German Economic rebuilding 1924 - 28

To what extent did the German economy recover in industry and agriculture between 1924 and 1928?

Introduction:

• Introduction of new currency - ‘rentenmark’ - and measures of Dawes Plan ushered in 5 yrs of economic growth and affluence.

• The period stands out between the economic chaos of 1922-3 and Great Depression 1929-33. For many Germans it seemed as if remarkable recovery had been made.

  Industry:

• 1925 - Germany more stable and prosperous → combination of new currency, Dawes Plan and Schacht’s work w/ Reichsbank (interest rates kept high, attract foreign investment) improved Germany’s economy.

• Despite loss of resources (Treaty of Versailles) heavy industry recovered fairly qucikly, by 1928 production levels had reached those of 1913.

• American loans stimulated the economy → industrial output grew from 1924, didn’t reach 1913 level until 1929.

• Foreign bankers, attracted by Germany’s high interest rates → large US corporations, (e.g., Ford and General Motors) invested massively/ selectively, in mass production factories.

• Extent of economic recovery shouldn’t be exaggerated → growth rates were unsteady: 1924-25 and 1927 = good years; economy shrank in 1928 and 1929.

• Investment in new machinery + factories was falling by 1929.

‘Rationalisation’ of German Industry:

• German industry had extensive ‘rationalisation’ w/ new management and production techniques introduced + antiquated equipment replaced with new machinery.

• Germany handed over materials as reparations, end of ww1 allowed new start + w/ American industrialists buying out/ making cooperative agreements with smaller firms = cartels.

  Cartel: Groups of companies in the same industries, which combined together to fix prices and protect profits. Cartels reduced competition but allowed more of the profits to be reinvested e.g. in research.

• Due to growing no. of cartels, German industry had advantage of lowering costs; cartels had better purchasing power than small industries (e.g. IG Farben, the chemicals giant, became largest manufacturing enterprise in Europe, while Vereinigte Stahlwerke combined coal, iron and steel interests of Germany’s great industrial companies and controlled nearly half all production.

• By 1925, 3000 such cartel arrangements in operation, including 90% of Germany’s coal and steel production.

• After 1925, Germany was allowed, under terms of Versailles Treaty, to protect its industries by introducing tariffs on imported foreign goods.

  Tariff: duties/taxes that have to be paid on goods entering a country. Their purpose is to make foreign goods more expensive than those produced in the country, thereby protecting firms from foreign competition.

• Between 1925 and 1929, German exports rose by 40%.

Economic Recovery:

● Advances made in the chemical industry e.g. large-scale production of artificial fertilisers.

● Car + aeroplane industries developed, although cars still too expensive for average German.

● Inflation rate = close to zero + living standards rose as wages began to increase from 1924.

● Loans helped finance building of housing, schools, municipal buildings, road + public works.

● Massive population growth had created acute housing shortage in Germany by early 20th c., and overcrowding and insanitary conditions of working-class city accommodation had been linked to political instability → so state initiatives to provide affordable homes were of great importance for future stability.

● 1925: 178, 930 dwellings built - over 70,000 more than in previous year - and in 1926 205, 793 more homes.

● Money spent on welfare payments + health improvements and in 1924 new schemes of relief were launched.

Strikes and Wages:

● No. of strikes in German industry declined, partly b/c of new system of compulsory arbitration for settling industrial disputes issued. ( see page 37 of textbook for number of strikes)

● Compulsory arbitration: Industrial suits often settled by arbitration, where both sides agree to allow independent figure, known as arbitrator, decide on a situation. In Weimar Germany arbitration was made compulsory by law.

● H/e employers felt this system was biased in favour of the unions + resented state’s interference in their affairs.

● Weimar Republic had already set maximum of 8 hours for working day + had given trade unions right to be part of works councils in factories + mines.

● In 1928, a dispute over wages in iron + steel industry in Ruhr resulted in arbitrator granting small wage increase to workers.

● Employers then refused to pay the increase + locked out the workers for 4 weeks.

● Lock out: an action by an employer to stop workers doing their jobs until they agree to the employer’s terms and conditions.

● In this dispute, the workers were backed by the govt.and paid by the state.

● There were undoubtedly improvements in living standards for ordinary German workers, especially those who were backed by powerful trade unions.

● They benefited from increases in real value of wages in each year after 1924 → in 1927, real wages increased by 9% and in 1928 they rose by further 12%. Hourly wage rates rose every year from 1924 to 1930.

Limits to economic recovery:

● In speech given shortly before his death in 1929, Gustav Stresemann warned ‘The economic position is only flourishing on the surface. Germany is dancing on a volcano. If the short-term loans are called in, a large section of our economy would collapse’.

● The economic growth was uneven, and in 1926 production actually declined.

● In overseas trade, the value of imports always exceeded that of exports.

● Unemployment was continuing problem in these years → by the end of 1925, unemployment had reached one million → by March 1926 it was over 3 million, although it did fall after that. Unemployment never fell below 1.3 million after 1925. Averaged 1.9 million in 1929.

● This was due partly to there being more people seeking work, partly to public spending cuts, but also to companies reducing their workforces in order to make efficiency savings.

● Mining companies reduced workforces by 136,000 between 1922 and 1925, and reduced them by another 56,000 between 1925 and 1929.

● The Weimar ‘economic miracle’ didn’t benefit everyone → Mittelstand, professional middle classes, gained v. little in this so-called ‘golden age’. Bankrupted by hyperinflation of 1923, middle-class managers, clerks + bureaucrats didn’t benefit fully from improved economic climate.

● White-collar workers didn’t enjoy wage rises of industrial sector → by later 1920s, industrial sector wages had drawn level with those of middle class, and in some cases exceeded them.

Agriculture:

● Farmers gained v. little benefit from economic recovery of these years → worldwide agricultural depression kept food prices low + few farmers able to make profit on their land.

● During inflation of early 1920s, large landowners + farmers borrowed money to buy new machinery + improve their farms.

● H/e smaller peasant farmers tended to hoard money + savings wiped out by inflation.

● After 1923, govt. Made it easier for farmers to borrow money, but this made matters worse → farmers became saddled with debt at a time when prices were falling and they therefore couldn’t keep up with repayments.

● Increased taxes introduced to pay for welfare benefits of unemployed and sick were regarded as unfair burden on farmers and landowners.

● Govt. tried to relieve farmers’ plight by introducing high import tariffs on food products, import controls and subsidies to farmers, but these measures didn’t go far enough/

● The plight of German farmers worsened due to global grain surplus + price slump in 1925 and 1926.

● By the late 1920s, there was an increase in bankruptcies amongst farmers + many of them lost their land as the banks demanded repayment of loans.

● When farmers borrowed from banks, they had to use their farms as security for loans → when farmers were unable to replay loans, banks ‘foreclosed’ on the contract: the banks took over the farms and evicted the farmers.

● Foreclosure: taking possession of mortgaged property when someone fails to keep up their repayments.

● 1928 → farmers initiated a series of small-scale riots known as ‘farmers’ revenge’ to protect against foreclosures and low market prices.

● By 1929, German agricultural production less than ¾ of pre-war levels.

● By late 1920s income per head in agriculture was 44% below national average.

Fundamental Economic Problems:

● World economic conditions: Traditionally, Germany had relied on its ability to export to achieve economic growth, but world trade didn’t return to pre-war levels. German exports hindered by protective tariffs in many parts of the world. They were additionally hindered by loss of valuable resources in territories such as Alsace-Lorraine. Therefore German balance of trade regularly in deficit.

● Agriculture: peasantry made up ⅓ of national population and faced difficulties b/c of worldwide pressures. Fall in world prices form mid-1920s placed great strain on farmers, who failed to make a profit. Support of govt. Financial aid and tariffs only partially helped reduce problems → decline in income reduced spending power of large section of population and led to fall in demand within the economy as a whole.

● Savings and investment: savers had lost a great deal of money in Great Inflation and after 1924 less enthusiastic to invest money. As a result, German economy relied on investors from abroad e.g. USA attracted by higher interest rates. Thus German economic well-being dependent on foreign investment.

● Government finances: government succeeded in balancing the budget in 1924 but from 1925 it continually ran into debt and by 1928 public expenditure reached 26% of GNP, double pre-war figure. Government found it difficult to encourage domestic savings and relied more on international loans, which didn’t create basis for solid future economic growth.

Conclusion: ‘A sick economy’?

● It has been suggested that the problems faced by the German economy before the world depression of 1929 were disguised by flood of foreign capital and exacerbated by development of extensive social welfare system.

● German economy in poor state b/c:

i) foreign loans made it vulnerable to problems in world economy

ii) investment too low to encourage growth

iii) cost of welfare could only be met by government taking on increasing debts

iv) agricultural sector faced problems from mid-1920s and various sectors of German economy had started to slow down by 1927.

● K. Borchardt, 1970s: Weimar Germany ‘an abnormal, in fact, sick economy’

● But hard to assess this without thinking of what might have happened without world economic crisis.

● Evidence does suggest that by 1929 the Weimar Republic was facing serious difficulties and was already heading for major economic downturn of its own making.