Exchange, Prices, and Production in Hyper-Inflation

CHAPTER XI

LOSSES ON FOREIGN TRADE IN MERCHANDISE AND CAPITAL GOODS

§ NATURE OF THE LOSSES

THE gains accruing to the German economy from the sale to foreigners of money which soon became moribund were in large measure cancelled by the losses on German exports of merchandise. The exporters themselves did not lose—on the contrary they were among the greatest winners from inflation—but, insofar as inflation led to exports being sold at gold prices greatly below those which would have prevailed under stable monetary conditions, the German economy as a whole bore the burden.1 There was but slight compensation on the import side since the depreciation of the mark could not have greatly lowered the gold cost of imported goods. It is true that certain shippers of goods to Germany in the early post-war years invoiced in marks and took a loss with the decline in the gold value of the currency in the interval between the date of contraction and payment of the debt. Their loss was Germany’s gain. But they were wary of repeating the error. Some shippers of goods from those countries with currencies declining even more rapidly than the German did, however, continue to invoice in marks in preference to using their own monetary unit. Whichever they used, the Germans were likely to gain. In the one case the Germans profited through the depreciation of their own, and, in the other, through the depreciation of the shipper’s currency. These possibilities, however, were realized to a progressively smaller extent as invoicing of German imports in stable currencies became general. On the export side, then, losses were wellnigh certain no matter how the goods were invoiced—low prices were here the dominant factor—while, on the import side, a compensatory gain was fortuitous at best.

§ METHOD OF COMPUTATION AND THE STATISTICS INVOLVED

The net result of these gains and losses is not easy to determine. It has already been pointed out that the official figures on exports and imports, insofar as they are expressed in paper marks, are worthless. But, from May 1921 onward, there are official estimates of the gold cost of total imports and of the gold value of receipts for total exports, and these are much more reliable. There are also figures, from the beginning of 1920, of gold values, at 1913 prices, of the current physical volume of individual exports and imports. An index, moreover, on a 1913 base, of the presumptive prices of German imports and exports in the absence of inflation, can be computed with a fair approach to accuracy. Knowing the total value of imports and exports at 1913 gold prices, and having an index of presumptive gold prices on a 1913 base, multiplication will give the total gold values which would have been paid and received on the commodity imports and exports actually made, had a stable currency standard been in operation. Comparison with the gold values in fact paid and received will show the net result of inflation on the German economic situation so far as the foreign trade in merchandise is concerned.

Before proceeding to the requisite computation it will be worth while to examine more closely the statistics on which it will be based. In all cases they are derived from official reports of the Statistische Reichsamt. The figures on the total value of imports and exports at 1913 prices were computed, by that organization, by multiplying the actual physical volume (weights usually, but in a few cases, numbers) of the current separate import and export items by the 1913 average price per unit of volume of similar imports and exports. The volume, as contrasted with the price, statistics on foreign trade in the inflation years may be regarded as substantially accurate and, since the variety of goods in any one item of the import-export schedule is not great, no large error would arise through a change in the volume relationship of two or more commodities grouped in the schedule under a single heading.2 There is, of course, no guarantee that the quality of the goods entering into any given schedule item of German international trade was identical, or even similar, in the pre- and in the post-war years. If the quality of both imports and exports in one of the periods was inferior to that in the other there would be an obvious error in multiplying the 1913 figures by any price index which assumed identical goods in the pre-and post-war periods. Even greater difficulties would arise if imports in general in the earlier years were inferior in quality and exports superior, or vice versa, or if, as was likely, there was, with innumerable variations, no definite trend in any direction. The best means of meeting the difficulty would seem to be to take the trade of 1924, 1925 and 1926, the first three years after the establishment of the currency on a gold basis, to compute for those years an index of export and import prices by dividing the actual gold total of imports and exports by the hypothetical total at 1913 prices, and to apply this index to the 1921, 1922 and 1923 trade. Price levels, measured in gold, were substantially stable throughout the six years involved3 while the character of German import and export trade and the quality of the goods exchanged appears to have altered but slightly during that time. Any changes that might have occurred between 1913 and 1921 would then be irrelevant.

An example, using the index of gold prices in 1924 only, instead of an average of the years 1924-1926, will make the matter clear. In 1924 the actual value of German imports was 8,628,675,000 gold marks. The sum of the values, at 1913 prices, of the same physical volume of each of the separate import items would have been 6,769,010,000 gold marks. The 1924 import price index (1913 = 100) is therefore

It is immaterial whether the post-war quality of imports was better or worse than in 1913. Whatever may have been the situation in this respect the goods imported in 1924 were, on the average, 27% higher in gold price than the goods imported under the same names in 1913. On the assumption that the quality of individual imports was not greatly different in 1924 from that in the immediately preceding years,4 the actual gold prices paid in 1924, when stabilization of the currency had been effected, would seem to give some indication of what must necessarily have been paid, in the period just prior to that date, if a gold currency had then been in operation. The fluctuation in world gold prices was, to repeat, not enough to have led to a substantial alteration in the gold prices of German imports during the period covered and so may safely be neglected.

Extending this method forward to 1926 and backward to 1921, for exports as well as imports, will no doubt lead to a greater margin of error in the matter of the quality of the goods entering German international trade (the assumption of unchanged quality during six years is clearly less warranted than during two) but on the other hand will tend to eliminate temporary aberrations, both in prices and quality, that may be present in the shorter period. It is to be justified, if at all, on this account. On the whole it seems improbable that any great error will be involved in assuming that the prices paid and received in 1924, 1925, and 1926 for German imports and exports of the composition and quality prevalent in the post-war period, are representative of the value of those goods in world markets in 1921, 1922, and 1923, or in supposing that they approximate the prices which would have been paid and received in the earlier period had Germany then been on the gold standard or its equivalent.

It is, indeed, not unlikely that this hypothesis of what would have occurred, if conditions had been other than they were, is quite as near the truth as are the statistics of what actually did occur. The official estimate of the gold value of the sums actually paid and received for German imports and exports in the inflation period is, in the case of exports, probably not very wide of the mark. But it is more dubious on the import side. For conversion, into gold, of the paper mark declarations of imports the Statistische Reichsamt has taken an arithmetic mean of: (1) the sum of the declared paper mark values of imports, converted into gold at the average dollar rate of the month preceding importation, and (2) the sum of the values of imports, at world market prices, at the time of the arrival of the goods.5 It was felt that the former of the two totals from which the average is derived was too low because, though German imports are usually paid for about a month in advance of the arrival of the goods, the interval is often longer. Furthermore, part of the imports was paid for in gold marks. In either case, whenever the depreciation of the mark was continuous, a larger gold value would actually have been paid than would appear from the conversion of the paper mark declarations at the average exchange rate prevailing in the month prior to their entry into Germany. On the other hand, the latter of the two totals was regarded as being too high because part of the imports was paid for in paper marks. The gold cost of these imports was reduced whenever the exchange value of the mark fell in the interval between the date when the contract was made and when payment took place. In addition to this, part of the imports came from countries themselves having depreciated currency and selling their exports at prices below world levels.

It is, of course, a matter of doubt as to how far the averaging of an estimate of the gold value of imports at the date of arrival with the declared paper values converted into gold can be trusted to give a close approximation to the actual gold cost of imports. It is probable that the result for 1923 is substantially correct but, for the earlier years, it is to be gravely questioned. Some modification in these years will be suggested in the ensuing pages.

The estimates of the gold values actually received for exports rest on a much firmer foundation. Some 60% to 70%, by value, of the exports were invoiced and declared in stable foreign currencies and were thus easily and accurately converted into gold. For the remainder, conversion to gold was made at the average dollar exchange rate of the month of export.6 Since prices were finally established by the Boards of Foreign Trade Control only when the goods were on the point of leaving the country this would seem to give a reasonably accurate picture of the gold values actually received.

§ THE PERIOD MAY 1921 TO DECEMBER 1923

In computing such profit and loss on German foreign trade as may be attributed to inflation, account will first be taken of the period May 1921 to December 1923, for which fairly detailed figures are available, and the investigation will then be pushed backward to cover the earlier years. The total gold value of German imports and exports in the period May 1921 to December 1923, if they had been sold at 1913 prices, is as follows:

German Imports and Exports 1921-1923, at 1913 Prices

(Thousands of gold marks)7

		IMPORTS	EXPORTS
1921	(May-Dec.)	3,821,400	2,975,800
1922	(full year)	6,301,147	6,187,794
1923	(full year)	4,808,174	5,338,110
		14,930,721	14,501,704

Gold prices in 1921-1923 were very different from those in 1913 but were, it will be recalled, much the same as in 1924-1926. The actual gold value of German imports and exports in 1924, 1925, and 1926, and the value of the same physical volume of corresponding items at 1913 prices, are given as numerator and denominator respectively in the figures in the subjoined table together with the resulting indices of import and export prices on a 1913 base. These indices will presently be used in application to the 1921-1923 trade.

VALUE OF GERMAN IMPORTS AND EXPORTS, 1924-1926 WITH AN INDEX OF PRICES (1913 = 100)

Taking the average price index for imports and exports respectively in the years 1924-1926 as appropriate to 1921-1923, the potential gold values of imports and exports of the earlier period—the amounts, that is, which would presumably have been paid and received had stable monetary conditions prevailed—together with actual outlay and income on imports and exports, as estimated by the Statistische Reichsamt, are presented herewith.

AMOUNTS POTENTIALLY AND ACTUALLY PAID AND RECEIVED ON GERMAN IMPORTS AND EXPORTS, MAY 1921 TO DECEMBER 1923

(Thousands of gold marks)

On this accounting the German economy obtained its imports during the period under discussion for 2,496,951,000 gold marks less than if stable monetary standards had been in operation but sold its exports for 6,861,504,000 less, a net loss of 4,364,553,000 gold marks.8

Part of the gain on imports was due to the fact that currency depreciation existed in countries other than Germany and cannot therefore be put to the credit of the inflation of the mark. It would have been obtained if Germany had been on the gold standard. It is doubtful, however, if this gain bulks very large. Germany’s imports were predominantly standardized commodities, foodstuffs in crude condition and industrial raw materials. It has already been noted that the gold prices of such goods in all countries, whatever the monetary standard, rapidly attain approximate equality except for minor variations covering costs of transport, tariffs, and similar charges. It is therefore probable that the considerable gain on imports, which the figures show, is due to an understatement of the gold value of the actual amounts paid, especially in 1921 and 1922. For 1923, the index of actual import prices, on the basis of the estimates of actual payments converted into gold, is 127.90, a figure very closely corresponding to the computed average index of potential prices of 126.33. This goes to show that in 1923 the Germans were not obtaining their imports at less than world market prices. It is rather doubtful that they ever did buy them at much below world prices, though the estimated totals of actual import costs for 1921 and 1922, measured in gold, give price indices of 105.06 and 98.40 respectively, figures far short of the then current prices of German imports in world markets. It may have been that by 1923 it was no longer possible for Germans to buy from abroad goods invoiced in paper marks whereas, up to that time, they had been able to do so on a substantial scale and so had secured their imports cheaply as the value of the mark fell. But the fact that it was not until 1923 that most of the imports were directly included in the computation of gold costs suggests that the discrepancy really lies in the official figures. To allow for this, and to exclude gains on imports which would have accrued under any monetary standard in Germany, gains, that is, which were due to currency depreciation in other countries, it seems best to cut in half the computed gain on imports and make it 1,248,475,000 gold marks. This will increase the net loss on foreign trade in the period May 1921 to December 1923 to 5,613,028,000 gold marks.

The index of actually realized export prices works out for 1921 at 80.69, for 1922 at 64.16, and for 1923 at 114.32 (1913 = 100 in all cases). These figures compare with the index of potential prices of 133.33. There is no reason to believe that they are not substantially accurate. In 1922, therefore, the Germans sold their exports at prices less than half, on the average, of those which they would presumably have obtained under a stable monetary standard, in 1921 at less than two-thirds, and in 1923 at a discount of some 14%. The much more favorable result in 1923 is probably due to the high degree of mobility of paper mark prices attained by that date and to the rapid adjustment of prices and exchange rates to one another. Whatever may have been the influence of the control of prices of exports in preventing a still greater sacrifice of German goods in the earlier years than did, in fact, occur, it is clear that the control did not succeed in forestalling an immense shift in the terms on which the Germans exchanged their products for those of the outside world.

§ THE PERIOD PRIOR TO MAY 1921

Up to this point the calculation of gains and losses can be made with some confidence. But prior to May 1921 the statistical fogs hang heavy. There are no figures, on which any reliance whatever may be placed, for the period preceding 1920. The years of the war, however, can be excluded from consideration. Except for a few months in the summer of 1917 the exchange value of the mark did not deviate very widely from its internal purchasing power during the whole course of the conflict and it was about as frequently above as below the par relationship. There were thus, at this time, no substantial gains or losses in the exchange of merchandise exports for imports, at least none that can be attributed to inflation.9 We are therefore reduced to arbitrary guessing for the single year 1919 only. For 1920, however, the statistics of actual values paid and received are available only in paper marks10 and are to some extent subject to those defects in that method of reporting which a year or two later became so glaring. For the first four months of 1921 there is official authority for interpolating pro rata to the figures for the remainder of that year. This interpolation, having been made along the lines so far laid down, shows a net loss for January-April 1921 of 579,999,000 gold marks. Adding this to the net loss already established gives a total from January 1921 to December 1923 of 6,193,027,000 gold marks.

Turning now to the year 1920, we find that reported imports and exports, at 1913 values, were approximately equal at 3,928,700,000 and 3,709,300,000 gold marks respectively.11 1920 was a year of marked vicissitudes in the gold price level. Starting with an index of 233 (1913 = 100) in January, wholesale prices in the United States rose to 247 in May and then declined to 179 in December. This fluctuation in the value of gold, however, would not necessarily, or even probably, affect in any considerable degree the relation between the gold values of imports and exports. After a number of unsatisfactory experiments with other methods it has consequently seemed best to assume that the values of German imports and exports in 1920, if they had been bought and sold at world prices in gold, would have been in substantial equilibrium just as the values at 1913 prices were.12 But the actual reported totals, in paper marks, were 99,077,000,000 and 69,421,200,000 respectively.13 The mark fluctuated during this year, without any trend in either direction, from 1.69 American cents in January to 1.05 cents in February, to 2.56 cents in June, to 1.32 in November and to 1.37 in December. Whatever the deviation of the paper mark valuations of the Statistische Reichsamt from actual prices, the errors would therefore tend to cancel out. The appreciation of the currency in the early part of the year would have an effect on the valuations which would neutralize the effect of the depreciation from July to November. Since the potential gold values of imports and exports in this year were equal, the difference between the reported paper mark cost of imports and the paper mark receipts from exports, when converted to gold, may consequently be taken as a fair measure of the net loss for 1920.

The average exchange rate of the paper mark against the dollar in

1920 was 1/15.01 of the gold mark par.14 Converting the net excess of imports, 29,655,800,000 paper marks, at this rate, gives a deficiency on foreign trade of 1,975,736,000 gold marks as compared with the potential equilibrium under a stable standard. Adding this to the total, from 1921 to 1923, of 6,193,027,000 gold marks brings the net loss from 1920 to 1923 to 8,168,763,000 gold marks.

§ THE YEAR 1919

There remains to be considered the year 1919 for which not even tolerable data are at hand. In the course of this year the number of paper marks exchangeable against a dollar was multiplied six times while prices in Germany a little more than tripled.15 Even at the beginning of the year the exchange value of the mark had been rather low relative to its domestic purchasing power. The war-time control of foreign trade was rapidly relaxed, and there was thus no bar to the sale of exports at gold or foreign exchange prices very greatly less than those prevailing in the outside world. Contemporary observations leave no doubt that Germany was then one immense bargain counter. But on the other hand the stock of goods was very low and production was small. Four and a half years of war had depleted the country and recovery was slow. On the whole it is improbable that the net loss was greater than the annual average of the succeeding years and certainly was not less than half as much, that is to say, it was between one and two billion gold marks.16 Counting it in at the higher, and more likely, figure, we may estimate the total depredations of inflation upon German foreign trade in merchandise, in the five year period 1919-1923, at roughly 10,000,000,000 gold marks.

§ THE MARGIN OF ERROR IN THE ESTIMATE

This estimate of losses more probably errs on the side of moderation than otherwise. On one or two scores it may, indeed, seem exaggerated. Until the spring of 1920 the Germans did not have control of their customs frontier in the Rhineland and they lost it on two occasions thereafter.17 The collection of statistics, even of physical quantities, at these times was difficult and incomplete. The lacunae in the statistics, however, are probably much greater on the import than on the export side and since, on imports, the depreciation of the currency tended to yield the German economy gains rather than losses, the total net losses on foreign trade indicated by the official figures may for this reason be somewhat too large. But, on the other hand, there must have been a very sizable undiscovered export of German goods, bought at very low gold or foreign exchange prices, in the luggage of “tourists.” There is every probability that the national loss on these transactions at least balances the defect in the statistics on the other side of the account.

Export duties, however, have not yet been taken into consideration. The valuations which have here been used, for both imports and exports, are valuations free of duty. Whatever may have been the ultimate incidence of German import duties (and there is no reason to believe it was not upon the Germans), the foreign exchange cost of imports would not include the duties levied. The import valuations used in the foregoing computations are therefore appropriate to the purpose in hand. But with exports the matter is not so clear. Export duties may have been paid, at least in part, by foreigners,18 and the foreign exchange receipts would, in consequence, cover not only the f.o.b. valuations but something on duties as well. The German losses on foreign trade would then be somewhat less than have been indicated. But the value of all export duties paid, from their inception in May 1920 to the close of the inflation period, was less than 450 million gold marks.19 Even if it be assumed that this was paid in toto by foreigners it does not bulk very large in the account—and may well be included in the general margin of error.

It may therefore be concluded that the figure of 10,000,000,000 gold marks does not seriously, if at all, overstate the loss to the German economy in the exchange of commodity exports for imports during the inflation regime.20

§ THE MONTH-TO-MONTH SITUATION IN 1922 AND I923

The available statistics make it possible to present the month-to-month situation during 1922 and 1923.21 Table XXIII shows by months the actual payments for imports and receipts on exports, the payments and receipts which would have attended the identical trade under stable money conditions, the potential payments for imports and receipts on exports expressed as a percentage of the actual payments and receipts, and the actual return on German foreign trade expressed as a percentage of the return which would have accrued under stable monetary conditions.22

TABLE XXIII

ACTUAL AND POTENTIAL PAYMENTS ON IMPORTS, ACTUAL AND POTENTIAL RECEIPTS ON EXPORTS, POTENTIAL PAYMENTS AND RECEIPTS AS A PERCENTAGE OF ACTUAL, AND THE ACTUAL RETURN ON FOREIGN TRADE AS A PERCENTAGE OF THE POTENTIAL RETURN; 1922 AND 1923

(All value figures in thousands of gold marks)

§ CORRELATION BETWEEN THE LOSSES ON FOREIGN TRADE AND THE MOVEMENTS IN THE RATIO OF INTERNAL TO EXTERNAL VALUE OF THE MARK

Chart XXXIII correlates the movements in the ratio of actual to potential return on foreign trade with the movements in the ratio of the internal to the external value of the mark. The inverse correlation is clear. When, as a result of a rise in foreign exchange relative to domestic prices, the internal value of the currency rose in comparison with its external value, the loss on foreign trade increased. The relatively low prices in the domestic market then resulted in a sacrifice of German exportable commodities. When, on the other hand, the ratio of the internal to the external value of the mark fell, the returns on foreign trade became much more favorable to the Germans. The relatively slight loss in 1923 was due to the advance in domestic prices being more rapid than that in exchange rates.

§ RESULTS OF FOREIGN TRADE IN CAPITAL GOODS

There remains to be considered the gains or losses on capital, rather than current merchandise, account, such as were involved in the sale of property or property rights other than those in the paper currency itself. It has already been noted that there is a very great discrepancy in the estimates of authorities as to the extent of such sales and, consequently, as to the proceeds in stable currencies. Though there were substantial agreement on this score, as there is not, it would be impossible to gauge with even a remote approximation to accuracy the national gain or loss to Germany for the simple reason that there is no criterion by which the real value of such property may be measured. Such value will emerge only in the indefinite future when the returns on the purchases of such property by foreigners in the inflation period are actually realized. The annual return will be dependent, among other things, on future legislation affecting taxation, and on the progressive relaxation of rent restriction and other housing laws. Some of the property bought by foreigners was soon resold to Germans. On such transactions the net gain or loss to the German economy might be accurately enough computed, in terms of gold, provided adequate statistics were available. But on the property held by foreigners up to the present time this would not be possible in any case.

CHART XXXIII

CORRELATION OF MOVEMENTS IN THE RATIO OF ACTUAL TO POTENTIAL RETURN ON FOREIGN TRADE WITH THE MOVEMENTS IN THE PRICE RATIO INDEX; 1922 AND 1923

Figures from April to September, 1923, prorated from total for 6 months.

Some limits may, however, be denoted. The total sum, in gold, realized by Germans on such sales has been estimated in the preceding chapter at 6,000 million gold marks. In the face of a much lower figure given by the McKenna Committee the estimate was deliberately put at a rather high level in order to forestall exaggeration of the amount obtained from the sale of marks. While some of the investments were poor the yield of many of the properties has been increasing as the housing laws have been modified and as the gold dividends on the shares of business concerns have been advanced. But it is doubtful whether, as late as the early part of 1926 at any rate, it would be justifiable to assume that the value of these properties, taken as a whole, was greater than the amount originally set down as the receipts from their sale abroad. This conclusion is based on the figures for the German balance of payments since the war published by the Statistische Reichsamt.23 It is there estimated that the net interest, dividend, and rental payments of Germany to foreign countries in the first half of 1926 were 80 million gold marks. But the payments on long-term loans floated since 1924 were 85 million. All other payments must therefore have been 5 million gold marks less than the receipts from German investment abroad. That investment was estimated by the McKenna Committee to be, at the end of 1923, about 6,750 million gold marks. But of this amount some 1,600 had apparently been sold between 1923 and the beginning of 1926,24 leaving a little more than 5,000 million at the later date. Since this investment yielded the Germans somewhat more interest than all foreign investments in Germany made prior to 1924 gave to the outside world, the real value of the latter, as late as 1926, cannot be put at more than 5,000 million gold marks. Whether the Germans did or did not lose substantially on the sale of properties is, however, a matter of no consequence in the consideration of the net results of their foreign transactions. If the proceeds of the sales of property, as given in Table XXII, are overestimated, and the Germans lost considerably on such sales, they must have obtained a pro tanto increase on sales of currency over what has here been indicated. The net position is the same in either event.

§ NET RESULT OF ALL FOREIGN TRANSACTIONS

It is possible now to sum up the net results of inflation in the field of foreign transactions. Sales of money yielded a net gain of from 15 to 20 billion gold marks. On current merchandise transactions a loss of something like 10 billion gold marks was sustained as compared with the presumptive result under a stable monetary standard. On capital transactions no gain or loss is evident. The balance to the credit of inflation is therefore from 5 to 10 billion gold marks. Of this amount more than 3 billion was due to the sale of gold. Not all of this saving has been permanent. The economy in the use of gold was initiated by inflation but the gold standard as now maintained, without the presence of gold in hand to hand circulation and therefore with a smaller total gold supply, could have been established without currency depreciation. It is therefore questionable whether the whole gain on the sale of gold should be put to the credit of the paper currency system. If allowance be made for this, and if a middle figure be taken for total sales of money, the net gain on all foreign transactions which is directly attributable to inflation may be set in the neighborhood of from 4 to 5 billion gold marks.

It should be noted that much of the eventual gains from the sale of paper currency was obtained on issues made during the war when gold prices were high but that most of the losses on trade occurred after 1920 when gold prices had fallen. This means, if the present value of gold is used as a criterion, that the real gains as here estimated are somewhat overstated. The conclusions reached, however, can lay no claim to such precision as would make it other than absurd to attempt to introduce the refinement of allowing for the shifting value of gold. In dealing with paper mark figures, in which the unit of value is changing crazily, the relative stability of gold can be put in the class of absolutes and the actual gold estimate of gains and losses, if it is at all reliable, will furnish a sufficiently accurate notion of the real effect of inflation on the German economy.

 

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25 The exporters did not lose because the prices of most of the things they bought (domestic commodities) were much below an equivalence with the prices of the things they sold. The German economy, on the other hand, was a loser since the prices of the things it bought (imports) were much above an equivalence with the prices of the things it sold (exports).

26 The number of separate headings is more than two thousand. These, however, are reduced by consolidation to something less than a thousand.

27 The average of the indices of wholesale prices in the United States for 1921-1923 was 150 while for 1924-1926 it was 153 (U.S. Bureau of Labor Statistics). Since, in this chapter, we are dealing with statistics and computations which cannot pretend to be precise it seems best not to attempt adjustment for this 2% difference but to assume that prices in the two periods were equal. Gold prices move in substantial correspondence the world over and prices in the United States would seem to be the best criterion of the world value of gold at this time.

28 That is, from 1921 onward.

29 From March 1, 1921, onward, declared values (subject to revision by the Trade Statistics Council) have been used for all imports and exports. Previous to that date uniform official values were used for most imports. As late as September 1922 the calculations of world market prices were made directly on only 37 items in the tariff classification though these represented 40% in declared value of all the imports; by December 1922 this had been extended to 324 items and 77% of all imports, and by March 1923 to 598 items and 91% of all imports. For the remainder, declared values were multiplied by the coefficient already established for the items directly computed.

30 For a more detailed explanation see Memorandum on International Trade and Balances of Payments 1912-1926, League of Nations Publications, II, Economic and Financial, 1927, II, 68r, Geneva, 1927. Figures throughout are for “Special Trade,” from which transit trade and similar transactions are excluded, and represent values at the frontier (c.i.f. for imports and f.o.b. for exports) exclusive of duties.

31 Memorandum on International Trade and Balances of Payments, 1912-1926, League of Nations Publications, II, Economic and Financial, 1927, II, 68II, p. 361. The import figures for May-December 1921 are obtained by taking a proportionate share of the amount reported for the full year 1921.

32 The published statistics have been corrected to eliminate errors in declaration and valuation as follows:

	1924	1925	1926
Imports reduced by	5%	5%	3%
Exports increased by	1.5%	1.5%	1.5%

This correction carries out an official suggestion of the Statistische Reichsamt in its report to the League of Nations’ statistical office, cf. for this and other data in this table Memorandum on International Trade and Balances of Payments 1912-1926, pp. 360, 361.

33 On the assumption that a gold standard had been in operation.

34 Memorandum on International Trade and Balances of Payments 1912-1926, p. 361.

35 It might, at first blush, be supposed that the computed gain on imports had already been accounted for in the estimates of sales of marks. This is not so, however, since the statistics of imports and exports, on which the estimate of sales of marks was based, purport to give the gold values actually paid and received. The present computation is based on potential payments and receipts. The Germans gained both by securing some imports at low gold prices and by paying in depreciating currency.

36 The price-level index in Germany during the war was never much higher than in the United States and was frequently lower. There was thus practically no war-time inflation in the sense of a paper currency of less value than gold.

37 But gold values, at 1913 prices, are given.

38 Statistik des deutschen Reichs, Vol. 317, Verlag von Reimar Hobbing, Berlin, 1925, p. 5.

39 From their peak in May the prices of raw materials, in the United States, had fallen by 35.5% in December; manufactured commodities had fallen by 34.3%. German imports are mainly raw materials while exports are manufactured commodities and there might therefore be a slight tendency for the potential gold total of imports to fall in a slightly greater degree than that of exports. Since, at 1913 prices, the total of imports was slightly greater than that of exports, a rather close approximation to equilibrium in import and export potential values may therefore be assumed. The changes in gold prices in 1920 are immaterial to the computation here made unless they affected imports and exports in different degrees.

40 Statistisches Jahrbuch, 1921-1922, p. 144.

41 This is an average of monthly averages, cf. Zahlen zur Geldentwertung, p. 6.

42 The exchange value of the mark fell from 12.21 to 2.1 cents: the German wholesale price index rose from 245 to 803.

43 Total exports were reported at 1.76 billion gold marks. Under stable monetary conditions they would, in all likelihood, have brought at least twice as much.

44 In the occupation of Düsseldorf, Duisburg and Ruhrort in March 1921 and in the occupation of the Ruhr in 1923.

45 The question of incidence is not involved. The actual cash outlay for export duties may have been made by the foreign buyer either directly or through an agreement to reimburse the seller. This may or may not have resulted in lower prices, at the point of production, than if no duty had been levied.

46 Converted according to the wholesale price index in Germany. If converted according to exchange rates it would be much less than this. cf. Germany’s Economy, Currency and Finance, p. 33.

47 Certain German business houses set up branches abroad and handled their exports through these branches. The price obtained by the branch on the sale of German goods may have been considerably greater than the price officially reported in German export statistics. To the extent that this occurred the loss to the German economy would, of course, be lessened.

48 With the exception of the half-year April to September 1923 which had to be taken as a unit.

Sources of data: Memorandum on Balance of Payments and Foreign Trade Balances 1910-1923, p. 120; ibid. 1911-1925, p. 140.

Potential values were obtained by multiplying values of imports and exports based on 1913 average prices by an index of potential prices calculated on the basis of values in 1924, 1925, and 1926. See supra, p. 265.

Values of imports, at 1913 prices, from January to September 1922, inclusive, were obtained from Wirtschaft und Statistik, 1922, p. 663. The values of imports for the remainder of 1922, and those of exports throughout that year, have been computed from official foreign trade figures for 1913 quoted in Statistik des Deutschen Reichs and from figures of physical volume of the separate export and import groups for each month of 1922 in Monatliche Nachweise über den auswärtigen Handel Deutschlands. The quantity of exports and imports for each group (according to the German classification) was multiplied by the average value per unit of that group in 1913. All groups were then added together to give the total value for each month. These totals were corrected by reference to the yearly total as quoted in Statistik des Deutschen Reichs, Vol. 317, p. 5.

Values of imports and exports, at 1913 prices, for each month of 1923 were obtained from Statistik des Deutschen Reichs, Vol. 317, p. 6.

49 This is the ratio of the percentage of potential to actual payments on imports to the percentage of potential to actual receipts on exports. The figures for January 1922, for instance, show that the Germans were receiving 160.82 gold marks’ worth of imports for every 100 gold marks’ worth that they would have received under gold standard conditions and were giving 193.89 gold marks’ worth of exports for every 100 gold marks’ worth that they would have given had their currency been gold. Considering exports as the payment for imports, this means that they were receiving 82.9% of the imports they would have secured in exchange for a given quantum of exports, if they had had a gold currency.

50 Vierteljahrshefte zur Konjunkturforschung, 1926, Ergänzungsheft 2, Reimar Hobbing, Berlin, 1926, pp. 5 ff.

51 ibid., p. 5.

• 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.
• 8Wholesale 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.
• 91    
• 10The 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.
• 11The 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.
• 12When 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.
• 13The 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.
• 14The 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.
• 15Dr. Schacht has written an excellent account of the reform in his Stabilization of the Mark, George Allen and Unwin Ltd., London, 1927.
• 16
• 17Though 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.
• 18This 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.
• 19Shortly after the inauguration of the reform Stresemann was followed by Marx as Chancellor, but Stresemann remained in the Cabinet.
• 20In exchange for the 100 billion originally delivered.
• 21Just 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%.
• 22The Reichsbank held gold reserves much more than adequate to cover this obligation.
• 23The justification alleged for this action was that the Germans had voluntarily defaulted in making the full timber deliveries required of them.
• 24The reparations demands might, however, have caused a fall in the exchange value of the mark regardless of its value in the domestic markets.
• 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.
• 32The 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.
• 33The 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.
• 34The 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.
• 35ibid., Vol. I, pp. 534. 477, 455.
• 36Of this amount approximately 97 billion marks had been obtained through long-term loans.
• 37The 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.
• 38When 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.
• 39Inflation 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.
• 40The 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.
• 41The 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.
• 42The 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.
• 43The 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.
• 44The 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.
• 45The 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.
• 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%.
• 49Cash 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!
• 50Cash 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!
• 51Though 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.