Treaty of Versailles
Fair is foul and fouls is fair: Hover through the fog and
filthy air.
-
Macbeth
By J.M. Hamilton (7-9-2016)
Ah history…. The actors and dancers may change over time,
but the play and the song, largely, remain the same. The tide goes in,
and the tide goes out, and humans often seem uninterested in learning from past
mistakes. Only the elite, who all too often profit from the repetition of
history’s mistakes, seem interested in both learning and exploiting same.
Such is the mistake of the Treaty of Versailles (TV), which
closed out WWI, and we are rapidly approaching its centennial
anniversary. The treaty was signed June 28, 1919, and ended war between
the Central & Allied powers, or the war between Germany & friends,
versus England, France, America & friends. TV is notable because
there were, indeed, lessons learned, but it’s also notable because it stands as a monument for lessons not learned.
The Treaty’s lesson – war reparations, or the centuries old
practice to the victors goes the spoils– was finally, buried and laid to rest
(although I’m sure w/ time, some demagogue will attempt to bring back both
practices). While the lesson not learned is that any nation & its
people suffering from a heavy debt burden – whether that debt be incurred in
times of peace or war – must have a means to avail themselves to global/universal bankruptcy laws. Failure to learn this latter lesson
post-WWI, allowed for events to occur leading to WWII and the rise of Herr
Adolph Hitler; failure to learn this latter lesson, has many real time parallels to the problems the United States and Western powers are facing today.
Before we go there, a quick overview of
TV, and the Treaty’s economic and political repercussion are in order. Article
231 w/in the Treaty, otherwise known as the War Guilt clause, mandated that
Germany pay war reparations, and these reparations could be paid back in
commodities, gold, or currencies backed by gold. The figure ultimately
settled upon was 139 million gold marks (over half this figure, C Bonds, was
said to be a fiction created to keep the Allied public sated). One German
politician stated that Article 231 amounted to nothing less than the
enslavement of the German people, and no less a figure than Lord Keynes
referred to the German war reparations as a “Carthaginian peace” (also a
metaphor for enslavement). Indeed, the French, in particular, wanted the
reparations to be both punitive and economically exhausting, all the better to
keep the Germans in check. TV also held a hammer for enforcement of
Article 231, and that was occupation of Germany’s Ruhr Valley – the center of
Germany’s industrial might – by French troops in the event of default.
(There’s plenty of debate among economist, as to whether or not Germany could
have actually paid the debt – through taxation, but needless to say the Treaty
was not popular among the German people or its leadership.) The Treaty
also required Germany to disarm, and end German conscription.
Rather than raise taxes, the Weimar Republic went off the
gold standard, and turned on the printing presses, and effectively attempted to
inflate away or engage in the practice known as debt monetization. Now,
if you were a German politician in the know, a banker, or an industrialist, one
could hedge against the hyper-inflation/devaluation that ensued by holding
assets, commodities, or currencies other than the German mark. But for
the 99%, who were busy earning a living based upon marks, or who had their life
savings in German marks, hyper-inflation and the devaluation of the German currency would wipe many out.
The bottom line, the German public paid the price, not only
for fighting the war, but the subsequent currency devaluation was carried on
the backs of the public as well. And the German industrialist, who
cashed in on the war, were able to ride out the subsequent devaluation much
better than the German public, per the usual. Compounding Germany’s war
reparations problem was the fact that Germany had largely financed the war,
with the idea of making the French, English and Americans pay down Germany’s
war debt, once it won the war. As mentioned, the German worker bore the
brunt of the mark’s devaluation with lower wages and lower purchasing power of
those wages, and as mentioned entire life savings were wiped out.
(Interestingly in the emergency legislation recently passed by the U.S.
Congress, it was agreed that Puerto Rico’s minimum wage would be allowed to drop. Right out of the Robber Baron playbook).
As these things generally go, the
wealthy got wealthier – particularly with German assets being sold at fire-sale
prices – and the general German public got screwed. By 1922, it was said to have taken 3,500 German marks to purchase one U.S. dollar.
Due to the uncertainty, currency devaluation, loss of purchasing power and
diminished aggregate demand, a depression set in and unemployment was
rampant. A downward spiral ensued, and the German public lost faith in
the mainstream political parties. Instead the German public turned to
extremist on the political left and the right, communist and authoritarian
types (read Nazi Party). The economy stalled, and for want of a stable
currency, German exports and imports dried up.
America would eventually step in with both a Dawes plan and
later a Young plan… these plans gave Germany additional loans to kick start the
German economy, pay reparations with, and ultimately, extended the reparations
payments as far out as 1988. Just what any struggling country needs, more
debt stacked upon existing debt: the very definition of insanity,
default, and kicking the can down the road (Today’s Greek citizens, and many
nation’s along the Southern Periphery of Europe, would be very familiar with
this concept). The Dawes and Young plan was also characterized by foreign
oversight over Germany’s finances; again, something indebted European nations,
and Latin American nations are all too familiar with. With the debt extension,
in the mid to late 1920s, Germany was allowed breath again, and the economy
actually improved. It was not until 1929 and the Wall Street Stock Market
Crash, setting off a worldwide global depression, that the German economy
succumbed once again. In the early ‘30s, Germany defaulted on war
reparations payments, which resulted in the withdrawal of foreign investment,
panic, German bank collapse & bank runs, and economic collapse.
Germany by now was an economic basket
case, and perfectly ripe for a father figure/authoritarian type to take over.
That figure, Herr Hitler, rather than correctly blame the Prussian aristocracy,
military leadership, bankers, and industrialist who led the nation to war and
the resulting economic chaos, instead blamed the Europeans of Jewish patrimony.
As I indicated earlier in this piece, the world has since
learned, post - WWII and the Holocaust - that war reparations are not a good
thing; but the world and its leadership appears to have failed to learn that
colossal amounts of debt – be that debt in the service of financed war,
reparations, bank bailouts, or to pay for tax cuts for the wealthy – are
equally dangerous things.
That is to say, holding a bankrupt
country responsible for war debt can create as many economic and political
problems, as holding a bankrupt country
responsible for debt incurred by corrupt politicians in support of their
efforts to retain power, provide patronage, or to bailout said politician’s
banker friends.
Banks often cannot retain sovereign debt below a certain
credit grade, or sovereign debt that has been defaulted upon…. So it is often
sold to Vulture capitalist at pennies on the dollar, who utilize the U.S.government and its courts as a debt collector and to enforce payment, or to
provide a bailout. All this reaps Vulture capitalists billions and
billions of dollars, for the connected truly an amazing return.
The irony in all this is that for every loan there are two,
perhaps three counterparties, to the transaction: the bank or financial
underwriter; the government borrowing the money; and the rating agencies who
are often owned by said bank or financial institution. What we see again
and again, in these default scenarios, is that the governments (the borrower)
are almost always held to account, but the banks, the bank underwriters (the
lender), and the bank owned rating agencies almost always escape unscathed (it
certainly has played out that way, since the ’08 crash).
That’s because the banks – throughout our Western
democracies – often own the political class.
German children
playing with banknotes.
Today the lessons of Weimar Germany
surround us:
·
The world is awash in debt, much of
which will never be repaid (global debt is a tremendous drag on the world
economy);
·
The plutocracy has largely benefited
from this debt, which has financed unnecessary wars and tax cuts for the
well-to-do;
·
Debt monetization is reoccurring, as
central banks have fired up the printing presses, once again;
·
Indebted countries are seeing their
country’s finances and fiscal policy overseen by foreign powers and foreign
governments;
·
U6 or unemployment & underemployment remain exceptionally high in heavily indebted nations, particularly
among the youth, minorities and foreigners;
·
Political instability is on the rise,
as is the rise of fascist and authoritarian parties throughout Europe;
·
Bank and banksters, per the usual, are
not paying for lousy underwriting, but instead countries are being forced to
pay down debt on the backs of the middle-class & poor, via fiscal
austerity;
·
Indebted countries are being forced to take on more debt, in the service of existing
debt; and
·
Minorities
and foreigners are being scapegoated in Western Europe and America for a
problem – too much debt (to finance tax cuts for the wealthy, patronage, bank
bailouts, & war profiteers) – that was created by, and benefited, a ruling
elite.
·
Unfortunately, unlike the Weimar era,
today we have hundreds of trillions (notional value) in derivatives and swaps
products that hang over global debt, very much like the Sword of Damocles.
These financial instruments of mass destruction will need to be unwound,
if global public debt is to be written down.
The Ghosts of the Weimar Republic surround the global economy today: the Monopoly Economy, the Credit Card Economy. If
you listen carefully enough, they are whispering in our ear.
Will we avoid their fate, to be slaves to public debt that
will never be repaid? Will we avoid their fate, to be slaves to demagogues and politicians yelling for unlimited war?
Will the leaders of the world undertake a global write down
of public debt, before a calamity ensues?
P.S.
History is full of twists and turns, and it is most
interesting to note that what Germany could not accomplish militarily, via WW I
& II, it has accomplished in relatively short order – post
reunification. And that is the German conquest and hegemonic control,
economic & politically, over the E.U. Our peace loving German
brethren appear to have learned their lessons well, beware of foreign
entanglements and Kriegsschulden.
Copyright
JM Hamilton Publishing 2016
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