PART 10: Nazism and the German economic miracle
By Henry C K Liu

(Click here for previous parts)

The term "social market economy" was coined by one of German chancellor Ludwig Erhard's close associates, economist Alfred Mueller-Armack, who served as secretary of state at the Economics Ministry in Bonn from 1958-63. Mueller-Armack defined social market economy as combining market freedom with social equity, with a vigilant regulatory regime to create an equitable framework for free market processes. The success of the social market economy made the Federal Republic of Germany the dominant component in the European Union. Focusing on the social aspect, Erhard himself shied away from praising free markets. He felt that social rules of the market-economy game must be adhered to as a precondition in order to prevent unbridled pursuit of profit from gaining the upper hand.

Erhard's concept of a socially responsive regulated market economy was based on a fusion of the Bismarck legacy of social welfare and US New Deal ideology of demand management through full employment, price control, state subsidies, anti-trust regulations, state control of monetary stability, etc. It was aided by the infusion of foreign capital through the Marshall Plan. It proved to be effective for rapid and strong recovery of the West German economy via guaranteed access to the huge US market during the Cold War, culminating in the postwar economic miracle (Wirtschaftswunder).

Yet Erhard's program bore a close resemblance to the early economic strategy of the Third Reich. The main difference was that while the Third Reich's program was one of economic nationalism, the Erhard program was subservient to US geopolitical interests in the context of the Cold War. By relying on US capital and US markets, chancellors Konrad Adenauer and Erhard accepted the delay of German independence from US domination for more than half a century. In contrast, Nazi economic policy aimed at the reconstruction of the German economy without the need for foreign capital, as a program for total and immediate national independence.

Hitler's economic miracle
The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began. In fact, German economic recovery preceded and later enabled German rearmament, in contrast to the US economy, where constitutional roadblocks placed by the US Supreme Court on the New Deal delayed economic recovery until US entry to World War II put the US market economy on a war footing. While this observation is not an endorsement for Nazi philosophy, the effectiveness of German economic policy in this period, some of which had been started during the last phase of the Weimar Republic, is undeniable.

There were major differences between the German situation in 1933 and that in 1945. Not having been a battlefield in World War I, Germany in 1933 was not physically in ruins, as it was in 1945. What lay in ruins was its political and economic institutions. But in 1933, Germany not only did not have the benefit of the Marshall Plan, it was saddled with ruinous war reparations and an inoperative credit rating. What Germany had in 1933 was full sovereignty through which the Third Reich was able to adopt policies of economic nationalism to full effectiveness. In 1945, Germany was deprived of sovereign power and national policies had to be adjusted to comply with US and Soviet geopolitical intentions. Economically, the dependence on foreign investments and credit forced West Germany into an export economy at the mercy of its main market: the United States.

After two and a half decades of economic reform toward neo-liberal market economy, China is still unable to accomplish in economic reconstruction what Nazi Germany managed in four years after coming to power, ie, full employment with a vibrant economy financed with sovereign credit without the need to export, which would challenge that of Britain, the then superpower. This is because China made the mistake of relying on foreign investment instead of using its own sovereign credit. The penalty for China is that it has to export the resultant wealth to pay for the foreign capital it did not need in the first place. The result after more than two decades is that while China has become a creditor to the US to the tune of nearing China's own gross domestic product (GDP), it continues to have to beg the US for investment capital.

The period between World Wars I and II, like no other period in modern European economic history, saw the success of centrally planned economies in Germany and the Soviet Union, two major states. The United States as the dominant victor of World War II was determined to perpetuate its hegemony by suppressing national planning everywhere to prevent the emergence of economic nationalism and socialism. It promoted global market capitalism and neo-liberal free trade to keep all other economies subservient to the US economy. It is the economic basis of the Pax Americana.

Stalin's New Economic Policy
In the Soviet Union, Josef Stalin's planned economy had followed the New Economic Policy (NEP) of 1921-28. NEP was in essence a mixed market economy; the main part of the market was in state possession (banks, industries, foreign trade, etc), while the peripheral part was owned by collective or private entrepreneurs. NEP, while successful, did not give the Soviet economy sufficient growth in the capital-goods sectors (ie coal, steel and electricity, transportation, heavy industry, etc), nor did it provide adequate food for the urban population even as the middle peasantry managed to feed itself. To overcome such structural obstacles and to combat general economic backwardness inherited from centuries of Czarist rule, Stalin introduced central planning as a strategy of national survival.

Starting from 1928, the Soviet economy was put under a system of planning whereby all modes of production were socialized and foreign trade was de-emphasized in favor of an autarkic system of domestic demand and supply. The irony was that Soviet central planning adopted much of its effective techniques from successful US experience. It was a system of planning focused solely on unit end-results while externalizing social costs. The key distinction was that the Soviets rejected and bypassed the corporate structure and replaced shareholders with state ownership. Stalin brought about "revolution from above". Its main features were: strengthening of political dictatorship in the name of the proletariat (equivalent to enhancing management authority in the US in the name of shareholders), collectivizing kulak peasants (equivalent to agri-business development in the US), emergency measure authority (equivalent to government bailouts and regulations in the US), introduction of a five-year plan structure (adopted from US corporate strategic planning) and rapid expansion of urban labor force (equivalent to urbanization in the US), and tight state control over agriculture (equivalent to farm subsidy programs in the US), heavy industry (equivalent to defense contracts in the US) and finance (equivalent to central banking in the US). Between 1934 and 1936 the Soviet economy achieved a spectacular economic growth rate that continued despite political purges of Trotskyites between 1936 and 1938. Economic growth was unfortunately interrupted by war in 1941. German invasion of the Union of Soviet Socialist Republics was not independent of apprehension of continued Soviet economic success.

Propaganda works. It worked in the USSR, in Nazi Germany, in imperial Japan and in the capitalist US, each to instill in the general public an acceptance of its system as being the suitable one if not the best, despite visible shortcomings. It helped achieve optimal effectiveness and stability in the overall economy in all these countries.

Nazi Germany provided another example of successful inter-war economic planning. One of the main differences between the Nazi and the Soviet economic systems was that the Nazis' was a mixed economy with strict state control while the Soviets' was a state-owned economy. Furthermore, being heavily influenced by the ideas of Walter Rathenau (1867-1922), German economic planners did not seek to build anew with revolutionary zeal as the Russians did, but rather to reform, molding the existing form of decentralized capitalism into a more effective centralized system with massive combines to support national aims.

The Rathenau factor
Rathenau, German industrialist, social theorist, and statesman, was the son of Emil Rathenau (1838-1915), founder of the gigantic German public utilities company Allgemeine Elektrizitaetsgesellschaft (AEG). He directed the distribution of raw materials in World War I and became minister of reconstruction (1921) and later foreign minister (1922) of the Weimar Republic. He represented Germany at the Cannes and Genoa reparations conferences and negotiated the Treaty of Rapallo in which Germany accorded the USSR de jure recognition, the first such recognition extended to the new Soviet government. The two signatories mutually canceled all prewar and war debts and renounced war claims. Particularly advantageous to Germany was the inclusion of a most-favored-nation clause and of extensive free-trade agreements. The treaty enabled the German army, through secret agreements, to produce and perfect in the USSR weapons forbidden by the Treaty of Versailles. A Jew, Rathenau was assassinated in 1922 by anti-Semitic nationalist fanatics who opposed his attempts to fulfill war-reparation obligations to the Western victors. A strong nationalist who played an important role in Germany's war efforts in World War I, Rathenau was also a strong proponent of postwar international cooperation and his diplomatic initiatives played a key role in breaking Germany's postwar diplomatic isolation.

In his writings, Rathenau criticized free-market capitalism and argued that technological change and industrialization were pushing civilization toward a stage of high mechanization, in which the human soul would be under threat. In an attempt to find an alternative to laissez-faire capitalism that did not involve state socialism and Marxism, Rathenau proposed a decentralized, democratic social order, in which the workers would have more control over production and the state would exert more control over the economy. His translated works include In Days to Come (1921) and The New Society (1921). Despite his great contribution to the German economy, Rathenau epitomized the living target of Adolf Hitler's accusation of internationalist Jewish treachery that betrayed the German nation. Hitler's rejection of the loyal nationalist support of the German Jews played an undeniable role in his own defeat. Jewish contribution to the flowering of German economy, culture and civilization had been the strongest in any European nation. Nazi persecution of the Jews was a strategic error more fundamental than the Nazi invasion of the USSR. The emigration of German Jews to the West, particularly to the US, played a critical role in the defeat of Germany in World War II. It is a lesson that the Arab nation in general, and Palestinians in particular, have yet to learn.

The economic power of full employment
From the very outset of his rule, Hitler, whose main short-term goal was the economic revival of Germany with the help of German nationalist bankers and industrialists, won popular support of the nation. Hitler adopted an aggressive full-employment campaign. Between January 1933 and July 1935 the number of employed Germans rose by a half, from 11.7 million to 16.9 million. More than 5 million new jobs paying living wages were created. Unemployment was banished from the German economy and the entire nation was productively engaged in reconstruction. Inflation was brought under control by wage freeze and price control. Besides this, taking into account the lessons learned during 1914-18, Hitler aimed at creating an economy that would be independent from foreign capital and supply, and be well protected from another blockade and economic war. For Germans, all of the above was proof that Hitler was the one who had not only brought Germany out of economic depression but would take it directly to prosperity with new pride. German popular trust in the Fuehrer rose dramatically.

In September 1936, British economist John Maynard Keynes, whose ideas had been credited as behind US president Franklin Roosevelt's New Deal, prepared a preface for the German translation of his book, The General Theory of Employment, Interest and Money. Addressing a readership of German economists, Keynes wrote: "The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state, than ... under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that [justify] the fact that I call my theory a general theory. Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced." Keynes clearly understood that the greater the degree of state control over any economy, the easier it would be for the government to manage the levers of monetary and fiscal policy to manipulate macroeconomic aggregates of total output, total employment, and the general price and wage levels for purposes of moving the overall economy into directions more to the economic-policy analyst's liking.

The radical Spartacists in Germany regrouped themselves as the Communist Party in 1920. They continued their opposition to the liberal government of the Weimar Republic. From 1923-29, the Communists always obtained about 10% of the seats in the Reichstag. Unlike elitist Italian Fascism, Nazism had a high regard for the German peasant. Unlike Fascist Italy, Nazi Germany, while imposing sweeping government control over all aspects of the economy, was not a corporate state.

In four short years, Hitler's Germany was able to turn a Germany ravaged by defeat in war and left in a state national malaise by the liberal policies of the Weimar Republic, with a bankrupt economy weighted down by heavy foreign war debt and the total unavailability of new foreign capital, into the strongest economy and military power in Europe. How did Germany do it? The centerpiece was Germany's Work Creation Program of 1933-36, which preceded its rearmament program. Neo-liberal economists everywhere seven decades later have yet to acknowledge that employment is all that counts and living wages are the key to national prosperity. Any economic policy that does not lead to full employment is self-deceivingly counterproductive, and any policy that permits international wage arbitrage is treasonous. German economic policies between 1930 and 1932 were brutally deflationary, which showed total indifference to high unemployment, and in 1933 Hitler was elected chancellor out of the socio-economic chaos.

The financing of Nazi economic-recovery programs drew upon sovereign credit creation techniques already experimented prior to Hitler's appointment as chancellor. What changed after 1933 was the government's willingness to create massive short-term sovereign credit and the its firm commitment to retire in full the debt created by that credit. Short-term sovereign credit was important to change the general climate of distrust on government credit. The quick rollover of short-term government notes created popular trust within months in German sovereign credit domestically.

Hitler told German industrialists in May 1933 that economic recovery required action by both the state and the private sector. The government's role was limited to encouraging private-sector investment, mainly through tax incentives. He expressed willingness to provide substantial public funding only for highway projects, not for industry. Investment was unlikely if consumers had no money to spend or were afraid because of job insecurity to spend money to buy products produced, and Hitler understood that workers needed decent income to become healthy consumers. Thus full employment was the kick-start point of the economic cycle. To combat traditional German fear of the social consequences of appearing better off than their neighbors, Nazi propaganda would psychologically stimulate the economy by developing a lust for life among consumers.

Hitler stressed on May 31, 1933, that the Reich budget must be balanced. A balanced budget meant reducing expenditures on social programs, because Hitler intended to reduce business taxes to promote needed private investment. To avoid reducing social programs, a large work program without deficit spending had to be financed outside of the Reich budget. Hitler resorted to "pre-financing" (Vorfinanzierung) by means of "work-creation bills" (Arbeitsbeschaffungswechseln), a classic response of using monetary measures to deal with a fiscal dilemma.

Under the scheme of "pre-financing" with work-creation bills, the Reich Finance Ministry distributed these WCB (work-creation bills (Arbeitsbeschaffungswechseln))s (three months, renewable up to five years) to participating credit institutions and public agencies. Contractors and suppliers who required cash to participate in work-creation projects drew bills against the agency ordering the work or the appropriate credit institutions. These credit institutions then accepted (assumed liability for payment of) the bills, which, now treated as commercial paper, could rediscount the bills at the Reichsbank (central bank). The entire process of drawing, accepting and discounting WCBs provided the cash necessary to pay the contractors and suppliers. The experience of successful rollover every three months quickly established credit worthiness. The Reich Treasury undertook to redeem these bills, one-fifth of the total every year, between 1934 and 1938, as the economy and tax receipts recovered. As security for the bills, the Reich Treasury deposited with the credit institutions a corresponding amount of tax vouchers (Steuergutscheine) or other securities. As the Treasury redeemed WCB(work-creation bills (Arbeitsbeschaffungswechseln))s, the tax vouchers were to be returned to the Treasury. Hitler increased the money supply in the German economy by creating special money for employment.

In the US Banking Panic of 1907, J P Morgan (1837-1913) did in essence the same thing. He strong-armed US banks to agree to settle accounts among themselves with clearinghouse certificates he issued rather than cash and thus illegally increased the money supply without involving the government, and ended up owning a much larger share of the financial sector paid for with his own paper, ironically with the gratitude of the government. The difference was that the economic benefit went to Morgan personally rather than to the nation as in Nazi Germany and the private money was used to save the banks rather than to save the unemployed.

Nazi economic experts understood that sovereign credit creation for purposes of job creation posed no inflationary threat and that it would be a far more responsible policy than the conservative approach of tax increases and welfare cuts to balance government budgets. The idiotic policy of monetary restraint and social-spending reduction to balance government budgets in order to pay foreign debts is still being advocated by the International Monetary Fund (IMF) in debtor nations around the world - except for the United States, the world's largest debtor nation, which uses dollar hegemony as an escape hatch or, more to the point, escape hedge. Redeeming WCBs did burden the 1934-39 Reich budget, but the decline in Reich expenditure for welfare support and other tax subsidies as a result of full employment recovery more than offset the redemption payments. The surplus was then used to reduce public debt and taxes further.

There were legal, political and institutional restrictions unique to Germany on the scope of the Reichsbank that virtually dictated resources to WCB (work-creation bills (Arbeitsbeschaffungswechseln))s as a way of putting 6 million unemployed Germans back to work. But the principle of WCB (work-creation bills (Arbeitsbeschaffungswechseln))s can be applied to the US or China or any other country today to combat unacceptably high levels of unemployment. Alas, this common-sense approach is faced with firm opposition rationalized by obscure theories of inflation in most countries. The real reason is that the banking sector can reap excess profit by treating high unemployment as an externality in the economy that translates high unemployment and low wages directly into corporate profits. The profit from high unemployment is kept in private hands, while the cost of high unemployment is socialized as government expenditure.

In 1933, Hitler sought to reassure Germany's business leadership that Nazi rule was consistent with the preservation of the free-market system, because he needed the support of the industrialists. He could buy that support by keeping wages down during the recovery, but any rigorous effort to curb prices and profits would alienate the business community and slow down economic recovery. Instead, Hitler sought to restore profitability to German business through reduced unit cost achieved by increasing output and sales volume, rather than through a general increase in prices (Mengenkonjunktur, niche Preiskonjunktur - output boom, not price boom). Adoption of "performance wage" (Leistungslohn - payment on a price-rate basis) increased labor productivity, thereby driving costs down and profit up. Some upward price movements were permitted to adjust price relationships between agricultural and manufactured products and between goods with elastic and inelastic demands, also to prevent price wars and below-cost dumping. These principles of "output boom, not price boom" and "performance wage" could also work in combating inflation today in many economies generally and China specifically.

Hitler saved the German farmers from their heavy debt burden through relief programs and through subsidized farm prices. The stable farm income came at the expenses of the middlemen institutions, but Hitler sustained popular support by the provision of living income to consumers. Had Nazi Germany been a member of the World Trade Organization (WTO), this option would have been foreclosed to it. Hitler sought price stability only in sectors critical to the national economy and to the ultimate goal of rearmament. Germany had no overall price policy until the 1936 Four Year Plan, which concentrated economic authority in the hands of Hermann Goering for war production and put an end to regulated free-market policies.

Business managers generally make investment and employment decisions based on their judgment of the prospect for new orders. The difference between German economic recovery under Hitler and US economic stagnation under Roosevelt in the 1930s was the degree of uncertainty for new orders for goods. Hitler made it clear that after 1936, a major rearmament program would make heavy demand on German durable-goods and capital-goods industries without the need to export. With that assurance, German industry could plan expansion with confidence. Roosevelt was unable to provide such "confidence" to industry and had to rely on anemic market forces until after the Japanese attack on Pearl Harbor, Hawaii.

The Marshall Plan: A Trojan horse for monetary conquest
The Marshall Plan grew out of the Truman Doctrine, proclaimed in 1947, stressing the moralistic duty of the United States to combat communist regimes worldwide. The Marshall Plan spent US$13 billion (out of a 1947 GDP of $244 billion or 5.4%, or $632 billion in 2004 dollars) to help Europe recover economically from World War II to keep it from communism. The money actually did not all come out of the US government's budget, but out of US sovereign credit. The most significant aspect of the Marshall Plan was the US government guarantee to US investors in Europe to exchange their profits denominated in weak European currencies back into dollars at guaranteed fixed rates, backed by gold at $35 an ounce.

The Marshall Plan helped establish the US dollar as the world's reserved currency at fixed exchange rates established by the IMF, which had been created by the Bretton Woods Conference. The Marshall Plan enabled international trade to resume and laid the foundation for dollar hegemony for more than half a century even after the dollar was taken off gold by president Richard Nixon in 1971. While the Marshall Plan did help the German economy recover, it was not entirely a selfless gift from the victor to the vanquished. It was more a Trojan horse for monetary conquest. It condemned Germany's economy to the status of a dependent satellite of the US economy from which it has yet to free itself fully.

The Marshall Plan lent Europe the equivalent of $632 billion in 2004 dollars. Japan's foreign-exchange reserves alone were $830 billion at the end of September 2004. In other words, Japan was lending more to the United States in 2004 than the Marshall Plan lent to Europe in 1947. And Japan did not get any benefits, because the loan is denominated in dollars that the US can print at will, and dollars are useless in Japan unless reconverted to yen, which because of dollar hegemony Japan is not in a position to do without reducing the yen money supply, causing the Japanese economy to contract and the yen exchange rate to rise, thus hurting Japanese export competitiveness.

West Germany's postwar economy functioned well for several decades, and became one of Europe's strongest. Much of its success was due to the German tradition of strong social welfare that dated back to the days of Otto von Bismarck a century earlier, and the system of co-determination, which gave workers in factories a voice about their management and provided West German industries a long period of labor peace. The economics of the Cold War also gave Germany guaranteed markets in the US. The export-oriented economy received another boost with the creation of the European Economic Community (EEC) by the Treaty of Rome in March 1957. West Germany was one of the EEC's founding members. Since the end of the Cold War, this economic order has been under threat from neo-liberal globalization that first attacked the developing economies in Latin America and then the world over.

Sovereignty, finance capitalism and democracy
Jean Bodin (1530-96), the first thinker in the West to develop the modern theory of sovereignty, held that in every society there must be one power with the legitimate authority to give law to all others. The Edict of Nantes issued by Henry of Navarre, the Huguenot (French Calvinist) chief, who reigned as Henry IV in 1598, was a sovereign edict that laid the foundation of French royal absolutism of the sovereign state. The Edict protected a Huguenot minority, composed mostly of members of the aristocracy, against popular opposition from the Catholic peasants with the support of the papacy. Henry IV was a member of the politiques who believed that no religious doctrine was important enough to justify ever-lasting war. He abjured the Calvinist faith in 1593 and subjected himself to papal absolution, supposedly remarking that Paris was well worth a Mass. He wanted to rebuild France from a war-torn economy caused by religious strife into a prosperous nation, with "a chicken in every pot" for every French family, a phrase borrowed by Roosevelt two and a half centuries later to describe the goal of his New Deal.

The Edict to protect the Protestant aristocrats led to the assassination of the converted Catholic king by a Catholic fanatic in 1610. The widowed queen, Marie de Medici, a devout Catholic and scion of the celebrated banking family of Florence, handed control of France to Cardinal Richelieu, who undertook a secular policy to enhance the economic interest of the state with mercantilist measures,

• by allowing the aristocracy to engage in maritime trade without loss of noble status, and

• by making it possible for merchants to become nobles through payments to the royal exchequer.

This provided a political union of the aristocracy and the bourgeois elite that held the nation together until the French Revolution of 1789.

In 1627, the Duke of Rohan led a Huguenot rebellion from La Rochelle with English military support. Richelieu suppressed the rebellion ruthlessly and modified the Edict of Nantes with the Peace of Alais in 1629, by allowing the Huguenots to keep their religion but stripping them of their instruments of political power: their fortified cities, their Protestant armies and all their military and territorial autonomy and rights. Calvinism has been identified by social historians as the driving force behind modern capitalism.

The Age of New Monarchy in Europe laid the foundation for the age of sovereign nation-states by placing royal authority to institute a fairer social contract above feudal rights, a development that began in the High Middle Ages. The new monarchs presented the institution of monarchy as a progressive guarantor of law and order and promoted hereditary monarchy as the legitimate means of transferring public power. Monarchism was supported by the urban bourgeoisie, as it had long been victimized by the private wars and marauding excesses of the feudal lords. The bourgeoisie was willing to pay taxes directly to the king in return for peace and royal protection from aristocratic abuse. Its members were willing to let parliament, the stronghold of the aristocracy, be dominated by the king who was expected to be a populist. The direct collection of popular taxes by the king, bypassing the feudal lords, gave the king the necessary resources to maintain a standing army to keep the feudal lords in check. These new monarchs revived Roman law, which favored the state and incorporated the will and welfare of the people in their own persons. Direct payment of taxes to the sovereign also ensured that future wars were fought to protect or enhance national interests, rather than at the personal pleasure of the king. The new monarchs ruled by the mandate of the dictatorship of the bourgeoisie, just as communist governments ruled centuries later with the mandate of the dictatorship of the proletariat. It was by protecting the people against abuses from aristocratic special interests that the king protected himself, a principle that escaped Louise XVI of France to his own sorrow.

Today, as the institution of democracy is supplanted by control by the moneyed class, democracy will lose its popular mandate. What the US needs is not to spread democracy around the world, but to restore economic democracy at home. Similarly, when the Chinese Communist Party permits neo-liberal market fundamentalism to distant itself from its revolutionary mission of protecting the peasant masses from market abuse, it will lose its mandate as the legitimate defender of the dictatorship of the proletariat. What China needs is not political reform to accommodate capitalistic democracy, but a restoration of its revolutionary ideological line in its political institutions and a renewal of populist commitment on the part of its leadership. Political reform driven by flawed ideology is institutional suicide.

The new monarchies in Europe, by breaking down feudal tariff barriers within the kingdom, contributed to the rise of the commercial revolution and the development of extended cross-border markets. In the rise of capitalism, the needs of a new military not dependent on the aristocracy had been of critical importance. The standing national armies of the new monarchs required sudden expenditures in times of war that the traditional feudal dues and normal flow of tax revenue could not meet. Private bankers emerged to finance wars by lending money to the kings secured by the right to collect taxes in the future from conquered lands. The medieval prohibition of interest as usury, denounced as the sin of avarice and forbidden by canon laws, faded in practice even as it continued to be upheld by all religions. Luther denounced "Fruggerism" in reference to the bankers of the Holy Roman Empire. Even Calvinism only gradually made allowances on the issue of interest.

The new monarchies, caught between fixed income and mounting expenses, were forced to devalue their money by diluting its gold content. They began to borrow from private banks to deal with recurring monetary crises. These monetary crises led to constitutional crises that produced absolute monarchies in Europe and the triumph of bourgeois parliamentarianism in England. The need to find new conquered lands to repay sovereign indebtedness gave birth to imperialism and colonialism, which the Atlantic Charter centuries later categorically rejected in the third of its eight points of "common principles in the national policies of their respective countries on which they base their hopes for a better future for the world". The third point stated that "they [the US and Britain, and later the United Nations members] respect the right of all peoples to choose the form of government under which they will live; and they wish to see sovereign rights and self-government restored to those who have been forcibly deprived of them".

German rearmament to defend neo-imperialism
Notwithstanding the high-sounding rhetoric of the Atlantic Charter, the outbreak of the Korean War in 1950 provided a propaganda opening for the US to impress on its submissive Western allies in the United Nations that international communism was a clear and present danger to residual Western imperialism and colonialism in the Third World. Under president Harry Truman, the US began to abandon its wartime anti-colonialist posture and to solicit the help of European imperialists, particularly the British and French, to support its global war on communism.

Colonel Harry G Summers Jr, US Army (retired), in an article in Military History magazine titled "The Korean War: A fresh perspective", pointed out that during a post-Cold War Pentagon briefing in 1974, General Vernon Walters, then deputy director of the Central Intelligence Agency (CIA), revealed what amounted to the unpredictability of US policy intentions on Korea: "If a Soviet KGB spy had broken into the Pentagon or the State Department on June 25, 1950, and gained access to our most secret files, he would have found the US had no interest at all in Korea. But the one place he couldn't break into was the mind of Harry Truman, and two days later America went to war over Korea."

Truman, unprepared for global leadership, insecure and paranoid, fell under the spell of Winston Churchill, who, borrowing from Lenin, equated anti-imperialism with anti-capitalism. Churchill aimed at using the Cold War as a device to save European imperialism by offering the fruits of neo-imperialism to the US in the name of democracy. In taking the United States to war in Korea, Truman, in addition to placing the US firmly on the side of imperialists, made two critical decisions that would shape future US military actions.

First, he decided to fight the war under the auspices of the United Nations, a pattern followed by president Lyndon B Johnson in the Vietnam War in 1964, president George H W Bush in the Gulf War in 1991, by president Bill Clinton in Bosnia-Herzegovina in 1999, and by President George W Bush in Afghanistan in 2001 and in Iraq in 2003. Second, for the first time in US military history, Truman decided to take the nation to war without first asking Congress for a declaration of war. Using the UN Security Council resolution as his authority, he said the conflict in Korea was not a war but a "police action". With the Soviet Union then boycotting the Security Council, the United States was able to gain approval of UN resolutions labeling the North Korean invasion a "breach of the peace" and urging all members to aid South Korea, notwithstanding that both North and South Korea had been aiming for unification by force for several years.

Another consequence of the Korean War was damage to the image of the UN as a neutral world body. Secretary general Trygve Lie was forced to resign over Soviet complaints of the way he manipulated Security Council procedures to comply with US dictates.

Colonel Summers pointed out that, in reality, UN involvement was a facade for unilateral US action to protect its vital interests in northeast Asia. The UN Command was just another name for General Douglas MacArthur's US Far East Command in Tokyo. At its peak strength in July 1953, the UN Command stood at 932,539 ground troops. Republic of Korea (ROK) army and marine forces accounted for 590,911 of that force, and US Army and Marine Corps forces for another 302,483. By comparison, other UN ground forces totaled 39,145 men, 24,085 of whom were provided by British Commonwealth Forces (Britain, Canada, Australia and New Zealand) and 5,455 of whom came from Turkey. The troop composition was similar to that of the "coalition of the willing" in the 2003 Iraq war. While the UN facade was detrimental to the prestige of the UN, Truman's decision not to seek a declaration of war set a dangerous precedent in the erosion of the constitutional power of the US Congress.

Claiming that their war-making authority rested in their power as commanders-in-chief, both Johnson and Nixon refused to ask Congress for approval to wage war in Vietnam, a major factor in undermining popular support for that conflict. In the entire history of the United States, only seven wars had been declared by Congress, with World War II the last declared war. Ten other wars were not declared:

1. the Florida Seminole Wars, 1817-58;

2. the Civil War, 1861-65;

3. the Korean War, 1950-53;

4. the Vietnam War, 1964-72;

5. the first Gulf War, 1991;

6. the war on drugs, 1980s to the present;

7. the Kosovo war, 1999;

8. the "war on terror", 2001 to the present;

9. Operation Enduring Freedom (Afghanistan), 2001; and

10. the second Gulf war (Iraq), 2003.

Instead of formal war declarations, the US Congress has issued authorizations of force. Such authorizations have included the Gulf of Tonkin Resolution of 1964 that officially initiated US participation in the Vietnam War, and the "use-of-force" resolution that started the 2003 Iraq war. Questions remain as to the legality of these authorizations of force.

Ironically, the Federal Republic of Germany, whose own empire had been partitioned out of existence since the end of World War I, was pushed to contribute financially to its own defense against Soviet threat so that its less prosperous but victorious imperialist allies, Britain and France, could spend their hard-pressed resources to defend their crumbling empires outside of Europe in the name of democracy.

For West Germany, five years after having lost the most devastating of all wars, this meant forming a new army, a step unthinkable for many Germans who had just gone through de-Nazification and demilitarization indoctrination during Allied occupation. But the worldwide "Korean War boom" of 1950 came at exactly the right moment for an export-addicted Germany eager to capture new overseas markets. As West Germany prospered from profits garnered from new wars to defend imperialism in Asia, the US was in a position to push Germany into rearmament, despite the fact that German rearmament was anathema not only to German citizens, but also to all their apprehensive neighbors, especially France. As the Korean War continued, however, opposition to rearmament lessened within West Germany, and China's entry into the war caused Gaullist France, which was apprehensive of the liberating impact of Asian communism on its crumbling empire in Southeast Asia, to revise its negative posture toward German rearmament, as long as the new German war machine was oriented toward the east. Instead of the tradition Franco-Russian alliance against a powerful Germany, the French began to see benefits in using the Germans to deter Soviet intentions to march toward Paris. It was a classic balance-of-power move. Germany, deprived of sovereign authority, was at the mercy of superpower global conflict.

To contain a newly armed Germany, French officials proposed the creation of the European Defense Community (EDC) under the aegis of North Atlantic Treaty Organization (NATO), but with strengthened European control, with a European Army to run in parallel with the European Steel and Coal Community that France and Germany had formed earlier. Within the EDC context was the need to rearm West Germany to counter the Soviet Union's overwhelming superiority in military manpower. Adenauer quickly agreed to join the EDC because he saw membership as likely to enhance the eventual full restoration of German sovereignty. The treaties establishing the EDC were signed in May 1952 in Bonn by the Western Allies and West Germany. Britain refused to be part of it, seeing its armed forces as being more important to NATO, the Commonwealth and the special relationship with the US than to Europe.

Arguments arose over who would have ultimate control over the army - would it be the EDC or would it be the national governments? The whole idea eventually fell apart, although West Germany was welcomed into NATO and the West European Union (WEU) was created. Although the German Bundestag ratified the treaties, the EDC was ultimately blocked by the French National Assembly, because it opposed putting French troops under foreign command. The French veto meant that Adenauer's attempt to regain German sovereignty through disguised militarism had failed and a new formula was needed to allay French fears of a strong Germany.

The failed negotiations surrounding the planned rearmament of West Germany through the creation of the EDC nevertheless provoked a Soviet countermeasure. After a second East German proposal for talks on a possible unification of the two German states failed because of West Germany's demands for free elections in the German Democratic Republic (GDR), the Soviet Union put forth a new proposal to its wartime Western Allies in March 1952. The Soviet Union would agree to German unification if the Oder-Neisse border were recognized as final and if a unified Germany were to remain neutral. If the proposal were accepted, Allied troops would leave Germany within one year, and a united neutral Germany would obtain its full sovereignty.

The offer, directed to the Western Allies rather than Germany, which, deprived of sovereignty, had no authority to negotiate its own fate, nevertheless aroused lively public discussion in West Germany about the country's political future. Adenauer was afraid that neutrality would mean Germany's exclusion from US-dominated Western Europe and that without US support, he and his conservative Christian Democrats might not stay in power, in view of the traditional strength of the Social Democrats or, worse, the communists. Encouraged by the United States, Adenauer demanded free elections in all of Germany as a precondition for negotiations, a demand he knew was unacceptable to both the Soviets and East Germany, as Western-style elections would be financed by money from the US to ensure the defeat of communist and socialist candidates, repeating the postwar political sham in both West Germany and Japan. The Soviet Union declined and abandoned its proposal. Adenauer was harshly criticized by the opposition for not having seized this opportunity for unification. By allying itself with the US, West Germany sacrificed its unification with East Germany for half a century. A divided Germany provided a balance-of-power arrangement between the two superpowers all through the Cold War.

Adenauer's decision to turn down the Soviet proposal left Germany divided for the then foreseeable future. West Germany was then expected to remain firmly anchored in the Western defense community. Yet doubt remained in Washington on whether Germans would kill other Germans to protect US interests in Europe.

After plans for the EDC failed because of the French veto, negotiations were successfully concluded on the Treaties of Paris in May 1954, which ended the Occupation Statute and made West Germany a member of the Western European Union and of NATO. NATO was the vehicle to camouflage US geopolitical interests in Europe with a common goal among the Western Allies against Soviet communism. On May 5, 1955, the Federal Republic of Germany declared its sovereignty as a state and, as a new member of NATO, undertook to contribute to the organization's defense effort by building up its own armed forces, the Bundeswehr. German rearmament was to be camouflaged under the NATO umbrella. West German soldiers could now be counted on to fight East German soldiers to protect Western Europe against communism. Militarism was the price the United States extracted for granting Germany a facade of independent sovereignty, but not yet full independence of foreign or security policy, as NATO continued to be dominated by the US, with its mission framed by US geopolitical interests.

The buildup of the Bundeswehr met considerable popular opposition within West Germany. To avoid isolating the army from the country's civilian and political life, as was the case historically up to the fall of the Weimar Republic, laws were passed that guaranteed civilian control over the armed forces and gave the individual soldier a new social status. Members of the conscription army were to be "citizens in uniform" and were encouraged to take an active part in democratic politics, in contrast to the Junker tradition of a warrior class. This was done to inject a measure of consideration of German domestic politics into US-dominated NATO decision-making.

By 1955, the Soviet Union had abandoned efforts to secure a neutralized united Germany. After the Four Power Conference in Geneva in July that year, Adenauer accepted an invitation to visit Moscow, seeking to open new lines of communication with the East without compromising West German commitments to the West. On the other side, Moscow wanted to exploit German apprehension of being in the front line of hostility to create a voice of caution within NATO. In Moscow in September, Adenauer arranged for the release of 10,000 German war prisoners in the Soviet Union. In addition, without having recognized the division of Germany or the Oder-Neisse line as permanent, West German negotiators also established diplomatic relations with the Soviet Union.

The Soviet Union recognized the German Democratic Republic as a sovereign state in 1954, and the two communist countries established diplomatic relations. The Federal Republic of Germany (FRG) had not, however, recognized the GDR. And to dissuade other countries from recognizing East Germany, Adenauer's foreign policy adviser, Walter Hallstein, proposed that the FRG break diplomatic relations with any country that recognized the GDR. Anti-communism was the convenient decoy from targeting the rise of neo-fascism in a society that had won a permissive reprieve from its US conqueror's de-Nazification program. As the brilliant German filmmaker Rainer Werner Fassbinder showed in many of his films, postwar Germany turned out to be very much what it would have been like if the Nazis had won the war.

The Hallstein proposal was based on the West German claim that as a democratic state, it should be accepted as the only legitimate representative of the German people. By contrast, East Germany claimed to be the legitimate state of the German people because it was a dictatorship of the proletariat. Democracy was used as a justification for legitimacy in the West. Israel would learn from the former persecutor of its people to use democracy to bargain for US acceptance of its legitimacy in an Arab region, using anti-communism as currency to secure US support, by purging the left totally from Israeli domestic politics. The Hallstein Doctrine was adopted as a principle of West German foreign policy in September 1955 and remained in effect until the late 1960s when the idea of two German states became a reality, and Germany remained divided until the dissolution of the USSR in 1991.

Unfortunately, whereas militarism under market capitalism stimulated economic expansion by providing profit to private enterprise, it operated to drain prosperity under communism, which could not find a vehicle to recycle financial energy consumed by the arms race. Militarism then was co-opted by finance capitalism as an effective weapon against communism, which was an economic system that could only be operative in peace. The reason war has not ended even after the global war on communism has ended with the dissolution of the USSR is because militarism and capitalism have a mutual dependency. The end of the Cold War, while marking the failure of peaceful communism, marked the triumph of capitalistic militarism.

Traditionally, European integration and trans-Atlantic relations have been the two key components of postwar German foreign policy. German trans-Atlantic relations are a euphemism for German acceptance of US dominance. Both components were strategic necessities for the Federal Republic of Germany after World War II, and at the same time paved the way for West Germany to rejoin the European community of nations. Since then, the US had been Germany's protector ally both in and outside Europe. This relationship remained after German unification.

Today, while the US and Germany continue to share similar views on a range of global issues such as terrorism, WMD (weapons of mass destruction) proliferation and regional conflicts, there is increasing divergence on what constitute proper policy responses to these new threats and challenges. Germany subscribes to multilateralism as a fundamental component of its foreign policy in a multipolar world. Differences on issues such as Iraq, Iran, the International Criminal Court, the Kyoto Protocol and the Ottawa Convention have surfaced between the US and Germany as the latter regains more of its full sovereignty and as its domestic politics turns centrist as opposed to US unilateralism. Strategically, German relations with China and Russia are evolving along lines more independent from US policies.

During the Cold War, trans-Atlantic relations in the West were dominated by the need to defend the US and Western Europe jointly against the Soviet threat. This was also the reason for US forces to remain in Europe via NATO. With the end of the Cold War in 1989, the threat posed by the Warsaw Pact and the Soviet Union disappeared overnight. Since then, trans-Atlantic relations have faced new challenges devoid of a common thread.

Having contained domestic terrorism on its own soil, Germany, like many other nations, is being pressured by the United States to join in the "global war on terrorism" as a replacement of the threat from global communism. International terrorism, which also put a new dimension on the problem of WMD proliferation, created a demand from the US for German military projection beyond German borders, along with regional conflicts that allegedly had supra-regional destabilizing effects, eg the Balkans, the Middle East, Congo, Afghanistan, India-Pakistan. This definition of supra-regional stability can involve Germany in distant conflicts around the globe, since no regional conflict can remain isolated in an interconnected global security network. The process of greater European integration has spilled beyond historical European borders into the Crimea and the Balkans, the Middle East, Africa and Asia. Yet domestic threats from international terrorism can be intensified by a country's military involvement beyond its borders, as demonstrated by the terrorist bombing of trains in Spain in response to deployment of Spanish troops in Iraq.

As early as 1990, the European Union and the United States agreed in the Transatlantic Declaration to establish a closely meshed network of twice-yearly summit consultations. The terrorist attacks of September 11, 2001, showed that security policy and trans-Atlantic cooperation have not been removed with the end of East-West conflict. Yet the nature of the cooperation has undergone a fundamental change: comprehensive security implies that internal and external security threats are interconnected. There is also a historical legacy that set German relations with Islamic nations apart from the Anglo-US legacy. Competition for the hearts and minds of Islamic peoples had been a focus of the contest between Germany and the Western Allies in the two World Wars.

With the US drifting toward a policy of relying on its super-power to impose a global geopolitical, economic and financial architecture to its liking, a critical divergence has emerged between the US and its NATO allies over the need for conflict prevention and the most effective paths of conflict resolution. US responses to terrorism threats, as manifested in its invasion and occupation of Iraq, if not Afghanistan, have created policy rifts between the EU and the US.

With the end of the Soviet threat to Western Europe, US planners began to ask whether the United States would always have to deploy troops and equipment to sort out Europe's problems. Consequently, the US was looking to Western Europe to take more responsibility for its own defense and security. It has also become harder for US policymakers to justify spending considerable amounts of money on overseas deployments. Equally, the US remains hesitant over overseas deployments because of experiences and lessons from the Vietnam War. Despite being the main contributor to Operation Desert Storm in the Persian Gulf during 1991, the later debacle of Operation Restore Hope in Somalia only reinforced US objections to its their ground forces in international hotspots.

For the United States, modern warfare or military operations have to be conducted with minimum risk to US lives. When the US refused to deploy peacekeepers to UN operations in Croatia and Bosnia-Herzegovina during 1992-95, or make the ground-force option available during Operation Allied Force in Kosovo in 1999, many Western European governments wondered whether the United States could always be counted on if military intervention were needed in an international crisis. Many were now asking the same questions as the French had asked years before: Why should an economically and politically powerful Western Europe not take more responsibility for its own security, especially as there was no longer the threat from the USSR and the Warsaw Pact?

As a result, Western Europe had begun to develop a European Security and Defense Identity (ESDI) since the early 1990s. In 1993, the EU decided to embody parts of the Petersberg Tasks into the Treaty on the European Union. This gave the WEU, Western Europe's own security apparatus within NATO, a clear defined role in humanitarian and conventional operations. The WEU was strengthened. Among other changes, this included the appointment of a secretary general and a planning cell that were responsible for assessing and planning for operations as they arose. The number of troops available to it was also increased. If necessary, the WEU could call on other NATO units such as the UK/Netherlands Landing Force. It also had its own rapid-response unit, EUROFOR, which was made up of troops from France, Italy, Spain and Portugal. It was envisaged that the WEU would act independently or as part of a UN force in humanitarian operations in which the US would not want to become involved. In other operations, it would act as part of NATO. Both the US and Western Europe believed that the proposals would strengthen NATO by providing better cooperation and coordination, a problem NATO had suffered from in multinational operations.

In 1999, however, the EU decided to revise the WEU plans. It decided to adopt the crisis-management and conflict-prevention elements itself. The WEU would remain as an organization but would mostly concentrate on being a contribution to NATO during a conventional war. At the European Council's Cologne Summit in June 1999, the EU launched the Common European Security and Defense Policy (CESDP). A later summit at Helsinki built on Cologne and defined new EU structures to undertake the crisis-management role. Both summits also proposed an EU Rapid Reaction Force that would draw mostly on the member states' commitments that had already been made to the WEU after the Petersberg Tasks - the force levels being agreed at the Military Capabilities Conference in November 2000.

The EU force is not a European Army in the sense of a standing army. It follows a similar character to NATO's Allied Command Europe (ACE) Rapid Reaction Corps (ARRC) in which certain elements of member states' armed forces are earmarked for rapid deployment if the need arises. Only one part of the force could be considered a standing army. In 1987, France and Germany decided to create a Security and Defense Council (SDC) that would allow for better coordination on joint Franco-German operations as part of the WEU and later NATO. In 1991, both countries decided to back up the SDC with a joint Franco-German brigade directly responsible to the EU and the WEU (and NATO from 1993) - this became known as the Eurocorps. Spain, Belgium and Luxembourg then went on to join, allowing the WEU to call on a sizable force for immediate deployment. With its headquarters in Strasbourg, the Eurocorps has since deployed to Bosnia and Kosovo and is likely to feature in the new EU force.

Germany goes its own way
The EU created the European Security and Defense Policy (ESDP) to ensure independent control of its security policy. The United States views the ESDP as an attempt to replace NATO by creating a security and defense system free of US dominance if not involvement. Changing its Cold War role of an economic giant and a geopolitical pigmy, drawing on the lesson of Iraq, Germany, the dominant component in the EU, has taken on the task of trying to prevent a military confrontation between the US and Iran. The European initiative, led by Germany, France and an ambiguously European Britain, proposes to give Iran substantial economic benefits in exchange for Iranian commitment to cease efforts to become a nuclear power. This initiative has received little support either from Iranian domestic politics or from the US. Washington views the European initiative with skeptical contempt. US hawks want "regime change" and/or a "surgical strike" against Iranian nuclear facilities. The EU views both options as ineffective, based on what has transpired in Iraq, since Iranian nuclear facilities are both dispersed and hardened, and since the US faces a severe shortage of troops because of its aggressive foreign policy, a problem that NATO is not at all keen to help resolve with its own troops.

German officials point out that their country's Iran initiative is a breakthrough, since for the first time in recent memory the leading European powers are united and proactive, as well as independent from Washington, on a major issue that threatens peace. There is sober concern about Iran playing off the US against Europe. German officials see their role as demonstrating that there are diplomatic alternatives to a repeat of US Iraq policy in Iran. If the EU approach to Iran should break down, the EU, being still economically dependent on the US, would have no choice but to join the United States in economic sanctions against Iran. Diplomatically, the EU would still be in a position to dissuade the Bush administration from pursuing a military option or seeking Security Council action that Russia and China could be expected to oppose.

Since the end of World War II, nothing major has happened on the world stage, good or bad, unless the United States has orchestrated it. The only two notable exceptions are chancellor Willy Brandt's efforts more than two decades ago to engage the Soviet Union and East Germany, and British and French diplomatic efforts that helped produce the deal to trade an end of Libyan terrorism for an end to economic and diplomatic sanctions.

Washington at first reacted negatively to both of these initiatives. European involvement in world affairs beyond continental borders has been welcomed by Washington only when Europe served as a docile junior partner to US geopolitical designs. On Iraq, most of Europe refused to accept this subservient role. The Iraq war is immensely unpopular in Europe, similarly to other regions around the globe, even in Britain, which has happily accepted the role of geopolitical water boy for US foreign policy since the end of World War II. German domestic politics does not give Chancellor Gerhard Schroeder an option to support the Bush administration's Iraq policy. The blatant ineptitude of recent US foreign policy, particularly in the Persian Gulf and the Middle East, has provided a window of opportunity for European independent activism in world affairs.

The re-election of Schroeder as chancellor of Germany with the help of the Green Party in September 2002 symbolized the end of an era in close, albeit unequal, postwar relations between the US and Germany. Schroeder held on to power after his SPD (Sozial-demokratische Partei Deutschlands, or Social Democrat Party), ran an intensely anti-US campaign based upon opposition to US policy on Iraq. The SPD was tied with the conservative, pro-US CDU-CSU (Christian Democrats), each getting 38.5% of the votes in an election in which 80% of eligible voters took part. But with the support of the Green Party's 8.6% vote, Schroeder defeated Edmond Stoiber, the CDU candidate, by fewer than 9,000 votes over the conservative coalition, giving the SPD-Green coalition 306 seats in the 603-seat parliament. The generally conservative German press referred to the winning coalition derogatorily as the Red-Green Coalition. The German Greens are a party of ecology and used to be a pacifist party until their chairman, Joschka Fischer, won a battle between the realists and the fundamentalists and got the party to back German troops going into Kosovo.

The re-election of Schroeder has been tremendously damaging to the carefully nurtured five-decade-old US-German alliance. After Schroeder's victory, a curt statement from the White House did not congratulate him, or even mention him by name. It was a marked contrast to a statement congratulating French President Jacques Chirac, with whom Washington also has serious diplomatic problems, on his May re-election. The White House also declined to arrange a personal telephone call between Schroeder and Bush. In the view of the US, Schroeder and key members of his cabinet played to anti-US sentiment in Germany over foreign-policy issues during the final weeks of the campaign beyond election politics to the point of personal attacks on the US president.

Politically, the Bush administration at the time leading up to the Iraq invasion wanted Germany to join its international coalition to support its disastrous policy on Iraq, with diplomatic backing at the UN, and to grant the "coalition of the willing" complete access to German airspace and allow the US and Britain full use of their bases on German soil for offensive operations against Iraq. The White House also wanted Germany to support more fully Washington's "war on terrorism", especially with regard to the extradition of terrorist suspects on German soil, even those with German citizenship, and the release of crucial evidence that could be used to help convict them in US courts. It also wanted Germany to increase defense spending, which had fallen to just 1.5% of its GDP, and to pay for costs associated with increased terrorism security at US bases in Germany. The US has warned that if the German government continues to hinder US policy toward Iraq and elsewhere, such as Iran and in the UN, Washington may conclude that Berlin is reneging on its defense-treaty obligations, which would have serious political consequences, beyond being labeled the "old Europe". US support for German membership in the UN Security Council hangs in the balance.

With the creation of NATO in April 1949, the US and Germany formally became military allies. It was a turning point for both. For the first time in its history, the United States had signed on to a permanent alliance that linked it to Europe's defense; and for Germany, as for Italy, membership in NATO signaled a new acceptance internationally, an important political legitima