The Great Depression Part 2: Debt, Crisis

11. the Great Depression Part 2: Debt, Crisis and the Rise of Hitler - Key questions: o o What lead to Germany’s financial crisis of 1931? Did the crisis contribute decisively to the rise of Hitler? Origins of international imbalances - US was the biggest creditor, Germany was the biggest debtor - Belgium, France, GB , Italy had even foreign debt balances, but their accounts dependee on Germany’s reparations - high proportion of borrowing was short term - Germany 1929: Debts owed to foreign banks plus reparations amounted to 86% of the GDP - How did this imbalance arise? - outstanding inter-governmental debts 1931 - gross capital flows to Germany dried out in the crisis - Treaty of versailles 1919: o o o o o Germany was responsible for WW1 and had to make compensation for all damage done Exact sum to be determined by Allied “Reparation commission” Placed restrictions on the size of German armed forces to make them incapable of offensive actions in the future Germany ceded around 10% of its territory Rhineland demilitarized and occupied by Allied for 15 years - London Ultimatim of May 1921: o o Fixed reparation bill (1.tranche: direct war damages, 2. Tranche: finance war depts France and GB owed to the US, 3. Tranche: Only payable is Germany was able to), roughtly 260% of Germany’s GDP in 1913 Threat to occupy the Ruhrgebiet if Germany woulld not comply - Ruhrkampf and hyper-inflation o o o o o o o o o o Taxpayers deferred subission of their returns, authorities delayed demand for arrears (Rückstände) Gap between tax receipts and government expenditures covered by printing banknotes German government virtually stopped paying cash after first tranche and also frequently reneged on deliveries in kind (Verweigerten Sachlieferungen) As a response, Belgian and French troops entered Ruhr region to collect coal German workes responend by passive resistance, which the government supported by printing money to pay their wages Hyperinflation: november 1923 Those having savings and hilding bonds lost their wealth, real wages plummeted Those in debt benefited as liabilities in Germany currently were annihilated Many voter were traumatized and disillusioned with the young Weimarer republic Afraid of losing control, the German government gave up its policy of passive resistance at the end of 1923. - Dawes Plan 1924: o Lowered annual repayment instalments and provided Germny with a foregin loan (Darlehen), the Dawes International Loan 1 Heruntergeladen von o o o o Introduced the Reichsmark, backed by gold and foreign reserves Belgium and France withdrew their troops from Ruhr Reichbank was made independent and supervised by foreign experts Agent General for Reparation Payments was to control the flow of repayments -> Plan was initially successful and Germany recovered quickly - Weakness of the Dawes Plan: o o o o o o The Plan was only a provisional settlement of the German debt question Only defined the annual repayment schedule without changing or confirming tranches fixed iin 1921 Increasingly difficult to maintain foreign supervision of Germany’s public finances Transfer protection clause allowed Germany to delay reparations if they threatened stability of currency Claims of private creditors had priority over reparations, thereby making lending to Germany even more attractive. Why additional foreign debt? • Increasing public service, avoiding tax increases to pay reparations stabilized support for Weimarer Republic • Lack of domestic credit • Some German officials saw high debt as a way to reduce reparations by threatening default • High returns for US investors Young Plan of 1930 - Tried to end looming debt crisis by improving Germany’s position in three respects: o o o Reduced yearly reparation payments Ended foreign financial control Allies would withdraw troops from the Rhineland - But the plan had 2 major disadvantages for Germany: - 1. Germany had to pay reparations until 1988: o o o o o o o This poved politically counterproductive, as it gave opponents the argument that Germans would be in debt for three generations The extreme right had been mobilizing against the plan since the first draw was released Referendum against the plan also demanded renouncement (Verzicht) of war guilt, end of reparations, making reparation agreement a criminal offence Referendum failed but for the Nazi party, the organization of the referendum was nevertheless a political success It gained profile and populatriy Communists were also against the Young Plan After heated debate, the German parliament approved the plan - 2. The plan changed the transfer protection clause: o o o Germany was obliged to pay 612 mio RM per year, no matter what. Reversed ranking of Germany’s foreign debts, with reparation payments coming first Borrowing from abroad became difficult, as banks feard that their claims would not be honoured on times of crisis 2 Heruntergeladen von o Germany now had to run a budget surplus to be able th pay reparations, which was likely to worsen the slump 1930 Elections - Grand coalition under Chancellor Müller collapsed in March 1930 over budget deficites - Increasing unemployment led to budget deficits, as the state had to support the Unemployment Insurance Fund - Coalition could not agree whether to increase contributions or cut spendings - New Chancellor: Brünung - Unemployment continued to climb, huge support of unemplyment insurance fund - Proposal of measures to save money (Austerity measures): temporary emergency tax, increase workers contribution to UID, series of spendung cuts,e.g. health insurance compensations - Austerity plan was rejected - Reichstag was dissolved and new elections took place in September 1930 - Nazi party increased vote share enormously because of campaigning agianst Young plan - on the left, the communists gained votes, too, but not that much - financial and economic repercussions: o o o o Reichsbank lost almost 20% of its gold and foreign reserves in 3 weeks after election Reichabank increased the interest reats from 4 to 5% to stem capital flight Brüning not only faced political gridlock and a widening funding gap but also a looming currency crisis Germany’s unstable political situation made it even more difficult to secure foreign loans The financial cirsis of 1931 - Downward spiral in 1931: o o o o As industrial production continued to fall and unemployment increased, fiscal situation became increasingly unsustaibable Preparation for new austerity paackages began in May 1931 Publications was to be combined with a statement indicating that German people were not willing to maka anymore sacrifices (Opfer). Brüning was under immense domestic pressure but had to avoid the impression that Germany couldn’t pay his dept. - Capital flight (Kapitalflucht) o o o o o o Germany announced that reparations payments had to be cut Run to the German currency worsened Foregin investors withdrew their funds form German banks (Reserves decreased) Banks rushed to the Reichsbank to pay to their fleeing depositors Reichsbnak further raises interest rates to 7% Hoover moratorium stopped intergovernmental dept payments incl. reparations - Banking cirsis 1931: o o Depression and scarcity (Knappheit) of foreign credits brought several European banks in trouble Bankruptcy of the Australian Credit Bank, May 1931 3 Heruntergeladen von o o o o o o o o Large German Bank, Danat, was closely related to a textile firmthat collapsed and asked for state help in Juni 1931 Danat’s repid expansion in the 20s based on foreign and short-term debt financing Danat was closed on Juy 13th and its assets and liabilities guaranteed by the government German government had to declare general Bankholidays to prevents a bank-run on July 14th, took over some of the large German banks Other central banks were not willing to support Germany with additional funds Capital introduced exchange controls on July 15th to prevent outflow of capital, thus effectively ending the gold standard German government managed to stabilize financial system but rescue required enormous amounts of public funds Further austrtity measures were introduced in October and December 1931 - International repercussion: o o o o o Because of increasing balance of payment deficits, UK ended gold-convertibility and devalued the Pound in September 1931 The fall of pound triggeredn a run on the FED, FED increased the interest rate Tightening monetary policy in delfation triggered another banik crisis and deepende US recession Gold reserves of privta investors as well as institutions accumulated in France, because a currency devalution of the Dollar was expected Hitler was the triumphant… 4 Heruntergeladen von