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The great inflation

The Great Inflation

In late-1922 the German government were forced to ask the Allies

for a moratorium on reparations payments; this was refused, and

she then defaulted on shipments of both coal and timber to

France. By January of the following year, French and Belgian

troops had entered and occupied the Ruhr. The German people,

perhaps for the first time since 1914, united behind their

government, and passive resistance to the occupying troops was

ordered. A government-funded strike began as thousands of workers

marched out of their factories and steel works. The German

economy, already under massive pressure, gave way. The huge cost

of funding the strike in the Ruhr and the costs of imports to

meet basic consumer needs were met by the familiar expedient of

the printing presses. Note circulation increased rapidly, and by

November 1923 had reached almost 92 trillion marks. With less

than three per cent of government expenditure being met from

income and with the cost of one dollar at four billion marks,

Germany was in the throes of economic and social chaos.

Starvation became a reality for millions of people, despite a

bumper cereal harvest, as shops reverted to the barter system.

Farmers refused to accept the effectively worthless, banknotes in

exchange for grain, and food quickly began to run short in the

cities. Prices rose one trillion-fold from their pre-war level.

More importantly, for the long-term political future of Germany,

the middle and working classes saw their savings wiped out.

These were, in essence, the people who were later to become the

hard-core of the Nazi vote.

Economists will argue that runaway hyperinflation has two

sources. Firstly, it arises through a fall in the foreign

exchange value of a currency, when an adverse balance of payments

reduces foreign investors demand for the currency. A falling

exchange rate increases the cost of imports and, therefore, the

cost of living. Wages rise as workers try to maintain their

standard of living, especially if previous institutional

arrangements have linked wages to living costs. Firms paying

higher wages raise the price of the goods they sell, prices rise

still further, the foreign exchange value of the currency falls

still more, and the cycle continues. Secondly, it arises through

a large budget deficit which no one believes will narrow in the

future. Faced with the prospect of budget deficits for many years

to come, the usual sources of credit available to the government

decline to make further loans; the government can no longer

borrow to cover the deficit between revenue and expenditure. The

only alternative is to print more and more banknotes. As

government workers and suppliers present their bills to the

Treasury, it pays them off with newly-printed pieces of paper.

This puts more banknotes into the hands of the public and they

then spend them. In Germany, as we have seen, the problem was

that there were trillions of marks worth of paper currency in

circulation. Prices could rise one thousand times between a

worker being paid and his reaching the shops. A common analogy

used is that if one could afford a bottle of wine today, one

should keep the empty bottle which would be worth more tomorrow

than the full bottle was today.

Eventually, the power to boost government spending by printing

money goes. When the government can no longer gain, even in the

short-term, a budgetary balance through inflation, the situation

becomes so intense that stabilisation through a currency board, a

new finance minister or a link to the gold standard is

implemented, and reform can be successful. It was at this point

that some sanity was injected into the German economy by the

election of Gustav Stresemann. He called a halt to resistance in

the Ruhr, and set out to stabilise the mark. Luther, StresemannÆs

Finance Minister, introduced the rentenmark the value of which

was based on GermanyÆs staple, rye, rather than gold. In fact the

rentenmark represented a mortgage on GermanyÆs land and industry,

which could never be redeemed. It did not matter. The point was

that the currency was stabilised and became exchangeable at a

rate of one billion old marks to one new mark, and at the pre-war

parity of 4.2 marks to the dollar. The new currency was quickly

accepted by the population, and food and consumer goods began to

appear in the shops. The government could now attempt to regain

budgetary control in a climate of low inflation. The Dawes Plan

was brokered, and a sum of some 39 billion dollars was lent to

Germany of the following five years. However, this new economic

prosperity had its basis in foreign investment, and thus the fate

of Germany was now effectively held in the hands of Wall Street.

The consequences of the Great Inflation to Germany are many fold,

and there is no doubt that politically, the first warning signs

of a move away from fascism were seen. In the elections of May

1924, both the Nazi and Communist Parties made gains at the

expense of the centre. The faith of the people in the Republic

suffered a severe blow. As Shirer points out: æWhat good were the

standards and practices of such a society, which encouraged

savings and investment and solemnly promised a safe return from

them and then defaulted? Was this not a fraud on the people? And

was not the democratic Republic, which had surrendered to the

enemy and accepted the burden of reparations, to blame for the

disaster?Æ Upper middle class savings in Germany were wiped out

during the hyperinflation. Such savings had usually been

invested in bonds and bank accounts, so the collapse of the real

value of the mark carried with it the collapse of the value of

the bonds. Debtors benefited substantially, for their debts were

effectively wiped out. The relatively small, financially

unsophisticated savers who made up GermanyÆs upper middle class

had nothing left. This may have been the most important aspect of

GermanyÆs early-1920s hyperinflation. People who are not rich but

are comfortably off, pillars of their community, in middle-age,

who have done well in life and saved enough to feel comfortable

were the strongest supporters of relatively democratic,

relatively liberal governments. Having learned the lessons of the

Great Inflation, these were the people who remembered 1923 when

the mark collapsed for the second time. These were the people who

voted for the Nazi Party in their millions.

The causes, then, of the Great Inflation are not perhaps the

reparations clauses of the Treaty of Versailles which are

commonly blamed for GermanyÆs ills. German financial practices

during the war undoubtedly sowed the seeds of the disaster which

was to strike in 1921. The failure of her Republican governments

to act, by implementing austerity measures, through a fear of

their own weakness of position, led to the inflationary printing

of more paper money. The reparations clauses were clearly side-

stepped by the very same governments who pleaded they did not

have the means to pay. This suited the government, and also

GermanyÆs industrialists and landowners who profited immensely

from inflation. Avoidance of reparations, in fact, became more

important than the welfare of the German people. The Republic was

built on weakness: the idea that the fledgling Republic had

æstabbed Germany in the backÆ by surrendering was widespread, and

therefore led to the perceived necessity of avoiding

reparations. This policy was doomed to failure, particularly in

the face of French belligerence. More short-sightedness was to

blame for the passive resistance in the Ruhr. Whilst clearly

wishing to prevent German production from falling into French

hands, it is clear that the government could not afford to

finance the resistance for long and, as we have seen, this was

the proverbial straw which broke the camelÆs back. There were, of

course, external influences: the manipulation of the mark by

foreign speculators was a side effect, as was Allied insistence

on reparations. These were, however, merely a side-show to the

main event. The fault of the inflation rests firmly in the hands

of the government. In terms of the consequences of the inflation,

the signposts to the future were in place. It was clear that a

relatively well-off middle and upper middle class had little of

no interest in anything other that centrist democracy. The swing

towards extremism in 1924 was an indicator of what was to come in

1930. This is demonstrated by the gains made by the Nazis and

Communists in May 1924, but also reflected in their poor

performances in the ægolden yearsÆ of late-1924 to 1928.

Following the second collapse of the mark in 1929, both these

parties made huge gains at the expense of the centre. Voters do

have memories, and those memories of two financial disasters in

less than a decade were extremely strong. Finally, the fate of

Germany, which since 1918 had been held in the hands of foreign

governments, was essentially transferred into the hands of

international financial institutions. The same people who

structured the loans which helped to end the Great Inflation were

the very same as those who speculated Germany - and, to be fair,

the rest of the world - into the financial collapse of 1929.

Germany, kept militarily weak by the allies, financially weak by

her government and her industrialists was waiting in the wings

for her moment to come. When that moment came, the ætwenty year

truceÆ was ended by Adolf Hitler. That isperhaps the most damning

indictment of both Republican mismanagement and world indecision

that can be made.

John Maynard Keynes, The Economic Consequences of the Peace,

(London: 1920), p.64.

William R. Keylor, The Twentieth Century World, (Oxford: 1984).,

pp. 84-85.

William Gutteman and Patricia Meehan, The Great Inflation:

Germany 1918 - 1923, (London: 1976), p.71.

Eberhard Kolb, æThe Weimar RepublicÆ, (London: 1995), pp. 39 -

41.

William L. Shirer, æThe Rise and Fall of the Third ReichÆ, (New

York: 1980), pp. 58-61.

David Hackett Fischer, æThe Great WaveÆ, (Oxford: 1996), pp. 192-

193.

Erik Achorn, æEuropean Civilization and Politics since 1815Æ,

(London: 1935), pp. 561 - 562.

Kolb, op. cit., pp. 40 - 41.

Shirer, op. cit., p. 63.

David Fischer, op. cit., p. 193

The argument in this paragraph is drawn from David Fischer, op.

cit., pp193 -194, Paul Kennedy, æThe Rise and Fall of the Great

PowersÆ, (London: 1989, pp. 357 - 373, and D. H. Aldcroft, æFrom

Versailles to Wall StreetÆ, (New York: 1977), chs. 1 & 2.

David Blackman, æEuropean Inflationary Trends: 1815 - 1945Æ,

(London: 1954), pp. 321 -322.

David Fischer, op. cit., pp. 194 - 5.

Kolb, op. cit., pp. 194 -195.

Shirer, op. cit., p. 61.

PAGE §

PAGE 1§

Footnote Text

iy, the provisions of the Treaty of Versaillesflation

profiteeringÆ. Successive German governments failed to implement

anti-inflationary policies and, it has been argued, this

represented the cynical use of inflation as a reason for

reducing, or not meeting, reparations payments. This is not to

say that the reparations clauses did not have an effect on the

German economy - of course they did. The Allies, however, failed

to set a final reparations figure until the London Ultimatum of

1921; this long delay produced, as William Keylor argues:

æàwidespread economic uncertaintyàForeign and domestic investors

were understandably reluctant to commit their savings to an

economic system that was saddled with an uncertain, and

potentially enormous, claim on its productive resources.Æ In

terms of the broader consequences of the Great Inflation, it is

easily argued that the control of GermanyÆs fiscal affairs

ultimately passed into the hands of the international banking

community, which was to have disastrous long-term effects on

Germany. It is also arguable that, as æthe foster-child of the

Great InflationÆ, Adolf Hitler would come to power as a long term

effect.

The total cost of the First World War to Germany was, it has

been calculated, in excess of 164 billion marks. This massive

cost was met by raising some 93 billion marks in war loans, 29

billion from discounted Treasury Bills and the balance by the

simple - if potentially disastrous - expedient of printing paper

money. By late-1918 over 35 billion paper marks were in

circulation, and more paper money was used to invest in yet more

Bills. There was little fear that inflation - already beginning

in Germany - would have a serious long-term effect on the

economy. This financial mismanagement was justified by the

belief, in both financial and government circles, that the

defeated enemy would pay for the cost of the war. Germany had

already indicated her willingness to fund her wars in this way,

as can be seen in the terms of the Treaty of Brest-Litovsk and

her treaty with France in 1871. Karl Helfferich, Reich Secretary

to the Treasury, had said in a wartime speech to the Reichstag:

æAfter the war we shall not forego our claim that our enemies

shall make restitution for all the material damage they have

caused by the irresponsible launching of this war against us.Æ

However, because of the inflationary means by which the imperial

government had financed the war, the German mark in 1919 was

worth less than 20 per cent of its pre-war value. After the

formation of the Republic in 1919that can be made.

John Maynard Keynes, The Economic Consequences of the Peace,

(London: 1920), p.64.

William R. Keylor, The Twentieth Century World, (Oxford: 1984).,

pp. 84-85.

William Gutteman and Patricia Meehan, The Great Inflation:

Germany 1918 - 1923, (London: 1976), p.71.

Eberhard Kolb, æThe Weimar RepublicÆ, (London: 1995), pp. 39 -

41.

William L. Shirer, æThe Rise and Fall of the Third ReichÆ, (New

York: 1980), pp. 58-61.

David Hackett Fischer, æThe Great WaveÆ, (Oxford: 1996), pp. 192-

193.

Erik Achorn, æEuropean Civilization and Politics since 1815Æ,

(London: 1935), pp. 561 - 562.

Kolb, op. cit., pp. 40 - 41.

Shirer, op. cit., p. 63.

David Fischer, op. cit., p. 193

The argument in this paragraph is drawn from David Fischer, op.

cit., pp193 -194, Paul Kennedy, æThe Rise and Fall of the Great

PowersÆ, (London: 1989, pp. 357 - 373, and D. H. Aldcroft, æFrom

Versailles to Wall StreetÆ, (New York: 1977), chs. 1 & 2.

David Blackman, æEuropean Inflationary Trends: 1815 - 1945Æ,

(London: 1954), pp. 321 -322.

David Fischer, op. cit., pp. 194 - 5.

Kolb, op. cit., pp. 194 -195.

Shirer, op. cit., p. 61.

Word Count: 2401

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