by Hew Strachan
Germany, with its commitment to rapid deployment and swift victory, was not unmindful of this aspect of its military preparations. But in some respects its response remained extraordinarily rudimentary, rooted in the experiences of 1870–1 and a desire to avoid their repetition.58
Frederick the Great’s conservative economics had included the accumulation of bullion in a war chest to finance future conflict. In 1871, after the defeat of France, Germany used the indemnity it received to establish a Reich war chest of 120 million marks in the Julius Tower at Spandau. This sum remained unchanged until the 1913 army law, which doubled it to 240 million gold marks, and threw in 120 million in silver for good measure. By 1914 205 million marks had been raised towards the new total. The arrangement was doubly absurd. In peacetime it tied up money unproductively, so that it neither earned interest nor was a basis for note issue. In war, the provision was too limited for even the most optimistic of short-war advocates. The Reichsbank in 1913 concluded that mobilization alone would cost 1,800 million marks; actual expenditure in the month of August 1914 totalled 2,047 million marks.59
German estimates of total war costs varied so wildly as to be meaningless. In 1905 the optimistic General Blume suggested between 4,680 million marks and 5,760 million; four years earlier J. Renauld had reckoned on an annual requirement of 22,000 million a year. In 1913 the general staff put its campaigning costs at 10,000 to 11,000 million marks a year. In the event, Germany’s annual expenditure during the war averaged 45,700 million marks.60 However, most official calculations were confined to the period of mobilization only. In 1891 Johannes von Miquel, the Prussian finance minister, managed to establish an annual review by the minister of war of the financial resources available for the first thirty days of hostilities. This, it was felt, would take the war up to the first German victory, after which—as in 1870—German credit would be secure on the foreign exchanges.61
To bridge the gap between the holdings of the state (the war chest plus other cash balances) and the anticipated mobilization costs, the government planned to turn to the Reichsbank for credit. Founded in 1875, not least with the needs of war in mind, the bank was independent of the state but obliged by law to provide it with services free of charge. The bank was required to cover at least a third of its note issue with gold, coin, or treasury bills. This—the gold standard—was the rock on which the Reichsbank’s proposals for war foundered. In 1891 the bank wanted to issue smaller-denomination notes in peacetime so as to wean the public gradually from its reliance on coin, and to make preparations to suspend convertibility. Miquel opposed: notes, he argued, should not have the character of money. The smallest note in circulation remained 100 marks. All that could be agreed on was the maximum compatible with the maintenance of the gold standard: on the outbreak of hostilities the issue of short-term treasury bills should be increased, and these, together with the war chest and other government balances, should be transferred to the Reichsbank to form the basis for an expanded note issue.
However, in the decade immediately before 1914 the policy of the Reichsbank changed sufficiently to make it far better prepared for war. This shift of direction could be taken as evidence of Germany’s role in the war’s origins. Certainly, the need to cope with the crisis of mobilization was part of the argument for change. But in 1904, when a law to suspend convertibility in time of war was drafted, the potential needs of an economy at war did not override the immediate desiderata of an economy at peace. Proposals to increase the war chest and to introduce smaller-denomination notes were both rejected. Twenty-mark and 50-mark notes were at last authorized at a crown council in February 1906. Two hundred million marks’ worth were for immediate circulation, and 800 million were to be held in reserve. The basis for this decision was the revelation that 2,500 million marks would be needed for the first three months of hostilities (1,300 million in the first thirty days), and that the Reichsbank had neither enough gold nor enough notes to cover this. But the problems thereby addressed show the interaction between the possible but distant requirements of war and the immediate difficulties of German finance, and that it was the urgency of the latter which gave direction to the solution of the former.
The expansion of German business was constrained by a lack of liquidity. And in 1907 the Reichsbank’s support of the Bank of England reduced its gold cover to 41.3 per cent of note issue, perilously close to the 33 per cent legal requirement. The response of the bank’s governor, Rudolf Havenstein, was to create a buffer against future crises by withdrawing gold from circulation, and by expanding alternative types of currency. In 1909 the 20- and 50-mark notes were made legal tender, and the use of cheques as exchange and the introduction of postal orders were both designed to reduce the demand for coin. Between 1908 and 1913 the Reichsbank’s note issue increased from 1,951 million marks to 2,574 million. In addition, the circulation of treasury notes (Reichskassenscheine) more than doubled, from 62 million marks to 148 million. Clearing accounts handled cashless transactions worth 163,632 million marks in 1908 and 379,157 million in 1913. One inflationary trend was in place before the war.62
More striking evidence of the relative balance between the priorities of peacetime finance and those of wartime is provided by the attitude of the German Treasury. Given the widespread contemporary recognition of the problems of financial mobilization, the Treasury’s neglect of the issue was remarkable—and was commented on even at the time. The second Morocco crisis caused major falls on the Berlin stock exchange in September 1911, and the banks said they could not finance a war without borrowing; the French exploited the situation by withdrawing short-term funds and so causing a liquidity crisis.63 But the Treasury spurned a call in 1911 for a financial general staff; its profile in the standing committee on the economic problems of mobilization, established in December 1912 by the minister of the interior, was low.64 Indeed, its behaviour provides further evidence of the limited impact of the resolutions of the so-called ‘war council’ of that month. Adolf Wermuth, secretary of state for the Treasury from July 1909 to March 1912, was more preoccupied with restraining the pressure of defence spending on the current budget than in making future provision. Wermuth lost his battle, but the financial significance of the 1913 army law resided in its projected impact on Reich expenditure over five years of peace. The law did rather less to address the finances of a Reich at war. It doubled the war chest, and it increased the circulation of short-term treasury bills by 120 million marks. But Havenstein reckoned that, in view of the public’s hoarding of gold in the 1911 Moroccan crisis, 3,500 million marks would now be needed to cover the period of mobilization.65
His worries were increased by the growth of the German credit banks. Deposits tripled and acceptances almost doubled in the decade before the war. This expansion was predicated almost entirely on the banks’ close relationship with German business; they were not in the practice of holding either treasury bills or other reserves to cover their own obligations. Havenstein was therefore concerned that in a crisis the banks would deplete the Reichsbank’s gold reserves precisely when it itself needed them to fulfil the purposes of the government. Although on 10 June 1914 the Berlin bankers rejected Havenstein’s suggestion that they should accept a 10 per-cent liquidity requirement, they saw the wisdom of permitting the Reichsbank to act as a controlling authority. Therefore, it was the Reichsbank and not the credit banks which dictated policy in late July.66
Financial circles were made aware of the possibility of mobilization on, or soon after, 18 July 1914.67 As in Britain, therefore, any sense of crisis began with the banks more than with their customers. The banks’ resolve to persuade their clients to deal in paper fostered the clients’ determination to do the opposite. The emergency (and unauthorized) issue of 5- and 10-mark notes deepened fears more than it eased circulation. Paper currency was exchanged at a 10 per cent discount, and was refused even by large institutions like the railways. Small savers stormed the banks on 27 July. About 7,000 depositors in Berlin w
ithdrew 935,000 marks, and the totals were only slightly lower on the following day: between 27 July and 8 November 1914 11 million marks were withdrawn but only 2.5 million paid in.68
The pressure was, however, almost entirely domestic. Being comparatively isolated, the German money market was spared the flurry of foreign withdrawals. Between 23 July and 31 July 1914 the Reichsbank’s holdings of gold only fell from 1,356.9 million marks to 1,253.2 million.69 To check withdrawals, commercial interest rates rose from 1.5 per cent to 4.5 per cent by 1 August, and the Reichsbank’s discount rate was fixed at 6 per cent on 31 July. By 7 August, partly through the addition of the war chest, the gold losses of the last week of July had been nominally recovered. Gold reserves rose 225 million marks in August as a whole.
On 4 August the Reichstag approved a package of proposals, including a short-term credit of 5,000 million marks secured on treasury bills lodged in the Reichsbank. The convertibility of both notes and treasury bills was suspended: it was argued that the international element in the gold standard was temporarily redundant, and that domestic confidence could be sustained by an enhancement of the status of the Reichsbank and by the knowledge that the one-third cover for notes still pertained. One of the symbols of this changed relationship between the Reichsbank and the government was the bank’s release from the tax on any uncovered notes. Treasury bills and treasury bonds were both declared secondary reserves against note issue. In addition, the task of providing credit to the private sector was delegated to loan banks, Darlehenskassen, created specially for the purpose.
The Darlehenskassen were another symbol of the continuity in German thinking on war finance. Prussia had used them in 1848, 1866, and 1870. Their purpose was to ensure liquidity so that business and local government could continue without adding to the demands on the collateral of the Reichsbank. They were authorized to give loans of up to 50 per cent of the value of goods, and up to 75 per cent on stocks and shares. Their interest rate was fixed to fall above that of the discount banks and below that of the Reichsbank. They were authorized to issue their own bills, Darlehenskassenscheinen, 550 million marks-worth of which had been printed in preparation for the possibility of war in 1912.70 While not legal tender, they were exchangeable for notes (but not, of course, for gold) at the Reichsbank. Their initial circulation was fixed at 1,500 million marks, but the Bundesrat was empowered to raise this—which it did. The Darlehenskassen proved as attractive to the communes and states of Germany as to the business world. Cut out from the normal loan market by the Reich’s needs, they could now get credit and at a rate lower than that of the Reichsbank. The effect was indirectly to draw their reserves, from whose exploitation the Reichsbank would otherwise have been excluded, into the base for an increase in note issue. The Reichsbank could substitute Darlehenskassenscheinen (as well as treasury bills) for bullion in the one-third reserve for its notes. Moreover, in practice if not in theory, the Darlehenskassenscheinen themselves became currency. Their low denominations (initially down to 5-mark notes, and from 31 August 1914 1- and 2-mark notes) filled the need for small change which had so preoccupied Hanssen and his waiters at the beginning of the month.71
The Darlehenskassen were a device to help bridge the shift from peacetime finance to wartime finance. Germany played down the significance of this shift. Alone of the major belligerents, it eschewed the declaration of a general moratorium. But this was more of a gesture to boost confidence and ensure credit than it was a reality. Individual states were allowed to take their own decisions. The law of 4 August permitted the postponement of payments, and on 6 August the settlement of bills and cheques was extended to thirty days. Pre-war debts could be put off for between three and six months. The stock exchange, which closed on 30 July, was subject to a moratorium on 14 August which was not lifted until November 1915. Officially, the stock exchange never reopened—although in practice trading, particularly in the shares of arms firms, persisted.72
The process of German mobilization had worked a more fundamental revolution in the mechanism of German credit than was realized at the time. The Reichsbank’s reserves were increased through treasury bills and Darlehenskassenscheinen. On 7 July, against a note circulation of 2,192 million marks were entered 1,626 million marks in gold and 1,025 million marks in treasury bills and other forms of security. On 31 August a note circulation of 4,235 million marks was covered by 1,606 million marks in gold and 4,897 million marks in treasury bills, Darlehenskassenscheinen, and exchange bills. The bills served as the basis for the growth in currency, but were themselves not subject to restriction. The supply of money had become effectively autonomous. Total German circulation of all types rose from 5,893 million marks in May 1914 to 8,436 million in September.
Currency inflation was indeed the simplest and most effective means of shifting to a war economy. Britain had incorporated elements of the same approach, particularly in the issue of treasury notes. But in Germany the possibility of the quantity of money itself creating inflation was not seriously entertained. Inflation, in German theory, could only be the consequence of a shortage of commodities, which would generate rising prices. The control of inflation could therefore be managed by the control of prices. And the law of 4 August included the power to fix prices.73
Inflation also played an important role in the financial mobilization of Germany’s principal ally, Austria-Hungary. And yet the overt manifestations were different, as the shortage of small change was much more persistent. The army’s need for cash was a clear lesson of the partial mobilization during the Bosnian crisis, but no preparations were made to meet the sudden demand for currency in August 1914. Although temporary use of 20 and 10-crown notes had been permitted on occasion, the smallest note in normal circulation was 50 crowns. A decision on 14 August to issue notes in denominations of 5 crowns, 2 crowns, and 1 crown was never fully implemented. The 2-crown note was available on 18 August 1914, but so hurried had been its printing that the Hungarian version had mistakes. The 5-crown note was not produced. In May 1915, to meet the demand for coin, a ‘new silver’ coin (in reality 50 per cent copper, 40 per cent zinc, and 10 per cent nickel) was minted, but the supply of copper began to run out in 1916. From March of that year small coins were fashioned from iron. Finally, in December 1916 the 1-crown note made its belated appearance. Only now was the need for small-denomination currency fully satisfied74.
Ironically, rather than help Austro-Hungarian financial preparedness for war, the Bosnian crisis undermined it. In 1908 Austria-Hungary was feeling the benefits of five years of industrial growth. Interest rates were set at 4 per cent in March, and in 1909 gold cover averaged 70 per cent of note issue. But, despite their best intentions, the finance ministers of Austria and Hungary found themselves unable to pay for the partial mobilization of 1909 out of tax income, and had to resort to treasury bills and an increase in the national debt. The spurt in arms spending which followed meant that by 1912 the state owed 541 million crowns in government stocks, against an average of 149 million in the decade up to 1909. Capital became increasingly hard to find, especially as the government’s needs competed with those of industry. Interest rates rose to 6 per cent in November 1912, and liquidity problems either dampened business expansion or encouraged a search for funds overseas, so contributing to Austria’s balance of payments’ deficit. Then the 1911 Moroccan crisis and the 1912 Balkan war took their toll. Foreign (particularly French) capital departed, and the confidence of domestic investors was shaken, leading them to place their capital overseas. The Austro-Hungarian Bank had to sell gold abroad to defend the exchange rate. In 1912 its gold cover averaged 45 per cent, and by the year’s end had fallen to 1,210 million crowns against a note issue of 2,816 million. Military mobilization was clearly a costly exercise—and, some argued, war itself could not be more damaging.75 One of the strongest exponents of this view was the common finance minister, Bilinski; for him, finance had become the servant of war even while peace still prevailed.76
The task of
funding mobilization had been given to the Austro-Hungarian Bank in 1887. The bank was a private company, although its governor was appointed by the emperor on ministerial advice, and the board included representatives of the two monarchies. It was obliged to maintain a cover of two-fifths of its note issue, although this could include up to 60 million crowns in British, French, and German deposits. The effect of the run on gold was that by 1912 the bank could not fund mobilization and adhere to the terms of the Bank act. The requirement for two-fifths cover reduced the possible additional note issue to 950 million crowns. The cost of the first three months of mobilization was estimated at 1,850 million crowns, without any allowance for an intervening increase in prices.77
The fact that war would require the suspension of the Bank act was emphasized by the governor, Alexander Popovics, at a conference of the banks and of representatives of the finance ministries in Budapest in November 1912. The conference thought that the normal credit machinery—existing cash, the placing of loans at home and abroad—could produce 800 million crowns for the first eight days, and that thereafter 1,700 million crowns could be borrowed from the clearing banks (Notenbanken). But the talk remained general. No draft laws or regulations were prepared. And consideration was given only to the first three months of war.78 Privately, the finance ministries thought that the empire could not fund hostilities for more than one or two months.79
Austro-Hungarian accounts showed some signs of stabilization in 1913–14. Gold reserves picked up, and the interest rate was reduced to 4 per cent in March 1914. But Popovics had had insufficient time to reduce Austria’s overseas holdings or to win back domestic capital. Furthermore, the response of the Austro-Hungarian Bank in the course of the July crisis was always late and inadequate. Popovics’s problem was that of Austria-Hungary writ small: he did not know whether he should be anticipating partial mobilization, general mobilization, or war, and he was subject to a timetable that was constantly foreshortened rather than lengthened.