From the 1950 EPU Crisis to Exportweltmeister: Hermes Guarantees and the 1968 Border Tax

For most of the late twentieth century, the Federal Republic of Germany was synonymous with relentless trade surpluses—a manufacturing powerhouse universally dubbed the Exportweltmeister (“Export World Champion”) whose undervalued Deutsche Mark repeatedly forced emergency currency realignments from Bonn to New York. Yet when the West German state was founded in 1949, its external accounts were so fragile that a sudden surge in raw-material imports after the outbreak of the Korean War in June 1950 nearly drove Bonn into international payments default. Between 1949 and 1985, West Germany’s transformation from a dollar-starved debtor inside the European Payments Union (EPU) into the chief European creditor at the Plaza Accord was shaped by five institutional milestones: the 1949 creation of federal Hermes export credit guarantees, the November 1950 $120 million EPU rescue engineered by Per Jacobsson and Alec Cairncross, the 1951 GATT and 1958 EEC tariff openings, Economics Minister Karl Schiller’s November 1968 4 percent border-tax “surrogate revaluation” (Ersatz-Aufwertung), and the September 22, 1985 Plaza Accord. ^[1]

1949–1950: Hermes Export Guarantees and the Korean War EPU Payments Crisis#

When the currency reform of June 1948 replaced the worthless Reichsmark with the Deutsche Mark and Economics Director Ludwig Erhard lifted domestic price controls, western Germany possessed virtually no gold or convertible dollar reserves. Partition had severed West German factories from the agricultural breadbasket of eastern Germany, forcing the new Federal Republic to import food, cotton, wool, non-ferrous metals, and petroleum while its bombed machine-tool and chemical industries struggled to reclaim prewar export markets. ^[2]

To help capital-goods manufacturers win orders in risky foreign markets without tying up scarce bank capital, the newly elected Bundestag enacted the Law on the Assumption of Security Guarantees and Warranties in Export Business on August 26, 1949, featuring an initial statutory guarantee ceiling of 120 million Deutsche Marks. Rather than establishing a state bureaucracy, the federal government appointed a dual private-sector mandatory consortium to administer the scheme on the federal budget’s account: Hermes Kreditversicherungs-AG (founded in 1917, serving as lead underwriter) and the auditing firm Deutsche Revisions- und Treuhand-AG (Treuarbeit). Operating under an Interministerial Committee in Bonn, these federal export credit guarantees—universally known as Hermes-Deckungen—insured German exporters and financing banks against both commercial default by private buyers (Garantien) and sovereign political or currency transfer freezes (Bürgschaften). ^[3]

Before the export drive could mature, however, an external shock nearly derailed Erhard’s liberalization program. On July 1, 1950, West Germany joined the newly established European Payments Union (EPU), a multilateral clearing house backed by $350 million in US Marshall Plan funds that allowed eighteen Organisation for European Economic Co-operation (OEEC) nations to settle intra-European trade balances monthly and abolish bilateral import quotas. Just days earlier, on June 25, 1950, North Korean troops had crossed the 38th parallel. Fearing a third world war and global raw-material shortages, West German industrialists and merchants borrowed heavily from commercial banks to stockpile imported rubber, wool, copper, and grain at soaring world prices. ^[4]

Because Erhard had already liberalized 60 percent of West Germany’s private OEEC imports while foreign buyers ordered German heavy machinery with long delivery lead times, West Germany’s trade balance plunged into deficit. Within four months, Bonn exhausted its entire initial EPU credit quota of $320 million (representing 15 percent of its 1949 intra-European trade), threatening a mandatory return to draconian import rationing. In October 1950, the EPU Managing Board dispatched two distinguished independent economists—Per Jacobsson of the Bank for International Settlements and Alec Cairncross, economic adviser to the OEEC—on an urgent fact-finding mission to Bonn and Frankfurt. ^[5]

Inspecting order books and factory utilization, Jacobsson and Cairncross concluded that West Germany’s deficit was a temporary working-capital mismatch rather than fundamental insolvency: the raw materials being imported in autumn 1950 would soon be re-exported as high-value finished machinery. On their recommendation, the Bank deutscher Länder (precursor to the Deutsche Bundesbank) raised its discount rate from 4 percent to 6 percent and hiked minimum reserve requirements to curb inventory speculation, while the OEEC Council granted West Germany an emergency $120 million EPU special credit line in November–December 1950 (repayable in monthly installments by autumn 1951). By spring 1951, German machinery exports surged across Europe; West Germany repaid the entire $120 million emergency loan five months ahead of schedule in May 1951 and never ran an annual trade deficit again during the history of the Bonn Republic. ^[6]

GATT at Torquay (1951), the EEC Customs Union (1958), and the Exportweltmeister Engine#

Having survived the EPU crisis, Chancellor Konrad Adenauer and Ludwig Erhard anchored West Germany’s export model inside multilateral tariff rules. Following six months of tariff bargaining at the Torquay Conference in Devon, England, the Federal Republic officially acceded to the General Agreement on Tariffs and Trade (GATT) on October 1, 1951. Simultaneously, Bonn replaced Germany’s archaic weight-based 1902 Bülow tariff with a modern ad valorem customs schedule that lowered duties on industrial inputs and granted most-favored-nation access to Western markets. ^[7]

Seven years later, the entry into force of the Treaty of Rome on January 1, 1958 created the six-nation European Economic Community (EEC) Customs Union. Even before the EEC completed the abolition of internal industrial tariffs on July 1, 1968, Erhard reinforced Germany’s anti-inflationary competitiveness by implementing unilateral “conjunctural tariff cuts” (konjunkturpolitische Zollsenkungen) in 1956–1957 and 1964 to cheapen imports and keep domestic industrial wages and prices below those of France, Britain, and Italy. ^[8]

Because the Deutsche Bundesbank (established in 1957) maintained stricter price discipline than its Bretton Woods trading partners while the fixed exchange rate remained anchored at 4.20 DM per US dollar (revalued modestly by 5 percent to 4.00 DM per dollar in March 1961), West Germany accumulated a structural real exchange rate advantage. Each year, foreign inflation made German automobiles, machine tools, electrical equipment, and chemicals progressively cheaper in real terms, turning the EPU’s former problem debtor into a chronic creditor whose gold and dollar inflows repeatedly destabilized European parities.

November 1968: Karl Schiller’s 4% Border-Tax “Ersatz Revaluation”#

By autumn 1968, the divergence between West Germany’s booming trade surplus (which reached 18.4 billion DM in 1968) and France’s post-May 1968 wage and strike crisis triggered an international currency panic. Speculators dumped French francs and British pounds to pour more than 9 billion DM of hot money into Frankfurt within three weeks, betting that Bonn would be forced to revalue the Deutsche Mark upward. From November 20 to 22, 1968, Social Democratic Economics Minister Karl Schiller—serving as rotating chairman of the Group of Ten (G10) industrial nations—convened an emergency international monetary conference inside the Bundestag complex in Bonn.

At the Bonn Conference, US Treasury Secretary Henry Fowler, British Chancellor of the Exchequer Roy Jenkins, and French Finance Minister François-Xavier Ortoli demanded a substantial formal revaluation of the Deutsche Mark to save the franc and pound. Backed by German export industrialists and farmers (whose EEC agricultural support prices were denominated in units of account that would fall in DM terms upon revaluation), Grand Coalition Chancellor Kurt Georg Kiesinger and Christian Social Union Finance Minister Franz Josef Strauß flatly refused to alter the official 4.00 DM per dollar parity, with Strauß famously declaring that it was up to the “sick” deficit countries to undergo surgery rather than the “healthy” German economy.

To prevent a breakdown of the Bretton Woods system without formally touching the exchange rate, Karl Schiller engineered a fiscal substitute immediately dubbed the “surrogate revaluation” (Ersatz-Aufwertung). Under the External Economic Safeguards Act (Gesetz über Maßnahmen zur außenwirtschaftlichen Absicherung, or Absicherungsgesetz) enacted on November 29, 1968, West Germany used its newly introduced Value-Added Tax (Mehrwertsteuer, launched on January 1, 1968 at 11 percent) to mimic a 4 percent currency revaluation at the border. Exporters saw their standard VAT border rebate cut by 4 percentage points—effectively imposing a 4 percent export tax (2 percent on reduced-rate agricultural goods)—while importers received a 4 percent border tax credit on imported merchandise.

Although the 4 percent border tax temporarily calmed currency markets over the winter of 1968–1969, foreign demand for German capital goods was so price-inelastic that German manufacturers simply passed the 4 percent surcharge onto foreign buyers, and the trade surplus barely budged. After making Deutsche Mark revaluation the central issue of the September 1969 federal election campaign, Karl Schiller and the newly elected Willy Brandt coalition suspended the 4 percent border tax, floated the currency briefly, and on October 24, 1969 enacted a formal 9.29 percent upward revaluation of the Deutsche Mark from 4.00 DM to 3.66 DM per US dollar.

From the Collapse of Bretton Woods to the 1985 Plaza Accord#

When the Bretton Woods fixed-rate regime collapsed completely in March 1973, West Germany transitioned to a joint European float while the Bundesbank pioneered annual monetary-growth targeting in December 1974. During the early 1980s, the combination of Federal Reserve Chairman Paul Volcker’s double-digit US interest rates and President Ronald Reagan’s fiscal deficits drove the US dollar from 1.70 DM in 1980 to a peak of 3.47 DM in February 1985. Priced in a super-strong dollar, West German exports to North America and Europe boomed, propelling the Federal Republic’s current-account surplus toward 4 percent of GDP even as protectionist bills piled up in the US Congress.

To head off a global trade war, US Treasury Secretary James Baker invited the finance ministers and central bank governors of West Germany, Japan, France, and the United Kingdom to a secret meeting at New York’s Plaza Hotel on September 22, 1985. Representing Bonn and Frankfurt, Finance Minister Gerhard Stoltenberg and Bundesbank President Karl Otto Pöhl signed the Plaza Accord, committing the G5 nations to coordinated foreign-exchange market interventions to bring about an “orderly appreciation of the main non-dollar currencies against the dollar.” Insisting on the word “orderly” to preserve the Bundesbank’s domestic monetary autonomy, Pöhl and Stoltenberg joined roughly $18 billion in multi-central-bank dollar sales that drove the greenback down by more than 40 percent to 1.58 DM by the end of 1987—demonstrating that even after a massive currency appreciation, West Germany’s high-value manufacturing specialization kept it at the pinnacle of global export trade.

Theoretical & Balance-Sheet Transmission Mechanism#

In the Kindleberger–Minsky taxonomy of financial instability (Kindleberger, 1978; Minsky, 1986) and Irving Fisher’s (1933) debt-deflation framework, speculative asset booms become systemic crises when credit expansion shifts balance sheets from hedge finance (cash flows covering principal and interest) to speculative and Ponzi finance (relying on rising asset prices and short-term margin roll-overs).

Once monetary tightening or an exogenous shock halts price appreciation, forced margin liquidations trigger Fisherian debt-deflation: fire-sale asset discounts erode bank collateral values, contracting credit supply across the real economy.

Sources and Further Reading

1. Barry Eichengreen, “ International Policy Coordination: The Long View (NBER Working Paper No. 17665),” National Bureau of Economic Research, 2011-12. Peer-Reviewed / Academic Research
2. Barry Eichengreen, “ Regional Financial Arrangements and the International Monetary Fund (ADBI Working Paper No. 394),” Asian Development Bank Institute / EconStor, 2012. International Financial Institution
3. Federal Ministry for Economic Affairs and Climate Action and Euler Hermes AG, “ History of the Export Credit Guarantees of the Federal Republic of Germany,” Exportkreditgarantien.de, 2024. Historical & Financial Reference
4. Jörg Bibow, “ Germany and the Euroland Crisis: The Making of a Vulnerable Haven (Levy Economics Institute Working Paper No. 767),” Levy Economics Institute / EconStor, 2013. Peer-Reviewed / Academic Research
5. Deutsche Bundesbank, “ Geschäftsbericht der Deutschen Bundesbank für das Jahr 1968,” Deutsche Bundesbank, 1969-04. Central Bank / Monetary Authority
6. James M. Boughton, “ Silent Revolution: The International Monetary Fund, 1979–1989 – Chapter 4: Policy Cooperation: The Fund and the Group of Seven,” International Monetary Fund, 2001. International Financial Institution
7. Irving Fisher — "The Debt-Deflation Theory of Great Depressions," Econometrica 1, no. 4 (FRASER Federal Reserve Archive, 1933): 337–357 Central Bank / Monetary Authority
8. Charles P. Kindleberger & Robert Z. Aliber — Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan) Peer-Reviewed / Academic Research

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