You’ve got to be kidding me:
OK, this is amazing, and not in a good way. Greek talks with finance ministers have broken up over this draft statement, which the Greeks have described as “absurd.” It’s certainly remarkable. On my reading, here’s the key sentence:
The Greek authorities committed to ensure appropriate primary fiscal surpluses and financing in order to guarantee debt sustainability in line with the targets agreed in the November 2012 Eurogroup statement. Moreover, any new measures should be funded, and not endanger financial stability.
Translation (if you look back at that Eurogroup statement): no give whatsoever on the primary surplus of 4.5 percent of GDP.
There was absolutely no way Tsipras and company could sign on to such a statement, which makes you wonder what the Eurogroup ministers think they’re doing.
I guess it’s possible that they’re just fools — that they don’t understand that Greece 2015 is not Ireland 2010, and that this kind of bullying won’t work.
Alternatively, and I guess more likely, they’ve decided to push Greece over the edge. Rather than give any ground, they prefer to see Greece forced into default and probably out of the euro, with the presumed economic wreckage as an object lesson to anyone else thinking of asking for relief. That is, they’re setting out to impose the economic equivalent of the “Carthaginian peace” France sought to impose on Germany after World War I.
Either way, the arrogance of the German government is absolutely stunning to behold. Though Krugman gets the historical parallel wrong—the Germans are following their own script from 144 years ago which had produced the French Indemnity.
I cannot remember where I saw the link that led me to this wisdom from Michael Pettis, but the title “Syriza and the French indemnity of 1871-73” indicates the relationship with the current Greek dilemma:
There were at least two important results of France’s military defeat. Of minor importance for the purpose of my blog entry, but interesting nonetheless for those obsessed with modernism and with France’s late 19th Century cultural history, like me, the Franco-Prussian War will always be remembered for its role in the subsequent creation and collapse of the Paris Commune. This event left its mark on the thinking of many cherished artists and intellectuals, from Manet and Rimbaud to Proudhon and Haussman.
But the other, to me, very interesting and far more relevant consequence was the French indemnity. As part of the privilege of conquest and as a condition for ending the occupation of much of northern France, Berlin demanded war reparation payments originally proposed at 1 billion gold francs but which eventually grew to an astonishing 5 billion, at least in part because of an explicit decision by Berlin to impose a high enough burden permanently to cripple any possible French economic recovery.
To give a sense of the sheer size of this payment, usually referred to in the literature as the French indemnity, this was equal to nearly 23% of France’s 1870 GDP.(2) Germany’s economy at the time, according to Angus Maddison, was only a little larger than that of France, so Germany was the beneficiary of a transfer over three years equal to around 20% of its annual GDP. This is an extraordinarily large transfer. I believe the French indemnity was the largest reparations payment in history — German reparations after WWI were in principle larger but I don’t think Germany actually paid an amount close to this size, and certainly not relative to its GDP.
Keynes decrying the reparations imposed on the Central Powers a “Carthaginian peace” does history a massive disservice; in reality the French were making the Germans drink their own elixir:
Astonishingly enough France was able to raise the money very quickly, mostly in the form of two domestic bond issues in 1871 and 1872, which were heavily over-subscribed. One of the most complete studies of the French indemnity, I think, is a booklet by Arthur Monroe published in 1919.(3) According to Monroe, the first issue of 2 billion in perpetual rentes was issued in June 1871, a mere 48 days after the treaty was signed, and was heavily oversubscribed. The second issue was even more successful:
Thirteen months after announcing the first loan the government opened subscriptions for a second, this time for three billions, again in 5 per cent rentes, but issued at 842. The response to this was astounding, for more than twelve times the amount desired was subscribed, more than half of the offers coming from foreign countries.
Monroe goes on to note that “it is no small compliment to the credit of France at this time to note that about one-third of the foreign subscriptions were from Germany,” so when we think about the net transfer to Germany, it was less than 5 billion francs. Although Monroe says that more than half the subscriptions came from outside France, and one-third of those were German, with twelve times oversubscription there is no way for me to estimate how much was actually allocated to German purchasers so I have no estimate for the amount by which the 5 billion should be adjusted.
The payments were made in the form of bills of exchange and to a lesser extent gold, silver, and bank notes, and Berlin received the full payment in 1873, two years before schedule. It was during this time that Germany went fully onto the gold standard, and obviously enough the massive indemnity made this not only possible but even easy. It also guaranteed currency credibility almost from the start, and it may jolt modern readers to know that at the time monetary credibility was not assumed to be part of the German DNA, so the additional credibility was welcome.
Huge tracts of France were under occupation from 1871 to 1873…
Areas of France occupied until the indemnity was paid
…yet France paid the indemnity two years ahead of schedule. France had suffered far worse during the fighting that concluded 45 years later; the German military having left behind Zone Rogue:
Map showing totally destroyed areas in red, areas of major damage in yellow and moderately damaged areas in green
This region also produced the bulk of France’s industrial output in the 1910s, which the Imperial German Army (Deutsches Heer—I’ll abbreviate as DH) conveniently tore apart during their withdrawal to the Hindenburg Line in March 1917. The DH’s behavior in countries it fully occupied wasn’t too honorable either:
Besides machines, raw materials and money, the occupiers were seizing food. In November and December , they ordered anyone who possessed any of five different kinds of grain, flour, potatoes, other vegetables or livestock to declare them on pain of seizure. The rest was simple. One Liege commune yielded up everything from livestock to fodder to blacksmiths’ and carpenters’ tools to fuel to clothes and shoes to butter, bacon, wine, coffee and sausages. The officer who had remarked on the war’s “horrible bad joke” said of Passchendaele in late November that “only a month ago, this country might have been rich; there were cattle and pigs in plenty.” Now, requisitions had emptied the place. “We have taken every horse, every car; all the petrol, all the railway-trucks, all the houses, coal, paraffin, and electricity, have been devoted to our exclusive use.”
So much for the vaunted “professional” Prussian officer corps—during the First World War these men led bands of marauding vandals and thieves. The consequences of the DH’s abhorrent behavior were stark:
On 16 October, Whitlock cabled Wilson that in “two weeks the civil population of Belgium, already in misery, will face starvation.” Eleven days later, his alarm made front-page headlines in the New York Times. By then, more than a million Belgians were said to be in the bread line, and the country had a three-week supply at most, less in Brussels. Namur had no flour, Flanders was running short because of having to feed the returning refugees, and famine was menacing the poorer parts of north Linburg. The head of the Belgian committee estimated that feeding his country would require eighty thousand tons of food every month, four times the earlier appraisal.
The governor-general in Belgium, DH General Moritz von Bissing occupied himself with raiding the national treasury:
Among Bissing’s first acts was to order the Belgian provincial councils, which had not met since the invasion, to approve a “war contribution” of 35 million francs a month, or 420 million a year. This was greater than Belgium’s direct-taxation revenue in 1914, 354 million francs. To fund the contributions, every month, banks would buy special bonds with paper currency the provinces must guarantee, which would flood the country with weak paper. Legal opinion had never discussed exactions this large, but though experts accepted levies, the only concept remotely similar, they usually enjoined the occupier to defray local expenses at most and consider ability to pay. Usages of War for once agreed with Westlake, saying that an occupier could not recoup the cost of war by taking private property, “even though the war was forced upon him.” Even Maximilien von Sandt, the occupation’s chief civilian official, urged Berlin to demand less, to avoid awkward questions in the Reichstag and objections based on international law. He estimated that the contribution exceeded what the occupation needed by so much that roughly one-fourth of the money would end up in the imperial treasury.
That’s right—the Emperor’s emissary believed Moritz von Bissing’s 35,000,000 francs per month extortion demand was excessive. The response of the chief military official is telling:
Nevertheless, Bissing directed the councils to ratify the contribution,, which had been raised to 480 million francs, or 40 million a month. He promised that if they did, he would ask for no more contributions, and that the Massenguter receipts would be paid promptly. Behind the carrot lurked a stick, for Lumm told the banks that if they refused to cooperate, he would confiscate their deposits. They consented to float the bonds.
Massenguter translates as “mass good,” which appears to be a reference to coal supplies—“all material and other goods which are produced or manufactured in large quantities, of which coal is the life blood.” Coal became a key commodity the Belgians and French would accept as payment for reparations postwar. Naturally, the DH quickly reneged on Lumm’s and von Bissing’s promises:
Belgium had become an occupied country and the German mark was introduced as legal tender. There was a fixed exchange rate against the Belgian franc, with 1 mark being worth 1.25 francs. In the interim, the National Bank had shipped its metal stocks, printing plates and banknotes via Antwerp to the Bank of England in London for safe-keeping. The occupying power ordered the Belgian government in Le Havre to fetch everything back to Belgium. The government refused, and the Germans then withdrew the National Bank’s right of issue. The Governor Théophile de Lantsheere was officially removed from office. Vice-Governor Leon Van der Rest took over his duties for the occupying power. The right of issue was entrusted to Société Générale, which set up an issuance department for the purpose. Although Société Générale was the issuer, its banknotes were printed on the presses belonging to the National Bank. These banknotes appeared in circulation from January 1915 and also comprised six denominations ranging from 1 to 1000 francs.
As described above, the population hoarded banknotes as well as coins. Moreover, the Royal Mint’s workshops were idle and all metal was needed for the war industry. In addition, the bank moratorium blocked deposits and the Germans had appropriated the cash stocks of many financial institutions. Finally, owing to the transport problems inherent in the war, it was difficult for banknotes to reach the provinces. That naturally led to a shortage of cash. As a result, more than 600 municipal authorities were forced to issue their own banknotes. This was known as emergency money. The commonest denominations were 1, 2 and 5 francs, or smaller than 1 franc. The primary purpose of the emergency money was therefore to remedy the shortage of small coins. The municipal authorities also used emergency money to pay their staff and to support refugees, the unemployed and the needy. This emergency money was used for military remuneration as well, and to pay the war contributions imposed by the Germans. In addition, there were organisations providing food and assistance that issued food vouchers and cash vouchers, and there were firms and factories that issued wage vouchers and shopping coupons.
Along with my colleague’s previous writing about the German assaults on Belgium in August 1914, one could begin to understand the Belgian and French anger at the German defaults on their reparations payments in the 1920s. The fact that the Rape of Belgium rapidly was dubbed a myth during the same decade is a bit startling, as the long tendrils of the criminal acts committed from 1914 to 1918 exposed Belgium to the force of the German hyperinflation:
The Société Générale issuance department was dismantled on 20 November 1918 and its banknotes were gradually exchanged for notes issued by the National Bank. In 1915 it had been agreed that the issuance department would close within three months of the end of the war. Although it was the government’s intention to phase out the emergency money as quickly as possible after the war, it was 1926 before all the emergency money had been removed from circulation. An even bigger problem was the huge quantity of German marks which were one of the causes of the post-war hyperinflation.
Though to be fair, Belgian forces participated in the event (the invasion of the Ruhr) that precipitated the hyperinflation of 1923. The Greeks, however, never did anything to be subjected to von Bissing, a healthy dose of Wehrmacht, a pinch Nazism mixed with a dash hyperinflation.
The Forgotten Crime against Greece
Raising the specter of Adolph Hitler is appropriate when the man rolled panzers up to the Acropolis:
At the outset of World War II, Greece saw a budget surplus for fiscal 1939 of 271 million drachma, but this slipped to a deficit of 790 million drachma in 1940, due mostly to trade, reduced industrial production as a result of scarce raw materials and unexpected military expenditures.
Unexpected, considering Italy launched an unprovoked attack on Greece beginning 28 October 1940. The Greeks refer to it accurately as the War of ’40 and the Italians as the War of Greece. War on Greece or One of Mussolini’s Many Blunders would be more honest.
The country’s deficits would continue to be funded by monetary advances from the Bank of Greece, which had doubled the money supply in two years.
With tax revenues down and military expenditures up nearly 10-fold, Greece’s finances were in a downward spiral. The country was occupied by Axis forces by May 1941, and Greece’s military costs were replaced by expenditures from the support of 400,000 troops, which varied between one-third and three-fifths of the country’s outlays during the occupation, which were all funded by the printing of money by the Bank of Greece. The Greek puppet government – established by the occupying forces – did not tax to cover its costs and revenues represented less than 6 percent of expenditures during the final year of occupation. This was combined with national income dropping from 67.4 billion drachma in 1939 to 20 billion in 1942, a level that was maintained until 1944.
Hyperinflation began in 1943, when expectations of future inflation caused Greeks to refuse to accept the currency and the government began paying in gold franc coins, which further encouraged the public to hold wealth in non-currency forms and decreased confidence in the drachma, reducing the elasticity of and the demand for domestic currency. When the government in exile returned to Athens, they had a limited ability to collect taxes outside of the capital and ran into substantial unemployment and refugee costs. By the time the new government’s stabilization effort went into effect, revenues comprised 0.4 percent of expenditures, with the Bank of Greece covering the rest.
The more accurate way to describe this would be “Hitler’s forces conquer neutral nation at behest of his idiot ally, seizes full control of nation’s government and treasury, and proceeds to wreck said nation’s finances.” That statement is quick, to the point, and a warning to Angela Merkel and the troika to stop doing what you are doing.
Oddly, the future of the German, not the Greek economy is at stake here in February 2015. The invasions of France, Belgium and Greece follow Otto von Bismarck’s script from 1871. Ironically, the indemnity was a shockingly stupid way for the Germans to try to impose Rome’s peace on Carthage against France:
One might at first think that France’s indemnity, at nearly 23% of GDP over three years, might have been devastating to the economy. It certainly left France with a heavy debt burden, but its immediate economic impact was not nearly as bad as might have been expected. Wikipedia’s assessment is pretty close to the consensus among historians:
It was generally assumed at the time that the indemnity would cripple France for thirty or fifty years. However the Third Republic that emerged after the war embarked on an ambitious programme of reforms, introduced banks, built schools (reducing illiteracy), improved roads, spreading railways into rural areas, encouraged industry and promoted French national identity rather than regional identities. France also reformed the army, adopting conscription.
Far more interesting to me is the impact of the indemnity on Germany. From 1871 to 1873 huge amounts of capital flowed from France to Germany. The inflow of course drove the obverse current account deficits for Germany, and Germany’s manufacturing sector struggled somewhat as an increasing share of rising domestic demand was supplied by French, British and American manufacturers. But there was a lot more to it than mild unpleasantness for the tradable goods sector. The overall impact in Germany was very negative. In fact economists have long argued that the German economy was badly affected by the indemnity payment both because of its impact on the terms of trade, which undermined German’s manufacturing industry, and its role in setting off the speculative stock market bubble of 1871-73, which among other things unleashed an unproductive investment boom and a surge in debt.
The parallels between German pitfalls in 1873 and the Eurozone today might not be apparent, but lurk right beneath the surface. More about this later.