The price of peace in Europe and who paid for it

By Neil Patrick

How Germany lost the war but won the peace.

I first visited Germany in the early 1970’s. I wasn’t much more than a boy, but we had family friends in Nuremburg and as they were keen to learn English and we to visit Germany, regular trips were made. I already had a keen interest in history, and I was delighted to visit the enchanting streets of the medieval city with its imposing castle and immaculate half-timbered buildings.

Scarcely 25 years earlier, like most German cities, Nuremburg had looked like this:

Nuremburg, 1945.
Photo credit: US Army

Yet within a few years, the beautiful city centre was more like a Disney movie set. It was a fairy tale sort of place with not a trace of the destruction which had been wrought upon the ideological birthplace of the Third Reich:

Nuremburg castle today.
Photo credit: AlterVista 

I was too young to wonder how such a recovery was economically accomplished. But once I began my university studies of finance and economics, that question began to nag at me. How was such a rapid and complete transformation possible?

What provoked an even stronger curiosity was that if Britain and her Allies had won the war, how come we seemed to be impoverished while Germans enjoyed such affluence? Our own bombed-out towns and cities were like Soviet concrete nightmares in comparison. Bad town planning was a totally inadequate answer. I already had a sense that this was to do with big money...

The Germans were tight-lipped. Post-war Germans had a collective amnesia. They didn’t ever want to discuss what had gone on in Germany during the critical years of 1933-45. They were content to attribute their prosperity to hard work, ingenuity and self-discipline. And I fell for that line at first.

As the years passed, I never lost my interest in this enigma. But more recently as Brexit has taken the centre stage of British and European politics, I felt it was high time to revisit the question, for it sheds useful light on the potential future for both the UK and the EU.

Today I think I have a fairly accurate picture of exactly how this economic ‘miracle’ was achieved. But I don’t really believe in miracles and this was indeed not one. Instead, the truth lies in murky deeds and events which are largely unknown or forgotten unless we look into the darker recesses of political and monetary history.

Like almost everything to do with post-war Germany, the roots are to be found in the leadership and ideas of Hitler's Third Reich. In fact Germany’s immediate post war economic plan was created under the auspices of SS chief Heinrich Himmler. In 1943, he tasked SS-Gruppenfuhrer Otto Ohlendorf to lead a panel of economic experts to plan the finances for Germany after they’d won the war. Ohlendorf was also leader of an Einsatzgruppe in Russia, found guilty at the Nuremburg trials of mass murder and hanged for his crimes.

Otto Ohlendorf.
Photo credit: Bundesarchiv
Bild 183-J08517 / CC-BY-SA 3.0

Ohlendorf’s economic planning panel included Ludwig Erhard, future Chancellor of West Germany (1963-66) and banker Karl Blessing who was to become President of the Bundesbank (1958-69).

Ohlendorf’s team recognised that Germany’s wartime economy would be unsustainable in peace time. During the war, it was propped up by massive money printing (which today would be called Quantitative Easing), the comprehensive pillaging of wealth from occupied nations and individuals alike, the engagement of slave labour and the denial of luxuries to most of the civil population of Germany.

The other key tool was the sale of Reichsmarks to conquered nations at vastly inflated prices – something which today we’d call Forex fraud. We think of Nazis today primarily as murderous zealots, but genocide was just the top of the pyramid of Nazi criminality. Theft and illegal financial transactions were just as much a part, and ones which would continue to yield enormous benefits to Germany long after the killing was stopped.

The absence of goods to buy in Germany imposed an enforced savings regime on Germans; there was little they could buy other than the basic necessities for life. In the (then expected) wake of Germany winning the war, these tools of economic exploitation and fraud could no longer be relied upon. So how could post-war Germany maintain its financial well-being in the wake of victory?

It was Erhard who came up with the radical answer. He proposed that the Reichsmark would be abolished and replaced by a new currency called the Deutsche Mark. But here’s the trick. Savers (which everyone was whether they liked it or not) would have their Reichsmarks converted to Deutsche Marks at a ratio of 15 Reichsmarks for a single Deutsche Mark. Business assets however would be converted at parity i.e. 1:1. At a stroke, the savings of German people would be wiped out, but business assets would be preserved and bolstered. It was in effect a massive wealth transfer program from the German public to Germany’s political, industrial and business elite.

The plan had a fundamental flaw however – it assumed Germany would win the war. By 1944, this was clearly not going to happen and so the Ohlendoft/Erhard plan was quietly shelved. However circumstances would lead to this plan re-emerging and being implemented sooner than anyone would guess…

Less than three weeks after the successful D-Day Allied landings in France, Franklin Roosevelt was also thinking about how to organise the German economy after the Allied victory. He set up a meeting for representatives of the forty Allied nations at the New Hampshire Washington Hotel in Bretton Woods. Here, the leading economic minds of the time would determine how to treat post-war Germany and financially restructure the world in the aftermath of the bloodshed. The UK dispatched John Maynard Keynes, probably the pre-eminent economic theorist of his day. He had been highly influential on the leading US delegate, Harry Dexter White.

But Keynes the mentor and White the student were to clash. Keynes' proposal was brimming with intellectual power. White was buoyed by the emerging US power vested in its economic and military might. Keynes advocated a globalised system which would stabilise global capitalism for decades to come. White sensed the winning hand was his however and sought to reshape the post-war world into a deal which made the US the pre-eminent global economic superpower. In what became termed ‘the New Deal’, he placed the dollar as the world’s reserve currency (there could really be no other contender) and the one to which the post-war currencies of nations in Europe would be pegged.

It was inevitable White would win. As a final blow to Keynes, when weeks later they met to discuss the softening of terms for the repayment of US war loans to Britain, White was implacable; there would be none. Distraught at this outcome, Keynes was to suffer a heart attack within days of his return to Britain and died at the age of 62. His failure was also to ensure the UK was repaying war loans to the USA until 2006.

The inescapable fact was that in the post-war world, only one nation had escaped economically more or less unscathed - the USA. By 1948, the new world order was becoming plain. The Cold War was a reality and Germany’s critical role in the NATO - Warsaw Pact balance of power was obvious. Without economic assistance, West Germany’s reliability as the bastion of the West was in question.

Erhard and his colleagues took their old plans out of the drawer. According to Handelsblatt, 25 June 2006:

'On 20 April 1948, a heavily guarded bus with opaque windows brings them to the airbase at Rothwesten near Kassel. There, after weeks of persuasion, the German experts get the representatives of the Allies to go along with their concept: on 20 June 1948, small savers lose everything, whereas owners of shares and material goods lose almost nothing…Erhard’s policy has one aim and one aim only: to support businesses in building up their capital. This he sees as the royal road to dynamic growth.'

Thus at a stroke, a Nazi economic plan for Germany was implemented three years after the end of WW2. But there was a big bonus too; the Marshall Plan was to see German debt (unlike Britain’s) written off. According to Professor Albert Ritschel in The Economist 25 June 2012:

'Here’s the core. German public debt in 1944 amounted to 379 billion Reichsmarks, roughly four times Germany’s 1938 GDP. Currency reform under the auspices of the US Army in 1948 wiped out this debt. To zero. From 1947 to 1952, the Marshall Plan bought West Germany a foreign debt holiday…that makes 465 billion Deutsche Marks of cancelled debt, still not including all deferred interest payments…Does that beat Greece? You bet.'

This then is the reality of Germany’s phoenix-like economic resurrection in the wake of losing the war and seeing its cities reduced to rubble. It is also why I visited such a wealthy and prosperous country in the 1970’s while my own was bleak and impoverished. From an economic perspective, the US restored Germany not just from the ashes of defeat, but also put in place the foundations which would see it emerge as the economic master of Europe, despite the US abandoning its financial aid to Germany in 1973, when the costs of the Vietnam War meant it was no longer affordable. America had its own home-grown problems to address by then.

From a British and US perspective, the liberation of Europe and the restoration of freedom to its people was accomplished at a very heavy price - not just the bloodshed of a generation. A debt which today’s European politicians would do well to remember I think.