Exchange, Prices, and Production in Hyper-Inflation

CHAPTER X

GAINS FROM THE SALE OF MONEY ABROAD

I—SALES OF SPECIE

§ PRE-WAR STOCK OF SPECIE AND ITS DISPOSITION

AT THE beginning of the war the specie stock in Germany, including the reserves of the Reichsbank in German coin, is estimated to have had a face value of about 3.7 billion gold marks.1 About one billion of this, being silver, was overvalued, but during the course of the war the value of silver so rose in terms of gold as to eliminate the necessity for correction on this score. In addition to its stock of German coin the Reichsbank held over 400 million marks in gold bullion or foreign coin.2 We may therefore take the pre-inflation supply of precious metals in the monetary use to have been, in round numbers, 4 billion gold marks. Some of this was never completely withdrawn from use as money if the gold reserves held by the Reichsbank up to the period of stabilization can be considered as having served a monetary purpose. In the later stages of inflation, however, these reserves amounted to less than 500 million marks. All the rest of the original 4 billion disappeared from sight and sooner or later most of it must have found its way abroad in the purchase of commodities with which the German economy would otherwise have had to dispense. Even since stabilization the gold stock in Germany has been relatively small; the reimport of gold has not been equal to the exports during inflation. Gold is no longer in circulation and, in the first years of stabilization, the metallic reserves of the Reichsbank averaged only about 500 million marks. In recent years, however, this has been raised to about 2½ billion. The gain from dispensing with coin as money may therefore be set down as a capital sum of about 3,500,000,000 gold marks during the later years of inflation and at about 3 to l½ billion thereafter. The annual yield on the saving of bullion, the amount by which the yearly income of the German people may be considered to have been directly increased by the abandonment of gold, would vary not only with the amounts involved but also with changing rates of interest. In the years immediately following the war, when capital was scarce and its marginal yield high, the annual gain could scarcely have been less than 200 to 250 million gold marks, no matter what had been the stability of the currency unit. In later years it did not amount to anything like this sum.

§ EFFECTS OF USE OF GOLD TO SUPPORT MARK EXCHANGE

There is the further consideration, however, that some of this specie was used by the Reichsbank to support the exchange value of the mark. The Reichsbank ultimately lost much of its hitherto carefully guarded gold reserve in these operations but one may not conclude that these losses were shared by the German economy taken as a whole. The sudden improvement in mark exchange resulting from the Reichsbank’s intervention in February 1923 must, for instance, have had varying effects. There was no gain in it for the Reichsbank since it was giving gold or dollar exchange for its own obligations which had cost it nothing to create and which it was not compelled to redeem. The Bank, moreover, was raising against itself the value of these obligations and this might have been serious if they had ever been made exchangeable against hard money at the rate which was then being maintained.3 Even if its action had been ultimately successful the most the Bank could have hoped for, in compensation for the increase in its obligations, was an augmentation in its supply of gold or foreign exchange as a result of having bought marks at a cheaper gold rate than that at which it later sold them. Such an increase could, however, have been secured directly, without any chance of loss, by the issue of new mark notes, and all the gold received would then have been a net gain instead of being, in large part, but a replacement of that previously expended.

So far as the German economy as a whole is concerned the rise in mark exchange occasioned by the Bank’s action had nominal rather than real effects,4 except insofar as:

(1)   It augmented the real returns (the receipts in foreign exchange and the imports which that exchange would purchase) on all exports still being invoiced in marks. This gain would be at the expense of foreigners. On exports invoiced in foreign exchange the real return to the national economy (the imports for which such exports served as payment) would be unaffected. Since, even as late as 1923, a not inconsiderable portion of German exports were still invoiced in marks the gains realized by the use of gold to support exchange were perhaps sizable.

(2)   It lowered the real cost of imports (the volume of exports which must be sent out in payment for imported goods) by reducing the return in marks to foreigners exporting to Germany. Since sellers to Germany, as a general rule, were not at this time accepting payment in marks the national gain to Germany on this score was probably negligible.

(3)   It affected the dealers in exchange. Dealers who were long on foreign exchange would suffer; dealers who were long on marks would gain. If those dealers who were long on marks were mainly Germans, and those who were long on foreign exchange were for the most part foreigners, the German national economy would benefit. There is, however, no reason to believe that this was the case unless the German dealers got wind of the proposed action of the Reichsbank before their foreign competitors.

(4)   It enabled “investment” holders of marks abroad to reconvert into foreign exchange at a rate much more favorable to them than would have been possible in the absence of intervention by the Reichsbank. This would be a national loss to Germany but was probably not done on any wide scale.

(5)   It prevented the sale of German goods abroad at extremely low gold, or foreign exchange, prices.

In sum it may be surmised that the German economy as a whole gained slightly through this action of the Reichsbank. This gain is some counterweight to the loss on foreign trade which the usual relatively low value of the currency on the foreign exchange markets occasioned5, but it is probably of insignificant comparative importance.

§ NET GAINS FROM SALE OF GOLD

Not only, then, was the Reichsbank’s loss of specie a gain to the German economy insofar as it eventually was used for the import of goods which would not otherwise have been available but the manner in which part of that loss was sustained may well have furnished supplementary benefits. All such benefits were, however, but one phase of the effects of the deviation of exchange rates from internal prices, a matter to be more fully treated in the next chapter. It will here be the more conservative course to disregard them altogether and to put to the credit of inflation only the actual value of the precious metals released from the monetary use, that is to say, 3½ billion marks in the later inflation period and from 1½ to 3 billions thereafter.

The report, in 1924, of the Second Committee of Experts of the Reparation Commission—the McKenna Committee—put the sale of hard money at only 2½ billions, one billion during the war and 1½ billion from the cessation of the war to the end of 1923. These figures seem to apply only to gold and, if silver be included, the estimate would seem to be in substantial correspondence with that above given.

II—SALES OF PAPER CURRENCY OR CLAIMS THERETO

§ IMPORTANCE OF CURRENCY SALES

Of greater importance than the sale abroad of precious metals was the volume of paper marks, mark credits, and securities (bonds) calling for the payment of a fixed amount of German currency, which were disposed of to foreign buyers. The extent to which such sales proved possible was a surprise to everyone, including the Germans themselves, and the net national gain was the greater inasmuch as these marks cost the Germans nothing but the paper on which they were printed. On the other hand, the gold that was exported had originally been paid for with goods, though for internal monetary purposes it was no longer required and had therefore, for the German domestic economy, largely lost its value. The German gain on marks actually sent abroad and on sales to foreigners of mark balances in German banks, or other similar claims, was largely dependent on how long the “investment” was held. Marks or claims to marks bought before 1923 and held till stabilization were a pure gift to Germany of the amount of foreign exchange paid therefor. The stabilization rate of one trillion paper marks to one of gold was such as to make it useless to collect and transfer to Germany the notes that were held abroad, while foreign-owned balances within the country were then worth less than enough to pay the postage on a letter of inquiry as to their fate.

Since the gain to the German economy was dependent upon the degree of depreciation, and that depreciation became complete, the whole of the gold, goods, or foreign exchange proceeds of the sale abroad of unused and unredeemed German currency, or claims thereto, (such as deposits in German banks to the account of foreigners, mark credits in foreign countries, and securities payable in an unchanging sum of marks) is to be put to the credit of the post-war inflation no matter when the marks were acquired by foreign purchasers. There were also large gains to Germany on marks or mark claims repatriated at values far below those at which they had originally been purchased by foreign buyers.

§ ESTIMATES OF GOLD VALUE OF CURRENCY SALES

The most authoritative estimate of the total gains on sales of currency is to be found in the report of the McKenna Committee on the situation as of December 31, 1923. The report is by no means lucid, the estimates are not altogether consistent, and there are large gaps.6 But it is, no doubt, as accurate as the facts permitted. The German surplus of imports during the war has been officially computed at approximately 15 billion gold marks.7 Of this amount some 6 to 7 billions were met by the direct issue or sale to foreigners of paper currency.8 Of the remaining 8 or 9 billion gold marks of this war-time excess of debits only 2 billion is accounted for in the McKenna Report, viz. 1 billion from the sale of gold and 1 billion from the sale of domestic securities. The balance of 6 to 7 billion was presumably covered by the sale of foreign securities owned by Germans, and by short-time foreign currency credits to Germans.9 Such credits were subsequently paid off, directly or indirectly, with the proceeds of later sales of marks. These later sales will be covered in the estimates of the post-war period. Foreign securities were of course unaffected by the collapse of the mark. In computing the war sales of currency, never redeemed, both items in this 6 to 7 billion balance may therefore be omitted. Of the 1 billion gold marks’ worth of domestic securities sold during the war a certain share was in bonds which eventually sank to complete worthlessness. It will therefore not be far wrong to take the upper estimate of 7 billion gold marks, arising from the direct issue or sale of currency abroad, as a conservative figure for the gains of the Germans from this source during the war period.10

For the post-war period the McKenna Committee estimated the net receipts from sales of marks or mark bank balances—the amount, that is, over and above any countervalues received for German currency returned to German ownership—at from 7.6 to 8.7 billion gold marks. Taking a round figure of 8 billion gold marks for the post-war period and adding to this the 7 billion acquired during the war, the total net receipts of the German economy from the sale of currency or its equivalent—receipts for which nothing but implied and unredeemed promises were ever given—reached 15 billion gold marks.

§ ALTERNATIVE METHOD OF ESTIMATE

This estimate may be checked by drawing up a balance sheet of German international transactions for the whole war and post-war period. The sale of marks and mark claims from the beginning of the war to the end of inflation was the principal means by which the Germans were able to secure a large value-excess of imports in the trade in commodities and, at the same time, in the post-war years, to make heavy payments under the Treaty of Versailles. If, therefore, to the adverse gold balance of trade in commodities from the beginning of the war to the end of inflation we add the cash payments on reparation and clearings account and such other debits as were involved, and subtract from this total such invisible credits, aside from sales of currency, as Germany acquired, we shall be able to obtain a rough notion of the net gain in gold arising from the sale of rights later rendered nugatory by the depreciation of the currency.

Several estimates of the German balance of payments in the period under review have been made. The material is gathered together in the Institute of Economics’ book Germany’s Capacity to Pay and the conclusions there reached, modified by the later findings of the McKenna Committee, are taken as the basis for the present computation. It should be understood that the results are necessarily far from precise. They are nothing more than reasonable guesses based on statistics which are of doubtful accuracy and in which lacunae are very frequent.

For the war-period the adverse trade balance covered by the sale of paper marks, or mark credits, by the export of German securities, or by short-term borrowing abroad, amounted to some 11 billion gold marks.11 So much of the short-term borrowings from foreigners as were later paid off in real values must necessarily have been paid out of international credits accruing to Germany in post-war years. Inasmuch as German post-war credits, other than from sales of money, failed to cover current debits, the short-term obligations incurred during the war and later paid off, as well as the current excess of debits, must have been met directly or indirectly by renewed sales of marks or rights thereto. The same is true of any claims to marks acquired by foreigners during the war and used to make purchases in Germany in the post-war period. The domestic securities sold to foreigners during the war-period were to some extent, no doubt, stocks rather than bonds and therefore not subject to complete loss of value by the depreciation of the currency. If held to the present they represent still valid claims against Germany and so are not to be accounted as German gain. But, since the total of domestic securities of all kinds sold up to 1919 has been counted at only one billion gold marks, the adjustment on this account cannot be large. At the beginning of 1919 it can therefore be assumed that floating obligations to foreign countries covered a debt of 11 billion gold marks and that so far as these obligations were redeemed in later years the excess of debits must have been pro tanto greater than appears in the figures for current items. Sales of marks or mark claims in the post-war period must therefore have been large enough to take care of such redemption of the war obligations to foreigners as took place and, in addition, to cover the excess of debits on current items other than sales of currency.

After the Ruhr invasion Germany could no longer sell marks for investment purposes and was forced to give real values in exchange for foreign credits. The extent to which paper marks or mark credits were used to pay for current extra-national debts in the post-war period can therefore be estimated from the international accounts covering the years 1919-1922 inclusive. The accompanying Table XXII presents estimates for that period together with the floating debt carried over from the war and the estimated total yield from sales of unredeemed money and claims thereto.

The total net yield to Germany from sales of marks, mark balances, and securities payable in a fixed amount of marks thus appears, according to this method of computation, to have been between fifteen and sixteen billion gold marks as compared with the fifteen billion obtained by direct estimate. On the assumption that no great part of the marks and mark credits acquired by foreigners during the war were turned into real values in the post-war period (and this is certainly true of the largest item, the currency itself) these estimates also coincide reasonably well with the figures given by J. M. Keynes12 and Kurt Singer13 for the period from the end of the war till mid-1922. Keynes’ figures are eight billion gold marks and Singer’s ten. It will be remembered that war time sales accounted for some 7 billion. These estimates would therefore give a total for the whole war and post-war period of fifteen to seventeen billion gold marks. All of the estimates are, to repeat, little more than more or less shrewd guesses. They perhaps indicate the general situation but must not be taken as precise.

TABLE XXII

GERMANY’S BALANCE OF PAYMENTS, 1919-1922, TOGETHER WITH FLOATING OBLIGATIONS TO FOREIGNERS OUTSTANDING AT THE BEGINNING OF THE PERIOD

(Millions of gold marks)

It may be worth while again to note that, had not the value of the German currency unit sunk to a practical zero, these sales of currency and currency claims would have been merely postponed obligations.24 As it was they were extinguished. The proceeds were a pure gift to the German economy attainable only by reason of the monetary collapse. They were, of course, of a very different order from the sales of hard money. The gains on the sales of hard money were in the nature of an economy; the gains on the sales of paper or bank deposits in marks were a swindle, unintended perhaps, but real, for all that. No sympathy, however, need be wasted on the majority of the victims. They were trying to get something for nothing; they received, instead, nothing for something.

The sale of vague promises thus proved immensely more profitable to the Germans than the sale of the precious metals. Germany increased her stock of consumable goods, as a result of both types of sale, by an amount equivalent to upwards of 20 billion gold marks, 3 to 4 billion on the sales of metal and 15 to 16 billion on the sales of paper. Even if the estimate of the latter, to be conservative, is reduced to, say, 12 billion, the total sum received from both types of sale is equal to some 4 billions of dollars. When it is considered that the annual income of the entire German nation in the most prosperous pre-war years was about 10 billion dollars the importance of this sum to the German economy will be appreciated.

_______________

25 cf. Germany’s Economy, Currency and Finance, p. 21.

26 cf. Verwaltungsbericht der Reichsbank, 1914, Berlin, Reichsdruckerei, 1914, p. 7.

27 When the action in support of the mark was initiated in February the gold reserves of the Reichsbank were several times as valuable as the total volume of circulating medium converted into gold at prevailing exchange rates. But in April, just before the support was withdrawn, the value of the note issues then outstanding exceeded the value of the Reichsbank’s gold reserve.

28 There was, of course, a great shifting of purchasing power on this rise of exchange just as there had been in the prior fall. Investors in foreign exchange for use in future internal payments on mark obligations suffered heavy losses. But most of this was a Peter-and-Paul transaction between Germans themselves. There was no national gain or loss except as the purchasing power of Germans over foreign goods, or of foreigners over German goods, was affected.

29 cf. infra, Chap. XI.

30 See criticism in The Reparation Plan, H. G. Moulton, Institute of Economics, McGraw-Hill Book Company, New York, 1924, passim. The McKenna Report is printed as an appendix.

31 See Germany’s Economic and Financial Situation, p. 22.

32 Since, in the course of the year 1919, the exchange value of the mark against the dollar fell from 12c to 2c, the loss to foreigners, and the gain to Germans, from these extra-national issues of marks, even if they were redeemed without much delay, must have been a very large percentage of the total value at the date of issue. Most of these marks had originally been put into circulation at a value of from 16 to 20c (American).

33 See estimate of Dr. von Glasenapp, Vice-President of the Reichsbank, quoted in Germany’s Capacity to Pay, H. G. Moulton and Constantine E. McGuire, Institute of Economics, McGraw-Hill Book Company, New York, 1923, p. 49.

34 cf. McKenna Committee Report, Annex, Section II.

35 This amount, with one billion from the sale of gold and three billion from the sale of foreign securities, covers the war excess of merchandise imports of 15 billion gold marks.

36 During this period the Reichsbank’s gold reserves fell by 1,258 million marks and net exports of specie on private account are assumed to have accounted for the remainder. In the figures on sales of specie given in the preceding section a total export over the whole war and post-war period of 3,500 million marks was given. The Reichsbank lost more than 500 million marks in 1923, leaving 3 billion to be accounted for prior to that time. The export during the war is computed by von Glasenapp at 1 billion so that, in the period 1919-1922, a total of 2 billion is indicated.

37 Wirtschaft und Statistik, No. 2, 1923, p. 64.

38 Computed from estimates in Germany’s Capacity to Pay, pp. 89 ff., and modified by the figures given in the McKenna Committee Report. In the former book, urban real estate sales are put at 4 billion gold marks, rural real estate at 1 billion, and share securities at 3 billion. The securities may be assumed to have been half in stock certificates and half in fixed value securities. The value of the latter may be deducted from the total as being essentially a sale of marks, ultimately of no worth, and to be included in the category of sales of money. This leaves a total of 6,500 million. The McKenna Report indicates that this is an extreme overstatement. The amount has therefore been reduced to 6,000 million. If the McKenna estimate is nearer the truth the sums realized on sales of currency must have been much larger than is here indicated. It seemed best, however, to under- rather than over-state such sales.

39 This is an arbitrarily estimated sum. The authors of Germany’s Capacity to Pay think the amounts so received were negligible. On the other hand, similar receipts, during 1924 and 1925, have been officially estimated at 400 million gold marks for the two year period. (Memorandum on the Balance of Payments and Foreign Trade Balances, 1911-1925, League of Nations Publications, II, Economic and Financial, 1926, II, 511, Geneva, 1926). Germany had not by 1926 made any sizable new foreign investments and, while interest payments later resumed were in many cases not forthcoming in the immediate post-war period, some foreign property, later disposed of, was yielding a return in the earlier years. It would seem therefore that an annual average of 150 million gold marks receipts on this account is not an improbable estimate for 1919 to 1922.

40 Germany’s Capacity to Pay, p. 55.

41 This figure is arbitrary. The authors of Germany’s Capacity to Pay think that sundry net credits would not amount to more than 400 million.

42 In Germany’s Capacity to Pay the estimate (largely based on German official figures) is 11,000 million. The McKenna Report declares this to be much too large and computes the total of excess of merchandise debits and cash reparations at not more than 10,000 million. The figures on cash reparations are definitely ascertainable at 1,750 million gold marks. The figure of 8,000 million excess of merchandise imports would therefore seem to be approximately correct.

43 Computed from History of Reparations, Carl Bergmann, passim. Nothing is here included except cash payments over German borders. It was officially reported in Germany’s Economic and Financial Situation, that cash reparations payments in foreign currency up to the end of 1922 were 1750 million gold marks and clearings payments 615 million gold marks. Other cash payments there reported did not clearly require international transfers.

44 This is a mean of the estimates of Sir Robert Home, Mr. Reginald McKenna, and Professor J. M. Keynes. cf. Germany’s Capacity to Pay, pp. 82-3.

45 The total German holdings of property abroad at the end of 1923 have been estimated at from 5.7 to 7.8 billion gold marks, cf. McKenna Committee Report. Part of these were acquired before the war and part in 1923. The figures given in the present table are a guess at the amount acquired up to the end of 1922, including foreign bank notes held in Germany.

46 Keynes’ figure of eight billion is stated as a maximum. He is of the opinion that five billion is really more nearly correct. The difference is due to what he regards as an exaggerated excess of imports in the official trade figures for 1919. cf. Keynes’ article in Manchester Guardian Commercial, Reconstruction Supplement, Section VIII, September 28, 1922, p. 480.

47 Quoted in Germany’s Capacity to Pay, p. 85.

48 They might, of course, have been partly but not fully repudiated. This would have occurred if the mark had been stabilized at any substantial fraction of its original value.

• 1CLIFFE-LESLIE once remarked that in social matters the greatest scientific progress is made when economic disorders raise vexing questions as to their causes. In the study of social phenomena, disorder is, it is true, the sole substitute for the controlled experiments of the natural sciences. But it sometimes happens that, in the midst of disorder, events move so rapidly that we are not able properly to observe them; disorder may be excessive even to the most detached of scientists. The course of inflation in Germany in the first post-war quinquennium had so much of this character that it has seemed to many to be incapable of throwing any light upon monetary problems. This most striking of monetary experiences has, in consequence, evoked a minimum of scientific curiosity. In spite of the fact that statistics—those notes of process on which the social scientist must so heavily rely—were for some phenomena abandoned in Germany in this period and for others are open to grave objection on the score of accuracy, it has seemed to me that such an attitude implies an unwarranted surrender in the face of difficulties which might with perseverance be surmounted. This book is an attempt, therefore, to discover what actually happened in Germany and either to bring the observed phenomena within the fold of accepted theory or else so to modify that theory as to give it a more catholic character. The actual course of events during inflation has not merely an historical and scientific interest but is of considerable practical importance. Germany’s present position as a nation with heavy international obligations has led to apprehension, both within and without the Reich, as to the future in international finance. The fears of such German competition as may issue out of the debtor status may be dismissed as but thinly-veiled mercantilism but the question as to the possibility of ultimate transfer of the large sums involved in reparations and interest payments must, perhaps, be treated with more respect. The ability of the German economy to provide, within Germany, the funds required, is, on the other hand, no longer seriously doubted. It is hoped that the sequel will throw some light on the disappearance of the latter doubt as also on the prospect of future transfers undisturbed by any serious economic friction.
• 2in Germany. It is based very largely on official German statistics as published by the Statistische Reichsamt and the Institut für Konjunkturforschung. These statistics, for the period studied, are, no doubt, far from perfect, but nothing is gained by attempting to go behind them and there is no reason to suppose that such alternative sources as are available are at all superior. The hope is cherished, perhaps not without justification, that such errors as are involved do not vitiate the conclusions reached. The immense nominal magnitudes attained by all -monetary phenomena in Germany in the inflation-time tend to dwarf the influence of even very considerable imperfections in the statistics. I am far from supposing, nevertheless, that the results obtained are to be taken as clearly proven and I trust that the reader will be no more credulous. They are merely hypotheses
• 3The publications of the Statistische Reichsamt which have been principally used are : Statistisches Jahrbuch für das deutsche Reich, Statistik des deutschen Reichs, Wirtschaft und Statistik, Monatliche Nachweise über den auswärtigen Handel Deutschlands, Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, and Germany’s Economy, Currency and Finance. Sparing use has been made of forms of statistics already available in these sources and, where tables are given in the text, they are, in nearly all cases, the result of computations from the original data.
• 4The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 5The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 6The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 7The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 8The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 9The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 10The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 11Wholesale prices in Germany, Great Britain and France at the end of 1918 were respectively 2.45, 2.30 and 3.53 times their pre-war height. In the United States they were just about twice their 1913 level.
• 12Shortly after the inauguration of the reform Stresemann was followed by Marx as Chancellor, but Stresemann remained in the Cabinet.
• 13In exchange for the 100 billion originally delivered.
• 14Of this amount approximately 97 billion marks had been obtained through long-term loans.
• 15The 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.
• 16When 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.
• 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.
• 18Inflation 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.
• 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 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.
• 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.
• 22The 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.
• 23The 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.
• 24Just 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%.
• 25cf. 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.
• 26In 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.
• 27The latter compilation was published in English, as well as in German, for use by the Committees of Experts of the Reparations Commission.
• 28Treasury 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.
• 29A 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.
• 30Germany’s Economic and Financial Situation, Statistisches Reichsamt, Zentralverlag G.m.b.H., Berlin, 1923, p. 28.
• 31Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, p. 46.
• 32Committee on Currency and Foreign Exchanges After the War (Cunliffe Committee) First Interim Report, H. M. Stationery Office, London, 1924, p. 5.
• 33Total 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.
• 34ibid., Vol. I, pp. 308, 470.
• 35ibid., Vol. I, pp. 534. 477, 455.
• 361    
• 37The 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.
• 38The 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.
• 39When 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.
• 40The 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.
• 41The 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.
• 42Dr. Schacht has written an excellent account of the reform in his Stabilization of the Mark, George Allen and Unwin Ltd., London, 1927.
• 43
• 44Though 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.
• 45This 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.
• 46Under 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.
• 47All 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.
• 48Revenues, 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%.