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

by Taylor, Frederick

  But for what? To pay unjust reparations to the vengeful Allies! Thus, despite Erzberger’s protests that such sums would be ring-fenced, argued the resurgent nationalist right. And it was hard to deny their claim. Whatever the technicalities of what was collected and where it was supposedly spent, it was true that reparations amounted to ‘a tax collected from German citizens by the German government acting as the Allies’ fiscal agent’.19 The propaganda connection between the Republic, its new, more egalitarian tax system, and the national humiliation of Versailles was personified by Erzberger. He was a gift for the enemies of the treaty and of the Republic. Now that Liebknecht and Luxemburg had been killed, he in many ways became an even greater hate figure for the reactionary extremists than any other Weimar politician.

  Especially unpopular among the anti-republican middle and upper classes was Erzberger’s so-called Reichsnotopfer (literally ‘Reich Emergency Sacrifice’ but perhaps better translated as ‘Emergency Capital Levy’), a one-off property tax levied on all individual citizens (it began at 10 per cent but rates from upwards of 7 million marks in taxable assets reached 65 per cent) or corporate entities of various kinds (levied at a flat 10 per cent), which became law in December 1919. The levy unleashed outrage even though it could be paid off in instalments (admittedly subject to interest) over a period of up to thirty years.

  Erzberger’s reforms were courageous and necessary, they were passed by the National Assembly even in the face of the right’s vigorous opposition and they were implemented. However, they did not solve the country’s problems, though they may have prevented them from getting even worse.

  Erzberger was nonetheless full of ideas to bring stability and what he considered fairness to Germany’s finances. Apart from the new taxes, and the rise in tax rates for the better off, he was also concerned to plug the widening hole in the national wealth created by capital flight. This was a process that increased in 1919 as wealthy German individuals and corporations, disturbed by the revolution, by the threat of high taxation and by the continuing slide in the value of the mark, began to place more and more of their money and assets abroad. Apart from tightening up the requirements for banks to report and explain foreign currency transactions, Erzberger had another part-answer to this: high-value banknotes and securities would be called in by the banks and overstamped or replaced with new paper; the old or unstamped ones would become invalid. This would inhibit capital flight, as well as forcing the peasant with the proverbial concealed stocking full of money to bring his hoard out into the light for inspection.20

  The stubborn opposition of the Reichsbank, which viewed such a process as technically impracticable, would eventually result in Erzberger’s banknote-recall plan being reluctantly dropped, but in the meantime the idea was out in the public sphere and contributed to a further deterioration of the currency. The problem was that, while conversion of marks by Germans into foreign currency was a bad thing, because it meant that German wealth was leaving the country, the proposed remedy would also affect the existence of large and small holdings of marks by foreigners in other countries, which were actually a good thing – these holdings by foreigners served to buttress the external value of the currency and thereby contributed to keeping domestic inflation at bay. When, as a consequence of measures such as that proposed by Erzberger, foreigners started selling marks, because they were frightened that their holdings might suddenly become worthless, it undermined confidence in the German currency.

  A respected Lübeck merchant, L. Possehl & Co., described this knotty problem to the Minister of Commerce in September 1919:

  Foreign speculation in mark notes is our only salvation today given stagnating exports. It was our good fortune that every peasant in Denmark bought mark notes and securities in the hope that the value of the mark would go up again after peace was restored . . . The situation is similar in Sweden, where many large and small speculators took advantage of the low value of the mark to purchase it. All these people place their hopes in the arrival of normal conditions in Germany and then consider an increase in the exchange value of the mark to be self-understood . . . The rumours reaching Sweden that the mark notes would be stamped called forth a real panic . . . Even many northern banks had the idea that the bank notes in their possession could become worthless if they overlooked some formality. In any case, countless persons decided to free themselves from holdings which were threatened with confiscation and enormous holdings of marks were thrown onto the market.21

  Numerous double binds of this kind apart – few fiscal reforms in any time or place are without unintended consequences – Germany’s finances had to be repaired, of that there could be no doubt. The Reich’s debts in 1913 had totalled 5 billion marks. By 1919 they had risen more than thirtyfold to 153 billion – of which almost half were not long-term debt but ‘floating’, meaning that they had either to be paid back or refinanced on a short-term basis. The amount of paper money in circulation in 1913 had been 2 billion marks; in 1919 it was 45 billion.22 Something had to be done to reintroduce discipline to Germany’s finances. In the fifth century ad, the pleasure-loving St Augustine had pleaded with God, ‘make me chaste, but not yet!’ Likewise, the German government’s agonising dilemma from 1918 onwards was not just how to apply the bitter prescription required to restore the country’s finances but when. The time never seemed to be right, the consequences of the reimposition of financial chastity potentially too painful. So, although the tax reforms went some way to mending the broken German economy, they were the only real medicine that the government dared administer during these early months. In the absence of genuine retrenchment, they made only a marginal impact on the country’s huge problems.

  There was, after all, a price to be paid for bold, tough action. In fact, there were several prices – economic, political and social. All of these were costs that a still weak, newly established Republic with vengeful enemies abroad, a restless, newly assertive population at home that expected swift, concrete improvement in its welfare and standard of living, and increasingly numerous and aggressive far-right critics in the political arena, could ill afford to risk taking on.

  As for Matthias Erzberger himself, a flawed individual but, with hindsight, perhaps post-war Germany’s most courageous political figure, he would in the fullness of time be made to pay the ultimate personal price.

  Footnotes

  * RWE is now an international company whose customers include 6.5 million energy users in the United Kingdom alone.

  10

  Consequences

  As the keen-eyed Professor Troeltsch had observed in November 1918, seeing the upper middle class of Berlin out, as usual, on their Sunday strolls in the Grunewald, ‘salaries continued to be paid’. One of the peculiarities of Germany’s financial situation after the armistice was that, regardless of revolution and counter-revolution, victory and defeat, monarchy and republic – or, for that matter, the collapse of the gold standard and the pre-war global trading system – the same two salaried officials remained at the helm of the German Reichsbank who had been in charge, under very different conditions, since well before the war.

  Rudolf Havenstein had been fifty-seven years old when war broke out in 1914, so by 1919 he was well into his sixties. He had entered the Prussian civil service when in his early thirties, and risen rapidly through the ranks at the Finance Ministry to become President of the Prussian State Bank (Königlich-Preußische Seehandlung) in 1900 and a much-admired President of the Reichsbank from 1907. This industrious and conscientious Prussian civil servant was joined at the helm of the bank by his deputy and trusted adviser, Otto Georg von Glasenapp. Four years older than Havenstein, his speciality was government debt, money and coinage. The currency changes embodied in the August 1914 decoupling of the mark from gold had been largely Glasenapp’s work.

  These, then, were the distinguished, patriotic and apparently reliable officials who unwittingly set Germany and its currency on the road to ruin. Both were lawyers by edu
cation and training rather than economists or financiers. Both were very much men of the pre-war era. Glasenapp, in particular, was a man of broad culture, with a deep interest in the works of Germany’s and perhaps Europe’s greatest polymath, Johann Wolfgang von Goethe (for many years he served on the committee of the Weimar-based Goethe Society). In fact, Glasenapp did a bit of writing himself, reportedly setting his son’s translations of Indian poetry into polished German verse in his head while walking to work in the morning.1

  Having played such a leading role in the growth of Germany’s indebtedness during the previous four or more years, the Reichsbank’s response to the armistice and the threat of a normalisation of the country’s economy was to demand austerity from the revolutionary government, while, paradoxically, at the same time the dubious underpinnings of the money supply, which implicitly encouraged the debauchment of the currency, remained in place. The ‘old gentlemen’ in the Jägerstrasse could, in any case, advise and remonstrate, but they could not force the new democratic ministers to espouse economic and financial policies they didn’t want or feel politically able to pursue.

  Erzberger’s reforms and his new taxes helped a little in the austerity direction, but not enough. Though the rate of inflation had slowed, coaxing taxes out of the non-salaried sections of the population – landowners, business people, traders – was not easy, and even when a decent tax haul was achieved, the fact that it was inevitably collected in arrears undermined its usefulness. The capacity of shrewd operators to further delay payment until the real value of the assessment had diminished, often drastically, would prove an almost insuperable problem throughout this period.

  The most hopeful aspect for Germany’s real economy, rather than a decisive rise in tax revenues, was the fact that, in the second half of 1919, the labour situation began to improve, especially in the crucial coal industry. General productivity compared with pre-war standards remained relatively low, a fact that the employers in particular blamed on the newly introduced eight-hour day, widespread part-time working and a general lack of discipline in the labour force. However, miners agreed to work extra shifts. Sources of foreign credit started to open up once more in the USA and also in the former neutral countries such as Holland for German companies and municipalities, which were considered a better risk than the national government.2

  It was true that the German mark nevertheless continued to fall against other currencies, especially after the more onerous foreign exchange restrictions (which during the war had helped keep it at an artificially high level) were lifted, and the mark began to be legally traded again throughout the world.

  Beginning 1919 at 8.9 marks to the dollar, the mark rate deteriorated to 13.5 in May, consequent to the announcement of the harsh terms at Versailles; then 16.5 to the dollar in July, just after the Allied blockade was formally lifted; and then down some more to 21 to the dollar at the beginning of September, where it stuck for a while.3 In the early winter, however, as expectations of Germany’s willingness or ability to meet the Allied demands declined, so did the currency. On the last day of 1919, the rate had more than halved from that of September to 49 marks per dollar.4 The mark was now worth less than one-tenth of its pre-war value.

  The Versailles peace treaty between Germany and the Allies finally came into force on Saturday, 10 January 1920, despite the USA having not yet ratified the document (which it never would, the treaty finally failing to pass the Senate in March 1920). Harry Kessler wrote gloomily, but with his usual astuteness, in his diary:

  Today the Peace Treaty was ratified in Paris. The War is over. A terrible era begins for Europe, like the gathering of clouds before a storm, and it will end in an explosion probably still more terrible than that of World War. In Germany there are all the signs of a continuing growth of nationalism.5

  Despite his support for the Republic, his internationalism and his cosmopolitan background - Kessler’s mother was Irish and he had been brought up partly in England - like most Germans, whether conservative, liberal or of the moderate left, he considered Versailles an outrage. The so-called ‘war guilt’ clause was therefore an ugly victors’ fiction, and the treaty itself an unjust imposition to be circumvented, if not openly defied.

  The German far left, on the other hand, took what seemed to be a radically different view. All the participants in the world war, up to the time the Bolsheviks took over in Russia, were merely capitalist hyenas, fighting over the spoils of imperialism. Imperial Germany had been just like the rest of the gang, no better or worse. This might have seemed to put the Communists and the far-left socialists poles apart from their compatriots, but so far as the war guilt question was concerned, it was not so simple. After all, since the war was the creation not of the German masses but of their pre-war, undemocratic government and of the international capitalist system in general, there could be no ‘guilt’ on the people’s part and therefore no penalty. So, in short, even the far left, though attacking the old elite for its warmongering and the military for its bad behaviour in the occupied countries, not to mention its ruthless sacrificing of millions of proletarian lives, could not stomach the notion of exclusive German war guilt.

  Whatever the complications around the war guilt issue, there were a few figures in German political life who believed that the problem of responsibility, even if confined to a small elite, had to be faced for the country’s sake. In the winter of 1918-19, the ill-fated Bavarian socialist Premier, Kurt Eisner, had sponsored the publication of secret Bavarian diplomatic reports, sent from Berlin during the July 1914 crisis, that seemed to support the notion of strong German (or, rather, since this was Bavaria, Prussian) responsibility for the outbreak of war. It was a bold and idealistic move that Eisner hoped might encourage the Allies to take a kindlier view of the new forces now ruling in Germany. In fact, the result was to mobilise the right and the military against him and lead to accusations of ‘treachery’ that certainly played a role in his assassination in April 1919. It was a strong indicator of the violence to come.

  In Berlin, meanwhile, a government committee meeting under the supervision of the Social Democratic elder statesman Karl Kautsky was also trawling through German Foreign Office documents covering the events of July and August 1914. From the documentary evidence its members found, they were convinced, as were their counterparts in Munich, that the Kaiser and his advisers had encouraged the ‘hawks’ of Austria-Hungary in their aggressive response to Serbia, following the assassination of Archduke Franz Ferdinand at Sarajevo by Serb nationalists. It followed that the German elite (not the same thing as the German people), seemingly obsessed with the idea of a preventive war against Russia, must bear a major share of responsibility for the outbreak of the First World War. Kautsky’s initial report in April 1919 was, however, held back, partly because most of the Republic’s ministers, including the Social Democrats, found the version of events that emerged to be intolerable, but also partly for fear that it would influence the still continuing treaty negotiations in a negative way for Germany.

  What difference it would have made to German domestic opinion, had these documents – undifferentiated, it is true, and lacking comparable evidence from the records of the other powers involved - been published in the spring following the armistice, we shall never know. Kautsky himself believed, like Eisner, that the evidence contained would both encourage the Allies to view the new, honest revolutionary Germany more favourably, and would also cement the Republic’s status in the minds of the German public, by making it aware of the full depth of the old regime’s irresponsibility. Others disagreed, most decisively Chancellor Scheidemann, and publication was not permitted.

  What we do know is that the nationalist right had no such inhibitions when it came to setting out its position. Appearing before an investigative committee of the National Assembly in November 1919, Field Marshal von Hindenburg put his powerful stamp of approval on the ‘stab in the back’ myth, blaming Germany’s collapse not on military defeat but on a domestic
political conspiracy by Marxists, pacifists and Jews. The nationalist right seized on his remarks and used them to establish a radically false narrative among many Germans as to both the causes and the end of the war, one which suited their own disruptive political purposes and would dictate the tenor of the debate for years to come.6 A reasonable denial of Germany’s sole responsibility for the war was turned into a denial of any guilt whatsoever, a mass fantasy of Germany as totally innocent victim.

  The so-called ‘Weimar parties’ (Social Democrats, Centre, German Democratic Party), which had supported the Republic from the outset, overwhelmingly denied sole German war guilt, and also therefore the liability to pay reparations (although compensation for damage done to the occupied areas of France and Belgium was another matter, which most Germans outside the extreme right acknowledged to be reasonable). All the same, it was deputies belonging to these republican parties that passed the treaty through the National Assembly in July 1919, ‘war guilt’ clause and all, having tried to include a protest against §231 but failed to prevail.

  The ‘Weimar parties’, and the governments chosen from their members, whose composition would change with alarming frequency – seven governments came and went in the first five years of the Republic’s existence - became, to the nationalist right, the ‘Versailles traitors’. The country split down the middle, in other words, but not about the acceptability of the treaty. Almost everyone agreed that it was unjust and immoral.