The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class

by Taylor, Frederick

  Every German knew these things. What most did not realise was that she also suffered from weaknesses, weaknesses that her enemies were either spared, or shared only in part. First, Germany was tied to the moribund Austro-Hungarian Empire, whose gilded façade concealed a snake-pit of warring nationalities, and whose frantic attempts to hold on to its recently acquired Balkan territories had caused the war in the first place. In her alliance with Austria-Hungary, Germany was, as the saying in Berlin went, ‘shackled to a corpse’. Second, despite frantic attempts to build a German navy to rival Britain’s, the Reich and her allies, known collectively as ‘the Central Powers’, were essentially landlocked, susceptible to a British sea blockade that would gradually reduce their populations to a state of semi-starvation. And third, for all her confidence and martial excellence, in the final analysis Imperial Germany was short of the money she would need to fight this war, and more lacking still in ways of acquiring it.

  Those who controlled the Reich’s finances were well aware of the problems that would arise if the country undertook a major war against the ‘Triple Entente’ of France, Russia and Britain. So far as such a conflict’s military side was concerned, the Imperial General Staff had a scheme to deal with this by means of a massive, no-holds-barred attack through neutral Belgium against France, delivering a swift knockout blow that would enable Germany to turn its full strength quickly against the ‘Russian steamroller’ to the east. The original plan had been developed almost ten years earlier under the late Chief of the Prussian General Staff, Field Marshal Count Alfred von Schlieffen, and though it had been modified since, in the history books it still bears his name. Likewise, the financial mandarins at the Reichsbank in Berlin – founded after German reunification in 1871 to manage the value and volume of the new nation’s currency – had reacted to the increasingly unsettled international scene by developing a secret blueprint that would enable the country to rise above its financial limitations for the duration.

  Of course, like all the major powers that went to war in the summer of 1914, Germany believed that, if she had to fight, she would win quickly. So, any radical measures taken to secure the financial sinews of war would, it was thought, be pretty short term in nature.

  The planners’ way of thinking seemed justified by past events. During the hundred years since the twenty-year struggle against Napoleon had been decided at the Battle of Waterloo, Prussia and its German allies had needed to fight no war longer than a few months in duration. Two out of the three wars that Otto von Bismarck, Chancellor of German unification, had won during the forced march to nationhood (against Denmark and against Austria) lasted a matter of weeks. Even the third, the defeat of France, though dragged out to six months, from the outbreak of war on 19 July 1870 to the formal surrender of Paris on 28 January 1871, had been all but decided from a military point of view by the second week of September.

  Just as the Schlieffen Plan was put into action by the Imperial General Staff (in an arguably fatally modified form) during the last days of July and first days of August 1914, so the men who ran the Reichsbank set in motion the modifications of the banking and currency system that would make it possible, they hoped, for Germany to survive the breakdown of the hitherto extremely open global economy for long enough to win the war.

  The first part of this financial plan of campaign involved abandoning the gold standard.

  For decades, the routine convertibility of Germany’s paper currency – two-thirds of the money in circulation by July 1914 – into solid gold (or silver) coinage had meant that notes were not money in themselves but, because exchangeable, represented real and constant (precious metal) value. And, indeed, the amount of paper money issued could, by law, never exceed two-thirds of the money in circulation. The remaining one-third had to be backed directly by gold. This was the promise, so the theory went, that for the previous forty years had kept the value of the German currency, like those of other major countries before 1914, concrete and graspable.

  Exactly why the Reichsbank’s drastic step away from the gold standard was necessary would have been clear to any interested observer who, as Europe teetered on the edge of war, had found themselves at No. 34–38 Jägerstrasse. Here, hard by the historic Gendarmenmarkt in the heart of Berlin, stood the Reichsbank’s imposing neo-classical head offices. Concerned citizens, alarmed by the headlines in the newspapers during the first part of July, had begun to form lines at the doors of the country’s private banks, and finally at the Reichsbank itself, which was also a retail bank, though a very privileged and special one. The threat of war had revived old anxieties about paper money, inspired a desire for the tangible, the immutable. They wanted to exchange their mark notes for gold and silver coins, those ancient, reliable stores of value.

  With war on the near horizon, Hans Peter Hanssen, a member of the German Reichstag, finished a meal in a Berlin restaurant. He offered the waiter a hundred-mark note in payment. The waiter refused it. Everyone, he said, seemed to be paying in notes and wanting coins in return. The next day, in another restaurant, Hanssen tried to pay with a twenty-mark note. The waiter, like his colleague the previous day, was displeased, but went off to look for change. He came back fifteen minutes later, empty-handed. The restaurant had run out of coins. Hanssen was forced to ask for credit.1

  Despite attempts by the government-guided press to convince them of the solidity of the everyday currency, many Germans suddenly didn’t trust paper any more. They wanted the security of the gold that the currency was alleged to represent. In the first weeks of July, around 163 million gold marks* were redeemed from German banks and stuffed under the nation’s collective mattress.2

  On Friday 31 July 1914, the doors of the Reichsbank were closed (private banks had already stopped exchanging currency for gold three days earlier) and they did not reopen until the following Tuesday – by which time there was no point in demanding gold for your paper money, because the bank would not give you any. On 4 August a raft of emergency currency and financial laws formally declared the convertibility on demand of paper money to gold suspended for the duration of the conflict. It was at this point, actually, that the term ‘gold mark’ came into usage, referring to the actual gold coin worth, by metal weight, either five, ten or twenty marks. There were also one-, two-, three- and five-mark coins struck from 900/1000 silver, and their convertibility was suspended as well. After all, until then all notes had been convertible, merely representing a gold value, so there were only ‘marks’.

  Paper currency – fiat money, it has often been called – now rapidly became the only currency in circulation. Gold coins, from now on, were either hoarded by individuals, therefore being removed from circulation, or became the property of the government, which was from the start keen to persuade an often reluctant populace to hand over whatever gold it still had, whether in the form of money or valuables. Gold represented, to the German government, something they could trade internationally, for precious militarily important minerals and products that had to be purchased abroad. Most important of all, under the Loan Bureau Law (Darlehenskassengesetz) that had also been included among the 4 August measures, the more gold the government had in its vaults, the more paper money it could issue while still maintaining the all-important appearance of a gold-backed currency.

  The problem was that, although the Reichsbank knew that 5 billion gold marks were in circulation at the outbreak of war, even by the end of 1914, after several months of an intensive propaganda campaign to persuade citizens to exchange gold for paper (‘gold for the Fatherland!’), it held only 2 billion of that total. Although all over the country patriots had obediently given up their gold and silver coins, many other Germans – especially in rural areas – proved immune to patriotic blandishments. They held on to the value they knew they could rely on, whatever the outcome of the developing European catastrophe. Somewhere, a lot of gold and silver was being hoarded.

  By 1915, the military conflict had settled into a bloody stalemate. Ge
rman and Allied forces faced each other in the west across no-man’s-land, each huddled into networks of trenches running 700 kilometres from the Belgian coast to the Swiss border. Germany had not triumphed, as so many of her people had expected, but she remained well placed. She controlled all but a tiny strip of Belgian territory. The great cities of Brussels, Antwerp (the port captured in October after a costly siege lasting more than three months) and historic Bruges, and the country’s rich industrial and coal mining area including Charleroi, Namur and Liège, all lay in German hands. The same went for much of northern France, including the major textile-producing city of Lille with a pre-war population of half a million, which finally fell to the Germans in October after vicious to-and-fro fighting.

  Although Paris was saved by the ‘Miracle of the Marne’, by the end of 1914 ten of the French Republic’s eighty-seven départements lay entirely or partly under German occupation. The more than 14,000 square miles of territory that for almost four years would remain behind the German lines included more than half of French coal mines, two-thirds of her textile manufacturing and 55 per cent of metallurgical production; altogether 20 per cent of the country’s gross domestic product.3 In short, France’s industrial heartland lay for most of the war in enemy hands. Although almost 2 million of the local population fled the German advance, that still left 2.25 million French citizens under an occupation that was to prove bleak, lonely and harsh – sometimes brutally so.4

  On the Eastern Front, after a brief Russian thrust into East Prussia in August 1914 was repulsed at the Battle of Tannenberg, Germany stabilised the general situation, regrouped, and after the war’s first winter began a slow but inexorable advance into the Baltic countries and Russian Poland. Most of the latter, including Warsaw, its capital, was conquered in the course of 1915.

  While from a military point of view, at this stage of the war and for a long time to come, Germany still held many advantages, her financial outlook was not nearly so positive. So desperate did the government become to separate its citizens from their hoarded gold that schoolchildren were enlisted into the campaign to cajole adult family members, neighbours and acquaintances to the ‘gold exchange bureaux’, where helpful officials waited to relieve them of their all-too-solid wealth and swap it for paper. One propaganda pamphlet, ‘The Gold Seekers’, was aimed at children via their teachers. It told the fictional story of three teenage high-school (Gymnasium) students and their campaign to get a well-off local grain merchant, Herr Lehmann, to part with his gold hoard for the country’s good, so that paper money could be printed for the war effort on the back of the exchange. It went without saying that they would accuse him of being a ‘betrayer of the fatherland’ if he refused to do so.

  Initially, Herr Lehmann was shown as resisting their pressure, and expressing scepticism that the Reichsbank would adhere to its side of the bargain by only printing paper money that was covered by the acquisition of gold such as his. After all, he craftily reminded them, though the law might prevent this at the moment, the law could be changed. But the imaginary youngsters were also prepared to do battle against Herr Lehmann’s financial arguments. One of them finally asked Lehmann if he would lend his own money to someone without the resources to repay him, even at a high interest rate. When the merchant said no, of course not, the young propagandist swooped:

  Why does everyone take paper as readily as gold, although, for example, even a thousand mark bill is nothing more than a scrap of paper? Because he knows that the Reichsbank is in a position to give gold for it at any moment, because he knows he can count on the Reich. What would happen if the Reich began to print notes without paying attention to its gold stock? It would immediately suffer a loss of confidence. The notes would no longer be accepted, especially abroad, or if accepted, then it would be like those profiteers who supply 750 marks of goods for the 1000 marks you pay them. A mark would only be worth 75 pfennig abroad or, as one would say, the mark has a low value (exchange rate) . . .5

  The words put into the precocious boy’s mouth were meant to sound convincing and, according to the propaganda playbook, they finally convinced Herr Lehmann, too. The last bit about the Reich’s trustworthiness, the bit about how the Kaiser and his Reichsbank would never do anything that endangered the soundness of the currency and the welfare of ordinary Germans, must have done the trick. Unfortunately, it was precisely this part of the argument that was – let us not mince words – a lie.

  The fact was that under the Loan Bureau Law of 4 August 1914, the Reichsbank was no longer, in practical terms, limited in its ability to print paper money by the amount of gold it held in its vaults. The Loan Bureau Law relieved the Reichsbank of the duty to provide credits to the individual German states and communities, as it would normally have done before the war. In place of these credits, the law set up a system of ‘loan bureaux’ – to be found, as it happened, in local branches or offices of the Reichsbank – which would provide nominally three-month (but in reality infinitely renewable) credits to these states and communities, backed by guarantees of either goods or securities. These acceptable securities included Treasury bills issued by the German states, some of them very small, and also, crucially, war bonds.

  So far, so innocuous seeming. But there was a hook concealed within the stipulations of this so-called Loan Bureau Law. The Loan Bureaux were entitled to issue bureau notes. These bills, which, though not fully legal tender, had the status of currency, were almost universally accepted as such, and rapidly passed into general circulation alongside regular paper money issued by the Reichsbank. The notes would also, inevitably, fall into the hands of the Reichsbank. And when they did, unlike the various other quasi-official bills in circulation, under the Loan Bureau Law they acquired the status of proper money, or as the technical term goes, specie. They became capable, like gold coins held by the Reichsbank, of being used to generate three times their value in normal paper money. So, for instance, there was nothing to stop a state or community using war bonds as security to acquire loan bureau notes, which could then be used to buy more war bonds from the Reichsbank, which could then be used as security to buy more loan bureau notes . . . and so on. And each time, the Reichsbank would increase its ability to print money that could be funnelled into the war effort.

  Admittedly, the law of 4 August limited the issue of loan bureau notes to 1.5 billion, but three months later, in November 1914, the ceiling was doubled to 3 billion to coincide with the first war bond drive. From then on, the ceiling was regularly raised. By the end of 1918, loan bureau notes with face value of a little over 15.5 billion marks were in circulation. More than a third of these were held by the Reichsbank, which could therefore legally print 15.7 billion fully legally valid marks on the base of this ‘security’, while still keeping up the façade of ‘sound’ money. Several German economists realised this and tried to protest. At least one had his article suppressed (written for publication in January 1915, it was not published until the war was over in order to ‘protect the public’), while another was told by the Reichsbank’s grandees that if he did not desist, they would be forced to ‘seek the assistance of the military authorities’.6

  Herr Lehmann was therefore right in his first arguments, and wrong to have let those pesky kids persuade him to change his mind and exchange his gold for paper. Although a fictional character created for propaganda purposes by a writer doing the bidding of a government desperate for the wherewithal to wage war, the irascible old grain merchant represented millions of real Germans. They, too, would succumb to the blandishments of the official pamphleteers, the tub-thumping politicians and the patriotic press, not to mention the sellers of war bonds. They would give away their solid wealth in exchange for a mess of paper, so that Germany might triumph.

  Within a few years, they would feel betrayed. Their patriotic pride would turn to anger; a slow-release anger that would fertilise a post-war harvest of intolerance and totalitarianism.

  Footnotes

  * Roughly a bill
ion and a half euros at 2011 values.

  2

  Loser Pays All

  The civilian populations of all the countries involved in the First World War experienced hardship. There were shortages and anxieties, even for those not occupied by the enemy or living close to the fighting zones. All the millions of men who fought – and in huge numbers died – in the war had friends, families, relatives, many of whose waking (and perhaps also their dreaming) hours were filled with apprehension on their behalf. However, especially in Germany and Austria-Hungary, the physical conditions under which civilians lived on the home front while their menfolk fought and died in the trenches and battlefields far away were not merely difficult or austere; hunger stalked Europe from the Rhine to the Vistula, from the Skagerrak to the Danube.

  On 1 August 1914, when Britain’s entry into the war was not yet certain, the German shipping journal Hansa had predicted that if she did join in on the side of Serbia, France and Russia, ‘economic life [would] suffer a collapse unprecedented in history’.1 The author of that judgement was proved right within a matter of months. Despite the huge sums that Germany had spent on building up its naval strength, the Reich did not have the surface ships to challenge the Royal Navy and thus to make the trading routes safe for German imports and exports during wartime.

  During the first months of the war, the British slowly tightened the screws on German trade by a series of restrictive measures, though these stopped short of a total, indiscriminate blockade. When, however, it became clear that the war was not going to be decided on the battlefield any time soon, the cabinet in London decided to step beyond the accepted rules of conflict. Exploiting the Germans’ declared intention in February 1915 to wage unrestricted submarine warfare against Entente shipping in the North Sea, the British initiated a total ban on imports and exports of all kinds, to and from the territories of the Central Powers, including food and other goods entering via neutral territories such as Holland and the Scandinavian countries. The measures were to be rigorously enforced by the Entente’s navies. On 1 March 1915, a British Order in Council declared ‘the British and French governments will hold themselves free to detain and take into port ships carrying goods of presumed enemy destination, ownership or origin’.2 For the remaining duration of the war, and for the months of armistice that followed, German overseas trade was confined to the Baltic and to occasional forays into the North Sea.