by Hew Strachan
The Reichskassenscheine (treasury notes) were declared legal tender on mobilization, and the Reichsbank intensified its efforts to trade these notes for gold. On 22 March 1915 10-mark notes—both the Treasury’s and the Reichsbank’s own—were introduced, and the total note issue was raised by 120 million marks. Thus, three types of irredeemable notes were in circulation—Reichsbanknoten, Reichskassenscheine, and Darlehenskassenscheine. Currency creation had become effectively autonomous, because it no longer rested on a combination of credit, goods, and gold but on credit itself. By the end of the war a third of the Reichskassenscheine in circulation were covered by deposited Darlehenskassenscheine, and a third of the Darlehenskassenscheine were held by the Reichsbank as security against their own note issue. In July 1914 total German circulation was 6,970 million marks: 2,909 million in Reichsbank notes, 172 million in treasury notes, 157 million in private bank notes, and 3,732 million in coin. In December 1918 circulation totalled 33,106 million marks: 22,188 million in Reichsbank notes, 10,109 million in Darlehenskassenscheine (i.e. minus the Darlehenskassenscheine held by the Reichsbank), 356 million in treasury notes, 283 million in private bank notes, and only 170 million in coin (as against a wartime low of 69 million in April 1918).283 The quantity of notes and coin in circulation in Germany increased from 110 marks per head in 1914 to 430 million in 1918.284 Most of this was in notes. Note circulation in Germany rose 1,141 per cent between late 1913 and late 1918, whereas the lack of small coin prevented shopkeepers giving change by 1916–17, and the coins that were in circulation were made of nickel and iron rather than silver and gold.285
Germany issued nine war loans between September 1914 and September 1918, with the purpose of redeeming its treasury bills and so wiping out its floating debt. Up until the issue of the fifth loan, in September 1916, this policy appeared to work.
The absence of a moratorium and the high level of liquidity at the war’s outset enabled Germany to issue its first loan with alacrity. Given the underdeveloped nature of Germany’s money market and the existing glut of government debt with which it was encumbered, it was essential that Germany exploit the initial mood of war enthusiasm in order to put its borrowing policy on secure foundations. In these terms, the first loan was a success. A total of 4,460 million marks was subscribed, producing a surplus of 1,832 million over the existing debt. The second, in March 1915, raised 9,060 million, a surplus of 1,851 million; the third, in September 1915,12,101 million, a surplus of 2,410 million; and the fourth 10,712 million, a surplus of 324 million. But although the sums subscribed continued to rise in the subsequent loans, up until the eighth (issued in March 1918 and netting 15,001 million marks), they failed to keep pace with the growth in floating debt. The fifth loan was 2,114 million marks short of its target, the sixth (in March 1917) 6,732 million, the seventh (in September 1917) 14,578 million, and the eighth 23,970 million. The total of the last loan, issued in September 1918, fell back to 10,443 million marks, and left a shortfall of 38,971 million.286 Thus, the Reich’s floating debt doubled in the second half of 1916 from 7,000 million marks to 13,000 million, doubled again to 28,000 million by the end of 1917, and almost doubled again to 50,000 million by November 1918. Furthermore, these figures understated the problem, because war loans were directed at mopping up the short-term debt of the Reich and ignored its increasing use by local government.287
Even before the fifth issue in September 1916 disquieting cracks were emerging. From 1915 the increase in subscriptions was falling behind the growth in the money supply and in the rise in prices. Thus their real value was declining. Indeed, the war loans were themselves contributing to this process. They were accepted as security by the Darlehenskassen, which issued their notes in exchange; these notes could be used by subscribers to buy more war loan stock, and by the Reichsbank as collateral for its own note issue. It was the war loan that gave the Darlehenskassen a higher profile: 70 per cent of their lendings were for subscriptions to the first issue, although their role declined there-after.288 Other credit institutions played key roles in the success of the scheme, but in doing so monetized goods or rendered liquid cash that was fixed. The savings banks were responsible for 19.8 per cent of the first subscription. For the third loan, in September 1915, the banks proposed special terms to those who had subscribed to the first and second issues. They would advance 75 per cent of their nominal value, and four times that amount could be subscribed to the new issue provided this stock too was deposited as collateral: thus, an initial investment of 10,000 marks in the first loan could grow to 36,997 marks over the nine loans of the war with no further cash payment.289 The war loans were therefore mopping up money which they were helping to create.
The ability of the scheme to make real inroads into Germany’s monetary overhang depended not on the financial institutions but on the loans’ attractiveness to individual investors of modest means. Success here could compensate for a lack of rigour in direct taxation.
Overtly, this side of the story was more successful. The first loan offered individuals an interest rate of 5 per cent (as against an existing rate of 4 per cent on government stocks), convertible in tranches after ten years. Institutional investors were channelled towards treasury bonds which matured in five years. Subscribers totalled 1,177,235 and the stock, issued at 97.5, reached par very quickly. Helfferich capitalized on this success, which he felt justified the generous terms of the issue, by stressing the notion of ‘financial conscription’: loans were the contribution which those safe at home could make to the war effort. Available in small denominations, advertised in posters and the press, and sold through post offices and banks, they were bought by increasing numbers of private citizens. The second attracted 2,691,060 subscribers, the third 3,966,418, and the fourth 5,279,645.290 But these aggregates, as Helfferich’s socialist critics were quick to point out, disguised some disquieting features. Of the total subscribed, 57 per cent had been taken up by 227,000 individuals, as opposed to 4 per cent by 3.3 million.291 What concerned the socialists was that a few people in Germany still had the larger share of wealth; what concerned the organizers of the war loans was that the majority were not subscribing more.
The fifth war loan, that of September 1916, provided clear confirmation that the war loans policy was no longer meeting the objectives Helfferich had assigned it. Not only did it produce a shortfall on the floating debt to be consolidated, it also saw a decline in the number of subscribers to 3,809,976. Those contributing less than 200 marks fell from 2,406,118 for the fourth issue to 1,794,084: only for sums above 50,100 marks were the numbers of individual subscribers increased. The few were giving more; the majority less. In part this was a reflection of the cost of living, but it also bore testimony to the relatively depressing military situation. This interpretation is borne out by the sixth loan, issued in March 1917. Individual subscribers reached their highest total of the war (7,063,347) and those investing less than 200 marks more than doubled. Its success reflected the greater liquidity created by Hindenburg’s programme for increased munitions output.292 But it also coincided with two promises of ultimate victory—revolution in Russia and the move to unrestricted U–boat war. The seventh loan (September 1917) witnessed another fall in the number of subscribers, to 5,530,285, and it required the March 1918 offensives on the western front to pull the eighth back up to 6,869,901. The ninth, issued in September 1918, could draw in only 2,742,446 investors, with the wealthy minority making a disproportionate contribution. By 3 October exchanges were refusing to buy war loans, and the market price in Bavaria had fallen to 70 per cent of par.293
The volatility of popular support for the war loans after 1916 prompted the government to pursue the big investor with more ardour. The consequences were doubly damaging. First, those workers who were in employment, and especially in war-related industries, were left with money in their pockets. Secondly, industry and finance insisted that they needed their resources in sufficiently liquid form to be available at the war’s end for demo
bilization, reconstruction, and the recapture of export markets. Short-term loans at 4.5 per cent were not sufficiently disadvantageous, given a rate of 5 per cent on longer-term stock, to encourage a shift from the former to the latter. In March 1917, anticipating the redemption of the treasury bonds of the initial war loan issues in 1918, the Reich tried to lure institutional investors to convert their short-term stock into longer-term capital growth. Treasury bills, still paying 4.5 per cent, were offered at 98 but would be redeemable at 110. Redemption was phased according to the date of the war loan which was to be converted, and would be completed in fifty years, in 1967. But the possibilities for exchange were too limited, and only 2,100 million marks were consolidated in this way.294
Therefore, in 1917–18 large credit balances were accumulating in bank accounts, earning rates of interest comparable with, or little below, war loan stock. In the first half of the war, three-quarters of the floating debt was held by the Reichsbank; this changed after 1916, and by 1918 well over 50 per cent was taken up by the money market. The balances of the seven major Berlin banks rose from 11,140 million marks in 1916 to 21,979 million in 1918, the bulk of the increase being attributable to treasury bills. From here it entered the secondary reserve against note issue. But over the same period, 1917–18, the velocity of circulation more than halved. Money was not being spent, it was being hoarded. In the short-term, therefore, Germany’s liquidity did not create hyperinflation. But the preconditions were in place.295
The broad intentions of Austria-Hungary’s policy were the same as those of its ally, to finance the war primarily through borrowing. However, Austria-Hungary was less wealthy. The creation of liquidity was not, as in Germany, simply a matter of realizing goods and assets; it also necessitated raiding the empire’s pre-war capital. There was a limit to what could be monetized. By 1918 Austria-Hungary’s war expenditure, alone of that of all the belligerents, was below its pre-war annual national income.296 Furthermore, a corollary of relative poverty was an underdeveloped money market. The postal savings bank was designed in 1910 to lead consortiums of banks in the raising of national credits; it failed to raise a loan of 100 million crowns in 1912, and during the war it remained more subject to the banks’ views than vice versa.297 As elsewhere, the activities of commercial banks expanded under the stimulus of war, but they did so from a lower base point than in Germany, and accordingly the government’s debt was less widely distributed. In Austria-Hungary, therefore, a greater burden fell on the central bank. In Germany the advances made to the government by the Reichsbank were comparable in frequency with loans raised from the public; in Austria-Hungary the Austro-Hungarian Bank contributed twice as often as the public.298.
The suspension of the Bank act on 4 August proved to be the first step towards a laxity in accounting from which the government benefited and of which parliament (because it did not meet) could not disapprove. Weekly accounts ceased to be published. Not until December 1917 did the bank hold its first general meeting of the war—when the close relationship between bank and state was at last fully revealed. In February 1918 a further meeting adopted in one fell swoop all the accounts for the years 1914, 1915, 1916, and 1917. By then the bank had advanced 13,000 million crowns to Austria and 6,000 million to Hungary.299 At the end of the war these figures stood at 25,060 million crowns and 9,909 million.
The relationship between the bank and the empire, called into being by the mobilization and prolonged by the moratorium (which denied other possible approaches to the money market), was put onto a regular footing on 15 July 1915. The bank advanced the two governments 1,500 million crowns, secured on treasury bills paying 1 per cent interest per annum. No pattern of repayment was fixed; this was to be discussed six months after the war’s end. No limit to the number of loans was agreed; by October 1918 the two governments had taken out twenty-one such loans. Each advance was for the same amount, but the periods between loans became progressively shorter: whereas Austria did not exhaust its first tranche for three months, its final instalment ran out in two weeks. In exchange, the two governments agreed not to issue any state paper currency. Therefore the bank had total charge of the note issue. It vowed to do its best to limit this. But the security on which the circulation rested was the loans which the bank advanced to the government, and these were unlimited.
After the war Popovics maintained he had done no more than his patriotic duty. He also suggested that the alternative to the July 1915 agreement was a takeover by the army. But, on his own account, his underlying fear was the threatened assumption of note-issuing powers by the two governments. Conversely, he regarded his primary achievement as the involvement of the issuing banks in the system of war finance: it was now up to them to offer interest rates high enough to absorb the currency which would enter circulation.300 What he forebore to mention were the increased profits accruing to the Austro-Hungarian Bank as a result of government business. In 1914 the bank’s profits had been 57.9 million crowns; in 1916 they reached 136.9 million. Although these were gained at the state’s expense, they were—through the war profits tax and the tax on banknotes—in part recouped. Furthermore, the interest rate was reduced to 0.5 per cent because the income of the two governments could not keep pace with the increase in their debt. But Popovics still hoped to use the profits to build a reserve in gold and foreign exchange in 1917 and 1918. Ultimately, however, the bank’s solvency had become dependent on the solvency of the empire itself.301
The yield of each loan was divided so that Austria received 954 million crowns and Hungary 546 million. The split, therefore, followed the budgetary allocation of financial responsibility. But it did not mirror the rate of wartime spending. Hungary’s demand for cash was much less pressing than that of Austria. In part this reflected a slightly more vigorous pursuit of the alternative forms of credit, but more significant was the difference in burden assumed by the two monarchies. Austria was more industrialized and involved in more areas of warlike activity; it was also much more generous in welfare payments. At the war’s end Austria owed the bank 25,560 million crowns, Hungary 5,740 million. Furthermore, Austria had exhausted its credit on 30 October 1918; Hungary still had 5,500 million crowns in hand. The loans were therefore raised in accordance with the constitutional needs of the empire, not according to its spending requirements. However, it would be unreasonable to leave this as further evidence of a rapacious and parasitical Hungary. The currency which the borrowing policy depreciated was an imperial one, but the main cause of the depreciation was Austria. Thus, ‘the forced loan’ which the note issue represented was levied disproportionately on Hungary.302
Banknote circulation in the dual monarchy increased 1,396 per cent during the war. The average monthly circulation was 2,405,350,660 crowns in July 1914, and 34,888,999,890 in December 1918.303 Metallic cover slumped from 40 per cent to 2.7 per cent by the end of 1917. Almost half of the note increase occurred in 1918 itself. Popovics blamed the recall of the Austrian parliament on 30 May 1917. Until then the balance in the relationship between Austria and Hungary had been preserved; after it Austria’s bank debt all but doubled (from 13,000 million to 25,000 million crowns), whereas Hungary’s grew by a third (from 6,200 million to 9,900 million).304 Parliament spent money on reconstruction and on family allowances which pushed cash back into private pockets. However, unlike in Germany, money was not hoarded. The commercial banks saw a large increase in their business, but no proportionate growth in private deposits. Clients moved away from savings banks as they preferred to keep their cash on call.305 Popovics’s strategy depended on the issuing banks fixing the inflated currency through attractive interest rates. So comprehensively did the policy fail that in March 1918 the governments effectively reneged on their agreement not to issue their own currency by introducing Kassenscheine, treasury bills designed to mop up the excessive banknotes.
Austria-Hungary found itself locked in a paradoxical spiral of excessive liquidity and insufficient cash. Banking had too weak a foothold t
o cope with the liquidity created by the mobilization and government spending. Small firms found their debts rapidly written off, not least by depreciation; the banks were then bypassed in the bid to acquire raw materials before prices rose. Consequently money was moved into goods as soon as possible, and the competition to do so—given the shortage of goods—forced up prices, therefore creating the need for yet more cash. Rising prices meant that assets in kind could always be sold at a profit, and the difference between the cost of borrowing and the growth in prices assured the middlemen of a dividend. Thus, in Austria-Hungary the velocity of circulation grew even during the war, and—unlike in Germany—hyperinflation was already entrenched in 1918.
