The Downfall of Money: Germanys Hyperinflation and the Destruction of the Middle Class
Page 17
All the same, it seemed in the early summer of 1920, though much in Germany was still confusion and deprivation, that an era of stability might at last be beginning.
Inflation had been held, and perhaps now it could be defeated.
Inflation afflicted every nation involved in the First World War, not just the losers. In Britain, prices more than doubled between 1913 and 1919; in France they were multiplied by around 3.5 per cent, directly comparable with Germany. Even America suffered a doubling of pre-war prices. As was the case in Germany, this trend continued into the early post-war era. In Great Britain, between May 1919 and May 1920, prices jumped further by 40 per cent from 246 to 325 (1913 = 100); in America, in 1919-20 prices rose by another quarter. In France, the victor country with the most serious economic and financial problems, the rise between April 1919 and 1920 was a spectacular 77 per cent.8
Every one of the belligerent nations had spent vast amounts on things that didn’t count as items of human consumption, and borrowed or printed money to do so. Then came peace, and, accompanying the relief at the end of violence, the gnawing anxiety of how to pay the bill for it.
A latecomer to the war and by 1918 the only major power with a surplus to invest rather than a deficit to finance, only America came through the conflict without serious damage to its economy, or to its financial and fiscal structures. Even Britain, which at the beginning of the war was in spectacularly good financial shape, with the lowest debt-to-income ratio of any European country,9 had by the third spring of the war drained its once-burgeoning imperial economy near enough dry.
America’s entry into the war on the Allied side in April 1917 was the deus ex machina that saved a financially exhausted Britain from running out of the cash it needed to pay for the American goods – food, raw materials and munitions – that were by now vital to the Allied war effort. In a splendid irony, Germany’s high-stakes switch to unlimited submarine warfare, pushed through by Ludendorff and the ultra-nationalists against the advice of cooler heads among the Reich’s elite, served as the casus belli. It was thus arguably the British Empire’s bitterest enemies in Berlin whose blunder, by tipping the USA into the Allied camp, managed to arrange Britain’s (and the Entente’s) salvation. As the German banker Max Warburg, a consistent opponent of unrestricted submarine warfare, had remarked in 1916: ‘If America is cut off from Germany, this means a fifty percent reduction in Germany’s financial strength for the war and an increase of a hundred percent for England and France’s.’10
Germany had financed her campaign mainly by domestic war loans, with some foreign borrowing from neutrals - she owed 1.5 billion gold marks to Holland by the end of the war and as much again to other neutrals - but she relied on foreign money far less than the Entente. This placed Germany in a different position to the Entente post-war, as well.
True, the German government owed its own people vast sums, but who was going to enforce the repayment of that? In any case, by the end of the war 5 per cent annual interest on the face value of a war bond was already worth a lot less in real terms than in 1914, and the value took a further dramatic dive between 1918 and 1920. Already, even though the inflation was not yet at the hyper stage – indeed, in the late spring of 1920 it had apparently reached a kind of plateau – a lot of Germany’s domestic war debt had effectively been liquidated. No one expressed it more clearly than Keynes, who knew full well from the outset what was going on in Germany, in his Economic Consequences of the Peace: ‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.’11
No, the biggest debt Germany was going to have to deal with in the post-war era was that pertaining to reparations. While, following the Kapp putsch, the mark continued its recovery, the Allies were still haggling over the exact sum, nature and distribution of the reparations they planned to demand. The negotiations, mainly at Spa in Belgium, would go on throughout 1920 and into the early part of 1921. The wait for a decision, from the point of view of Germany and the other defeated powers, was agonising, and destabilising.
Part of the problem arose from the web of inter-Allied debt that had come into being during the war. The United States had lent the European Allies around $10 billion altogether, with Britain often acting as intermediary. By the end of the war, France owed $4 billion to the United States directly, and $3 billion to Britain. Britain in turn owed $4.7 billion to America, while being owed $11.1 in total by the other Allied powers, including the minor ones. Britain was therefore relying on getting paid by France and other Allies in order to pay back its debt to America; while France was counting on getting reparations from Germany.12
This gives some idea of the war debt versus reparations merry-go-round that followed the end of the war. Whatever the rights or wrongs of the financial penalties forced upon Germany, it helps to explain why the French in particular – but also, try as they might to hide the fact, the British as well – were so insistent on their billions of pounds of flesh. If we take the pre-war gold mark/dollar rate as 4.2, then it comes out that the Allies owed America 42 billion gold marks.
The notional transfer into gold marks is useful because it helps look at the reparations totals that were up for discussion between the Allies in a meaningful way. So, if we add an estimate for damage caused by the German occupation of northern France and the fighting that went on there of between $7 billion and $11 billion (see Chapter 2) and take a median of $9 billion, we must add another bill of around 38 billion gold marks. So that is already a running total of 80 billion gold marks. Belgium’s economy was paralysed at the end of the war. In the spring of 1919, the country still suffered from 75 per cent unemployment, and meanwhile was looking for at least $3 billion (12.6 billion gold marks) for civilian damage, war debts and pensions. This was before she embarked on trying to get compensation for the financial shenanigans that the Germans had indulged in during their four-year occupation. These had included flooding the Belgian economy with paper marks which depreciated rapidly during the course of the war but were still redeemed at the ludicrously high compulsory rate of 1.25 Belgian francs to the mark. The cost of this forced conversion, the Belgian government claimed, amounted to 7.5 billion francs.13 Our running total now reaches somewhere between 95 and 100 billion gold marks. And these were by no means the only financial losses the Allied powers had suffered and for which they might feel inclined to seek recompense.
Understandably, none of the victorious Allied governments wanted to have to tell their taxpayers that this money, which they had been told for more than four years was being spent on a just war against a brutal German tyranny, was going to be levied on them rather than on the defeated enemy. This nervousness on the part of the Allied rulers when explaining the post-war settlement to their populations affected not just the substance of the penalties inflicted on Germany but, perhaps even more significantly, the appearance of these penalties. Reparations were bound to be complicated, and the governments of the victor nations were not at all above exploiting this complexity, using it to hide milder terms within tough-sounding rhetoric, smaller net figures within impressively punitive-sounding gross numbers.
So, reparations were a way for the victorious Allies – all except America, the lender – to repay their own war loans without additional pain. Had the American loans to their co-belligerents been forgiven, as some had believed and many hoped they would be, then it seemed logical that the pressure for imposing crippling reparations on the Germans would have been correspondingly lessened.
However, America gave not an inch in that regard. Both in Congress and in government, there was pretty much universal agreement that the loans made to the Allies during the war were commercial loans, to be repaid in full. As early as November 1918, when, just after the armistice, the British first made a suggestion that debts might be cancelled, they got a dusty answer from Treasury Secretary William McAdoo.14 This insistence on every cent being repaid by America’s struggling form
er allies turned ‘Uncle Sam’ in popular parlance into ‘Uncle Shylock’.
Germany therefore found itself not just the loser in a major war but also, initially at least, a powerless spectator in a post-war economic game of some complexity and danger. The debtor nations among the victors – in practice, everyone except the USA – needed to run consistent export surpluses for some years in order to earn the gold necessary to pay back America. Looked at through this lens, Germany was no different. She also owed a lot of money, much of it indirectly to America via future reparations payments to America’s debtors – Britain, France, Belgium and the rest. Germany therefore also needed, in the post-war period, to vastly increase her taxes to put money in her government’s coffers. Since the Allies would accept reparations only in hard, gold-backed currency, not in paper marks, Germany also needed to achieve a spectacular increase in her exports, in order to earn the foreign exchange required to meet her obligations.
In effect, it followed that every European nation had to create a large export surplus during the post-war years. But if that was so, under widespread conditions of slump everywhere except Germany, who was going to actually buy these exports? For Britain, France, Belgium and so on – or for that matter, Germany – to run surpluses, they needed someone to run a deficit. And who was that going to be? The country they owed all the money to, i.e. America? In Europe’s dreams, perhaps, but in reality, never.
America was pretty self-sufficient, and, especially in commodities such as foodstuffs, a strong net exporter. Not, therefore, a great candidate for the role of sucker-in of imports from the desperate Europeans. The American economy was also a highly protected one. It would become even more so when the Republican candidate, Warren G. Harding, won the presidency in late 1920 on an ‘America First’ platform, based on the lower taxes and even higher tariff walls which were an article of faith for the GOP’s industrial and agricultural supporters. Harding’s Secretary of Commerce, Herbert Hoover, would argue, one must suppose disingenuously, that American purchase of European services, especially through the growth of transatlantic tourist visits to Europe, would help get round this problem.
In fact, the only realistic way of squaring the circle was for American banks, which were awash with potential credit, to lend the Europeans the money needed to set off the recovery that would enable those same Europeans to pay the debts they owed from the war.15 The similarity of this strategy to the modern one of running up debt on one credit card in order to pay off another hardly needs to be mentioned.
The international debt problem was made even worse by the domestic-economic decisions that were made by Western governments in the aftermath of victory. In both America and Great Britain, the powers that be decided to prioritise financial stability over production, private over social welfare, and capital over labour, thus reversing the trends that had been followed during the war.
In Britain, the release of pent-up demand for goods, normal in a post-war period, had led to a spectacular boom that was brought to an abrupt halt in April 1920 when the Bank of England raised interest rates sharply. In America, the Federal Reserve followed a similar strategy. The consequence of this espousal of a balanced budget, spending cuts and tight money by the two major English-speaking powers, was a slump known in its time, though not for long, as the ‘Great Depression’.16 In mid-1921, between a fifth and a quarter of the insured working population of Britain was out of work: 2.4 million people.17
Even in Britain, the harsh new economic policies led to strikes and riots, and were justified by a government rhetoric that exploited the fears of the middle classes. In America, the political atmosphere was thick with the ‘Red Scare’. Attorney General Alexander Mitchell Palmer pushed through arrests and deportations of foreign activists and agitators (the so-called ‘Palmer Raids’), and there was a rise in violent strike-breaking activity.
So, again, in the light of the slump in two of its biggest foreign markets, to whom was Germany supposed to export in order to earn the gold that would soon be demanded by the Allies under the terms of the VersaillesTreaty? In any case, the country remained in very poor shape politically. It was all very well for the two most well-established democracies, Britain and the USA, to subject their populations to ruthless post-war economic health cures, but could newly democratised Germany, in which the electorate was sharply – not to say violently – divided, risk such a daring strategy?
The consensus among the supporters of the Weimar Republic was that it could not, and if the international value of the mark had to be sacrificed to save democracy, so be it.
13
Goldilocks and the Mark
The purpose of the new German elections that took place in June 1920 was to replace the National Assembly with the first post-war Reichstag, in other words to follow a predominantly constituent body with a law-making and governing one. It was surely right that this should be so, but if the government’s object in sending the people back to the polls was to further the process of post-war stabilisation, it could not have made a worse miscalculation.
The vote showed, if the chaos of the year’s early months had not already done so, that whatever degree of consensus had carried the country through the revolution and the painful path to the peace treaty, any such unity of purpose belonged to the past.
The losses for the moderate parties were devastating. The Majority Social Democrats, who had won almost 38 per cent of the vote in January 1919 and 165 seats, had their vote almost halved, to 21.7 per cent, giving them 102 seats. All the other government parties suffered losses, most seriously the democratically minded liberal German Democratic Party, which saw its support, mostly among the educated middle class, reduced even more markedly, from 18.6 to 8.3 per cent.
The Majority Social Democrats had lost most votes to the Independent Social Democrats, whose share soared from 7.6 per cent and 22 seats to 17.9 per cent and 84 seats. The fledgling German Communist Party received 2.1 per cent. The next biggest gainer was the ‘German People’s Party’, the right-of-centre liberals, led by Gustav Stresemann, whose attacks on the Versailles Treaty and on Erzberger’s swingeing new taxes had found a response among the beleaguered middle classes. The right-liberals enjoyed a tripling of their vote (from 4.4 to 13.6 per cent) and an increase in Reichstag seats from 19 to 65. The nationalist-conservative, stridently anti-Republic German National People’s Party also benefited from popular disillusionment, winning 71 seats.
With a total of 459 seats to be distributed in the new Reichstag, the previous governing coalition could only win 205. Never again would there be a majority in the German parliament that gave the Republic its unconditional support. For the rest of the decade, the country would suffer from weak, unstable governments, subjected to an insistent and well-funded barrage of criticism from the radical nationalist camp that could not help but exercise a long-term negative effect on the German public’s conception of democracy.
For now, however, to become viable, the new post-election government would have to follow public opinion and political mathematics, and shift to the right. The new Chancellor would have to come, for the first time since the revolution, from a non-socialist party.
The Majority Social Democrat Chancellor, Hermann Müller, resigned. Sixty-eight-year-old Konstantin Fehrenbach, of the Catholic Centre Party, formed a minority administration composed of Centre, German Democratic Party, and, for the first time, the German People’s Party. It could command the loyalty of only around 170 deputies, and therefore was dependent on Majority Social Democratic support on most major issues.
The new coalition was in any case not a strong combination. The German People’s Party was opposed both to the Republic – in theory at least – and to the Versailles Treaty. It was also reliant on the financial support of many powerful industrialists, including Hugo Stinnes, adding to the party’s strongly pro-business and anti-socialist tone. The dream of a democratic Germany was not yet a thing of the past, but the 1920 Reichstag election certainly spelled the e
nd for a social-democratic one.
If the period after the defeat of the Kapp conspiracy represented Germany’s window of opportunity to turn back the tide of inflation – and if there was one, this was probably it – Fehrenbach and his ministers were, sadly, not equipped with the instruments to turn that chance into a reality. Fehrenbach himself was a decent man who had previously been President of the National Assembly and was therefore experienced in crafting compromises. However, for the period of almost a year that followed the June 1920 election, he and his ministers were doomed to spend most of their energy and ingenuity, not getting the country out of its financial hole, but haggling over the interpretation of the Versailles Treaty and the final sum that would soon become due as reparations.
Precisely at the end of June 1920, as fate would have it, the mark reached its most favourable rate against the dollar in more than a year: 37.95. Good news! Except that the improvement caused problems elsewhere in the economy.
That spring, State Secretary Hirsch of the Finance Ministry had been waylaid at a railway station by a Communist agitator carrying a placard that read: ‘See what this “comrade” Hirsch has given you. First, he promised to make the mark strong again. Now it is stronger, but we cannot export any more. Instead of inflation, he has brought us unemployment and hunger.’1 It was certainly true that, although the strengthening mark was in principle a positive development, it did make German goods less competitive on world markets and thereby brought a rise in unemployment. The stronger the mark, the more Germans out of work.
A table comparing unemployment with the exchange rates for 1920-21 shows a pretty precise correlation: