Lords of Finance

by Liaquat Ahamed

  In early 1923, when Germany was late in meeting a reparations payment for that year—the precipitating incident was the failure to deliver one hundred thousand telephone poles to France—forty thousand French and Belgian troops invaded Germany and occupied the Ruhr valley, its industrial heartland. The chancellor, Wilhelm Cuno, powerless in every other way, launched a campaign of passive resistance. The budget deficit almost doubled, to around $1.5 billion. To finance this shortfall required the printing of ever-increasing amounts of ever more worthless paper marks. In 1922, around 1 trillion marks of additional currency was issued; in the first six months of 1923 it was 17 trillion marks.

  Wrote one observer: “In the whole course of history, no dog has run after its own tail with the speed of the Reichsbank. The discredit the Germans throw on their own notes increases even faster than the volumes of notes in circulation. The effect is greater than the cause. The tail goes faster than the dog.”

  The task of keeping Germany adequately supplied with currency notes became a major logistical operation involving “133 printing works with 1783 machines . . . and more than 30 paper mills.” By 1923, the inflation had acquired a momentum of its own, creating an ever-accelerating appetite for currency that the Reichsbank, even after conscripting private printers, could not meet. In a country already flooded with paper, there were even complaints of a shortage of money in municipalities, so towns and private companies began to print their own notes.

  Over the next few months, Germany experienced the single greatest destruction of monetary value in human history. By August 1923, a dollar was worth 620,000 marks and by early November 1923, 630 billion.17

  Basic necessities were now priced in the billions—a kilo of butter cost 250 billion; a kilo of bacon 180 billion; a simple ride on a Berlin street car, which had cost 1 mark before the war, was now set at 15 billion. Even though currency notes were available in denominations of up to 100 billion marks, it took whole sheaves to pay for anything. The country was awash with currency notes, carried around in bags, in wheelbarrows, in laundry baskets and hampers, even in baby carriages.

  It was not simply the extraordinary numbers involved; it was the dizzying speed at which prices were now soaring. In the last three weeks of October, they rose ten thousandfold, doubling every couple of days. In the time that it took to drink a cup of coffee in one of Berlin’s many cafés the price might have doubled. Money received at the beginning of the week lost nine-tenths of its buying power by the end of the week.

  It became meaningless to talk about the price of anything, because the numbers changed so fast. Economic existence became a race. Workers, once paid weekly, were now paid daily with large stacks of notes. Every morning big trucks loaded with laundry baskets full of notes rolled out of the Reichsbank printing offices and drove from factory to factory, where someone would clamber aboard to pitch great bundles to the sullen crowds of workers, who would then be given half an hour off to rush out and buy something before the money became worthless. They grabbed almost anything in the shop to barter later on for necessities in the flea markets, which had sprung up around the city.

  Having to calculate and recalculate prices in the billions and trillions made any sort of reasonable commercial calculations almost impossible. German physicians even diagnosed a strange malady that swept the country, which they named “cipher stroke.” Those afflicted were apparently normal in every respect except, according to the New York Times, “for a desire to write endless rows of ciphers and engage in computations more involved than the most difficult problems in logarithms.” Perfectly sensible people would say they were ten billion years old or had forty trillion children. Apparently cashiers, bookkeepers, and bankers were particularly prone to this bizarre disease. Most people simply turned to barter or to using foreign currency. Every middle-class housewife knew up to the latest hour the exchange rate for the mark against the dollar. At every street corner, in shops and tobacconists’, even in apartment blocks, minute bureaux de change sprang up, with blackboards outside, advertising the latest exchange rates.

  With the mark falling faster than domestic prices were rising, foreigners were able to live grotesquely well. Berlin apartments worth $10,000 before the war could be bought for as little as $500. Malcolm Cowley, an American literary critic then living in Paris, in Berlin to visit his friend the journalist Matthew Josephson, wrote, “For a salary of a hundred dollars a month, Josephson lived in a duplex apartment with two maids, riding lessons for his wife, dinners only in the most expensive restaurants, tips to the orchestra, pictures collected, charities to struggling German writers—it was an insane life for foreigners in Berlin and nobody could be happy there.” For one hundred dollars, a Texan hired the full Berlin Philharmonic for an evening. The contrast between the extravagance of foreigners, many of them French or British, but also Poles, Czechs, and Swiss, and the daily struggles of the average German to make a living only fed the resentment against the Versailles settlement further.

  Inflation transformed the class structure of Germany far more than any revolution might have done. The rich industrialists did well. Their large holdings of real assets—factories, land, stocks of goods—soared in value while inflation wiped away their debts. Workers, particularly the unionized, also did surprisingly well. Until 1922, their wages kept up with inflation and jobs were plentiful. It was only in the last stages, from the end of 1922 into 1923, when the implosion of confidence caused the monetary system to seize up and the economy reverted to barter, that men were thrown out of work.

  Those who made up the backbone of Germany—the civil servants, doctors, teachers, and professors—were hit the worst. Their investments in government bonds and bank deposits, carefully accumulated after a lifetime of prudence and discipline, were suddenly worthless. Forced to scrape by on meager pensions and salaries, which were decimated by inflation, they had to abandon their last vestiges of dignity. Imperial officers took jobs as bank clerks, middle-class families took in lodgers, professors begged on the streets, and young ladies from respectable families became prostitutes.

  The people who truly raked it in were the speculators. By buying up assets—houses, jewelry, paintings, furniture—at throwaway prices from middle-class families desperate for cash, by cornering the market in goods that were in scarce supply, profiteering in imported commodities and gambling on a further collapse in the currency, they enriched themselves beyond their wildest dreams.

  As German society was overturned, the traditional values that had made it so conservative and ordered a community were jettisoned. Stefan Zweig, the writer, tried to capture the mood of that time in his autobiography: “How wild, anarchic, and unreal were those years, years in which, with the dwindling value of money, all other values in Austria and Germany began to slip. It was an epoch of high ecstasy and ugly scheming, a singular mixture of unrest and fanaticism. Every extravagant idea . . . reaped a gold harvest.”

  THE OFFICIAL MOST responsible for the reckless policy of inflation was none other than Rudolf von Havenstein, the sober and dedicated president of the Reichsbank who had so disastrously overseen Germany’s wartime finances. When the war ended in disaster, Von Havenstein fully expected to lose his job. A Prussian official closely identified with the imperial administration, he did not conceal his lack of sympathy for the new government led by the Social Democrats. Nevertheless, during the revolution of 1918, he went out of his way to cooperate with it, even allowing one of the new workers’ and soldiers’ councils to form within the Reichsbank. During those days of violence and turmoil, he also used a squad of revolutionary sailors to guard the Reichsbank’s gold reserves to convey the message that it was the “people” who controlled the nation’s treasure, though the word was that he had secretly booby-trapped the safes with poison gas just in case the sailors’ loyalty wore thin.

  Having successfully maneuvered to keep his job, Von Havenstein found himself in the classic dilemma of the dutiful civil servant. He was now working for a government fo
r which he had little liking, one that was pursuing a social agenda he did not believe in and thought Germany could ill afford. Worst of all, the government had decided to make its best efforts to pay the Allies’ demands—the so-called policy of fulfillment. Nevertheless, despite these fundamental disagreements, Von Havenstein acceded to the government’s requests and allowed the Reichsbank to print money to finance the budget gap.

  Why did Von Havenstein submit without any apparent effort to resist? Two very conflicting pictures have been drawn of his motives: that he deliberately engineered the whole monetary explosion as a way of destroying the financial fabric of Germany, a collective self-immolation designed to prove to the Allies that reparations were uncollectible, or alternatively, that his conduct reflects nothing subtler than sheer economic ignorance. Trained as a lawyer, he had learned the banking business during the gold standard era, when the rules of monetary policy were dictated by the requirement that the Reichsmark be kept convertible at a fixed gold equivalent, and was completely at sea in a world not hitched to gold.

  The truth seems to be more complex than either explanation. Von Havenstein faced a very real dilemma. Were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germany’s current fragile state might precipitate a real political convulsion. As the prominent Hamburg banker Max Warburg, a member of the Reichsbank’s board of directors, put it, the dilemma was “whether one wished to stop the inflation and trigger the revolution” or continue to print money. Loyal servant of the state that he was, Von Havenstein had no wish to destroy the last vestiges of the old order.

  Alternatively, if by standing firm against the government he forced it to raise taxes or cut domestic expenditures, he would be accused, particularly by his nationalist friends on the right, of being a tool of the blood-sucking Allies, who all along had been insisting that Germany could pay reparations if it would only cut its domestic expenditures and raise taxes. In effect, Von Havenstein would be in the position of doing the Allies’ dirty work—he just could not bring himself to act as the collection agent for his country’s enemies.

  Faced with these confusing and competing considerations, Von Havenstein decided to play for time, supplying the government with whatever money it needed. Contrary to popular myth, he was perfectly aware that printing money to finance the deficit would bring on inflation. But he hoped that it would be modest, and that in the meantime, something would turn up to induce the Allies to lower their demands or at least agree to a moratorium on actual payments, giving Germany some breathing space.

  It was a total miscalculation. Von Havenstein failed to recognize that experimenting with the currency was like walking a knife-edge. A moderate degree of inflation does not remain moderate for long. At some point the public loses confidence in the authority’s power to maintain the value of money, and deserts the currency in panic. Germany passed this tipping point in the middle of 1921.

  Instead of admitting that he had made a terrible mistake, Von Havenstein, with his dogged Prussian sense of duty, dug in his heels, refusing to change any of his policies and continuing to print as much money as the government “needed.” The inflation had initially been beneficial to private business because it had the effect of wiping out their debts. By 1923, however, the crisis had moved to a new stage, and without a functioning currency, commerce became impossible. Unemployment, which had hovered around 3 percent suddenly shot up to 20 percent in the fall of 1923. In order to maintain some illusion of solvency, Von Havenstein began to pump Reichsbank money directly to private businesses. He hid behind the claim that, but for reparations, there would be no inflation in Germany and therefore put the blame for the inflation on the rapacious demands of foreigners. He began arguing that the inflation had nothing to do with him, that he was a passive bystander to the whole process, that his task was simply to make enough money available to grease the wheels of commerce, and if business required a trillion more marks, then it was his job to make sure they were run off the presses and efficiently distributed around the country.

  On August 17, 1923, he delivered his annual report on economic conditions before the Council of State:The Reichsbank today issues 20,000 milliard marks of new money daily, of which 5,000 milliards are in large denominations. In the next week the bank will have increased this to 46,000 milliards daily, of which 18,000 milliards will be in large denominations. The total issue at present amounts to 63,000 milliards. In a few days we shall therefore be able to issue in one day two-thirds of the total circulation.

  Here was the president of the Reichsbank, whose principal obligation was supposed be the preservation of the value of the currency, proudly proclaiming to a group of parliamentarians that he now had the capacity to expand the money supply by over 60 percent in a single day and flood the country with even more paper. For many people, it was just one more sign that German finance had entered an Alice-in-Wonderland phantasmagoria.

  “No-one could anticipate such an ingenious revelation of extreme folly to which ignorance and false theory could lead . . . The Reichbank’s own demented inspirations give stabilization no chance,” wrote the British ambassador, Lord d’Abernon, an expert on state bankruptcies who had thought that he surely had to have witnessed the worst financial excesses in the lunacies of the Egyptian khedives and the Ottoman Turks, only to find them almost Swiss in their rectitude compared to the Germany of 1923. “It appears almost impossible to hope for the recovery of a country where such things are possible. It is certainly vain to hope for it unless power is taken entirely from the lunatics presently in charge.”

  WHEN THE WAR ENDED, Hjalmar Schacht was just a modestly successful banker, not yet especially distinguished or rich. It was the opportunities thrown up by inflation that would make him powerful and wealthy. He certainly did not make money by speculating himself—having grown up poor, he was very conservative and took few risks with his own savings. He was, however, lucky.

  In 1918, he recruited a thirty-six-year-old stockbroker, Jacob Goldschmidt, to join the Nationalbank. Goldschmidt was talented, cultivated, and charming, very different from the traditional conservative bankers of Berlin, a self-made millionaire who had built a successful stock exchange trading firm. Once at the Nationalbank, Goldschmidt began playing the market with large amounts of the bank’s capital, and by engineering a series of astute mergers, he transformed the bank, now named the Danatbank, into the third largest banking conglomerate in Germany. By 1923, Schacht had suddenly been vaulted into the upper reaches of the Berlin banking establishment.

  In the summer of 1923, he stood at his office window contemplating the scene below. While most of the other large Berlin banks were housed along the Behrenstrasse in somber gray buildings with great rusticated stone walls and massive pillars and pilasters, the Danatbank had chosen for its headquarters a charming red sandstone building overlooking a quiet square on the banks of the Spree. His own office commanded a perfect view of the square below, in the center of which stood a small bronze statue of Karl Friedrich Schinkel, the architect who had designed so much of Berlin—a strangely tranquil scene, he reflected, far removed from the fever gripping the rest of the city.

  A constant reminder of what had happened to Germany loomed eastward across the canal: the Berliner Schloss, for almost five centuries the home of the Hohenzollern kings. The vast imperial palace of over 1,200 rooms, its grand dome dominating the landscape for miles, now stood empty, its contents looted and ransacked, its beautiful balconies splintered and shattered, its Baroque façade disfigured by large pallid patches where artillery shells had struck during the 1918 revolution.

  Schacht had become increasingly ambivalent about the new republican Germany. In no way nostalgic about the past, he felt no regret at the passing of empire, with its “old style Prussian militarism”
that sought to impose a “permanent order of society.” But proud and nationalistic as he was, he did look back to the times before the war when Germany had been a nation of order and discipline, the economic powerhouse of Europe. The country was, in his view, now destroying itself pointlessly. The republic had betrayed the professional middle classes, which had once made Germany so strong. The Fatherland had become a “hell’s kitchen.”

  Though he now had the money and position he had so long scrambled to acquire, Schacht felt frustrated. At the Danatbank, he had been sidelined by the more successful Goldschmidt. By writing articles in the Berliner Tageblatt and the Vossische Zeitung, he had developed something of a reputation as an expert on reparations, arguing that Germany could and should pay no more than $200 million a year, equivalent to a total reparations settlement of $4 billion, a third of what had been agreed to in London in 1921. It was an amount that at the time would have been completely unacceptable to France. He tried to have it both ways. At the same time he was taking a hard line on the level of reparations that Germany could pay, he would urge the government to be more pragmatic, to open negotiations with the French, abandon the failed policy of passive resistance in the Ruhr, and cease printing money.

  Had he been honest with himself, he would have had to admit that he was lucky not to have been involved. Over the last three years, as the country had sunk into economic chaos, reparations had been a no-win issue for any German politician or official.

  8. UNCLE SHYLOCK