Great Inflation Essay, Research Paper

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 pre sses. 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

th roes 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

pe ople 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 rat e 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 pr ice 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 t o 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 bottl e 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 Ru hr, and set out to stabilise the

mark. Luther, Stresemann?s Finance Minister, introduced the rentenmark the

value of which was based on Germany?s staple, rye, rather than gold. In

fact the rentenmark represented a mortgage on Germany?s 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 quickl y 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 ex pense of the centre. The faith of

the people in the Republic suffered a severe blow. As Shirer points out:

?What good were the standards and practices of such a society, which

encouraged savings and investment and solemnly promised a safe return from

the m 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?? Upper middle class

savings in Germany were wiped out dur ing 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 effecti

vely wiped out. The relatively small, financially unsophisticated savers

who made up Germany?s upper middle class had nothing left. This may have

been the most important aspect of Germany?s early-1920s hyperinflation.

People who are not rich but are comfo rtably 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

Inflatio n, 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 Germany?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 Germany?s 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 ?stabbed Germany in the back? 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 g overnment could not afford to

finance the resistance for long and, as we have seen, this was the

proverbial straw which broke the camel?s back. There were, of course,

external influences: the manipulation of the mark by foreign speculators

was a side effe ct, 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 ga

ins made by the Nazis and Communists in May 1924, but also reflected in

their poor performances in the ?golden years? 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 han ds 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 ?twenty year truce? was ended by Adolf

Hitler. That is perhaps the most dam ning 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, ?The Weimar Republic?, (London: 1995), pp. 39 – 41.

 William L. Shirer, ?The Rise and Fall of the Third Reich?, (New York: 1980), pp. 58-61.

 David Hackett Fischer, ?The Great Wave?, (Oxford: 1996), pp. 192-193.

 Erik Achorn, ?European Civilization and Politics since 1815?, (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, ?The Rise and Fall of the Great Powers?, (London: 1989, pp. 357 – 373, and D. H. Aldcroft, ?From Versailles to Wall Street?, (New York: 1977), chs. 1 & 2.

 David Blackman, ?European Inflationary Trends: 1815 – 1945?, (London: 1954), pp. 321 -322.

 David Fischer, op. cit., pp. 194 – 5.

 Kolb, op. cit., pp. 194 -195.

 Shirer, op. cit., p. 61.

Footnote Text:

iy, the provisions of the Treaty of Versaillesflation profiteering?.

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 meeti

ng, 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: ??widespread economic

uncertainty?Foreign 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 pro

ductive resources.? In terms of the broader consequences of the Great

Inflation, it is easily argued that the control of Germany?s fiscal

affairs ultimately passed into the hands of the international banking

community, which was to have disastrous long-t

erm effects on Germany. It is also arguable that, as ?the foster-child of

the Great Inflation?, 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 will

ingness 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: ?After the war we shall n

ot 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.? 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, ?The Weimar Republic?, (London: 1995), pp. 39 – 41.

 William L. Shirer, ?The Rise and Fall of the Third Reich?, (New York: 1980), pp. 58-61.

 David Hackett Fischer, ?The Great Wave?, (Oxford: 1996), pp. 192-193.

 Erik Achorn, ?European Civilization and Politics since 1815?, (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, ?The Rise and Fall of the Great Powers?, (London: 1989, pp. 357 – 373, and D. H. Aldcroft, ?From Versailles to Wall Street?, (New York: 1977), chs. 1 & 2.

 David Blackman, ?European Inflationary Trends: 1815 – 1945?, (London: 1954), pp. 321 -322.

 David Fischer, op. cit., pp. 194 – 5.

 Kolb, op. cit., pp. 194 -195.

 Shirer, op. cit., p. 61.