Exchange, Prices, and Production in Hyper-Inflation

CHAPTER II

FACTORS IN INFLATION

§ OUTLINE

THE relative importance of external pressure on the Germans, and of their internal lack of cohesion, as causes of the decline and dissolution of the mark is disputable. The external pressure, especially as applied in 1923, was combated with more spirit than intelligence, and the struggle with foreign Powers stirred rather than allayed the centrifugal tendencies at home. Nevertheless, it is not improbable that had the external burden not been crushing, the government would have been able to marshal such support of its efforts to establish sound public finance as to have insured success. In this chapter the several factors in inflation will be examined, not in the order of their presumed importance, but rather as they fit into a more or less logical and chronological scheme. The effects of the German war- and treaty-losses will first be appraised and this will be followed by estimates of the influence of reparations, of fiscal policy and status, of speculation, of banking operations, and of military sanctions. Under some one of these heads all of the important causes of inflation may, it is submitted, be subsumed.

I. EFFECTS OF THE WAR- AND TREATY-LOSSES

§ GERMANY’S COMPARATIVE ECONOMIC STATUS AFTER THE WAR

All of the countries engaged in the war from the beginning suffered an immense impairment of productive powers. Though, except for a small area in East Prussia, German territory was not devastated, it is none the less probable that the decline in the productive capacity of that country was greater than in the case of any other of the principal combatants. The shortage of important materials occasioned by the practical cessation of imports in the war years and the somewhat more complete organization of production for the purpose of immediate yield, and therefore without regard for repairs and replacements, led to an extreme deterioration in equipment of all types. On the human side, the losses in killed and wounded were proportionately not very unequal as between Germany and the other principal Powers engaged, but the much greater deficiency in foodstuffs in Germany had sápped the strength of the population and had induced a persistent lassitude which affected the output not only of the then adult workers but of the generation which was adolescent when peace was concluded.

The exactions under the Armistice and the Treaty of Versailles considerably increased any discrepancy in relative productive powers which may have existed between Germany and the victor nations at the end of the conflict and made the task of restoring order to currency and finance more difficult for the Reich and somewhat easier for its adversaries. That Germany’s failure to prevent a financial débîcle was directly or indirectly due to the losses of territory, resources, and capital imposed by the victor nations has, indeed, freely been asserted. It is doubtful, however, whether such losses played any great part. The effect of cash reparations (and other recurring cash payments) on mark exchange, on the budget, and on the whole financial structure was great, but this is much less true of the capital goods delivered once and for all in 1918 and 1919, and it is scarcely true at all of the cession of land.

§ CONTRAST BETWEEN THE POLITICAL AND ECONOMIC EFFECTS OF LOSS OF TERRITORY

Politically considered Germany’s losses were certainly staggering. About 1/8 of the area in Europe, as well as all the colonies, and 1/10 of the population was transferred to other flags. Much of this area was well supplied with basic minerals, was industrially advanced, or, to the extent that it was agricultural, was of better than average fertility. But from the economic, as distinguished from the political point of view, this cession of territory and transfer of population is, in itself, a matter of indifference. There is no inherent reason why the people either of the ceded or remaining territory should have been one whit the worse for the shifting of boundary lines. This will be clear enough when it is pointed out that, in the absence of later political interference, it would have been possible to carry on industry and trade within and across the new borders in the identical manner in which it had taken place before the severance occurred. The German nation was smaller after this territory was taken away but by no means necessarily poorer.1

Though, under certain conditions, the cession of territory might thus have no adverse economic effects upon the ceding country, the German economy was in fact subjected to an increase in per capita burdens through the loss of districts in the West and East. In so far as the German people as a unit, rather than as individuals, were under obligation to make payments to foreign governments or private persons (and in this matter recurring reparations were of dominating import), the per capita burden on the smaller population would be increased in equal proportion with the loss in numbers and in total wealth and income. Further than this, a large real loss was occasioned by the dislocation to industry consequent upon the general adoption of political measures running counter to economic sense. This was of special significance in Alsace-Lorraine and in Upper Silesia where the most advantageous use of coal and iron in conjunction, or as factors in the production of finished goods requiring either or both as raw materials, was disturbed by the fact that the separate natural deposits, or the mines and the finishing industries, were no longer within the same political unit.2 Economic organization was consequently subject to distortion by tariffs, or other forms of administrative control, in the supposed interest of the levying country and certainly to the harm of Germany. But though this latter loss was real it may very easily be overestimated. It is confined to the difference between the use of equipment and resources in the most, and in a less, advantageous manner and is similar in scope to the burden which any protective tariff may at any time impose both upon the levying and on other countries.3

§ SLIGHT INFLUENCE OF TERRITORIAL LOSSES ON TRADE, EXCHANGE, AND CURRENCY

The shrinkage in total German area, wealth, and numbers did materially reduce the base of taxation at the very time that heavy external burdens were being laid upon the German fise and this was a factor retarding the rehabilitation of the national finance. But the notion that Germany’s foreign trade balance, and with it foreign exchange rates and the domestic value of the currency, was acutely affected by the separation of territory is erroneous. Because, in the pre-war era, Germany had failed to provide sufficient food for her own population, the surrender of the agricultural districts, Posen and West Prussia, which had always furnished a surplus of foodstuffs above their own consumption, has quite generally been supposed to have been of peculiar significance. The abstraction of this territory from the Reich compelled an even greater resort to foreign supplies than had hitherto been necessary and so, it has been alleged, increased the unfavorable balance of trade. In addition to this, the loss of the industrial export of Alsace-Lorraine and Upper Silesia is generally regarded as having still further widened the spread between exports and imports. Such reasoning fails to take account of the true nature of trade and forgets that production is offset by consumption. If, in the pre-Armistice period, Posen and West Prussia contributed agricultural products to the remainder of Germany they took industrial products in exchange.4 Solely as a result of the division of territory the post-Armistice Germany might therefore show a greater total foreign trade than did the larger pre-war unit, since, without any change in the volume and character of trading, the smaller political unit would tend to have greater imports of foodstuffs and greater exports of manufactured goods than did its larger predecessor. The export of foodstuffs by Posen and West Prussia to the present German territories would, after the separation, count as German imports, though they did not do so before the Peace of Versailles, and conversely, the export of manufactured goods from the present German territories to Posen and West Prussia would count as German exports. On the other hand, neither exports nor imports of Posen and West Prussia to and from the non-German world would appear in German post-war foreign trade figures. If, instead of assuming that the volume and direction of trade remained unaltered, it be supposed that Posen and West Prussia no longer trade with post-war Germany, or trade in less degree than formerly, the increased German import of foodstuffs from other sources would presumably be paid for by the export to other lands of the very commodities, or their equivalents, which had formerly gone to Posen and West Prussia. In whatever degree trade between these former German provinces and the Reich was affected by the separation there would thus be no tendency to alter the balance of international transactions.

With industrial Alsace-Lorraine and Upper Silesia the case is similar. In so far as these districts exported their products to foreign countries in the pre-war period, such exports then counting as part of the German export trade, they must have drawn on foreign countries, or on the remainder of Germany, for imports in exchange.5 If they drew on foreign countries, both exports and imports of the present German territory would be diminished in equal degree provided no change in the total volume or in the direction of transactions occurred. Similar conclusions hold if it be supposed that they drew for imports on the rest of Germany since, with the identical trade, exports from the present German territory would now, on the one hand, be increased by so much of the volume of German shipments to Alsace-Lorraine and Upper Silesia as was necessary to balance the excess of exports of those territories to the outside world and, on the other, would be reduced by an equivalent amount owing to the fact that Alsace-Lorraine and Upper Silesia are no longer part of Germany and their exports no longer German exports. In neither case would the German balance of trade be disturbed. Nor would it be disturbed if Alsace-Lorraine and Upper Silesia should no longer trade with Germany on the old scale. This will be clear from the examples given for Posen and West Prussia.

So far as total German foreign trade is concerned the separation of parts of the old territory from the main body might thus operate either to increase or diminish it. This would depend upon the relation between the foreign trade of the separate units of the original territory and their trade with one another.6 Before the severance, the foreign trade (both imports and exports) of any one of the separated units appeared in the foreign trade statistics of the Reich, while its trade with other units of the original political federation did not. After the severance, that part of the trade of any of the separated areas which formerly counted as German foreign trade no longer appeared in the import and export statistics of the reduced Germany, but, on the other hand, its trade with such units of the old federation as remained within the Reich, trade which formerly counted as domestic, was now classified as German foreign commerce. Since the trade between the separated territories and the rest of Germany was probably considerably greater than the trade of those territories with the outside world, there would be a tendency, so far as the old commercial connections were maintained, for the total imports and exports of the smaller post-war Germany to be greater than for the larger pre-war area. But whether or not old commercial connections were kept up, and whether or not total German foreign trade was larger or smaller as a result of the changes, there would be no effect on the balance of imports and exports nor any tendency, from this source, toward an adverse movement of exchange rates.

Similar reasoning is applicable to the German colonies in Africa and the Pacific. Fiscally considered the cession of these colonies was a gain rather than a loss since more was spent on them than was ever received and any economies from trade with their former possessions are, in most cases, as open to the Germans now as they ever were. So far as foreign exchange is concerned, the commerce of the colonies with the home country had always been foreign trade, and its status is therefore unchanged.

§ LOSS OF NATURAL RESOURCES OTHER THAN LAND

If now we turn to resources other than the land itself, and especially to the raw materials of industry, there is no reason to believe that the transfer to other jurisdictions of the locus of certain raw materials, whether in or outside of Europe, would in itself have any adverse effect on the prosperity of the transferred or the remaining territory or on rates of exchange. It is improbable that these or competing raw materials will now cost the German economy any more than if they had remained under German control, and they will be paid for, as they always have been, by an exchange of products between the territory producing more raw materials and less manufactured goods, and the territory producing more manufactured goods and less raw materials, than they respectively consume. The total wealth of Germany will be less by reason of the “loss” solely because its area and population will be smaller than they would otherwise have been. Per capita wealth,7 productivity, general prosperity, total foreign trade, and foreign exchange rates suffer no necessary or probable impairment.

§ LOSSES OF PROPERTY VS. LOSS OF SUZERAINTY

Changes of suzerainty affected only the per capita weight of future reparations charges and, aside from this, were of no economic significance, but, on the other hand, an extremely heavy economic loss was sustained in the transfer of ownership, as distinct from the political control, of property from German to Allied hands. It is not to be supposed that this economic weakening was primarily responsible for the ruin of the German financial structure. But it had some immediate, if not persistent, effect on the foreign exchanges (and so indirectly on public finance) and the Treasury’s revenues were directly affected in a not inconsiderable degree by the consequent loss of income to the German citizenry. This is true whether the property had formerly belonged to the German state or to German private persons, individual or corporate. Contrary to well established international law, private property belonging to Germans, as contrasted with “Alsatians” for instance, was in some of the transferred areas confiscated, and an obligation was laid upon the German government to reimburse its nationals for these losses. All of this property, together with State property in the ceded territory, the Saar mines, practically the whole German mercantile marine, cables, railroad rolling stock, and a large amount of other goods was subtracted from the wealth of the present German population.8 For this property no German received any quid pro quo whatever except at the expense of other German citizens. The income of the German population is therefore permanently diminished by the amount of the annual yield from this confiscated property. Since a large part of this annual yield was formerly imported into the present German territory the trade balance was disturbed to the extent of its loss and a corresponding pressure was exerted upon the exchange value of the German currency.9

The value of the capital goods surrendered by the Germans on the Conclusion of the war has been variously estimated at from six to upwards of forty billion gold marks, the lower figure being that of the Reparations Commission and the upper that of the German Government. The immense gap between the two estimates is due in part to different methods of valuation, in part to the omission of some categories in the Reparations Commission’s appraisal, and in part to the fact that the property sequestrated was not as valuable to the new owners as it had been to the Germans. The loss to the Germans may fairly be computed at from 20 to 25 billion gold marks, of which the principal items were:10

	Billions of gold marks
Private property in the separated territories	10.0
State property in the separated territories	5.0
Merchant marine	3.5
Railroad material	1.4

This sum, it should be noted, was the value of capital goods only. It does not take into consideration the large current payments made on reparations account, or on account of costs of the armies of occupation or other headings, nor even the loss of capital involved in the forced annulment of Germany’s claims upon her former Allies. The latter item amounted to 8.6 billion gold marks nominally but was of dubious real value. The great influence on the inflation process of recurring reparation payments will appear in the sequel but it does not concern us here. Of the capital items listed above some did not yield a cash return nor others a return which would pass over the present boundaries of Germany. While representing a diminution of German income, the failure of the yield on this property would not therefore affect the balance of international payments nor the exchange value of the German monetary unit, though it would make the payment, as distinct from the transfer, of reparations harder to bear. The loss of income from the remainder, moreover, was large, and had to be compensated by reduced imports or increased exports or both.

§ EXCHANGE RATES ONLY TEMPORARILY AFFECTED BY PROPERTY LOSSES

But though the cession of this latter type of property tended to bring about or accentuate the excess of international debits (imports) which appeared soon after the close of the war, it cannot be contended that this could have depressed the exchange value of the mark for more than a temporary period. The influence of a so-called unfavorable balance of payments upon the exchange and internal value of the currency concerned has been greatly exaggerated. Counting credit in various forms, and voluntary or involuntary gifts, no country can at any time have a favorable or unfavorable balance of international payments (there must be equilibrium) and an unfavorable balance of trade is rather more likely to be an effect than a cause of marked currency deprecia-tion.11 It must be admitted, of course, that a present increase in the ratio of imports, or other international debits, to exports, or other international credits, can occur and that it will lower the exchange value of the monetary unit of the country in question at least temporarily.12 Given ordered domestic finances such a decline, however, normally contains its own corrective. That it might not have done so in Germany’s case will later appear, but, if this was so, it was due to the unconditional recurring obligations imposed upon the Germans rather than to the losses occasioned by the sequestration of income yielding property already in being when the Treaty of Versailles was signed.

In spite of the loss of German foreign income, merchandise imports into Germany did in fact greatly exceed exports from 1920 to the end of 1922, and this in the face of general conditions which clearly called for the opposite phenomenon. Such an excess of imports was possible only because: (1) foreign short-term credit was easily to be obtained in the immediate post-war period and, (2) currency was sold to foreigners as an investment. On the credit possibilities in the early post-war period it has been pointed out that :

“European markets seemed at first to display an illimitable power of purchasing goods at higher and higher prices.13 . . . To practical men a German mark meant 23.82 cents. If for the time being the market quoted it at 6 or 4 or 3 cents, they attributed the fall to an adverse balance of trade. Once Germany’s urgent needs for imports were satisfied, surely, they argued, the mark would recover, perhaps not to its old parity (for loss of credit through defeat in war might prevent that), but at least to the 12 or 15 cents quoted after defeat had occurred and before the imports had begun. Rather than sell their marks at a ruinous sacrifice, many of them held on. . . . Those traders and speculators who acquired holdings of the currencies and kept them in hope of a rise, instead of selling them in the market, delayed the process of adjustment. They were in effect lending to the country whose currency they held, and so helping to bridge the gap between exports and imports.

“The continuous fall in European currencies eventually frightened not only the American exporters but the banks which were financing them. . . .

“In January, 1920, the New York rediscount rate was raised to 6 per cent, and the patience of the American banks gave way. Advances to exporters on the security of European currencies were called in. The depreciation of these currencies, rapid as it had been, was accelerated to the point of panic. .. .

“This exchange panic marks a stage in the great post-war currency crisis. It was followed by a general recovery. . . .

“By cutting their losses the American exporters and the speculators had turned the greater part of their loans to distressed Europe into free gifts. They had also in the process relieved the exchange market of an incubus in the shape of a vast disappointed bull account. . . .

“The excess of imports, which had been swamping their [the central European countries] exchange markets, and was a transitory phenomenon, was not the true cause of the depreciation. So long as it continued it was merely a sign that the existing depreciation, as recorded in the market, was insufficient, and that equilibrium was not secured.”14

§ CONTINUOUS UNFAVORABLE BALANCE OF CURRENT INTERNATIONAL ITEMS IMPOSSIBLE

Excessive imports may possibly have initiated the early post-war decline in the exchange value of the mark but they could not have remained large, relative to exports, if the possibility of selling currency abroad had not still been open to the Germans.15 This view is corroborated by the experience of 1923. By that date further sales of marks to foreigners for investment were impossible and, though the Germans were in dire need of imports, no excess over exports appeared. The reason for the elimination of the excess of imports in 1923 is obvious. Imports could by no hook or crook be purchased except from the proceeds of merchandise exports. This fact throws light on the whole question of the possibility of the destruction of the value of a currency through excessive international debits when such debits are not imposed from without as in the case of reparations.16 Merchandise imports may at any time be ordered in excess of the current receipts of foreign exchange from exports or other credits and, when payment is required, the exchange value of the currency of the importing country may fall. If this fall does not of itself restore equilibrium by raising the price of imports and lowering the foreign exchange cost of exports (and it will later appear that it will sometimes fail to do so), and no method other than the export of merchandise is available as a means of providing payment for imports, the excess of imports will nevertheless be eliminated. Sellers will not indefinitely dispose of their goods without payment therefor. No positive minimum of imports is inevitable and the coat must be cut according to the cloth. If a country is poor it must adjust its imports to what it can in some way pay for and so must cut its own consumption of exportable goods to the point where the share of production exported is sufficient to cover any inadequacy in its international credits. Reference to Chart I will show that in 1923, when the Germans could no longer obtain foreign credits by the sale of marks, the export of manufactures made from imported raw materials increased substantially though the import of the raw materials used in the production of these goods declined. Accumulated stocks of raw materials may have been drawn on to some extent but it is more probable that domestic consumption of the exportable products was curtailed. In the construction of the chart the import and export in 1922 is taken as the standard (100) in each case.

Since imports for domestic consumption, imports, that is, over and above the amount for which payment is made by re-export in the same or different form, come into a country only because it is cheaper and more satisfactory to procure them by the exchange of domestic products than to produce them, or substitutes therefor, at home, they will tend to decline steadily whenever the price relationship with exports is seriously disturbed to the disadvantage of export prices. The matter is complicated by varying elasticities of demand and supply, on which something will later be said, but there can be no doubt that, so far as the power to adjust their international debits and credits lies in the hands of the nationals of any given country, the play of prices will practically always prevent the occurrence of persistent pressure on exchange rates no matter what sudden alteration in wealth and income, even from extra-national sources, may have taken place.17 And if, in very exceptional cases, this does not happen, the refusal of sellers to deliver goods for which there is no prospect of payment will effect the same result.

CHART I

IMPORT OF CERTAIN RAW MATERIALS OF GERMAN INDUSTRY AND EXPORT OF PRODUCTS MANUFACTURED THEREFROM; 1922 and 1923
(1922 =100)

Reproduced from Wirtschaft und Statistik, Vol. 4, No. 5, p. 136 with the permission of the Statistische Reichsamt.

§ SALES OF MARKS NOT UNFAVORABLE TO MARK EXCHANGE

An unfavorable balance of trade cannot therefore be an important causal factor in the persistent decline of the exchange value of a currency. Nor will the sale abroad of the money of any given country in itself provoke collapse. It is true that if imports are first obtained by means of the sale of currency which is later sold back to the issuing country for what it will bring on the exchange market, and this process is repeated again and again, a vicious circle may be set up leading to continuous exchange depreciation. But such a situation would develop only if the domestic purchasing power of the currency is steadily declining from causes other than the effect of exchange rate movements on prices. Sales of a currency are also purchases of that currency and, in themselves, do not depress its exchange value. Along with the domestic, they create an equivalent supply of foreign exchange. The significant thing for exchange rates is not the sale, qua sale, but the terms upon which the seller and buyer of a given money are ready to part with the currencies they respectively possess. Those terms will depend upon the present relative purchasing power of the currencies in question and on the judgment of the parties as to the future of each. The use of a currency for investment purposes tends rather to elevate than depress its exchange value inasmuch as the exchange transaction gives a supply of immediately available foreign exchange against a supply of the domestic exchange which will not come into the market immediately and the advent of which may be indefinitely postponed. It cannot be said that sales of currency are a material factor in preventing as great a fall in its exchange value as would otherwise occur, since, as a result of the sales, imports may be larger relative to exports than would be the case if no sales of currency took place. But the sale of marks for investment or speculative purposes, merely by virtue of being sales, did not depress the exchange value of the German monetary unit. They simply permitted a larger ratio of imports to exports, measured by value, than could have resulted from a similar status of the exchanges if no such sales had occurred.

§ EXCHANGE RATES DEPENDENT SOLELY UPON THE INTERNATIONAL TRANSFER OF MONETARY CLAIMS

Neither the excess of imports temporarily occasioned by the loss of German income from foreign sources nor that made possible by the sale of marks abroad can therefore be held to have led to the persistent decline in the exchange value of the German monetary unit, nor, a fortiori, to its general depreciation. The cession of territory and resources had equally little bearing on the collapse of the currency. Exchange rates are affected only by the movement of monetary claims across the border. The motivating force must be monetary claims rather than the tangible property itself and the claims must carry across the border. The actual transfer of property of any kind across national boundaries does not influence exchange rates except as it establishes or extinguishes monetary claims. Practically all of the German capital appropriated by the victor powers was already outside the post-war boundaries of Germany, or was composed of movable goods which were taken in corpore, and so did not affect exchange. The only way in which mark exchange could be touched by either of these operations was through the loss of such claims to income on former German capital as accrued outside of, and would have been brought into, the present German territory if the capital from which it issued had remained under German owner-ship.18 By reason of the expropriation of this property by the Allies there was a somewhat smaller volume of annually recurring international credits to German account to meet the more or less flexible international debits. But, in view of what has been said above with regard to the adjustment of international debits and credits to shifting exchange rates, it is clear that, whatever may be thought of the justice or economic sense of the sequestration, it would be an error to attribute even to this phase of the total capital transfer any substantial share in the fall of the exchange value of the mark. If the Germans had possessed control over their international debits, if their debits had been dependent upon the volition of commercial creditors, the fact that their accruing credits had been reduced would of necessity have been compensated by a reduction of counterclaims, for the simple reason that they would not have been willing, or if willing, would not have been able to contract debits beyond this amount. This is true regardless of what might have happened to their currency. The currency might have been ruined but it could not have been ruined by a loss of income from abroad or by an excess of imports. In fact, however, a dominant part of their actual debits, reparations claims, was not volitional. It was thrust upon them not by those who were giving them goods—no commercial creditor would have been so foolish—but by those who were giving them nothing at all. So far therefore as an excess of international debits was responsible for the destruction of the German currency it was the obligation to make payments out of assets in posse rather than in esse which exerted any influence. It was not the payment, in reparations, of what they had, but the attempt to pay what they had not, which could and did have a decisive bearing on the German monetary system.

II. THE INFLUENCE OF REPARATIONS

§ REPARATIONS TO MAY 1921

The history of reparations19 till the adoption of the Dawes Plan in 1924 is an almost incredible tale of stupid persecution.20 The confusion of counsels and the vacillation in action which prevailed among the creditor Powers until the adoption of the Dawes Plan, the bickering and endless negotiation, the frustration of all attempts at compromise, were fatal to an orderly process of payments on the part of Germany even if payments in the amount demanded had, at the time, been practicable. The Allies began by demanding the impossible and they capriciously imposed sanctions when the impossible was not performed. Pending final determination of claims, the Versailles Treaty, effective January 10, 1920, required the Germans to deliver bonds as an instalment on their total debt to the value of 100 billion gold marks. Of this amount 20 billion were to mature on May l, 1921. Prior to that date the Reparations Commission was to fix the total of Germany’s obligations and, on the total so fixed, interest was to run at 5%. The Commission did not hand down its decision till April 27, 1921, when the debt was set at 132 billion gold marks.21 Meanwhile Germany had been making large payments in kind, the value of which was estimated by the Commission at 2.6 billion gold marks and by the Germans at several times that amount, but these were declared to have been inadequate to meet the costs of the armies of occupation. Though, in addition to the enormous levy on existing wealth under the Armistice and Treaty, the Germans had now for nearly two years been making large deliveries out of current production, they were held not only to have failed to pay any reparations at all, but to be steadily incurring still greater capital obligations through the accumulation of unpaid interest charges.

§ INAUGURATION OF CASH REPARATIONS PAYMENTS

All this time cash reparations had been in abyance. Several conferences had been held, to some of which German representatives had been summoned and to others not, but, aside from the determination of the distribution of the payments when received, and demands for a series of annuities graduated steeply to 6 billion gold marks yearly, nothing decisive was done until the London Conference of March 1921. The Germans proposed at this meeting that they should assume a capital liability of 50 billion gold marks. Their offer was scornfully rejected, the Allies proceeded to occupy Düsseldorf, Duisburg and Ruhrort, to set up a customs barrier between the occupied and unoccupied parts of Germany, to sequestrate customs receipts on the Western frontier, and to enact Reparation Recovery Acts under which a large part of the value of their imports from Germany were retained for reparations purposes. The Reparations Commission followed this up with new demands which the Germans felt it impossible to meet. They again offered, however, to undertake an obligation of a capital sum of 50 billion gold marks and to pay annuities upon it up to a total of 200 billion. Though this is a much larger sum than will ever be paid under the arrangement now in operation,22 and was probably more than the Allies even then ever expected to receive, it was contumaciously spurned, on the ground, apparently, that Germans bearing gifts were to be suspected beyond measure. On May 5, 1921, a schedule of payments, drawn up at London by the Supreme Council of the Allies, required the delivery of bonds to the value of the gold mark total of the debt as set by the Reparations Commission,23 ordered annual payments of two billion gold marks plus 26% of German exports, and demanded the immediate delivery of one billion gold marks in cash.

Just at this point the German government had brought its tax revenues into some semblance of equivalence with outlays,24 foreign exchange rates had shown no rising trend for more than a year, domestic prices had been steady, and the circulation of Reichsbank notes, while increasing, had not risen consistently or at a very rapid rate. Under threat of further sanctions the Germans paid in May (1921) 150 million gold marks in cash (foreign exchange). Drafts on the Treasury maturing within three months and guaranteed by the German banks were tendered, and accepted, for the remaining 850 millions immediately payable. The purchase of foreign bills with which to cover these drafts drove the exchange value of the mark steadily downward. At the end of August 400 million gold marks were still unpaid but a six-weeks covering credit was arranged in Holland and England. The repayment of this loan extended the pressure on mark exchange into October. The index of the monthly average of dollar exchange rates (number of paper marks to the dollar equivalent of one gold mark) rose from 14.8 in May to 62.6 in November, the index of wholesale prices (1913 = 1) from 13.1 to 34.1, and the ratio of the monthly increase in the floating debt to all other state revenue from 50% to 155%.

§ TEMPORARY RELIEF TOWARD END OF 1921

By the end of October the payments on this first billion gold marks of cash reparations had been completed and the next payment of 500 million did not fall due till January 1922. On the eighth of November mark exchange steadied and within a little more than a month had increased in value by 88%. Internal prices, however, did not fall correspondingly, or at all. The upward- movement in foreign exchange rates from May to November had far outstripped the rise in prices and, in the succeeding months, prices, instead of responding to the fall in foreign exchange, made up most of the lost ground. The public finances, on the other hand, rapidly improved again and by the beginning of the new calendar year the monthly increase in the floating debt had once more been reduced to approximately 50% of all other revenues.

§ LOAN NEGOTIATIONS AND THEIR FAILURE

Before the year 1921 was out the German government had notified the Reparations Commission that it would be unable to meet its obligations maturing in January and February 1922 and it requested a postponement. This led to a protracted series of negotiations, interrupted, in the middle of the Cannes Conference (January 1922), by the fall of the Briand government and the elevation of Poincaré to the French premiership. With this political change the liberal element in the Reparations Commission was submerged and the Allied attitude toward Germany became markedly stiffer. As a temporary arrangement Germany was required to pay in cash 31 million gold marks every ten days. Later in the year, a provisional schedule calling for cash payments at the rate of 60 million marks monthly, and payments in kind at the rate of approximately 120 million marks every month, was set up. Under this steady pressure mark exchange immediately began to give ground, though, at first, the decline was slow. Negotiations for a tolerable solution of the reparations difficulties were in constant progress among the more moderate groups on both sides and the hope of an international loan for the rehabilitation of the German finances kept confidence alive. The hope burned brightly when a Loan Committee appointed by the Reparations Commission met on May 24, 1922. Including in its membership J. P. Morgan, Sir Robert Kindersley, and other prominent international bankers, this committee set about canvassing the possibilities of an international loan to Germany in a sympathetic and constructive way. Much was expected of it. Mark exchange steadied yet once more, the rise in the domestic price level was temporarily checked, and under the tax program enacted a few months earlier revenues began to cover all government expenses other than reparations. If a loan could be floated to take qare of reparations temporarily, or if a postponement of payments could be obtained, all might still be well.

The hope was frustrated by the adamantine attitude of Premier Poincaré who refused to abate one jot or tittle of the French claims and vehemently attacked the financiers for favoring a reduction. The Loan Committee was forced to report on June 10 that, without an alleviation of the burden and a permanent settlement of the whole question of reparations, it could not recommend the contemplated loan, to say nothing of disposing of it to foreign buyers. Like so many earlier attempts at a solution the loan negotiations thus fell dismally to the ground. With them perished the last hope of foreign aid in German financial reconstruction. The Reich was abandoned to its fate.

§ DEATH OF RATHENAU, OCCUPATION OF THE RUHR, AND COMPLETE CURRENCY COLLAPSE

The news of the failure to secure a loan was scarcely cold before Dr. Rathenau, the German Minister of Foreign Affairs, was assassinated. The loss was quite irreparable. Rathenau had been the life of the administration. Devoted to a policy of reconciliation with the victor Powers, possessing the confidence of many of the Allied leaders, influential at home, and able in negotiation, he had been indispensable in establishing such a relationship between Germany and her opponents as might give some prospect of restoration of the national fortunes. His death turned pessimism into panic. Palsy fell on the Wirth government and from this time forward the tide of inflation flowed irresistibly on. From June to December, 1922, the exchange value of the mark fell from 1/3 to 1/100 of an American cent, domestic prices were multiplied more than twenty times, the recovery of government finance was turned into a rout, and paper marks poured from the presses in an undammed stream.

Cash reparations actually paid no longer played a dominating rôle in inflation though the then hopeless prospect of a relaxation of the Allied demands, and the general expectation of the imposition of further sanctions, were potent influences. On July 12, 1922, Germany applied for a complete lifting of all further obligations for that year and stated that the desperate position of the fise would make it impossible to meet the Allied demands for a further period of two years or more. After weeks of bickering among the creditors, during which Germany was held to the schedule earlier laid down, matters reached an impasse at the end of August. The deadlock was finally broken when the Belgians, who were to receive the balance of the 1922 payments, agreed to accept six months’ Treasury bills (payable in gold and guaranteed by the Reichsbank25) in lieu of immediate cash. The respite thus gained by the Germans was of no avail. The toboggan of currency depreciation was then travelling much too rapidly to be checked by any such puny means and, before the notes fell due, the occupation of the Ruhr26 pushed it over the precipice. Except to take up the bills given to Belgium in the preceding summer, no cash reparations were paid in 1923 and though, on the invasion of the Ruhr, reparations in kind were suspended toward the occupying Powers only, that action was generalized in August. After the collapse of the attempt to support mark exchange in the first four months of the invasion, and of a second similar, but much feebler, essay in July, the era of astronomic monetary magnitudes began. Prices, exchange rates, and the volume of circulating medium vied with one another in daily and hourly upward leaps. The Reichsbank was finally reduced to making apologies for its inability to provide for a weekly output of more than several billion (or trillion) of marks of the required denomination and to an expression of its hope that this situation would be quickly remedied by an improvement in the speed of the printing presses! The printing presses did their bit. By the end of inflation the daily output of currency was over 400,000,000,000,000,000 marks. But, strange as it may seem, this did not effect the expected cure!

III. THE FISC

§ PUBLIC FINANCE IN THE IMMEDIATE POST-WAR PERIOD

Though the war, and the peace, dealt heavy blows to the German economy and though poverty was for some years inevitable, the losses in domestic income like those in territory, natural resources, and property, furnish no adequate explanation of the collapse of the internal value of the currency.27 Not even state bankruptcy is, in itself, a sufficient cause. “The existence of ‘budgetary equilibrium’ is not necessary [to stability of the currency]. ... An absolutely bankrupt State can have a perfectly good currency without a trace of inflation.”28 But this possibility can be realized only by the outright repudiation of state obligations. The consequences of such repudiation must always be weighed against the dangers involved in meeting the situation by the issue of fiat money. In the case of Germany, repudiation of recurring reparations obligations would have meant an early application of military sanctions by the victor Powers and complete loss of German sovereignty. Few would deny that to keep things going even temporarily, by inflation of the currency, was the lesser of the evil courses open to the German government and people.

State bankruptcy lay on the knees of the gods. To repair the ravages of war and to restore order in public finance it was urgently necessary that all remaining economic resources should be carefully husbanded and that the fise should be replenished with revenues derived entirely from taxation. But, along with peace, revolution was ushered into Germany and the energies of the people were wasted in internal conflict. The struggle for control of the new republic not only prevented remedial measures in public finance but enormously increased the existing difficulties. The continuation of the war blockade till after the signing of the Peace of Versailles, June 28, 1919, further augmented the troubles of the government, for though circuses were denied, the people had to be supplied with bread.29

In the course of the year 1919 the outstanding volume of discounted Treasury bills rose from 55 to 86 billion marks,30 the index of the cost of dollar exchange from 1.97 to 11.94 (1913=1) and the index of wholesale prices from 2.45 to 8.03 (1913=1). The increase in the currency from 33 to 50 billion marks was comparatively slight, showing that, in spite of the disturbances, the public or commercial banks were buying the discounted Treasury bills from the Reichsbank. This buying was especially marked after the internal political situation had somewhat cleared but the sale of government securities was perforce confined to short-term issues since the future was too obscure to permit the flotation of bonds.

§ TAX REFORMS OF 1919 AND 1920

The administration was far from dilatory and the reform of the finances was attacked with vigor at the earliest practicable moment. The old central government had always been without direct taxing powers31 and the new did not for some time acquire any greater authority. The constitution, adopted at Weimar August 11, 1919, gave to the Reich the right of legislation over the revenues to be devoted, in whole or in part, to its own purposes but it was not until December 13, 1919, that a federal tax administration could be provided for.32 Meanwhile, customs duties had been put on a gold basis, an extraordinary single levy had been imposed on corporations, and a heavy tax laid on war profits. Before the year was out legislation establishing a turnover tax had been passed and a special capital levy, the Reichsnotopfer, or National Emergency Contribution, had been ordered.33 Under the leadership of Finance Minister Erzberger the whole taxing system was revised in March 1920, control of taxation was largely transferred from the States to the federal government, and new impositions were laid on corporations and on the yield of capital. Few sources of revenue remained unexplored and the rates imposed were heavy. But the government was running a losing race with inflation. Its efforts to balance its budget were unsuccessful, the deficiency was made up by short-term loans necessitating constant new issues of currency, and the resulting depreciation depressed revenues still further. Classes of property easy to tax and capable in normal times of providing large revenues were falling rapidly in real value. This was true of all securities yielding a fixed monetary return and also of rentals. The latter were practically confiscated by inflation and by housing legislation felt to be socially indispensable. The depreciation of the currency led to a proper resistance to the taxation of such paper mark incomes as were wholly illusory34 but the resentment against injustice was perverted to secure unwarranted exemptions. The resulting complexity of the tax structure, the administration of which was necessarily inefficient,35 still further reduced the revenues. The greatest source of loss, however, lay in the fact that, between the period for which a tax was levied and the dates of assessment and collection, a decline in the value of the currency might wipe out all but a small portion of the purchasing power of the sum received.

§ POSITION OF THE FISC IN 1921

There is, however, every reason to believe that, apart from the recurring impositions of the Treaty of Versailles, a budgetary balance would have been achieved and inflation checked. Tax revenues in 1920 yielded the equivalent of 4090 millions of gold marks and in the following year 5235 millions.36 Expenditures in 1921, exclusive of the deficit of the state railways and payments under the Treaty of Versailles, were equal to 5738 million gold marks. The railway deficit was eliminated in the following year.37 Leaving it out of account, the ratio of taxes to outlays for domestic purposes in 1921 was 91.2%, an achievement which compared very favorably with that of most of the victor nations. The expenditures under the treaty, however, were themselves approximately equal to all other expenditures combined, and therefore to the total yield from taxes. Unless the improvement in the finances should proceed steadily forward the handwriting on the wall was clear and startling.

§ FAILURE TO ACHIEVE A BALANCE IN THE BUDGET

The facts are that neither in gold mark values38 nor in the purchasing power of paper marks did revenues continue to advance. The appended Chart II shows the matter clearly. By the middle of 1921 the tax reforms of 1919-1920 had produced their maximum effect but it was far short of the requirements of the Reich and a further twist of the screw of taxation was obviously necessary. But tax revision takes time. A greatly extended and intensified tax program was adopted in the spring of 1922 and tax revenues once again, for a month or so, approached the level of expenditures. But it was then too late. The approach to a balance had been achieved only through a partial moratorium on reparations and the threatening attitude of the principal creditors left no hope of a permanent alleviation on this score. Moreover the last bulwark against currency collapse was crumbling. The people at home began to lose all confidence in their money. Exchange rates, prices, and governmental expenses soared, but tax revenues, while increasing in paper mark totals, lagged hopelessly behind. Finally, in late 1923, taxes covered only 1% to 2% of expenditures and many taxes did not yield the cost of collection.39

CHART II

REVENUE OF THE REICH, 1920-1922, IN PAPER MARKS AND IN GOLD MARKS CALCULATED ON THE BASIS OF THE WHOLESALE PRICE INDEX

Reproduced from Germany’s Economic and Financial Situation, p. 27, with permission of the Statistische Reichsamt.

Table IV presents, in gold marks, the revenue and expenditures of the Reich from 1920 to 1923 and Chart III shows the ratio of taxes to total revenues (or expenditures) compared with the monthly average index of exchange rates. The general inverse correlation between the movement of foreign exchange and the proportion of expenditures covered by taxation is clear except in the first half of 1922 when the revised and extended tax program raised the ratio of taxes to outlays in spite of the fact that exchange rates (and prices and wages) were rising at a rapid rate.40 The relative improvement in the Treasury’s position in April and May 1923 ensued upon a sharp drop in foreign exchange in February of that year and upon the stability which obtained till the middle of April, though this is largely obscured on the chart owing to the necessity of plotting exchange rates, at this period, on a diminishing logarithmic, rather than on an arithmetic, scale.

TABLE IV

REVENUE AND EXPENDITURE OF THE REICH; 1920-192341
(Millions of gold marks)

CHART III

PERCENTAGE RATIO OF TAXES TO TOTAL REVENUE, AND MONTHLY AVERAGE INDEX OF DOLLAR EXCHANGE RATES (1913 = l); APRIL 1920 TO NOVEMBER 1923

Exchange rate index plotted from figures in Table V.

§ CAUSES OF BUDGETARY DEFICITS

The exchange value of the mark frequently fell much more rapidly than its internal purchasing power, or to put the other face on the matter, foreign exchange rose faster than wholesale prices and much faster than the cost of living. If the government had had only internal charges to meet, its expenditures, measured in gold according to the exchange rate, would not, in the early inflation years, have run much ahead of receipts. Receipts and expenditures would both have been in paper marks and the government’s business would have been affected by the varying exchange value of the currency only so far as exchange rates reacted on prices but not on revenues.

The major difficulty up to mid-1922 arose from the fact that revenues were collected at one price level while a great part of government expenditures were made at a different and much higher level. Expenditures were of four types as follows:

(1) interest on the public debt. For any given amount of debt this was a fixed charge in marks the burden of which declined with every fall in the internal value of the currency. On this score the position of the government was constantly improving. The number of marks in circulation was increasing, mark prices and incomes were going up, some taxes were more easily obtained, yet mark payments on the old debt remained as they were.

(2) expenditures on wages and salaries. These varied roughly with the cost-of-living index. A considerable part of the taxes accrued from levies on income. “Earned” income varied in fairly close correspondence with the cost-of-living index so that, except for the shifts in distribution which accompanied inflation and made concealment and evasion easy, the tendency toward budgetary disequilibrium, so far as the share of income taxes in total tax revenues is concerned, was in some measure compensated by rising incomes.

(3) expenditures for commodities. This type of expenditure varied approximately with wholesale prices. After the reduction of railway subsidies it was of much significance only in the case of reparations in kind, of which the most important were coal deliveries. Since taxes on commodities varied with movements in wholesale prices, revenues grew, in this case also, in some measure of correspondence with increased expenditures.

(4) cash reparations. Payments under this head were fixed in terms of foreign exchange. The mark burden of these outlays consequently rose with every fall in the exchange value of the German currency. Whenever such a fall was disproportionate to the movement of internal prices and incomes there was no tendency whatever for any type of revenues (all of which accrued in paper marks) to respond to the increase in expenditures which the fall in mark exchange inevitably occasioned.

But whether the fall in the exchange value of the currency at any time was or was not greater than the decline in its domestic purchasing power, the result was merely to accentuate or mitigate the lag of revenues which was inherent in the depreciation itself. This is especially true of the period after the middle of 1922. For the year May 1921 to April 1922, a year of heavy cash payments on reparations account, the low relative value of the mark on the exchange markets was of great importance in determining the condition of the Treasury, but the mere fact of currency depreciation, regardless of the relation between the internal and external value of the monetary unit, was thereafter the sole significant factor. For the greater part of 1923 there was a steady rise in the relative value of the mark on the exchanges42 but this was of slight consequence since the government was then making no cash reparations payments and the precipitous fall in the absolute value of the currency, both within and without the country, led, in any case, to exiguous revenues in comparison with the enormous increase in outlays.

In spite of decrees calling for the payment of taxes in anticipation of their due dates, of attempts to speed up their collection in other ways, and of tax rates which at the time they were imposed seemed intolerably severe, the actual receipts were ridiculously inadequate. According to the Act of December 23, 1922 the income of a married man with two children, such as was at that date equivalent to $1020, was subject to a tax the equivalent of $230 and, on the larger incomes, the ratio was much higher. But the levy and payment were both in paper marks. If this tax had been paid in full as early as the end of June 1923 (and some such interval must elapse to give time for assessment and collection) it would then have been worth slightly over $10, at the end of July about $1.50, at the end of August about 15c, at the end of September a fraction of a cent, while, at the end of October, it would have been in that twilight zone where infinitesimals fade into nothingness. With whatever pecuniary penalties delay in payment had been attended, and they were in appearance severe, the advantage of postponement could not but have outweighed them. This fact made collection difficult even though at the time the taxes became legally due they had already lost a great part of their sting. The only income taxes which bore heavily on the payer and brought in any considerable revenues to the government were those levied at the source. The result was that the wage worker, whose taxes were so levied, paid an ever increasing share of the total yield of income taxes.

Taxes on commodities tended to increase in paper mark totals as prices rose but, as the pace of depreciation waxed, even these were of little value by the time they accrued to the Treasury. The one gray spot on the otherwise immaculate blackness of the Treasury’s position from mid-1922 to the end of inflation came as a result of the temporary stabilization of exchange rates and prices in the spring of 1923. This result, achieved through intervention by the Reichsbank on the exchange market, cost the bank heavily and, in the existing state of government finance, it was a gesture only. It temporarily raised the ratio of revenues to expenditures but the marked increase in the latter, consequent upon the policy of passive resistance, would have led to another reversal even if the support of the mark had been maintained for much longer than in fact proved possible. From May onward the ratio of the monthly increase in the floating debt to state revenue from all other sources grew higher and higher. In the last half-year of inflation, only an insignificant fraction of expenditures was covered other than by the discount of Treasury bills and the ensuing emission of Reichsbank notes. In practical effect the government had ceased to collect ordinary taxes43 and was financing its activities all but solely through issues of fiat money.

§ INCREASE OF THE FLOATING DEBT

The upward march of the floating debt was never once interrupted from the end of the war till the currency reform in November 1923. Though this was not absolutely true of the issue of Reichsbank notes, owing to the fact that a larger or smaller proportion of the discounted bills was from time to time sold to the public by the Reichsbank, the connection between the two phenomena was close.

TABLE V

DISCOUNTED TREASURY BILLS OUTSTANDING AND ISSUES OF REICHSBANK NOTE; 1919-1923
(Billions of marks)

44

Table V shows by months the total amount of discounted bills outstanding and the volume of Reichsbank note issues. The figures in the table are not, of course, to be interpreted as representing the difference between financing the state requirements partly by taxation, as in the earlier years, and wholly by fiat money, as in the later. They reflect this situation very obscurely and show, in the main, simply the depreciation of the currency. The hundreds of quintillions of marks, in November 1923, were actually of much less gold value than the comparatively insignificant totals of discounts and note issues in earlier years. The depreciation of the currency thus not only wiped out the pre-inflation federal debt but also was continually reducing the burden of the enormous current borrowings. If one were to take thousand-mark notes and pile them tightly together one on top of the other the sum of values would not equal the government’s borrowing from the Reichsbank until the pillar was twenty-five billion times as high as the loftiest mountain on earth.45 Yet, at the rate at which the mark was converted into the new stable-value currency (a trillion to one), the total discounted bills outstanding on November 15, 1923, were worth less than fifty million dollars.

§ INTERRELATIONS BETWEEN EXCHANGE RATES AND THE STATUS OF THE FISC

The relation between foreign exchange rates and the status of the fise may have been due to the fact that shifts,in exchange rates affected the position of the Treasury, that the position of the Treasury affected exchange rates, or that these factors reacted upon one another. The last is the most likely. Vicious circles are germane to the whole process of inflation and the connection between exchange rates and the public finances in Germany is but one aspect of a phenomenon which occurred in many forms. Deficits in the state finances, increases in the volume of circulating medium, the rise of internal prices, and upward movements in exchange rates were all tied together and the order of their coming was by no means fixed. Any one of these factors in inflation might alter independently, exert its influence on any or all of the others, and be affected in turn by the changes which its own movement had initiated. Not only was the whole circle of changes then again set in motion and indefinitely repeated but from each of the changing factors a new set of impulses, either independently or as a resultant, was constantly being communicated to each of the others, and was from each again passed on with ever accelerated momentum. Once inflation was fully under way the process was an inverted spiral with the sweep always widening and the vertical distance between the coils growing greater with every revolution.

The ramifications of the process cannot well be presented in a single picture but it may be helpful to outline one full circle, remembering that any one of the factors might be causal, that the influence of a change in any of them was exerted on those which precede as well as on those which follow it in the list, and that the order in which they are set down merely reflects the random selection of a starting point. Such a circle, beginning with exchange rates, would be:

Rising foreign exchange rates, rising domestic prices, increase of governmental expenses, larger budgetary deficit, increase both in the absolute volume and in the rate of acceleration of government discounting of Treasury bills, diminished public demand for such bills, increase in the absolute amount and in the rate of issue of Reichsbank notes, larger cash and credit volume of circulating medium, further rise in exchange rates and prices, and so on in indefinite repetition.

The circle might at any time be short-circuited in any direction, but this would not diminish, but rather increase, the strength of the current throughout the line.

An opposite trend in any of the factors would, of course, act cumulatively toward deflation. Cases of this sort occurred but they were sooner or later checked by the failure, even at the best of times, of state revenues to cover expenditures (including reparations), and by the recurrent pressure on exchange rates issuing from attempts to meet elastic demands from the victor nations. The latter persistently took the position that whatever was paid or offered was but an inchoate essay at fulfilment of the obligations due.

IV. SPECULATION

§ POWER OF SPECULATION TO DEPRESS EXCHANGE

Great has been the abuse heaped upon the exchange speculator as a destroyer of currencies. Most of this abuse is due to the conscious or unconscious search for a scapegoat and is unwarranted by the facts. But though speculators who persistently operate against the trend of fundamental forces are certain to be eliminated, and so cannot long affect the market, it is not to be denied that bear speculation may depress the exchange value of a monetary unit, that the fall in the currency’s exchange value may provoke retrogression in its domestic purchasing power and in the public finances of the country concerned, that new issues of notes may thus be induced, that the consequent further fall in exchanges may justify the speculation from the point of view of private profit and may lead to continued bearish operations which, in the manner just indicated, actually bring about the depreciation on which the operators count.46

§ THE VENUE OF SPECULATION

Speculation in the mark was rampant both on the bull and on the bear side of the market though the two movements did not by any means coincide. The post-war history of German inflation, so far as foreign exchange is concerned, shows several clearly marked major movements as follows:47

(1) The period of immediate post-war adjustment, November 1918 to February 1920, characterized by a steady fall in mark exchange.

(2) The period from March 1920 to May 1921, a year and a quarter of stability considered as a whole, though with an upward movement of the mark from March to May 1920, a downward movement from August to mid-November, and an upward movement from mid-November 1920 through January 1921.

(3) The period from June to late-November 1921, the months of heavy cash reparations payments, characterized by a rapid fall in mark exchange.

(4) The period from December 1921 to May 1922, a half-year of comparative stability again.

(5) The period from June 1922 to the end of inflation during which the trend was steadily downward.

In the immediate post-war period the speculative48 dealing was predominantly on the bull side of mark exchange and, indeed, till late in 1922, the persistent foreign speculative buying of German currency was one of the most striking aspects of inflation. It is doubtful whether bear activities ever fully counteracted this steady buying. As a result, however, of the operation of forces much more fundamental than speculation, the mark sagged in 1919 at a steady and, for that time, rapid rate, and the speculators as a group took heavy losses. Those who had played the part of bears of course iriade money but the situation was reversed after March 1920 when, in the course of a little more than two months, the mark rose nearly 200% (100.13 to the dollar on March 4; 34.75 to the dollar on May 25). This was the heyday of the bull movement and as usual it was overdone. The exchange value of the mark had been carried beyond the point at which it would be sustained by basic factors and it slowly slid back toward the current equilibrium level. In the ensuing months speculation was not very active except for the so-called investment demand49 but, with the beginning of cash reparations, the bears were presented with a near certainty of success. Knowing that the government must procure foreign exchange in large volume, and that it had no means of doing so except by further note issues, the “spot” purchase of foreign exchange or the sale of mark futures carried a rich promise of profits to the speculator. This situation continued from June to November 1921. Investment buying of marks was then on the decline and it is probable that speculative selling operated to produce the situation it anticipated. The farther bear speculation drove the mark down the worse became the situation of the fise. The discounts of Treasury bills and emissions of Reichsbank notes consequently grew larger, with a reflex again on the exchanges, and so on in indefinite repetition. The only escape was to have mark exchange fall so far below the domestic purchasing power of the currency as to lead to purchases for present use or to speculation for a rise. If this should occur the spin of the circle would be checked and perhaps reversed. It actually was checked when relief from reparations payments was temporarily obtained in late 1921.50

§ THE FLIGHT FROM THE MARK

The greatest effect exerted by speculators in exchange is ordinarily supposed to have occurred after the middle of 1922 when the home population, having lost all confidence in the currency, rushed in a frenzy into the exchange markets and initiated, the so-called export of capital. The export of capital and the flight from the mark, so far as the latter phrase means the exchange of the mark for foreign currency, have been generally used as synonymous expressions. In reality they have no connection with one another. The essence of an export of capital is the transfer to residents of a foreign country of the ownership of immediate claims to goods (and later, when the claims are exercised, of the goods themselves), without any obligation on the capital importer to furnish similar immediate claims in return.51 A foreign exchange transaction is not of this type but is a barter of immediate monetary claims to goods in one national market against immediate monetary claims to goods in another.52 It is true that either or both of the bartered claims may have been obtained in exchange for deferred obligations in the other currency (a claim to future goods) or may later be used to purchase them. But there is nothing in the sale of a currency itself to show that this is occurring. There can, indeed, be no net export of real capital in the actual purchase and sale of exchange. All that happens is a swapping of claims on currencies, with the nationals of each country, after the transaction, owning the equivalent in present goods (or claims thereto) of their former possessions. This is true whether, for instance, a German sells for marks American exchange to another German, to an American, or to a foreigner not a citizen of the United States. Whatever the details, in no case would either country send out capital in the exchange transaction.53

§ MECHANISM OF CAPITAL EXPORT

Since an exchange transaction cannot of itself involve a net export of capital it follows that capital must be exported outside the exchange process. There is an inchoate export of capital as soon as immediate monetary claims to goods in one country are given to another in excess of the immediate claims received by the former from the latter.54 This is not an exchange transaction. When, however, such immediate claims are sold the exchange of the lending country will tend to be depressed. The actual export of capital is made in the form of commodities and, when an equivalent additional volume of commodity exports attends an undertaking to export claims to capital, exchange rates tend to be restored to their old position. Similarly, a constructive export of capital, without effect on exchange rates, takes place whenever the borrower (the seller of future obligations) takes the present foreign exchange proceeds of his borrowing and spends such exchange on tangibles left in the lending country. The only effect on exchange rates of an export of capital claims occurs, therefore, when the newly acquired rights of the borrower, in the form of the money of the lending country, are sold for what they will bring in his own money. The resulting temporary fall in the exchange value of the currency of the lending country is due not to the export of capital, as such, but to the fact that there is a momentary redundancy in the foreign holdings of rights to the lending country’s money rather than of its commodities. The lending country’s money therefore falls in exchange value against other currencies and it will pay to change it into goods. As soon as the cash holdings are expended for commodities, whether or not such commodities are imported into the buyer’s country, the redundancy of the lender’s currency on the exchange markets is reduced and exchange rates tend to recover.

§ EXPORT OF CAPITAL FROM GERMANY SLIGHT

Now the flight from the mark was not due to an impulse on the part of Germans to export capital, that is, an impulse to give to foreigners immediate claims on German goods in exchange for a postponed command over foreign commodities, but merely to a desire to swap present purchasing power in their own currency for anything which would retain its value. If capital had really been in process of exportation from Germany there would have been no trouble. It is just because there was almost no capital capable of export that mark exchange fell so rapidly. Insofar as German exchange was held by foreigners as an investment, and thus approached the category of securities,55 it is much more nearly true to say that capital was being imported into Germany, either actually, in the shape of an excess of commodity imports which would otherwise not have been possible, or constructively, in the acquisition by sellers of marks of present property in foreign countries.56 In exchange for the capital actually or constructively imported the Germans offered marks or mark claims which were, in effect, promises to pay on demand, throughout an indefinite period, an undetermined but steadily diminishing amount of purchasing power over German goods—provided the withdrawal of those goods were permitted by the German authorities. So far as the marks were bought and held by foreigners till they became worthless this process was not even an exchange of capital, to say nothing of a net export. It is therefore all but quite erroneous to speak of the flight from the mark into foreign currencies as an export of capital.57

It has already been pointed out that the sale of marks, in itself, did not tend to depress mark exchange. When buyers were eager, as in 1920, the sale (which was also a purchase) of marks was attended by a rising value; when they were reluctant and sellers were eager, as in the second half of 1922, mark exchange fell. The crux of the matter is not that marks were being sold abroad but that they were being sold under the hammer without reservation of price. Assuming that the Germans would have had the same foreign obligations, whether or not marks had been sold abroad, the sales to “investment” buyers acted to sustain or improve the exchange value of the German currency precisely as if the Germans had been in the second stage of the export of real capital—the sending out of goods rather than of monetary claims against them—or had been borrowing in foreign countries through the issue of securities.

Marks could not be sold without being bought and when foreigners purchased marks, or claims to marks, they could do one of three things with them. ( 1 ) They could hold them either abroad or on deposit in Germany or they could lend or otherwise invest them in Germany. In this case the original support given the mark by their demand would be subject to no diminution. (2) They could later buy exportable goods with them. If these goods would not otherwise have been purchased the upward impetus to mark exchange arising from the original demand for the marks would be sustained. (3) They could sell the marks already purchased. In this case the original support given the mark by the investor’s purchase might in part be cancelled.58 But even here any decline in the value of the mark between the date of the original and the later transaction would make the pressure on mark exchange much lighter than an equivalence with the support originally given.

§ SALES OF CURRENCY AS A BULLISH FACTOR ON MARK EXCHANGE

It is clear that, taking the whole period of post-war inflation into consideration and assuming that a fixed amount of foreign exchange was unconditionally required by the Germans, the sale of the currency was a bullish factor on its exchange value. This was specially true of the earlier years. In the final stages of inflation, moreover, it was not the sale of the currency (the so-called export of capital) which was of any significance in depressing its value but the fact that sellers were intensely eager and sales extremely hard to make. In the first place they were prohibited by the German government59 but, more important perhaps, the lists of gullible foreign buyers had by this time been fairly well exhausted. There were few individuals ready to buy, with stable-value currencies, a monetary unit which was rushing to its doom. Clearly it was the attitude of the buyers and sellers of marks toward the wares of which they were making disposal and acquisition, and not the sales themselves, which was the fundamental influence in driving the value of the mark downward and, per contra, in raising to the sky the mark value of foreign exchange.60

From the beginning of 1923, at latest, practically the sole sources of foreign exchange were the proceeds of German commodity exports or of such property as foreigners bought in Germany. Exchange dealings involving the mark must have been confined largely to the Germans themselves since foreign sellers of goods to Germany were invoicing in stable currencies, German sellers were in large measure also following this practice, there was no foreign investment demand for marks, and the supply of marks purchased by foreigners in previous years, and subject to sale, cut no appreciable figure at the value to which the mark had then fallen. Practically the sole market for marks thus lay with German exporters who had acquired foreign exchange and were ready to part with it at a price which would enable them to employ immediately, and at a profit, the mark proceeds of the sale of their exchange. The transaction thus resolved itself into a close calculation of the relative advantages of holding foreign exchange or of selling it against marks and buying goods at home. There was thus no tendency for exchange rates to rise far in advance of prices, and internal prices at this time did, in fact, advance even more rapidly than foreign exchange. (See infra, Chart VI.)61 There is thus no reason to believe that the panic flight from the mark expressed itself primarily in the exchange markets. On the contrary the evidence runs in the opposite direction. The final cataclysm can therefore not be attributed to speculation on the exchange markets even when that term is extended to include German buying of foreign currencies as a safeguard against ruin and with the intention of holding the purchased moneys indefinitely. Purchases of foreign exchange were only one, and it would seem not the dominating, aspect of a general repudiation of the mark. The exchange market was closed to legal speculation and, even if exchange bootlegging had been successfully prevented, it is unlikely that the rates would have deviated very widely from those actually established. Arbitrage as between foreign exchange and commodities would have kept exchange rates in approximately the same relation to domestic prices as did in fact take place. Domestic prices were affected as directly as exchange rates by the flight from the mark and exchange speculation was no more active than speculation in commodities.

It is true that the first access of panic in mid-1922, when the final relapse of the currency began, affected exchange markets first of all and, in the manner already described, helped to realize the fears of the population with respect to the monetary unit. The fall in mark exchange which occurred at that time was certainly a factor in destroying whatever chance then existed of rehabilitation of the public finances just as the fall in 1921, attendant on cash reparations payments, had ruined an earlier favorable prospect. To this extent speculation may have been in some measure responsible for the ultimate collapse. But in view of the enormous sale of marks to eager foreign buyers, rather than by urgent German sellers, up to the middle of 1922, and of the peculiar situation in 1923, it seems probable that, over the whole period of inflation, speculation was a favorable rather than an adverse influence on the exchange value of the German currency unit and, inasmuch as the sales abroad removed some of the issues of mark notes from the only milieu in which they could affect prices, it is equally probable that speculation prevented as rapid a fall in the internal value of the mark as would otherwise have taken place.

V. BANKING

§ GENERAL INFLUENCE OF BANKING ON INFLATION

The basic though perhaps not originally causal factor in the complete syncope of the German financial structure was the constant and eventually overwhelming increase in the issue of Reichsbank notes. Whether or not the forces impelling such issues were capable of restraint is an open question. But when, in the fall of 1923, even a box of matches sold for more marks than were in existence in pre-war Germany, it is clear that, but for the flood of notes, the depreciation actually realized would have been impossible. Yet it was constantly and vehemently asserted in Germany that note issues were the result rather than the cause of the decline in the value of the mark. There is, moreover, some basis for this contention. Causes and effects here as elsewhere were confused and reciprocal. They were but another phase of the protean vicious circle. Note issues were a consequence of government deficits and government deficits depended largely on exchange rates and prices. Exchange rates and prices were thus an important causal factor in fixing the amount of notes in circulation at any given moment, yet at the same time they were affected in part, but in part only and to an indeterminate degree, by the past, present, and highly uncertain prospective volume of such note issues.

Whenever gold payments are suspended the gold value of a currency may depreciate gravely as a result of the operations of commercial banks even if such banks have no note issuing powers. The range of depreciation is ordinarily widened if the government is forced to resort to short-term borrowing but, if its obligations ultimately find their way into the investment portfolios of the public, the road to recovery is still open. State borrowing may indeed be carried on in excess of the absorptive capacity of the public, and without irreparable damage, provided the banking organization takes up an adequate volume of the government’s floating obligations. Up to this point inflation can be confined to an expansion of bank credit on a relatively constant monetary base. Though such credit may be stretched far, the more or less stable proportion of money to credit instruments which is required by established business habits keeps credit expansion within at least measurable bounds. This is especially true where, as in Germany, the commercial banks are dependent for cash reserves on the note issues of the central institution.62 But, when a government can no longer in any manner place its securities, and is forced to cover deficits by persistent direct issues of notes, the constant growth in the monetary base greases the ways for the launching of unlimited currency depreciation. The post-war inflationary experience of Great Britain, where the original value of the monetary unit was eventually restored, may be taken as partially representative of the first type of inflation, that of France, where a large floating debt was a constant menace until the reforms of 1926 resulted in the stabilization of the currency unit at about 1/5 of its original value, as typical of the second,63 while Germany is the arch-exemplar of the third.

§ METHOD OF GERMAN NOTE ISSUES

The German government did not, it is true, issue its own notes in any considerable volume but operated through the Reichsbank. All government revenues in excess of tax and long-term loan receipts being obtained by the discount of Treasury bills it made little difference whether the government took the proceeds of such discounts in Reichsbank notes or in deposit credit. Reichsbank notes or their equivalent passed into the hands of the public as soon as the government settled its accounts either by payment in cash or by draft on the Reichsbank.

To the extent that the Reichsbank could dispose of Treasury bills to the commercial banks or to the general public it could withdraw its own issues from circulation and to the extent that the Treasury could sell its bills directly to the same buyers no new issues of paper money were involved. If the Reichsbank had ever been able to effect a permanent reduction in its holdings of Treasury bills, or even to prevent their increase, the progress of inflation could have been stayed. But it will be remembered that, from the Armistice to the end of the period of inflation, the end-of-the-month figures of outstanding discounted Treasury bills show an absolutely uninterrupted increase although the holdings of such bills by the Reichsbank were, on several occasions, temporarily lowered. These reductions correspond roughly with improvements in the exchange value of the mark, though the cause and effect relationship is not indisputable.64 Whatever the causal sequence may have been, the correlation is significant of what might have been accomplished if the reduction in Reichsbank holdings could have been made other than ephemeral. But of this the persistent growth in the total of Treasury discounts did not permit. Statistics on the amount of Treasury bills held by the Reichsbank, the proportion which the latter bore to the total Treasury bills discounted, and the ratio of Reichsbank note issues to its holdings of these bills are given in Table VI.

§ REICHSBANK HOLDINGS OF TREASURY BILLS

It will be noted that, from the beginning of 1922 onward, the rise in the Reichsbank holdings of Treasury bills was as uninterrupted as had been for several years the progress of total government discounts and that the increase in the Reichsbank’s share of the growing total was almost as steady as the rise in the absolute figures. This means, of course, that the commercial banks and the public were then constantly reducing the relative volume of their purchases. The movement is especially marked after the middle of 1922 when, for several months, not only did the proportion of Treasury bills outside the Reichsbank show a declining trend but, in spite of the fact that there was a rapid increase in the total output of the bills, the absolute volume of non-Reichsbank holdings fell off. The situation up to September 1922 is depicted in Chart IV.

TABLE VI

REICHSBANK HOLDINGS OF TREASURY BILLS, RATIO OF SUCH HOLDINGS TO TOTAL TREASURY BILL DISCOUNTS, AND RATIO OF REICHSBANK NOTE ISSUES TO HOLDINGS OF TREASURY BILLS; 1919-1923

Sources of data: (1) Germany’s Economy, Currency and Finance, p. 63. (2) Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, pp. 45-7.

Even though the commercial banks could borrow from the central institution at low rates there was no profit in investing in Treasury bills and, as the currency depreciation proceeded, Treasury bills became quite obviously a very poor type of secondary reserve. They were still less desirable investments for the public at large who, unlike the commercial banks, could not easily hedge on their transactions by borrowing at low rates from the Reichsbank in monetary units which fell in value pari passu with their investments, and who therefore had to take an uncompensated loss with every decline in the value of the mark. The growing disinclination to invest in such “securities” forcedthe Reichsbank to absorb an ever increasing proportion of each newissue and, in order to keep any outside market at all, it was impelled torepurchase as large an amount of the old issues as might be offered toit. Its holdings thus increased at certain periods at a faster rate thanthe government borrowings. The volume of notes in circulation was,of course, correspondingly enlarged.

CHART IV

TREASURY BILLS AND THEIR DISTRIBUTION; JANUARY 1920-September 1922

Data from Geld und Kredit, L. Albert Hahn, Tübingen, 1924, p. 115.

§ DISCOUNT OF COMMERCIAL BILLS AND POLICY OF REICHSBANK TOWARD PRIVATE BORROWING

But Reichsbank note issues were not dependent on Treasury borrowing only. In pre-war days the non-cash cover of Reichsbank notes had consisted of commercial bills. Against the discount of such bills the bulk of the pre-war circulation had been issued. The provision permitting commercial bills as cover was retained in the war- and postwar period and the output of notes was thus conditioned by private as well as by government borrowing.65 The percentage of Reichsbank note issues to the total of discounted Treasury bills in the portfolio of the bank was therefore frequently above 100% though the ratio was reduced by the share of both private and government discounts which were left on deposit in the central institution rather than taken in the form of notes. Reference to Table VI will show that the volume of note issues began to exceed the Reichsbank holdings of Treasury bills at the beginning of 1920. The use of commercial bills had almost entirely ceased during the war and was not widely resumed till the middle of 1922 so that, to that time, the cover for Reichsbank notes, other than that provided by Treasury bills, was either coin, bullion, Reichskassenscheine or Darlehnskassenscheine. None of the latter types of cover were of great quantitative significance in comparison with the Treasury bill. Inflation, till mid-1922, was therefore dominated by Treasury deficits.

The shrinkage of all types of bank deposits and the resulting scarcity of credit, which grew marked as inflation advanced,66 impelled the Reichsbank, in the summer of 1922, to urge the readoption of the commercial bill as a credit instrument. A low discount rate was applied and, under the existing condition of continuous currency depreciation, the rediscounting of commercial bills became an obvious recourse for the private banks. The Reichsbank’s portfolio of commercial bills consequently grew rapidly in spite of a gradual diminution in the bank’s enthusiasm in the matter and of subsequent large but always inadequate increases in the rate. The figures for discounted commercial bills, for total discounted bills (commercial plus Treasury), and for note issues are given in Table VII.

§ RATIO OF DISCOUNTS OF COMMERCIAL BILLS TO TOTAL NOTE ISSUES

From a negligible amount in June 1922 the Reichsbank discount of commercial bills thus rose to one-third of its total discounts in April 1923, that is, the commercial bills amounted to one-half as much as the Treasury bills. From then on a relative decline in the volume of commercial bills discounted set in and this tendency continued till just prior to the currency reform in November. After November 15 there was no further discounting of Treasury bills, the former government discounts were taken up,67 and commercial bills occupied the whole stage.68 Though discounts for the Treasury continued to be preeminent up to the end of inflation the credits put at the disposal of the commercial banks thus played a rôle of considerable importance. The ratio of Reichsbank discount of commercial bills to total note issues is given in Table VIII. Though, even in 1923, the ratio did not rise much above the status in 1914 it must be remembered that in the pre-war period the Reichsbank did comparatively little discounting for the government. The fillip given to inflation by the premium put on private borrowing from the Reichsbank cannot therefore be denied.69 In this connection the relation between prices and exchange rates is worthy of notice. Up to 1923 domestic prices had risen much less than foreign exchange rates but in that year they no longer lagged behind. The conclusion is possibly warranted that the volume of notes issued as a result of Treasury operations only, huge as it was, had been short of the amount necessary to sustain the domestic price level on a basis of equality with the depreciation in the exchange value of the currency, but that, when Reichsbank credit was made easy to private banks and commercial borrowers, the total volume of means of payment was extended to any degree requisite to keep pace with the plunging value of the currency on the exchange markets.

Source of data: Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, passim.

TABLE VIII

COMMERCIAL BILLS DISCOUNTED BY THE REICHSBANK AS A PERCENTAGE OF TOTAL NOTE CIRCULATION; 1914-1923
(By years 1914-1919, by months 1920-1923)

The intensity of the stimulus toward borrowing from the Reichsbank may be gauged from a comparison of the sluggish rise in the discount rate at the central bank with the ever-accelerated pace of currency depreciation. From the early days of the war till the end of June 1922 the Reichsbank rate remained unchanged at 5%; it was raised to 6% in July, to 7% in August, 8% in September and 10% in November 1922, to 12% in January 1923, 18% in April, 30% in August and 90% in September. But these increases were as nothing when measured alongside the progressive lightening in the burden of a loan during the time for which it ran. Though, after September 1923, a bank or private individual had to pay at the rate of 900% per annum for a loan from the Reichsbank, this was no deterrent to borrowing. It would have been profitable to pay a so-called interest, in reality an insurance, charge, of thousands or even millions of per cents per annum, since the money in which the loan would be repaid was depreciating at a speed which would have left even rates like these far in the rear. With a 900% interest rate in September 1923 the Reichsbank was practically giving money away and the same is true of the lower rates in the preceding months when the course of depreciation was not quite so headlong. The policy of the Reichsbank authorities in encouraging the discount of commercial bills that they might thus mitigate the scarcity of credit was but further evidence of the Alice-in-Wonderland determination of the directors of that institution to run ever faster in order to keep up with themselves. The scarcity of credit was due solely to currency depreciation and the cure prescribed was to increase the volume of means of payment ! The Reichsbank could not refuse to discount Treasury bills70 but the policy on commercial bills was a gratuitous mortification of an already fatal wound.

§ COMMERCIAL BANK DEPOSITS

Aside from accepting the opportunity to secure central bank credit which was thus thrust upon them, and of somewhat extending their own operations on the basis of this credit, the commercial banks played a subordinate part in the whole inflation process. Deposits in the commercial banks grew, of course, as paper money streamed forth from the Reichsbank, and the credits granted corresponded measurably with the upward surge of prices. But the commercial banks had no note issuing powers71 and their own contribution to inflation was therefore necessarily confined to an expansion of loans the proceeds of which were left on deposit. No figures are available which make it possible to separate with any precision commercial deposits resulting from loans from those actually brought in by customers. Table IX, however, shows total bank deposits in comparison with total money in circulation and the ratio between them. Except in 1922, when rediscounting of commercial bills at the Reichsbank was being encouraged, the ratio, during inflation, was lower than in the pre-war period. The figure at the end of 1923 is affected by the fact that the currency reform had just then been gotten under way. Time deposits which had wellnigh vanished under the spell of depreciation were not yet being restored and the banks were extremely cautious about extensions of commercial credit. The ratio of deposits had been further reduced by the incredibly rapid issue of bank notes in the last days of the old mark. The 1924 figure is given to show the gradual return to “normal” stable-standard conditions.

So far as total deposits go it would seem that operations of commercial banks had no inflationary effect except in 1922 and 1923 (up to the reform) and then only at the instigation of the Reichsbank. This assertion is based on the facts that up to 1922 total deposits, as compared with 1913, had declined in importance relative to note issues and that the increase in the ratio in 1922, and till November 1923, was presumably due to the Reichsbank’s encouragement of the rediscount of commercial bills. The index of deposits relative to total money in circulation, when expressed as a percentage of the 1913 ratio, was, for the end of the years 1920, 1921, 1922, 1923, respectively 65%, 80%, 108%, 41%. But a sizable part of the total deposits were time deposits which tended to disappear as the risk of depreciation grew. If therefore, instead of total deposits, demand deposits72 of the type designated “Kreditoren,” the deposits most affected by loans, are solely considered, a better picture of the action of the commercial banks in extending or reducing the scope of inflation will be obtained. Taking as a base the 1913 ratio of “Kreditoren” deposits to total money in circulation, the percentage figures for later years were as follows : 1920, 148%; 1921, 164%; 1922, 341%; 1923, 276%.73 It would appear, therefore, that the commercial banks extended loans throughout the period of post-war inflation considerably in excess of a proportionate relationship with the increase in the monetary base and that the relative decline in total deposits was due to the shrinkage in the value, or the withdrawal from the banks, of time moneys at interest or to the general reluctance actually to depont cash even if subject to demand draft. The increase in deposits issuing from loans was especially marked in 1922 and till stabilization in 1923, owing to the fact that rediscounting of commercial bills at the Reichsbank gave the private banks an enlarged base for extensions of credit. This increase was enough to carry upward the ratio figure for total commercial deposits. The growth in commercial bank loans took place in spite of the fact that the Reichsbank’s rediscount of commercial bills was by no means confined to banks but was also done for approved business concerns and for individuals and at a rate far below what the commercial banks were charging. The explanation lies in the fact that only a certain group of business interests enjoyed the Reichsbank’s favor and others were forced to go to the private banks. Nevertheless the commercial bills held by the Reichsbank at the end of 1922 formed nearly half of all the commercial bills in circulation in Germany at that date. In view of the fact that the central banking institution was supposed to accept only bills of the first quality it may perhaps be assumed that the remaining moiety was ineligible.74

§ MONETARY RATHER THAN CREDIT ISSUES THE DOMINANT FACTOR

Though the increase in the ratio of loan-initiated deposits to total money in circulation cannot be dismissed as a negligible factor in inflation the situation was nevertheless dominated throughout by monetary, as distinct from credit, expansion.75 At times the swollen volume of note issues pouring into the coffers of business concerns rendered them in part independent of bank credit. This was markedly true in the last war-year when note issues were rising faster than prices. The ratio of “Kreditoren” deposits to total monetary circulation, as compared with the situation in 1913, was, at the end of the years 1914, 1915, 1916, 1917, 1918, respectively 103%, 125%, 109%, 101%, and 83%. But whether or not deposits issuing from loans rose relatively to money in circulation they were basically dependent on the money factor. The commercial banks had not in pre-war days based their lending on anything other than Reichsbank notes and they never altered that practice materially. The course of inflation, so far as the volume of circulating medium may be taken as a criterion thereof, can consequently be traced through note issues about as well as through the total volume of means of payment. Since statistics on the latter are available only at infrequent intervals, note issues alone will be used in the later discussion as representative of the monetary supply.

§ NOTE ISSUES OTHER THAN THOSE OF THE REICHSBANK

The notes issued by the Reichsbank were always the principal but not the sole element in the circulation. In the war and early post-war days there were, in addition to coin, Reichsbank notes, and the notes of the four other banks of issue, a considerable volume of Reichskassenscheine (Treasury notes) and Darlehnskassenscheine (Loan Bureau notes). Gold and silver coin was withdrawn by the banks, or otherwise disappeared from circulation, early in the war. The iron, zinc, copper, and aluminum token-coins, issued to take the place of silver in small transactions, vanished during the second half of I922 when they became far more valuable as commodities than as money. A quantity of small emergency paper currency had been put out by various agencies during the war to take the place of coin. In the postwar inflation these issues were greatly extended to meet the recurring need for more currency when prices rose at so rapid a rate that the printing presses were unable to turn out the desired amount of Reichsbank notes of the smaller denominations. In the second half of 1922 these casual issues were withdrawn but they were much more than replaced by emissions under authority of the Minister of Finance who was empowered under stipulated conditions to grant, not only to municipalities but even to private firms, the right to issue notes. At the end of 1922 the total issue of such emergency currency is estimated to have been about 20 billions of marks as compared with the 1280 billions of Reichsbank notes outstanding at that date. During 1923 the output of this sanctioned emergency money increased tremendously and at the end of the year reached a total of about 7½ quintillion marks.76 In the final weeks of inflation the federal railways also emitted their own emergency currency on such a gigantic scale as to amount, at the end of November 1923, to more than a quarter of the total issue of 400 quintillion marks of Reichsbank notes outstanding at that date. In the chaos then prevailing not only did these huge authorized issues of emergency money take place but “money” was put out, with no authority whatever, by any municipality, or private business undertaking, ready and able to obtain in this way costless purchasing power. How much of such “money” was spewed forth will never be known but for the occupied part of Germany it has been estimated at 180 quintillion marks,77 or between a third and a half of the maximum figure of the Reichsbank issues. The total volume of mark emergency money of all types in circulation in the whole of Germany at the date of stabilization was thus about three-fourths as large as the issue of Reichsbank notes.

In Table X are given the amounts of the various types of authorized paper mark issues outstanding at several dates together with figures on the coin in circulation at the same dates.

Alongside the various forms of paper mark circulating medium a variety of so-called stable-value currencies had come into use. In April 1923 the government put out an issue of Treasury bills payable in gold, and in August to October a long-term loan in terms of United States currency of the one, two, and five dollar denominations and intended for use as money, was put upon the market. This was followed by an emission of gold Treasury bonds on November 4. The latter was issued to serve as gold backing for emergency stable-value currency put out by local authorities.78 All of the issues of stable-value currency in the last three months of inflation were intended to bridge the gap until the rentenmark could be introduced. They were much resorted to and, in the final weeks of the old standard, formed an important part of the total circulating medium. They had been preceded by nearly a year by gold and commodity loans raised by municipalities or business concerns whose obligations served some of the functions of money. The Roggenrentenbank, founded in Berlin in 1922, issued bonds payable in rye, and other organizations put out loans calling for repayment in coal, lignite, coke, potash, wood and kilowatt hours. In Hamburg, a gold currency issued by two of the banks of that city, against the deposit of foreign bills of exchange, functioned satisfactorily as money in the autumn of 1923.

TABLE X

AUTHORIZED MONETARY CIRCULATION OTHER THAN STABLE-VALUE ISSUES OF 1923; 1913-1923
(Billions of Marks)

Sources of data: (1) Memorandum on Currency 1913-1923, p. 105. (2) Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, pp. 47, 48.

§ REICHSBANK NOTES THE SOLE LEGAL TENDER

To the very end, however, the central government retained the paper mark as the sole paper legal tender. The reasons are understandable enough. Not to have done so would have been a repudiation of the currency on the part of the government itself, would no doubt have accelerated the already dizzy pace of depreciation, and would have left the administration without any assurance whatever of the wherewithal to carry on the business of the state.79 Whatever the defects of the existing currency the authorities were unwilling to abandon the one horse they surely had while it could still keep them above the flood. Early in 1923, nevertheless, the quoting of prices in foreign currencies or in conventional gold units—a practice which had long been in use in foreign trade—became wellnigh universal in the business world. It proceeded geographically from the borders inward and, by trades, from manufacturing industry to wholesalers, to agriculture, and eventually to retail commerce. After a prolonged struggle wages were put on a similar basis. The mark was thus no longer used as a unit of account even in transactions covering a relatively short period of time and, of all the functions of money, it still fulfilled only that of a medium of exchange. The pace of depreciation eventually became so rapid that even for this purpose it became intolerable. Foreign currencies began to circulate. The intensity of the desire for some form of money which would hold its value may be gauged from the fact that the government securities designed for use as money, to which reference has been made in the preceding pages, rose to a high paper-mark premium over the American dollars they were supposed to repre-sent.80 The rentenmark was long in gestation and, in the meantime, the supply of fixed-value currency was too limited to afford much relief especially as the hoarding of currency of this type made its rate of turnover very low. Though, at the end of October, the gold value of the total stable currencies which had been issued by governmental authority was almost as great as the gold value of the total Reichsbank note issues (124 and 144 million gold marks respectively)81 both together were worth less than 5% of the pre-war circulation.82 It is improbable that the stable-value currencies circulated more rapidly than at the normal pre-war rate while, on the other hand, the paper mark was moving around with astounding celerity. Though practically all prices were by then quoted in gold, or the equivalent, and, expressed in paper, were moving upward in more or less close correspondence with dollar exchange, the bulk of payments was still made with paper marks.

§ POSITION OF THE BANKS

In the whole bedlam into which banking and currency had fallen it has often been alleged that the banks, and especially the Reichsbank, were great losers in the national Casino which was Germany. It is true that the Reichsbank lent, at low real rates of interest, stupendous sums to the government, commercial banks, and business men, and that these sums were repaid in money the value of which had withered away during the course of the loan. But the loans cost the Reichsbank nothing but printing expenses. The interest return was sufficient to meet operating charges and leave something over for profits. These profits when realized were, it is true, worth next to nothing. Measured in stable values the Reichsbank therefore made but small profits in the inflation years but it suffered no real losses except in the decline of its gold reserve. This decline was not due to inflation, as such, but to special causes of which mention will later be made.

The commercial banks may at times have suffered under inflation but as it progressed they began to exact from borrowers such interest rates as would more than cover the anticipated (though perhaps not the realized) decline in the value of the currency during the period for which the loans were to run. Their liabilities as well as their assets were diminished by currency depreciation and their only real loss occurred when they assumed demand liabilities, immediately called, in exchange for assets which were due only after the expiration of a certain term. When the practice of rediscounting commercial bills at the Reichsbank was renewed, and new loanable funds were thus obtained by the commercial banks, the risk of loss was thrown on the central institution which shed it in turn upon the public. The commercial banks were able to extend their physical assets very considerably in the years of high inflation. In spite of governmental regulations against the acquisition of foreign currencies for investment purposes they also acquired stable-value assets abroad83 and their prosperity is attested by the mushroom growth, at this time, of small competing institutions. Most of the latter did not long survive the return of stable monetary conditions but this is certainly no evidence that inflation was not a favoring influence. The paper profits realized by the commercial banks, like those of the Reichsbank, were of course highly contractile as the value of the mark marched toward zero, and the real profits or losses of any given institution were dependent upon the ability of its administration to grasp what was happening and to take appropriate action. On the whole, such ability was not conspicuously common, and the banks, as a group, did not emerge from inflation in as good condition as might reasonably have been expected. It has indeed been suggested that the big industrial borrowers virtually stole the banks84 but, insofar as this occurred, the commercial bank directorates largely recouped their losses at the expense of the Reichsbank while the Reichsbank losses were only scraps of paper. The real transfer of property was from the hands of holders of currency, or of fixed-interest investments, to those of the entrepreneurs.

VI. MILITARY SANCTIONS AND GERMAN RESISTANCE

§ OCCUPATIONS OF DÜSSELDORF AND OF THE RUHR

The occupation of Düsseldorf, Duisburg and Ruhrort in 1921 and of the Ruhr district in 1923 were both attended by interference with German control of customs. The customs barrier between the Rhineland and the remainder of Germany, set up in the former occupation, was withdrawn on October 1, 1921, after the Germans had accepted the Allied terms on reparations. The occupation, however, continued. In the case of the Ruhr, not only was a new customs area created and special import and export duties levied but exports from the district were altogether prohibited except under special license for which a stiff price (in foreign currency) was charged. Taxes other than duties were also imposed in the interest of the occupying Powers and were made payable on a stable-value basis and even in foreign currency.

Immediately upon the marching in of the French and Belgian troops the Reich government had forbidden its employees, including railroad workers, to cooperate with the invaders, and had urged the industrial leaders of the district to offer every possible resistance to the “enemy.” Not only were reparations (in kind) to the occupying Powers suspended but, at the instance of the central government, coal deliveries were refused even after payment had been offered the producers. The district simply went on strike. To this resistance of the Germans the French commanders replied with extreme measures of coercion. Many civil functionaries and many of the railroad workers and their families were expelled. Industrial leaders who did not prove amenable were thrown into prison. Courts-martial were frequent, seizures and confiscations of cash and commodities were common, and blood flowed freely.

The economic life of the district was stricken as by paresis and the idle German workers became a charge on the central government. Though this, in itself, would have been an insupportable burden, the Cuno government, through the Reichsbank, put huge credits at the disposal of the Ruhr industrialists.85 The occupying Powers obtained little or nothing on reparations but Germany was brought to the brink of destruction. It is impossible to censure the German decision to resist the invasion to the limit but the abandon with which mark credits and Reichsbank notes were flung about was nothing short of financial insanity.

VII. SUMMARY AND CONCLUSIONS

In the closing phase of inflation there was little external pressure on exchange rates since all cash reparations were suspended. The exigencies of government finance within the country were then of almost exclusive import. Whether, in a consideration of the causes operating throughout the course of inflation, major stress is, as in this last phase, to be laid upon revenues inadequate for obligations volitionally assumed, or upon inescapable demands imposed from without, is a thorny question. The foregoing discussion attempts to show that certain alleged causes of depreciation such as speculation, or the losses of territory, population, and resources under the Treaty of Versailles, had almost no real influence, and that but a very slight measure of responsibility can be laid at the door of the private banking organization. The crux of the matter was the state of the public finances. The sequel will indicate that, up to 1923, exchange rate movements tended to dominate the status of the fise. Since exchange rate movements were chiefly conditioned by obligations imposed from without, the principal immediate causes of the collapse of the German currency are to be traced to the action of the Entente Allies rather than to that of Germany herself. These immediate causes were, however, not necessarily definitive. Depreciation, as measured by internal prices rather than exchange rates, is ultimately dependent solely on note issues.86 The decision as to whether notes should be issued lay with the German administrations. The hard fact of external pressure was, in itself, enough to ruin the exchange value of the currency, though a more than Spartan tax policy might perhaps have preserved its internal value.87 The several administrations, however, though at times resolute, were fundamentally weak, and the interests on whom taxation must fall if it was to be productive were powerful enough to delay, or defeat, the passage of legislation. The slightest delay was fatal. In large measure inflation was carried forward by its own momentum88 and it seems probable that, even without the reckless financial policy pursued in 1923, the final result would have been changed but little. Complete collapse might have been delayed but it lay in the stars. Nothing could have stopped inflation but the coincident retraction of strong external pressure and the stiffening of internal resistance. For this, nothing but the collapse, itself, sufficed.

 

_____________

89 The national wealth as a whole would, of course, be less. But this has almost no meaning apart from population. Per capita wealth might well be the same as before or it might be greater or less. Individual wealth would tend to remain unchanged except as affected by further political action.

90 Much of the iron ore for the Ruhr industry had, however, always come from France.

91 Germany was compelled to admit free of duty, for five years, raw materials and manufactured goods from Alsace-Lorraine and, for three years, all imports from those parts of Poland which had formerly been German. Unilateral most-favored-nation treatment had to be accorded, for five years, to all imports from the Allied and Associated States. It is doubtful whether these impositions were harmful to Germany however discriminatory they may have been. The real harm came from the duties levied against German goods imported.

92 This is the general situation. Part of the export of agricultural products from Posen and West Prussia to the other pre-war German territory may, of course, have been as payment of interest on investments or other “invisible” items. The same is true of other territories later discussed. Unless the private property concerned was confiscated, a matter to which attention will presently be given, the argument here advanced is not affected. The territory in which investment was made will still pay interest to that from which the capital was drawn, just as it always did.

93 if Alsace-Lorraine and Upper Silesia formerly drew on the remainder of Germany for imports they would offer in payment the foreign exchange proceeds of their exports abroad. This would have been used to finance imports from foreign countries into the present German territory.

94 It may be worth while to indicate the limits of variation. They are :

1. if all the external trade of the severed unit is, and always was, done with the original political entity, the foreign trade of this truncated entity will be increased by the amount of trade between the two units.

2. if none of the external trade of the severed unit is, or ever was, done with the remaining part of the original political entity, the foreign trade of the latter will be less than that of the full original territory by the amount of the foreign trade of the severed part.

95 This is a matter of the relative per capita productivity in the separated and remaining territory. The probabilities are that they were approximately equal though this cannot be proven. Competition within a given political unit, however, is normally free enough to bring value productivity of workers, and their returns, into something like equality.

96 Except where German nationals formerly living and owning property in the ceded territories have remained there and have not been, and will not be, reimbursed from the German Treasury.

97 The adverse effect of reparations and clearing costs on mark exchange was thus increased. Clearing costs were due to the balance between foreign pre-war private claims on Germany and German pre-war private claims on foreign countries. The impotent position of Germany led to immediate assessment of the claims against that country but to delays and diminutions in the counterclaims, which were subordinated to reparations. All current items are now, however, included in the general settlement reached under the Dawes and Young Plans.

98 cf. Germany’s Capacity to Pay, H. G. Moulton and Constantine E. McGuire, Institute of Economics, McGraw-Hill Pub. Co., Inc., New York, 1923, p. 75.

99 An unfavorable balance of trade tends to occur, e.g., whenever currency is sold abroad for investment purposes and the proceeds become available for the purchase of imports.

100 In this case an involuntary credit is extended by foreign sellers. An unfavorable balance of payments may then, in one sense, perhaps, be said to be present.

101 Author’s note. The hunger after imports was very great. Evidence is conflicting as to whether the German people as a whole fully realized the inevitability of low standards of living. Great numbers of people shrank before the rise in prices but there were many who could and did spend their inflated incomes freely. So long as foreign private credit would support importers’ purchases there was no check upon these expenditures. The cherishing of illusions was, however, by no means the peculiar property of the Germans at this time.

102 See Currency and Credit, R. G. Hawtrey, Longmans, Green & Co., London, 1923, pp. 375 ff.

103 The investment demand for German currency after 1920 did not come from unduly long extensions of commercial credits but rather from buyers intending to hold marks for an indefinite period.

104 Reparations payments were suspended in 1923.

105 cf. Die geldtheoretische Seite des Stabilisierungsproblems, Ludwig Mises, Schriften des Vereins für Sozialpolitik, Vol. 164, Part II, Verlag von Duncker und Humblot, München and Leipzig, 1923, p. 23.

106 The loss of income which accrued on property in the separated territory and would have been left or consumed in that territory by its former German owners, had they still retained control, would have no bearing on exchange.

107 For an excellent and remarkably dispassionate treatment of reparations cf. History of Reparations, Carl Bergmann, Ernest Benn, Ltd., London, 1927. This book is the chief source of the very abbreviated account of reparations here given.

108 Though practically all of the various administrations in Germany up to the invasion of the Ruhr made sincere efforts to satisfy the claims of the victors, a measure of persecution may have been necessary to break down the overt or covert resistance of financially powerful Germans in private life. The defiance offered the Allies by men like Hugo Stinnes greatly increased the suspicion and hostility toward the Germans, as a people, and was a fateful error. But though persecution may have been necessary to the securing of such reparations as the Germans could pay, if they would, the stupid malice of certain Allied politicians was heartrending. Much of it was due to the still ardent passions of war, either in the breasts of the politicians themselves or in those of their constituents, but a great deal must be attributed to sheer ineptitude. For a time it seemed as if reparation demands were being used merely as a weapon to bring about the disintegration of the Reich. But, if this purpose was ever held, the double-edged character of the sword soon became apparent. For years thereafter the policy was simply one of vacillation. The Bourbons were of the same mind as ever but they had somewhat lost in influence. Liberals grew stronger as time went on but for long the issue hung in the balance. Either party might attain a superiority and temporarily dominate the situation but the final adoption of a policy of moderation was not attained till the “spirited” group had had their fling in the Ruhr.

109 This sum is almost half the estimated total wealth of Germany in 1913. The maximum payments under the Dawes Plan were about one-third of the interest on this sum and even these have now been recognized by the creditors to have been excessive.

110 The total payments under the Young Plan amount to 121 billion gold marks and something over 10 billion had been paid up to the time it came into operation.

111 In exchange for the 100 billion originally delivered.

112 Revenues, apart from borrowing, then covered about 60% of expenditures including payments under the Treaty of Versailles. By the end of the year they covered only about 28%.

113 The Reichsbank held gold reserves much more than adequate to cover this obligation.

114 The justification alleged for this action was that the Germans had voluntarily defaulted in making the full timber deliveries required of them.

115 The reparations demands might, however, have caused a fall in the exchange value of the mark regardless of its value in the domestic markets.

116 See An Economist’s Protest, Edwin Cannan, P. S. King & Son, Ltd., London, 1927, P. 393.

117 In order to prevent Communistic disorder relief had to be given to the unemployed and subsidies provided for the import of such foodstuffs as could, at whatever price, be obtained. A large part of the gold reserve of the Reichsbank was devoted to the procuring of food imports.

118 This increase was equivalent to about $2,000,000,000 according to the average of wholesale prices for the year.

119 Except in a limited measure the taxing power had been reserved to the constituent States.

120 Before the war the federal government had had but the rudiments of a fiscal administration. All taxes were handled by the fiscal organization in the several States. Direct taxes were, in principle, confined to the States while indirect taxes were left to the central government. In the later years of the war, however, an excess profits tax had been levied by the federal government in addition to new and increased indirect taxes. Such a tax might come under the German concept of indirect taxes.

121 As passed, the latter tax, instead of being a single contribution as originally intended, was distributed over a considerable period.

122 When prices were rapidly rising goods might be sold for more than they had cost (in monetary terms) but for less than the sum at which they could be replaced. If so an accounting profit was actually a real loss.

123 The system and the personnel were new and had no precedents on which to build.

124 cf. Germany’s Economy, Currency and Finance, p. 96. Paper marks are con-verted according to the index of cost of living which is the most representative index for expenditures other than those arising under the Treaty of Versailles.

125 It reappeared, however, as inflation advanced.

126 Gold mark values are obtained by converting paper mark figures according to the index of wholesale prices. Government expenditures were partly determined by exchange rates (cash reparations), partly by wholesale prices (reparations in kind and other purchases of commodities), and partly by the cost of living (wages and salaries). An official investigation showed, however, that the gold value of expenditures of the several sorts, when measured by the appropriate index, corresponded closely, at this period, with the gold value of the total paper mark expenditures converted according to the index of wholesale prices, cf. Germany’s Economy, Currency and Finance, p. 95.

127 Adjustment of yields was attempted for the different taxes through:

(1) The raising of rates, or adding of supplements, on existing taxes.

(2) Levies in kind, usually commuted to an equivalent in money.

(3) Changes of base from physical volume to current value.

(4) Multiplication by a factor of depreciation.

(5) The speeding up of payment.

All proved inadequate, cf. Besteuerung und Geldentwertung, Arthur Cohen, Verlag von Duncker und Humblot, München and Leipzig, 1924, p. 9.

128 The marked influence of exchange rate fluctuations on the condition of the German fise will be apparent when it is noted that from April 1920 to May 1921 foreign exchange showed no upward tendency, that from June to November the dollar was five times multiplied in mark value, that from December 1921 to June 1922 a second period of relative stability in exchange intervened, and that from July 1922 onward the upward march, or flight, of exchange rates was practically continuous.

129 This table is an average of three sets of figures calculated on the cost of living index, wholesale price index, and dollar index, respectively. The original figures are given in millions and tenths of millions of gold marks. Since they run to the first decimal place only, slight discrepancies occur between the totals and the sums of the individual items when the average of the three sets is taken. The decimal place has been omitted in the above table and minor corrections made in order to secure consistent totals. The balancing of the original tables leaves something to be desired and some small adjustments were necessary on this account.

130 cf. infra, Chart VI. The relative rise appears in the decline in the index of foreign exchange rates relative to that of wholesale prices.

131 Inflation was, of course, a concealed method of taxation. It has been stated, with apparent accuracy, that the German government would actually have been better off if it had given up ordinary tax collection altogether. Taxes, as a whole, cost more to collect than they brought in. The issues of fiat money would therefore have been smaller if the whole of the ordinary taxing machinery had been discarded.

132 As of November 15.

Sources of data: (1) Germany’s Economy, Currency and Finance, p. 63. (2) Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, p. 46.

133 The illustration is taken from Germany Since the War, Peter P. Reinhold, Institute of Politics Publications, Yale University Press, New Haven, 1928, p. 53.

134 cf. Valuta, Karl Diehl and Paul Mombert, Verlag G. Braun, Karlsruhe, 1925, p. 13.

135 Prices and volume of circulating medium showed generally similar movements.

136 “Speculative” is to be construed broadly to include the activities of commercial houses who took claims to future marks in exchange for goods.

137 Purchases made with the intent of holding the currency indefinitely.

138 cf. Die Reichsbank, Gert von Eynern, Verlag von Gustav Fischer, Jena, 1928, p. 74. Von Eynern thinks that the exports which had gone out in response to the low exchange value of the mark were primarily responsible for this improvement in the exchange situation.

139 The quid pro quo is usually a claim to future goods (securities) though capital may of course be exported as a gift or as tribute.

140 Other than sight bills of exchange would not strictly meet this definition but, though payment in this case is not immediate, it is deferred for a few months at most. As a national matter payment may, however, be deferred indefinitely whenever a fund of foreign exchange is acquired by the creditor country the constituent units of the fund constantly coming to maturity and as constantly being replaced by new units. There was some export of capital, in this sense, from Germany, but the amount involved does not appear to have been large, cf. infra, Chap. x.

141 if the term “capital,” which is ambiguous, be used to include immediate money claims both countries would, at most, export “capital” in equal measure, with no net change in the national position. But see supra, note 52.

142 Such a transaction has been called an inchoate export of capital in order to avoid confusion in the use of the word “capital.” “Capital” will henceforth be used in this discussion to mean real things rather than claims thereto. “Wealth” is probably a better word for the concept but it has no currency in the idiom of international finance.

143 Albeit of the character of wildcat mining stocks.

144 The exporter of capital acquires rights to future not to present goods.

145 The scintilla of truth in the expression lies in the degree in which Germans bought foreign exchange with immediately cashed claims to marks and held a fund of it as an investment. But even this was compensated, many times over, by foreign holdings of marks.

146 There would, however, be no effect on mark exchange if the marks were sold to another foreign investor who would otherwise not have been in the market.

147 Exchange dealings were authorized only for mercantile transactions. The idea was that by diminishing the offers of marks the exchange rate would be sustained. It is an open question whether the policy did not defeat its own end since the passion to sell marks merely impelled their possessors to offer them clandestinely on ever cheaper terms in the competition to obtain buyers in a greatly narrowed market. The mark was, as it were, squeezed into a funnel.

148 It should be noted that, while in the absence of a sufficient export of goods and of investment opportunities in Germany, buyers of marks as a group were almost sure to lose, no matter how apparently cheap the German currency on the exchange markets seemed to be, this was not necessarily true of individual buyers. It was a question of how quickly the marks could be turned into real values. This led to a scramble, with the devil taking the hindmost, but with the foremost emerging with considerable gains. The latter possibility was always a force on the bullish side of mark exchange. It was not sufficient, to keep exchange rates at anything like par with internal prices, since the chance of large gains had to be present, but it imposed some limit on the upward movement of foreign currencies.

149 In the chart the relatively slower rise of exchange rates is shown by a ratio declining with respect to prices.

150 cf. Currency and Credit, R. G. Hawtrey, Longmans, Green and Co., London, 1923, pp. 51, 52. Hawtrey points out that in countries like Germany, where deposit credit is not highly developed, the control of credit by the central bank is comparatively easy.

151 From the end of the war onward the circulation of notes in France was a fairly constant quantity. It fluctuated between 35 and 40 billions of francs from the middle of 1919 to the end of 1924. In the latter year an increase began which carried it to 56 billion in 1926 and France was, for a time, in grave danger of treading in Germany’s footsteps. Only at the eleventh hour was the process checked by the vigorous measures adopted by the Coalition Cabinet under Premier Poincaré.

152 Over the period of 60 months from January 1919 to December 1923 a reduction in the Reichsbank end-of-the-month holdings of bills was generally accompanied by an improvement in the exchange value of the mark and an increase in holdings was generally accompanied by a decline in that value. This inverse correlation fails to occur, however, in 19 of the 60 months. Assuming a lag of exchange rates behind holdings of Treasury bills of one month, there are only 17 points at which the movements of the two series are in the same direction. Considering only the period from February 1920 through December 1923 (47 months), the number of points where the two series do not move in opposite directions are as follows : with no lag, 16 points; with a lag of exchange of one month, 13 points; with a lag of exchange of 15 days, 11 points.

153 Notes might be issued against “cash” cover consisting of gold, German coin, Treasury notes (Reichskassenscheine), or Loan Bureau notes (Darlehnskassenscheine) or against non-cash cover consisting of Treasury bills (Reichsschatzwechsel) or commercial bills. In May 1921, (inauguration of cash reparations), the regulation requiring that at least one-third of the note circulation must be backed by “cash” cover was indefinitely suspended.

154 No one was willing to leave sums on deposit only to have their value melt away. The commercial banks, moreover, did not follow the Reichsbank lead in keeping their interest rates low but stepped them up in some degree of correspondence with the presumptive loss of value between the date of borrowing and of repayment. Up to the end of 1921, however, bank deposits had fairly well kept pace with the depreciation of the currency. Dr. Alfred Lansburgh, writing in Die Bank, July 1922, attributes this to the deposit in German banks of actual mark currency reimported from abroad.

TABLE VII

REICHSBANK DISCOUNT OF COMMERCIAL BILLS, TOTAL BILLS DISCOUNTED, AND NOTE ISSUES; 1922 AND 1923155
{Billions of Marks)

Source of data: Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, passim.

156 The excess of the total of bills discounted over the issue of notes is presumably due either to private holding of Treasury bills or to deposit credits (in lieu of notes) with the Reichsbank.

157 Through an arrangement made by the government with the Reichsbank and the Rentenbank.

158 The figures for December are convertible into rentenmarks at a trillion to one.

159 This total includes Reichsbank notes, Darlehnskassenscheine, Reichskassenscheine, and the notes of the four private banks with note issuing powers.

160 A good share of the borrowing was for the purpose of buying foreign exchange as an investment, cf. Deutsche Währungs- und Kreditpolitik, Rudolf Dalberg, Verlag von Reimar Hobbing, Berlin, 1926, p. 12. Foreign exchange could be used as collateral for further loans. Business concerns were therefore under no disability in acquiring accumulations of exchange. The privilege of borrowing on foreign exchange collateral was eventually withdrawn but exchange might then be used to buy stable-value German government loans which were, in turn, used as collateral for borrowings in marks.

161 In March 1922 the Reichsbankgesetz had been so amended as to make the institution “completely” independent of the government. The legislation was adopted under external political pressure and was a dead letter from the beginning.

162 Besides the Reichsbank, the four quasi-official banks of Bavaria, Saxony, Würtemberg and Baden had the right to issue notes. (These banks are usually designated “the private banks of issue.”) While their quota was from time to time, during the inflation years, extended, it was always insignificant in relation to Reichsbank issues and declined in comparative importance as inflation proceeded.

TABLE IX

BANK DEPOSITS AND MONEY IN CIRCULATION IN GERMANY; 1913 AND 1920-1924
(Millions of Marks)

163 Gold marks.

164 These are the deposits of the seven biggest Berlin banking institutions, namely: Deutsche Bank, Diskontogesellschaft (including the Schaffhausenscher Bankverein, absorbed in 1914), Dresdner Bank, Commerz-und-Privatbank, Mitteldeutsche Kreditbank, Bank für Handel und Industrie, and Nationalbank für Deutschland. In November 1921 the two last named institutions were amalgamated under the name Darmstädter und Nationalbank and the figures thereafter are for the six banks into which the original seven had by then evolved. In 1913 the deposits of these seven banks constituted about 50%, and in 1920, mainly as a result of amalgamations, 72% of all commercial deposits.

165 000,000 omitted.

166 End of February 1925.

167 Figures for total commercial deposits in 1913 refer to 160, and in 1920, to 105 commercial banks, the reduction in number being due to amalgamations. The figures for the total for all banks in 1921, 1922, 1923 and 1924 are estimates based on the relation of the deposits in the seven largest banks to the total deposits in 1920. Since this figure is merely an approximation the ratios in the bottom line are not precise.

168 The figure for total monetary circulation has been changed from that quoted in the source so as to include gold as well as notes in circulation in 1913.

    Source of data: Memoranda on Currency 1913-1921, 1913-1922, and 1913-1923, and Memorandum on Currency and Central Banks 1913-1925, League of Nations Publications, Geneva, 1922-1925, passim.

169 Figures are available only on the basis of deposits payable within seven days. These are construed as demand deposits.

170 Computed from data in the Memorandum on Currency and Central Banks 1913-1924, League of Nations Publications, Geneva, 1925, Vol. II, p. 269. The figure for 1923 is based on data in which no figures from the Deutsche Bank were included. It has been assumed that the movement in the Deutsche Bank paralleled that in the other institutions.

171 The gold value of the discounted commercial bills was never more than half that of the pre-war Reichsbank holdings though the proportion of the total of bills in circulation to the total supply of money was much above the prewar status. The gold value has little meaning, however, since, with the very great increase in the rate of monetary turnover, the gold or goods value of the total stock of both money and deposit credits shrank to a small fraction of the pre-war figures.

172 This is natural in other than Anglo-Saxon countries since the check and deposit mechanism has there had a comparatively slight development.

173 cf. Germany’s Economy, Currency and Finance, p. 67.

174 Scrip of this loan was printed and when deposited with the Reichskreditgesellschaft served as cover for stable-value emergency currency. Several of the constituent States of the Reich followed the action of the central government in the issue of gold loans.

175 It was far from likely that any sizable issue of securities denominated in gold could have been marketed by the federal government. The attempts to do so met with very indifferent success whenever payment in stable-value currencies was required though the sale was easy enough when payment in paper marks was permitted.

176 At one time the premium was as much as 600%. This was possible, of course, only by reason of the restrictions on foreign exchange transactions.

177 Converted at the dollar rate of October 31.

178 The amount of foreign currency hoarded, or in use, in Germany at this time is unknown, but may have been as much as the equivalent of two to three billion gold marks, cf. Währungszerfall und Währungsstabilisierung, Paul Beusch, Verlag von Julius Springer, Berlin, 1928, p. 8. The rate of turnover of this foreign currency was, however, very slow and though its value was probably several times as great as that of the total mark issues it did not do nearly as much monetary work. The use of foreign currencies, however, was a factor of considerable importance in depressing the value of the mark by limiting its sphere of circulation. On the other hand, each currency was used to buy the other and this increase in the use of the mark may have operated to support its value.

179 In 1921 those assets of the German banks which, in the United States, would be included under the heading “Due from other Banks,” part of which were foreign assets in stable-value currencies, were 12% of liabilities; in 1922 they were 47%. On the other hand, bill holdings, mainly Treasury bills, fell from 60% of all liabilities in 1920 to 46% in 1921 and to 20% in 1922. In addition to deposits abroad the banks held a considerable volume of depreciation-proof securities, cf. Economic Review, Vol. VIII, No. 7, London, August 17, 1923, p. 136.

180 cf. The Recovery of Germany, J. W. Angeli, Yale University Press, New Haven, 1929, p. 43.

181 This was done, allegedly, to enable the industrialists to produce for stock rather than permit the French to benefit by export duties on sales outside the district. In actual fact, credits were so freely disbursed that they were used for speculation in foreign exchange and other purposes alien to the presumed intent of the administration. The mark was thus attacked from both sides at the same time and the government was furnishing the ammunition. The Reichsbank even refrained from any careful scrutiny of credit demands from the unoccupied area in order to forestall protests alleging discrimination.

182 cf. infra, Chaps, iv-vi.

183 At the Conference of Brussels, in December 1920, neutral experts declared, however, that the German tax burden was nowhere surpassed and had reached the limit of the people’s capacity, cf. Das Geldproblem in Mitteleuropa, Elemer Hantos, Verlag von Gustav Fischer, Jena, 1925, p. 20. The direct tax burden was, as we have seen, greatly lightened with the progress of inflation. The smallest real incomes sometimes paid extremely heavy surtaxes by reason of their increase in nominal amount. But, except on those incomes where the levy and payment were made at the source, the real burden was slight by the time the tax was actually paid.

184 Inertia was favored by the attitude of the courts. Until very late in the inflation period the Reichsgericht refused to recognize the fundamental change in the value of the monetary unit which was in progress but kept insisting that a mark was a mark. So long as this attitude was maintained, borrowing, even at high rates of interest, was likely to prove extremely profitable and the greater the borrowing the larger grew the issues of currency.

• 1CLIFFE-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.
• 2in 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
• 3The 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.
• 4The 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.
• 5The 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.
• 6The 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.
• 7The 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.
• 8The 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.
• 9The 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.
• 10The 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.
• 11Wholesale 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.
• 121    
• 13The 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.
• 14The 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.
• 15When 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.
• 16The 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.
• 17The 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.
• 18Dr. Schacht has written an excellent account of the reform in his Stabilization of the Mark, George Allen and Unwin Ltd., London, 1927.
• 19
• 20Though practically all of the various administrations in Germany up to the invasion of the Ruhr made sincere efforts to satisfy the claims of the victors, a measure of persecution may have been necessary to break down the overt or covert resistance of financially powerful Germans in private life. The defiance offered the Allies by men like Hugo Stinnes greatly increased the suspicion and hostility toward the Germans, as a people, and was a fateful error. But though persecution may have been necessary to the securing of such reparations as the Germans could pay, if they would, the stupid malice of certain Allied politicians was heartrending. Much of it was due to the still ardent passions of war, either in the breasts of the politicians themselves or in those of their constituents, but a great deal must be attributed to sheer ineptitude. For a time it seemed as if reparation demands were being used merely as a weapon to bring about the disintegration of the Reich. But, if this purpose was ever held, the double-edged character of the sword soon became apparent. For years thereafter the policy was simply one of vacillation. The Bourbons were of the same mind as ever but they had somewhat lost in influence. Liberals grew stronger as time went on but for long the issue hung in the balance. Either party might attain a superiority and temporarily dominate the situation but the final adoption of a policy of moderation was not attained till the “spirited” group had had their fling in the Ruhr.
• 21This sum is almost half the estimated total wealth of Germany in 1913. The maximum payments under the Dawes Plan were about one-third of the interest on this sum and even these have now been recognized by the creditors to have been excessive.
• 22Shortly after the inauguration of the reform Stresemann was followed by Marx as Chancellor, but Stresemann remained in the Cabinet.
• 23In exchange for the 100 billion originally delivered.
• 24Revenues, apart from borrowing, then covered about 60% of expenditures including payments under the Treaty of Versailles. By the end of the year they covered only about 28%.
• 25The Reichsbank held gold reserves much more than adequate to cover this obligation.
• 26The justification alleged for this action was that the Germans had voluntarily defaulted in making the full timber deliveries required of them.
• 27The reparations demands might, however, have caused a fall in the exchange value of the mark regardless of its value in the domestic markets.
• 28See An Economist’s Protest, Edwin Cannan, P. S. King & Son, Ltd., London, 1927, P. 393.
• 29In order to prevent Communistic disorder relief had to be given to the unemployed and subsidies provided for the import of such foodstuffs as could, at whatever price, be obtained. A large part of the gold reserve of the Reichsbank was devoted to the procuring of food imports.
• 30This increase was equivalent to about $2,000,000,000 according to the average of wholesale prices for the year.
• 31Except in a limited measure the taxing power had been reserved to the constituent States.
• 32Before the war the federal government had had but the rudiments of a fiscal administration. All taxes were handled by the fiscal organization in the several States. Direct taxes were, in principle, confined to the States while indirect taxes were left to the central government. In the later years of the war, however, an excess profits tax had been levied by the federal government in addition to new and increased indirect taxes. Such a tax might come under the German concept of indirect taxes.
• 33As passed, the latter tax, instead of being a single contribution as originally intended, was distributed over a considerable period.
• 34When prices were rapidly rising goods might be sold for more than they had cost (in monetary terms) but for less than the sum at which they could be replaced. If so an accounting profit was actually a real loss.
• 35The system and the personnel were new and had no precedents on which to build.
• 36cf. Germany’s Economy, Currency and Finance, p. 96. Paper marks are con-verted according to the index of cost of living which is the most representative index for expenditures other than those arising under the Treaty of Versailles.
• 37It reappeared, however, as inflation advanced.
• 38Gold mark values are obtained by converting paper mark figures according to the index of wholesale prices. Government expenditures were partly determined by exchange rates (cash reparations), partly by wholesale prices (reparations in kind and other purchases of commodities), and partly by the cost of living (wages and salaries). An official investigation showed, however, that the gold value of expenditures of the several sorts, when measured by the appropriate index, corresponded closely, at this period, with the gold value of the total paper mark expenditures converted according to the index of wholesale prices, cf. Germany’s Economy, Currency and Finance, p. 95.
• 39Adjustment of yields was attempted for the different taxes through:
• 40The marked influence of exchange rate fluctuations on the condition of the German fise will be apparent when it is noted that from April 1920 to May 1921 foreign exchange showed no upward tendency, that from June to November the dollar was five times multiplied in mark value, that from December 1921 to June 1922 a second period of relative stability in exchange intervened, and that from July 1922 onward the upward march, or flight, of exchange rates was practically continuous.
• 41This table is an average of three sets of figures calculated on the cost of living index, wholesale price index, and dollar index, respectively. The original figures are given in millions and tenths of millions of gold marks. Since they run to the first decimal place only, slight discrepancies occur between the totals and the sums of the individual items when the average of the three sets is taken. The decimal place has been omitted in the above table and minor corrections made in order to secure consistent totals. The balancing of the original tables leaves something to be desired and some small adjustments were necessary on this account.
• 42cf. infra, Chart VI. The relative rise appears in the decline in the index of foreign exchange rates relative to that of wholesale prices.
• 43Inflation was, of course, a concealed method of taxation. It has been stated, with apparent accuracy, that the German government would actually have been better off if it had given up ordinary tax collection altogether. Taxes, as a whole, cost more to collect than they brought in. The issues of fiat money would therefore have been smaller if the whole of the ordinary taxing machinery had been discarded.
• 44As of November 15.
• 45The illustration is taken from Germany Since the War, Peter P. Reinhold, Institute of Politics Publications, Yale University Press, New Haven, 1928, p. 53.
• 46cf. Valuta, Karl Diehl and Paul Mombert, Verlag G. Braun, Karlsruhe, 1925, p. 13.
• 47Prices and volume of circulating medium showed generally similar movements.
• 48“Speculative” is to be construed broadly to include the activities of commercial houses who took claims to future marks in exchange for goods.
• 49Purchases made with the intent of holding the currency indefinitely.
• 50cf. Die Reichsbank, Gert von Eynern, Verlag von Gustav Fischer, Jena, 1928, p. 74. Von Eynern thinks that the exports which had gone out in response to the low exchange value of the mark were primarily responsible for this improvement in the exchange situation.
• 51The quid pro quo is usually a claim to future goods (securities) though capital may of course be exported as a gift or as tribute.
• 52Other than sight bills of exchange would not strictly meet this definition but, though payment in this case is not immediate, it is deferred for a few months at most. As a national matter payment may, however, be deferred indefinitely whenever a fund of foreign exchange is acquired by the creditor country the constituent units of the fund constantly coming to maturity and as constantly being replaced by new units. There was some export of capital, in this sense, from Germany, but the amount involved does not appear to have been large, cf. infra, Chap. x.
• 53if the term “capital,” which is ambiguous, be used to include immediate money claims both countries would, at most, export “capital” in equal measure, with no net change in the national position. But see supra, note 52.
• 54Such a transaction has been called an inchoate export of capital in order to avoid confusion in the use of the word “capital.” “Capital” will henceforth be used in this discussion to mean real things rather than claims thereto. “Wealth” is probably a better word for the concept but it has no currency in the idiom of international finance.
• 55Albeit of the character of wildcat mining stocks.
• 56The exporter of capital acquires rights to future not to present goods.
• 57The scintilla of truth in the expression lies in the degree in which Germans bought foreign exchange with immediately cashed claims to marks and held a fund of it as an investment. But even this was compensated, many times over, by foreign holdings of marks.
• 58There would, however, be no effect on mark exchange if the marks were sold to another foreign investor who would otherwise not have been in the market.
• 59Exchange dealings were authorized only for mercantile transactions. The idea was that by diminishing the offers of marks the exchange rate would be sustained. It is an open question whether the policy did not defeat its own end since the passion to sell marks merely impelled their possessors to offer them clandestinely on ever cheaper terms in the competition to obtain buyers in a greatly narrowed market. The mark was, as it were, squeezed into a funnel.
• 60It should be noted that, while in the absence of a sufficient export of goods and of investment opportunities in Germany, buyers of marks as a group were almost sure to lose, no matter how apparently cheap the German currency on the exchange markets seemed to be, this was not necessarily true of individual buyers. It was a question of how quickly the marks could be turned into real values. This led to a scramble, with the devil taking the hindmost, but with the foremost emerging with considerable gains. The latter possibility was always a force on the bullish side of mark exchange. It was not sufficient, to keep exchange rates at anything like par with internal prices, since the chance of large gains had to be present, but it imposed some limit on the upward movement of foreign currencies.
• 61In the chart the relatively slower rise of exchange rates is shown by a ratio declining with respect to prices.
• 62cf. Currency and Credit, R. G. Hawtrey, Longmans, Green and Co., London, 1923, pp. 51, 52. Hawtrey points out that in countries like Germany, where deposit credit is not highly developed, the control of credit by the central bank is comparatively easy.
• 63From the end of the war onward the circulation of notes in France was a fairly constant quantity. It fluctuated between 35 and 40 billions of francs from the middle of 1919 to the end of 1924. In the latter year an increase began which carried it to 56 billion in 1926 and France was, for a time, in grave danger of treading in Germany’s footsteps. Only at the eleventh hour was the process checked by the vigorous measures adopted by the Coalition Cabinet under Premier Poincaré.
• 64Over the period of 60 months from January 1919 to December 1923 a reduction in the Reichsbank end-of-the-month holdings of bills was generally accompanied by an improvement in the exchange value of the mark and an increase in holdings was generally accompanied by a decline in that value. This inverse correlation fails to occur, however, in 19 of the 60 months. Assuming a lag of exchange rates behind holdings of Treasury bills of one month, there are only 17 points at which the movements of the two series are in the same direction. Considering only the period from February 1920 through December 1923 (47 months), the number of points where the two series do not move in opposite directions are as follows : with no lag, 16 points; with a lag of exchange of one month, 13 points; with a lag of exchange of 15 days, 11 points.
• 65Notes might be issued against “cash” cover consisting of gold, German coin, Treasury notes (Reichskassenscheine), or Loan Bureau notes (Darlehnskassenscheine) or against non-cash cover consisting of Treasury bills (Reichsschatzwechsel) or commercial bills. In May 1921, (inauguration of cash reparations), the regulation requiring that at least one-third of the note circulation must be backed by “cash” cover was indefinitely suspended.
• 66No one was willing to leave sums on deposit only to have their value melt away. The commercial banks, moreover, did not follow the Reichsbank lead in keeping their interest rates low but stepped them up in some degree of correspondence with the presumptive loss of value between the date of borrowing and of repayment. Up to the end of 1921, however, bank deposits had fairly well kept pace with the depreciation of the currency. Dr. Alfred Lansburgh, writing in Die Bank, July 1922, attributes this to the deposit in German banks of actual mark currency reimported from abroad.
• 67Through an arrangement made by the government with the Reichsbank and the Rentenbank.
• 68The figures for December are convertible into rentenmarks at a trillion to one.
• 69A good share of the borrowing was for the purpose of buying foreign exchange as an investment, cf. Deutsche Währungs- und Kreditpolitik, Rudolf Dalberg, Verlag von Reimar Hobbing, Berlin, 1926, p. 12. Foreign exchange could be used as collateral for further loans. Business concerns were therefore under no disability in acquiring accumulations of exchange. The privilege of borrowing on foreign exchange collateral was eventually withdrawn but exchange might then be used to buy stable-value German government loans which were, in turn, used as collateral for borrowings in marks.
• 70In March 1922 the Reichsbankgesetz had been so amended as to make the institution “completely” independent of the government. The legislation was adopted under external political pressure and was a dead letter from the beginning.
• 71Besides the Reichsbank, the four quasi-official banks of Bavaria, Saxony, Würtemberg and Baden had the right to issue notes. (These banks are usually designated “the private banks of issue.”) While their quota was from time to time, during the inflation years, extended, it was always insignificant in relation to Reichsbank issues and declined in comparative importance as inflation proceeded.
• 72Figures are available only on the basis of deposits payable within seven days. These are construed as demand deposits.
• 73Computed from data in the Memorandum on Currency and Central Banks 1913-1924, League of Nations Publications, Geneva, 1925, Vol. II, p. 269. The figure for 1923 is based on data in which no figures from the Deutsche Bank were included. It has been assumed that the movement in the Deutsche Bank paralleled that in the other institutions.
• 74The gold value of the discounted commercial bills was never more than half that of the pre-war Reichsbank holdings though the proportion of the total of bills in circulation to the total supply of money was much above the prewar status. The gold value has little meaning, however, since, with the very great increase in the rate of monetary turnover, the gold or goods value of the total stock of both money and deposit credits shrank to a small fraction of the pre-war figures.
• 75This is natural in other than Anglo-Saxon countries since the check and deposit mechanism has there had a comparatively slight development.
• 76cf. Germany’s Economy, Currency and Finance, p. 67.
• 77cf. Germany’s Economy, Currency and Finance, p. 67.
• 78Scrip of this loan was printed and when deposited with the Reichskreditgesellschaft served as cover for stable-value emergency currency. Several of the constituent States of the Reich followed the action of the central government in the issue of gold loans.
• 79It was far from likely that any sizable issue of securities denominated in gold could have been marketed by the federal government. The attempts to do so met with very indifferent success whenever payment in stable-value currencies was required though the sale was easy enough when payment in paper marks was permitted.
• 80At one time the premium was as much as 600%. This was possible, of course, only by reason of the restrictions on foreign exchange transactions.
• 81Converted at the dollar rate of October 31.
• 82The amount of foreign currency hoarded, or in use, in Germany at this time is unknown, but may have been as much as the equivalent of two to three billion gold marks, cf. Währungszerfall und Währungsstabilisierung, Paul Beusch, Verlag von Julius Springer, Berlin, 1928, p. 8. The rate of turnover of this foreign currency was, however, very slow and though its value was probably several times as great as that of the total mark issues it did not do nearly as much monetary work. The use of foreign currencies, however, was a factor of considerable importance in depressing the value of the mark by limiting its sphere of circulation. On the other hand, each currency was used to buy the other and this increase in the use of the mark may have operated to support its value.
• 83In 1921 those assets of the German banks which, in the United States, would be included under the heading “Due from other Banks,” part of which were foreign assets in stable-value currencies, were 12% of liabilities; in 1922 they were 47%. On the other hand, bill holdings, mainly Treasury bills, fell from 60% of all liabilities in 1920 to 46% in 1921 and to 20% in 1922. In addition to deposits abroad the banks held a considerable volume of depreciation-proof securities, cf. Economic Review, Vol. VIII, No. 7, London, August 17, 1923, p. 136.
• 84cf. The Recovery of Germany, J. W. Angeli, Yale University Press, New Haven, 1929, p. 43.
• 85This was done, allegedly, to enable the industrialists to produce for stock rather than permit the French to benefit by export duties on sales outside the district. In actual fact, credits were so freely disbursed that they were used for speculation in foreign exchange and other purposes alien to the presumed intent of the administration. The mark was thus attacked from both sides at the same time and the government was furnishing the ammunition. The Reichsbank even refrained from any careful scrutiny of credit demands from the unoccupied area in order to forestall protests alleging discrimination.
• 86cf. infra, Chaps, iv-vi.
• 87At the Conference of Brussels, in December 1920, neutral experts declared, however, that the German tax burden was nowhere surpassed and had reached the limit of the people’s capacity, cf. Das Geldproblem in Mitteleuropa, Elemer Hantos, Verlag von Gustav Fischer, Jena, 1925, p. 20. The direct tax burden was, as we have seen, greatly lightened with the progress of inflation. The smallest real incomes sometimes paid extremely heavy surtaxes by reason of their increase in nominal amount. But, except on those incomes where the levy and payment were made at the source, the real burden was slight by the time the tax was actually paid.
• 88Inertia was favored by the attitude of the courts. Until very late in the inflation period the Reichsgericht refused to recognize the fundamental change in the value of the monetary unit which was in progress but kept insisting that a mark was a mark. So long as this attitude was maintained, borrowing, even at high rates of interest, was likely to prove extremely profitable and the greater the borrowing the larger grew the issues of currency.
• 89CLIFFE-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.
• 90in 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
• 91The 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.
• 92The 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.
• 93The 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.
• 94The 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.
• 95Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, p. 46.
• 96Committee on Currency and Foreign Exchanges After the War (Cunliffe Committee) First Interim Report, H. M. Stationery Office, London, 1924, p. 5.
• 97Total 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.
• 98ibid., Vol. I, pp. 308, 470.
• 99ibid., Vol. I, pp. 534. 477, 455.
• 100Of this amount approximately 97 billion marks had been obtained through long-term loans.
• 101The 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.
• 102When 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.
• 103Inflation 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.
• 104The 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.
• 105The 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.
• 106The 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.
• 107The history of reparations till the adoption of the Dawes Plan in 1924 is an almost incredible tale of stupid persecution. The confusion of counsels and the vacillation in action which prevailed among the creditor Powers until the adoption of the Dawes Plan, the bickering and endless negotiation, the frustration of all attempts at compromise, were fatal to an orderly process of payments on the part of Germany even if payments in the amount demanded had, at the time, been practicable. The Allies began by demanding the impossible and they capriciously imposed sanctions when the impossible was not performed. Pending final determination of claims, the Versailles Treaty, effective January 10, 1920, required the Germans to deliver bonds as an instalment on their total debt to the value of 100 billion gold marks. Of this amount 20 billion were to mature on May l, 1921. Prior to that date the Reparations Commission was to fix the total of Germany’s obligations and, on the total so fixed, interest was to run at 5%. The Commission did not hand down its decision till April 27, 1921, when the debt was set at 132 billion gold marks. Meanwhile Germany had been making large payments in kind, the value of which was estimated by the Commission at 2.6 billion gold marks and by the Germans at several times that amount, but these were declared to have been inadequate to meet the costs of the armies of occupation. Though, in addition to the enormous levy on existing wealth under the Armistice and Treaty, the Germans had now for nearly two years been making large deliveries out of current production, they were held not only to have failed to pay any reparations at all, but to be steadily incurring still greater capital obligations through the accumulation of unpaid interest charges.
• 108The history of reparations till the adoption of the Dawes Plan in 1924 is an almost incredible tale of stupid persecution. The confusion of counsels and the vacillation in action which prevailed among the creditor Powers until the adoption of the Dawes Plan, the bickering and endless negotiation, the frustration of all attempts at compromise, were fatal to an orderly process of payments on the part of Germany even if payments in the amount demanded had, at the time, been practicable. The Allies began by demanding the impossible and they capriciously imposed sanctions when the impossible was not performed. Pending final determination of claims, the Versailles Treaty, effective January 10, 1920, required the Germans to deliver bonds as an instalment on their total debt to the value of 100 billion gold marks. Of this amount 20 billion were to mature on May l, 1921. Prior to that date the Reparations Commission was to fix the total of Germany’s obligations and, on the total so fixed, interest was to run at 5%. The Commission did not hand down its decision till April 27, 1921, when the debt was set at 132 billion gold marks. Meanwhile Germany had been making large payments in kind, the value of which was estimated by the Commission at 2.6 billion gold marks and by the Germans at several times that amount, but these were declared to have been inadequate to meet the costs of the armies of occupation. Though, in addition to the enormous levy on existing wealth under the Armistice and Treaty, the Germans had now for nearly two years been making large deliveries out of current production, they were held not only to have failed to pay any reparations at all, but to be steadily incurring still greater capital obligations through the accumulation of unpaid interest charges.
• 109The history of reparations till the adoption of the Dawes Plan in 1924 is an almost incredible tale of stupid persecution. The confusion of counsels and the vacillation in action which prevailed among the creditor Powers until the adoption of the Dawes Plan, the bickering and endless negotiation, the frustration of all attempts at compromise, were fatal to an orderly process of payments on the part of Germany even if payments in the amount demanded had, at the time, been practicable. The Allies began by demanding the impossible and they capriciously imposed sanctions when the impossible was not performed. Pending final determination of claims, the Versailles Treaty, effective January 10, 1920, required the Germans to deliver bonds as an instalment on their total debt to the value of 100 billion gold marks. Of this amount 20 billion were to mature on May l, 1921. Prior to that date the Reparations Commission was to fix the total of Germany’s obligations and, on the total so fixed, interest was to run at 5%. The Commission did not hand down its decision till April 27, 1921, when the debt was set at 132 billion gold marks. Meanwhile Germany had been making large payments in kind, the value of which was estimated by the Commission at 2.6 billion gold marks and by the Germans at several times that amount, but these were declared to have been inadequate to meet the costs of the armies of occupation. Though, in addition to the enormous levy on existing wealth under the Armistice and Treaty, the Germans had now for nearly two years been making large deliveries out of current production, they were held not only to have failed to pay any reparations at all, but to be steadily incurring still greater capital obligations through the accumulation of unpaid interest charges.
• 110Under 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.
• 111All this time cash reparations had been in abyance. Several conferences had been held, to some of which German representatives had been summoned and to others not, but, aside from the determination of the distribution of the payments when received, and demands for a series of annuities graduated steeply to 6 billion gold marks yearly, nothing decisive was done until the London Conference of March 1921. The Germans proposed at this meeting that they should assume a capital liability of 50 billion gold marks. Their offer was scornfully rejected, the Allies proceeded to occupy Düsseldorf, Duisburg and Ruhrort, to set up a customs barrier between the occupied and unoccupied parts of Germany, to sequestrate customs receipts on the Western frontier, and to enact Reparation Recovery Acts under which a large part of the value of their imports from Germany were retained for reparations purposes. The Reparations Commission followed this up with new demands which the Germans felt it impossible to meet. They again offered, however, to undertake an obligation of a capital sum of 50 billion gold marks and to pay annuities upon it up to a total of 200 billion. Though this is a much larger sum than will ever be paid under the arrangement now in operation, and was probably more than the Allies even then ever expected to receive, it was contumaciously spurned, on the ground, apparently, that Germans bearing gifts were to be suspected beyond measure. On May 5, 1921, a schedule of payments, drawn up at London by the Supreme Council of the Allies, required the delivery of bonds to the value of the gold mark total of the debt as set by the Reparations Commission, ordered annual payments of two billion gold marks plus 26% of German exports, and demanded the immediate delivery of one billion gold marks in cash.
• 112Just at this point the German government had brought its tax revenues into some semblance of equivalence with outlays, foreign exchange rates had shown no rising trend for more than a year, domestic prices had been steady, and the circulation of Reichsbank notes, while increasing, had not risen consistently or at a very rapid rate. Under threat of further sanctions the Germans paid in May (1921) 150 million gold marks in cash (foreign exchange). Drafts on the Treasury maturing within three months and guaranteed by the German banks were tendered, and accepted, for the remaining 850 millions immediately payable. The purchase of foreign bills with which to cover these drafts drove the exchange value of the mark steadily downward. At the end of August 400 million gold marks were still unpaid but a six-weeks covering credit was arranged in Holland and England. The repayment of this loan extended the pressure on mark exchange into October. The index of the monthly average of dollar exchange rates (number of paper marks to the dollar equivalent of one gold mark) rose from 14.8 in May to 62.6 in November, the index of wholesale prices (1913 = 1) from 13.1 to 34.1, and the ratio of the monthly increase in the floating debt to all other state revenue from 50% to 155%.
• 113Cash reparations actually paid no longer played a dominating rôle in inflation though the then hopeless prospect of a relaxation of the Allied demands, and the general expectation of the imposition of further sanctions, were potent influences. On July 12, 1922, Germany applied for a complete lifting of all further obligations for that year and stated that the desperate position of the fise would make it impossible to meet the Allied demands for a further period of two years or more. After weeks of bickering among the creditors, during which Germany was held to the schedule earlier laid down, matters reached an impasse at the end of August. The deadlock was finally broken when the Belgians, who were to receive the balance of the 1922 payments, agreed to accept six months’ Treasury bills (payable in gold and guaranteed by the Reichsbank) in lieu of immediate cash. The respite thus gained by the Germans was of no avail. The toboggan of currency depreciation was then travelling much too rapidly to be checked by any such puny means and, before the notes fell due, the occupation of the Ruhr pushed it over the precipice. Except to take up the bills given to Belgium in the preceding summer, no cash reparations were paid in 1923 and though, on the invasion of the Ruhr, reparations in kind were suspended toward the occupying Powers only, that action was generalized in August. After the collapse of the attempt to support mark exchange in the first four months of the invasion, and of a second similar, but much feebler, essay in July, the era of astronomic monetary magnitudes began. Prices, exchange rates, and the volume of circulating medium vied with one another in daily and hourly upward leaps. The Reichsbank was finally reduced to making apologies for its inability to provide for a weekly output of more than several billion (or trillion) of marks of the required denomination and to an expression of its hope that this situation would be quickly remedied by an improvement in the speed of the printing presses! The printing presses did their bit. By the end of inflation the daily output of currency was over 400,000,000,000,000,000 marks. But, strange as it may seem, this did not effect the expected cure!
• 114Cash reparations actually paid no longer played a dominating rôle in inflation though the then hopeless prospect of a relaxation of the Allied demands, and the general expectation of the imposition of further sanctions, were potent influences. On July 12, 1922, Germany applied for a complete lifting of all further obligations for that year and stated that the desperate position of the fise would make it impossible to meet the Allied demands for a further period of two years or more. After weeks of bickering among the creditors, during which Germany was held to the schedule earlier laid down, matters reached an impasse at the end of August. The deadlock was finally broken when the Belgians, who were to receive the balance of the 1922 payments, agreed to accept six months’ Treasury bills (payable in gold and guaranteed by the Reichsbank) in lieu of immediate cash. The respite thus gained by the Germans was of no avail. The toboggan of currency depreciation was then travelling much too rapidly to be checked by any such puny means and, before the notes fell due, the occupation of the Ruhr pushed it over the precipice. Except to take up the bills given to Belgium in the preceding summer, no cash reparations were paid in 1923 and though, on the invasion of the Ruhr, reparations in kind were suspended toward the occupying Powers only, that action was generalized in August. After the collapse of the attempt to support mark exchange in the first four months of the invasion, and of a second similar, but much feebler, essay in July, the era of astronomic monetary magnitudes began. Prices, exchange rates, and the volume of circulating medium vied with one another in daily and hourly upward leaps. The Reichsbank was finally reduced to making apologies for its inability to provide for a weekly output of more than several billion (or trillion) of marks of the required denomination and to an expression of its hope that this situation would be quickly remedied by an improvement in the speed of the printing presses! The printing presses did their bit. By the end of inflation the daily output of currency was over 400,000,000,000,000,000 marks. But, strange as it may seem, this did not effect the expected cure!
• 115Though the war, and the peace, dealt heavy blows to the German economy and though poverty was for some years inevitable, the losses in domestic income like those in territory, natural resources, and property, furnish no adequate explanation of the collapse of the internal value of the currency. Not even state bankruptcy is, in itself, a sufficient cause. “The existence of ‘budgetary equilibrium’ is not necessary [to stability of the currency]. ... An absolutely bankrupt State can have a perfectly good currency without a trace of inflation.” But this possibility can be realized only by the outright repudiation of state obligations. The consequences of such repudiation must always be weighed against the dangers involved in meeting the situation by the issue of fiat money. In the case of Germany, repudiation of recurring reparations obligations would have meant an early application of military sanctions by the victor Powers and complete loss of German sovereignty. Few would deny that to keep things going even temporarily, by inflation of the currency, was the lesser of the evil courses open to the German government and people.
• 116Though the war, and the peace, dealt heavy blows to the German economy and though poverty was for some years inevitable, the losses in domestic income like those in territory, natural resources, and property, furnish no adequate explanation of the collapse of the internal value of the currency. Not even state bankruptcy is, in itself, a sufficient cause. “The existence of ‘budgetary equilibrium’ is not necessary [to stability of the currency]. ... An absolutely bankrupt State can have a perfectly good currency without a trace of inflation.” But this possibility can be realized only by the outright repudiation of state obligations. The consequences of such repudiation must always be weighed against the dangers involved in meeting the situation by the issue of fiat money. In the case of Germany, repudiation of recurring reparations obligations would have meant an early application of military sanctions by the victor Powers and complete loss of German sovereignty. Few would deny that to keep things going even temporarily, by inflation of the currency, was the lesser of the evil courses open to the German government and people.
• 117State bankruptcy lay on the knees of the gods. To repair the ravages of war and to restore order in public finance it was urgently necessary that all remaining economic resources should be carefully husbanded and that the fise should be replenished with revenues derived entirely from taxation. But, along with peace, revolution was ushered into Germany and the energies of the people were wasted in internal conflict. The struggle for control of the new republic not only prevented remedial measures in public finance but enormously increased the existing difficulties. The continuation of the war blockade till after the signing of the Peace of Versailles, June 28, 1919, further augmented the troubles of the government, for though circuses were denied, the people had to be supplied with bread.
• 118In the course of the year 1919 the outstanding volume of discounted Treasury bills rose from 55 to 86 billion marks, the index of the cost of dollar exchange from 1.97 to 11.94 (1913=1) and the index of wholesale prices from 2.45 to 8.03 (1913=1). The increase in the currency from 33 to 50 billion marks was comparatively slight, showing that, in spite of the disturbances, the public or commercial banks were buying the discounted Treasury bills from the Reichsbank. This buying was especially marked after the internal political situation had somewhat cleared but the sale of government securities was perforce confined to short-term issues since the future was too obscure to permit the flotation of bonds.
• 119The administration was far from dilatory and the reform of the finances was attacked with vigor at the earliest practicable moment. The old central government had always been without direct taxing powers and the new did not for some time acquire any greater authority. The constitution, adopted at Weimar August 11, 1919, gave to the Reich the right of legislation over the revenues to be devoted, in whole or in part, to its own purposes but it was not until December 13, 1919, that a federal tax administration could be provided for. Meanwhile, customs duties had been put on a gold basis, an extraordinary single levy had been imposed on corporations, and a heavy tax laid on war profits. Before the year was out legislation establishing a turnover tax had been passed and a special capital levy, the Reichsnotopfer, or National Emergency Contribution, had been ordered. Under the leadership of Finance Minister Erzberger the whole taxing system was revised in March 1920, control of taxation was largely transferred from the States to the federal government, and new impositions were laid on corporations and on the yield of capital. Few sources of revenue remained unexplored and the rates imposed were heavy. But the government was running a losing race with inflation. Its efforts to balance its budget were unsuccessful, the deficiency was made up by short-term loans necessitating constant new issues of currency, and the resulting depreciation depressed revenues still further. Classes of property easy to tax and capable in normal times of providing large revenues were falling rapidly in real value. This was true of all securities yielding a fixed monetary return and also of rentals. The latter were practically confiscated by inflation and by housing legislation felt to be socially indispensable. The depreciation of the currency led to a proper resistance to the taxation of such paper mark incomes as were wholly illusory but the resentment against injustice was perverted to secure unwarranted exemptions. The resulting complexity of the tax structure, the administration of which was necessarily inefficient, still further reduced the revenues. The greatest source of loss, however, lay in the fact that, between the period for which a tax was levied and the dates of assessment and collection, a decline in the value of the currency might wipe out all but a small portion of the purchasing power of the sum received.
• 120The administration was far from dilatory and the reform of the finances was attacked with vigor at the earliest practicable moment. The old central government had always been without direct taxing powers and the new did not for some time acquire any greater authority. The constitution, adopted at Weimar August 11, 1919, gave to the Reich the right of legislation over the revenues to be devoted, in whole or in part, to its own purposes but it was not until December 13, 1919, that a federal tax administration could be provided for. Meanwhile, customs duties had been put on a gold basis, an extraordinary single levy had been imposed on corporations, and a heavy tax laid on war profits. Before the year was out legislation establishing a turnover tax had been passed and a special capital levy, the Reichsnotopfer, or National Emergency Contribution, had been ordered. Under the leadership of Finance Minister Erzberger the whole taxing system was revised in March 1920, control of taxation was largely transferred from the States to the federal government, and new impositions were laid on corporations and on the yield of capital. Few sources of revenue remained unexplored and the rates imposed were heavy. But the government was running a losing race with inflation. Its efforts to balance its budget were unsuccessful, the deficiency was made up by short-term loans necessitating constant new issues of currency, and the resulting depreciation depressed revenues still further. Classes of property easy to tax and capable in normal times of providing large revenues were falling rapidly in real value. This was true of all securities yielding a fixed monetary return and also of rentals. The latter were practically confiscated by inflation and by housing legislation felt to be socially indispensable. The depreciation of the currency led to a proper resistance to the taxation of such paper mark incomes as were wholly illusory but the resentment against injustice was perverted to secure unwarranted exemptions. The resulting complexity of the tax structure, the administration of which was necessarily inefficient, still further reduced the revenues. The greatest source of loss, however, lay in the fact that, between the period for which a tax was levied and the dates of assessment and collection, a decline in the value of the currency might wipe out all but a small portion of the purchasing power of the sum received.
• 121The administration was far from dilatory and the reform of the finances was attacked with vigor at the earliest practicable moment. The old central government had always been without direct taxing powers and the new did not for some time acquire any greater authority. The constitution, adopted at Weimar August 11, 1919, gave to the Reich the right of legislation over the revenues to be devoted, in whole or in part, to its own purposes but it was not until December 13, 1919, that a federal tax administration could be provided for. Meanwhile, customs duties had been put on a gold basis, an extraordinary single levy had been imposed on corporations, and a heavy tax laid on war profits. Before the year was out legislation establishing a turnover tax had been passed and a special capital levy, the Reichsnotopfer, or National Emergency Contribution, had been ordered. Under the leadership of Finance Minister Erzberger the whole taxing system was revised in March 1920, control of taxation was largely transferred from the States to the federal government, and new impositions were laid on corporations and on the yield of capital. Few sources of revenue remained unexplored and the rates imposed were heavy. But the government was running a losing race with inflation. Its efforts to balance its budget were unsuccessful, the deficiency was made up by short-term loans necessitating constant new issues of currency, and the resulting depreciation depressed revenues still further. Classes of property easy to tax and capable in normal times of providing large revenues were falling rapidly in real value. This was true of all securities yielding a fixed monetary return and also of rentals. The latter were practically confiscated by inflation and by housing legislation felt to be socially indispensable. The depreciation of the currency led to a proper resistance to the taxation of such paper mark incomes as were wholly illusory but the resentment against injustice was perverted to secure unwarranted exemptions. The resulting complexity of the tax structure, the administration of which was necessarily inefficient, still further reduced the revenues. The greatest source of loss, however, lay in the fact that, between the period for which a tax was levied and the dates of assessment and collection, a decline in the value of the currency might wipe out all but a small portion of the purchasing power of the sum received.
• 122The administration was far from dilatory and the reform of the finances was attacked with vigor at the earliest practicable moment. The old central government had always been without direct taxing powers and the new did not for some time acquire any greater authority. The constitution, adopted at Weimar August 11, 1919, gave to the Reich the right of legislation over the revenues to be devoted, in whole or in part, to its own purposes but it was not until December 13, 1919, that a federal tax administration could be provided for. Meanwhile, customs duties had been put on a gold basis, an extraordinary single levy had been imposed on corporations, and a heavy tax laid on war profits. Before the year was out legislation establishing a turnover tax had been passed and a special capital levy, the Reichsnotopfer, or National Emergency Contribution, had been ordered. Under the leadership of Finance Minister Erzberger the whole taxing system was revised in March 1920, control of taxation was largely transferred from the States to the federal government, and new impositions were laid on corporations and on the yield of capital. Few sources of revenue remained unexplored and the rates imposed were heavy. But the government was running a losing race with inflation. Its efforts to balance its budget were unsuccessful, the deficiency was made up by short-term loans necessitating constant new issues of currency, and the resulting depreciation depressed revenues still further. Classes of property easy to tax and capable in normal times of providing large revenues were falling rapidly in real value. This was true of all securities yielding a fixed monetary return and also of rentals. The latter were practically confiscated by inflation and by housing legislation felt to be socially indispensable. The depreciation of the currency led to a proper resistance to the taxation of such paper mark incomes as were wholly illusory but the resentment against injustice was perverted to secure unwarranted exemptions. The resulting complexity of the tax structure, the administration of which was necessarily inefficient, still further reduced the revenues. The greatest source of loss, however, lay in the fact that, between the period for which a tax was levied and the dates of assessment and collection, a decline in the value of the currency might wipe out all but a small portion of the purchasing power of the sum received.
• 123The administration was far from dilatory and the reform of the finances was attacked with vigor at the earliest practicable moment. The old central government had always been without direct taxing powers and the new did not for some time acquire any greater authority. The constitution, adopted at Weimar August 11, 1919, gave to the Reich the right of legislation over the revenues to be devoted, in whole or in part, to its own purposes but it was not until December 13, 1919, that a federal tax administration could be provided for. Meanwhile, customs duties had been put on a gold basis, an extraordinary single levy had been imposed on corporations, and a heavy tax laid on war profits. Before the year was out legislation establishing a turnover tax had been passed and a special capital levy, the Reichsnotopfer, or National Emergency Contribution, had been ordered. Under the leadership of Finance Minister Erzberger the whole taxing system was revised in March 1920, control of taxation was largely transferred from the States to the federal government, and new impositions were laid on corporations and on the yield of capital. Few sources of revenue remained unexplored and the rates imposed were heavy. But the government was running a losing race with inflation. Its efforts to balance its budget were unsuccessful, the deficiency was made up by short-term loans necessitating constant new issues of currency, and the resulting depreciation depressed revenues still further. Classes of property easy to tax and capable in normal times of providing large revenues were falling rapidly in real value. This was true of all securities yielding a fixed monetary return and also of rentals. The latter were practically confiscated by inflation and by housing legislation felt to be socially indispensable. The depreciation of the currency led to a proper resistance to the taxation of such paper mark incomes as were wholly illusory but the resentment against injustice was perverted to secure unwarranted exemptions. The resulting complexity of the tax structure, the administration of which was necessarily inefficient, still further reduced the revenues. The greatest source of loss, however, lay in the fact that, between the period for which a tax was levied and the dates of assessment and collection, a decline in the value of the currency might wipe out all but a small portion of the purchasing power of the sum received.
• 124There is, however, every reason to believe that, apart from the recurring impositions of the Treaty of Versailles, a budgetary balance would have been achieved and inflation checked. Tax revenues in 1920 yielded the equivalent of 4090 millions of gold marks and in the following year 5235 millions. Expenditures in 1921, exclusive of the deficit of the state railways and payments under the Treaty of Versailles, were equal to 5738 million gold marks. The railway deficit was eliminated in the following year. Leaving it out of account, the ratio of taxes to outlays for domestic purposes in 1921 was 91.2%, an achievement which compared very favorably with that of most of the victor nations. The expenditures under the treaty, however, were themselves approximately equal to all other expenditures combined, and therefore to the total yield from taxes. Unless the improvement in the finances should proceed steadily forward the handwriting on the wall was clear and startling.
• 125There is, however, every reason to believe that, apart from the recurring impositions of the Treaty of Versailles, a budgetary balance would have been achieved and inflation checked. Tax revenues in 1920 yielded the equivalent of 4090 millions of gold marks and in the following year 5235 millions. Expenditures in 1921, exclusive of the deficit of the state railways and payments under the Treaty of Versailles, were equal to 5738 million gold marks. The railway deficit was eliminated in the following year. Leaving it out of account, the ratio of taxes to outlays for domestic purposes in 1921 was 91.2%, an achievement which compared very favorably with that of most of the victor nations. The expenditures under the treaty, however, were themselves approximately equal to all other expenditures combined, and therefore to the total yield from taxes. Unless the improvement in the finances should proceed steadily forward the handwriting on the wall was clear and startling.
• 126The facts are that neither in gold mark values nor in the purchasing power of paper marks did revenues continue to advance. The appended Chart II shows the matter clearly. By the middle of 1921 the tax reforms of 1919-1920 had produced their maximum effect but it was far short of the requirements of the Reich and a further twist of the screw of taxation was obviously necessary. But tax revision takes time. A greatly extended and intensified tax program was adopted in the spring of 1922 and tax revenues once again, for a month or so, approached the level of expenditures. But it was then too late. The approach to a balance had been achieved only through a partial moratorium on reparations and the threatening attitude of the principal creditors left no hope of a permanent alleviation on this score. Moreover the last bulwark against currency collapse was crumbling. The people at home began to lose all confidence in their money. Exchange rates, prices, and governmental expenses soared, but tax revenues, while increasing in paper mark totals, lagged hopelessly behind. Finally, in late 1923, taxes covered only 1% to 2% of expenditures and many taxes did not yield the cost of collection.
• 127The facts are that neither in gold mark values nor in the purchasing power of paper marks did revenues continue to advance. The appended Chart II shows the matter clearly. By the middle of 1921 the tax reforms of 1919-1920 had produced their maximum effect but it was far short of the requirements of the Reich and a further twist of the screw of taxation was obviously necessary. But tax revision takes time. A greatly extended and intensified tax program was adopted in the spring of 1922 and tax revenues once again, for a month or so, approached the level of expenditures. But it was then too late. The approach to a balance had been achieved only through a partial moratorium on reparations and the threatening attitude of the principal creditors left no hope of a permanent alleviation on this score. Moreover the last bulwark against currency collapse was crumbling. The people at home began to lose all confidence in their money. Exchange rates, prices, and governmental expenses soared, but tax revenues, while increasing in paper mark totals, lagged hopelessly behind. Finally, in late 1923, taxes covered only 1% to 2% of expenditures and many taxes did not yield the cost of collection.
• 128Table IV presents, in gold marks, the revenue and expenditures of the Reich from 1920 to 1923 and Chart III shows the ratio of taxes to total revenues (or expenditures) compared with the monthly average index of exchange rates. The general inverse correlation between the movement of foreign exchange and the proportion of expenditures covered by taxation is clear except in the first half of 1922 when the revised and extended tax program raised the ratio of taxes to outlays in spite of the fact that exchange rates (and prices and wages) were rising at a rapid rate. The relative improvement in the Treasury’s position in April and May 1923 ensued upon a sharp drop in foreign exchange in February of that year and upon the stability which obtained till the middle of April, though this is largely obscured on the chart owing to the necessity of plotting exchange rates, at this period, on a diminishing logarithmic, rather than on an arithmetic, scale.
• 129REVENUE AND EXPENDITURE OF THE REICH; 1920-1923(Millions of gold marks)
• 130But whether the fall in the exchange value of the currency at any time was or was not greater than the decline in its domestic purchasing power, the result was merely to accentuate or mitigate the lag of revenues which was inherent in the depreciation itself. This is especially true of the period after the middle of 1922. For the year May 1921 to April 1922, a year of heavy cash payments on reparations account, the low relative value of the mark on the exchange markets was of great importance in determining the condition of the Treasury, but the mere fact of currency depreciation, regardless of the relation between the internal and external value of the monetary unit, was thereafter the sole significant factor. For the greater part of 1923 there was a steady rise in the relative value of the mark on the exchanges but this was of slight consequence since the government was then making no cash reparations payments and the precipitous fall in the absolute value of the currency, both within and without the country, led, in any case, to exiguous revenues in comparison with the enormous increase in outlays.
• 131Taxes on commodities tended to increase in paper mark totals as prices rose but, as the pace of depreciation waxed, even these were of little value by the time they accrued to the Treasury. The one gray spot on the otherwise immaculate blackness of the Treasury’s position from mid-1922 to the end of inflation came as a result of the temporary stabilization of exchange rates and prices in the spring of 1923. This result, achieved through intervention by the Reichsbank on the exchange market, cost the bank heavily and, in the existing state of government finance, it was a gesture only. It temporarily raised the ratio of revenues to expenditures but the marked increase in the latter, consequent upon the policy of passive resistance, would have led to another reversal even if the support of the mark had been maintained for much longer than in fact proved possible. From May onward the ratio of the monthly increase in the floating debt to state revenue from all other sources grew higher and higher. In the last half-year of inflation, only an insignificant fraction of expenditures was covered other than by the discount of Treasury bills and the ensuing emission of Reichsbank notes. In practical effect the government had ceased to collect ordinary taxes and was financing its activities all but solely through issues of fiat money.
• 132
• 133Table V shows by months the total amount of discounted bills outstanding and the volume of Reichsbank note issues. The figures in the table are not, of course, to be interpreted as representing the difference between financing the state requirements partly by taxation, as in the earlier years, and wholly by fiat money, as in the later. They reflect this situation very obscurely and show, in the main, simply the depreciation of the currency. The hundreds of quintillions of marks, in November 1923, were actually of much less gold value than the comparatively insignificant totals of discounts and note issues in earlier years. The depreciation of the currency thus not only wiped out the pre-inflation federal debt but also was continually reducing the burden of the enormous current borrowings. If one were to take thousand-mark notes and pile them tightly together one on top of the other the sum of values would not equal the government’s borrowing from the Reichsbank until the pillar was twenty-five billion times as high as the loftiest mountain on earth. Yet, at the rate at which the mark was converted into the new stable-value currency (a trillion to one), the total discounted bills outstanding on November 15, 1923, were worth less than fifty million dollars.
• 134Great has been the abuse heaped upon the exchange speculator as a destroyer of currencies. Most of this abuse is due to the conscious or unconscious search for a scapegoat and is unwarranted by the facts. But though speculators who persistently operate against the trend of fundamental forces are certain to be eliminated, and so cannot long affect the market, it is not to be denied that bear speculation may depress the exchange value of a monetary unit, that the fall in the currency’s exchange value may provoke retrogression in its domestic purchasing power and in the public finances of the country concerned, that new issues of notes may thus be induced, that the consequent further fall in exchanges may justify the speculation from the point of view of private profit and may lead to continued bearish operations which, in the manner just indicated, actually bring about the depreciation on which the operators count.
• 135Speculation in the mark was rampant both on the bull and on the bear side of the market though the two movements did not by any means coincide. The post-war history of German inflation, so far as foreign exchange is concerned, shows several clearly marked major movements as follows:
• 136In the immediate post-war period the speculative dealing was predominantly on the bull side of mark exchange and, indeed, till late in 1922, the persistent foreign speculative buying of German currency was one of the most striking aspects of inflation. It is doubtful whether bear activities ever fully counteracted this steady buying. As a result, however, of the operation of forces much more fundamental than speculation, the mark sagged in 1919 at a steady and, for that time, rapid rate, and the speculators as a group took heavy losses. Those who had played the part of bears of course iriade money but the situation was reversed after March 1920 when, in the course of a little more than two months, the mark rose nearly 200% (100.13 to the dollar on March 4; 34.75 to the dollar on May 25). This was the heyday of the bull movement and as usual it was overdone. The exchange value of the mark had been carried beyond the point at which it would be sustained by basic factors and it slowly slid back toward the current equilibrium level. In the ensuing months speculation was not very active except for the so-called investment demand but, with the beginning of cash reparations, the bears were presented with a near certainty of success. Knowing that the government must procure foreign exchange in large volume, and that it had no means of doing so except by further note issues, the “spot” purchase of foreign exchange or the sale of mark futures carried a rich promise of profits to the speculator. This situation continued from June to November 1921. Investment buying of marks was then on the decline and it is probable that speculative selling operated to produce the situation it anticipated. The farther bear speculation drove the mark down the worse became the situation of the fise. The discounts of Treasury bills and emissions of Reichsbank notes consequently grew larger, with a reflex again on the exchanges, and so on in indefinite repetition. The only escape was to have mark exchange fall so far below the domestic purchasing power of the currency as to lead to purchases for present use or to speculation for a rise. If this should occur the spin of the circle would be checked and perhaps reversed. It actually was checked when relief from reparations payments was temporarily obtained in late 1921.
• 137In the immediate post-war period the speculative dealing was predominantly on the bull side of mark exchange and, indeed, till late in 1922, the persistent foreign speculative buying of German currency was one of the most striking aspects of inflation. It is doubtful whether bear activities ever fully counteracted this steady buying. As a result, however, of the operation of forces much more fundamental than speculation, the mark sagged in 1919 at a steady and, for that time, rapid rate, and the speculators as a group took heavy losses. Those who had played the part of bears of course iriade money but the situation was reversed after March 1920 when, in the course of a little more than two months, the mark rose nearly 200% (100.13 to the dollar on March 4; 34.75 to the dollar on May 25). This was the heyday of the bull movement and as usual it was overdone. The exchange value of the mark had been carried beyond the point at which it would be sustained by basic factors and it slowly slid back toward the current equilibrium level. In the ensuing months speculation was not very active except for the so-called investment demand but, with the beginning of cash reparations, the bears were presented with a near certainty of success. Knowing that the government must procure foreign exchange in large volume, and that it had no means of doing so except by further note issues, the “spot” purchase of foreign exchange or the sale of mark futures carried a rich promise of profits to the speculator. This situation continued from June to November 1921. Investment buying of marks was then on the decline and it is probable that speculative selling operated to produce the situation it anticipated. The farther bear speculation drove the mark down the worse became the situation of the fise. The discounts of Treasury bills and emissions of Reichsbank notes consequently grew larger, with a reflex again on the exchanges, and so on in indefinite repetition. The only escape was to have mark exchange fall so far below the domestic purchasing power of the currency as to lead to purchases for present use or to speculation for a rise. If this should occur the spin of the circle would be checked and perhaps reversed. It actually was checked when relief from reparations payments was temporarily obtained in late 1921.
• 138In the immediate post-war period the speculative dealing was predominantly on the bull side of mark exchange and, indeed, till late in 1922, the persistent foreign speculative buying of German currency was one of the most striking aspects of inflation. It is doubtful whether bear activities ever fully counteracted this steady buying. As a result, however, of the operation of forces much more fundamental than speculation, the mark sagged in 1919 at a steady and, for that time, rapid rate, and the speculators as a group took heavy losses. Those who had played the part of bears of course iriade money but the situation was reversed after March 1920 when, in the course of a little more than two months, the mark rose nearly 200% (100.13 to the dollar on March 4; 34.75 to the dollar on May 25). This was the heyday of the bull movement and as usual it was overdone. The exchange value of the mark had been carried beyond the point at which it would be sustained by basic factors and it slowly slid back toward the current equilibrium level. In the ensuing months speculation was not very active except for the so-called investment demand but, with the beginning of cash reparations, the bears were presented with a near certainty of success. Knowing that the government must procure foreign exchange in large volume, and that it had no means of doing so except by further note issues, the “spot” purchase of foreign exchange or the sale of mark futures carried a rich promise of profits to the speculator. This situation continued from June to November 1921. Investment buying of marks was then on the decline and it is probable that speculative selling operated to produce the situation it anticipated. The farther bear speculation drove the mark down the worse became the situation of the fise. The discounts of Treasury bills and emissions of Reichsbank notes consequently grew larger, with a reflex again on the exchanges, and so on in indefinite repetition. The only escape was to have mark exchange fall so far below the domestic purchasing power of the currency as to lead to purchases for present use or to speculation for a rise. If this should occur the spin of the circle would be checked and perhaps reversed. It actually was checked when relief from reparations payments was temporarily obtained in late 1921.
• 139The greatest effect exerted by speculators in exchange is ordinarily supposed to have occurred after the middle of 1922 when the home population, having lost all confidence in the currency, rushed in a frenzy into the exchange markets and initiated, the so-called export of capital. The export of capital and the flight from the mark, so far as the latter phrase means the exchange of the mark for foreign currency, have been generally used as synonymous expressions. In reality they have no connection with one another. The essence of an export of capital is the transfer to residents of a foreign country of the ownership of immediate claims to goods (and later, when the claims are exercised, of the goods themselves), without any obligation on the capital importer to furnish similar immediate claims in return. A foreign exchange transaction is not of this type but is a barter of immediate monetary claims to goods in one national market against immediate monetary claims to goods in another. It is true that either or both of the bartered claims may have been obtained in exchange for deferred obligations in the other currency (a claim to future goods) or may later be used to purchase them. But there is nothing in the sale of a currency itself to show that this is occurring. There can, indeed, be no net export of real capital in the actual purchase and sale of exchange. All that happens is a swapping of claims on currencies, with the nationals of each country, after the transaction, owning the equivalent in present goods (or claims thereto) of their former possessions. This is true whether, for instance, a German sells for marks American exchange to another German, to an American, or to a foreigner not a citizen of the United States. Whatever the details, in no case would either country send out capital in the exchange transaction.
• 140The greatest effect exerted by speculators in exchange is ordinarily supposed to have occurred after the middle of 1922 when the home population, having lost all confidence in the currency, rushed in a frenzy into the exchange markets and initiated, the so-called export of capital. The export of capital and the flight from the mark, so far as the latter phrase means the exchange of the mark for foreign currency, have been generally used as synonymous expressions. In reality they have no connection with one another. The essence of an export of capital is the transfer to residents of a foreign country of the ownership of immediate claims to goods (and later, when the claims are exercised, of the goods themselves), without any obligation on the capital importer to furnish similar immediate claims in return. A foreign exchange transaction is not of this type but is a barter of immediate monetary claims to goods in one national market against immediate monetary claims to goods in another. It is true that either or both of the bartered claims may have been obtained in exchange for deferred obligations in the other currency (a claim to future goods) or may later be used to purchase them. But there is nothing in the sale of a currency itself to show that this is occurring. There can, indeed, be no net export of real capital in the actual purchase and sale of exchange. All that happens is a swapping of claims on currencies, with the nationals of each country, after the transaction, owning the equivalent in present goods (or claims thereto) of their former possessions. This is true whether, for instance, a German sells for marks American exchange to another German, to an American, or to a foreigner not a citizen of the United States. Whatever the details, in no case would either country send out capital in the exchange transaction.
• 141The greatest effect exerted by speculators in exchange is ordinarily supposed to have occurred after the middle of 1922 when the home population, having lost all confidence in the currency, rushed in a frenzy into the exchange markets and initiated, the so-called export of capital. The export of capital and the flight from the mark, so far as the latter phrase means the exchange of the mark for foreign currency, have been generally used as synonymous expressions. In reality they have no connection with one another. The essence of an export of capital is the transfer to residents of a foreign country of the ownership of immediate claims to goods (and later, when the claims are exercised, of the goods themselves), without any obligation on the capital importer to furnish similar immediate claims in return. A foreign exchange transaction is not of this type but is a barter of immediate monetary claims to goods in one national market against immediate monetary claims to goods in another. It is true that either or both of the bartered claims may have been obtained in exchange for deferred obligations in the other currency (a claim to future goods) or may later be used to purchase them. But there is nothing in the sale of a currency itself to show that this is occurring. There can, indeed, be no net export of real capital in the actual purchase and sale of exchange. All that happens is a swapping of claims on currencies, with the nationals of each country, after the transaction, owning the equivalent in present goods (or claims thereto) of their former possessions. This is true whether, for instance, a German sells for marks American exchange to another German, to an American, or to a foreigner not a citizen of the United States. Whatever the details, in no case would either country send out capital in the exchange transaction.
• 142Since an exchange transaction cannot of itself involve a net export of capital it follows that capital must be exported outside the exchange process. There is an inchoate export of capital as soon as immediate monetary claims to goods in one country are given to another in excess of the immediate claims received by the former from the latter. This is not an exchange transaction. When, however, such immediate claims are sold the exchange of the lending country will tend to be depressed. The actual export of capital is made in the form of commodities and, when an equivalent additional volume of commodity exports attends an undertaking to export claims to capital, exchange rates tend to be restored to their old position. Similarly, a constructive export of capital, without effect on exchange rates, takes place whenever the borrower (the seller of future obligations) takes the present foreign exchange proceeds of his borrowing and spends such exchange on tangibles left in the lending country. The only effect on exchange rates of an export of capital claims occurs, therefore, when the newly acquired rights of the borrower, in the form of the money of the lending country, are sold for what they will bring in his own money. The resulting temporary fall in the exchange value of the currency of the lending country is due not to the export of capital, as such, but to the fact that there is a momentary redundancy in the foreign holdings of rights to the lending country’s money rather than of its commodities. The lending country’s money therefore falls in exchange value against other currencies and it will pay to change it into goods. As soon as the cash holdings are expended for commodities, whether or not such commodities are imported into the buyer’s country, the redundancy of the lender’s currency on the exchange markets is reduced and exchange rates tend to recover.
• 143Now the flight from the mark was not due to an impulse on the part of Germans to export capital, that is, an impulse to give to foreigners immediate claims on German goods in exchange for a postponed command over foreign commodities, but merely to a desire to swap present purchasing power in their own currency for anything which would retain its value. If capital had really been in process of exportation from Germany there would have been no trouble. It is just because there was almost no capital capable of export that mark exchange fell so rapidly. Insofar as German exchange was held by foreigners as an investment, and thus approached the category of securities, it is much more nearly true to say that capital was being imported into Germany, either actually, in the shape of an excess of commodity imports which would otherwise not have been possible, or constructively, in the acquisition by sellers of marks of present property in foreign countries. In exchange for the capital actually or constructively imported the Germans offered marks or mark claims which were, in effect, promises to pay on demand, throughout an indefinite period, an undetermined but steadily diminishing amount of purchasing power over German goods—provided the withdrawal of those goods were permitted by the German authorities. So far as the marks were bought and held by foreigners till they became worthless this process was not even an exchange of capital, to say nothing of a net export. It is therefore all but quite erroneous to speak of the flight from the mark into foreign currencies as an export of capital.
• 144Now the flight from the mark was not due to an impulse on the part of Germans to export capital, that is, an impulse to give to foreigners immediate claims on German goods in exchange for a postponed command over foreign commodities, but merely to a desire to swap present purchasing power in their own currency for anything which would retain its value. If capital had really been in process of exportation from Germany there would have been no trouble. It is just because there was almost no capital capable of export that mark exchange fell so rapidly. Insofar as German exchange was held by foreigners as an investment, and thus approached the category of securities, it is much more nearly true to say that capital was being imported into Germany, either actually, in the shape of an excess of commodity imports which would otherwise not have been possible, or constructively, in the acquisition by sellers of marks of present property in foreign countries. In exchange for the capital actually or constructively imported the Germans offered marks or mark claims which were, in effect, promises to pay on demand, throughout an indefinite period, an undetermined but steadily diminishing amount of purchasing power over German goods—provided the withdrawal of those goods were permitted by the German authorities. So far as the marks were bought and held by foreigners till they became worthless this process was not even an exchange of capital, to say nothing of a net export. It is therefore all but quite erroneous to speak of the flight from the mark into foreign currencies as an export of capital.
• 145Now the flight from the mark was not due to an impulse on the part of Germans to export capital, that is, an impulse to give to foreigners immediate claims on German goods in exchange for a postponed command over foreign commodities, but merely to a desire to swap present purchasing power in their own currency for anything which would retain its value. If capital had really been in process of exportation from Germany there would have been no trouble. It is just because there was almost no capital capable of export that mark exchange fell so rapidly. Insofar as German exchange was held by foreigners as an investment, and thus approached the category of securities, it is much more nearly true to say that capital was being imported into Germany, either actually, in the shape of an excess of commodity imports which would otherwise not have been possible, or constructively, in the acquisition by sellers of marks of present property in foreign countries. In exchange for the capital actually or constructively imported the Germans offered marks or mark claims which were, in effect, promises to pay on demand, throughout an indefinite period, an undetermined but steadily diminishing amount of purchasing power over German goods—provided the withdrawal of those goods were permitted by the German authorities. So far as the marks were bought and held by foreigners till they became worthless this process was not even an exchange of capital, to say nothing of a net export. It is therefore all but quite erroneous to speak of the flight from the mark into foreign currencies as an export of capital.
• 146Marks could not be sold without being bought and when foreigners purchased marks, or claims to marks, they could do one of three things with them. ( 1 ) They could hold them either abroad or on deposit in Germany or they could lend or otherwise invest them in Germany. In this case the original support given the mark by their demand would be subject to no diminution. (2) They could later buy exportable goods with them. If these goods would not otherwise have been purchased the upward impetus to mark exchange arising from the original demand for the marks would be sustained. (3) They could sell the marks already purchased. In this case the original support given the mark by the investor’s purchase might in part be cancelled. But even here any decline in the value of the mark between the date of the original and the later transaction would make the pressure on mark exchange much lighter than an equivalence with the support originally given.
• 147It is clear that, taking the whole period of post-war inflation into consideration and assuming that a fixed amount of foreign exchange was unconditionally required by the Germans, the sale of the currency was a bullish factor on its exchange value. This was specially true of the earlier years. In the final stages of inflation, moreover, it was not the sale of the currency (the so-called export of capital) which was of any significance in depressing its value but the fact that sellers were intensely eager and sales extremely hard to make. In the first place they were prohibited by the German government but, more important perhaps, the lists of gullible foreign buyers had by this time been fairly well exhausted. There were few individuals ready to buy, with stable-value currencies, a monetary unit which was rushing to its doom. Clearly it was the attitude of the buyers and sellers of marks toward the wares of which they were making disposal and acquisition, and not the sales themselves, which was the fundamental influence in driving the value of the mark downward and, per contra, in raising to the sky the mark value of foreign exchange.
• 148It is clear that, taking the whole period of post-war inflation into consideration and assuming that a fixed amount of foreign exchange was unconditionally required by the Germans, the sale of the currency was a bullish factor on its exchange value. This was specially true of the earlier years. In the final stages of inflation, moreover, it was not the sale of the currency (the so-called export of capital) which was of any significance in depressing its value but the fact that sellers were intensely eager and sales extremely hard to make. In the first place they were prohibited by the German government but, more important perhaps, the lists of gullible foreign buyers had by this time been fairly well exhausted. There were few individuals ready to buy, with stable-value currencies, a monetary unit which was rushing to its doom. Clearly it was the attitude of the buyers and sellers of marks toward the wares of which they were making disposal and acquisition, and not the sales themselves, which was the fundamental influence in driving the value of the mark downward and, per contra, in raising to the sky the mark value of foreign exchange.
• 149From the beginning of 1923, at latest, practically the sole sources of foreign exchange were the proceeds of German commodity exports or of such property as foreigners bought in Germany. Exchange dealings involving the mark must have been confined largely to the Germans themselves since foreign sellers of goods to Germany were invoicing in stable currencies, German sellers were in large measure also following this practice, there was no foreign investment demand for marks, and the supply of marks purchased by foreigners in previous years, and subject to sale, cut no appreciable figure at the value to which the mark had then fallen. Practically the sole market for marks thus lay with German exporters who had acquired foreign exchange and were ready to part with it at a price which would enable them to employ immediately, and at a profit, the mark proceeds of the sale of their exchange. The transaction thus resolved itself into a close calculation of the relative advantages of holding foreign exchange or of selling it against marks and buying goods at home. There was thus no tendency for exchange rates to rise far in advance of prices, and internal prices at this time did, in fact, advance even more rapidly than foreign exchange. (See infra, Chart VI.) There is thus no reason to believe that the panic flight from the mark expressed itself primarily in the exchange markets. On the contrary the evidence runs in the opposite direction. The final cataclysm can therefore not be attributed to speculation on the exchange markets even when that term is extended to include German buying of foreign currencies as a safeguard against ruin and with the intention of holding the purchased moneys indefinitely. Purchases of foreign exchange were only one, and it would seem not the dominating, aspect of a general repudiation of the mark. The exchange market was closed to legal speculation and, even if exchange bootlegging had been successfully prevented, it is unlikely that the rates would have deviated very widely from those actually established. Arbitrage as between foreign exchange and commodities would have kept exchange rates in approximately the same relation to domestic prices as did in fact take place. Domestic prices were affected as directly as exchange rates by the flight from the mark and exchange speculation was no more active than speculation in commodities.
• 150Whenever gold payments are suspended the gold value of a currency may depreciate gravely as a result of the operations of commercial banks even if such banks have no note issuing powers. The range of depreciation is ordinarily widened if the government is forced to resort to short-term borrowing but, if its obligations ultimately find their way into the investment portfolios of the public, the road to recovery is still open. State borrowing may indeed be carried on in excess of the absorptive capacity of the public, and without irreparable damage, provided the banking organization takes up an adequate volume of the government’s floating obligations. Up to this point inflation can be confined to an expansion of bank credit on a relatively constant monetary base. Though such credit may be stretched far, the more or less stable proportion of money to credit instruments which is required by established business habits keeps credit expansion within at least measurable bounds. This is especially true where, as in Germany, the commercial banks are dependent for cash reserves on the note issues of the central institution. But, when a government can no longer in any manner place its securities, and is forced to cover deficits by persistent direct issues of notes, the constant growth in the monetary base greases the ways for the launching of unlimited currency depreciation. The post-war inflationary experience of Great Britain, where the original value of the monetary unit was eventually restored, may be taken as partially representative of the first type of inflation, that of France, where a large floating debt was a constant menace until the reforms of 1926 resulted in the stabilization of the currency unit at about 1/5 of its original value, as typical of the second, while Germany is the arch-exemplar of the third.
• 151Whenever gold payments are suspended the gold value of a currency may depreciate gravely as a result of the operations of commercial banks even if such banks have no note issuing powers. The range of depreciation is ordinarily widened if the government is forced to resort to short-term borrowing but, if its obligations ultimately find their way into the investment portfolios of the public, the road to recovery is still open. State borrowing may indeed be carried on in excess of the absorptive capacity of the public, and without irreparable damage, provided the banking organization takes up an adequate volume of the government’s floating obligations. Up to this point inflation can be confined to an expansion of bank credit on a relatively constant monetary base. Though such credit may be stretched far, the more or less stable proportion of money to credit instruments which is required by established business habits keeps credit expansion within at least measurable bounds. This is especially true where, as in Germany, the commercial banks are dependent for cash reserves on the note issues of the central institution. But, when a government can no longer in any manner place its securities, and is forced to cover deficits by persistent direct issues of notes, the constant growth in the monetary base greases the ways for the launching of unlimited currency depreciation. The post-war inflationary experience of Great Britain, where the original value of the monetary unit was eventually restored, may be taken as partially representative of the first type of inflation, that of France, where a large floating debt was a constant menace until the reforms of 1926 resulted in the stabilization of the currency unit at about 1/5 of its original value, as typical of the second, while Germany is the arch-exemplar of the third.
• 152To the extent that the Reichsbank could dispose of Treasury bills to the commercial banks or to the general public it could withdraw its own issues from circulation and to the extent that the Treasury could sell its bills directly to the same buyers no new issues of paper money were involved. If the Reichsbank had ever been able to effect a permanent reduction in its holdings of Treasury bills, or even to prevent their increase, the progress of inflation could have been stayed. But it will be remembered that, from the Armistice to the end of the period of inflation, the end-of-the-month figures of outstanding discounted Treasury bills show an absolutely uninterrupted increase although the holdings of such bills by the Reichsbank were, on several occasions, temporarily lowered. These reductions correspond roughly with improvements in the exchange value of the mark, though the cause and effect relationship is not indisputable. Whatever the causal sequence may have been, the correlation is significant of what might have been accomplished if the reduction in Reichsbank holdings could have been made other than ephemeral. But of this the persistent growth in the total of Treasury discounts did not permit. Statistics on the amount of Treasury bills held by the Reichsbank, the proportion which the latter bore to the total Treasury bills discounted, and the ratio of Reichsbank note issues to its holdings of these bills are given in Table VI.
• 153But Reichsbank note issues were not dependent on Treasury borrowing only. In pre-war days the non-cash cover of Reichsbank notes had consisted of commercial bills. Against the discount of such bills the bulk of the pre-war circulation had been issued. The provision permitting commercial bills as cover was retained in the war- and postwar period and the output of notes was thus conditioned by private as well as by government borrowing. The percentage of Reichsbank note issues to the total of discounted Treasury bills in the portfolio of the bank was therefore frequently above 100% though the ratio was reduced by the share of both private and government discounts which were left on deposit in the central institution rather than taken in the form of notes. Reference to Table VI will show that the volume of note issues began to exceed the Reichsbank holdings of Treasury bills at the beginning of 1920. The use of commercial bills had almost entirely ceased during the war and was not widely resumed till the middle of 1922 so that, to that time, the cover for Reichsbank notes, other than that provided by Treasury bills, was either coin, bullion, Reichskassenscheine or Darlehnskassenscheine. None of the latter types of cover were of great quantitative significance in comparison with the Treasury bill. Inflation, till mid-1922, was therefore dominated by Treasury deficits.
• 154The shrinkage of all types of bank deposits and the resulting scarcity of credit, which grew marked as inflation advanced, impelled the Reichsbank, in the summer of 1922, to urge the readoption of the commercial bill as a credit instrument. A low discount rate was applied and, under the existing condition of continuous currency depreciation, the rediscounting of commercial bills became an obvious recourse for the private banks. The Reichsbank’s portfolio of commercial bills consequently grew rapidly in spite of a gradual diminution in the bank’s enthusiasm in the matter and of subsequent large but always inadequate increases in the rate. The figures for discounted commercial bills, for total discounted bills (commercial plus Treasury), and for note issues are given in Table VII.
• 155The excess of the total of bills discounted over the issue of notes is presumably due either to private holding of Treasury bills or to deposit credits (in lieu of notes) with the Reichsbank.
• 156REICHSBANK DISCOUNT OF COMMERCIAL BILLS, TOTAL BILLS DISCOUNTED, AND NOTE ISSUES; 1922 AND 1923{Billions of Marks)
• 157From a negligible amount in June 1922 the Reichsbank discount of commercial bills thus rose to one-third of its total discounts in April 1923, that is, the commercial bills amounted to one-half as much as the Treasury bills. From then on a relative decline in the volume of commercial bills discounted set in and this tendency continued till just prior to the currency reform in November. After November 15 there was no further discounting of Treasury bills, the former government discounts were taken up, and commercial bills occupied the whole stage. Though discounts for the Treasury continued to be preeminent up to the end of inflation the credits put at the disposal of the commercial banks thus played a rôle of considerable importance. The ratio of Reichsbank discount of commercial bills to total note issues is given in Table VIII. Though, even in 1923, the ratio did not rise much above the status in 1914 it must be remembered that in the pre-war period the Reichsbank did comparatively little discounting for the government. The fillip given to inflation by the premium put on private borrowing from the Reichsbank cannot therefore be denied. In this connection the relation between prices and exchange rates is worthy of notice. Up to 1923 domestic prices had risen much less than foreign exchange rates but in that year they no longer lagged behind. The conclusion is possibly warranted that the volume of notes issued as a result of Treasury operations only, huge as it was, had been short of the amount necessary to sustain the domestic price level on a basis of equality with the depreciation in the exchange value of the currency, but that, when Reichsbank credit was made easy to private banks and commercial borrowers, the total volume of means of payment was extended to any degree requisite to keep pace with the plunging value of the currency on the exchange markets.
• 158From a negligible amount in June 1922 the Reichsbank discount of commercial bills thus rose to one-third of its total discounts in April 1923, that is, the commercial bills amounted to one-half as much as the Treasury bills. From then on a relative decline in the volume of commercial bills discounted set in and this tendency continued till just prior to the currency reform in November. After November 15 there was no further discounting of Treasury bills, the former government discounts were taken up, and commercial bills occupied the whole stage. Though discounts for the Treasury continued to be preeminent up to the end of inflation the credits put at the disposal of the commercial banks thus played a rôle of considerable importance. The ratio of Reichsbank discount of commercial bills to total note issues is given in Table VIII. Though, even in 1923, the ratio did not rise much above the status in 1914 it must be remembered that in the pre-war period the Reichsbank did comparatively little discounting for the government. The fillip given to inflation by the premium put on private borrowing from the Reichsbank cannot therefore be denied. In this connection the relation between prices and exchange rates is worthy of notice. Up to 1923 domestic prices had risen much less than foreign exchange rates but in that year they no longer lagged behind. The conclusion is possibly warranted that the volume of notes issued as a result of Treasury operations only, huge as it was, had been short of the amount necessary to sustain the domestic price level on a basis of equality with the depreciation in the exchange value of the currency, but that, when Reichsbank credit was made easy to private banks and commercial borrowers, the total volume of means of payment was extended to any degree requisite to keep pace with the plunging value of the currency on the exchange markets.
• 159
• 160From a negligible amount in June 1922 the Reichsbank discount of commercial bills thus rose to one-third of its total discounts in April 1923, that is, the commercial bills amounted to one-half as much as the Treasury bills. From then on a relative decline in the volume of commercial bills discounted set in and this tendency continued till just prior to the currency reform in November. After November 15 there was no further discounting of Treasury bills, the former government discounts were taken up, and commercial bills occupied the whole stage. Though discounts for the Treasury continued to be preeminent up to the end of inflation the credits put at the disposal of the commercial banks thus played a rôle of considerable importance. The ratio of Reichsbank discount of commercial bills to total note issues is given in Table VIII. Though, even in 1923, the ratio did not rise much above the status in 1914 it must be remembered that in the pre-war period the Reichsbank did comparatively little discounting for the government. The fillip given to inflation by the premium put on private borrowing from the Reichsbank cannot therefore be denied. In this connection the relation between prices and exchange rates is worthy of notice. Up to 1923 domestic prices had risen much less than foreign exchange rates but in that year they no longer lagged behind. The conclusion is possibly warranted that the volume of notes issued as a result of Treasury operations only, huge as it was, had been short of the amount necessary to sustain the domestic price level on a basis of equality with the depreciation in the exchange value of the currency, but that, when Reichsbank credit was made easy to private banks and commercial borrowers, the total volume of means of payment was extended to any degree requisite to keep pace with the plunging value of the currency on the exchange markets.
• 161The intensity of the stimulus toward borrowing from the Reichsbank may be gauged from a comparison of the sluggish rise in the discount rate at the central bank with the ever-accelerated pace of currency depreciation. From the early days of the war till the end of June 1922 the Reichsbank rate remained unchanged at 5%; it was raised to 6% in July, to 7% in August, 8% in September and 10% in November 1922, to 12% in January 1923, 18% in April, 30% in August and 90% in September. But these increases were as nothing when measured alongside the progressive lightening in the burden of a loan during the time for which it ran. Though, after September 1923, a bank or private individual had to pay at the rate of 900% per annum for a loan from the Reichsbank, this was no deterrent to borrowing. It would have been profitable to pay a so-called interest, in reality an insurance, charge, of thousands or even millions of per cents per annum, since the money in which the loan would be repaid was depreciating at a speed which would have left even rates like these far in the rear. With a 900% interest rate in September 1923 the Reichsbank was practically giving money away and the same is true of the lower rates in the preceding months when the course of depreciation was not quite so headlong. The policy of the Reichsbank authorities in encouraging the discount of commercial bills that they might thus mitigate the scarcity of credit was but further evidence of the Alice-in-Wonderland determination of the directors of that institution to run ever faster in order to keep up with themselves. The scarcity of credit was due solely to currency depreciation and the cure prescribed was to increase the volume of means of payment ! The Reichsbank could not refuse to discount Treasury bills but the policy on commercial bills was a gratuitous mortification of an already fatal wound.
• 162Aside from accepting the opportunity to secure central bank credit which was thus thrust upon them, and of somewhat extending their own operations on the basis of this credit, the commercial banks played a subordinate part in the whole inflation process. Deposits in the commercial banks grew, of course, as paper money streamed forth from the Reichsbank, and the credits granted corresponded measurably with the upward surge of prices. But the commercial banks had no note issuing powers and their own contribution to inflation was therefore necessarily confined to an expansion of loans the proceeds of which were left on deposit. No figures are available which make it possible to separate with any precision commercial deposits resulting from loans from those actually brought in by customers. Table IX, however, shows total bank deposits in comparison with total money in circulation and the ratio between them. Except in 1922, when rediscounting of commercial bills at the Reichsbank was being encouraged, the ratio, during inflation, was lower than in the pre-war period. The figure at the end of 1923 is affected by the fact that the currency reform had just then been gotten under way. Time deposits which had wellnigh vanished under the spell of depreciation were not yet being restored and the banks were extremely cautious about extensions of commercial credit. The ratio of deposits had been further reduced by the incredibly rapid issue of bank notes in the last days of the old mark. The 1924 figure is given to show the gradual return to “normal” stable-standard conditions.
• 163
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• 169So far as total deposits go it would seem that operations of commercial banks had no inflationary effect except in 1922 and 1923 (up to the reform) and then only at the instigation of the Reichsbank. This assertion is based on the facts that up to 1922 total deposits, as compared with 1913, had declined in importance relative to note issues and that the increase in the ratio in 1922, and till November 1923, was presumably due to the Reichsbank’s encouragement of the rediscount of commercial bills. The index of deposits relative to total money in circulation, when expressed as a percentage of the 1913 ratio, was, for the end of the years 1920, 1921, 1922, 1923, respectively 65%, 80%, 108%, 41%. But a sizable part of the total deposits were time deposits which tended to disappear as the risk of depreciation grew. If therefore, instead of total deposits, demand deposits of the type designated “Kreditoren,” the deposits most affected by loans, are solely considered, a better picture of the action of the commercial banks in extending or reducing the scope of inflation will be obtained. Taking as a base the 1913 ratio of “Kreditoren” deposits to total money in circulation, the percentage figures for later years were as follows : 1920, 148%; 1921, 164%; 1922, 341%; 1923, 276%. It would appear, therefore, that the commercial banks extended loans throughout the period of post-war inflation considerably in excess of a proportionate relationship with the increase in the monetary base and that the relative decline in total deposits was due to the shrinkage in the value, or the withdrawal from the banks, of time moneys at interest or to the general reluctance actually to depont cash even if subject to demand draft. The increase in deposits issuing from loans was especially marked in 1922 and till stabilization in 1923, owing to the fact that rediscounting of commercial bills at the Reichsbank gave the private banks an enlarged base for extensions of credit. This increase was enough to carry upward the ratio figure for total commercial deposits. The growth in commercial bank loans took place in spite of the fact that the Reichsbank’s rediscount of commercial bills was by no means confined to banks but was also done for approved business concerns and for individuals and at a rate far below what the commercial banks were charging. The explanation lies in the fact that only a certain group of business interests enjoyed the Reichsbank’s favor and others were forced to go to the private banks. Nevertheless the commercial bills held by the Reichsbank at the end of 1922 formed nearly half of all the commercial bills in circulation in Germany at that date. In view of the fact that the central banking institution was supposed to accept only bills of the first quality it may perhaps be assumed that the remaining moiety was ineligible.
• 170So far as total deposits go it would seem that operations of commercial banks had no inflationary effect except in 1922 and 1923 (up to the reform) and then only at the instigation of the Reichsbank. This assertion is based on the facts that up to 1922 total deposits, as compared with 1913, had declined in importance relative to note issues and that the increase in the ratio in 1922, and till November 1923, was presumably due to the Reichsbank’s encouragement of the rediscount of commercial bills. The index of deposits relative to total money in circulation, when expressed as a percentage of the 1913 ratio, was, for the end of the years 1920, 1921, 1922, 1923, respectively 65%, 80%, 108%, 41%. But a sizable part of the total deposits were time deposits which tended to disappear as the risk of depreciation grew. If therefore, instead of total deposits, demand deposits of the type designated “Kreditoren,” the deposits most affected by loans, are solely considered, a better picture of the action of the commercial banks in extending or reducing the scope of inflation will be obtained. Taking as a base the 1913 ratio of “Kreditoren” deposits to total money in circulation, the percentage figures for later years were as follows : 1920, 148%; 1921, 164%; 1922, 341%; 1923, 276%. It would appear, therefore, that the commercial banks extended loans throughout the period of post-war inflation considerably in excess of a proportionate relationship with the increase in the monetary base and that the relative decline in total deposits was due to the shrinkage in the value, or the withdrawal from the banks, of time moneys at interest or to the general reluctance actually to depont cash even if subject to demand draft. The increase in deposits issuing from loans was especially marked in 1922 and till stabilization in 1923, owing to the fact that rediscounting of commercial bills at the Reichsbank gave the private banks an enlarged base for extensions of credit. This increase was enough to carry upward the ratio figure for total commercial deposits. The growth in commercial bank loans took place in spite of the fact that the Reichsbank’s rediscount of commercial bills was by no means confined to banks but was also done for approved business concerns and for individuals and at a rate far below what the commercial banks were charging. The explanation lies in the fact that only a certain group of business interests enjoyed the Reichsbank’s favor and others were forced to go to the private banks. Nevertheless the commercial bills held by the Reichsbank at the end of 1922 formed nearly half of all the commercial bills in circulation in Germany at that date. In view of the fact that the central banking institution was supposed to accept only bills of the first quality it may perhaps be assumed that the remaining moiety was ineligible.
• 171So far as total deposits go it would seem that operations of commercial banks had no inflationary effect except in 1922 and 1923 (up to the reform) and then only at the instigation of the Reichsbank. This assertion is based on the facts that up to 1922 total deposits, as compared with 1913, had declined in importance relative to note issues and that the increase in the ratio in 1922, and till November 1923, was presumably due to the Reichsbank’s encouragement of the rediscount of commercial bills. The index of deposits relative to total money in circulation, when expressed as a percentage of the 1913 ratio, was, for the end of the years 1920, 1921, 1922, 1923, respectively 65%, 80%, 108%, 41%. But a sizable part of the total deposits were time deposits which tended to disappear as the risk of depreciation grew. If therefore, instead of total deposits, demand deposits of the type designated “Kreditoren,” the deposits most affected by loans, are solely considered, a better picture of the action of the commercial banks in extending or reducing the scope of inflation will be obtained. Taking as a base the 1913 ratio of “Kreditoren” deposits to total money in circulation, the percentage figures for later years were as follows : 1920, 148%; 1921, 164%; 1922, 341%; 1923, 276%. It would appear, therefore, that the commercial banks extended loans throughout the period of post-war inflation considerably in excess of a proportionate relationship with the increase in the monetary base and that the relative decline in total deposits was due to the shrinkage in the value, or the withdrawal from the banks, of time moneys at interest or to the general reluctance actually to depont cash even if subject to demand draft. The increase in deposits issuing from loans was especially marked in 1922 and till stabilization in 1923, owing to the fact that rediscounting of commercial bills at the Reichsbank gave the private banks an enlarged base for extensions of credit. This increase was enough to carry upward the ratio figure for total commercial deposits. The growth in commercial bank loans took place in spite of the fact that the Reichsbank’s rediscount of commercial bills was by no means confined to banks but was also done for approved business concerns and for individuals and at a rate far below what the commercial banks were charging. The explanation lies in the fact that only a certain group of business interests enjoyed the Reichsbank’s favor and others were forced to go to the private banks. Nevertheless the commercial bills held by the Reichsbank at the end of 1922 formed nearly half of all the commercial bills in circulation in Germany at that date. In view of the fact that the central banking institution was supposed to accept only bills of the first quality it may perhaps be assumed that the remaining moiety was ineligible.
• 172Though the increase in the ratio of loan-initiated deposits to total money in circulation cannot be dismissed as a negligible factor in inflation the situation was nevertheless dominated throughout by monetary, as distinct from credit, expansion. At times the swollen volume of note issues pouring into the coffers of business concerns rendered them in part independent of bank credit. This was markedly true in the last war-year when note issues were rising faster than prices. The ratio of “Kreditoren” deposits to total monetary circulation, as compared with the situation in 1913, was, at the end of the years 1914, 1915, 1916, 1917, 1918, respectively 103%, 125%, 109%, 101%, and 83%. But whether or not deposits issuing from loans rose relatively to money in circulation they were basically dependent on the money factor. The commercial banks had not in pre-war days based their lending on anything other than Reichsbank notes and they never altered that practice materially. The course of inflation, so far as the volume of circulating medium may be taken as a criterion thereof, can consequently be traced through note issues about as well as through the total volume of means of payment. Since statistics on the latter are available only at infrequent intervals, note issues alone will be used in the later discussion as representative of the monetary supply.
• 173The notes issued by the Reichsbank were always the principal but not the sole element in the circulation. In the war and early post-war days there were, in addition to coin, Reichsbank notes, and the notes of the four other banks of issue, a considerable volume of Reichskassenscheine (Treasury notes) and Darlehnskassenscheine (Loan Bureau notes). Gold and silver coin was withdrawn by the banks, or otherwise disappeared from circulation, early in the war. The iron, zinc, copper, and aluminum token-coins, issued to take the place of silver in small transactions, vanished during the second half of I922 when they became far more valuable as commodities than as money. A quantity of small emergency paper currency had been put out by various agencies during the war to take the place of coin. In the postwar inflation these issues were greatly extended to meet the recurring need for more currency when prices rose at so rapid a rate that the printing presses were unable to turn out the desired amount of Reichsbank notes of the smaller denominations. In the second half of 1922 these casual issues were withdrawn but they were much more than replaced by emissions under authority of the Minister of Finance who was empowered under stipulated conditions to grant, not only to municipalities but even to private firms, the right to issue notes. At the end of 1922 the total issue of such emergency currency is estimated to have been about 20 billions of marks as compared with the 1280 billions of Reichsbank notes outstanding at that date. During 1923 the output of this sanctioned emergency money increased tremendously and at the end of the year reached a total of about 7½ quintillion marks. In the final weeks of inflation the federal railways also emitted their own emergency currency on such a gigantic scale as to amount, at the end of November 1923, to more than a quarter of the total issue of 400 quintillion marks of Reichsbank notes outstanding at that date. In the chaos then prevailing not only did these huge authorized issues of emergency money take place but “money” was put out, with no authority whatever, by any municipality, or private business undertaking, ready and able to obtain in this way costless purchasing power. How much of such “money” was spewed forth will never be known but for the occupied part of Germany it has been estimated at 180 quintillion marks, or between a third and a half of the maximum figure of the Reichsbank issues. The total volume of mark emergency money of all types in circulation in the whole of Germany at the date of stabilization was thus about three-fourths as large as the issue of Reichsbank notes.
• 174Alongside the various forms of paper mark circulating medium a variety of so-called stable-value currencies had come into use. In April 1923 the government put out an issue of Treasury bills payable in gold, and in August to October a long-term loan in terms of United States currency of the one, two, and five dollar denominations and intended for use as money, was put upon the market. This was followed by an emission of gold Treasury bonds on November 4. The latter was issued to serve as gold backing for emergency stable-value currency put out by local authorities. All of the issues of stable-value currency in the last three months of inflation were intended to bridge the gap until the rentenmark could be introduced. They were much resorted to and, in the final weeks of the old standard, formed an important part of the total circulating medium. They had been preceded by nearly a year by gold and commodity loans raised by municipalities or business concerns whose obligations served some of the functions of money. The Roggenrentenbank, founded in Berlin in 1922, issued bonds payable in rye, and other organizations put out loans calling for repayment in coal, lignite, coke, potash, wood and kilowatt hours. In Hamburg, a gold currency issued by two of the banks of that city, against the deposit of foreign bills of exchange, functioned satisfactorily as money in the autumn of 1923.
• 175To the very end, however, the central government retained the paper mark as the sole paper legal tender. The reasons are understandable enough. Not to have done so would have been a repudiation of the currency on the part of the government itself, would no doubt have accelerated the already dizzy pace of depreciation, and would have left the administration without any assurance whatever of the wherewithal to carry on the business of the state. Whatever the defects of the existing currency the authorities were unwilling to abandon the one horse they surely had while it could still keep them above the flood. Early in 1923, nevertheless, the quoting of prices in foreign currencies or in conventional gold units—a practice which had long been in use in foreign trade—became wellnigh universal in the business world. It proceeded geographically from the borders inward and, by trades, from manufacturing industry to wholesalers, to agriculture, and eventually to retail commerce. After a prolonged struggle wages were put on a similar basis. The mark was thus no longer used as a unit of account even in transactions covering a relatively short period of time and, of all the functions of money, it still fulfilled only that of a medium of exchange. The pace of depreciation eventually became so rapid that even for this purpose it became intolerable. Foreign currencies began to circulate. The intensity of the desire for some form of money which would hold its value may be gauged from the fact that the government securities designed for use as money, to which reference has been made in the preceding pages, rose to a high paper-mark premium over the American dollars they were supposed to repre-sent. The rentenmark was long in gestation and, in the meantime, the supply of fixed-value currency was too limited to afford much relief especially as the hoarding of currency of this type made its rate of turnover very low. Though, at the end of October, the gold value of the total stable currencies which had been issued by governmental authority was almost as great as the gold value of the total Reichsbank note issues (124 and 144 million gold marks respectively) both together were worth less than 5% of the pre-war circulation. It is improbable that the stable-value currencies circulated more rapidly than at the normal pre-war rate while, on the other hand, the paper mark was moving around with astounding celerity. Though practically all prices were by then quoted in gold, or the equivalent, and, expressed in paper, were moving upward in more or less close correspondence with dollar exchange, the bulk of payments was still made with paper marks.
• 176To the very end, however, the central government retained the paper mark as the sole paper legal tender. The reasons are understandable enough. Not to have done so would have been a repudiation of the currency on the part of the government itself, would no doubt have accelerated the already dizzy pace of depreciation, and would have left the administration without any assurance whatever of the wherewithal to carry on the business of the state. Whatever the defects of the existing currency the authorities were unwilling to abandon the one horse they surely had while it could still keep them above the flood. Early in 1923, nevertheless, the quoting of prices in foreign currencies or in conventional gold units—a practice which had long been in use in foreign trade—became wellnigh universal in the business world. It proceeded geographically from the borders inward and, by trades, from manufacturing industry to wholesalers, to agriculture, and eventually to retail commerce. After a prolonged struggle wages were put on a similar basis. The mark was thus no longer used as a unit of account even in transactions covering a relatively short period of time and, of all the functions of money, it still fulfilled only that of a medium of exchange. The pace of depreciation eventually became so rapid that even for this purpose it became intolerable. Foreign currencies began to circulate. The intensity of the desire for some form of money which would hold its value may be gauged from the fact that the government securities designed for use as money, to which reference has been made in the preceding pages, rose to a high paper-mark premium over the American dollars they were supposed to repre-sent. The rentenmark was long in gestation and, in the meantime, the supply of fixed-value currency was too limited to afford much relief especially as the hoarding of currency of this type made its rate of turnover very low. Though, at the end of October, the gold value of the total stable currencies which had been issued by governmental authority was almost as great as the gold value of the total Reichsbank note issues (124 and 144 million gold marks respectively) both together were worth less than 5% of the pre-war circulation. It is improbable that the stable-value currencies circulated more rapidly than at the normal pre-war rate while, on the other hand, the paper mark was moving around with astounding celerity. Though practically all prices were by then quoted in gold, or the equivalent, and, expressed in paper, were moving upward in more or less close correspondence with dollar exchange, the bulk of payments was still made with paper marks.
• 177To the very end, however, the central government retained the paper mark as the sole paper legal tender. The reasons are understandable enough. Not to have done so would have been a repudiation of the currency on the part of the government itself, would no doubt have accelerated the already dizzy pace of depreciation, and would have left the administration without any assurance whatever of the wherewithal to carry on the business of the state. Whatever the defects of the existing currency the authorities were unwilling to abandon the one horse they surely had while it could still keep them above the flood. Early in 1923, nevertheless, the quoting of prices in foreign currencies or in conventional gold units—a practice which had long been in use in foreign trade—became wellnigh universal in the business world. It proceeded geographically from the borders inward and, by trades, from manufacturing industry to wholesalers, to agriculture, and eventually to retail commerce. After a prolonged struggle wages were put on a similar basis. The mark was thus no longer used as a unit of account even in transactions covering a relatively short period of time and, of all the functions of money, it still fulfilled only that of a medium of exchange. The pace of depreciation eventually became so rapid that even for this purpose it became intolerable. Foreign currencies began to circulate. The intensity of the desire for some form of money which would hold its value may be gauged from the fact that the government securities designed for use as money, to which reference has been made in the preceding pages, rose to a high paper-mark premium over the American dollars they were supposed to repre-sent. The rentenmark was long in gestation and, in the meantime, the supply of fixed-value currency was too limited to afford much relief especially as the hoarding of currency of this type made its rate of turnover very low. Though, at the end of October, the gold value of the total stable currencies which had been issued by governmental authority was almost as great as the gold value of the total Reichsbank note issues (124 and 144 million gold marks respectively) both together were worth less than 5% of the pre-war circulation. It is improbable that the stable-value currencies circulated more rapidly than at the normal pre-war rate while, on the other hand, the paper mark was moving around with astounding celerity. Though practically all prices were by then quoted in gold, or the equivalent, and, expressed in paper, were moving upward in more or less close correspondence with dollar exchange, the bulk of payments was still made with paper marks.
• 178To the very end, however, the central government retained the paper mark as the sole paper legal tender. The reasons are understandable enough. Not to have done so would have been a repudiation of the currency on the part of the government itself, would no doubt have accelerated the already dizzy pace of depreciation, and would have left the administration without any assurance whatever of the wherewithal to carry on the business of the state. Whatever the defects of the existing currency the authorities were unwilling to abandon the one horse they surely had while it could still keep them above the flood. Early in 1923, nevertheless, the quoting of prices in foreign currencies or in conventional gold units—a practice which had long been in use in foreign trade—became wellnigh universal in the business world. It proceeded geographically from the borders inward and, by trades, from manufacturing industry to wholesalers, to agriculture, and eventually to retail commerce. After a prolonged struggle wages were put on a similar basis. The mark was thus no longer used as a unit of account even in transactions covering a relatively short period of time and, of all the functions of money, it still fulfilled only that of a medium of exchange. The pace of depreciation eventually became so rapid that even for this purpose it became intolerable. Foreign currencies began to circulate. The intensity of the desire for some form of money which would hold its value may be gauged from the fact that the government securities designed for use as money, to which reference has been made in the preceding pages, rose to a high paper-mark premium over the American dollars they were supposed to repre-sent. The rentenmark was long in gestation and, in the meantime, the supply of fixed-value currency was too limited to afford much relief especially as the hoarding of currency of this type made its rate of turnover very low. Though, at the end of October, the gold value of the total stable currencies which had been issued by governmental authority was almost as great as the gold value of the total Reichsbank note issues (124 and 144 million gold marks respectively) both together were worth less than 5% of the pre-war circulation. It is improbable that the stable-value currencies circulated more rapidly than at the normal pre-war rate while, on the other hand, the paper mark was moving around with astounding celerity. Though practically all prices were by then quoted in gold, or the equivalent, and, expressed in paper, were moving upward in more or less close correspondence with dollar exchange, the bulk of payments was still made with paper marks.
• 179The commercial banks may at times have suffered under inflation but as it progressed they began to exact from borrowers such interest rates as would more than cover the anticipated (though perhaps not the realized) decline in the value of the currency during the period for which the loans were to run. Their liabilities as well as their assets were diminished by currency depreciation and their only real loss occurred when they assumed demand liabilities, immediately called, in exchange for assets which were due only after the expiration of a certain term. When the practice of rediscounting commercial bills at the Reichsbank was renewed, and new loanable funds were thus obtained by the commercial banks, the risk of loss was thrown on the central institution which shed it in turn upon the public. The commercial banks were able to extend their physical assets very considerably in the years of high inflation. In spite of governmental regulations against the acquisition of foreign currencies for investment purposes they also acquired stable-value assets abroad and their prosperity is attested by the mushroom growth, at this time, of small competing institutions. Most of the latter did not long survive the return of stable monetary conditions but this is certainly no evidence that inflation was not a favoring influence. The paper profits realized by the commercial banks, like those of the Reichsbank, were of course highly contractile as the value of the mark marched toward zero, and the real profits or losses of any given institution were dependent upon the ability of its administration to grasp what was happening and to take appropriate action. On the whole, such ability was not conspicuously common, and the banks, as a group, did not emerge from inflation in as good condition as might reasonably have been expected. It has indeed been suggested that the big industrial borrowers virtually stole the banks but, insofar as this occurred, the commercial bank directorates largely recouped their losses at the expense of the Reichsbank while the Reichsbank losses were only scraps of paper. The real transfer of property was from the hands of holders of currency, or of fixed-interest investments, to those of the entrepreneurs.
• 180The commercial banks may at times have suffered under inflation but as it progressed they began to exact from borrowers such interest rates as would more than cover the anticipated (though perhaps not the realized) decline in the value of the currency during the period for which the loans were to run. Their liabilities as well as their assets were diminished by currency depreciation and their only real loss occurred when they assumed demand liabilities, immediately called, in exchange for assets which were due only after the expiration of a certain term. When the practice of rediscounting commercial bills at the Reichsbank was renewed, and new loanable funds were thus obtained by the commercial banks, the risk of loss was thrown on the central institution which shed it in turn upon the public. The commercial banks were able to extend their physical assets very considerably in the years of high inflation. In spite of governmental regulations against the acquisition of foreign currencies for investment purposes they also acquired stable-value assets abroad and their prosperity is attested by the mushroom growth, at this time, of small competing institutions. Most of the latter did not long survive the return of stable monetary conditions but this is certainly no evidence that inflation was not a favoring influence. The paper profits realized by the commercial banks, like those of the Reichsbank, were of course highly contractile as the value of the mark marched toward zero, and the real profits or losses of any given institution were dependent upon the ability of its administration to grasp what was happening and to take appropriate action. On the whole, such ability was not conspicuously common, and the banks, as a group, did not emerge from inflation in as good condition as might reasonably have been expected. It has indeed been suggested that the big industrial borrowers virtually stole the banks but, insofar as this occurred, the commercial bank directorates largely recouped their losses at the expense of the Reichsbank while the Reichsbank losses were only scraps of paper. The real transfer of property was from the hands of holders of currency, or of fixed-interest investments, to those of the entrepreneurs.
• 181The economic life of the district was stricken as by paresis and the idle German workers became a charge on the central government. Though this, in itself, would have been an insupportable burden, the Cuno government, through the Reichsbank, put huge credits at the disposal of the Ruhr industrialists. The occupying Powers obtained little or nothing on reparations but Germany was brought to the brink of destruction. It is impossible to censure the German decision to resist the invasion to the limit but the abandon with which mark credits and Reichsbank notes were flung about was nothing short of financial insanity.
• 182In the closing phase of inflation there was little external pressure on exchange rates since all cash reparations were suspended. The exigencies of government finance within the country were then of almost exclusive import. Whether, in a consideration of the causes operating throughout the course of inflation, major stress is, as in this last phase, to be laid upon revenues inadequate for obligations volitionally assumed, or upon inescapable demands imposed from without, is a thorny question. The foregoing discussion attempts to show that certain alleged causes of depreciation such as speculation, or the losses of territory, population, and resources under the Treaty of Versailles, had almost no real influence, and that but a very slight measure of responsibility can be laid at the door of the private banking organization. The crux of the matter was the state of the public finances. The sequel will indicate that, up to 1923, exchange rate movements tended to dominate the status of the fise. Since exchange rate movements were chiefly conditioned by obligations imposed from without, the principal immediate causes of the collapse of the German currency are to be traced to the action of the Entente Allies rather than to that of Germany herself. These immediate causes were, however, not necessarily definitive. Depreciation, as measured by internal prices rather than exchange rates, is ultimately dependent solely on note issues. The decision as to whether notes should be issued lay with the German administrations. The hard fact of external pressure was, in itself, enough to ruin the exchange value of the currency, though a more than Spartan tax policy might perhaps have preserved its internal value. The several administrations, however, though at times resolute, were fundamentally weak, and the interests on whom taxation must fall if it was to be productive were powerful enough to delay, or defeat, the passage of legislation. The slightest delay was fatal. In large measure inflation was carried forward by its own momentum and it seems probable that, even without the reckless financial policy pursued in 1923, the final result would have been changed but little. Complete collapse might have been delayed but it lay in the stars. Nothing could have stopped inflation but the coincident retraction of strong external pressure and the stiffening of internal resistance. For this, nothing but the collapse, itself, sufficed.
• 183In the closing phase of inflation there was little external pressure on exchange rates since all cash reparations were suspended. The exigencies of government finance within the country were then of almost exclusive import. Whether, in a consideration of the causes operating throughout the course of inflation, major stress is, as in this last phase, to be laid upon revenues inadequate for obligations volitionally assumed, or upon inescapable demands imposed from without, is a thorny question. The foregoing discussion attempts to show that certain alleged causes of depreciation such as speculation, or the losses of territory, population, and resources under the Treaty of Versailles, had almost no real influence, and that but a very slight measure of responsibility can be laid at the door of the private banking organization. The crux of the matter was the state of the public finances. The sequel will indicate that, up to 1923, exchange rate movements tended to dominate the status of the fise. Since exchange rate movements were chiefly conditioned by obligations imposed from without, the principal immediate causes of the collapse of the German currency are to be traced to the action of the Entente Allies rather than to that of Germany herself. These immediate causes were, however, not necessarily definitive. Depreciation, as measured by internal prices rather than exchange rates, is ultimately dependent solely on note issues. The decision as to whether notes should be issued lay with the German administrations. The hard fact of external pressure was, in itself, enough to ruin the exchange value of the currency, though a more than Spartan tax policy might perhaps have preserved its internal value. The several administrations, however, though at times resolute, were fundamentally weak, and the interests on whom taxation must fall if it was to be productive were powerful enough to delay, or defeat, the passage of legislation. The slightest delay was fatal. In large measure inflation was carried forward by its own momentum and it seems probable that, even without the reckless financial policy pursued in 1923, the final result would have been changed but little. Complete collapse might have been delayed but it lay in the stars. Nothing could have stopped inflation but the coincident retraction of strong external pressure and the stiffening of internal resistance. For this, nothing but the collapse, itself, sufficed.
• 184In the closing phase of inflation there was little external pressure on exchange rates since all cash reparations were suspended. The exigencies of government finance within the country were then of almost exclusive import. Whether, in a consideration of the causes operating throughout the course of inflation, major stress is, as in this last phase, to be laid upon revenues inadequate for obligations volitionally assumed, or upon inescapable demands imposed from without, is a thorny question. The foregoing discussion attempts to show that certain alleged causes of depreciation such as speculation, or the losses of territory, population, and resources under the Treaty of Versailles, had almost no real influence, and that but a very slight measure of responsibility can be laid at the door of the private banking organization. The crux of the matter was the state of the public finances. The sequel will indicate that, up to 1923, exchange rate movements tended to dominate the status of the fise. Since exchange rate movements were chiefly conditioned by obligations imposed from without, the principal immediate causes of the collapse of the German currency are to be traced to the action of the Entente Allies rather than to that of Germany herself. These immediate causes were, however, not necessarily definitive. Depreciation, as measured by internal prices rather than exchange rates, is ultimately dependent solely on note issues. The decision as to whether notes should be issued lay with the German administrations. The hard fact of external pressure was, in itself, enough to ruin the exchange value of the currency, though a more than Spartan tax policy might perhaps have preserved its internal value. The several administrations, however, though at times resolute, were fundamentally weak, and the interests on whom taxation must fall if it was to be productive were powerful enough to delay, or defeat, the passage of legislation. The slightest delay was fatal. In large measure inflation was carried forward by its own momentum and it seems probable that, even without the reckless financial policy pursued in 1923, the final result would have been changed but little. Complete collapse might have been delayed but it lay in the stars. Nothing could have stopped inflation but the coincident retraction of strong external pressure and the stiffening of internal resistance. For this, nothing but the collapse, itself, sufficed.