Exchange, Prices, and Production in Hyper-Inflation

CHAPTER I

INTRODUCTION

§ SCOPE AND CHARACTER OF GERMAN INFLATION

GERMANY, in common with other warring countries, departed from the gold standard at the outbreak of hostilities in 1914. On November 20, 1923, the German paper mark, after having fallen to an infinitesimal fraction of its former value, was made redeemable in the newly introduced rentenmark at a trillion to one.1 The rentenmark, after a short but honorable existence during which its gold value remained substantially stable at that of the original gold mark, was supplanted by the present standard reichsmark.2 The latter is also of equal gold value with the German pre-war currency unit and is convertible, in practice, into dollar exchange at the old rate.3

The regime of inconvertible and depreciating paper money thus ran for a little less than a decade. The progress of depreciation was, however, very unevenly distributed over these ten years. During most of the war-period the exchange value of the mark did not fall greatly from par with the dollar and if, when the issue of the conflict was no longer in doubt, it sank heavily, it was still quoted in December 1918 at more than twelve American cents. During the peace negotiations, however, German exchange continued to fall fast. This downward movement persisted till February 1920 when the descent was checked at just a shade below one cent per mark, that is, at about 1/24 of its pre-war value. A quick recovery then set in which carried the rate to nearly 3c in May. Though there was some reaction from this figure relative stability at a level of from 1½ to 2c was attained in June. By early 1920 the period of immediate adjustment to post-war conditions may therefore be considered to have been completed. Not until September 1921 did the value of the mark again fall below one American cent and as late as June 1922 it still sold for about 1/3 of a cent. From then onward the decline was vertiginous till the final collapse in November 1923. At the latter date forty-two billion (42,000,000,000) marks were worth but a single American cent. Without a complete ouster of the currency concerned, no corresponding depreciation appears in the long and varied annals of monetary history. Never before had a paper money fallen at so rapid a rate over such an extended period. In 1913 the mark was solidly based on gold; in 1923 its value was, as one writer has said, something more ridiculous than zero.

Not only in magnitude of depreciation was the German currency experience unique. Its quality was also peculiar. In this respect the most informative comparison is not so much with other times as with other countries at the same time. Many of the phenomena which occurred in Germany were, it is true, more or less closely paralleled in neighboring countries the currencies of which were undergoing contemporaneous depreciation. But the degree of deviation of exchange rates from the course of internal prices was much greater in Germany than elsewhere and this resulted in domestic business being carried on at a price level very largely divorced from that of the outside world. The extent of governmental intervention in external commercial and financial transactions, as well as in the domestic markets, was greater than in any other country organized on a capitalistic basis. Upon no other country was foreign tribute assessed on anything like the same scale and no other country was forced to pay any sizable sum on this account. The difficulty of securing foreign or domestic loans in any measure adequate to the need found no parallel in any other land with the possible exception of the Succession States and Russia. Finally, the will to check depreciation in Germany was much weaker than in other countries since the Germans were convinced, by no means without justification, that improvement in the public finances would lead to still more severe exactions on the part of the victors in the war. All these forces combined to give to the inflation of the mark a peculiar character the features of which it will be the task of the ensuing chapters to examine.

§ FINANCIAL POSITION OF GERMANY AT THE END OF THE WAR

The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine4 and Darlehns-kassenscheine5 available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks;6 at the end of 1918 it was something more than five times as much, 32,936,700,000 marks.7 The total monetary circulation in Great Britain was about £180,000,000 when war broke out8 while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion.9 The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France10) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs11 or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.

Wholesale prices in Germany, Great Britain and France at the end of 1918 were respectively 2.45, 2.30 and 3.53 times their pre-war height.12 In the United States they were just about twice their 1913 level.

The public finances of Germany had of course been adversely affected by the war and, under the illusion of an early victory, loans had been too heavily relied upon. But the German debt in 1918 was not disproportionately large in comparison with that of any other of the principal belligerents. Measured in terms of the actual values of their respective currencies as expressed in wholesale price levels, the obligations of the four chief financial Powers engaged in the war, Great Britain, France, Germany and the United States, showed indeed, a close equivalence at its close. It is true that the domestic short-time floating debt in Germany, even at this time, formed an unduly large part of the total, but the German situation in this respect was not materially worse than the French.

As a result of inability to purchase abroad in any large measure during the war Germany had no long-term foreign debt, and short-term foreign obligations, the amount of which is not definitely ascertainable, probably did not exceed three or four billion gold marks. Most of this was paid off in the early post-war years. So far as inflation and government finances are concerned, therefore, the end of the war found the Reich in a position by no means hopeless. The situation at that time may be envisaged from the subjoined Tables 1 and II giving data on government finance and currency up to the close of 1918.

Granted a respite from abnormal burdens there is no reason to believe that the administration could not have brought the federal finances into order. In fact, early in 1920, it succeeded in balancing non-reparation expenditures with receipts other than loans. This favorable progress did not, however, continue. Nevertheless, even as late as the spring of 1922, when inflation was far advanced, a similar position was again temporarily attained.

TABLE I

EXPENDITURES, REVENUES OTHER THAN FROM SHORT-TERM BORROWING, AND DEFICITS OF THE REICH; 1914-1919
(Billions of marks)

Sources of data: (1) Statistisches Jahrbuch 1919, Verlag von Puttkamer und Mühlbrecht, Berlin, 1919, passim. (2) Verwaltungsbericht der Reichsbank 1918, Reichsdruckerei, Berlin, 1919, p. 11.

TABLE II

NATIONAL DEBT OF GERMANY, ISSUES OF PAPER CURRENCY, INDEX OF WHOLESALE PRICES, and INDEX OF DOLLAR EXCHANGE RATES AGAINST PAPER MARKS;
1914-1918
(Value figures in millions of marks)

Sources of data: (1) European Currency and Finance, Vol. I, pp. 533-5, 540. (2) Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, pp. 6, 45.

§ EFFECT OF REPARATIONS

The burdens laid upon Germany by the Treaty of Versailles went far to establish the difference between success and failure in the restoration of financial order. The health of the state finances was largely conditioned by the course of foreign exchange rates and of prices. The latter in turn were driven upward by the failure of the Reich to cover its obligations without inflation. The relation of cause and effect in the vicious circle of movements of exchange rates, prices, the status of government finance, and note issues has been much disputed not only in the German but in many similar cases. Whatever it may have been in other countries the situation in Germany was such as to make the movement of exchange rates of peculiar and preeminent importance. At regular intervals the administration had to procure, for reparations purposes, fixed sums of foreign exchange. The mark cost of this exchange was dependent on the rate prevailing at the time of purchase and was increased by the depreciation attendant upon the purchases themselves. It was, consequently, not only impossible for the government of the Reich to estimate the probable burden on the budget and so to plan in a rational manner in advance, but, in the absence of any other form of government credit, any sharp rise in the cost of foreign currency practically forced the administration to have recourse to the Reichsbank for loans. An enlarged issue of Reichsbank notes was then the inevitable result.

Reparations affected the situation in two ways. In the first place the failure of the Allied Powers to fix a total sum till May 1921, and the magnitude of that total when fixed (132,000,000,000 gold marks), destroyed whatever credit the German government might otherwise have had. But more important than the total amount of reparations was the demand for large immediate payments. Given time for adjustment, there is probably no limit to the possibility of transferring abroad any excess of production over the bare minimum of subsistence, provided such excess can be collected at home. But time is of the essence of the matter. Transfers cannot be made instanter since the necessary volume of goods is not available in transportable form. The requisite foreign exchange can therefore not be acquired by the immediate export of commodities. Having no credit abroad on the basis of which foreign exchange might have been obtained without a present excess of commodity exports, Germany’s attempt to make large cash reparation payments was bound to depress the exchange value of the mark relative to its purchasing power at home, and it would have done so regardless of the volume of issues of paper currency. The amount of such issues, on the other hand, was, in the manner above described, inevitably increased by a fall in the exchange value of the mark.

The fact of reparations, therefore, sharply distinguishes the German inflationary experience from that of other countries. In most cases an inconvertible and fluctuating currency was avoidable however poor the country which was employing it might be. Poverty is no excuse for bad money. Government outlay is conditioned by income and monetary disorder does not improve the situation. If the outlays are within the control of the government concerned all can be made well. But if ineluctable demands for cash payments outside its own borders be made upon a state, and if these demands be in excess of current national cash assets, resort to sales of capital or to loans must first be had, and when these fail, disorder is inevitable. Without such demands the currency can always be kept convertible into gold, or substantially stable in exchange value, by a sufficiently rigorous policy of taxation. When such demands are present it cannot be done. This fact must be kept constantly in mind in a consideration of the causes of the collapse of the German monetary unit. In Germany’s case alone was the depreciation of the currency in large part due to pressure from outside; for Germany alone could it be reasonably maintained that, so long as reparations demands were insatiable, stabilization was a matter beyond her own control.

The climax in the reparations conflict came with the invasion of the Ruhr, an action which had no support from some of the creditor Powers.14 Much as the invasion is to be regretted or condemned, however foolish it may have been as a method of collecting payment, and however evil its immediate results, it was the thunderclap that cleared the air. It showed the obdurate creditors how little could be obtained by a policy of force and, on the other hand, it brought such distress to Germany as to convince even the stoutest opponent of the policy of fulfilment (and they were many and powerful) that it was better to accept a moderated burden of payments which, in spite of strong convictions to the contrary, it might be possible for the country to carry, than to continue in an attitude of stubborn intransigence.

When force had led to disaster, the repercussions of which affected the creditors as well as the debtors,15 the way was at last open to men of conciliatory spirit, and a solution of the problem, or at any rate a working compromise, could be reached. The invasion was a tragic but triumphant vindication of the policy of moderation, and it led to sympathetic, even if selfish, efforts on the part of the creditor Powers to rehabilitate the economy and finances of the Reich. Once order had been restored progress was possible.

But order came only through chaos. The Germans had decided upon a policy of passive resistance to the French and Belgians. The financing of the program was a costly process and was carried out almost entirely with the proceeds of discounted treasury bills. The consequent enormous issues of paper currency gave the coup de grace to the mark. During January 1923 its dollar value fell to 1/7 of what it had been at the beginning of the month. The effort officially made in the next few months to influence the foreign exchange markets was but temporarily successful. Thereafter it was merely a question of how long the currency unit could retain any value at all. The pace of depreciation was constantly accelerated. Within each of the months of May and June, 1923, the price of the dollar in paper marks doubled. Such increases were by no means unprecedented but in July the mark price of dollars was multiplied 7 times, in August 10 times, in September 17 times, and in October 400 times. By this date resort to other means of payment was general and almost the sole determinant of the value of the existing monetary unit were guesses at the rate at which conversion into the rentenmark currency, which was presently to be established, would take place.

§ DOMESTIC COMPLACENCY TOWARD INFLATION

While the payments of cash reparations in 1921 undoubtedly played an important part in promoting the decline in the currency, and while the sanctions imposed on Germany in 1923 led to the ultimate collapse, this is, of course, by no means the whole story. Reparations gravely affected public finances but the fiscal difficulties were far from being solely due to this cause. It is true that, if a more soundly conceived and executed reparations policy had been adopted by the creditor Powers, inflation of the currency might perhaps have been stayed by the vigorous measures of reform of the public finances initiated in Germany in 1920. But inflation had none the less proceeded far before any cash reparations whatever had been paid and it was accelerated after they had been entirely suspended. Its roots went back into the early war period and it was, in many German quarters, nurtured rather than repressed. The war administration, for instance, with Vice-Chancellor Helfferich holding the Treasury portfolio, had looked with a much too friendly eye on inflationary policies. The initial impetus thus given was never checked and long after the war was over the Reichsbank, where Helfferich again was influential and its President, Havenstein, ineffectual, was entirely too pliable in its attitude toward both governmental and private borrowing.

The attitude of the Reichsbank was but one aspect of a fairly general complacency toward currency depreciation. The burden of the great internal government debt, piled up during and immediately after the war, meant exceedingly high taxes unless it should be lightened by a decline in the value of the counters in which it was expressed. Though currency depreciation meant confiscation of the property of holders of the government debt it was the line of least resistance for the Treasury and was thus not unwelcome in official circles. The policy of inflation had, in addition, powerful support from influential private quarters. Many of the leaders of business were convinced that inflation was necessary to the rehabilitation of the German industrial organization; that only through a falling exchange value of the mark could essential foreign markets be regained ; that the business profits which it promised, and indeed produced, were a prerequisite to the restoration of a sound peacetime economy ; that the demands of the war victors were outrageous and might be made to react upon those victors’ own heads if German exchange should fall so far as to lead to ruinous competition in foreign trade.

Inflation was therefore combated but half-heartedly at best. Though several of the administrations of the years 1920 to 1923 made valiant attempts to arrest its progress they could not summon the sustained powers necessary to success. All of their efforts came to naught, largely through the apathy or active opposition of powerful business groups who were disposed neither to aid their government in imposing regular taxation nor to cooperate with it in carrying out its obligations under the Treaty of Versailles.16 Whatever might have been possible to a government backed by a people determined to have no further traffic with inflation, the will to establish a stable standard was lacking until the drama had run its course. It may well be doubted whether a stable standard could in any case have been set up while immense reparations debts were plaguing the situation. But this must remain an open question. So long as wealth and income were being merely transferred by the decline in the value of the monetary unit and not, as a sum, diminished, so long as scapegoats could be found to assume the burdens and yield of their substance to those who knew how to profit from the situation, projects of reform were treated cavalierly. It was only when enterprisers, instead of surely profiting from inflation as they long did, were suddenly plunged into a sea of uncertainties, only when business activity passed from the stage of exhilaration to panic, only when resistance to a further assumption of losses on the part of the public at large became general, that influential opinion veered to a conviction of the necessity of restoring a stable standard. The pass to which matters had then come is shown in Table III.

§ RESTORATION OF CURRENCY STABILITY

The successful introduction of the rentenmark in November 1923, a currency without gold backing and, indeed, nothing more than a new tenor of inconvertible paper,17 with the monetary stabilization thus effected, has been hailed as a miracle. It was certainly a remarkable achievement and bears strong witness to the steadfastness of the German character.18 The time was ripe but extremely unpropitious. The people had lost all confidence in their currency and in the possibility of its reform. Foreign troops were in possession of their chief industrial districts and the coercive measures adopted by the occupying powers had paralyzed the industrial life of the country. The masses of the urban population were living from hand to mouth, nay, had nothing in their hands but worthless bits of paper which the farmers would no longer accept in exchange for grain. Food riots were general. Political dissolution was in imminent prospect and armed revolt had already raised its head. Affairs were indeed so black that it is clear, in retrospect, that they actually facilitated the reform by imbuing the people with the resolution of despair. The conduct of currency matters was given to Dr. Hjalmar Schacht19 who possessed the temperament necessary to the situation. His powers were presently enlarged by his election to the Presidency of the Reichsbank. The former President Havenstein had died on the very day that conversion of the old currency into the new was under-taken, a demise which cannot be thought of as other than opportune.

TREASURY BILLS DISCOUNTED BY THE REICH, ISSUES OF PAPER CURRENCY, INDEX OF WHOLESALE PRICES, AND INDEX OF DOLLAR EXCHANGE RATES AGAINST PAPER MARKS; 1919-1923
( Value figures in millions of marks)

Under Dr. Schacht’s firm grip it was but a short time before financial order was restored. The permanent success of Schacht’s measures was assured through the work of Chancellor Stresemann and Finance Minister Luther.20 The government balanced its budget, reparations were presently put upon a practicable basis with the adoption of the Dawes Plan in 1924, and German finances were once again given a solid footing.

§ RESULTS OF THE CURRENCY COLLAPSE

Inflation had shaken the social structure to its roots. The changes of status which it caused were profound. No such shifting of property rights, in time of peace, had ever before taken place. Great numbers of families of long established wealth and position were reduced to beggary at the very time that new or additional fortunes of staggering magnitude were being accumulated. The old middle class wellnigh disappeared and a new group came into prominence. There was less change in the condition of the masses—they had not so much to lose—but the wiping out of savings, insurance, and pensions pressed heavily upon the worker even if his losses did not parallel those of some of the better-to-do social classes.

The drama, and particularly the tragedy, of the time have left an indelible impression of the evils of inflation on the minds of the generation which lived through it. The most striking effects were in the realm of the distribution of wealth rather than in production but there were periods, principally in the final stages of depreciation, when the great majority of the population was in extreme want and perhaps even more distressing uncertainty. When prices were rising hourly by leaps and bounds, when the purchasing power of present and prospective receipts of money was vanishing before it could be spent, or would even be acquired, the population of a so highly specialized exchange society as Germany, was subjected to a wellnigh intolerable strain.

But though suffering was widespread and terrible, though the blow to morale was devastating, though imponderable psychological assets withered, the material losses, from the national point of view at any rate, were largely ephemeral, and the obvious evils were in large part compensated by benefits which only later came to light. Much of the distress attributed to the depreciation of the currency was due to other causes, such as the decline in productive capacity on both the material and human side which was a legacy of the war, and the invasion of the Ruhr in 1923. Inflation worked with blind injustice but was not otherwise an essentially destructive force. The common analogy likening inflation to a drug is only half true. Currency depreciation acted as a stimulant for years ; there was then a short period of prostration, a rather quick recovery, and no indisputable permanent weakening of the body economic. It has been maintained, indeed, that the reverse was true, that Germany came out strengthened rather than enfeebled. The facts would seem to be that, aside from its revolutionary effects on the distribution of wealth and income, about which little will be said in this book, inflation influenced the national Welfare in diverse ways, some favorable, some the reverse. The net material result is in some degree susceptible of measurement and an attempt will therefore be made to follow the process, to assess the material gains and losses, and to cast up the accounts without benefit of advocates of one view or the other.

_______________

21 A trillion according to American and French nomenclature, a billion according to English and German. American usage will be adhered to throughout. The following notation will help to keep the reader clear if he is accustomed to the English and German usage.

22 The rentenmark was supplanted only in its capacity as the standard currency unit. Rentenmarks still circulate alongside the standard reichsmark but are gradually being retired.

23 1 gold mark = 23.82 American cents. 4.198 gold marks = $1.00.

24 Treasury notes, a fiduciary currency. These were, however, issued rather sparingly. The maximum issue was 356 million marks. Reichskassenscheine had been legal as cash cover in pre-war days but their issue had been closely restricted and few had been available. These Treasury notes are to be carefully distinguished from Treasury bills, a short-term security not used as money.

25 A form of currency issued by officially established Loan Bureaus against the pledge of securities (or commodities) by borrowers other than the government and the larger banks and business concerns. During the war these notes formed an important share of the circulating medium but thereafter remained comparatively stable in absolute figures (7 to 14 billion marks) and were of constantly declining relative importance. They played but a slight ròle from 1921 onward.

26 Germany’s Economic and Financial Situation, Statistisches Reichsamt, Zentralverlag G.m.b.H., Berlin, 1923, p. 28.

27 Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, p. 46.

28 Committee on Currency and Foreign Exchanges After the War (Cunliffe Committee) First Interim Report, H. M. Stationery Office, London, 1924, p. 5.

29 Total bank deposits, exclusive of those of small private banks, were £716 million on June 30, 1914, and £1361 million on June 30, 1919. European Currency and Finance, United States Senate Commission of Gold and Silver Inquiry, Serial 9, Vol. I, Government Printing Office, Washington, 1925, pp. 277, 278.

30 ibid., Vol. I, pp. 308, 470.

31 ibid., Vol. I, pp. 534. 477, 455.

32 Of this amount approximately 97 billion marks had been obtained through long-term loans.

33 The occupation, by French and Belgian troops, took place in the early days of January 1923. The British government of the day adopted an attitude of passive disapproval and Italy, while assenting to the measures taken, refused to participate actively in the occupation.

34 The exchange value of French currency, for instance, was brought very low when it became apparent that the French fise could not count on any large receipts from Germany.

35 When the administration proposed a capital levy to meet the burdens imposed, the industrialists countered with the offer of a loan of one billion gold marks. But, as negotiations proceeded, the industrialists demanded a remission of future taxes and the turning over to them of the state railroads. The government properly refused and resorted to a forced loan which, however, yielded only 50 million gold marks.

36 The provisions for redemption in “rentenbank certificates” and the mortgage cover provided had, as all students of monetary phenomena will recognize, but a psychological value. The success of the rentenmark was due entirely to the rigid limitations on issue.

37 The reform was carried out without foreign assistance of any sort. Rather was there covert opposition from certain powerful foreign groups who would have welcomed the threatened political, as well as financial, dissolution of the Reich.

38 Dr. Schacht has written an excellent account of the reform in his Stabilization of the Mark, George Allen and Unwin Ltd., London, 1927.

39 Practically all government borrowing after 1919 was in the form of discounted Treasury bills. The figure for November 1923 is as of the 15th of that month.

40 In the index number of wholesale prices from December 1919 to December 1922 inclusive, the figures represent monthly averages. From January to June, 1923, statistics are available for specific days three times a month, and from July to December, 1923, weekly. The figures in the table are for the latest available date in each month.

41 The December 1919 figure for the index number of exchange rates is a monthly average. All other figures for this index are end-of-month quotations.

Sources of data: (1) Zahlen zur Geldentwertung in Deutschland 1914 bis 1923; Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, pp. 6-10, 16-18, 46-7. (2) Germany’s Economy, Currency and finance, Zentral-Verlag G.m.b.H., Berlin, 1924, p. 63.

42 Shortly after the inauguration of the reform Stresemann was followed by Marx as Chancellor, but Stresemann remained in the Cabinet.

• 1cf. Foreign Banking Systems, H. P. Willis and B. H. Beckhart, editors, Chap, VIII, “The Banking System of Germany,” Paul Quittner, Henry Holt and Company, New York, 1929, p. 632, where it is declared that it would be useless to try to connect the development of the German currency system from 1919 to 1923 with any theories of money.
• 2In the matter of mark exchange rates, for instance, sizable differences developed, in the later stages of inflation, between the Berlin and other markets. These were due to the obstruction of arbitrage transactions. At the time that this occurred, however, the Berlin rate was alone of much significance. The Berlin rates have therefore been used throughout. In the matter of prices the alternative sources are the indices of the Berliner Tageblatt, the Frankfurter Zeitung, and the Industrie- und Handelszeitung.
• 3The latter compilation was published in English, as well as in German, for use by the Committees of Experts of the Reparations Commission.
• 4Treasury notes, a fiduciary currency. These were, however, issued rather sparingly. The maximum issue was 356 million marks. Reichskassenscheine had been legal as cash cover in pre-war days but their issue had been closely restricted and few had been available. These Treasury notes are to be carefully distinguished from Treasury bills, a short-term security not used as money.
• 5A form of currency issued by officially established Loan Bureaus against the pledge of securities (or commodities) by borrowers other than the government and the larger banks and business concerns. During the war these notes formed an important share of the circulating medium but thereafter remained comparatively stable in absolute figures (7 to 14 billion marks) and were of constantly declining relative importance. They played but a slight ròle from 1921 onward.
• 6Germany’s Economic and Financial Situation, Statistisches Reichsamt, Zentralverlag G.m.b.H., Berlin, 1923, p. 28.
• 7Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, p. 46.
• 8Committee on Currency and Foreign Exchanges After the War (Cunliffe Committee) First Interim Report, H. M. Stationery Office, London, 1924, p. 5.
• 9Total bank deposits, exclusive of those of small private banks, were £716 million on June 30, 1914, and £1361 million on June 30, 1919. European Currency and Finance, United States Senate Commission of Gold and Silver Inquiry, Serial 9, Vol. I, Government Printing Office, Washington, 1925, pp. 277, 278.
• 10ibid., Vol. I, pp. 308, 470.
• 11ibid., Vol. I, pp. 308, 470.
• 12ibid., Vol. I, pp. 534. 477, 455.
• 13Of this amount approximately 97 billion marks had been obtained through long-term loans.
• 14The occupation, by French and Belgian troops, took place in the early days of January 1923. The British government of the day adopted an attitude of passive disapproval and Italy, while assenting to the measures taken, refused to participate actively in the occupation.
• 15The exchange value of French currency, for instance, was brought very low when it became apparent that the French fise could not count on any large receipts from Germany.
• 16When the administration proposed a capital levy to meet the burdens imposed, the industrialists countered with the offer of a loan of one billion gold marks. But, as negotiations proceeded, the industrialists demanded a remission of future taxes and the turning over to them of the state railroads. The government properly refused and resorted to a forced loan which, however, yielded only 50 million gold marks.
• 17The provisions for redemption in “rentenbank certificates” and the mortgage cover provided had, as all students of monetary phenomena will recognize, but a psychological value. The success of the rentenmark was due entirely to the rigid limitations on issue.
• 18The reform was carried out without foreign assistance of any sort. Rather was there covert opposition from certain powerful foreign groups who would have welcomed the threatened political, as well as financial, dissolution of the Reich.
• 19Dr. Schacht has written an excellent account of the reform in his Stabilization of the Mark, George Allen and Unwin Ltd., London, 1927.
• 20Shortly after the inauguration of the reform Stresemann was followed by Marx as Chancellor, but Stresemann remained in the Cabinet.
• 21CLIFFE-LESLIE once remarked that in social matters the greatest scientific progress is made when economic disorders raise vexing questions as to their causes. In the study of social phenomena, disorder is, it is true, the sole substitute for the controlled experiments of the natural sciences. But it sometimes happens that, in the midst of disorder, events move so rapidly that we are not able properly to observe them; disorder may be excessive even to the most detached of scientists. The course of inflation in Germany in the first post-war quinquennium had so much of this character that it has seemed to many to be incapable of throwing any light upon monetary problems. This most striking of monetary experiences has, in consequence, evoked a minimum of scientific curiosity. In spite of the fact that statistics—those notes of process on which the social scientist must so heavily rely—were for some phenomena abandoned in Germany in this period and for others are open to grave objection on the score of accuracy, it has seemed to me that such an attitude implies an unwarranted surrender in the face of difficulties which might with perseverance be surmounted. This book is an attempt, therefore, to discover what actually happened in Germany and either to bring the observed phenomena within the fold of accepted theory or else so to modify that theory as to give it a more catholic character. The actual course of events during inflation has not merely an historical and scientific interest but is of considerable practical importance. Germany’s present position as a nation with heavy international obligations has led to apprehension, both within and without the Reich, as to the future in international finance. The fears of such German competition as may issue out of the debtor status may be dismissed as but thinly-veiled mercantilism but the question as to the possibility of ultimate transfer of the large sums involved in reparations and interest payments must, perhaps, be treated with more respect. The ability of the German economy to provide, within Germany, the funds required, is, on the other hand, no longer seriously doubted. It is hoped that the sequel will throw some light on the disappearance of the latter doubt as also on the prospect of future transfers undisturbed by any serious economic friction.
• 22in Germany. It is based very largely on official German statistics as published by the Statistische Reichsamt and the Institut für Konjunkturforschung. These statistics, for the period studied, are, no doubt, far from perfect, but nothing is gained by attempting to go behind them and there is no reason to suppose that such alternative sources as are available are at all superior. The hope is cherished, perhaps not without justification, that such errors as are involved do not vitiate the conclusions reached. The immense nominal magnitudes attained by all -monetary phenomena in Germany in the inflation-time tend to dwarf the influence of even very considerable imperfections in the statistics. I am far from supposing, nevertheless, that the results obtained are to be taken as clearly proven and I trust that the reader will be no more credulous. They are merely hypotheses
• 23The publications of the Statistische Reichsamt which have been principally used are : Statistisches Jahrbuch für das deutsche Reich, Statistik des deutschen Reichs, Wirtschaft und Statistik, Monatliche Nachweise über den auswärtigen Handel Deutschlands, Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, and Germany’s Economy, Currency and Finance. Sparing use has been made of forms of statistics already available in these sources and, where tables are given in the text, they are, in nearly all cases, the result of computations from the original data.
• 24The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 25The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 26The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 27The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 28The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 29The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 30The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 31Wholesale prices in Germany, Great Britain and France at the end of 1918 were respectively 2.45, 2.30 and 3.53 times their pre-war height. In the United States they were just about twice their 1913 level.
• 321    
• 33The climax in the reparations conflict came with the invasion of the Ruhr, an action which had no support from some of the creditor Powers. Much as the invasion is to be regretted or condemned, however foolish it may have been as a method of collecting payment, and however evil its immediate results, it was the thunderclap that cleared the air. It showed the obdurate creditors how little could be obtained by a policy of force and, on the other hand, it brought such distress to Germany as to convince even the stoutest opponent of the policy of fulfilment (and they were many and powerful) that it was better to accept a moderated burden of payments which, in spite of strong convictions to the contrary, it might be possible for the country to carry, than to continue in an attitude of stubborn intransigence.
• 34When force had led to disaster, the repercussions of which affected the creditors as well as the debtors, the way was at last open to men of conciliatory spirit, and a solution of the problem, or at any rate a working compromise, could be reached. The invasion was a tragic but triumphant vindication of the policy of moderation, and it led to sympathetic, even if selfish, efforts on the part of the creditor Powers to rehabilitate the economy and finances of the Reich. Once order had been restored progress was possible.
• 35Inflation was therefore combated but half-heartedly at best. Though several of the administrations of the years 1920 to 1923 made valiant attempts to arrest its progress they could not summon the sustained powers necessary to success. All of their efforts came to naught, largely through the apathy or active opposition of powerful business groups who were disposed neither to aid their government in imposing regular taxation nor to cooperate with it in carrying out its obligations under the Treaty of Versailles. Whatever might have been possible to a government backed by a people determined to have no further traffic with inflation, the will to establish a stable standard was lacking until the drama had run its course. It may well be doubted whether a stable standard could in any case have been set up while immense reparations debts were plaguing the situation. But this must remain an open question. So long as wealth and income were being merely transferred by the decline in the value of the monetary unit and not, as a sum, diminished, so long as scapegoats could be found to assume the burdens and yield of their substance to those who knew how to profit from the situation, projects of reform were treated cavalierly. It was only when enterprisers, instead of surely profiting from inflation as they long did, were suddenly plunged into a sea of uncertainties, only when business activity passed from the stage of exhilaration to panic, only when resistance to a further assumption of losses on the part of the public at large became general, that influential opinion veered to a conviction of the necessity of restoring a stable standard. The pass to which matters had then come is shown in Table III.
• 36The successful introduction of the rentenmark in November 1923, a currency without gold backing and, indeed, nothing more than a new tenor of inconvertible paper, with the monetary stabilization thus effected, has been hailed as a miracle. It was certainly a remarkable achievement and bears strong witness to the steadfastness of the German character. The time was ripe but extremely unpropitious. The people had lost all confidence in their currency and in the possibility of its reform. Foreign troops were in possession of their chief industrial districts and the coercive measures adopted by the occupying powers had paralyzed the industrial life of the country. The masses of the urban population were living from hand to mouth, nay, had nothing in their hands but worthless bits of paper which the farmers would no longer accept in exchange for grain. Food riots were general. Political dissolution was in imminent prospect and armed revolt had already raised its head. Affairs were indeed so black that it is clear, in retrospect, that they actually facilitated the reform by imbuing the people with the resolution of despair. The conduct of currency matters was given to Dr. Hjalmar Schacht who possessed the temperament necessary to the situation. His powers were presently enlarged by his election to the Presidency of the Reichsbank. The former President Havenstein had died on the very day that conversion of the old currency into the new was under-taken, a demise which cannot be thought of as other than opportune.
• 37The successful introduction of the rentenmark in November 1923, a currency without gold backing and, indeed, nothing more than a new tenor of inconvertible paper, with the monetary stabilization thus effected, has been hailed as a miracle. It was certainly a remarkable achievement and bears strong witness to the steadfastness of the German character. The time was ripe but extremely unpropitious. The people had lost all confidence in their currency and in the possibility of its reform. Foreign troops were in possession of their chief industrial districts and the coercive measures adopted by the occupying powers had paralyzed the industrial life of the country. The masses of the urban population were living from hand to mouth, nay, had nothing in their hands but worthless bits of paper which the farmers would no longer accept in exchange for grain. Food riots were general. Political dissolution was in imminent prospect and armed revolt had already raised its head. Affairs were indeed so black that it is clear, in retrospect, that they actually facilitated the reform by imbuing the people with the resolution of despair. The conduct of currency matters was given to Dr. Hjalmar Schacht who possessed the temperament necessary to the situation. His powers were presently enlarged by his election to the Presidency of the Reichsbank. The former President Havenstein had died on the very day that conversion of the old currency into the new was under-taken, a demise which cannot be thought of as other than opportune.
• 38The successful introduction of the rentenmark in November 1923, a currency without gold backing and, indeed, nothing more than a new tenor of inconvertible paper, with the monetary stabilization thus effected, has been hailed as a miracle. It was certainly a remarkable achievement and bears strong witness to the steadfastness of the German character. The time was ripe but extremely unpropitious. The people had lost all confidence in their currency and in the possibility of its reform. Foreign troops were in possession of their chief industrial districts and the coercive measures adopted by the occupying powers had paralyzed the industrial life of the country. The masses of the urban population were living from hand to mouth, nay, had nothing in their hands but worthless bits of paper which the farmers would no longer accept in exchange for grain. Food riots were general. Political dissolution was in imminent prospect and armed revolt had already raised its head. Affairs were indeed so black that it is clear, in retrospect, that they actually facilitated the reform by imbuing the people with the resolution of despair. The conduct of currency matters was given to Dr. Hjalmar Schacht who possessed the temperament necessary to the situation. His powers were presently enlarged by his election to the Presidency of the Reichsbank. The former President Havenstein had died on the very day that conversion of the old currency into the new was under-taken, a demise which cannot be thought of as other than opportune.
• 39
• 40
• 41
• 42Under Dr. Schacht’s firm grip it was but a short time before financial order was restored. The permanent success of Schacht’s measures was assured through the work of Chancellor Stresemann and Finance Minister Luther. The government balanced its budget, reparations were presently put upon a practicable basis with the adoption of the Dawes Plan in 1924, and German finances were once again given a solid footing.