At the Berlin Palace, Frederick III felt immense pressure. Due to the impact of the war, the economic crisis had erupted, and the Kingdom of Prussia had fallen into a deep depression early on. The only reason the Prussian government had managed to hold on until now was by flipping the table, seizing assets and confiscating wealth to secure a temporary financial boost. But flipping the table came at a cost. Even though Frederick III took decisive measures to restore production in time, the government’s revenue still suffered greatly. If that were the only problem, it wouldn’t be too concerning. Given time, things could eventually recover. Unfortunately, misfortune never comes alone. Just as the factories were being allocated and people were ready to roll up their sleeves and get to work, the global economic crisis struck. Mountains of unsold products piled up, with no buyers in sight. The officers and soldiers who had taken over the factories naturally turned to the government to solve the problem. But Frederick III couldn't conjure up a market out of thin air. All of Europe was suffering from overproduction, while the two biggest economic bullies, Britain and Austria, were shamelessly engaging in dumping. As a result, the international prices of industrial and commercial goods had fallen below Prussia’s production costs. Not only was the Prussian industry unable to compete on price, but its products also lagged far behind in quality. The Prussian government had an agreement with its British creditors, allowing it to repay debts with industrial and commercial goods… at least in theory. The problem was that the British controlled the pricing. For example, right now, the British were setting the final repayment value by first applying a 30% discount based on international wholesale prices, then deducting additional amounts based on a quality assessment. According to British pricing, the majority of Prussian goods were valued at less than half of their production cost. “Selling” them meant taking a massive loss, and this loss couldn’t be passed on to the producers. Otherwise, every factory in the country, without exception, would go bankrupt. This was something the Prussian government absolutely could not accept. These factory owners had become the backbone of the Kingdom of Prussia. It had taken great effort and economic incentives to persuade the Junker aristocrats to accept military downsizing. If their livelihoods were now destroyed, the government would be digging its own grave. With revolutionary waves surging across Europe, Prussia’s stability depended on preserving employment. Since the factories were owned by the workers themselves, unemployment was not an issue. To maintain public confidence, the Prussian government had promised to guarantee purchases at cost price. Under normal economic conditions, this promise posed no problem. Businesses exist to make a profit, and no one would deliberately produce excess goods just to dump them on the government. But now, with the economic crisis in full swing, the market was in complete disarray, and businesses couldn’t turn a profit at all. According to the agreement, since companies couldn’t sell their products, the Prussian government was obligated to purchase them at cost. Prussia had no colonies, so if it wanted to dump its surplus goods, it had to compete with the rest of Europe. From a purely economic perspective, the British pricing was reasonable. Prussian industrial and commercial goods simply lacked competitiveness and could only rely on price wars. The European continent was not a viable market. Due to the economic crisis, most Europeans were impoverished, and unless a product was an absolute necessity, finding buyers was difficult. For many people, the only essential commodity at this time was food. Unfortunately, Prussia itself did not have enough to eat, so exporting grain was out of the question. As for these low-quality industrial goods, the only option was to dump them overseas. However, Prussia lacked the capability to conduct large-scale global trade. Most international markets were inaccessible to them. Only a few nations possessed well-established commercial networks capable of global market penetration. These were Britain, Austria, France, Spain, the Netherlands, and Portugal—six countries that all shared one common trait: colonial empires. Among them, Spain, the Netherlands, and Portugal had declined. While their trade networks still existed, their colonies had dwindled, making them incapable of absorbing Prussia’s industrial output. France had a fair number of colonies, but its markets were too small. Domestic capitalists were already struggling over limited resources, so there was no chance they would allow Prussian goods in. Austria had developed its colonies well, and its markets were relatively stable. However, Austria itself had massive industrial capacity, leaving no extra demand for Prussian products. Even if Prussia managed to enter Austrian markets, its goods would struggle to compete against Austrian-made products. Britain, on the other hand, had the largest colonial empire, ample markets, and relatively less internal competition. It was, in effect, Prussia’s only option. Under these circumstances, it was only natural for the British to drive prices down. On one hand, they exported industrial raw materials to Prussia; on the other, they accepted Prussian industrial and commercial goods as debt repayment. On the surface, it seemed like they were helping the Prussian government, but in reality, Prussia was working for them for free. And not just for free—now the British were taking things a step further, forcing Prussia to work at a loss. Frederick III felt like a man who had labored tirelessly for a year, only to find, after settling accounts, that he hadn’t earned a single penny and was instead drowning in debt. Yet he had no choice but to accept it. If he refused, it would be like losing his job while still being crushed by mortgage payments, credit card bills, and loans piling up all at once—it would be disastrous. Life had to go on. “Bleeding losses” were still better than “losing everything.” Even though the British were squeezing them on prices, the Prussian government had no choice but to bear the losses. With hope in his voice, Frederick III asked, “How is the situation? Have the British agreed to extend our debt payments?” Prussia was too resource-poor to sustain itself. It had to import industrial raw materials, and foreign suppliers did not accept Prussian marks. This meant the kingdom had to spend its precious foreign exchange reserves. Their debt repayment agreement with Britain did not mean Prussia could simply dump its goods on its creditors and be done with it. The Prussian government wasn’t in a position to act so boldly. Most of Prussia’s creditors were banks and financial institutions which were entities focused on finance rather than international trade.
In reality, Prussia sold its industrial and commercial goods to British capitalists in exchange for foreign currency. After deducting costs, the remaining funds were used entirely for debt repayment.
The purpose of the “agreement” was that the British government also allowed Prussian goods to enter its markets. Without this arrangement, Prussian exports would have been limited to the British domestic market under the free trade system and it was obvious that they wouldn’t sell well there. Now, with prices collapsing, the selling price of Prussian goods was lower than the cost of their industrial raw materials. Since it was a losing business, the Prussian government naturally had no “foreign exchange” left to repay its debts. Foreign Minister Friedmann’s expression darkened. “We’ve tried everything, even securing support from the British government, but negotiations still failed. The economic crisis has hit Britain even harder than we expected. The banks are short on money too. One of our creditors, Garrett Bank, went bankrupt during negotiations due to a broken financial chain.” If the creditors themselves were struggling financially, this was a huge problem—especially for banks like Garrett Bank, which had collapsed from its own liquidity crisis. A bank that couldn’t even save itself was certainly not going to agree to a debt extension. Frederick III let out a deep sigh and turned to the Finance Minister. “How much foreign exchange do we have left? If we continue making normal debt payments, how long can we last?” Finance Minister Ovitz frowned and replied, “The situation is dire. Currently, our total foreign exchange reserves amount to approximately 7.656 million pounds, consisting of 3.54 million pounds, 5.68 million guilders, and 8 million francs… Theoretically, if we used all of it solely for debt payments and made no other expenditures, we could last for a maximum of seven months. In reality, that’s impossible. We must import industrial raw materials, machinery, and agricultural products to sustain domestic production and meet basic living needs.” Foreign exchange reserves fluctuated with both inflows and outflows. Under normal circumstances, Prussia’s industrial and commercial exports would allow it to maintain a balanced trade account. After all, domestically produced industrial raw materials and labor costs did not require foreign exchange. They could be settled in marks instead. The 7.656 million pounds in reserves was equivalent to 56.04 tons of gold, an undeniable fortune in this era, greater than the total gold reserves of many nations. If Prussia had no foreign debt, such reserves would have been more than enough to sustain a comfortable existence for a small country. Unfortunately, there was no “ifs.” The Kingdom of Prussia carried an enormous debt burden. This fortune was barely enough to cover seven months of payments. In reality, it wouldn’t even last that long. With export prices falling, Prussia had already entered an era of trade deficits. Unless creditors were willing to accept payment in marks, the Prussian government had no way of making its scheduled debt repayments. … Upon receiving the Prussian government’s urgent request for assistance, Franz’s first reaction was: Encourage the Prussians to default. Once the thought took hold, it refused to leave, as if he had been possessed by the idea. “If the Prussian government defaults, what will be the consequences?” Foreign Minister Wessenberg’s expression changed slightly. “Your Majesty, Prussia’s economy is heavily influenced by the British. The Prussian government does not have the capability to default on its debts. If Prussia were to default, the British could simply impose trade sanctions, and Prussia would collapse within six months.” This was a fact. If the Royal Navy blockaded the coastline, the Kingdom of Prussia would face severe shortages of industrial raw materials and a lack of markets for its products. Of course, they could still use land routes to bypass the blockade through neighboring countries, but the costs would be high enough to bankrupt any business. Chancellor Felix countered, “Not necessarily! Under normal circumstances, the British might take such action to make an example out of them. But things are different now. The revolutionary tide in Europe is growing stronger. The French revolutionaries have already taken control of Paris, and the situation in Prussia is also dire where an uprising could break out at any moment. Unless the British plan to collect their debts from revolutionaries, they cannot afford to let Prussia collapse. Right now, the Prussian government truly lacks the ability to repay its debts. A default is only a matter of time, and the British government should already be aware of this. As long as the Prussian government does not outright refuse to pay and instead finds a reasonable excuse to request a debt extension, the British government is unlikely to take extreme measures. The creditors—banks, financial institutions, and speculators—may hold significant influence in Britain, but they do not have the power to dictate government policy. The British government will not sacrifice its strategic interests just to protect these financial groups. Without government backing, they cannot do anything to the Kingdom of Prussia. If the situation in Europe worsens further, the Prussian government might even be able to negotiate with the British for a partial debt reduction.” Right now, this is not the post-World War II era. Noble elites are still at their peak, and the idea that financial groups could control the government is nothing but a pipe dream. The French Revolution was already terrifying enough. If a revolution were to succeed in Prussia as well, then the revolutionary tide in Europe would become completely uncontrollable. Even though Britain is an island nation, the revolutionary wave has not spared it. For years, Britain and France have been exporting revolutionary ideas to each other. If the revolution continues to spread, they will not be able to remain unaffected. … On May 1, 1882, a large-scale Anti-Hunger Movement erupted in the Kingdom of Prussia. Countless citizens took to the streets, demanding that the government import more grain to resolve the domestic food shortage. In response to the outbreak of the movement, the Prussian government acted swiftly, seeking international aid as quickly as possible. At the same time, citing the heavy depletion of foreign reserves due to debt repayment and the lack of funds to purchase food, the Prussian government formally requested a debt repayment extension from its creditors. Without a doubt, this did not feel like a request, it was more like an outright notice. Alongside submitting this request, the Prussian government had already halted its May debt payments. Publicly, it was announced that the funds originally allocated for May’s debt repayment would instead be used to purchase grain to alleviate the domestic food crisis. The majority of Prussia’s creditors were concentrated in Britain and France, holding 95.4% of Prussia’s external debt. Settling matters with these two major creditors essentially meant settling everything. More precisely, as long as Britain was dealt with, the problem would be solved. The French were currently preoccupied. A civil war had already broken out, and for the time being, they had no time to bother with such trivial matters. Has a famine truly broken out in the Kingdom of Prussia? That depended on how the British saw it as such! If the British government accepted this claim, then a famine had “truly” broken out in Prussia. If the British government refused to acknowledge it, then no famine existed in Prussia. Politics is simply about weighing pros and cons—truth is irrelevant.
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