Core Notes 8
Overview:
In 20 years before WW1 German economy grew immensely but 4 years of total war seriously dislocated German economy.
In aftermath of defeat, revolution + imposed peace settlement of Versailles, Germany experienced severe economic difficulties.
Problems culminated in hyperinflation crisis, which gripped country for much of 1923.
Although economy still had many natural strengths + potential, by 1919 it faced
fundamental problems such as:
i) loss of resources from lost territories resulted in 16% decline in coal production, 13% decline in arable agricultural land and 48% loss of iron ore
ii) cost of paying reparations (set at 6600 million pounds in 1921)
iii) growing increase in prices → between 1914 + 1918 real value of mark was falling against other currencies, while prices of basic goods increased nearly fourfold.
iv) Increase in national debt to 144,000 million marks by 1919 compared with 5000 million marks in 1914.
Significantly, Germany had always depended on its ability to export to achieve economic growth; h/e between 1914 + 1918 world trade had collapsed + even after 1919 it remained very sluggish .
Financial Problems in the aftermath of the war:
Germany’s defeat plunged finances of state into crisis
For all countries involved, war effort required unprecedented levels of govt. spending → in Britain financed through combination of higher taxes and govt. borrowing
H/e in Germany wartime govts. chose to finance war through increased borrowing + by printing more money → meant that govt. debt grew + value of currency fell.
Highly risky strategy based on simple but flawed calculation – that Germany would win war + recoup losses by annexing industrial areas of defeated enemies + forcing them to pay heavy financial reparations.
Defeat for Germany not only deprived country of this repayment method, but also imposed heavy burden of reparations + loss of some industrial areas.
How Weimar Republic dealt with this:
In 1919, new govt. of W.R. faced with debt of 1.44 billion marks.
In situations where national debt needs to be reduced, govts. can either raise taxes or reduce spending, or both + in context of political instability of early years of W.R. both policies carried serious risks.
Rise in taxation would risk alienating support for new republic as anti-republican parties would be able to claim that taxes were being raised to pay reparations to Allies.
Also v. difficult for govts. to reduce spending → although military expenditure was dramatically reduced, civil servants needed payment.
Support for new republic considered to be so fragile that successive govts. avoided making civil servants redundant + even extended welfare benefits.
Given severe political difficulties Germany faced in the immediate aftermath of war, hardly surprising that govts. of W.R. didn’t try to address economic issues with unpopular measures (e.g. raising taxes/cutting spending)
Although national debt was high, unemployment had virtually disappeared by 1921 and there was a rapid recovery in economic activity.
In many ways, German economy coped with transition from war to peace much more successfully than other European economies.
H/e allowing inflation to continue unchecked was policy fraught with danger → prices, which had doubled between 1918 + 1919, had quadrupled again between 1919 + 1920, reaching a point 14 times higher than in 1913.
Why Inflation went unchecked:
Reason why govts. allowed this to happen partly political → 1920 coalition, led by Konstantin Fehrenbach, dominated by Centre Party which was supported by many powerful industrialists, benefitting from inflation by taking short-term loans from Germany’s central bank to expand their businesses.
Konstantin Fehrenbach (1852-1926): leading member of Centre Party + President (speaker) of Reichstag in 1919-20; became Chancellor in 1920, leading first cabinet in new republic that didn’t include SPD.
By time loans due for repayment, real value significantly reduced by inflation
Furthermore inflation had effect of lessening govt. burden of debt (although reparations themselves weren’t affected b/c were paid in gold marks or goods) + often suggested that German politicians had vested interest in allowing it to continue unchecked.
Therefore, in some ways, inflation = beneficial → by 1921, unemployment in Germany only 1.8% compared with nearly 17% in Great Britain, which in turn encouraged investment, especially from the USA.
H/E left unchecked inflation eventually became uncontrollable and by 1923 Germany’s high inflation became hyperinflation.
Political Impact of Reparations:
Treaty of Versailles included requirement that Germany would have to pay reparations in cash + goods but hadn’t fixed actual amount.
Reparations Commission set up to determine scale of damage caused by German armed forces in Allied countries.
Reparations Commission’s report concluded Germany should pay 132 billion gold marks, or 6.6 billion pounds, to be paid in annual installments.
When report presented to German govt. in 1921, with ultimatum to accept terms within 6 days, caused political crisis in Germany.
Cabinet of Fehrenbach resigned in protest at excessively harsh terms + replaced by another led by Chancellor Joseph Wirth.
Joseph Wirth (1879-1956): schoolteacher by profession but entered politics as member of Centre Party, became Minister of Finance in 1920 before becoming Chancellor in 1921.
Just as in 1919, with Allied ultimatum to Germany to sign Versailles Treaty, no alternative to acceptance + new govt. signed unwillingly + Germany made first payment soon after.
This was start of German policy of fulfillment of Treaty of Versailles under which successive German govts. calculated that cooperation would win sympathy from Allies + revision in terms once it became clear that full payment of reparations was beyond Germany’s capacity.
Postponement of Reparations? :
H/e was far from final settlement of reparations issue → by Jan 1922 Germany in such economic difficulties that Reparations Commission granted postponement of January + February installments.
In July, German govt. asked for further suspension of payments due that year.
In Nov. 1922, asked for loan of 500 million gold marks + to be released from obligations for 3-4 years in order to stabilize currency.
French = deeply suspicious this was simply an excuse + refused to agree to Germany’s requests.
This dispute set scene for major clash over reparations in 1923, during which French + Belgian forces occupied Ruhr industrial area of western Germany in attempt to extract payment by force.
Economic Impact of Reparations:
Burden of reparations undoubtedly made bad situation much worse → reparations payments made repayment of huge govt. debt resulting from war even more difficult.
In addition, Germany’s gold reserves inadequate for scale of reparations payments that had to be made in gold.
Another part of reparations payments had to be made in coal, but Germany had lost large part of its coal reserves in Versailles Treaty.
A further possible method of payment in manufactured goods, but workers + manufacturers in Allied countries wouldn’t agree to this as they regarded it as a threat to their jobs + businesses.
Germany might have been able to increase reserves of foreign currency, in order to make payments, by increasing exports to other nations.
H/e Allies hampered Germany’s export trade by confiscating entire merchant fleet + later imposed high tariffs on imports of German goods.
Allies forcing Germany to pay reparations but making it difficult for Germany to find money to do so.
Response of the German govt. was to print more money thereby making inflation even worse + making value of mark fall even further.
Reparations Issue:
English economist John Maynard Keynes was highly critical of Allied demand for 6.6 billion pounds in reparations.
He calculated that 2 billion pounds was a ‘safe maximum figure of Germany’s capacity to pay’ and he predicted that burden of reparations wouldn’t only damage Germany’s economy but also economies of Allied countries, since it would hamper economic recovery across continent.
H/e modern historian Peukert (1991) argued final figure of reparations was actually quite manageable for Germany since it amounted to only 2% of its GNP → his view = effects of reparations have been exaggerated.
It is certainly the case that German govts. in immediate post-war years allowed inflation to spiral since it suited their foreign policy objectives.
They could use the rapid decline in the value of the German currency to support their cause that reparations should either be abolished altogether, or at least, reduced + rescheduled to give Germany more time to pay.
Long Term Causes of Great Inflation:
Germany made no financial provision for long drawn-out war → despite increasing cost of war, Kaiser’s govt. decided for political reasons against increase in taxation.
Instead it borrowed massive sums by selling war bonds to public + when this policy proved insufficient from 1916 it simply allowed national debt to grow bigger.
Result of Imperial Germany’s financial policies was that by the end of 1918 only 16% of war expenditure had been raised from taxation – 84% had been borrowed.
Victory would have allowed Imperial Germany to settle debts by claiming reparations from Allies, but defeat meant reverse.
In addition, although war years had seen almost full employment, economy concentrated on supply of military weapons, which didn’t satisfy growing requirements of civilian consumers → high demand + shortage of consumer goods began to push prices up.
By 1919 Germany’s finances described by economic historian Volker Berghahn as ‘an unholy mess’.
Medium Term Causes of Great Inflation:
From 1919 Matthias Erzberger, finance minister, extensively increased taxation on profits, wealth + income
h/e didn’t go so far as balancing budget, deciding to adopt policy of ‘deficit financing’ in
belief it would:
i) give people more money to spend + increase demand for goods + create work.
ii) overcome problems of demobilizing millions of returning troops- booming economy
would ensure jobs for returning soldiers + sailors.
iii) cover cost of public spending on extensive welfare state e.g. health insurance, housing +
benefits for disabled and orphans.
Unfortunately an essential part of this policy was to allow inflation to continue.
Short Term Causes of Great Inflation:
Germany had already been allowed to postpone several instalments of its reparations payments in early 1922, but attempt to resolve crisis on international level by calling Genoa Economic Conference = ill-fated.
When in July 1922 German govt. made another request for ‘holiday’ from making reparations payments, final stage of country’s inflationary crisis set in.
French govt. led by Raymond Poincare, suspected German intentions + was determined to secure what was seen as France’s rightful claims.
Therefore when in December 1922 the Reparations Commission declared Germany to be in default, Poincare ordered French and Belgian troops to occupy industrial Ruhr to make Germany pay in kind for what it hadn’t paid in capital.
In the next few months inflationary spiral ran out of control.
Govt. led by Wilhelm Cuno embarked on policy of ‘passive resistance’ and invasion helped unite German people → urged workers to go on strike + refuse to cooperate with French authorities, although it also promised to carry on paying their wages.
At same time govt. was unable to collect taxes from Ruhr area + French prevented delivery of coal to rest of Germany, thus forcing necessary stocks of fuel to be imported.
In this situation, govt. finances collapsed + mark fell to worthless levels → by autyumn 1923 it cost more to print a bank note than the note was worth + Reichsbank forced to use newspaper presses to produce sufficient money.
German currency ceased to have any real value + German people had to resort to barter.
Conclusion:
Fundamental cause of Great Inflation = mismanagement of Germany’s finances from 1914 onwards.
Certainly inflationary spiral didn’t increase at an even rate + short periods when it slackened h/e at no time was there willingness by various German govts. to bring spending + borrowing back within reasonable limits.
Until 1918 cost of waging war = excuse but in immediate post-war period high levels of debt allowed to continue.
Has been argued by some that inflation remained quite modest in years 1914-22 + perhaps acceptable in view of all various difficulties facing new govt.
H/e payment of reparations from 1921 simply added to already desperate situation + govt. found it more convenient to print money than tackle basic problems facing economy.
By end of 1922 hyperinflation set in + Cuno’s govt. made no effort to deal with situation.
Indeed, it could be said that Cuno deliberately deepened economic crisis + played on nationalist fervor brought about by popular decision to encourage ‘passive resistance’.
Only in August 1923 when German economy on verge of complete collapse that new coalition govt. formed under Gustav Stresemann, who found will to introduce economic policy aimed at controlling amount of money in circulation.
Overview:
In 20 years before WW1 German economy grew immensely but 4 years of total war seriously dislocated German economy.
In aftermath of defeat, revolution + imposed peace settlement of Versailles, Germany experienced severe economic difficulties.
Problems culminated in hyperinflation crisis, which gripped country for much of 1923.
Although economy still had many natural strengths + potential, by 1919 it faced
fundamental problems such as:
i) loss of resources from lost territories resulted in 16% decline in coal production, 13% decline in arable agricultural land and 48% loss of iron ore
ii) cost of paying reparations (set at 6600 million pounds in 1921)
iii) growing increase in prices → between 1914 + 1918 real value of mark was falling against other currencies, while prices of basic goods increased nearly fourfold.
iv) Increase in national debt to 144,000 million marks by 1919 compared with 5000 million marks in 1914.
Significantly, Germany had always depended on its ability to export to achieve economic growth; h/e between 1914 + 1918 world trade had collapsed + even after 1919 it remained very sluggish .
Financial Problems in the aftermath of the war:
Germany’s defeat plunged finances of state into crisis
For all countries involved, war effort required unprecedented levels of govt. spending → in Britain financed through combination of higher taxes and govt. borrowing
H/e in Germany wartime govts. chose to finance war through increased borrowing + by printing more money → meant that govt. debt grew + value of currency fell.
Highly risky strategy based on simple but flawed calculation – that Germany would win war + recoup losses by annexing industrial areas of defeated enemies + forcing them to pay heavy financial reparations.
Defeat for Germany not only deprived country of this repayment method, but also imposed heavy burden of reparations + loss of some industrial areas.
How Weimar Republic dealt with this:
In 1919, new govt. of W.R. faced with debt of 1.44 billion marks.
In situations where national debt needs to be reduced, govts. can either raise taxes or reduce spending, or both + in context of political instability of early years of W.R. both policies carried serious risks.
Rise in taxation would risk alienating support for new republic as anti-republican parties would be able to claim that taxes were being raised to pay reparations to Allies.
Also v. difficult for govts. to reduce spending → although military expenditure was dramatically reduced, civil servants needed payment.
Support for new republic considered to be so fragile that successive govts. avoided making civil servants redundant + even extended welfare benefits.
Given severe political difficulties Germany faced in the immediate aftermath of war, hardly surprising that govts. of W.R. didn’t try to address economic issues with unpopular measures (e.g. raising taxes/cutting spending)
Although national debt was high, unemployment had virtually disappeared by 1921 and there was a rapid recovery in economic activity.
In many ways, German economy coped with transition from war to peace much more successfully than other European economies.
H/e allowing inflation to continue unchecked was policy fraught with danger → prices, which had doubled between 1918 + 1919, had quadrupled again between 1919 + 1920, reaching a point 14 times higher than in 1913.
Why Inflation went unchecked:
Reason why govts. allowed this to happen partly political → 1920 coalition, led by Konstantin Fehrenbach, dominated by Centre Party which was supported by many powerful industrialists, benefitting from inflation by taking short-term loans from Germany’s central bank to expand their businesses.
Konstantin Fehrenbach (1852-1926): leading member of Centre Party + President (speaker) of Reichstag in 1919-20; became Chancellor in 1920, leading first cabinet in new republic that didn’t include SPD.
By time loans due for repayment, real value significantly reduced by inflation
Furthermore inflation had effect of lessening govt. burden of debt (although reparations themselves weren’t affected b/c were paid in gold marks or goods) + often suggested that German politicians had vested interest in allowing it to continue unchecked.
Therefore, in some ways, inflation = beneficial → by 1921, unemployment in Germany only 1.8% compared with nearly 17% in Great Britain, which in turn encouraged investment, especially from the USA.
H/E left unchecked inflation eventually became uncontrollable and by 1923 Germany’s high inflation became hyperinflation.
Political Impact of Reparations:
Treaty of Versailles included requirement that Germany would have to pay reparations in cash + goods but hadn’t fixed actual amount.
Reparations Commission set up to determine scale of damage caused by German armed forces in Allied countries.
Reparations Commission’s report concluded Germany should pay 132 billion gold marks, or 6.6 billion pounds, to be paid in annual installments.
When report presented to German govt. in 1921, with ultimatum to accept terms within 6 days, caused political crisis in Germany.
Cabinet of Fehrenbach resigned in protest at excessively harsh terms + replaced by another led by Chancellor Joseph Wirth.
Joseph Wirth (1879-1956): schoolteacher by profession but entered politics as member of Centre Party, became Minister of Finance in 1920 before becoming Chancellor in 1921.
Just as in 1919, with Allied ultimatum to Germany to sign Versailles Treaty, no alternative to acceptance + new govt. signed unwillingly + Germany made first payment soon after.
This was start of German policy of fulfillment of Treaty of Versailles under which successive German govts. calculated that cooperation would win sympathy from Allies + revision in terms once it became clear that full payment of reparations was beyond Germany’s capacity.
Postponement of Reparations? :
H/e was far from final settlement of reparations issue → by Jan 1922 Germany in such economic difficulties that Reparations Commission granted postponement of January + February installments.
In July, German govt. asked for further suspension of payments due that year.
In Nov. 1922, asked for loan of 500 million gold marks + to be released from obligations for 3-4 years in order to stabilize currency.
French = deeply suspicious this was simply an excuse + refused to agree to Germany’s requests.
This dispute set scene for major clash over reparations in 1923, during which French + Belgian forces occupied Ruhr industrial area of western Germany in attempt to extract payment by force.
Economic Impact of Reparations:
Burden of reparations undoubtedly made bad situation much worse → reparations payments made repayment of huge govt. debt resulting from war even more difficult.
In addition, Germany’s gold reserves inadequate for scale of reparations payments that had to be made in gold.
Another part of reparations payments had to be made in coal, but Germany had lost large part of its coal reserves in Versailles Treaty.
A further possible method of payment in manufactured goods, but workers + manufacturers in Allied countries wouldn’t agree to this as they regarded it as a threat to their jobs + businesses.
Germany might have been able to increase reserves of foreign currency, in order to make payments, by increasing exports to other nations.
H/e Allies hampered Germany’s export trade by confiscating entire merchant fleet + later imposed high tariffs on imports of German goods.
Allies forcing Germany to pay reparations but making it difficult for Germany to find money to do so.
Response of the German govt. was to print more money thereby making inflation even worse + making value of mark fall even further.
Reparations Issue:
English economist John Maynard Keynes was highly critical of Allied demand for 6.6 billion pounds in reparations.
He calculated that 2 billion pounds was a ‘safe maximum figure of Germany’s capacity to pay’ and he predicted that burden of reparations wouldn’t only damage Germany’s economy but also economies of Allied countries, since it would hamper economic recovery across continent.
H/e modern historian Peukert (1991) argued final figure of reparations was actually quite manageable for Germany since it amounted to only 2% of its GNP → his view = effects of reparations have been exaggerated.
It is certainly the case that German govts. in immediate post-war years allowed inflation to spiral since it suited their foreign policy objectives.
They could use the rapid decline in the value of the German currency to support their cause that reparations should either be abolished altogether, or at least, reduced + rescheduled to give Germany more time to pay.
Long Term Causes of Great Inflation:
Germany made no financial provision for long drawn-out war → despite increasing cost of war, Kaiser’s govt. decided for political reasons against increase in taxation.
Instead it borrowed massive sums by selling war bonds to public + when this policy proved insufficient from 1916 it simply allowed national debt to grow bigger.
Result of Imperial Germany’s financial policies was that by the end of 1918 only 16% of war expenditure had been raised from taxation – 84% had been borrowed.
Victory would have allowed Imperial Germany to settle debts by claiming reparations from Allies, but defeat meant reverse.
In addition, although war years had seen almost full employment, economy concentrated on supply of military weapons, which didn’t satisfy growing requirements of civilian consumers → high demand + shortage of consumer goods began to push prices up.
By 1919 Germany’s finances described by economic historian Volker Berghahn as ‘an unholy mess’.
Medium Term Causes of Great Inflation:
From 1919 Matthias Erzberger, finance minister, extensively increased taxation on profits, wealth + income
h/e didn’t go so far as balancing budget, deciding to adopt policy of ‘deficit financing’ in
belief it would:
i) give people more money to spend + increase demand for goods + create work.
ii) overcome problems of demobilizing millions of returning troops- booming economy
would ensure jobs for returning soldiers + sailors.
iii) cover cost of public spending on extensive welfare state e.g. health insurance, housing +
benefits for disabled and orphans.
Unfortunately an essential part of this policy was to allow inflation to continue.
Short Term Causes of Great Inflation:
Germany had already been allowed to postpone several instalments of its reparations payments in early 1922, but attempt to resolve crisis on international level by calling Genoa Economic Conference = ill-fated.
When in July 1922 German govt. made another request for ‘holiday’ from making reparations payments, final stage of country’s inflationary crisis set in.
French govt. led by Raymond Poincare, suspected German intentions + was determined to secure what was seen as France’s rightful claims.
Therefore when in December 1922 the Reparations Commission declared Germany to be in default, Poincare ordered French and Belgian troops to occupy industrial Ruhr to make Germany pay in kind for what it hadn’t paid in capital.
In the next few months inflationary spiral ran out of control.
Govt. led by Wilhelm Cuno embarked on policy of ‘passive resistance’ and invasion helped unite German people → urged workers to go on strike + refuse to cooperate with French authorities, although it also promised to carry on paying their wages.
At same time govt. was unable to collect taxes from Ruhr area + French prevented delivery of coal to rest of Germany, thus forcing necessary stocks of fuel to be imported.
In this situation, govt. finances collapsed + mark fell to worthless levels → by autyumn 1923 it cost more to print a bank note than the note was worth + Reichsbank forced to use newspaper presses to produce sufficient money.
German currency ceased to have any real value + German people had to resort to barter.
Conclusion:
Fundamental cause of Great Inflation = mismanagement of Germany’s finances from 1914 onwards.
Certainly inflationary spiral didn’t increase at an even rate + short periods when it slackened h/e at no time was there willingness by various German govts. to bring spending + borrowing back within reasonable limits.
Until 1918 cost of waging war = excuse but in immediate post-war period high levels of debt allowed to continue.
Has been argued by some that inflation remained quite modest in years 1914-22 + perhaps acceptable in view of all various difficulties facing new govt.
H/e payment of reparations from 1921 simply added to already desperate situation + govt. found it more convenient to print money than tackle basic problems facing economy.
By end of 1922 hyperinflation set in + Cuno’s govt. made no effort to deal with situation.
Indeed, it could be said that Cuno deliberately deepened economic crisis + played on nationalist fervor brought about by popular decision to encourage ‘passive resistance’.
Only in August 1923 when German economy on verge of complete collapse that new coalition govt. formed under Gustav Stresemann, who found will to introduce economic policy aimed at controlling amount of money in circulation.
