The Downfall of Money: Germanys Hyperinflation and the Destruction of the Middle Class
Page 13
Stinnes was already well on his way to becoming the richest businessman in Germany. ‘How much money did he have deposited in neutral banks?’ asked the contemporary biographer. ‘How much did he have seeking new investments? The time came when he could not place all his funds through ordinary banking channels. His capital kept madly multiplying.’
This was the man who sat down opposite Legien on 15 November 1918 in Berlin, heading a delegation of employers primed to meet a delegation of trade union leaders. These latter included officials representing the much smaller Christian and liberal workers’ organisations as well as Legien’s left-affiliated General Commission of Trade Unions, but essentially this was a socialist–capitalist agreement. The revolution of 9 November had brought to power two parties – the Majority and Independent Social Democrats – which were both committed to the socialisation of the German economy, whether immediate (in the case of the far left) or eventual (in the case of the moderates). Non-socialists had, essentially, no executive function in Germany in mid-November 1919. Legien’s political comrades were, for now, the power in the land.
Regular meetings between capital and labour had, in fact, taken place throughout the war under the auspices of the government and the military, as part of the drive for wartime industrial peace and continuity of production. Throughout that last wartime autumn, with the country clearly entering a new, more unstable phase, there had been more pointed bilateral talks between the unions and employers, with the unions probing for the settlement of longstanding demands and the employers seeing how much they would have to give in order to maintain what they perceived as ‘order in the house’.
The revolution pushed the employers into seeking a deal with the new powers that be. In effect, any deal.2 As a leading representative of the steel industry’s employers had said on 14 November: ‘It is not a question of money now . . . right now we must see that we survive the chaos.’3 Thus it was that some of Germany’s most diehard captains of industry affixed their names to the historic treaty between organised labour and capital in Germany that became known as the ‘Stinnes-Legien Agreement’.
The agreement gave workers an eight-hour working day with no reduction in pay – a long-standing demand of organised labour – compulsory union recognition, mandatory collective bargaining and wage contracts, and the right to be represented in companies with more than fifty employees through ‘workers’ committees’. It also guaranteed that industry would re-employ every one of the millions of German men who would soon be demobilised. To ensure that these improvements would work in practice, trade union and employer representatives set up a ‘Central Working Group of Industrial and Commercial Employer and Employee Organisations of Germany’. Any agreements arrived at by this Central Working Group would be enforced by both sides.4
Clearly, though some more enlightened employers found such an agreement more or less acceptable, this amounted to a U-turn for some of Germany’s toughest, hitherto most anti-union employers. These last were represented particularly strongly in the heavy industrial sector and tended to be closely connected with the conservative, nationalist political camp. However, as a group the country’s industrialists had evidently decided that it was better to make concessions, however painful in some cases, than to risk losing everything to the wave of socialistic fervour that was sweeping the Reich during November 1918. The more optimistic of them even hoped, by involving the workers in decision-making, to induce more realistic attitudes (from the employers’ point of view), in particular to ‘give them the opportunity to have the insight into the economic situation, the economic perspectives, the economic interconnections, which are the foundation of all social and wage demands . . . in order . . . to convince them that there is a limit to where social and economic policy are compatible’.5
Legien and the unions appeared, like Ebert in his dealings with General Groener, to be giving away a lot in return for relatively little. The agreement was basically a recognition on the unions’ part that the existing economic and social system would not be abolished in the near future, but simply subjected to improvement.
Many workers expected the revolution to lead to a socialist state in Germany, in which the capitalists would be expropriated and become irrelevant. That was still, officially at least, the policy even of the moderate Social Democrats. But Legien was a dealmaker, not a utopian radical. This, he could tell his union members, was what Social Democrats had always wanted. Workers and their union representatives were now on the inside instead of, as for so long, the outside of the decision-making process in industry. This was a crucial step-up for the working class, part of the process of learning how to run things and thereby building a new future for a democratic Germany under difficult post-war circumstances. The capitalists had been tamed, and their undoubted managerial skills could now be pushed in socially useful directions. Total and immediate socialisation would risk throwing the babies of efficiency and full employment out with the capitalist bathwater. Or so the story went.6
The Stinnes-Legien deal certainly contributed, alongside Ebert’s bargain with the military, to stemming the tide of extreme radicalism, of turning the movement of 9 November 1918 into the ‘reined-in revolution’ (gebremste Revolution). The employers got to save their businesses, and the trade unionists got better hours, better pay and the employers’ promise to give returning soldiers their jobs back.
Business decided to forget about the money, as the man from the steel industry had put it, and therefore, so employers hoped, to ‘survive the chaos’. And, broadly speaking, it did survive and even prosper. There was, however, a price to be paid for all this sweetness and compromise, and in the long term not just for the capitalists.
There had been more than four years of hard work and sacrifice, on the home front and in the trenches. It soon became clear, in the aftermath of peace, that many Germans felt disinclined to take just any job that came up, or, if they did, to devote themselves to it in the conspicuously committed fashion that had become almost a stereotypical national trait in pre-war times. Employers and officials bemoaned this work-shy attitude (Arbeitsunlust).
Workers were also liable to be choosy about which industries they wanted to work in. No one, it seemed, wanted a job on the land, or in forestry, or in mining – all areas of the economy that were physically demanding and required a high tolerance threshold for discomfort, but were nevertheless vital to any post-war recovery. This applied especially to returning soldiers. Those demobilised in time for Christmas 1918 preferred, it seemed, to use up any savings they had, and sometimes to claim unemployment benefit, which under pressure from local workers’ and soldiers’ councils had now become more generous, and to wait for a decently paid, more comfortable job to present itself.7
Welfare fraud became a serious problem especially in Berlin, where one trade union observer estimated that 25 per cent of all claims were illegitimate. Members of the Republican Guard, for instance – one of the relatively small number of government-organised militias – apparently made a regular practice of claiming unemployment benefit as well as collecting their pay. Extra family members were invented. Another trick was to claim for welfare in two different areas of Berlin, knowing that district offices rarely cross-checked with others.8 The war had seen a great growth in the black market, and the threshold for general dishonesty had also clearly been lowered over the past four years. In any case, there was a widespread sense of entitlement, given the sacrifices that these men and their families had made during the war years. This was understandable, but unhealthy from the point of view of the challenges facing the wider German economy.
The situation was further complicated by the fact that unemployment pay, which during the immediate post-war period was the responsibility of municipal authorities, varied fairly radically from one area of Germany to another. In conservative rural districts it might be three marks per day, while in socialistic Berlin in early 1919 it was four marks, and in Dresden as high as six – rates which increased ra
pidly over the next few months under pressure from the unemployed and the revolutionary councils.9 Proposals were made to set a national minimum and maximum for unemployment pay, but without success. After all, three or four marks a day might be completely inadequate to keep body and soul together in a big city, while in the remoter parts of the countryside it was probably more than the average labourer could expect for a hard day’s work. One thing was for certain: these were arrangements not calculated to discourage returned soldiers from flocking to the cities. They were also not calculated to bring down the price of labour and therefore the price of what labour produced.
As 1919 wore on, the authorities, concerned at the numbers of returned soldiers still unemployed, tried to put pressure on the unemployed to accept available work, however unsatisfactory the pay. Success in that direction was limited. These were turbulent times, where the writ of the bureaucrat did not run as strong as it had once done and the power of the crowd was hard to challenge. The white-collar staff at the labour exchanges faced, as one official observation put it, ‘the mistrust of the worker for the academically trained and better clothed person’. In Leipzig, officials who tried to enforce the rules were ‘cursed in the crudest manner, insulted, and even threatened’. There were cases of officials being assaulted by groups of the unemployed.10
Wages and prices kept drifting upwards, despite the huge numbers of returned servicemen that the labour market was being forced to absorb.
One of the features of the Weimar Constitution, finally approved in August 1919, was a paragraph (§163) not only granting ‘the right to work’ but also a dole in case of involuntary unemployment:
Every German has the moral duty, without prejudice to his personal freedom, so to exercise his mental and physical strength as the welfare of all requires. Every German should be given the opportunity to earn his living through economic work. To the extent that appropriate job opportunities cannot be demonstrated, means will be provided for his necessary upkeep.11
Unemployment rose sharply between October 1918, the final month of full-scale war production, and January 1919. War contracts were cancelled or not renewed, and there were widespread shortages of coal and raw materials owing to chaotic circumstances in some of the industrial areas (Alsace-Lorraine and the Saar were occupied by the French, and there was fighting with the Poles in the important industrial region of Upper Silesia). The inevitable switch from turning out armaments and materiel of war back to making goods for civilian consumption, the production of which had diminished dramatically during the war years, had not yet begun.
However, in the period of slightly less than five months that passed between the opening of the National Assembly in Weimar at the beginning of February 1919 and the signing of the Versailles Treaty at the end of June 1919, the percentage of male unemployed (or, at least, the number of unemployed who were trade union members) fell from 6.2 to 2.8 per cent.12 These figures, though somewhat rosy due to under-reporting, showed a trend that was both undeniable and surprising.
Some of this reduction was achieved by a policy of dismissing female workers wherever possible and replacing them with men. As the war went on, and more male workers were conscripted to the front, women had, in fact, taken on industrial tasks that before 1914 few would have thought them capable of successfully performing. These included strenuous labouring jobs in the mines and steel smelters, and it is clear that they were reliable and hard-working (and generally accepted lower pay than men). This did not stop the authorities from insisting on their dismissal.
At Krupp in Essen, for instance, 52,000 workers were dismissed within weeks of the end of the fighting. Of those made unemployed, almost 30,000 were women, leaving just 500 still employed at the company. They were clearly, in many cases, reluctant to return to the old domestic life. A somewhat sheepish bureaucratic report admitted that the women were ‘diligent and skilful’ while ‘the men were more choosy’: ‘They [the men] refused to accept heavy or dirty work or left it after a short time. Thus it required especially vigorous measures to remove women from the coking plants, where they were employed at jobs completely unsuitable for them.’13
The apparently positive male employment picture was also due to widespread underemployment, whether this meant full-time workers doing relatively little or actual short-time working. A twenty-four-hour week was encouraged in the Demobilisation Decree as an alternative to dismissals of surplus workers.14 And the employers, many of whom had done very well out of the war, and whose sense of vulnerability in the new post-revolutionary state inclined them to a temporary generosity, could be persuaded to help. One report on army demobilisation stated that ‘the chief burden of the readjustment losses was borne by commerce and industry’, and went on:
The relatively good position of the labour market was only upheld by the fiction that industry could employ the larger portion of the workers. In actuality, this was impossible given the halved coal supply, the raw-materials shortage, the continuation of the blockade, the uncertainty of the situation. The cost of the transition, therefore, had to be covered by the reserves of industry. These were probably not small in the case of a large number of plants because of the wartime boom.15
It was also assumed, by most manufacturers, that they could pay the increased wages required to keep the industrial peace in these politically unstable times, and compensate by putting up the prices of the goods they sold – in other words, by feeding inflation.16
The government, while recognising the problems that rising prices brought, was so concerned with the simple demands of keeping order and feeding the population that it openly espoused a similar ‘pay-what-it-takes’ strategy. Once some food imports were permitted in the spring of 1919, it was clearly vital that the railways needed to be kept running in order to transport these essential supplies into the country. Without them, the labour force threatened to become too physically weak to keep the country’s mines working and her factories producing. However, in May, Germany’s railway workers – their numbers vastly inflated during the war years – went on strike for more pay.
During a crisis meeting at the Reich Food Ministry in Berlin on 5 May – two days before the shock announcement of the peace treaty terms at Versailles – the moderate Social Democratic Prussian Finance Minister, Albert Südekum, was brutally, and not especially elegantly, frank:
Every price and every kind of concession is justified to prevent the shutdown of railroad traffic in Prussia. What is not feasible through the ending of the inflation is feasible, and can be carried out, if work becomes possible as a result of improved provisioning with food. In this regard, there is no reason to consider the exchange rate, since every foreign merchant is really only influenced by his mistrust of the general conditions in Germany.17
In other words, inflation came a long way second to social peace. Social peace at, literally, any price.
But where was the Reich to get the money, when it was already almost 160 billion marks in debt as a direct result of war spending?
Erzberger’s revolutionary tax reforms constituted at least part of the answer. With the presentation of his programme in July 1919, he proposed to decisively assert the supremacy of the central Reich government in taxation matters and thus make possible, for the first time in German history, some kind of clear coincidence between the central government’s policies and the raising of the money required to carry them out.
The new Republic was still a federation, with large powers still reserved to the individual states – be they the enormous Prussia, with, at more than 40 million, two-thirds of the country’s population, or tiny Schaumburg-Lippe, with a mere 50,000 or so – but clearly no coherent management of the country’s finances was possible if the normal means of taxation were the preserve mainly, or even to a significant extent, of these historic (and stubbornly independent) entities.
The Reich took control of income tax, sales taxes, inheritance tax and land purchase taxes among others, and also empowered itself to enforce on
e-off emergency and windfall taxes on those perceived to be capable of paying them.
Compared with other countries, post-revolutionary Germany became a very highly taxed nation. Erzberger quite specifically targeted war profiteers and speculators, the kind of smartly dressed people that visitors to Berlin and other major cities saw stuffing themselves with black-market food in upmarket restaurants while the majority of Germans struggled to feed and clothe themselves. He provided the legal and administrative basis for the modern German tax system. However, he did not solve the government’s problems with debt and deficit.
Only inflation, as it turned out, could do that.
Erzberger set out his tax reforms before the National Assembly on 8 July 1919. The next day, 9 July, the Versailles treaty was ratified by 209 votes to 116. The tax reforms would be passed piecemeal in different legislative packages between September and the following March.
The bespectacled, overweight but infuriatingly cheerful and self-confident Finance Minister had presented his proposals with remarkable energy, clarity and determination. He immediately found himself (arguably, put himself) in the eye of a storm that saw a rising tide of rage on the nationalist right against the Versailles treaty and at the same time against the fiscal reforms. The new taxes would particularly affect the old landowning, industrialist and property-owning classes, from which the nationalist right drew a great deal of its support.
Erzberger was the man who had proposed the ‘Peace Without Annexations’ resolution in 1917, who in November 1918 had signed the scandalous armistice, who had, moreover, then openly preached acceptance of the Schmachfrieden (literally ‘shame peace’) of Versailles. Many held him responsible for weakening the Reich’s morale and its bargaining position in its hour of greatest need. Now he was also the man who demanded that the burden of tax on the less wealthy be moderated, while the classes that formed the backbone of Germany (certainly in their own view) should be hit harder in their tax liabilities. ‘Income from capital,’ Erzberger declared, ‘must bear a much greater share of the burden than income from labour.’18