Printing money is not cheap.
Neither is destroying it. Here deep underground workers are unearthing piles of East German marks to be incinerated. This huge project cost an estimated €500,000.
The reunification of Germany led to the monetary union of East and West Germany. In the run-up to the monetary union, 620 million notes with a value of 17.8 billion marks were deposited for exchange. In total, 431 billion East German marks were exchanged for the West mark, 62 billion of that at a 1:1 exchange rate, the rest at the higher 2:1 ratio.
The worthless marks, employees and archives — were handed over to Staatsbank Berlin before finally landing at the Kreditanstalt für Wiederaufbau (KfW), a government-owned development bank, in 1994.
Suddenly banks were inundated with worthless currency and had to find a solution. Coins weighing 450,000 tons and nominally worth 640 million marks were simply melted down right away for their metal — mostly aluminum.
Paper money though had another life of its own. All of the notes, including the cash collected during the monetary union and the never-issued 200- and 500-mark notes, were gathered and hidden in underground tunnels near Halberstadt in rural Saxony-Anhalt. It was assumed that moisture mixed with the poor quality of the notes would lead to their decay, but that didn't happen.
After break-ins and thefts, the KfW caretakers decided to speed up the process. In early 2002, all that remained of the 3,000 tons of the cash was dug up. Eventually 298 truckloads were sent to an incinerator, mixed with household trash and burned, bring an end to part of East German history.
The twentieth century story of currency within the changing European borders of Germany is like riding a rollercoaster.
Intamin Wooden Roller Coaster at Heide Park in Germany
Paper money for Germany to go to war in 1914 . . .
The wartime German Fleet at Kiel 1914
To pay for the large costs of the ongoing First World War, Germany suspended the gold standard (the convertibility of its currency to gold) when the war broke out. Unlike France, which imposed its first income tax to pay for the war, German Emperor Wilhelm II and the Reichstag decided unanimously to fund the war entirely by borrowing, a decision criticized by financial experts such as Hjalmar Schacht as a dangerous risk for currency devaluation.
Krup armaments industry 1914
The government believed that it would be able to pay off the debt by winning the war, as it would be able to annex resource-rich industrial territory in the west and east and impose massive reparations on the defeated Allies. Thus, the exchange rate of the mark against the US dollar steadily devalued from 4.2 to 7.9 marks per dollar, a preliminary warning to the extreme postwar inflation.
The Goldmark became the Papiermark from 4 August 1914 when the link between the Goldmark and gold was abandoned, due to the outbreak of World War I. In particular, the name is used for the banknotes issued during the hyperinflation in Germany of 1922 and especially 1923.
This strategy failed as Germany lost the war, which left the new Weimar Republic saddled with massive war debts that it could not afford, a problem exacerbated by printing money without any economic resources to back it.
Reparations or revenge?
The Treaty of Versailles was the most important of the peace treaties that brought World War I to an end. The Treaty ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1919 in Versailles, exactly five years after the assassination of Archduke Franz Ferdinand, which had directly led to the war. The other Central Powers on the German side signed separate treaties. Although the armistice, signed on 11 November 1918, ended the actual fighting, it took six months of Allied negotiations at the Paris Peace Conference to conclude the peace treaty.
Although the process leading up to the signing of the treaty is known as the Versailles Conference, the negotiations took place elsewhere, and it was only the signing of the treaty that took place at Versailles.
This treaty signing ceremony occurred in the same Hall of Mirrors where the proclamation of the Deutsches Kaiserreich, officially Deutsches Reich, had taken place on the 18th January 1871, following the defeat of France in the Franco Prussian War and the unification of Germany.
German delegate Johannes Bell signing the Treaty of Versailles in the Hall of Mirrors, with various Allied delegations sitting and standing in front of him
Of the many provisions in the treaty, one of the most important and controversial required "Germany [to] accept the responsibility of Germany and her allies for causing all the loss and damage" during the war (the other members of the Central Powers signed treaties containing similar articles).
This article, Article 231, later became known as the War Guilt clause. The treaty required Germany to disarm, make ample territorial concessions, and pay reparations to certain countries that had formed the Entente powers. In 1921 the total cost of these reparations was assessed at 132 billion marks (then $31.4 billion or £6.6 billion, roughly equivalent to US$442 billion or UK£284 billion in 2020).
Present at the time the economist John Maynard Keynes, a British delegate to the Paris Peace Conference, predicted that the treaty was too harsh—a "Carthaginian peace"—and said the reparations figure was excessive and counter-productive, views that, since then, have been the subject of ongoing debate by historians and economists.
Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, The Economic Consequences of the Peace, published in 1919. This work has been described as Keynes's best book, where he was able to bring all his gifts to bear – his passion as well as his skill as an economist. In addition to economic analysis, the book contained pleas to the reader's sense of compassion:
I cannot leave this subject as though its just treatment wholly depended either on our pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, – abhorrent and detestable, even if it was possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe.Also present was striking imagery such as "year by year Germany must be kept impoverished and her children starved and crippled" along with bold predictions which were later justified by events:
If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.Keynes's followers assert that his predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923, and again by the collapse of the Weimar Republic and the outbreak of the Second World War.
Nevertheless, the conservative powers in the coalition that emerged from the British so-called 1918 coupon election were able to ensure that both Keynes himself and the Britush Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins – the judge Lord Sumner and the banker Lord Cunliffe whose nickname derived from the "astronomically" high war compensation they wanted to demand from Germany. Keynes was forced to try to exert influence mostly from behind the scenes. Other prominent figures on the Allied side, such as French Marshal Ferdinand Foch, criticized the treaty for treating Germany too leniently.
The demand in the Treaty of Versailles for reparations further accelerated the decline in the value of the mark, with 48 paper marks required to buy a US dollar by late 1919.
Afterwards, German currency was relatively stable at about 90 marks per dollar during the first half of 1921. Because the WWI Western Front had been mostly in France and Belgium, Germany came out of the war with most of its industrial infrastructure intact, leaving it in a better position to become the dominant economic force on the European continent.
However, in April 1921, the Reparations Commission announced the "London payment plan", ordering Germany to pay reparations in gold or foreign currency in annual installments of two billion gold marks plus 26% of the value of Germany's exports; despite German outcry at these demands, they were accepted the following month after an Allied ultimatum to impose economic sanctions that would force Germany to meet payments.
The first payment was made when it came due in June 1921, and marked the beginning of an increasingly rapid devaluation of the mark, which fell in value to approximately 330 marks per dollar. The total reparations demanded were 132 billion gold marks, but Germany had to pay only 50 billion marks at the time, as the reparations were required to be repaid in hard currency, not the rapidly depreciating paper mark.
From August 1921, Germany began to buy foreign currency with marks at any price, but that only increased the speed of the collapse in value of the mark, meaning more and more marks were required to buy the foreign currency that was demanded by the Reparations Commission.
10 Papiermark 6 Feb 1920
In the first half of 1922, the mark stabilized at about 320 marks per dollar. International reparations conferences were being held. The meetings produced no workable solution, and inflation erupted into hyperinflation, the mark falling to 7,400 marks per US dollar by December 1922. The cost-of-living index was 41 in June 1922 and 685 in December, a nearly 17-fold increase. By fall 1922, Germany found itself unable to make reparations payments.
5,000 Papiermark 16 September 1922
Section of Portrait of a Man with a Coin by Hans Memling
Since the mark was by now practically worthless, it was impossible for Germany to buy foreign exchange or gold using paper marks. Instead, reparations were to be paid in goods, such as coal, and in January 1923, French and Belgian troops occupied the industrial region of Germany in the Ruhr valley to ensure reparations payments.
100,000 Papiermark 1 February 1923
Portrait of Georg Giese by Hans Holbein the Younger
While workers in the Ruhr went on a general strike to protest the occupation, the German government still had to print more money to continue paying for their passive resistance, and the chronic inflation was exacerbated even further.
Mass printing of bank notes to buy foreign currencyThe strategy that Germany used was the mass printing of bank notes to buy foreign currency, which was then used to pay reparations, which greatly exacerbated the inflation of the paper mark. In late 1922, after Germany failed to pay France an installment of reparations on time, France responded by sending troops to occupy the Ruhr, Germany's main industrial region, in January 1923.
The German government's response was to order a policy of passive resistance in the Ruhr, with workers being told to do nothing which helped the invaders in any way. While this policy, in practice, amounted to a general strike to protest the occupation, the striking workers still had to be given financial support.
The government paid these workers by printing more and more banknotes, with Germany soon being swamped with paper money, bringing the inevitable result of hyperinflation.
100 Trillion Papiermark 15 February 1924
Portrait of Willibald Pirckheimer based on a painting by Albrecht Dürer
The hyperinflation crisis required prominent economists and politicians to seek a means to stabilize German currency. In August 1923, an economist, Karl Helfferich, proposed a plan to issue a new currency, the "Roggenmark" ("rye mark"), to be backed by mortgage bonds indexed to the market price of rye grain. The plan was rejected because of the greatly fluctuating price of rye in paper marks.
This was followed by a proposal by the Agriculture Minister Hans Luther that substituted gold for rye and led to the issuance of the Rentenmark ("mortgage mark"), backed by bonds indexed to the market price of gold. The gold bonds were indexed at the rate of 2790 gold marks per kilogram of gold, the same as the pre-war gold marks.
Rentenmarks were not redeemable in gold but only indexed to the gold bonds. The plan was adopted in monetary reform decrees, on October 13–15, 1923. A new bank, the Rentenbank, was set up and controlled by new German Finance Minister Hans Luther.After November 12, 1923, when Hjalmar Schacht became currency commissioner, Germany's central bank (the Reichsbank) was not allowed to discount any further government Treasury bills, which meant the corresponding issue of paper marks also ceased. The discounting of commercial trade bills was allowed and the amount of Rentenmarks expanded, but the issue was strictly controlled to conform to current commercial and government transactions. The Rentenbank refused credit to the government and to speculators who were not able to borrow Rentenmarks, because Rentenmarks were not legal tender.
On November 16, 1923, the new Rentenmark was introduced to replace the worthless paper marks issued by the Reichsbank. Twelve zeros were cut from prices, and the prices quoted in the new currency remained stable.
When the president of the Reichsbank, Rudolf Havenstein, died on November 20, 1923, Schacht was appointed to replace him. By November 30, 1923, there were 500,000,000 Rentenmarks in circulation, which increased to 1,000,000,000 by January 1, 1924 and to 1,800,000,000 Rentenmarks by July 1924. Meanwhile, the old paper Marks continued in circulation. The total paper marks increased to 1.2 sextillion (1,200,000,000,000,000,000,000) in July 1924 and continued to fall in value to a third of their conversion value in Rentenmarks.
On August 30, 1924, a monetary law permitted the exchange of a 1-trillion paper mark note to a new Reichsmark, worth the same as a Rentenmark. By 1924 one dollar was equivalent to 4.2 Rentenmark.
The Reichsmark and German re-armament . . .
After taking power in 1933, the National Socialists realized that rearming Germany would require funds that were not likely to be generated from taxes or public loans. In addition, the need to keep the rearmament effort secret led to the creation of a dummy company known as MEFO. This was the common abbreviation for MEtallurgische FOrschungsgesellschaft m.b.H. (Society for Metallurgical Research LLC).
This dummy company was set up in May 1933, just after appointment of Hjalmar Schacht as Reichsbank President in March 1933, as a front for purchases from four German armament manufacturers, Krupp, Siemens, Gutehoffnungshütte, and Rheinmetall. The four were persuaded to put up the initial share capital of Reichsmark 1 million. The German government was not openly involved in any way; on paper, MEFO was entirely a private company, in reality, the company had two directors, one appointed by the Reich Ministry of Defence and the other by the Reichsbank.
The four companies pooled together over 1 billion Reichsmark (equivalent to 4 billion 2009 euros) where the National Socialist government agreed to repay the money with five-year promissory notes known as Mefo bills. Soon afterwards, the Nazis discounted these notes (known in German as Mefo-Wechsel), basically turning them into a type of currency.
Between 1934 and 1938, Mefo bills worth a total of 12 billion Reichsmark were issued to pay for rearmament. To put that into context, Germany's national debt in 1932, the year before Hitler took power, was only 10 billion Reichsmark. By 1938 the official admitted national debt was 19 billion Reichsmark -- but the Reichsmark 12 billion in Mefo bills has to be added on top of that.
In other words, Hitler and the German Minister of Economics, Hjalmar Schacht, tripled Germany's national debt in just six years, but more than half of the increase was off the books.
When the MEFO notes fell due in 1938, the government discovered a serious cash shortage. To resolve the problem, the Nazi regime employed “highly dubious methods” where “banks were forced to buy government bonds to be used to repay these bills, and the government took money from savings accounts and insurance companies. This made the ordinary German citizen the financier of the German rearmament.” Eventually, the government had to resort to the printing press to help mitigate the cash shortage.
In 1938 Hitler had two options. Either shift the German economy to export goods to pay the bills or going to war and paying the debts off by looting profits extracted from conquered states.
Winning and losing . . .
Signing the Armistice 11 November 1918 in a railway carriage at Compiégne.
Settling a score with France . . .
In 1940, when the French government called on Germany for an Armistice during World War II, Hitler finally had the chance to enact his greatest revenge.
The Fuhrer dictated that the surrender be formalized at Compiègne, the very spot where Germans had signed the Armistice ending World War I on 11 November 1918 – just 22 years earlier.
At 5.00am on 11 November 1918, Germany, faced with imminent invasion, signed an armistice agreement with the Allies in a railway carriage outside Compiégne, France. At the 11th hour on the 11th day of the 11th month of 1918, the Great War was over.
When it came time to negotiate the Franco-German Armistice in June 1940, Hitler was hell-bent on revenge.
Already demanding the location was the very spot where Germany signed the WWI Armistice, Hitler also ordered that the signing take place in the same railway carriage in which Germany had surrendered.
The carriage, which had been housed in a French museum, was retrieved by Hitler’s engineers and taken to the forest northeast of Paris.
Arriving at the scene, it was clear to the French what Hitler was doing – his aim was to disgrace the French as much as possible and avenge Germany’s defeat.
History made to repeat itself as a tragedy and as a theatrical farce . . .
This is a slightly altered version of Karl Marx's famous observation in his essay The Eighteenth Brumaire of Louis Napoleon, written between December 1851 and March 1852, and originally published in 1852 in Die Revolution, a German monthly magazine published in New York City.
The essay discusses the French coup of 1851 in which Louis-Napoléon Bonaparte assumed dictatorial powers. It shows Marx as a social and political historian, treating actual historical events from the viewpoint of his materialist conception of history.
The title refers to the Coup of 18 Brumaire in which Napoleon Bonaparte seized power in revolutionary France (9 November 1799, or 18 Brumaire Year VIII in the French Republican Calendar), in order to contrast it with the coup of 1851.
Marx's observation that:
Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce.These two sentences echo the ideas of his friend and colleague, Friedrich Engels, sent in a letter to Marx 3 December 1851. Engels writing from Manchester says:
.... it really seems as though old Hegel, in the guise of the World Spirit, were directing history from the grave and, with the greatest conscientiousness, causing everything to be re-enacted twice over, once as grand tragedy and the second time as rotten farce, Caussidière for Danton, L. Blanc for Robespierre, Barthélemy for Saint-Just, Flocon for Carnot, and the moon-calf together with the first available dozen debt-encumbered lieutenants for the little corporal and his band of marshals. Thus the 18th Brumaire would already be upon us.
Defeat, dismemberment of the nation and reconstruction . . .
At the Yalta Conference, held in February 1945, the United States, United Kingdom, and the Soviet Union agreed on the division of Germany into occupation zones. Estimating the territory that the converging armies of the western Allies and the Soviet Union would overrun, the Yalta Conference determined the demarcation line for the respective areas of occupation.
It was also decided that a "Committee on Dismemberment of Germany" was to be set up. The purpose was to decide whether Germany was to be divided into several nations, and if so, what borders and inter-relationships the new German states were to have. Following Germany's surrender, the Allied Control Council, representing the United States, Britain, France, and the Soviet Union, assumed governmental authority in postwar Germany. Economic demilitarization however (especially the stripping of industrial equipment) was the responsibility of each zone individually.
This was clearly a move towards the de-construction of "Germania" and an echo of the political impulse to destroy the capacity of Germany to wage war again and combined in part with the reparations, similar to those that, for some critics, had proved so disastrous in the consequences following on from Treaty of Versailles of 1919.
Nevertheless the existence of the reparations account served the nationalists and "the right", in stoking a sense of victimhood and betrayal in popular discourses in Europe and North America.
In 1945 the post war occupation powers held very different ideas about future policies. The US economists and administrators ideology had been forcefully shaped by the depression and the "New Deal", whereas the Soviet Union was governed by the mediocre, a consequence of vicious dictatorship.
From Reichsmark to Deutsche Mark . . .
After the 1945 defeat of Germany in the Second World War, the Reichsmark continued to circulate in Germany, but with new banknotes (Allied Occupation Marks) printed in the US and in the Soviet Zone, as well as with coins (without swastikas).
In practice, massive inflation dating back to the latter stages of the war had rendered the Reichsmark nearly worthless. For all intents and purposes, it was supplanted by a barter economy (commonly, "cigarette currency"). The Reichsmark was replaced in June 1948 by the Deutsche Mark in the Trizone (three western occupation zones) and (in the Soviet occupation zone) later in the same year by the East German Mark (colloquially also "Ostmark", since 1968 officially "Mark der DDR") in East Germany.
The 1948 currency reform under the direction of Ludwig Erhard is considered the beginning of the West German economic recovery; however, the secret plan to introduce the Deutsche Mark in the Trizone was formulated by economist Edward A. Tenenbaum of the US military government, and was executed abruptly on 21 June 1948. Three days later, the new currency also replaced the Reichsmark in the three Western sectors of Berlin.
The Berlin of 1948 is the setting for the film Germany Year Zero by neorealist film director Roberto Rossellini. Rossellini used mainly local, non-professional actors. He filmed on locations in Berlin and intended to convey the reality in Germany the year after its near total destruction in World War II. It contains dramatic images of bombed out Berlin and of the human struggle for survival following the destruction of Nazi Germany. When explaining his ideas about realism in an interview, he said, "realism is nothing other than the artistic form of truth."
The dismantlement of Germany . . .
To the west of the eastern occupation zone, the policy began to shift in another direction.To ensure Germany could never threaten the peace again, its heavy industry was partly dismantled and its main coal-producing regions were detached as in the case of Saarland, and Silesia, or put under international control as was the Ruhr area.
This was the Morgenthau Plan stemming from the Morgenthau memorandum of 1944 proposed by United States Secretary of the Treasury Henry Morgenthau Jr. entitled Suggested Post-Surrender Program for Germany. The plan had some influence until 1947 on Allied planning for the occupation of Germany, it was not adopted. US occupation policies aimed at "industrial disarmament", but contained a number of deliberate "loopholes", limiting any action to short-term military measures and preventing large-scale destruction of mines and industrial plants, giving wide-ranging discretion to the military governor and Morgenthau's opponents at the War Department.
U turn in United States policy . . .
From 1947, US policies aimed at restoring a "stable and productive Germany" and were soon followed by the Marshall Plan.
The Marshall Plan (officially the European Recovery Program, ERP) was an American initiative passed in 1948 for foreign aid to Western Europe. The United States transferred over $12 billion in economic recovery programs to Western European economies after the end of World War II. Replacing an earlier proposal for a Morgenthau Plan, it operated for four years beginning on April 3, 1948. The goals of the United States were to rebuild war-torn regions, remove trade barriers, modernize industry, improve European prosperity, and prevent the spread of Communism. The Marshall Plan required a reduction of interstate barriers, a dropping of many regulations, and encouraged an increase in productivity, as well as the adoption of modern business procedures.
The Marshall Plan aid was divided amongst the participant states roughly on a per capita basis. A larger amount was given to the major industrial powers, as the prevailing opinion was that their resuscitation was essential for general European revival. Somewhat more aid per capita was also directed towards the Allied nations, with less for those that had been part of the Axis or remained neutral.
The largest recipient of Marshall Plan money was the United Kingdom (receiving about 26% of the total), followed by France (18%) and West Germany (11%). Some eighteen European countries received Plan benefits.
Although offered participation, the Soviet Union refused Plan benefits, and also blocked benefits to Eastern Bloc countries, such as Hungary and Poland. The United States provided similar aid programs in Asia, but they were not part of the Marshall Plan. To combat the effects of the Marshall Plan, the USSR developed its own economic plan, known as the Molotov Plan, in spite of the fact that large amounts of resources from the Eastern Bloc countries to the USSR were paid as reparations, for countries participating in the Axis Power during the war.
A "United States of Europe"
Winston Churchill's 1946 call for a "United States of Europe" was followed by the creation of the Council of Europe in 1949. This was the first pan-European organisation. More significantly in terms of the founding architecture of the European Union after the Maastricht Treaty, in the year following, on 9 May 1950, the French Foreign Minister Robert Schuman proposed a community to integrate the coal and steel industries of Europe as these being the two elements necessary to make weapons of war. An interconnected and integral European industrial base abolished the prospect of any possible future industrialised European war.
France, Italy, Belgium, Netherlands, Luxembourg, together with West Germany signed the Treaty of Paris (1951) creating the European Coal and Steel Community the following year. This took over the role of the International Authority for the Ruhr and lifted some restrictions on German industrial productivity. It gave birth to the first institutions, such as the High Authority, now the European Commission, and the Common Assembly, now the European Parliament.
The Treaties of Rome
The Intergovernmental Conference on the Common Market and Euratom focused on economic unity, leading to the Treaties of Rome being signed in 1957 which established the European Economic Community (EEC) and the European Atomic Energy Community (Euratom) among the members.
The Berlin Agreement
East-West rapprochement had led to the Four Power Agreement on Berlin, known as the Berlin Agreement, in 1971 and the Basic Treaty with West Germany in December 1972.
The Berlin Agreement and the Basic Treaty normalized relations between East Germany and West Germany. The Berlin Agreement (effective June 1972), signed by the United States, Britain, France, and the Soviet Union, protected trade and travel relations between West Berlin and West Germany and aimed at improving communications between East Berlin and West Berlin. The Soviet Union stipulated, however, that West Berlin would not be incorporated into West Germany. The Basic Treaty (effective June 1973) politically recognized two German states, and the two countries pledged to respect one another's sovereignty. Under the terms of the treaty, diplomatic missions were to be exchanged and commercial, tourist, cultural, and communications relations established. In September 1973, both countries joined the United Nations, and thus East Germany received its long-sought international recognition.
From the mid-1970s, East Germany remained poised between East and West. The 1974 amendment to the Constitution deleted all references to the "German nation" and "German unity" and designated East Germany "a socialist nation-state of workers and peasants" and "an inseparable constituent part of the socialist community of states." However, the SED leadership had little success in inculcating East Germans with a sense of ideological identification with the Soviet Union. Honecker, conceding to public opinion, devised the formula "citizenship, GDR; nationality, German." In so doing, the SED first secretary acknowledged the persisting psychological and emotional attachment of East German citizens to German traditions and culture and, by implication, to their German neighbors in West Germany.
The collapse of the GDR and the Reunification of Germany
In May 1989, local government elections were held. The public reaction was one of anger, when it was revealed that National Front candidates had won the majority of seats, with 'only' 98.5% of the vote. In other words, despite larger-than-ever numbers of voters rejecting the single candidate put forward by the Front (an exercise of defiance that carried great risk—including being sacked from a job or expelled from university), the vote had been flagrantly rigged. Increasing numbers of citizens applied for exit visas or left the country illegally.
On 28 November 1989—two weeks after the fall of the Berlin Wall—West German Chancellor Helmut Kohl announced a 10-point program calling for the two Germanys to expand their cooperation with the view toward eventual reunification.
Initially, no timetable was proposed. However, events rapidly came to a head in early 1990. First, in March, the Party of Democratic Socialism—the former Socialist Unity Party of Germany—was heavily defeated in East Germany's first free elections. A grand coalition was formed under Lothar de Maizière, leader of the East German wing of Kohl's Christian Democratic Union, on a platform of speedy reunification. Second, East Germany's economy and infrastructure underwent a swift and near-total collapse. While East Germany was long reckoned as having the most robust economy in the Soviet bloc, the removal of Communist hegemony revealed the ramshackle foundations of that system. The East German mark had been almost worthless outside East Germany for some time before the events of 1989–90, and the collapse of the East German economy further magnified the problem.
The building of the former East German central bank is now a five star hotel
Some months after the fall of the Berlin Wall, on Sunday, July 1, 1990, the East German central bank handed over its monetary policy sovereignty to West Germany's Bundesbank — more than three months before the two countries actually became one.
Suddenly the East German mark, called Mark der DDR, was out and the West German mark was officially in as the country's sole legal tender. Money in East German banks was automatically converted. But the nearly 17 million East Germans only had six days to convert their hard cash or lose it.
There were no actual exchange counters where currencies changed hands. All East German marks had to be deposited in a bank account in order to be exchanged. Cash found after July 6 was worthless. The race was on.
A tiered exchange rate allowed for a one-to-one exchange, but only for a maximum of 6,000 marks for those over 60, 4,000 marks for adults and 2,000 for kids under 14. Any amounts over that were exchanged at the reduced rate of 2:1.
Unity at any cost?
But why the rush without knowing the true state of the East German economy like its productivity or competitiveness? Professor Wilfried Fuhrmann, a monetary expert and economist at Potsdam University, thinks then Chancellor Helmut Kohl was primarily interested in quick decisions which would make going back on unification impossible. He wanted to seal the deal at nearly any cost.
The staggered exchange plan blatantly went against the Bundesbank's advice based on an economic assessment. Many called it a generous rate, others called it a massive subsidy for the East — paychecks, rents and retirements were converted 1:1.
The restrictions put on this rate were meant to find illicit money and to stop speculators and insiders from becoming millionaires overnight. Because of hasty and opaque decisions the complex 'exchange' mechanism reinforced unrealistic ideas" and led to an enormous rise in mistrust from the East German side.
The exchange rate likewise forced many companies into bankruptcy by overvaluing the East German mark and squeezed the competitiveness of East German companies, thus increasing unemployment and fueling westward migration, the consequences of which we still see today.
From its beginnings, the East German central bank had been fighting an uphill battle. The monumental upheaval at the end of the Second World War was just the beginning. The country was ruled by the four victors. Germans themselves had little say. The old Reichsmark was still the official currency, though the black market was booming. Saving was pointless, only survival mattered.
To help get the country back on track and at least create the semblances of financial stability, the Soviets set up and consolidated a series of institutions in East Germany to look after monetary policy.
After the western zones announced a currency reform in mid-1948 and created the Deutsche Mark, the Soviets did the same in their occupation zone. The end result was the Deutsche Notenbank and the introduction of East German's own separate currency. Many see this as the point of no return for the division of the country into two parts.
In 1968, the bank was rebranded as the Staatsbank der DDR. Like most central banks, the Staatsbank was responsible for issuing money and controlling the cash in circulation. But it was also subordinate to the finance ministry. So it was additionally in charge of processing accounts for the state-owned institutions and state-run enterprises. It was also a dogged pursuer of foreign currency within the country — an attempt to stave off a parallel currency or black markets.
Although the bank had always been under the thumb of the government, a 1974 law reinforced this status by making the bank a part of the ruling Council of Ministers, thereby removing any illusion of independence. German unification 16 years later didn't take politics out of finance.
Most importantly, after the monetary union the responsibility of East Germany's central bank did not fall on the West Germans. So while the Frankfurt-based Bundesbank became a knight in shining armor, the former central bank in East Berlin was left with the thankless job of picking up its own pieces.
Winners and losers
In the film Good bye, Lenin! staring Daniel Brühl, the family discovers a stash of East German marks, but the deadline to exchange them has passed and their mother's life savings is worthless
A lot of savers did not make the six-day deadline to turn in their Eastern marks. Banknotes worth 600 million marks and coins worth 960 million marks are still out there. Additionally, 4.4 million private East German bank accounts with 900 million marks and 74,000 business accounts holding 3.2 billion marks were not converted because the proper applications were not filled out, they were simply forgotten, or the owner was deceased.
The frantic and hurried monetary union not only killed the East German mark and destroyed billions in savings, it also closed the country's account books for good. At the end of the exchange period, the West Germans were able to see and understand the financial assets of their future citizens in a few figures. Yet despite the clarity on this question, many surprises were waiting just around the corner.
But for Helmut Kohl it was all about getting into the history books and not about economic reality, says Wilfried Fuhrmann. Unification was unstoppable and the West Germany mark was triumphant — and can be indefinitely exchanged for euros — while its poor cousin was at first literally left to rot. What remains of East Germany's central bank are only memories and 1.5 billion worthless marks.
Piles of East German marks counted and ready to transport in 1990 to their "final" resting place in an underground cave
The reunification was not a merger that created a third state out of the two. Rather, West Germany effectively absorbed East Germany.
"We took this video footage at the East/West German Border near Hof, West Germany two days after the Berlin Wall came down. It shows the East German (GDR) citizens streaming into West Germany in their Trabants (East German-made cars), most for the first time in their lives. The emotions of both the East Germans coming into West Germany and the West Germans welcoming them is visible in the faces and voices of the people in the video. The West German government gave each East Germany visitor 250DM in "begruessungsgelt" (welcome-money) since the East Germany currency was worthless in West Germany and otherwise they would not have been able to afford to visit. The line outside the Red Cross building is for East Germans to collect their money. The normally high-speed German autobahns were crowded with the slow-moving trabies, making for many traffic jams and very unsafe driving conditions. All-in-all it was a tremendously emotional and moving event to witness."
An Indecent Proposal
In Chapter 3 of And The Weak Suffer What They Must? by Yanis Varoufakis, An Indecent Proposal, he presents the motives, governed by self interest, for the United States to spare Germany a return to a bucolic past.
If for some reason there was a slump in the US economy the threat to global capitalism would be far greater without the existence of shock absorbers in the system.
In a global system of fixed exchange rates, shock absorbers take the form of strong regional currencies, issued by potent central banks, to act as secondary pillars in support of the system's main currency. There was need for at least one such currency in Europe and another in Asia. ( Varoufakis page 50)
Varoufakis points out that in Japan the factories were still largely intact and German industry was far more advanced than France's. So Japan, a country ruled by US armed forces, provided a perfect candidate for Asia. West Germany was the obvious equivalent for Europe in the US global plan for a currency that could function as a shock-absorbing pillar. German factories produced more than twice as much as France's, "defeated Germans, fearing a pastoral future, would breathe would breathe a sigh of relief", and the US "had written the constitution of the federal republic of Germany and even created the Bundesbank from scratch" (Varoufakis page 51).
This endgame story was the key to a continuing process that led in 1992 to the signing of the Maastricht Treaty and the the creation of the eurozone.
When the euro's time came, after Europe's pitiful attempts at fixed exchange rate regimes were abandoned, it was evident that the franc and the Deutsche Mark were not entering a romantic marriage. 'Takeover' comes closer to describing the proceedings than 'union'. Indeed, the eurozone's formation recalled both versions of German reunification: That of 1871, dominated by Prussia, and the second one in 1990, when East Germany was absorbed into West Germany.
(Varoufakis page 118)
German Empire V.1.0
German Empire V.2.0?
No comments:
Post a Comment