by Hew Strachan
This constituted about half Germany’s total debt to all neutrals. The leverage of Germany’s coal enabled the contracting of debt in Switzerland (the Reichsbank had secured credits of 335 million gold marks by October 1917), and also in the two other border neutrals with which Germany sustained major trade— Sweden and Denmark (Reichsbank credits of 285 and 180 million gold marks respectively by October 1917). About 3,000 million marks had been raised through the sale of foreign securities and a further 1,000 million through the disposal of German shares; exports of gold totalled about 1,000 million marks.
Germany, therefore, paid for its imports primarily with notes; to that extent its foreign purchasing was deflationary. The consequences were inflationary in that virtually all Germany’s debt was held domestically, and most of it in the Reichsbank. Thus, far more of Germany’s debt was monetized than was the case in Britain. Germany’s monetary base increased 56 per cent between 1913 and the end of 1917 and 76 per cent by the end of 1918; by contrast, Britain’s grew 12 per cent by the end of 1917 and 32 per cent by the end of 1918.408 Moreover, if war represents an unproductive use of capital, then Germany loaded the responsibility onto its own money market rather than onto those of others. Nonetheless, German bankers and shipowners were not over-anxious about the consequences of inflation for international reintegration as the war came to an end. Indeed, they saw the depreciation of the mark on the international exchanges as the fastest route to the recovery of Germany’s export trade and the readjustment of its balance of payments. As Albert Ballin of Hapag put it in September 1917: ‘The American who no longer gets for his dollar 4.21 marks worth of goods from us, but 6.20 marks worth, will rediscover his fondness for Germany.’ Max Warburg was inclined to agree.409 Therefore, the assumption in commercial circles was that the best policy after the war would be a quick return to pre-war parity.
A further source of consolation was the fact that, unlike the import-dependent Entente powers, Germany had avoided the need to export gold to support the exchange rate. Indeed, the Reichsbank’s holdings of gold, pursuing the policy established by Havenstein before the war, swelled by 93 per cent during it.410 Some of this gold was the fruit of conquest. The persistence into 1918 of the notion of the gold standard and of the faith in indemnities was confirmed by the Treaty of Brest-Litovsk, whose clauses included the requirement that the Russians surrender to the Germans 245,564 kilograms of fine gold valued at 200 million marks.411 Much of it came from Germany’s own population, the result of successive propaganda drives linking gold in the Reichsbank to an increased money supply. A great deal of it came from Austria-Hungary. Germany may not have borrowed abroad to any great extent, but its allies borrowed from Germany. Berlin did not lose the opportunity to confirm its economic suzerainty.
The pattern of Austro-German financial relations was set by the end of 1914. Austria-Hungary had a balance of payments problem before the war. Even in 1913 the empire had not managed to cover its own cereal needs, and in 1914 the harvest fell yet further; the pattern was to be repeated in every subsequent year, although the decline was less precipitate in 1917 and 1918. To feed it had to import, and to do that it needed foreign exchange. In November 1914 German banks, with the backing of the government, advanced 300 million marks on the security of Austrian and Hungarian treasury bills. Not all of this sum was released, because of constraints on the German capital market.412 The notes paid 6 per cent up until 23 December 1914 and 5 per cent thereafter, and had a life of one year, although this was renewable. By July 1918 Austria had received credits of 2,124 million marks and Hungary 1,336 million; in the first six months of 1918 Germany was advancing the dual monarchy 75 million marks a month on condition that Austria-Hungary met the costs of German soldiers serving on its soil.
However, in addition to the needs of the two governments the Austro-Hungarian Bank required marks to service foreign trade. From the Bank Berlin demanded not paper securities but gold. Between December 1914 and December 1915 the Bank’s holdings of gold fell from 1,055 million crowns to 684 million. By 31 October 1918 its stocks had dwindled to 268 million crowns.413 In December 1918 Vienna’s gold reserves were 79 per cent below those of December 1913, a collapse unparalleled in the finances of any other belligerent.414 Only a decisive victory and a massive indemnity, it seemed, could restore the empire to the international gold standard. What rankled in Vienna was that the cause of this fall seemed to be not the war but the empire’s ally.
Austria-Hungary’s obvious route to salvation was to lessen its dependence on its gold-hungry partner and to increase its reliance on the gold-satiated neutrals. In January 1916 the leading banks undertook to negotiate loans with their peers in Switzerland, Holland, Denmark, and Sweden. But their success was limited. The banks themselves charged commission and they did not halt the haemorrhage of gold, being prepared to advance up to a third of their collateral in this form. Only the Dutch advanced significant sums, and even here talk of an Austro-Dutch trading company came to nought.
Intergovernmental arrangements secured in treasury bills promised to be much less costly. In November 1916 Austria and Hungary each concluded a loan with Holland, whereby the Dutch accepted two-year treasury bills paying 5 per cent to the value of 45,560,000 guilders and in exchange advanced 70 per cent of that sum in nine monthly instalments. In November 1917 a second agreement gave the dual monarchy a further 24 million guilders, and in three separate deals over 1917 Austria used its tobacco monopoly to get more Dutch advances. Denmark, between late 1917 and early 1918, advanced 20,569,150 Danish crowns to Austria and 8,815,350 to Hungary on the security of renewable, non-interest-bearing treasury bills. In late 1917 Sweden lent 4.2 million Swedish crowns to Austria and 3,755,707 to Hungary in exchange for a combination of exports and treasury bills. Switzerland proved the most reluctant, but Swiss francs were promised by a group of companies in late 1917 in exchange for deliveries of kerosene, benzine, and sugar.415 As in Germany’s case, the American market remained closed: contacts through Warburgs with Kuhn Loeb in New York came to nothing. Even where these deals were successful, they bore witness to Austria-Hungary’s impoverishment: the nominal credits were vastly in excess of the cash advanced. Furthermore, although Austria-Hungary’s dependence on Germany was eased, it was far from eliminated: of 717,234,000 crowns in foreign credits outstanding in February 1918, 510,790,000 were German.416
But the frustration was not all on one side of the relationship. What irked Germany was that the Austro-Hungarian Bank used the better-priced mark, rather than the rapidly depreciating crown, to finance its foreign purchases. Thus, Berlin’s own efforts to sustain the mark were undermined by Vienna’s tendency to spend the German currency it borrowed not in Germany but in the adjacent territories. Furthermore, Berlin felt, with good reason, that Vienna could make more strenuous efforts to curb its flow of imports, and thus reduce its foreign-exchange dealings.
Germany’s establishment of its own foreign exchange control mechanisms in January 1916 served to alleviate, at least temporarily, some of these tensions. Austria-Hungary collaborated with the German scheme. Central offices for foreign-exchange dealings were set up in Vienna and Budapest under the auspices of the Austro-Hungarian Bank. But the scheme was voluntary, demand exceeded supply, and the price of foreign exchange on the open market rose. In December 1916, under German pressure, the arrangements became mandatory: foreign dealings were confined to a list of approved firms, and foreign exchange gained through exports was to be handed over to the foreign-exchange office. In March 1917 all imports became subject to the approval of the two finance ministries. Finally, in June 1918 these various acts were consolidated, and ministerial and bank approval for imports had to be granted before negotiations began, not once they were in train.417
The depreciation of the crown on the international market suggested that all these measures were little and late. Like the mark, the crown stabilized in 1916, fell in 1917, recovered in early 1918, and plunged in September 1918. In July 1914 the crown tr
aded against the dollar at 4.9535; by January 1916 it had reached 8.1440; in October 1917 it exchanged at 11.498, a rate which was not exceeded until eleven months later, when the crown stood at 12.010. In Zurich 100 crowns bought 105 Swiss francs at par, but 66.75 in June 1916, 44.02 in June 1917, and 43.01 in June 1918. During the war itself what mattered most of course was the crown-mark exchange. Depreciation here accelerated the exodus of gold and increased the cost of German imports. In January 1916 the crown stood 27 per cent over par; it reached 32.5 per cent by the end of 1917, recovered briefly with the hopes of victory at the beginning of 1918, and fell back to 47 per cent in December 1918.418
Nonetheless, what is surprising about this picture is not that it was bleak, but that it was not bleaker. The efforts to control imports in 1917–18 and the securing of credits in neutral nations over the same period helped slow the fall of the crown until it was overtaken by military collapse in the autumn of 1918. Moreover, the depreciation on the international exchanges bore no relationship to the increase in circulation in 1914–16 or to the rise in prices in 1916–18. Both the latter soared, undermining the value of the crown in a way that was not reflected on the international money markets during the war. The blockade, by controlling Austria-Hungary’s balance of payments’ deficit as it did that of Germany, hid the true decline in the crown until trade resumed at fuller levels on the conclusion of the war.
Germany’s role as banker to its allies was even more pronounced in the case of Turkey. But, unlike Austria-Hungary, the Ottoman empire managed to resist exploitation by its powerful coadjutor. Arguably the ultimate destination of the gold provided by Vienna was not Berlin but Constantinople. Of 900 million marks in gold surrendered by Germany by June 1918, 844 million represented payments to the other Central Powers,419 predominantly Turkey. Efforts by Berlin to get long-term concessions from Constantinople in return foundered repeatedly on the rock of immediate military necessity. The provision of ready cash seemed the only way to cut through Ottoman procrastination. Furthermore, Turkey’s use of the aid it received was very different from that of the other belligerents: its economic backwardness curbed the implications of the balance of payments problem and Turkey’s standing on the international exchanges was proportionately irrelevant. The Sublime Porte’s foreign borrowing was applied predominantly to domestic purposes. Germany’s task, therefore, was nothing less than to be the main financier of Turkey’s war effort.
Turkey made this plain even before it entered the war. Enver’s demand for a loan of £Turkish 5 million was set as a precondition of Turkey’s fulfilment of its alliance obligations. The Germans wisely made full payment conditional on active belligerence, and thus £T2million was advanced in mid-October before Souchon’s sally into the Black Sea, and the balance followed in six monthly instalments beginning on 1 December. The loan was secured in Turkish treasury bills, paying 6 per cent per annum, and redeemable a year after the end of the war.420
What alarmed Germany was that the export of its gold promised to continue for the duration of the war. The issue of paper money was in the hands of the Imperial Ottoman Bank, but the bank was effectively administered from Paris. The British and French managers of the bank in Constantinople were not removed from their posts until January 1915. Djavid, as finance minister, was reluctant to break the French link, a reflection of his pro-Entente sympathies as well as a recognition of the likely importance of France’s investments to Turkey’s post-war position. Ninety per cent of the £T40 million in circulation in 1914 was metallic, and the faith in notes was proportionately slender. Paper currency issued by any authority, and certainly paper money issued by any authority other than the Imperial Ottoman Bank, was unlikely to command confidence. Thus, it seemed that liquidity could only be maintained by further shipments of gold.
Djavid’s solution was to propose that the Ottoman public debt be used as a bank of issue on a temporary basis. Helfferich favoured the idea but not its corollary—that, to gain public confidence, the notes be fully covered by German gold. The compromise was to make the notes redeemable in gold six months after the conclusion of hostilities, but in wartime to keep the gold in Berlin, in the Deutsche Bank, for the account of the Ottoman public debt. On this basis 80 million marks were advanced in the spring of 1915.
For subsequent note issues the Turks agreed to accept the security of German treasury bills rather than gold. Furthermore, although the bills too were redeemable in gold, the period for repayment was progressively extended. For the second and third issues, in November 1915 and February 1916, payment was due a year after the end of the war. The fourth (August 1916) was not due to be fully redeemed until five years after the peace, and the fifth (February 1917) would not begin to be repaid until the redemption of the fourth issue was complete. On this basis Turkey added £T160 million to its note circulation. But the increased currency did not, as in the case of other belligerents, constitute a forced loan from its own public; it was instead a loan, worth almost 4,000 million marks, from Germany.421
Germany’s financial obligations to its ally were not thereby resolved. The lack of public confidence in paper currency was not overcome. Before the war notes were issued in high-value denominations, £T100,£T50, and £T5, and were therefore rarely seen in market-place transactions. On 10 August 1914 the banks were relieved of the obligation to redeem notes for metal, and notes valued at £T1 and were issued. The result was that coin disappeared, not because it had been withdrawn from circulation but because it was hoarded. Notes were progressively less acceptable the further one moved from Constantinople. Their rejection contributed to paper’s depreciation, as its availability exceeded its marketability. By 1916 paper money was exchanged even in Constantinople at 40 per cent below its face value, and in the provinces at 80 to 90 per cent. By 1917–18 £T1 in gold traded for £T6 in notes, and in Syria and Arabia for £T8 or £10422 Lack of faith in paper currency was therefore a major cause of rising prices. Efforts to reform the currency had no appreciable impact. In April 1916 the currency was unified, but its primary aim was to prevent further deterioration in the value of Turkish paper money and common valuations of the same denominations did not follow.423 On 1 January 1917 the National Credit Bank was founded, but as it had no powers of issue the dilemma created by the French management of the Imperial Ottoman Bank was not resolved.424
Lack of liquidity jeopardized military effectiveness. Between 1916 and 1918 the major Turkish war zones were in the southern parts of the empire, remote from the note-using metropolis. In Syria and Mesopotamia only gold was negotiable. Even in April 1916, when the Turkish 6th army was in the ascendant in Iraq, it found itself unable to buy food or horses for lack of gold.425 In 1918 each Turkish army was given a float of £T1 million in paper. But the Arabs would only sell their goods for gold, and therefore preferred to trade with the British.426 Thus, German support of the note circulation was not in itself sufficient to shore up Turkey’s currency. Shipments of gold were required to enable the Ottoman armies to stay in the field. To all intents and purposes, Turkey reversed the normal pattern of foreign borrowing: it contracted debt in Germany to enable it to buy war goods within its own frontiers, and it imported, rather than exported, gold in order to try to stabilize the regional variations in the domestic exchange rate between metal and notes.
The most direct manifestation of the indissolubility of the link between German gold and Turkish military effectiveness was provided in May 1917. Berlin was scaling down its credit operations in the Ottoman empire, but its commitment to an offensive planned to recapture Baghdad required it to provide £T200,000 a month in gold, with a willingness eventually to allocate £T5 million.427 If Germany wanted to ensure that Turkey conformed to its strategic priorities, it had little choice but to fund them directly. Thus, German gold and silver, valued at £T17.5 million, was pumped into pan-Islamic propaganda.428 Since the notion of holy war furthered the principles of the Caliphate as well as the anti-British objectives of the Germans, Turko-German tensions
were not thereby revealed. But when in 1915 the German foreign ministry offered an advance of 40 million marks to hasten the completion of the Baghdad railway, Djavid objected that the purposes were German and that a hasty and improvised construction would fulful the short-term needs of Berlin, not the long-term objectives of Constantinople. Terms were finally settled in January 1916, but only because Germany, not Turkey, provided the financial guarantees needed by the Bagdad-Eisenbahn-Gesellschaft.429
The Baghdad railway also highlighted how much Germany’s financial aid was supplemented by the provision of equipment. Locomotives, machinery, and raw materials allocated to the railway by Germany were valued at 435 million marks. Total military supplies from Germany were estimated at 616 million marks.430 The Foreign Ministry’s final calculation of Germany’s contribution, aggregating aid in kind as well as in cash, was £T235,056,344 or 4,700 million marks.431