The Downfall of Money: Germanys Hyperinflation and the Destruction of the Middle Class
Page 20
The German government and the country’s financial sector had no objection to this wave of speculation. It is true that the Reich became unhealthily dependent upon these unreliable sources of hard currency – this was speculative money that could be withdrawn at any time, not long-term, productive investment in Germany – but the fact remained that at this stage it was just about the only way the Reich and its institutions were going to get any funding from the victorious nations, and particularly the United States.
The foreign craze for buying marks did, for a while, help bolster its value. As John Maynard Keynes put it at the time, for Germany the speculative inflow took the place of ‘her much discussed international loan’: ‘. . . and on the easiest terms imaginable – as for interest, most of it bears none; and as for capital, only such proportion is repayable as Germany may herself decide to when she comes to fix the value of the paper mark’.14
The American government stopped short of formal control of private investment abroad, though it was understandably concerned at the way its citizens, corporate and individual, were putting their money into Europe, and especially Germany, without necessarily considering the risks involved. And in the summer of 1921 the value of the mark did start to slip once more. Sure enough, by the following spring, the Republican Treasury Secretary Herbert Hoover would estimate that Americans had lost nearly $500 million (over 2 billion pre-war gold marks) in bad foreign investments, including in Germany.15 This was even before German inflation got seriously out of control. Recent expert estimates have put the total speculative transfer to Germany during the years immediately following the First World War at in excess of 15 billion gold marks ($3.5 billion).16
Let it be said, all the same, that it was not only naive investors who lost their money betting on the German mark and on German industry during this period. John Maynard Keynes, brilliant economist and lifelong (on the whole extremely successful) speculator in the financial markets, had also looked at the fundamentals of the German economy. Despite his gloomy prognostications about the effect that the Versailles Treaty would have on Germany, he put his money into marks in 1919. The great man ended up losing £20,000, mostly his own money, a sum that today would equal at least half a million pounds sterling. Obliquely admitting that he was no better than all the other common speculators, he would write two years later:
Everyone in Europe and America bought mark notes. They have been hawked by itinerant Jews in the streets of the capitals, and handled by barber’s assistants in the remotest townships of Spain and South America . . . the argument has been the same . . . Germany is a great and strong country; some day she will recover; when that happens the mark will recover also, which will bring a very large profit. So little do bankers and servant girls know of history and economics.17
Keynes also knew by then the full extent to which there would be no winners in the game that Germany and her erstwhile enemies had embarked upon:
Yet it must not be supposed that Germany, too, has not paid a penalty. In the modern world, organisation is worth more in the long run than material resources. By the sale of paper marks, Germany has somewhat replenished the stocks of materials of which the war and blockade had denuded her; but she has done it at the cost of a ruinous disorganisation, present and still to come. She has confiscated most of the means of livelihood of her educated middle class, the source of her intellectual strength; and the industrial chaos and unemployment, which the end of the present inflationary boom seems likely to bring, may disorder the minds of her working class, the source of her political stability. The money of the bankers and servant girls, which would have been nearly enough to restore Europe if applied with prudence and wisdom, has been wasted and thrown away.18
The mark began to fall again after the London Ultimatum of May 1921 forced the German government into a scramble to pay the first big tranche of cash reparations. The murder of Erzberger at the end of August, coinciding almost exactly with the deadline for the reparations transfer, showed that the frenetic economic activity was doing less than nothing to curb post-war Germany’s endemic political violence, leading to another fall. The mark to dollar rate moved even more drastically downwards after the rich industrial and mining region of Upper Silesia was declared forfeit to Poland in October 1921, despite plebiscites that saw most of its population voting to stay within the Reich, thus robbing Germany of another substantial slice of its pre-war economic potential. This also represented yet another injustice for the nationalist right to brood over, in this case justifiably.
At the end of trading on the first working day of January 1922, the mark languished at 186 to the dollar, as opposed to just under 75 four months earlier. All the same, Germany’s factories kept busy. Unemployment in the December just past remained at a mere 1.6 per cent.
The New Year’s editorial in the liberal Berlin newspaper the Vossische Zeitung took a generally optimistic tone. ‘Germany’s path of suffering is beginning to lead up out of the valley,’ wrote editor Georg Bernhard, himself a prominent figure in the German Democratic Party and a member of the Reich Economic Council, a government-sponsored forum for discussion of economic problems. ‘In the past year we have put a substantial part of our journey through the darkness behind us.’ However, regarding the inflation, he added less cosily:
That the inflation in Germany must be reduced has now, gradually, become a commonplace. But until now no one has had the confidence. Everyone who has some knowledge of economic matters and connections also knows why. Inflation is a gigantic fraud, which causes pleasing images to dance before our senses. The lively state of business, the rise in all prices and wages, does, it is true, mean everything sells at below the real price, but it also means that as consumers the masses are the victims of profiteering and as producers the working population is underpaid. But because there is a constant rise in the numbers, to which our old concepts of price still adhere, we notice only slowly, or not at all, and because everyone who wants to work finds employment and payment, the favourable labour market statistics only serve to thicken the mist and fog that surround us. Against this, deflation means a cruel awakening, as if after an opium trance . . .19
Footnotes
* Literally, ‘compulsory economy’, the word used to describe the centralised, statedirected German war economy, especially as applying to food distribution and pricing.
15
No More Heroes
On 17 April 1922, the Manchester Guardian printed an admiring piece about Herr Walther Rathenau, now the German Republic’s Foreign Minister. The context was a speech he had delivered the previous day at a gathering in the Italian port city of Genoa, where yet another international conference was under way. Like the others, its aim, three and a half years after the fighting had stopped, was to try to sort out the continuing post-war mess.
There were many, many conferences in those early years following the First World War, but the remarkable thing about Genoa was, firstly, that thirty-four nations took part. Secondly, for the first time since the war, these included Europe’s so-called ‘pariahs’. This was at the insistence of Lloyd George, the main organiser of the talks. Germany, the loser and alleged culprit of the First World War, was finally there on an equal footing with other countries, and so was revolutionary Russia, only just emerging from civil war and famine, still not officially recognised by the major powers and until now excluded from international forums. Everyone distrusted the Communist government in Moscow, but everyone wanted access to their huge country’s natural resources – timber, oil, minerals.
The theme of Genoa was supposedly economic reconstruction. Among other things, Lloyd George, politically and economically beleaguered at home and in desperate need of an international success, had plans for a reorganisation of economic relations so as to draw Russia and Germany back in as partners. The Russians would provide the raw materials and Germany the finished products and capital goods (and some of the profits Germany made would be siphoned off to pay those still problema
tic reparations). This would not benefit only Russia and Germany. The ripple effect would supposedly help revive the entire European economy.1
Change was in the air, and although reparations were not officially on the agenda, here Rathenau made his mark. Having served since May 1921 in Wirth’s government as Minister for Reconstruction, he had been appointed Foreign Minister in January 1922. The fact that he spoke, according to contemporaries, perfect, accent-free English, French and Italian was not without significance. Exploiting his favourable international reputation and contacts, he had begun what could only be described as a ‘charm offensive’ on his country’s part, of which this speech, delivered in the garden of a villa rented by the German delegation to an international audience that included J. M. Keynes, was clearly an important component.
Standing in the spring sunshine surrounded by Europe’s great and good, Rathenau argued that the only problems the world faced were essentially ‘mental and moral’. In practical terms, there was nothing Europe possessed that she had not possessed ten years earlier. But ‘huge errors and deviations of the way in which humanity thinks’ were stopping the world from finding its way through the post-war maze. ‘The first error,’ the Manchester Guardian’s man reported him as saying, ‘is that of peace. Everyone is talking of peace as if it exists in Europe’; ‘The cannon are in their bastions. You may walk from the Rhine to the Vistula and not hear a shot fired nowadays. Yet peace does not exist. Peace means something positive, not merely negative . . .’2
The other two ‘errors’ were disarmament – a nonsense, since only Germany had disarmed so far – and debt. The whole of Europe was being strangled by an ‘infernal circle’ of debt. Rathenau reached out both to France and Russia, whom he saw as the other serious victims of this evil. All needed temporary loans to get them through the crisis.
My illustrious friend Keynes will not, I know, agree with me wholly here. We must enlarge the circle temporarily in order to breathe. For three nations cannot wait. These are France, Germany, Russia. Only we understand the awful financial difficulties of France.
Germany’s difficulties are less understood. We are living on our own fat. Our prosperity is a bubble. Our companies pay dividends – but in fairy gold. We are eating our own accumulated resources, the result of generations of work of our ancestors. That will end.
The barometer of our position is the value of the dollar at the Berlin bourse. At present it hovers around 300 marks to the dollar. Let the needle start to move in the direction of 400, 500, 1,000 to the dollar and we are gone the way of Austria. It will be too late to talk of reparations then; we shall have to speak of charity.
It was a different point of view from the one he had expressed to the government, when he was still no more than an adviser back in January 1921. Then, with the mark at around 60 to the dollar, the possibility of inflation had been seen as a necessary evil. Now, at 300 to the dollar, it was just an evil.
Rathenau was on to something of a hiding to nothing when it came to pleading Germany’s case, especially to the French. Having made one cash payment at the end of August 1921, the German government had promptly begun once more to plead poverty and to agitate for a moratorium and/or a loan to help the country while it got its affairs properly in order.
At a meeting in Wiesbaden in October 1921, the French under the moderate leftist Prime Minister Aristide Briand had shown signs of willingness to compromise. Rathenau, then Reconstruction Minister, and his French counterpart had signed an agreement to that effect. There had also been a possibility of a loan from the Bank of England, although that had finally fallen through in December 1921. At a bilateral meeting with the French in Cannes in January 1922, Lloyd George persuaded – some said bullied – Briand into agreeing to German attendance at the Genoa conference, though on condition that reparations and Versailles were not on the agenda.
Unfortunately there were plenty of French politicians who nevertheless thought that Briand had sold out French interests. Among them was the French President, M. Millerand, and the leader of the patriotic right in the Chamber of Deputies, Raymond Poincaré. On 12 January, Briand was forced out of office and replaced by Poincaré, who stood for a tough, in fact unrelenting, line on reparations.
The Genoa conference, nice speeches by the new and generally popular German Foreign Minister apart, went on for six weeks, from 10 April to 19 May 1922. A major problem was that the Americans had refused to participate, dismissing the conference as another futile ‘Lloyd George conjuring trick’, no substitute for the real political progress in Europe that was the only long-term solution to the continent’s problems. Since the Americans controlled the world’s purse strings at that time, the possibilities of meaningful success as a result of the Genoa discussions were therefore practically zero.3
Moreover, there was another problem. On Easter Sunday 1922, 16 April (not long after Rathenau’s garden lecture), Russian and German representatives met secretly at the nearby resort of Rapallo, just thirty kilometres along the coast from Genoa. There they signed a treaty allowing for mutual recognition, cancellation of all financial claims – including reparations – favoured trade status, and an extensive programme of economic cooperation (which, in fact, continued until the end phase of the Weimar Republic in 1932–3).
The Rapallo Treaty was certainly a big surprise, and, for Lloyd George especially, a very unwelcome one. Though Genoa limped on to its inglorious conclusion, nothing was decided there that made any real difference to the direction Europe in general was heading. If Lloyd George was disappointed – his coalition government, already in serious difficulties, finally fell in October – the French were furious, interpreting the separate agreement between Germany and Russia both as a cause of Genoa’s failure and as a typical act of bad faith. As for Rathenau himself, he had fought against the Rapallo Treaty, believing that Germany risked returning relations with the Western powers to the dark days of 1919. Only when it became clear that the Russians might otherwise make a deal with Britain and France and the rest which would leave Germany out in the cold again, did the Foreign Minister relent.
The final decision to sign the Russian treaty came during what was described as a ‘pyjama party’ in Rathenau’s hotel suite during the night of 15/16 April. Even then, to retain some shred of good faith, Rathenau wanted to inform Lloyd George of their intention before the event. It was only when the architect of the treaty, ‘Ago’ (an acronym for Adolf Georg Otto) von Maltzan, State Secretary and powerful head of the Foreign Ministry’s Eastern Section, threatened to resign, that Rathenau agreed not to tell the British. Thus it was ensured that the German–Russian deal would become one of the twentieth century’s most notorious diplomatic bombshells.4
Particularly in the German Finance Ministry, there remained serious doubts about the wisdom of the Russian alliance. Finance Minister Hermes, who had attended Genoa, still thought that preparing the ground for changes to the reparations settlement was more important than a treaty with Russia whose benefits were impossible to predict. ‘It’s not enough to have a treaty with Russia in our pockets,’ he wrote. ‘We should also be taking home a fund of trust with the Allies with regard to the reparations question.’ State Secretary Hirsch was snappier and more to the point, expressing his worry that ‘for the Russian bird in the bush’ Germany had sacrificed ‘the plump reparations bird in the hand’.5
A response to Rapallo was not long in coming. On 24 April, the French Prime Minister Poincaré gave a speech in which he openly declared the treaty a hostile act, and emphasised the possibility of French military action if Germany did not keep to her agreements. The French military and the Paris government discussed the possibility of forcing Berlin’s hand by occupying the Ruhr.
That the international exchange rate depended as much on political as on purely economic events, was witnessed by the mark’s gyrations in the spring and early summer of 1922. It had slipped to 326 to the dollar at the beginning of April, recovered a little as hopes of an agreement at Gen
oa rose, then surged back to 252 amidst the generally positive domestic reception to the Rapallo Treaty. By mid-May, however, with Genoa clearly a damp squib and the hostile French reaction to Rapallo clear for all to see, the mark’s value tumbled once more to 314. Then came a conference of bankers in Paris set for early June, and high hopes of an international loan for Germany that would break the reparations deadlock. These factors took the mark back up to 272 on 2 June. Then the bankers’ conference also turned out to be a disappointment – no one wanted to lend Germany money until it had sorted out its finances, for one thing – which meant postponing the matter of the loan indefinitely and depressing the markets. So, 318 to the dollar on 11 June . . . 6 And then came a slightly weary comment from a financial journalist the next working day, Monday 12 June, concentrating on the strength of the dollar against the mark rather than vice versa:
On the foreign currency market today the effects of the loan postponement were sharply expressed. The dollar, which on Saturday had closed at 297, leapt up, and during the morning for a while touched a rate of 322. Later the tendency relaxed a little, because some speculators took in their gains. The dollar rate dipped as a result to 315, soon firmed once more, however, and then oscillated between 316 and 318.7