Exchange, Prices, and Production in Hyper-Inflation

CHAPTER III

BUSINESS REGULATION UNDER INFLATION

§ INTRODUCTORY

THE stresses developed under inflation evoked a series of governmental measures, and a private code of business practice, markedly different from that prevailing under stable monetary conditions. The present chapter will briefly describe such measures and practice.

I. GOVERNMENTAL REGULATION OF BUSINESS

Like many another government the German administrations while pumping money into circulation with one hand kept attempting to curb the inevitable effects with the other. The efforts to combat the manifestations of inflation took the following forms :

(1) Regulation of internal prices

(2) Regulation of foreign trade

(3) Regulation of dealings in foreign exchange

(4) Regulation of foreign exchange by direct action.

1. Regulation of Prices

The course of internal prices will be treated in detail in ensuing chapters and it will be sufficient here to say that the pressure on the government to take steps toward mitigating hardships induced legislation designed to keep down the cost of foodstuffs, of certain other commodities, and of housing. The methods adopted were similar to those employed in many other countries in the war and post-war years. Some of the measures employed in Germany in the inflation period were simply a continuation or resurrection of the war-time price-control. In the case of foodstuffs the supplies were rationed, part of the cost of certain staples was borne by the government, and farmers were required to deliver a quota of their harvests at arbitrarily established prices. Commodity price control applied however to relatively few articles, was not continuous, and, when it was operative, had the effect of setting up price differentials in the same article rather than of exerting any general influence.1 With house rents, on the other hand, legislation was extremely important. Tenants were protected from eviction so long as they paid rentals officially determined on the basis of prewar charges. The amount collectible was occasionally raised as inflation proceeded but the increases always lagged far behind the existing depreciation of the currency and were quickly rendered nugatory by the further loss of value of the monetary unit. At all times after 1920 rentals were more or less nominal, and, in the period of hyper-inflation,2 housing was obtained practically free of charge. Except for a possible reversion when financial order should be restored the property of the landlords was to all intents and purposes confiscated.3 The regulation of rentals had wide repercussions. It reduced the cost of living and diminished the pressure for wage advances to compensate for the rise in commodity prices.4 It was thus a factor in keeping those prices below what they would otherwise have been5 and in widening the differential between the domestic price structure and that of the outside world. Domestic prices, converted at current rates of exchange, were always low relative to those in countries with stable currencies.

Other causes, primarily connected with the foreign exchange markets, were, however, somewhat more influential in establishing the spread between external and internal prices and in leading, as a consequence, to the regulation of foreign trade.

2. Regulation of Foreign Trade6

§ WAR-TIME CONTROL

Control of exports and imports had been established during the war, first, to ensure to Germany a full supply of domestically-produced essentials of war and to prevent their egress into enemy hands and, second, to limit the domestic consumption of non-essential imports so that the import of war-materials might be more easily financed. When mark exchange began to waver in 1917 attention was directed mainly toward the preservation of the exchange value of the German currency and the control was enlarged and intensified. The administration of foreign trade control was at first in the hands of the Ministry of the Interior but, in 1916, a Federal Commissar for Export and Import Permits was appointed. He was assisted by an advisory council of representatives from the German Trade Council, the German Board of Agriculture, the War Committee of German Industry, and from all of the government ministries which were, or might be, interested. The Commissar, however, had a rather free hand during the war when the issues involved were simple and subject to little dispute.

§ AIMS OF POST-WAR CONTROL

In 1919, control other than by normal trade regulations was abandoned, partly as a reaction against the rigors of war and partly because the enemy occupation of the Rhineland made it impossible to enforce the measures which had hitherto obtained. Goods streamed in through the “Hole in the West” opened up by the Allied occupation and the feeling grew strong that the rapid decline in mark exchange which took place at that time was to be solely attributed to this cause.7 On the other hand, the fall in mark exchange, both absolutely and in relation to internal prices, led to a draining of Germany of all exportable goods and to marked scarcity of essential domestic products in the home markets. At the end of 1919 limited control measures were therefore again adopted and early in 1920 the Germans were able to obtain the cooperation of the authorities in the occupied districts in the reestablishment of an effective customs frontier.

The objects of foreign trade control in the post-war period were of course other than those principally aimed at during the war. The protection of mark exchange, and of the German economy in general, against such consequences of exchange vagaries as could not otherwise be prevented was the dominant purpose. Import was much less thoroughly regimented than export though licenses were required, and quotas established, for all imports other than textile raw materials and certain foodstuffs. Luxury imports were strictly limited.

In the control of exports the following complex ends were sought:

(i) Assurance for the home population of a sufficient supply of necessaries. Foodstuff exports were unconditionally prohibited, a certain latitude was given in the case of raw materials, while manufactured goods were, in the main, freely exportable.

(ii) Assurance of reasonable prices. Since domestic prices consistently lagged far behind the upward surge of exchange rates there was a constant tendency for such German exporters as were basing their quotations on domestic market conditions to sell their goods at extremely low prices when measured in stable-value currencies. The foreign exchange proceeds of exports tended therefore to provide for but a very limited volume of imports. The terms of international trade thus moved strongly against the Germans. In order to prevent a “selling-out” of the country at bargain-counter rates exporters were forbidden to dispose of their goods below certain minimum prices officially established for every transaction. This procedure was initiated not only to prevent exploitation of the German economy but to forestall the adoption of anti-dumping duties by foreign countries whose manufacturers were setting up a violent protest against the admission of German goods at prices with which they could not hope to compete. In addition to the system of minimum prices the necessity of invoicing in foreign exchange was urgently presented to exporters.

(iii) Assurance that the foreign exchange proceeds would be brought back to Germany. In order to avoid the loss of purchasing power which was involved in holding mark balances there was a strong disposition on the part of exporters to leave abroad the foreign exchange proceeds of their exports rather than convert them into marks. The supplies of foreign exchange requisite for imports and reparations were thus not forthcoming and, to combat this situation, the permit to export was made conditional on the delivery to the authorities of a smaller or larger share of the foreign exchange proceeds according as the raw materials required for the manufacture of the commodity in question were or were not of foreign origin.

(iv) The participation of the Reich in the gains on export trade. Since the minimum prices on goods sold abroad were ordinarily much above those currently prevailing in the domestic markets exporters were in a highly advantageous position as compared with producers of goods for home consumption. There was no reason for permitting the price differential officially established to accrue to one favored class. Duties were therefore imposed on exports. The rates actually levied, averaging about 3% of the price, were much too low to bring about equality in the position of exporters and other producers but, in the later days of inflation, they provided about one-sixth of all the tax revenues of the Reich. This sizable proportion was due rather to the decline in other revenues than to the absolute importance of the tax on exports.

§ ADMINISTRATIVE MACHINERY AND PROCEDURE

While the desirability, and even necessity, of a renewal of strict control of foreign trade was generally recognized in 1920, industry was then in no mood to accept the yoke which had been imposed during the war. Rehabilitation of the whole economic life of the country had at first been attempted by organized industry along consciously planned, rather than laissez-faire, lines (Planwirtschaft), and foreign trade control was part of this program. When this effort broke down the business leaders were unwilling to surrender to the government the independence just retrieved from the restraints of the war and would support measures designed to regiment foreign trade only on condition that the regulations should be imposed by their own organizations. To establish quotas of export and import, to determine the right to such quotas, to fix “reasonable” prices, and to levy varying rates of duty was a task of such magnitude as, in any case, to require the cooperation of all the interests affected. In 1922 the daily dispatch of goods amounted to more than 70,000 individual consignments, each requiring separate attention from the foreign trade control organization. To ensure expert judgment, especially in the matter of price revision on so large and varied a volume of transactions, resort was perhaps necessarily had to the trade associations and, in an effort to prevent arbitrary decisions, the system of Boards of Foreign Trade Control (Aussenhandelsstellen) was set up.

Procedure was as follows : The basic policy was decided by the Federal administration and permits were issued through the Federal Commissar for Import and Export Permits (Reichskommissar für Ein-und Ausfuhrbewilligungen). This officer was assisted by 150 immediate subordinates (Reichsbevollmächtigte) each of whom had a separate branch of industry under his jurisdiction and consulted with an advisory council of representatives of the manufacturers, dealers, workers, and consumers of the commodities with which he was concerned. On this basis seventy Boards of Foreign Trade Control were gradually built up, many with numerous subsidiaries, in all, 170 different boards with 4000 to 5000 persons engaged. Each of these boards pursued a separate and arbitrary policy. The minimum prices set on exports were supposed to be established on the basis of quotations in world markets but the practical policy seems to have been to fix low supplements to the domestic price in cases where the producing industry was depressed and high supplements where business was active. The whole organization was most un-wieldy; there was no real coordination and no fixed rules of procedure. Special price examination offices (Preisprüfungstellen) did not greatly improve the situation. The real power lay in the hands of the subordinates of the Commissar, the Reichsbevollmächtigten, who distributed the assigned quotas, determined prices, and were charged with the duty of securing the designated share of the foreign exchange proceeds of exports.

These Boards of Foreign Trade Control exerted a powerful but indeterminate influence on external trade. Records, if ever compiled in any comprehensive way, have disappeared, and whether the activities of the boards were beneficial, on the whole, or vicious, is a much disputed question to which no certain answer can be given.8 The matter will receive further attention in Chapter VIII.

3. Regulation of Dealings in Foreign Exchange9

Regulation of dealings in foreign exchange was undertaken in a long series of legislative and administrative decrees which imposed restrictions on the purchase of foreign money, prohibited the sale abroad of German currency,10 or the purchase of foreign currency at rates other than those officially fixed in Berlin,11 and required exporters to turn over to the Reichsbank the foreign exchange proceeds of their sales. It was also forbidden to demand payment in foreign currency in any domestic transaction and sellers of goods on the domestic market were laid under obligation to accept German currency.

As early as September 1919 a law designed to prevent the “flight of capital” prescribed that payments to foreign countries should be made only through banks and, in October 1921, legislation was passed giving to the Reichsbank partial control of the proceeds of exports. The principal exchange regulations date, however, from early 1922. In February of that year it was enacted that transactions in foreign exchange must be confined to a limited group of specially authorized banks and then only on notification to the Ministry of Finance. Later in the year the permission of the Ministry was made a prerequisite, but firms which could show a certificate from a Chamber of Commerce that, in the nature of their business, foreign exchange transactions were regularly conducted were exempt from the ordinance. The loophole to evasion thus given rendered the measure of little effect. In May 1923 bank loans on foreign currency were prohibited, and loans on foreign bills were subjected to registration, with the purpose of preventing any holder of foreign exchange from retaining it as an investment or using it as collateral to secure funds for current needs. If this practice were prevented it was thought that private holdings of foreign exchange would be forced on the market. The Reichsbank was given the right to claim foreign currency and precious metals. This legislation was supplemented in September 1923 by a decree appointing a special commissioner with the most absolute powers of requisition of foreign means of payment including securities.12 Previous to this, in June and August 1922, the order that transactions in foreign exchange must be made only at the officially established rates was promulgated and it was also decreed that marks must not be sold directly or indirectly to persons living abroad nor in any way placed at their disposal. The number of dealers who might legally carry on transactions in exchange was progressively reduced throughout the inflation period and control was centered in the Reichsbank. Finally, by ordinances of September 17 and November 2, 1923, a general obligation was imposed on exporters to hand over the foreign exchange proceeds of their sales to the Reichsbank.13

Some of this regulation was perverse and all of it was futile. Bootlegging in exchange was widely prevalent, other evasion of the law was not unduly difficult, and it is questionable whether the interference of the government did not partially induce the evils it was designed to prevent. There is at any rate no evidence that it mitigated them in the slightest degree.

4. Regulation of Exchange by Direct Action

Several direct attempts to influence exchange were made by the Reichsbank on behalf of the government. The first of these was undertaken in the summer of 1922 when, after the chilling report of the Reparations Commission’s Loan Committee and the assassination of Dr. Rathenau, the bottom fell out of the exchange market. The task of supporting exchange was reluctantly assumed by the Reichsbank and only after strong pressure from the government. The Reichsbank president, Havenstein, regarded it as ill advised, the whole matter was handled irresolutely, and the results were negligible.

A spirited intervention, however, was undertaken in the early months of 1923 in support of the policy of passive resistance to Allied coercion. It has already been pointed out that the invasion of the Ruhr was the signal for a renewed and precipitous decline in mark exchange. On the date of entry, January 11, the exchange rate was 10,260 marks to the dollar. On the thirty-first of that month it was 49,000. The German government was convinced that unless the decline in exchange was checked, passive resistance, to which it felt itself driven, was hopeless. For exchange operations which were likely to prove expensive it had no resources of its own but through all the vicissitudes of the time the Reichsbank had managed to hold on to a gold stock of over a billion marks. Except for the episode in 1922 it had consistently refused to risk any considerable portion of this sum in support of mark exchange but it was now prevailed on to make a determined effort in this direction. Had the finances of the government been in order, and had the flood of paper mark issues been able to be checked, the attempt could hardly have failed. On January 31, 1923, the total issue of paper currency (practically all of which was Reichsbank notes) was almost exactly two trillion (2,000,000,000,000) marks. At the exchange rate of that day this sum was worth about 172 million gold marks. The Reichsbank’s gold reserve in its own vaults was 954 million marks, enough to redeem the total paper circulation at the existing exchange rate more than five times over. Given no new issues of paper currency and no reissues of redeemed notes the withdrawal of the paper currency from circulation by purchase with gold could easily have been continued, if necessary, until there was no paper left. Since no cash reparations were then being paid there would have been no unconditionally necessary drain of gold abroad and the chance of exhaustion of a 100% gold currency by ordinary international business transactions is nil. As a matter of fact all similar experience has shown that it would merely have been necessary to establish confidence that the exchange value of the mark would not fall below the current rate. If this had been accomplished it would not only have been possible to keep in circulation the existing volume of paper but the wellnigh inevitable slowing down of the rate of monetary turnover would have required greatly increased issues if an inconveniently rapid rise in the value of the mark was to be obviated.14

The intervention of the Reichsbank did, in fact, not only keep the mark from falling farther at this time but, within a fortnight, had multiplied its exchange value two and a half times. This was done without any net deduction from the bank’s gold reserve since it soon developed that the bank could sell more marks against gold or foreign currencies than it was obliged to buy. Prices steadied with the rise in exchange rates, the real value of tax revenues mounted, and the ratio of tax receipts to total expenditures increased. But with the immense new burdens involved in the policy of passive resistance the improvement was relative only. The absolute magnitude of the deficits continued to expand and the one essential to permanent success, the cessation of further note issues, was lacking. For two months and a half the bank kept up the unequal struggle and maintained stability in the exchange value of the currency but it was impossible to continue indefinite redemption of notes when for every million marks taken out of the circulation by exchange operations hundreds of millions were, at the behest of the government, thrown upon the domestic market.

On the eighteenth of April demands for foreign exchange had to be rationed by the bank and the final collapse of the currency began. In July one more attempt to stem the tide was made. It was, however, but a feeble and futile gesture and was soon abandoned. The successful stabilization and redemption finally effected through the rentenmark—merely a new tenor of paper currency—shows what might have been done with gold. The two situations differed in only one vital respect. When the rentenmark was introduced, an abrupt end was made of the rediscounting of Treasury bills;15 during the earlier attempt at stabilization, on the contrary, rediscounting had proceeded at an ever increasing tempo. By the time the successful effort at the end of 1923 was made the costly pursuit of passive resistance had been given up; provided further depreciation was avoided expenditures were, in consequence, within the range of the yield from taxes; the right hand which offended with constant new emissions of currency had been cut off, and the work of the left was thus not without avail.

II. BUSINESS PRACTICE16

§ FORESTALLING, ENGROSSING, AND REGRATING

Even where not subject to artificial control the response of different groups of prices to the stimulus of inflation was very unequal. In practically all the vicissitudes of prices, moreover, wages were relatively slow to move. The creditor was a fellow sufferer with the worker and this is true of short- as well as of long-term loans since interest rates, even on short loans, were never raised sufficiently to prevent a negative return to the lender. The shifting of income from the wage and lending groups to industrial and trading enterprisers called forth great numbers of middlemen who sought to take advantage of the increase in the spread between the prices received by producers and those paid by the consuming population, a spread which grew larger the longer the goods were kept in circulation.17 Forestalling, engrossing, and regrating, the familiar progeny of declining currencies, became wellnigh universal As the tempo of depreciation increased these traits of traders developed into a positive reluctance to sell. Buyers, on the other hand, were eager to purchase anything at all which would maintain its value. The effect on prices of this reversal of ordinary business psychology may be imagined. The more rapid the rise in prices the greater became the intensity of demand.18 Business boomed, unemployment vanished, sales were all too easy. There was of course an enormous amount of buying which, under other circumstances, would have been quite senseless. People purchased not what they wanted to use but whatever they could get, and the function of prices in directing production into the lines most likely to satisfy consumers was almost completely abrogated. One could produce anything material and be sure of a market. Corporations could not wait to distribute dividends to their stockholders without the latter losing all but a negligible fraction of the company’s earnings. Profits were therefore immediately invested in “improvements” with little regard to the future or even present usefulness of such investments except as they were not so grossly inefficient storers of value as money had become.

§ EFFECT OF INFLATION ON OVERHEAD COSTS

With any temporary halt in the course of depreciation, and still more with a reversal of the movement, the shock to business as it had developed was of course very severe. Not only did the sellers’ immediately change to a buyers’ market, but producing organizations were prone to shut down instantly. Overhead costs, on the books, had become but a negligible fraction of total expenses. In some respects this was a real and in others an illusory gain to the producing concern. The real weight of interest on bonds and similar charges all but vanished19 but, so far as productive physical property was concerned, it was of course poor accounting to continue to regard its worth, as expressed in the old immensely more valuable monetary unit, as comparable with similar nominal values in the highly depreciated unit in which the product was being sold. But, whatever the real situation, the low ratio of overhead costs, as reckoned on the books, greatly diminished the normal hesitation over a shutdown. So long as the march of prices did not show a consistent upward trend industry was therefore subject to a malarial infection with alternate fevers of activity and chills of depression.

§ FORMS OF CAPITAL ACCUMULATION

The loss of substance to which the lender of money was subjected very quickly suppressed the inclination to lend or to save in the monetary form. Except for the ploughing-in of profits by business concerns the accumulation of capital goods practically ceased.20 Before the introduction of stable-value loans denominated in rye, coal, etc., long-term capital was, it is true, acquired partly by the sale of stock but, for the most part, new note issues provided the principal substitute for the former mode of saving. Long-term needs were met either out of profits or by repeated short-term bank borrowing.21 Since the borrowing concern received the notes when first issued it obtained them when their purchasing power was relatively high. A form of involuntary saving was thus imposed upon all existing holders of money whose consuming power was presently diminished by the automatic reduction in the value of money which attended the new issue of notes. This involuntary saving accrued to the borrower free of cost. It became national saving, of course, only when used for investment purposes.

So far as capital was raised by sales of stock it became customary to issue, to German nationals, preference shares with multiple voting powers. This action was one phase of a general attempt to prevent the foreign acquisition of German property (commodities or securities) at the external rather than the internal value of the mark. Securities were selling at levels which were essentially part of the domestic price structure and, though low, were within hailing distance of the prices of domestic commodities. But, with the exchange value of the mark greatly below its domestic purchasing power, they could be bought with foreign exchange at prices which bore almost no relation to their real value measured in terms either of foreign or domestic commodities. There was thus a strong tendency for industry to be gobbled up by foreign investors and for control to pass out of the hands of the Germans. On the whole, however, the shift of ownership was much less than might have been expected.22

§ SHIFTING OF THE INCIDENCE OF INFLATION

The action taken to prevent the loss of control of industry was paralleled by the raising of prices on exports above those prevailing in the domestic market. Not only were prices on exports fixed by official action but the sellers asserted against the buyer, both domestic and foreign, further rights to protect themselves against losses arising from inflation. Instead of delivering at a stated date they reserved the right to deliver when they would, or even not to deliver at all, and this was done despite the terms of existing contracts to the contrary.23 Slidingscales of prices, measured according to a variety of indices, were also adopted, and attempts were made to put the risk of exchange and price fluctuations upon the buyer. This might be accomplished either by quoting in terms of foreign exchange, with payment in marks at the prevailing rate, or by requiring payment in foreign currencies. Prepayment was insisted upon sometimes before work was begun, but, in any case, before delivery. If payment in marks was accepted it became customary to demand the equivalent of the foreign exchange price on the day, or even hour, of the arrival of the remittance. After dealings in foreign exchange had been restricted and the supply rationed, the risk of loss, even after the arrival of the mark payment, was thrust on the buyer. Finally, payment in marks was refused altogether whenever this was permissible under the existing legislation and, in numerous cases, where it was not.

§ WAGE ADJUSTMENTS

A thoroughgoing change in business practice occurred in the adjustment of wages to rising cost of living.24 In the early post-war years the development of a system of regulation of the relations between employer and employed had brought the great majority of workers within the scope of agreements set up by collective bargaining between the organizations of employer and employee. The Minister of Labor might at any time declare such agreements compulsory upon the whole industry to which they applied. The progressive depreciation of the currency required constant revision of the wage clauses of these agreements and led to elaboration of the machinery of adjustment along certain well-defined lines.

The sections of the agreements dealing exclusively with wages were gradually made subject to revision without affecting the operation of other sections and, as time went on, the validity of the wage sections was restricted to shorter and shorter periods, or made conditional on changes in the cost of living, or both. After the middle of 1922, however, wage questions, for the most part, were dealt with quite independently of the general agreement. By the end of 1922 wage conventions were seldom concluded for longer than six weeks25 and by the middle of 1923 for more than a fortnight.

The methods of revision of wage scales show a progressive tendency from a temporizing to a settled policy along two main lines: (a) maintenance of a basic wage supplemented by cost-of-living bonuses, adjusted, according to a variety of forms, to the rising level of prices; (b) complete revision of the wage scale. Owing to wide differences in prices between localities, a tendency which persisted owing to the fact that the effect of competition in ironing out such discrepancies always lagged behind the continuous alteration of monetary conditions, local supplements to general cost-of-living bonuses were of frequent occurrence in those agreements where a basic wage was maintained.

The basic wage plus cost-of-living bonus idea gradually evolved into proposals for a system of sliding wage scales calculated according to one of several available index numbers. But this method was not adopted anywhere without a struggle and, when adopted, it did not function without a great deal of friction. In the first place the choice of the basic wage was the subject of much controversy and, since the base chosen affected all future wages, the controversy was by no means pointless. Further than this many workers were at first reluctant to accept a schedule which changed only with changes in the cost of living since this condemned them, at best, to an unchanging real wage instead of giving them a share in any improvements in productive power which might take place.26 As the tempo of inflation waxed, however, the workers’ hesitation at accepting a sliding scale disappeared. The lag of wages then centered attention on preserving the existing real wage rather than going after advances. Employers, on the other hand, opposed sliding scales not only on the selfish grounds that they reduced their profits and increased their risks27 but also because they tended, so it was said, to accelerate the course of depreciation. The latter possibility also rendered the governmental administrations antagonistic to the sliding-scale idea especially when efforts to stabilize the currency were being at all vigorously pursued. The employers, nevertheless, eventually agreed to pay wages based on dollar exchange rates. This proposal was rejected by the workers’ representatives and a compromise was finally reached in mid-1923 under which basic wages were to be fixed at regular short intervals with due regard not only to the cost of living but to the general economic situation and the prosperity of the particular industry concerned. Within these intervals adjustments were to be made each week according to predetermined cost-of-living indices.

The wild pace of currency depreciation in the latter months of 1923 rendered even as flexible a standard as this far too rigid. It was necessary to adapt wage scales to the period when the wages would be spent rather than to that in which they were received. Enormous differences in wages arose from the fact that one group of workers would be on a new scale while others still had part of their old week to run. Resort to payment more than once a week was then widely had and the cost-of-living index number was projected into the future in order to estimate in advance the prices likely to prevail in the period immediately ahead and to make the appropriate adjustment of wages.28

The discussion of sliding scales was accompanied by proposals for the payment of stable-value wages. So far as the mark was to be used as the medium in which payment was to be effected there was almost no difference between the two concepts, though this was by no means generally recognized. Demands for stable or gold value wages were construed, perhaps correctly, as being demands for pre-war wages. So far as sliding scales were adopted there was a partial divorce of the function of the mark as a unit of account from its function as a medium of exchange. The adoption of stable-value wages would simply have been more or less officially to recognize this de facto situation. Business with foreign contacts had long been using foreign currencies as a unit of account, insurance companies had obtained legal sanction for keeping all their accounts on a gold basis, wholesale concerns were quite generally following the same practice, and though retail traders were prohibited from quoting prices in anything but paper marks29 their reckoning was more and more done in terms of the dollar or other stable currency. The result was greatly to reduce the deviation of prices from the prevailing rates of exchange and to weaken the force of objections to putting wages on a straight gold basis. The opposition of the government to such a method of payments declined with the introduction of the pre-rentenmark currencies denominated in gold, and gold-value wages became common in the last few weeks of inflation. While calculated in gold they were still paid in paper marks as indeed was the case long after the currency had been stabilized. The system was adopted locally and was gradually spreading over the whole country when the currency reform shifted the center of attention from methods of payment to the old controversy over the basic wage.

For almost the whole of the inflation period the workers were thus engaged in a constant struggle to increase wages in order merely to keep pace with the ever-renewed spurts in prices and, in spite of the elaborate machinery of adjustment which was developed, they were usually a lap or two behind.

§ BUSINESS CONSOLIDATIONS

The concentration of business and industry which had been such a marked feature of German economic life in the pre-war era, and had been accentuated by the readjustments occasioned by the transfer of territory to other political units,30 was carried even further in the inflation period. Eventually it went to lengths which were little short of the bizarre. Vertical integration was stimulated by the need for eliminating unpredictable shifts in the cost of raw materials and even for giving assurance that supplies would be steadily forthcoming. Horizontal, as well as vertical, combination was prompted by the desirability of spreading the risk of fluctuations in selling prices over a wider range of commodities, by the very vicissitudes of status which inflation brought in its train (the prosperous industries bought up those which were in financial straits), and by sheer exploitation of the opportunity to borrow and buy, paying back the loan in money worth but a fraction of the value of that which had been borrowed.

The dominant personality in the whole movement was Hugo Stinnes, and his greatest concern, the Siemens-Schuckert-Rhein-Elbe-Union. In this group were gathered enormous shipping, mining, iron and steel, and electrical enterprises. Stinnes acquired, in addition, through the holding company Hugo Stinnes G.m.b.H., all sorts of undertakings both in Germany and abroad, and is said at one time to have controlled the employment of 600,000 workers.31 At the height of his power he was possessed of a controlling share in sixty large enterprises, aside from the Siemens-Rhein-Elbe group which was itself made up of 47 separate units,32 and is said to have had important interests in no less than 4500 different companies.

Another large combination was that of the Allgemeine Elektrizitäts Gesellschaft with the interests of Krupp and Otto Wolff. These combinations were paralleled by vertical and horizontal consolidations in most of the mining industries, in oil, automobiles, and numerous other branches of production.33

When the stimulus given by inflation had ceased with the coming of stabilization, the Stinnes and several other combinations collapsed. Still others dissolved quietly into their component parts. There was, under a stable monetary standard, no justification for such monstrosities as had been thrown together by Stinnes, and many of the other groups were built on sands almost as shifting. The real integration effected in some cases, however, has left a lasting impress on the composition of German industry.

 

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34The general policy of control was abandoned at the end of 1921 and only sporadic action was taken thereafter. Illicit trading at prices markedly higher than the official quotations was always rife.

35 It is, of course, not possible to draw a strict line between high- and hyperinflation but the latter period may be considered to have begun its course about the middle of 1921.

36 Legal title was, of course, not disturbed but for the time being the possession of residential real estate was rather more likely to be a liability than an asset.

37 Rentals on new houses were not strictly controlled but the generally low rate of wages made it impossible for workers to pay the rent necessary to yield any reasonable return on the cost of building new dwellings. A marked shortage of housing was the inevitable result.

38 The writer does not here wish to take any position on the general question of the causal relationship between wages and commodity prices. There can, however, be little doubt that wages were at least proximately determined at this time by the cost of living and, insofar as rent restriction lowered the worker’s cost of living, it had its effect on wages.

39 The following account is derived mainly from: (1) Grundriss der Sozial ökonomik, V Abteilung, II Teil, Der Moderne Handel, Julius Hirsch, Verlag von J. C. B. Mohr, Tübingen, 1925, pp. 166 ff. (2) Die deutsche Aussenhandelskontrolle, Ernst Grünfeld, Bonner Staatswissenschaftliche Untersuchungen, Kurt Schröder, Bonn and Leipzig, 1922, passim. (3) Die deutsche Ausfuhr kontroll e nach dem Kriege, Arnold Richard Schwarz, L. Bamberg, Greifswald, 1923, passim.

40 Smuggling was widely prevalent and many companies sprang up in Holland offering insurance against seizure. After this “Hole in the West” had been closed in 1920 the premium went to 15% and business declined. It is improbable that there was any great amount of inward smuggling thereafter except during the periods of further occupation of German territory.

41 The story of each of the boards was projected but only one small volume ever appeared and the information which it gives is not highly illuminating.

42 This section is largely a résumé of the account in Germany’s Economy, Currency and Finance, p. 69.

43 The authorities evidently attempted a distinction between the purchase of foreign currency and the sale of the German. It is submitted that the two things were identical.

44 In 1923 a considerable difference between the Berlin rates and those of other foreign exchange centers developed. In this book the Berlin rates are used throughout with one exception. See infra Table XIII. Wherever differences prevailed the Berlin rate applied to most of the transactions.

45 “He may demand any information, may examine into anyone’s affairs, search anyone; summon anyone before him to make declarations, and require anyone to make solemn affirmation as to the correctness and completeness of his declarations. He may seize in favor of the Reich without any compensation all foreign payment media acquired illegitimately or retained contrary to his orders. He may withdraw from banks the right to transact or negotiate business in foreign currency or in outstanding debts calculated in foreign currency; he may also withdraw from firms their Chamber of Commerce certificate and from persons and corporations the permit to do business on the stock exchange. He may limit the number of foreign-bills banks and of firms in possession of the Chamber of Commerce certificate mentioned above; he is also empowered to issue regulations for the transfer to, and import from, foreign countries of objects of value.” See Germany’s Economy, Currency and Finance, p. 70.

46 That is, such proceeds as were not used immediately for the purchase of raw materials or were turned in to the Boards of Control of Foreign Trade. The latter sums were eventually turned over to the Reichsbank in any case.

47 cf. for example, The Austrian Crown, J. van Walré de Bordes, P. S. King & Son, Ltd., London, 1924, passim.

48 With the introduction of the rentenmark the Treasury was helped over a short transition period till taxes could take care of expenditures—a result achieved almost solely because stabilization proved successful—by means of a loan in the new currency.

49 The material of this section is mainly derived from Grundriss der Sozialökonomik, Der Moderne Handel, pp. 38 ff.

50 The gain in paper marks was in many cases merely an accounting profit. The real gain, if any, after goods had been replaced was not nearly as large.

51 People were not only ready to buy but were ardently determined to spend as rapidly as possible all the money they possessed. The circulation of the money of course kept this lively demand constantly renewed.

52 As in all other such cases “creditors were seen running away from debtors and debtors pursuing them in triumph and paying them without mercy.”

53 More or less durable consumers’ goods are here excluded from the concept of capital goods.

54 In a good many cases, however, new issues of stock were made solely for the purpose of paying off bank loans. This tended to happen whenever the banks became restive about the liquidity of their assets.

55 This was true of almost all forms of property. Legislative obstruction to transfers to foreigners was common though not overt. A law put into effect by Prussia, for instance, precluded transfers of urban real estate without the consent of the local authorities.

56 The dissatisfaction thus caused frequently led to the refusal of foreign business men to buy German goods no matter how attractive the quoted price might be.

57 cf. The Workers Standard of Life in Countries With Depreciated Currency; International Labor Office Studies and Reports, Series D (Wages and Hours), No. 15, Geneva, 1925, passim. The description here given follows this report closely.

58 The average was much less than this.

59 In addition, the workers were apprehensive of a reduction in money wages should the index on which the wage was based show a declining tendency. As the wage would be based on the preceding month’s index it might be lowered just as prices were starting on a renewed rise.

60 Sliding scales based on the cost of living, for instance, might prove highly inconvenient in export industries if, in the vicissitudes of foreign exchange, a fall should take place unaccompanied by a similar and equal fall in the cost of living index.

61 All this was not done, of course, without conflict. Strikes were frequent but, as inflation progressed, they tended to be of short duration. The employer became ready to grant an increase of wages rather than suffer an interruption of activity when he found that he could almost certainly pass on the greater wage bill in enhanced prices for his product, and the worker accepted the offer of higher money wages in the delusion, or at least the hope, that it would enable him to purchase more goods than he had hitherto been able to obtain.

62 Retail shopkeepers were obliged to keep their premises open during customary business hours and persons selling necessaries of life were obliged to part with them against mark payments. See Deutsche Allgemeine Zeitung, Berlin, October 24, 1923.

63 The loss of Lorraine and of parts of Upper Silesia had torn integral parts of the iron and steel industry asunder. A regrouping of component firms in the remaining German territory was natural, and even essential, and this led to several important mergers.

64 cf. Le Commerce et l’industrie devant la depreciation et la stabilisation monétaire, Gaston Giustiniani, Felix Alcan, Paris, 1927, p. 65.

65 cf. Drei Verderber Deutschlands, Curt Geyer, J. H. W. Dietz Nachfolger, Berlin, 1924, p. 48.

66 cf. Konzerne. . . . Ende 1926, Statistisches Reichsamt, Berlin, 1927, passim. In addition to the motivating forces listed above vertical combination was provoked in an effort to evade the turnover tax.

• 1cf. Foreign Banking Systems, H. P. Willis and B. H. Beckhart, editors, Chap, VIII, “The Banking System of Germany,” Paul Quittner, Henry Holt and Company, New York, 1929, p. 632, where it is declared that it would be useless to try to connect the development of the German currency system from 1919 to 1923 with any theories of money.
• 2In the matter of mark exchange rates, for instance, sizable differences developed, in the later stages of inflation, between the Berlin and other markets. These were due to the obstruction of arbitrage transactions. At the time that this occurred, however, the Berlin rate was alone of much significance. The Berlin rates have therefore been used throughout. In the matter of prices the alternative sources are the indices of the Berliner Tageblatt, the Frankfurter Zeitung, and the Industrie- und Handelszeitung.
• 3The latter compilation was published in English, as well as in German, for use by the Committees of Experts of the Reparations Commission.
• 4Treasury notes, a fiduciary currency. These were, however, issued rather sparingly. The maximum issue was 356 million marks. Reichskassenscheine had been legal as cash cover in pre-war days but their issue had been closely restricted and few had been available. These Treasury notes are to be carefully distinguished from Treasury bills, a short-term security not used as money.
• 5A form of currency issued by officially established Loan Bureaus against the pledge of securities (or commodities) by borrowers other than the government and the larger banks and business concerns. During the war these notes formed an important share of the circulating medium but thereafter remained comparatively stable in absolute figures (7 to 14 billion marks) and were of constantly declining relative importance. They played but a slight ròle from 1921 onward.
• 6Germany’s Economic and Financial Situation, Statistisches Reichsamt, Zentralverlag G.m.b.H., Berlin, 1923, p. 28.
• 7Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, p. 46.
• 8Committee on Currency and Foreign Exchanges After the War (Cunliffe Committee) First Interim Report, H. M. Stationery Office, London, 1924, p. 5.
• 9Total bank deposits, exclusive of those of small private banks, were £716 million on June 30, 1914, and £1361 million on June 30, 1919. European Currency and Finance, United States Senate Commission of Gold and Silver Inquiry, Serial 9, Vol. I, Government Printing Office, Washington, 1925, pp. 277, 278.
• 10ibid., Vol. I, pp. 308, 470.
• 11ibid., Vol. I, pp. 534. 477, 455.
• 12Of this amount approximately 97 billion marks had been obtained through long-term loans.
• 13The 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.
• 14When 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.
• 15Inflation 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.
• 16The 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.
• 17The 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.
• 18The 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.
• 19The 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.
• 20The 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.
• 21The 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.
• 22Under 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.
• 23All 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.
• 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%.
• 25Cash 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!
• 26Cash 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!
• 27Though 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.
• 28Though 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.
• 29State 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.
• 30In 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.
• 31The 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.
• 32The 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.
• 33The 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.
• 34CLIFFE-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.
• 35in 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
• 36The 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.
• 37The 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.
• 38The 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.
• 39The 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.
• 40The 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.
• 41The 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.
• 42The 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.
• 43The 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.
• 44Wholesale 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.
• 451    
• 46The 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.
• 47The 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.
• 48When 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.
• 49The 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.
• 50The 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.
• 51Dr. Schacht has written an excellent account of the reform in his Stabilization of the Mark, George Allen and Unwin Ltd., London, 1927.
• 52
• 53Though 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.
• 54This 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.
• 55Shortly after the inauguration of the reform Stresemann was followed by Marx as Chancellor, but Stresemann remained in the Cabinet.
• 56In exchange for the 100 billion originally delivered.
• 57Just 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%.
• 58The Reichsbank held gold reserves much more than adequate to cover this obligation.
• 59The justification alleged for this action was that the Germans had voluntarily defaulted in making the full timber deliveries required of them.
• 60The reparations demands might, however, have caused a fall in the exchange value of the mark regardless of its value in the domestic markets.
• 61See An Economist’s Protest, Edwin Cannan, P. S. King & Son, Ltd., London, 1927, P. 393.
• 62In 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.
• 63This increase was equivalent to about $2,000,000,000 according to the average of wholesale prices for the year.
• 64Except in a limited measure the taxing power had been reserved to the constituent States.
• 65Before 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.
• 66As passed, the latter tax, instead of being a single contribution as originally intended, was distributed over a considerable period.