.

The thrust of the euro is to secure that Germany never runs into the problem of lack of currency or trade credit again. That it controls the mechanism upon which those two instruments depend is a very lucrative bonus, of course. And they are neither the first, only or last in history to do so–indeed, at least three “great powers” of this sort vie against each other today.

This is really not rocket science–he who controls the currency makes the rules, as it were. Certainly, no method is perfect and, even more certainly, not for everyone involved–call that “win-win with exclusions.”

That Germany is apprehensive or even “ruthlessly negative” about further fiscal and political integration may not be just a ploy, in this vein, or simply a concern about moral hazard. It may be a genuine realization that what Germany intended for…Germany may be getting out of (its) hand; that the EU experiment it going off the previously contemplated reservation–and not in a good way. Not from the point of view of control necessarily, but politically–uncharted fiscal and monetary waters in modern times.

“Deeper” union is not a solution to anything, really–it is a bulldozer-compactor approach to the political differences among the countries and peoples of Europe so it is “anti-democratic”, in more than one sense, politically; and it certainly does not address the economic problems since it actually increases the “all banks can do it” probability of naughtiness thereby increasing systemic risk.


  1. “But Europe is solid with herself. France, Germany, Italy, Austria and Holland, Russia and Romania and Poland, throb together, and their structure and civilization are essentially one… If the European Civil War is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds.” J.M. Keynes, The Economic Consequences of the Peace, Ch. I, Introductory, emph. added
  2. Keynes, op. cit., Ch. V, ii
  3. “‘At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well,’” Ellen Brown (author of Web of Debt) “Time to get out the wheelbarrows? Another look at the Weimar hyperinflation”, 19 May 2009. She quotes from Stephen Zarlenga, The Lost Science of Money, pp.590-600 and “Germany’s 1923 Hyperinflation: A ‘Private’ Affair,” Barnes Review, Aug. 1999 who explored Hjalmar Schacht’s memoirs for clues on the mechanisms whereby money dies.
  4. http://en.wikipedia.org/wiki/Great_Depression
  5. http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
  6. An in-depth presentation of these issues is given in Paul Hehn’s A Low, Dishonest Decade: The Great Powers, Eastern Europe and the Economic Origins of World War II, Continuum Publishing Company, 26 September 2005.
  7. J. Hansengard and L. Wei, “H&M keen on Yuan Option“, The Wall Street Journal, 20 June 2012, http://online.wsj.com/article/SB10001424052702304765304577477783586650836.html

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