West Germany narrowly avoided bankruptcy 75 years ago, a situation that bears striking similarities to current economic crises. A combination of decisive reforms and European solidarity ultimately proved to be its salvation. The episode serves as a cautionary tale about the dangers of governmental inaction and the exacerbation of crises.
“The Germans are facing bankruptcy,” declared Dutch Foreign Minister Dirk Stikker on October 22, 1950, during a ministerial conference of the Benelux states in Luxembourg. The stark warning underscored the precarious financial position of the young Federal Republic of Germany.
While the meeting’s primary focus was trade issues, a more significant question loomed: the future of West Germany. Stikker cautioned that the nation’s economic prospects were uncertain and that a hyperinflation similar to that experienced after World War I was imminent.
A hyperinflation is not currently anticipated, but Germany’s economic future remains uncertain. The events of 75 years ago offer more than just a historical footnote. They provide a valuable lesson in how government inaction and resistance to reform can worsen a crisis, and conversely, how decisive action can lead to success – alongside the crucial importance of European cooperation.
The Dollar as the Sun of the Financial Universe
The global financial system following World War II was built upon the Bretton Woods Agreement. Concluded in the summer of 1944 by representatives from 44 nations in Bretton Woods, Fresh Hampshire, it was an attempt to bring order to a devastated global economy. At the center of this new monetary order was the U.S. Dollar. It functioned as the central point around which all other currencies revolved, much like planets orbiting the sun.
The distance from the sun – or the respective exchange rate to the dollar – was fixed, automatically establishing the relationships between other currencies. The American currency, in turn, was pegged to gold – the value of one fine ounce of gold (31.1 grams) was fixed at $35. The U.S. Federal Reserve committed to buying or selling gold at this price, making the precious metal and the U.S. Currency interchangeable. This system aimed to provide stability in the post-war global economy.
For such a system to remain stable, the balance of payments among participating countries needed to be balanced – or actively balanced. This meant that if a country ran a trade deficit, leading to capital outflow, its central bank would need to repurchase its currency abroad to restore balance. Payments were made in dollars or gold – the hard currency of the system.
The Deutsche Mark was introduced into this system in June 1948, and shortly thereafter, in May 1949, the Federal Republic of Germany was founded. Although, neither the new currency nor the young nation were fully prepared for this monetary world order.
Germany faced two key problems at the time. First, it was running a trade deficit. This seems paradoxical given Germany’s later reputation as a leading export nation. However, Germany had historically often run trade deficits, and after the currency reform of 1948 and the resumption of foreign trade, it continued this pattern.
Simultaneously, and this was the second problem, Germany lacked gold or dollar reserves to offset this deficit.
By mid-1950, this became an increasingly pressing issue. An external shock compounded the problem: a rapid rise in import prices triggered by the Korean War, which began in June 1950. Similar to the impact of the Russian invasion of Ukraine in February 2022, the Korean War led to a scarcity of raw materials and a surge in their prices. Germany’s trade deficit continued to grow.
Initially, this wasn’t a major concern, as the European Payments Union (EPU) had been established in June 1950. The EPU operated within the system of Bretton Woods.
The members – the Federal Republic of Germany, Austria, Switzerland, Denmark, France, Greece, Great Britain, Italy, Iceland, Luxembourg, the Netherlands, Norway, Portugal, Sweden, and Turkey – agreed to waive the settlement of balance of payments deficits among themselves. In effect, they granted each other credit, but only up to defined limits. For the Federal Republic, this limit was $192 million.
Germany Experienced Its “Greece Crisis” in 1950
However, Germany quickly exhausted this credit line. By the end of October 1950, Germany’s deficit within the EPU had reached $289 million – meaning the country was living on borrowed time and had significantly overdrawn its account. Approximately $100 million needed to be settled, but the Bank deutscher Länder, the West German central bank and predecessor to the Bundesbank, simply lacked the funds. It was in this situation that Dutch Foreign Minister Stikker made his pronouncements about impending bankruptcy.
The situation was indeed critical, and it strikingly resembles the Greek debt crisis in the Eurozone decades later. Stikker questioned whether the Federal Republic should even belong to the monetary union.
However – and this is also a parallel to the Greek crisis – most partners did not consider Germany’s exit from the EPU to be advisable. A solution was sought and found: credit lines for Germany were increased, while the German government was urged to implement a reform program to strengthen the German export economy.
Initially, these calls for reform fell on deaf ears in Bonn. The Bank deutscher Länder drastically increased the key interest rate from 4.5% to 6.5% to build the Deutsche Mark more attractive to foreign investors, attracting capital and closing the balance of payments deficit. However, this was not well-received by Chancellor Konrad Adenauer, who internally criticized those responsible for potentially harming the economy. Nor did Economics Minister Ludwig Erhard capture any steps to address the problem.
The situation continued to deteriorate. By the end of January 1951, half of the additional credit from partner countries had already been used up, and their patience was wearing thin. “The German practice in these matters has shown no hesitation in using credits to the maximum, hoping to receive further credits from somewhere when they need them,” summarized a staff member from the British High Commissioner’s economic advisor. Wilhelm Vocke, the President of the Directorate of the Bank deutscher Länder, warned of Germany’s potential exit from the EPU.
Finally, the United States intervened, wielding one of its most powerful tools to compel the German government to act. On March 6, General John McCloy, the U.S. High Commissioner for Germany, threatened to end U.S. Support under the Marshall Plan if the government did not immediately take measures to reduce the trade deficit.
The U.S. Threat Proved Effective
This proved effective. The German government then acted – belatedly, but decisively. Measures included making imports more difficult and providing tax incentives for exports. This quickly reversed the trend. As raw material prices also began to fall in mid-March, the Federal Republic even achieved a trade surplus. This allowed it to fully repay the EPU credits by November 1951.
“A European act of solidarity, albeit not one filled with enthusiasm, had saved the Federal Republic from foreign trade bankruptcy and its domestic economic consequences,” summarizes economic historian Volker Hentschel. “That was more than the country could have hoped for.” Just a few years earlier, those same countries showing solidarity had been occupied by German troops.
A bankruptcy of the Federal Republic, a new hyperinflation, and the end of the newly introduced Deutsche Mark were thus averted. The path was then clear for the economic reconstruction, the economic miracle, and the rise of the Deutsche Mark, which eventually became the world’s second most important currency after the dollar in the 1970s.
Today, Germany is firmly embedded in a European system of solidarity through the EU and the Eurosystem. The government in Berlin has also bought itself time with massive loans, which it calls special funds. What was possible 75 years ago should also be possible today.
This article was created for the Economic Competence Center of WELT and “Business Insider Germany.”
Frank Stocker is an economics and finance correspondent in Frankfurt. He reports on investments, financial markets, economic developments and interest rate policy. He has also published books on the inflation of 1923 and on the history of the Deutsche Mark.
