The German Credit Wave

The Dawes Plan of 1924 stabilised the mark and made Germany respectable to lenders again. What followed was one of the strangest circuits in financial history: American investors bought German bonds; Germany paid reparations to Britain and France; Britain and France paid war debts to the United States. Each leg depended on the first.

The German borrowing was heavily short-term — bank deposits and credits that had to be renewed continually — while the money went into things that could not be sold quickly: municipal works, industrial plant, housing. As long as new lending arrived, the maturity mismatch was invisible.

It stopped arriving in 1928, when American money found a better use at home in the New York stock market, and then stopped absolutely after October 1929. By 1931 the structure was standing on nothing. The Austrian Creditanstalt failed in May; the panic moved to Germany, where the Danatbank failed in July and the government closed the banks, froze foreign deposits, and imposed exchange controls.

The contagion did not stop at the border. Britain, its reserves drained by the German freeze, abandoned the gold standard that September — an unthinkable act that turned a severe recession into the global slump. The book treats 1931, not 1929, as the true catastrophe of the interwar years: a stock market crash is survivable, but a banking collapse propagated internationally through short-term credit is what turns one country’s bust into everyone’s depression.

What it cost

Germany paid for the credit wave over the following two years, and not mainly in share prices. Output fell by roughly 40%, wages and real earnings by more than a fifth, and by 1933 a third of the workforce was out of a job. The government met the collapse by cutting spending, wages, pensions and the dole.

• 6 million Germans out of work by 1933 — a third of the workforce Doerr, Gissler, Peydró and Voth, Financial Crises and Political Radicalization, Journal of Finance, 2022
• 26 → 20 weeks of unemployment insurance after the emergency decree of 6 October 1931, which also cut state pensions by 5–15% New York Times reports of the decree, quoted in Holtfrerich, Austerity: Brüning’s and Hoover’s Fiscal Policies, 2015
• 2.6% → 37% the NSDAP share of the Reichstag vote, May 1928 to July 1932 German Bundestag, Elections in the Weimar Republic

Danatbank, the second largest of Germany’s great banks, had lent a textile firm a sum equal to 80% of its own equity. The firm hid the losses in a Dutch shell company and went bankrupt in June 1931. When the size of the hole became public the following month, retail depositors ran. The government suspended deposits and shut the banks for three weeks, Germany left the gold standard in all but name, and Danat and Dresdner Bank both failed.

What followed

Brüning resigned on 30 May 1932. The election that July made the NSDAP the largest party in the Reichstag, and Hitler was appointed Chancellor on 30 January 1933. Doerr, Gissler, Peydró and Voth put the connection on a narrow, testable footing: comparing German cities, they find that those exposed to Danatbank saw the Nazi vote rise 2.9 percentage points further between 1930 and July 1932, and that the effect was strongest where anti-Semitism already had a local history. The banking crisis is one measurable cause of what followed, not the whole of it.

Britannica on Brüning; German Bundestag election records; Doerr, Gissler, Peydró and Voth, Journal of Finance, 2022

Phases on show: displacementboomdistresspanic