Great Inflation Essay, Research Paper
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 pre sses. 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
th roes 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
pe ople 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 rat e 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 pr ice 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 t o 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 bottl e 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 Ru hr, and set out to stabilise the
mark. Luther, Stresemann?s Finance Minister, introduced the rentenmark the
value of which was based on Germany?s staple, rye, rather than gold. In
fact the rentenmark represented a mortgage on Germany?s 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 quickl y 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 ex pense of the centre. The faith of
the people in the Republic suffered a severe blow. As Shirer points out:
?What good were the standards and practices of such a society, which
encouraged savings and investment and solemnly promised a safe return from
the m 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?? Upper middle class
savings in Germany were wiped out dur ing 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 effecti
vely wiped out. The relatively small, financially unsophisticated savers
who made up Germany?s upper middle class had nothing left. This may have
been the most important aspect of Germany?s early-1920s hyperinflation.
People who are not rich but are comfo rtably 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
Inflatio n, 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 Germany?s 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 Germany?s 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 ?stabbed Germany in the back? 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 g overnment could not afford to
finance the resistance for long and, as we have seen, this was the
proverbial straw which broke the camel?s back. There were, of course,
external influences: the manipulation of the mark by foreign speculators
was a side effe ct, 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 ga
ins made by the Nazis and Communists in May 1924, but also reflected in
their poor performances in the ?golden years? 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 han ds 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 ?twenty year truce? was ended by Adolf
Hitler. That is perhaps the most dam ning 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, ?The Weimar Republic?, (London: 1995), pp. 39 – 41.
William L. Shirer, ?The Rise and Fall of the Third Reich?, (New York: 1980), pp. 58-61.
David Hackett Fischer, ?The Great Wave?, (Oxford: 1996), pp. 192-193.
Erik Achorn, ?European Civilization and Politics since 1815?, (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, ?The Rise and Fall of the Great Powers?, (London: 1989, pp. 357 – 373, and D. H. Aldcroft, ?From Versailles to Wall Street?, (New York: 1977), chs. 1 & 2.
David Blackman, ?European Inflationary Trends: 1815 – 1945?, (London: 1954), pp. 321 -322.
David Fischer, op. cit., pp. 194 – 5.
Kolb, op. cit., pp. 194 -195.
Shirer, op. cit., p. 61.
Footnote Text:
iy, the provisions of the Treaty of Versaillesflation profiteering?.
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 meeti
ng, 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: ??widespread economic
uncertainty?Foreign 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 pro
ductive resources.? In terms of the broader consequences of the Great
Inflation, it is easily argued that the control of Germany?s fiscal
affairs ultimately passed into the hands of the international banking
community, which was to have disastrous long-t
erm effects on Germany. It is also arguable that, as ?the foster-child of
the Great Inflation?, 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 will
ingness 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: ?After the war we shall n
ot 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.? 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, ?The Weimar Republic?, (London: 1995), pp. 39 – 41.
William L. Shirer, ?The Rise and Fall of the Third Reich?, (New York: 1980), pp. 58-61.
David Hackett Fischer, ?The Great Wave?, (Oxford: 1996), pp. 192-193.
Erik Achorn, ?European Civilization and Politics since 1815?, (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, ?The Rise and Fall of the Great Powers?, (London: 1989, pp. 357 – 373, and D. H. Aldcroft, ?From Versailles to Wall Street?, (New York: 1977), chs. 1 & 2.
David Blackman, ?European Inflationary Trends: 1815 – 1945?, (London: 1954), pp. 321 -322.
David Fischer, op. cit., pp. 194 – 5.
Kolb, op. cit., pp. 194 -195.
Shirer, op. cit., p. 61.