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The Great Inflation
In late-1922 the German government were forced to ask the Allies for a
moratorium on reparations payments; this was refused, and she then
defaulted on shipments of both coal and timber to France. By January of
the following year, French and Belgian troops had entered and occupied the
Ruhr. The German people, perhaps for the first time since 1914, united
behind their government, and passive resistance to the occupying troops
was ordered. A government-funded strike began as thousands of workers
marched out of their factories and steel works. The German economy,
already under massive pressure, gave way. The huge cost of funding the
strike in the Ruhr and the costs of imports to meet basic consumer needs
were met by the familiar expedient of the printing presses. Note
circulation increased rapidly, and by November 1923 had reached almost 92
trillion marks. With less than three per cent of government expenditure
being met from income and with the cost of one dollar at four billion
marks, Germany was in the throes of economic and social chaos. Starvation
became a reality for millions of people, despite a bumper cereal harvest,
as shops reverted to the barter system. Farmers refused to accept the
effectively worthless, banknotes in exchange for grain, and food quickly
began to run short in the cities. Prices rose one trillion-fold from their
pre-war level. More importantly, for the long-term political future of
Germany, the middle and working classes saw their savings wiped out.
These were, in essence, the people who were later to become the hard-core
of the Nazi vote.
Economists will argue that runaway hyperinflation has two sources. Firstly,
it arises through a fall in the foreign exchange value of a currency, when
an adverse balance of payments reduces foreign investors demand for the
currency. A falling exchange rate increases the cost of imports and,
therefore, the cost of living. Wages rise as workers try to maintain their
standard of living, especially if previous institutional arrangements have
linked wages to living costs. Firms paying higher wages raise the price of
the goods they sell, prices rise still further, the foreign exchange value
of the currency falls still more, and the cycle continues. Secondly, it
arises through a large budget deficit which no one believes will narrow in
the future. Faced with the prospect of budget deficits for many years to
come, the usual sources of credit available to the government decline to
make further loans; the government can no longer borrow to cover the
deficit between revenue and expenditure. The only alternative is to print
more and more banknotes. As government workers and suppliers present their
bills to the Treasury, it pays them off with newly-printed pieces of
paper. This puts more banknotes into the hands of the public and they
then spend them. In Germany, as we have seen, the problem was that there
were trillions of marks worth of paper currency in circulation. Prices
could rise one thousand times between a worker being paid and his reaching
the shops. A common analogy used is that if one could afford a bottle of
wine today, one should keep the empty bottle which would be worth more
tomorrow than the full bottle was today.
Eventually, the power to boost government spending by printing money goes.
When the government can no longer gain, even in the short-term, a
budgetary balance through inflation, the situation becomes so intense that
stabilisation through a currency board, a new finance minister or a link
to the gold standard is implemented, and reform can be successful. It was
at this point that some sanity was injected into the German economy by the
election of Gustav Stresemann. He called a halt to resistance in the Ruhr,
and set out to stabilise the mark. Luther, StresemannÆs Finance Minister,
introduced the rentenmark the value of which was based on GermanyÆs staple,
rye, rather than gold. In fact the rentenmark represented a mortgage on
GermanyÆs land and industry, which could never be redeemed. It did not
matter. The point was that the currency was stabilised and became
exchangeable at a rate of one billion old marks to one new mark, and at
the pre-war parity of 4.2 marks to the dollar. The new currency was
quickly accepted by the population, and food and consumer goods began to
appear in the shops. The government could now attempt to regain budgetary
control in a climate of low inflation. The Dawes Plan was brokered, and a
sum of some 39 billion dollars was lent to Germany of the following five
years. However, this new economic prosperity had its basis in foreign
investment, and thus the fate of Germany was now effectively held in the
hands of Wall Street.
The consequences of the Great Inflation to Germany are many fold, and
there is no doubt that politically, the first warning signs of a move away
from fascism were seen. In the elections of May 1924, both the Nazi and
Communist Parties made gains at the expense of the centre. The faith of
the people in the Republic suffered a severe blow. As Shirer points out: æ
What good were the standards and practices of such a society, which
encouraged savings and investment and solemnly promised a safe return from
them and then defaulted? Was this not a fraud on the people? And was not
the democratic Republic, which had surrendered to the enemy and accepted
the burden of reparations, to blame for the disaster?Æ Upper middle class
savings in Germany were wiped out during the hyperinflation. Such savings
had usually been invested in bonds and bank accounts, so the collapse of
the real value of the mark carried with it the collapse of the value of
the bonds. Debtors benefited substantially, for their debts were
effectively wiped out. The relatively small, financially unsophisticated
savers who made up GermanyÆs upper middle class had nothing left. This may
have been the most important aspect of GermanyÆs early-1920s
hyperinflation. People who are not rich but are comfortably off, pillars
of their community, in middle-age, who have done well in life and saved
enough to feel comfortable were the strongest supporters of relatively
democratic, relatively liberal governments. Having learned the lessons of
the Great Inflation, these were the people who remembered 1923 when the
mark collapsed for the second time. These were the people who voted for
the Nazi Party in their millions.
The causes, then, of the Great Inflation are not perhaps the reparations
clauses of the Treaty of Versailles which are commonly blamed for GermanyÆ
s ills. German financial practices during the war undoubtedly sowed the
seeds of the disaster which was to strike in 1921. The failure of her
Republican governments to act, by implementing austerity measures, through
a fear of their own weakness of position, led to the inflationary printing
of more paper money. The reparations clauses were clearly side-stepped by
the very same governments who pleaded they did not have the means to pay.
This suited the government, and also GermanyÆs industrialists and
landowners who profited immensely from inflation. Avoidance of reparations,
in fact, became more important than the welfare of the German people. The
Republic was built on weakness: the idea that the fledgling Republic had æ
stabbed Germany in the backÆ by surrendering was widespread, and therefore
led to the perceived necessity of avoiding reparations. This policy was
doomed to failure, particularly in the face of French belligerence. More
short-sightedness was to blame for the passive resistance in the Ruhr.
Whilst clearly wishing to prevent German production from falling into
French hands, it is clear that the government could not afford to finance
the resistance for long and, as we have seen, this was the proverbial
straw which broke the camelÆs back. There were, of course, external
influences: the manipulation of the mark by foreign speculators was a side
effect, as was Allied insistence on reparations. These were, however,
merely a side-show to the main event. The fault of the inflation rests
firmly in the hands of the government. In terms of the consequences of the
inflation, the signposts to the future were in place. It was clear that a
relatively well-off middle and upper middle class had little of no
interest in anything other that centrist democracy. The swing towards
extremism in 1924 was an indicator of what was to come in 1930. This is
demonstrated by the gains made by the Nazis and Communists in May 1924,
but also reflected in their poor performances in the ægolden yearsÆ of
late-1924 to 1928. Following the second collapse of the mark in 1929, both
these parties made huge gains at the expense of the centre. Voters do
have memories, and those memories of two financial disasters in less than
a decade were extremely strong. Finally, the fate of Germany, which since
1918 had been held in the hands of foreign governments, was essentially
transferred into the hands of international financial institutions. The
same people who structured the loans which helped to end the Great
Inflation were the very same as those who speculated Germany - and, to be
fair, the rest of the world - into the financial collapse of 1929.
Germany, kept militarily weak by the allies, financially weak by her
government and her industrialists was waiting in the wings for her moment
to come. When that moment came, the ætwenty year truceÆ was ended by Adolf
Hitler. That isperhaps the most damning indictment of both Republican
mismanagement and world indecision that can be made.
John Maynard Keynes, The Economic Consequences of the Peace, (London:
1920), p.64.
William R. Keylor, The Twentieth Century World, (Oxford: 1984)., pp. 84-
-85.
William Gutteman and Patricia Meehan, The Great Inflation: Germany 1918 -
1923, (London: 1976), p.71.
Eberhard Kolb, æThe Weimar RepublicÆ, (London: 1995), pp. 39 - 41.
William L. Shirer, æThe Rise and Fall of the Third ReichÆ, (New York:
1980), pp. 58-61.
David Hackett Fischer, æThe Great WaveÆ, (Oxford: 1996), pp. 192-193.
Erik Achorn, æEuropean Civilization and Politics since 1815Æ, (London:
1935), pp. 561 - 562.
Kolb, op. cit., pp. 40 - 41.
Shirer, op. cit., p. 63.
David Fischer, op. cit., p. 193
The argument in this paragraph is drawn from David Fischer, op. cit.,
pp193 -194, Paul Kennedy, æThe Rise and Fall of the Great PowersÆ,
(London: 1989, pp. 357 - 373, and D. H. Aldcroft, æFrom Versailles to Wall
StreetÆ, (New York: 1977), chs. 1 & 2.
David Blackman, æEuropean Inflationary Trends: 1815 - 1945Æ, (London:
1954), pp. 321 -322.
David Fischer, op. cit., pp. 194 - 5.
Kolb, op. cit., pp. 194 -195.
Shirer, op. cit., p. 61.
PAGE §
PAGE 1§
Footnote Text iy, the provisions of the Treaty of Versaillesflation
profiteeringÆ. Successive German governments failed to implement anti-
inflationary policies and, it has been argued, this represented the
cynical use of inflation as a reason for reducing, or not meeting,
reparations payments. This is not to say that the reparations clauses did
not have an effect on the German economy - of course they did. The Allies,
however, failed to set a final reparations figure until the London
Ultimatum of 1921; this long delay produced, as William Keylor argues: æà
widespread economic uncertaintyàForeign and domestic investors were
understandably reluctant to commit their savings to an economic system
that was saddled with an uncertain, and potentially enormous, claim on its
productive resources.Æ In terms of the broader consequences of the Great
Inflation, it is easily argued that the control of GermanyÆs fiscal
affairs ultimately passed into the hands of the international banking
community, which was to have disastrous long-term effects on Germany. It
is also arguable that, as æthe foster-child of the Great InflationÆ, Adolf
Hitler would come to power as a long term effect.
The total cost of the First World War to Germany was, it has been
calculated, in excess of 164 billion marks. This massive cost was met by
raising some 93 billion marks in war loans, 29 billion from discounted
Treasury Bills and the balance by the simple - if potentially disastrous -
expedient of printing paper money. By late-1918 over 35 billion paper
marks were in circulation, and more paper money was used to invest in yet
more Bills. There was little fear that inflation - already beginning in
Germany - would have a serious long-term effect on the economy. This
financial mismanagement was justified by the belief, in both financial
and government circles, that the defeated enemy would pay for the cost of
the war. Germany had already indicated her willingness to fund her wars in
this way, as can be seen in the terms of the Treaty of Brest-Litovsk and
her treaty with France in 1871. Karl Helfferich, Reich Secretary to the
Treasury, had said in a wartime speech to the Reichstag: æAfter the war we
shall not forego our claim that our enemies shall make restitution for all
the material damage they have caused by the irresponsible launching of
this war against us.Æ However, because of the inflationary means by which
the imperial government had financed the war, the German mark in 1919 was
worth less than 20 per cent of its pre-war value. After the formation of
the Republic in 1919that can be made.
John Maynard Keynes, The Economic Consequences of the Peace, (London:
1920), p.64.
William R. Keylor, The Twentieth Century World, (Oxford: 1984)., pp. 84-85.
William Gutteman and Patricia Meehan, The Great Inflation: Germany 1918 -
1923, (London: 1976), p.71.
Eberhard Kolb, æThe Weimar RepublicÆ, (London: 1995), pp. 39 - 41.
William L. Shirer, æThe Rise and Fall of the Third ReichÆ, (New York:
1980), pp. 58-61.
David Hackett Fischer, æThe Great WaveÆ, (Oxford: 1996), pp. 192-193.
Erik Achorn, æEuropean Civilization and Politics since 1815Æ, (London:
1935), pp. 561 - 562.
Kolb, op. cit., pp. 40 - 41.
Shirer, op. cit., p. 63.
David Fischer, op. cit., p. 193
The argument in this paragraph is drawn from David Fischer, op. cit.,
pp193 -194, Paul Kennedy, æThe Rise and Fall of the Great PowersÆ,
(London: 1989, pp. 357 - 373, and D. H. Aldcroft, æFrom Versailles to Wall
StreetÆ, (New York: 1977), chs. 1 & 2.
David Blackman, æEuropean Inflationary Trends: 1815 - 1945Æ, (London:
1954), pp. 321 -322.
David Fischer, op. cit., pp. 194 - 5.
Kolb, op. cit., pp. 194 -195.
Shirer, op. cit., p. 61.
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