Sunday, March 1, 2015

The Germans Don’t Remember how the Allies Forgave 50% of their Debts in 1953 and Restructured the Rest

I am talking about the London Agreement on German External Debts of 1953, which is examined in the video discussion below.

After the Second World War, Germany still had a large burden of debt – owed to both external private banks and creditors and foreign governments – consisting of both the unpaid debt from the Treaty of Versailles (and subsequent renegotiations of that debt) and postwar debts incurred after 1945 from the US.

By 1953, the burden of this external debt was considered something of a crisis. In that year representatives of the various governments met, and in the London Agreement on German External Debts they eventually agreed to write off about 50% of Germany’s debts and the remaining debts were largely restructured in new, realistic long-term debt contracts.

This lesson from history puts Germany’s brutal treatment of Greece – and other Eurozone nations – into perspective. Despite idiots who want to dismiss this analogy as “demagoguery,” the analogy is real: the ordinary Greek people have now gone through a humanitarian catastrophe after years of austerity, just as the ordinary German people went through a humanitarian catastrophe in the years after 1945.

It is often alleged that Greece’s governments before 2008 were dishonest and profligate. Even if true, it hardly follows that the ordinary Greek people today must be collectively punished for this. Whatever crimes or irresponsible and immoral actions Greek governments before 2008 might have committed pale into utter insignificance compared with the unspeakable crimes of the genocidal Nazi regime that ruled Germany between 1933 and 1945 and that victimised most of Europe in those years. But still Germany got debt relief in 1953, even when some Nazi mass murderers and other war criminals who had escaped punishment were alive and well and living in Germany.

In truth, ordinary Greeks are not to blame for the alleged dishonesty and profligacy (even if true) of previous Greek governments, any more than ordinary Germans by 1953 were collectively responsive for the crimes of the Nazi government.

Finally, Noam Chomsky gives a nice perspective on the Eurozone (from an interview back in 2013) in the video below, with an interesting reference to this very issue, except that he is wrong to fall for the line that government debt is necessarily harmful in the long run. Frankly, he should read more Post Keynesian economics!


  1. The author of the above article simply highlights and derides the problems in the EZ, without giving us a solution. If there’s a simple solution, let’s hear all about it.

    Plus the author of the above article doesn’t seem to understand the PURPOSE of imposing austerity on periphery countries. Those countries are not competitive as compared to core countries, thus they need to get their costs down (in terms of Euros).

    In the case of a country with its own currency, lack of competitiveness is dealt with relatively easily: via devaluation. (Assuming devaluation works, which is not 100% guaranteed). When you’re in a common currency area it’s not so easy. One solution is INTERNAL DEVALUATION, and austerity or lack of demand in periphery countries brings that about – at a painfully slow rate, admittedly. But that’s common currencies for you. Anyone got any better suggestions?

    Another solution is fiscal union, which would involve the sort of transfers from core countries to PIGS. That’s the equivalent of assistance given by the South East of the UK to the North East, etc. That’s works where all those concerned see themselves as the same “volk”. But that just ain’t how core countries see Greece or Portugal.

    Moreover, there’s a limit to how far competitiveness disparities can grow even under fiscal union: else assistance from core to periphery becomes absurdly large.

    Yet another solution is emigration from problem countries. Ireland (and I’m fairly sure Greece as well) have used that solution at various points over the last century. But that’s scarcely better than austerity.

    1. "The author of the above article simply highlights and derides the problems in the EZ"

      Are you referring to me or the author of the article I link to?

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  3. Ralph

    'A simple solution'. Would that solution also be neat and plausible by any chance?
    I see you say two things on the blogosphere:
    1. External problem? Devalue!
    2. Internal problem? Revalue with positive money!
    Does it not strike you that these two simples may make things complex, so complex in fact that they can only be worked out through collective action. That's why this post gets to the problem. If we don't have a collective memory then collective action becomes impossible and we end up in 1930, where the sectional fight for surplus money claims wrecks the very production that money seeks to claim.

  4. Chomsky read up on post Keynsian economics? Are you joking? The man believes capitalism must be overthrown and replaced with an anarchic form of socialism in which people are not paid for working (I kid you not!). Do you subscribe to the doctrine of "No enemies to the left"? If so, Chomsky will support post-Keynsians like the rope supports the hanged man!

    1. I am well aware of Chomsky's left-wing, utopian libertarianism. I reject all libertarianism as foolish nonsense.

      But you are wrong. In his various comments over the years, Chomsky has had the good sense to admit his left libertarianism remains an unrealistic utopia. When pressed about what economic policies he supports now, he invariably supports radical Keynesian policies.

      As for the "No enemies to the left" idea, no, I totally reject that. In fact, I think Marxists and other extreme leftists are cultists as bad as the Austrians. Real life communism in the 20th century was an absolute nightmare, and that alone is sufficient to reject all forms of Marxism.

      I also regard postmodernism as a horrible perversion of the left.

    2. Leaving aside the political repression, how do you know that Communism was an economic nightmare? The figures for economic growth in the Soviet Union do not suggest this, even when adjusted for falsification and distortion.

      The poor economic performance of the Soviet Union (relative to the West) was only apparent from descriptive aspects of the life of ordinary citizens (e.g. shortages, poor qualify consumer goods, etc). If macroeconomic data don't tell the full story about Communism, they may not tell the full story about capitalist economies,

    3. "I reject all libertarianism as foolish nonsense."

      What do you suppose libertarianism is? I really would like to know.

    4. (1) I did not say it was an economic nightmare. For many peasants used to extreme poverty, no doubt they experienced improvements in their lives under the Soviet Union from the 1930s to the 1970s.

      I am also well aware some communist economies had significant real output growth:

      So, yes, some communist command economies can "succeed" in economic terms. But what they had to do to achieve this was horrific The price was too bloody high.

      (2) As for "libertarianism," I was referring to stateless versions of it: the utopian fantasy anarchist idea that you can abolish government and under Rothbardian libertarianism both the state and even criminal law.

      I do not deny some people have a "small government"/Classical liberal version of libertarianism with a night watchman state, e.g., the Austrians Mises and Hayek.

    5. I wouldn't go near Rothbard for defending anarchism [or anything for that matter]. But what do you think about David Friedman's consequentialist defense of anarchistic libertarianism? His research and work on polycentric law was of much interest to me, especially considering the scope of its application.

  5. I'm sorry to be a bit out of place here, but how would you comment this graphs from a Keynesian point if view?

    some of the explanation can be found in this article:

    thanks in advance!

    1. The graphs are showing the growth in M2 money supply as compared with the inflation rate.

      The mainstream neoclassicals interpret that relationship by means of the quantity theory of money.

      Post Keynesians reject this:

  6. You are right that most Germans have forgotten the London agreement of 1953. In a similar vein, I have the impression that many Germans believe that hyperinflation caused the rise of the Nazis, when in fact it was the deflation and austerity. The problem is that there is a huge underrepresentation of economic historians in German universities and the media. For the past decades German universities have regarded economic history as "brotlose Kunst" and instead directed their resources at more profitable mainstream microeconomics.

  7. The crucial difference is the importance of geopolitics. Germany´s debt in 1953 was forgiven out of fear that continuing to punish the West German population would push them towards the Soviet Union. Greece now does not have such leverage (although some people fear that if Greece exits the euro it would look for help from Russia or China, but apparently Germany now is not worried about this scenario, preferring to cling stubbornly to austerity due to domestic political considerations.).