Economic and social problems in Germany

WW1 | Government/Welfare | Reparations | Occupation | Hyperinflation Crisis | Consequences

How did WW1 lead to hyperinflation?

The kaiser’s government paid for the war via printing more money and war bonds (i.e the people invest in government funds t finance the war with the belief that their savings would be secure).

The government were against raising taxes (which was how Britain paid for the war).

Germany made no financial provision for a long drawn out war; they expected to win the war and recoup its losses from annexing other land and forcing them to pay.

War bonds proved to be insufficient in 1916 but was continued to be used.

• By 1918, 84% of war expenditure was raised by borrowing money.

This led to hyperinflation as the government needed to pay off national debt (1.44 billion marks by 1919) as well as reparations.

Recovering from this debt would typically be achieved by decreasing public spending or by increasing taxes; however, the newly-created Weimar Republic were conflicted as these methods would cause them to lose support.

How did the actions of the finance minister and the actions of the chancellor lead to hyperinflation?

From 1919, Matthias Erzberger, the finance minister, extensively increased taxation profits, wealth, and income.

He adapted a policy of deficit financing (the government spends more than it receives in revenue) in the belief that it would give more money for people to spend thus increasing the demand for goods and thereby create work, covering the cost of public spending on an extensive welfare state.

This led to hyperinflation as a vital part of policy was allowing inflation to continue.

The welfare state:

• 1919: the constitution highlighted that every German citizen should have the right to work or welfare; reform included an 8 hour work day, aid for veterans, and a state health insurance system

• 1922: National Youth Welfare Act gave all children a right to education

The welfare system was expensive so more money was printed to pay for it, causing hyperinflation.

Inflation was allowed to continue until 1923 thanks to Konstantin Fehrenbach’s coalition government in 1920 which benefitted industrialists (the main voters of his party - the Centre Party).

It was believed that the USA might increase investment if the country continued to financially struggle.

Inflation made reparations more manageable as it made the burden of debt lesson; it also made the economic shift from war to peace better than other countries.

• Unemployment virtually disappeared by 1921; in Germany it was 1.8% whereas in Britain it was 17%.

How did reparations lead to hyperinflation?

In 1921, the Reparations Commission concluded that Germany’s reparations was £6.6 billion or 132 billion gold marks.

Germany had six days to accept causing Fehrenbach’s government to resign in protest and was replaced by Joseph Wirth.

The government followed the policy of fulfillment in which cooperation would win sympathy from the Allies and a revision in the terms once it became clear that they couldn’t play the full payment (as the payment was so high and that they had to pay debt).

The reparations needed to be paid in hard currency (like currency or gold) but the treaty made it very hard for Germany to do so as the country’s gold reserves were inadequate and 15% of the country’s coal reserves were taken.

The treaty confiscated Germany’s merchant fleet, restricted trade, and later imposed high tariffs on German goods making it hard for Germany to increase the amount of foreign currency by increasing exports.

So, to obtain stronger foreign currencies, the government printed large amounts of money to pay for the reparations leading to hyperinflation.

How did the Franco-Belgian occupation of the Ruhr lead to hyperinflation?

Germany’s financial difficulties led to a postponement of payments in January and July of 1922; in November, they requested for a loan of 500 million gold marks and to be released from its obligations for 3-4 years to stabilise its currency.

France was suspicious; led by Raymond Poincaré, the French government ordered 60,000 Belgian and French troops to occupy the Ruhr in January 1923. (This number later increased to 100,000.)

The troops seized the mines, steel works, and railways, and set up machine gun posts in the streets.

Chancellor Wilhelm Cuno told the people in the Ruhr to follow ‘passive resistance’, in which people do not cooperate with the troops.

German paramilitary troops secretly organised acts of sabotage; workers went on strike as the government promised them their wages, which came from more printed money.

The German government were unable to collect taxes from the Ruhr and as the French prevented the delivery of coal to the rest of Germany, more money had to be spent on importing fuel.

150,00 Germans were expelled; 132 were shot, including a 7-year-old boy.

By May 1923, deliveries were a third of the average monthly deliveries in 1922 and the output of the Ruhr became a fifth of its preoccupation output.

What was the hyperinflation crisis of 1923?

More money was being printed further decreasing the value of the mark; the Reichsbank was forced to use newspaper presses to produce sufficient money.

The number of American dollars to one German mark:

• July 1914: 4.2

• January 1923: 17972

• 15th November 1923: 4.2 trillion

A kilo of rye bread, a staple of the German diet, by 19th November 1923 had risen to 233 billion marks when in January it costed 163 marks.

People had to spend wheelbarrows full of worthless paper money immediately.

Shortages led to speculators hoarding supplies.

People resorted to bartering their possessions as supplies were worth more than money.

What were the consequences of the hyperinflation crisis?

Hyperinflation led to a breakdown in law and order:

• Food riots and crowds looting shops

• Increased convictions for theft

• Gangs travelled to the countryside attempting to take food from farms but were met with angry farmers determined to protect their livelihoods

Those who suffered:

• Those who invested in war bonds as interested payments decreased in value and therefore meant nothing

• People who lived on fixed incomes (like pensioners) suffered as their money meant nothing

• Those that relied on their savings/bank accounts

• Those not part of trade unions as wages didn’t match the rising prices causing a lower standard of living

  • By 1923, only 29.3% of the workforce were fully employed

• Mittelstand: costs rose and the prices they charged couldn’t keep up with inflation

• The sick suffered as medical care costs increased

  • Widespread malnutrition resulted in increased rates of rickets and tuberculosis

  • increased death and suicide rates

Those who benefitted:

• Farmers benefitted as they valued food more than money which was in high demand anyway

• Foreigners or owners of foreign exchange benefitted as the rate of exchange was very attractive

• Black marketeers bought food stocks and sold them at vastly inflated prices

• Those that paid off their debts, mortgages, and loans as loans didn’t increase with inflation so could be paid of

• Some businessmen profited by borrowing cheaply and investing in new industrial enterprises

  • like Hugo Stinnes, who by the end of 1923, controlled 20% of the German industry (‘king of the Ruhr’ ‘inflation king’)