A poster declares Germany's intention to honor the interest on its war
bonds, ca. 1919.
Source: Library of Congress Prints and Photographs Division
Germans complaining about how
Greeks, Italians and Spaniards aren’t paying their debts is
a recurring feature of Europe’s debt crisis.
In May, German Finance Minister
Wolfgang Schaeuble
declared in a radio interview that “We Germans show that
it’s possible to have solid fiscal policy and generate
growth at the same time. We have the lowest unemployment.
Those recipes that work for us must be applied in other
countries and not the opposite.” A month later, he
complained that
Greece’s crisis was due to “decades of
economic mismanagement.” And this week, he
said U.S.
President
Barack Obama “should, above all, deal with the
reduction of the American deficit.”
An earlier generation of investors would be shaking
their heads.
Germany in the 1920s was synonymous with
default. After suffering serious hyperinflation following
World War I, Germans received the kinds of loans and debt-
restructuring plans from the U.S. that Schaeuble and the
German parliament are furious about offering to Greece and
others today. Germans were considered the unhealthiest
borrowers in the world, though that didn’t stop American
companies such as National City Bank and Dillon, Read & Co
from lending in what historians call “the great bond boom”
of the 1920s.
German Recipes
Herbert Hoover, then the U.S. secretary of commerce,
was troubled by what seemed like reckless lending to German
municipalities. But, perhaps believing in German “recipes”
for sound fiscal policy, he gave official consent to more
than $1 billion a year in foreign, high-yield, dollar-
denominated loans from 1924 to 1928. Hoover’s office even
issued a covering letter for these risky loans, asserting
that since they didn’t affect government policy, the U.S.
government had no objection to them.
Most of these loans went to fund construction projects
throughout Germany. They ended the hyperinflation, and U.S.
savings banks quickly snatched up the high-yield bonds,
confident that thrifty Germans would repay their debts.
Repayment plans were left sketchy at best.
Meanwhile, the German government still resented the
costly reparations imposed on it for World War I. In
October 1927, Seymour Parker Gilbert, the U.S. official
charged with extracting reparations, complained to the
German government that in taking on billions of dollars in
municipal loans while still owing so much money, Germany
was “living beyond its means.” Gilbert criticized Germany’s
system of tax payouts to its states, and warned that the
loans might never be repaid.
German political parties quickly dismissed Gilbert as
ignorant and disrespectful, and then used his report to
attack one another. The burghers of 1920s Germany would be
shocked today at Schaeuble’s demand for
Italy to install a
technocratic government or for Greece to postpone its
elections.
But Gilbert was right; the Germans couldn’t repay
their loans. By late March 1928, German Finance Minister
Heinrich Koehler publicly confirmed what Gilbert had
guessed the year before....
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