The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class

by Taylor, Frederick

  Fortunately, that was not the end of the story. When another election was called in December 1924, in an attempt to break the political deadlock, the economy had started to expand once more and the job market to improve. The extremist tide proved to have ebbed. The Communists lost seventeen seats. The ultra-nationalist grouping’s representation dropped even more dramatically by more than 50 per cent, back to fourteen. Although the extreme right’s main leader, Hitler, was released from his comfortable imprisonment at Schloss Landsberg in that same month, relatively little would be heard of him for the next five years.

  During the year or so following the end of the inflation, however, nature punished an astonishing number of the other main protagonists of the inflation saga by removing them from this world altogether, in the prime of their lives. Reichsbank Governor Havenstein had died suddenly in November 1923 in his mid-sixties. Then Hugo Stinnes, long a martyr to gall bladder problems, finally consented to surgical intervention in the spring of 1924. The richest man in Germany died on 10 April, a few days after the botched operation, at the age of fifty-four. Almost immediately, his business empire began a rapid disintegration. Stinnes was followed to the grave less than two weeks later by Karl Helfferich, who had promised the nation that the Allies would ‘carry the weight’ of financing the First World War. During his career, he had been Imperial Treasury Secretary, Vice-Chancellor of the Empire, passionate hater of the Republic, but nevertheless co-creator of the Rentenmark. Aged only fifty-one, Helfferich was killed in a railway accident while on holiday in Switzerland, where, so he said, he often got his best ideas, such as the ‘Rye Bank’ that had formed the basis of the currency reform. Suddenly, at the end of February 1925, President Ebert succumbed to ‘septic shock’ after an emergency operation for appendicitis, and thus the Republic lost its first leader and its most dependable political fixer. He was barely fifty-four.

  Germany, with its currency and politics more settled, was nevertheless now considered a better risk – even by the same foreigners who had lost a great deal of money betting on the mark in the early years of the inflation. She finally completed arrangements to borrow a great deal of money - to pay the reparations still owed to the Allies. This was the longed-for ‘bail-out’. America was booming again, with capital to burn, and keen to put it to use in Europe, especially Germany. Over the next five years, 21 billion marks – 5 billion dollars at 1920s prices, probably between 60 and 70 billion dollars in today’s values – flowed into the German economy, most of it from eager American investors.

  In 1928, the standard of living of working Germans reached a level comfortably above that which they had enjoyed before the First World War. However, the country was not the same place it had been a decade and a half earlier. It had been transformed by war, and by the death and resurrection of its financial system. The inflation, horrendous as it was for many individuals, had made the country more equal in many ways, more like other advanced industrial societies.

  One figure crucial to understanding the depth and social significance of the change in 1913 has already been mentioned. The proportion of Germany’s national income going to rentiers – people living from the proceeds of their investments – had been 15 per cent. By 1925-6, it had fallen drastically to around 3 per cent. These so-called ‘passive’ capitalists (who included wide swathes of the educated middle class) became a far less important factor in German society. The ‘active’ capitalists – industrialists, bankers and traders – and the producers – manual workers – now prospered.

  Meanwhile, the federal states and cities used their plentiful borrowed money and invested in modern housing for ordinary Germans, who for so long had suffered from terrible living conditions. Around 2.5 million new dwellings, housing some 9 million people, were built during the Weimar era. The new principle was one of ‘light, air, sun’. They attracted architects of national and international reputation to design idealistic modern developments in all the major cities.

  After the currency had stabilised, the ‘passive’ capitalists tried to get back what they had lost in the inflation – their mortgages, their investments, the interest on their war bonds. By and large, they failed to get compensation. The class that had suffered drastic downward mobility during these years did not, for the most part, regain anything close to its former prosperity.

  Every commentator of the time, left or right, agrees that a major and lasting effect of the hyperinflation was to encourage cynicism and selfishness. Life in early Weimar Germany felt, for most Germans alive at the time, like a zero-sum game, in which the main object was to avoid being left holding worthless paper money. And where the race for survival belonged to the swift, the cunning and the ruthless. This was the shape-shifting, unpredictable, pitilessly exploitative world of Fritz Lang’s famous film, Dr Mabuse the Gambler.

  Another figure tells us why this may have been allowed to happen, and why the cynicism penetrated deep into the roots of the German psyche after the First World War. In 1918, the German government owed 154 billion gold marks in domestic war debt. When the twelve noughts were wiped off the mark at the end of the inflation to give values in the new Rentenmark, that debt amounted to a sum total of 15.4 new pfennigs.1 Whatever the republican government’s intentions – some scholars feel the inflation was a conspiracy, some not – it had, in practical terms, confiscated the money its most loyal citizens had lent it to fight the First World War.

  All the same, the economy of the Weimar Republic seemed to have stabilised, and with it the political situation.

  But by the end of the decade, behind the façade of the so-called ‘Golden Twenties’, which had turned Berlin, especially, into such a symbolic city of enjoyment and experiment, Weimar Germany was once more in trouble. Farming, which had booked such spectacular gains during the inflation, pretty much went bust. The unemployment rate remained, though not catastrophic in its extent, stubbornly high. There were banking crises, as the huge overseas debt proved near impossible to service. This was even before the Wall Street crash of 1929 brought the long boom in America to a disastrous halt. Weimar Germany had become, as later historians would describe it, a ‘mortgaged democracy’.

  And so it came about, that when the American bankers wanted their money back from their German creditors, the latter could not pay. A slump, 6 million unemployed and a return to extremism and fighting on the streets of Berlin and other German cities was the result.

  October 1929 had also removed from the equation the one politician who, of all his peers, might have played a crucial role in holding German democracy together during the coming storm. On the morning of 3 October 1929, Gustav Stresemann rose early, ready to begin another day’s work as Germany’s Foreign Minister and key member of the governing coalition, positions he had held now continuously for more than six years. He died in the bathroom of his villa at 5.30 a.m., having suffered a stroke while shaving. His wisdom, intelligence and network of political influence could be replicated by no other political figure in the country. Neither could his relationships with foreign statesmen, which had facilitated Germany’s efforts to reintegrate itself into the international system as a full and peaceful participant over the past half-decade. Like so many other prominent Weimar figures, he was only in his early fifties when he died.

  Following the collapse of the last ‘Weimar Coalition’ in 1930, torn apart by disagreements about the response to the new economic crisis and the resignation of Hermann Müller, its Social Democratic Chancellor, Germany was governed by presidential decree. Three more chancellors, none with a Reichstag majority, struggled to put the crisis-ridden country back on her feet. Meanwhile, the real power in the land had become the octogenarian President von Hindenburg, populariser of the ‘stab in the back’ myth of defeat, symbol of the alleged Prussian virtues, elected by a national vote after Ebert’s sudden death as what more than one commentator has called Germany’s ‘substitute Kaiser’.

  Heinrich Brüning, Franz von Papen and General Kurt von Schleicher followe
d each other over the next three years, each with less of a base in the Reichstag and each lasting appreciably less long than his predecessor. Anxious not to repeat the disastrous mistakes of the inflation period, they all – especially Brüning, the only financial expert among them – pursued grimly orthodox, deflationary economic and financial policies. Whatever these measures may have done for the nation’s balance sheet, they caused great suffering and resentment, arguably artificially prolonging the crisis and promoting ever-increasing levels of mass unemployment that proved politically catastrophic. So the hyperinflation cast its deadly shadow over the new German crisis.

  Many of the masses lost what trust they had left in the Republic. Democracy withered. And then Hitler, the troublemaker from Munich, did finally conquer Berlin.

  Afterword

  Why a German Trauma?

  Of course, it was economic depression, not inflation, that finally brought Hitler to the Reich Chancellery, on 30 January 1933. But then he did not care which horse of the apocalypse he rode to power. Hyperinflation in the early 1920s had nurtured the seed of Nazism. A decade later, depression – accompanied by what might be called hyperausterity – brought the toxic plant into fruit.

  Specifically a German trauma, though? Why is this? After all, the German inflation of 1914 to 1923 – it was a much slower, and more toxic, process than most people think – was not the only example of this phenomenon. For instance, after the First World War, Austria, Hungary, Russia and Poland suffered from hyperinflation. In fact, Hungary underwent the experience once more after the Second World War, on an even worse scale. As did Greece. France and Italy at various points suffered from severe to hyperinflation, too, but none of these countries seems to have been permanently scarred by the experience in the same way.

  Almost every German after 1918 experienced the humiliation of defeat. Most suffered in some way, often severely, from the results of that defeat – shortages, political instability, rises in prices. A great country fell from a great height, and it is to that extent hardly surprising that the pain was all the more severe. But does this explain the lasting, almost obsessive memory of ruin that has persisted there ever since?

  It was peculiar to Germany that the country’s extensive and exceptionally privileged educated middle class, the Bildungsbürgertum – higher civil servants, academics and teachers, Protestant clergy, lawyers, doctors – suffered, arguably, most comprehensively. This was a class that had bought large numbers of war bonds, whose value had started to fall even before the end of the war. In the years following 1918 the return from these would dwindle to nothing. Professional salaries and fees had also started a steep decline during the war, a fact that had caused bitter complaint even while the Kaiser was still on the throne.

  With socialists in power after 1918, the wages and welfare of ordinary workers, manual and junior white-collar alike, were far more important to the republican government. The incomes of the pre-war elite, which had already declined relative to that of the average German worker, did not increase sufficiently to keep up the standard of living such men and their families had been used to. The private wealth, based on property, savings and fixed-income investments, which had cascaded down the generations, suddenly all but evaporated. Their sons could not afford to study as their fathers and grandfathers had.

  Crucially, it was not just a question of money. The prestige of the class to which most of these students belonged, since the eighteenth century closely associated with its services to the German monarchical states, also took a tumble. After 1918, with the glamour and power of monarchy no longer a decisive factor in Germany, even the social status of this class seemed doomed.

  The Bildungsbürgertum felt humiliation arising from defeat in the war – it had always been keenly patriotic – political alienation from a republican system that seemed bent on denying its values and handing the country over to the ignorant proletariat – and, to cap it all, it was experiencing financial ruin, which it could blame on the inflationary financial policies of the republican government. No wonder the educated middle class decamped, in its overwhelming majority, to the nationalist right.

  A cartoon in the satirical magazine Simplicissimus showed a threadbare member of the educated middle class begging a little soup from a gang of well-fed workers. It was a shameless exaggeration – many workers were also suffering from the ills of the country after 1918, and had less to fall back on than the Bildungsbürgertum – but there was enough truth in it to help explain the terrible divide that opened up in Germany during the early years of the Weimar Republic. The Herr Professor forced to beg. The self-description of the educated class as the ‘new proletariat’ or the ‘new poor’ became widespread at this time.

  So, who did well out of the inflation in Germany? Creditors lost almost everything. By contrast, everyone, broadly speaking, who owed money, had their debt liquidated by inflation. And there were the profiteers and speculators, obviously. People who worked in banks – an area of business that mushroomed during the inflation. Investors in stocks and shares – unlike fixed investments, these increased in price along with inflation and over the years in many cases provided an excellent return. Farmers, who could pay off their mortgages and other debts, and who – especially if they were prepared to sell on the black market to middlemen and desperate town-dwellers – could charge high prices for their produce. And the industrialists such as Hugo Stinnes, who could borrow money from the Reichsbank at low interest, and pay it back in depreciated marks. They could also sell in export markets and use the foreign exchange from the sales to buy up businesses, properties and other material assets inside Germany. This is how Stinnes, by the time of his death, came to own or part-own a large shipping line, many hotels, newspapers, engineering, timber and pulp, and other enterprises, reckoned to have reached about 4,500 in total, as well as the mining and steel businesses where he had first made his fortune before the First World War. He was not alone in this, merely the best-known of the ‘robber barons’ of the inflation.

  Even the workers did not, in most cases, suffer a steep fall in their standard of living until the runaway hyperinflation brought complete economic chaos from the spring of 1923 onwards, ended only by the currency reform in November 1923.

  The hyperinflation ended in the winter of 1923–4 because the situation became so destructive and chaotic that even those (quite large) sections of the population that had coped with and even done well out of inflation almost until its end realised that things had gone too far. Even if the end of the inflation brought slump and unemployment – which it did for a while – by the autumn of 1923 its end was a national necessity.

  As John Maynard Keynes had warned three years earlier, inflation was a means for governments to ‘confiscate . . . an important part of the wealth of their citizens’.

  The German educated middle classes certainly thought so, and with good reason. And what the Bildungsbürgertum felt and thought was, above all, extremely important in the formation of public opinion. It taught, it wrote, and even in the changed circumstances after 1918 it knew how to publicise its grievances. The collective memory of this group within German society was – perhaps remains, nine decades later – suffused not just with a sense of economic loss but also of stark social decline. Add into this mix a profound, almost existential bitterness, arising not just out of military defeat and revolution, but of being made to pay the price of a war for which they and most Germans – with some reason – never acknowledged sole responsibility. The resulting historical echo resonates beyond mere economics or even politics. As already noted, other countries have suffered from inflation, some equal to Germany’s and some even worse, but it does not seem to have affected their national psyches to the same extent.

  It seems, in the case of Germany, that this is in good part because a relatively small but once extraordinarily privileged social group, the Bildungsbürgertum, lost more than anyone else, as a result both of inflation and the lost war. This group also suffered from t
he demise of the elaborate network of monarchical privilege, spread over many localised power centres, that had been a particular feature of pre-1914 Germany, and in which the Bildungsbürgertum, as a kind of intellectual seneschal class, had played a key supporting role. Its children (and grandchildren) might not have matched the previous generations’ exalted status and financial security, but because of their continuing inheritance of education, of pride and self-confidence, they turned out to be a great opinion-forming force during the next three-quarters of a century. Every educated family in Germany seemed (and even now seems still) to have a story of how the inflation had caused drastic forfeiture of status and wealth.

  The fall of the Bildungsbürgertum, when it occurred, took place from a great height. It went from a position of unchallenged privilege within continental Europe’s most powerful country to become, in practical terms, just one group competing in a modern political and economic marketplace for which it felt little else but contempt and loathing.

  It was, of course, the sons of this class who provided the shock troops of the anti-Republican movement, acting as assassins and terrorists for the far right and its shadowy armed wing, represented by groups such as Organisation Consul. The conspiracy to murder Weimar’s brightest and finest, Walter Rathenau, exemplified this principle. Interestingly, Erich von Salomon, after serving his five-year sentence for involvement in the Rathenau plot, became a well-known writer. His novel-cum-memoir Der Fragebogen (The Questionnaire), written after the Second World War as a critical response to the Allied denazification campaign, included something of an apologia for why young men of his cultivated background and intelligence became enemies of German democracy. The inflation, Versailles, national humiliation. It was all in there. After its publication in 1951, the book became a major bestseller of its time, exercising a profound influence on opinion in the new Federal Republic of West Germany and elsewhere in the world.