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Thursday, July 8, 2010

Common Cause, Part XIII: The German Monetary Union of 1871

On July 14, 1750, Frederick the Great issued an ordinance to bring order to the monetary chaos which had prevailed in Germany since the Thirty Years War (1618-1648). This was to have a fundamental importance in the development of European monetary systems. He introduced the "Reichsthaler" to replace the Reichsspeziesthaler. The Reichsspeziesthaler was an earlier attempt at standardization. Frederick made the new Thaler, consisting of the fourteenth part of a Köln pound, current throughout the Prussian realm and sphere of influence. The silver weight was .5317 of a Troy ounce, down significantly from the .7521 of the Reichsspeziesthaler.


Part of Friederich's coinage reform was the simultaneous issue of a new gold coin. This new denomination, the "Friedrich d'Or," was nominally valued at five Reichsthalers. This was approximately the same as the gold "Pistole" issued by a number of German states, although with a slightly higher gold content (.1940 ounces to the more usual .1924). According to the ordinance, the "proportions between gold and silver" were to be strictly observed. Because of certain other provisions, however, gold and silver coin could not simply be substituted for one another. The effect was to render the fixed ratio between gold and silver meaningless. The proportion of five Reichsthalers to one Friedrich d'Or did not prevail in commerce, and the gold coin soon passed at a premium.

Within fifteen years, the government bowed to the inevitable. The king issued a rescript on July 30, 1764 that removed the legal fixed exchange rate of the gold coin. A current quotation for the Friedrich d'Or was allowed to appear on the stock exchange. Finally, twenty-three years later, on February 2, 1787, an order was issued that the Friedrich d'Or was to have no legally determined relation to silver coin, but would be allowed to float freely against the Reichsthaler. Reichsspeziesthalers continued to circulate, as did a large variety of other Thalers. The end result of Frederich's attempt at reform was to increase the prevalent monetary confusion.

The South was not nearly as confusing, although things developed along similar lines. In 1753, the southern currency convention standardized the Thaler at approximately .7515 Troy ounce of silver, and made the new "Convention Thaler" equal to two Convention Gulden (the Gulden was also known as a "Florin"). The official name of the new Thaler was "Vereinsthaler," but to use the proper term would cause endless confusion, as that was also the term used over a century later for yet another new Thaler. The Convention Gulden was equal to sixty Convention Kreuzer. As if to make certain that confusion reigned, the old Kreuzer Landmünzen continued in use. Twenty-four of the old Kreuzer equaled twenty of the new Kreuzer.

The South also took self-defeating steps to try and establish a gold standard. On February 21, 1786, the Austrian Kaiser Joseph repealed, "all prohibitions and penal provisions against premia on different kinds of money." This allowed all currency to pass at its intrinsic or trade value instead of its face value. In 1765 the most important states in the South had agreed to rate the gold Ducat at two Gulden, ten Kreuzer (Convention Münzen), but the contracting states were allowed to abate the ten Kreuzer premium (40 Pfennige) in whole or in part. Presumably this returned the Ducat to its parity with the silver Thaler. Gradually, however, silver became the only formal currency, and gold coins were viewed as "trade coins." These were essentially lumps of metal of a specific weight and fineness, valued according to current conditions with no official exchange.

The Ascendancy of Prussia

After the Napoleonic wars, the German states returned to the struggle to put things back together. During the Congress of Vienna, although the intention was to restore the status quo, Prussia gained a number of new territories. This resulted from Metternich's orchestration of a "Balance of Power," with Austria as the leader in Mitteleuropa. In view of the national bankruptcy of 1811 and its under-manned and poorly equipped military, Austria was ill-fitted for this position.

Monetary matters were still chaotic. Attempts by Prussia to achieve regularity and standardization were, with justification, looked upon by the remaining independent states as a form of imperialism and a way of seizing first economic, then political control. After 1830, Prussia attempted more reforms with the Friedrich d'Or, but ended in a few years once again with an effective silver standard.

In 1837, the South put together a monetary union that managed to create a relative degree of order. The difference between Kreuzer Landmünze, and Kreuzer Convention Münze was abolished. The Convention Thaler remained equal to two Convention Gulden, and was, after that date, minted only in Austria. After the reforms the following year in Germany, the Gulden in Austria was worth more than the Gulden in the German states, although they had both originally started out as just one more variety of Thaler. Significantly, the treaty made no mention of gold.

The northern Dresden Currency Convention of 1838, which covered all the states within the Zollverein, the Prussian-sponsored customs union that, by an extremely circuitous route, eventually became the European Union, also ignored gold. The Zollverein had started in Prussia in 1819, but by 1834 most of the important German states had joined. The Reichsthaler, previously equal to 288 Pfennige (2 x 12 x 12), was made equal to 360 Pfennige (3 x 10 x 12). This was done by increasing the number of 12 Pfennige Groschen in the Reichsthaler from 24 to 30. The Convention Thaler, while no longer minted in Germany, continued to circulate, along with most other silver coins struck since the early 18th century.

The German Gulden, hitherto worth two-thirds of a Reichsthaler, was revalued as four-sevenths of a Reichsthaler. This meant that the Gulden, formerly 192 Pfennige, was now a little over 205-3/4 Pfennige. This made the Gulden into a parallel system not completely interchangeable with the main currency. The Mariengroschen of eight Pfennige, the main division of the Gulden, was not minted after 1837.

Silver Gulden and Halbegulden (Half Gulden) were struck to the new standard by a number of the German states. Others struck large double Reichsthalers equal to 3-1/2 Gulden. The object was probably, as Austria was to do later and as the Netherlands had already done, to go decimal using the Gulden as the main unit of currency, and make the Thaler money of account. If that was the intention, the effort was doomed from the start by having a Gulden that could not be broken down evenly into Groschen or Pfennige, thus becoming obsolete and virtually unusable in channels of trade at the same time it was struck as a current coin.

Another Failure

The result of the Dresden Currency Conference was to streamline the monetary system in Germany officially while achieving exactly the opposite in practice. Obsolete silver currency from the previous century and a half continued in circulation, made even more confusing by the revaluations. Complicating matters economically was the discovery of gold in California and Australia. This completely altered the availability of gold. There was also the growing Indian demand for silver to finance British attempts at development. This dramatically reduced the amount of silver available to the rest of the world, particularly Germany, whose former preeminence as the leading producer of silver had faded as the mines in the Tyrol were depleted.

For these reasons (and others too numerous to mention), when the Currency Conference met in Vienna in November 1854, as agreed upon in the Prusso-Austrian Trade Treaty of 1853, Austria proposed that the new monetary system be based on gold. The Germans (meaning the Prussians) objected. The stated reason to avoid the gold standard was the fear of violent fluctuations because of increased production of gold and reduced availability of silver.

Attempting to dethrone Prussian political domination by economic means, Austria insisted on gold. Holding to the theory of economic cycles, the German delegates pressed their point. They assumed there would have to be a series of crises before gold achieved any permanence in value. The political situation was unfavorable to any disruption of the status quo. A change to a gold standard would, they felt, provide the tiny wedge that would destroy society, as the 1848 revolutions nearly had. No one could come to an agreement, and the conference adjourned until 1856.

Under heavy pressure in the interim, Austria acceded to Prussian demands and dropped the idea of a gold standard. This made rapid agreement possible. On January 24, 1857, the Vienna Currency Convention formally proclaimed the "maintenance of a pure silver standard." Further coinage of all existing gold currency was forbidden. To replace the old types of gold coin, two new coins, Vereins-Handels-Goldmünzen, "Treaty Trade Gold Coins," were introduced.

These were the Krone of ten grams, and the Halbekrone of five grams, which, when alloyed with copper, had a total weight of 11.1110 grams and 5.5550 grams, respectively. These coins were not to have any fixed value in terms of the standard silver currency, but were to be allowed to float freely in accordance with the laws of supply and demand. The Friedrich d'Or, Pistoles, Gold Gulden and other gold coins were given a fixed rating by the Treasury, but the state governments were required to withdraw them from circulation as the opportunity arose. This was not much of a problem, as gold did not circulate to any great extent outside of Hanover and Brunswick.

Good as Silver

All German states outside the Zollverein except Bremen adopted the silver standard. Oddly enough, Bremen did not mint any gold coins during this period, in spite of the fact that it was the only German state on the gold standard. Gold continued to be used in certain areas, particularly Hanover and Brunswick, where it was the established custom to pay in gold (and hence more gold coins were minted there than anywhere else in Germany), but silver was used in most transactions, and was the real currency. Gold tended to leave circulation, and would do so until unification and the implementation of a gold standard throughout the Second Reich. The Krone and the Halbekrone were not minted in any great quantities except in Prussia and Saxony, and were not a significant factor in the monetary system.

The silver Vereinsthaler was the basic legal tender coin of the new monetary union. It was to be minted to a uniform weight of 1/30 pound of fine silver. This works out to approximately .5360 of a Troy ounce of silver per Vereinsthaler, a little less than the Prussian Reichsthaler which weighed in at .5371 of a Troy ounce, and substantially less than the old Austrian Vereinsthaler (Convention Thaler), which Austria now ceased minting. Austria based its new decimal system on the Vereinsthaler, rating it at 1-1/2 of a revalued Florin (Gulden) of 100 Kreuzer. In spite of the preparation for such a move, Prussia did not adopt a decimal system at this time. It virtually abandoned the Gulden system, effectively isolating Austria with a national rather than international currency in spite of the common implementation of the Vereinsthaler.

To put the seal on Prussia's ascendancy, Prussia and its allies among the German states along with Italy declared war on Austria-Hungary and its allies among the German states in 1866. Depending on your source, the brief conflict is known as the "Six Weeks War," the "Seven Weeks War," the "Austro-Prussian War" (Österreichisch-preussischer Krieg) the "German War" (Deutscher Krieg), the "Unification War," the "German Civil War" (Bruderkrieg or "Brothers War"), and in Italy, the "Third Independence War."

Austria and its allies were completely unprepared and taken by surprise. Consequently, Prussia found it very easy to secure everything on its agenda. Principally this was to unify all the German states north of Austria under Prussia, first by abolishing the German Confederation that had replaced the Holy Roman Empire, and then instituting a "Small Germany," or Kleindeutschland without Austria. Ironically, approximately sixty years after the formation of "Small Germany" as the Second Reich in 1871, Adolph Hitler announced the formation of "Greater Germany" under the Third Reich, and — among other acquisitions — annexed Austria, bringing it back into the German fold (or so he claimed).

Prussia was now in the ascendant, both politically and economically. It had "won" the currency conflict, forcing a silver standard onto the rest of Central Europe. The other major power, Austria, had surrendered in its efforts to implement a gold standard, and had been isolated economically by establishing a currency substantially different from the rest of Middle Europe. Austria was also isolated politically as its former allies were drawn into the Prussian sphere of influence, and its geographic isolation was advanced by the loss of the province of Venetia, annexed by Italy. The economic system of Mitteleuropa had been sacrificed to the political exigencies of the most powerful player in the game. Prussia was now solidly placed to begin the final move in its campaign to dominate and control all of Germany.

The Second Reich

The Franco-Prussian War gave Prussia the might as well as the prestige it needed to force through final German unification on its own terms. The King of Prussia became Kaiser of all the German states, except for Austria, which still maintained its position as an empire and rightful claimant to the rule of the German states. The new establishment was called the Second Reich.

While there were numerous plans afoot in the 1870s to establish an international currency, international currencies or local sovereignty in monetary matters did not suit Bismarck, the architect of unification. A universal standard would have taken power away from Prussia, and was one of the reasons for the clever monetary isolation of Austria. Monetary control by individual states would have prevented total control by Prussia. The excess of nationalism that had grown up during Prussian expansion exacerbated the situation. There was, however, still the critical need for a common currency in the new Reich.

By controlling the supply of gold and silver through the indemnity payments it was receiving, Prussia was able to control the monetary system as well as the currency. On December 4, 1871, the initial coinage reform act of the new Reich was promulgated. The new imperial currency was to be called a "Mark," and divided into one hundred Pfennigs. The Mark was given the value of a third of the old Vereinsthaler. (Ibid., 156.) This made the new Pfennig worth 16-2/3% more than the old Pfennig, resulting in a slight gain to anyone holding small change. This gain was more than offset by heavy losses sustained in the reform of the paper currency. The old Groschen, at thirty to the Thaler, was now worth ten Pfennigs instead of twelve, a tenth of a Mark, until it could be retired. The other old denominations, to be withdrawn from circulation as fast as possible and recoined, (Ibid., 161-162.) were revalued in similar fashion.

Local and Personal Sovereignty Subverted

Since the Reich was technically a confederation of independent states, the question immediately arose as to who had the duty or right to coin money and print currency. At the time of unification, many of the separate states retained the mint right (Chester L. Krause and Clifford Mishler, "Germany," Standard Catalog of World Coins, Colin R. Bruce II, Editor, 1984 Edition.) and, in addition, twenty-one states and thirty-one banks issued paper currency. (Albert Pick, "Germany," Standard Catalog of World Paper Money, Fifth Edition, Volume One: Specialized Issues, Colin R. Bruce II and Neil Shafer, editors, Battenberg Verlag München, 1986; "Germany," Standard Catalog of World Paper Money, Fifth Edition, Volume Two: Regular Issues, Colin R. Bruce II and Neil Shafer, editors, Battenberg Verlag München, 1986.) In the absence of sound principles of central banking, many of these note issues were backed neither by loan paper representing hard industrial or agricultural assets, nor by gold or silver. (Helfferich, op. cit., 149.) Instead, as many central banks do to this day, most issues were backed simply by the issuer's promise to pay, or, what amounts to the same thing, government debt.

The new Reichsmark was defined as being one-tenth of the new imperial gold coin, which was to be made to the standard of 139-1/2 to the pound, .900 fine, or .1152 of a Troy ounce of pure gold. (Ibid., 156-157.) Until the question was settled as to who was to assume the mint right, however, nothing specific could be put into place for the actual coinage. In the end, it was decided (primarily by Prussia), that minor coins were to be general issues of the Reich, while coinage of greater than One Mark was to be the province of those states still permitted the mint right. (Krause and Mishler, loc. cit.) Specific provisions in the law, however, made it clear that the "independent" state issues were actually issues of what were, to all intents and purposes, branches of the main imperial mint in Berlin. No less an authority than Karl Helfferich stated that, "The right of coinage which had thus been reserved for the individual States loses, therefore, all real importance. It amounts in effect to nothing more than carrying out of orders issued by the Reich." (Helfferich, op. cit., 157.)

The only concession made to the individual states (and a fairly meaningless one at that), was to permit the effigy of the territorial ruler, or the crest of the Freistadt, as the case might be, on the obverse, with an appropriate inscription. The reverses of all gold and silver coins were standardized, displaying the Imperial Eagle and the inscription, "DEUTSCHES REICH." At first, an attempt was made to have the effigy of the Kaiser on all issues, no matter where minted, but Bismarck put his foot down. It was important to allow states the illusion of independence. Forcing "local" coinage to bear the image of the Kaiser was, Bismarck felt, "politically in the highest degree inadvisable." (Ibid., 157.)

Control Over Money and Credit

Issues of paper currency were an even bigger bone of contention than the coinage, though it seemed much simpler on the surface. Whoever had authority to print currency also effectively had the power to control money and credit within the Empire. At first, the only thing everyone could agree to was that territorial and state issues not denominated in terms of the Reich standard were to be retired as soon as possible and replaced with Reichskassenscheine — Imperial Treasury Notes. (Helfferich, op. cit., 163.)

Well and good, but Bismarck attempted to force through the question of changing the Prussian State Bank into a Reichsbank, a central bank for the entire empire. Bismarck signed the legislation early in 1872, but then, surprisingly, Camphausen, the Prussian Finance Minister, blocked the project at the last minute. (Ibid., p. 162.) He may have had some inkling of the dangers represented by concentrated control over money and credit. The Bundesrat (the upper house of the Reichstag) at Bismarck's direction then attempted to begin retiring the territorial currencies, but was blocked by Bavaria. The delegates of the southern kingdom insisted that the question of the bank be settled at the same time as that of the currency (Helfferich, op. cit., 163.) in order to avoid any future tricks by Prussia.

After overruling Bavaria, the Imperial Treasury undertook the issuance of replacement notes, and allocated them to the various states on the basis of population. Since a limit was placed on the total issues, this resulted in many of the smaller states, which had relied heavily on paper currency, to receive less than the face value of their outstanding issues. The allocation worked out to three Marks — one Vereinsthaler — per capita. (Ibid.)

The final move in the financial reorganization of the German Union came about on March 14, 1875, with the passage of the Bank Act. With this, the Prussian State Bank was transformed into the Reichsbank (a foregone conclusion once Bismarck had decided that was desirable), and the Reichsbank was given the power to regulate the issue and circulation of bank notes, the spheres of activity of private banks of issue, and so on. Most important, the Bank of Prussia was now given the duty of regulating and supervising the currency circulation of all Germany, having had most currency functions of the Imperial Treasury transferred to it. (Ibid., 165.)

The strategic plan was gradually to reduce the amount of paper currency in circulation and rely primarily on specie currency. This was the focus of monetary policy until 1892, when the pre-determined statutory amount of 120 million Marks in Treasury notes was reached. Banknotes were another matter, and to restrict the issue of them in such fashion would have been to cripple permanently the ability of businesses to obtain necessary credit and financing. So that Treasury notes and Banknotes would not compete, however, Banknotes could not be issued in denominations of less than 100 Marks. (Ibid., 164.)

All of these carefully worked-out reforms were not to last very long. The financial chaos of World War One brought an end to soundly structured currencies in many parts of the world, including the United States.