2011

SATISH KHADKA
BBA-BI (B) 4th

[CRISIS IN GERMANY]

CRISIS IN GERMANY
THE DEFEAT OF Germany in the 1914-18 war had massive political, social and economic consequences. The Allies were determined to obtain their pound of flesh from the defeated Germany. The clear aim of the victor powers, as expressed in the Treaty of Versailles of 1919, was the crushing of German militarism and the bleeding of the German economy. As compensation for the Allies, Germanys colonies were divided between Italy, France, Belgium, Japan and Britain, the latter taking the lions share. Germany itself was also dismembered: the Saar mines were transferred to France, as was Alsace-Lorraine, with its two million population and three-quarters of German iron production. The southern part of Silesia, with its industries and mines were ceded to Poland, whereas the north part of Schleswig went to Denmark. The Allied nations seized 5000 cannons, 30,000 machine guns, 3000 mine throwers, 2000 airplanes, 100 submarines and eight cruisers. The German army was drastically reduced to 100,000 men, an adequate instrument to be used if needed against revolution. In May 1921 the hard-headed Allies demanded the full payment of 132,000 million gold marks as reparations. To overcome any major difficulties, and show their generosity, payment in kind was arranged, whereby Britain was to receive tonnage for tonnage and class for class all her lost shipping during the war. The French were given 5000 trains, 150,000 railway wagons, 10,000 lorries and 140,000 cows. The Belgians also received their payment in cattle. Germany had been completely humiliated and economically stripped by the Allies. But the German bourgeoisie were able to make enormous profits from the inflation, while the mass of the population faced starvation and severe hardship. This had several consequences. First, it resulted in the value of the German currency falling. The table above illustrates how rapidly this happened. Second, it resulted in the cost of items within Germany rising as the relative cost of importation rose as the value of the currency declined. This is inflationary in nature and has several consequences. In situations such as this people make use of their savings, as they cannot afford to make purchases using only their weekly or monthly income. In Germany billions of dollars worth of hoarded and saved marks re-entered the economy in the period after the war. Again, this result in inflation rise and the value of the currency falling when compared to other currencies. Combined, these factors lead to a cycle of devaluation and inflation that can, and did, become hyperinflation. It is not however the case that the economy within Germany continued to decline throughout the whole of the period 1919 1923. In 1920 the currency stabilized for a period of some 6 months. The price index remained almost constant and the value of the German mark remained at approximately 1US$ to 69 German marks. The Weimar Government, it has been argued, could have introduced a stable currency at this point. Instead they continued to increase the amount of money in circulation which is inflationary. The result was hyperinflation in 1923. This had massive consequences for the economy and society in general.

What caused the inflation? The inflation was caused by the government issuing a flood of new money, causing prices to rise. Then, as the inflation gained momentum, events seemed to demand the printing of larger and larger issues of currency. To half the process would have taken political courage, and this was lacking. As usual, the true facts were hidden behind a barrage of excuses, explanations and propaganda laying blame on everyone except the true culprit. First, it would be wrong to think that everyone was opposed to inflation. Many big business leaders accepted it cheerfully. It wiped out their debts. They knew how to protect themselves and even profit--by speculating in foreign exchange, by converting money into goods and fixed plant, by borrowing money from the bank and using it to buy up cheap stocks and competing companies. Their wage costs, in true value, decreased, swelling their profits. Yet many workers also thought that they were benefiting, at least in the earlier stages of the inflation. Their wages were increased, and it took time before they recognized that, with prices soaring even faster, they were actually suffering a cut in true income. Above all, it became an article of faith among the political leaders and most ordinary citizens that the inflation was really due to the burden of reparation payments imposed by the peace treaty. This meant, so the argument ran, that Germany would be stripped of its gold, foreign exchange and wealth; it would be bankrupt. Hence, the mark fell in value in terms of gold or dollars. This drop in the foreign exchange value of the mark was said to be the true reason for the inflation. The German leaders felt that the collapse of the mark was proving how impossible it was for Germany to pay the reparations which were demanded. Stabilization of the mark would have spoiled this "proof." Especially after France occupied the Ruhr in January 1923; it was felt that the destruction of the mark was somehow a blow against the hated occupier--the only patriotic response available to disarmed Germany. Finally, inflation seemed to bring prosperity. In 1921, when the rest of the world was in a severe post-war recession, production indices in Germany rose sharply. Late in 1921 the mark stabilized temporarily, and business promptly weakened. By early 1922 the mark was sliding again, and business immediately revived. People were buying goods as fast as they obtained money; companies rushed to expand plants and turn money into fixed investment. Germany was actually envied for its "prosperity" by many foreigners. Effects of Inflation on Business As inflation proceeded, people rushed to buy goods and get rid of their depreciated money. For similar reasons, businessmen hastened to buy machinery, to build new factories, to buy huge stocks of coal, steel and other raw materials. Those who had access to credit borrowed heavily for these purposes, and inflation wiped out their debt. There was a tremendous conversion of working capital into fixed investments. Business was booming and unemployment virtually vanished until the last stages of the inflation. Farmers got rid of currency by heavy purchases of equipment, and later many were left holding large supplies of useless machinery. Shipbuilding was expanded beyond all market

needs. Marginal mines were opened leading to serious overproduction later on. But while basic industries prospered, there was a severe depression in consumer goods industries such as textiles, meat, beer, sugar and tobacco. Too many workers and persons on fixed incomes had lost their purchasing power. Earlier the great German industrial leaders--men like Krupp, Thyssen and Siemens--had developed basic new ideas in technology or in organization. But now the rising stars were those of shrewd speculators and manipulators geared to quick trading and to jumping from deal to deal and from company to company. The most successful were those who saw the trend of events early, who borrowed to the hilt and bought up goods, shares and companies at bargain prices. Conglomerates sprung up forty years before the heyday of the conglomerate movement in the U.S. Perhaps the biggest operator of the day, Hugo Stinnes, formed a giant conglomerate including companies in oil, coal, steel, shipyards, electrical works, insurance, newspapers and hotels. He died in 1924, just before his empire fell apart in the cold winds of the stabilization period. Most of these new mushroom combinations and conglomerates were speculative bubbles which were only able to survive as long as they benefited from ongoing inflation. Stabilization--The Rentenmark Miracle In November 1923, a currency reform was undertaken. A new bank, the Rentenbank, was created to issue a new currency--the Rentenmark. This money was exchangeable for bonds supposedly backed up by land and industrial plant a total of 2.4 billion Rentenmarks was created, and each Rentenmark was valued at one trillion old paper marks. From that moment on the depreciation stopped--the Rentenmarks held their value; even the old paper marks held stable. Inflation ceased. What was the secret of the "miracle of the Rentenmark"? After all, the new currency was not redeemable in anything. Its backing by real property was a fiction, since there was no way by which property could be foreclosed or distributed. Further, there we have the government distributing a vast new supply of money--2.4 billion trillion in terms of the old mark. Ought that not have led to a new wild inflation? To understand this, we must recall that the real value of the money circulating in late 1923 was small--equal to a mere 168 million pre-war gold marks. The continued depreciation at this point was due to utter lack of confidence--to the belief that the printing presses would run indefinitely. But actually there was a great shortage of and need for money. New money could be introduced without price inflation if only people had confidence in it. How was confidence developed? First, the government announced that the new currency would be "wertbestaendig"--stable in value. In their hunger for usable money people accepted this, at least until it should be proven false. Then the property backing seemed to give the currency value. True, the Assignats of the French Revolution, backed by fixed property, had depreciated, but still the backing helped. Second, and certainly most important, the government limited strictly the amount of Rentenmarks which could be issued and it halted the issue and discounting of notes and the

creation of paper marks. Finally, after April 1924, the Reichsbank stopped the expansion of credit to businesses which had been stimulating inflation. Businessmen were required to repay loans in gold marks, equal to the original value of the loan. Thereafter, incentive was gone to borrow except for legitimate needs. In August 1924 the reform was completed by introduction of a new Reichsmark, equal in value to the Rentenmark. The Reichsmark has a 30% gold backing. It was not redeemable in gold, but the government undertook to support it by buying in the foreign exchange markets as necessary. Drastic new taxes were imposed, and with the inflation ended, tax receipts increased impressively. In 1924-1925 the government had a surplus. After the stabilization, most companies found that they were critically short of working capital. Their funds had been dissipated or converted into goods and plant, and cash was very short. They could no longer rely on a stream of incoming capital at the cost of bond holders and workers. Taxes were again a serious burden, as were wage agreements that had been made under the inflation. In other ways the business climate changed. Now there was a huge demand for consumer goods, but the capital goods industries which had so over expanded in the inflation were depressed. Huge stocks of coal, steel and other materials which had been accumulated was a drug on the market. Agriculture and building, however, flourished. Many of the speculative and conglomerate companies which had been formed in the inflation were unable to survive. They failed, or split up into their original components. In 1923 there had been only 263 bankruptcies; in 1924 there were 6,033. Most of the great inflation speculators were ruined or faded from the business scene. However, strong, well-organized companies like Krupp and Thyssen which had resisted overexpansion and speculation were able to weather the stabilization period and to thrive. How Investments Fared At the start it is important to understand how hard it was to obtain real income during the inflation. Professionals, skilled workers and others used to enjoying good income found their real salaries disastrously cut. Those who depended on savings, pensions or investment income for a living faced a terrible situation. Cash: Money held in cash lost value rapidly and soon became completely worthless. Of all investment forms, this was the most disastrous. Bank Deposits: In theory, bank deposits became as worthless as cash. However, after the stabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid. Naturally, however, the great majority of depositors withdrew their funds at some time during the inflation, after much of the value had been lost, and exchanged them for goods. Few Germans held money in deposits through the entire period. Bonds, Mortgages: As usual in inflation, bonds and mortgages fell in value even faster than cash. After the stabilization, some restitution was provided by law. Holders of government

bonds were reimbursed to the extent of 2.5% of the original bond values. Mortgage holders also received some repayment, while a 1925 law provided for 15-25% reimbursement of corporate bondholders, though the payment was delayed for some years. Here again, few investors held bonds or mortgages throughout the entire period; most holders got rid of them for whatever pittance they would bring during the inflation. Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation. Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or ingold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value. Personal Property: Capital was preserved by those who early changed it into objects of lasting value--rare coins, stamps, jewelry, works of art, antiques--or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.

The Economic Recovery 1924 1929 The introduction of the Rentenmark was highly significant, it allowed the currency to stabilise and supported by the Dawes Plan it stood a good chance of not succumbing to inflationary pressures as had previously happened. The new Rentenmark was valued at 1 Rentenmark to One Trillion old marks (no typographical error there). The Rentenmark was exchangeable for bonds in land and industrial plant in other words they were worth something. Inflation ceased to be a problem, the German people accepted the value of the new currency and businesses accepted it as being of worth. The stability of the new currency couldnt be taken for granted however and a range of new fiscal measures were implemented that would keep inflation and the exchange rate at acceptable levels. For example, the government opted to stop offering credit to industry as this had led to widespread speculation and consequently inflation. Borrowing therefore slowed and the circulation of money returned to normal levels. Similarly the government altered the policy with regards the printing of money. Previously the government had increased the amount of money being printed as inflation had risen; this had simply led to prices rising even

more rapidly. Now the government decided that the amount of money in circulation would be strictly limited to the real worth of economy. In August of 1924 the Rentenmark was replaced by the Reichsmark, which was backed up by the German Gold Reserve, which had to be maintained at 30% of the value of all Reichsmark in circulation. This was combined with a range of new taxes that increased the tax burden of companies and individuals alike, reducing their spending power and enabling the government to reinvest a larger proportion of the nations wealth. This constitutes quite a large change in the way that the economy was operated. Companies that were well organized, had sound business sense and were well managed would prosper. Those that had relied on credit would suffer the number of companies going bankrupt in Germany rose from 233 in 1923 to over 6000 in 1924. This resulted in the economy being more streamlined and efficient; success was possible but relied, perhaps, on prudence and careful planning. How successful was the German Recovery? In terms of its impact on the political stability of Germany the moves outlined above were quite successful in the shorter term. Under the leadership of Gustav Stresemann the Grand Coalition managed to bring the economy under control. This process, supervised by Hjalmar Schacht, the newly appointed Finance Minister, continued throughout the remainder of the 1920s until the Wall Street Crash led to further economic problems. The political atmosphere did not change overnight though. With the economy increasingly stable and a number of extremist political groups shattered by their failings in the early 1920s with many of their leaders either dead or imprisoned the opposition to the democratic government had fewer opportunities to criticize the government and less popular support. This does not mean that extremism vanished however: Hitler for example was imprisoned and writing Mein Kampf at the time. Support for parties such as the Nazi party remained and they continued to receive votes, though limited in number, in elections (statement is a general one about parties to the far right / left rather than relating just to the electoral fortunes of the NSPAD). The Grand Coalition did not last long. Stresemann lasted as Chancellor for only a few months before he was forced to resign as a result of protests about the way in which he had dealt with the Munich Putsch (Socialists withdrew their support for the coalition in protest at the leniency shown towards Adolf Hitler). Following this Stresemann moved to a position in the newly formed cabinet as Foreign Minister, with Hans Luther becoming Chancellor. This pattern of short lived coalitions continued throughout The Golden era of the Weimar Republic as parties failed to find acceptable working agreements. Society in general appears, at first glance, to have improved significantly. For example new roads, public buildings and schools were built throughout Germany in this era. Women had an increasingly important role to play in the German economy and confidence in the economy was restored.