The "Weimar Inflation". Much
has been spoken about it, but few really appreciate key points, motives and
reasoning. It seems that it was just excessive money, but in reality it was a
constant shortage! The critical role of the velocity of money is also not
understood in these situations, nor today. It was
portrayed and possibly constructed as a financial accident, but linking the
scene to that day's politics shows another picture!
In understanding today's environment and the
prospects for "Stagflation" and the battle to export
"Deflation", understanding the Weimar Republic's
hyperinflation is one of the critical lessons for Investors today.
Quintessential Inflation - The Great Weimar Inflation - Germany the Early
Julian D. W. Phillips
History as written,
is written not by those who make history, but usually by those who observe
it. Sad to say they may be possessed of less information than needed to give
an accurate picture. Some facts of history become evident later when
observers perceive the full picture in the results achieved well after the
event. It will be so that the facts they present may be accurate, but their
presentation may lack proportions and mixture that gives the true picture. In
this Article we are going to re-look at the collapse of the German Currency
in the post- first world war years as occurred in the Weimar Republic.
With the benefit of hindsight and the
experience of similar albeit moderate repeats of the evil of inflation we can
see that this collapse was not a financial accident in the hands of the
inexperienced and incompetent German government, but clearly a deliberate
"accident", which achieved a desired and effective result in
financial terms, despite the dreadful seeds laid by it that led to the Second
World war. It was the only recourse a defeated government to the imposition
of greedy, rapacious conquerors masquerading as oppressive creditors, seeking
financial revenge and further grabbing of the spoils of war..
It serves as the most dramatic example of Inflation in history.
Since then it has been used as a useful tool
to give the appearance of wealth where none was, and
a most useful tool in later decades of the century to achieve short term
goals. Do not think for one moment that it will be repeated exactly as it
occurred then. The world has learned how to use it in a way to postpone its
effects, in the pretence that the effects are not necessarily pernicious.
Today, by re-examining this period through the eyes we now have, we can see
features to this disaster that were not understood or even perceived by the
less street-smart observers of that day.
Indeed, since then, the world has come to
understand the phenomena of Inflation and deflation and their hybrid -
stagflation. They have been used as tools to achieve Political as well as
Monetary objectives and over long periods of apparent growth, giving fluidity
to such economic growth, globalisation, Imperialistic widening of
multi-national synergies. The impression of increasing wealth,
and general prosperity have made these processes tenable, indeed welcomed.
With such benefits, who could reasonably object to the pervasive processes
that, in reality, undermined the very foundations of long-term stability. The postponing of the painful process of
re-establishing monetary stability, is a temptation
far too hard for a government to resist, until they can reap the rewards of
political kudos when they resolve a crisis, without the unpopularity that
attends the solution of mere problems.
We ask you, the reader, to ponder over these
events looking at the ingredients and observing their presence today. We have
no doubt that you will add to the observation we make, these events being
structural events whose offshoots can manifest themselves in so many ways.
The ingredients of a beautiful meal they, of themselves, will not make the
final dish, but their quantities, preparation and presentation will give you
the final dish. And mark well, just who the Chefs are - they decide just what
you will eat!. So it was just after the First World
This analogy is not simply for the decoration
of this Article, but an attempt to persuade our readers to stop isolating
economic, monetary or markets world from the broader spectrum of the
integrated and interdependent world we live in. We have to stop being myopic,
to take off our blinkers and integrate political and other features into the
biggest picture, as far as the public facts will allow us, to identify the
true picture of power. Only when we can place these into proper
"synch" will we be able to understand the events that occurred in
the past and perceive those that lie ahead.
The Weimar Republic, on the surface, looked as
though it could have been accidental, or an act of irresponsibility by the
Monetary Officials involved, indeed the commentator to which we will refer
constantly, the Right Hon. Viscount D'Abernon [with thanks to Euromoney], who
was a commentator of the day, wrote: -
"The evils through which Germany had to
pass might have been avoided had proper measures been taken in time. Their was more ignorance than malevolence in their
currency blunders, more recklessness than malicious intent. Had a full,
accurate and impartial narrative existed of the currency adventures in France
between 1790 and 1800, it is not impossible that both Germany and France
would have avoided many of the mistakes that have caused them recent trouble.
Although the German crisis is only three years old, similar errors of
currency policy are today being committed in other countries.
"With the benefit of hindsight and the
final objectives achieved, we would disagree with this conclusion, saying that
the entire process of the financial bankruptcy of Germany in 1919-23 was a
costly but effective way of resolving and removing the punishment the Allies
had imposed on Germany at the end of the war - namely that they should carry
the cost of the entire war - including the Allies costs. Such a punishment
would have endured decades longer, were it not for this relatively short term
expedient. The recovery of the German currency and economy, from 1923 to
1926, provided sufficient evidence of this fact. The social ramifications
inside Germany, such as the financial destruction of the middle and upper
classes of the thrifty and prudent was a price the nation felt had to pay.
After all, the interests of the State always outweigh those of its citizens,
even in Financial conflict! The social damage quickly laid the seed of the
Second World War.
France handled it inflationary objectives
better as the figures demonstrate below. Lessons had clearly been
The development of the Inflation crisis was
true to standard type. Result followed cause in the financial world, in
accordance with what should have been theoretical expectation. Nothing
occurred which could not be explained by known law, or which could not have
been anticipated from a knowledge of what previously
occurred elsewhere. The case was, however, at once normal and also abnormal;
normal in its truth to type, abnormal in its violence and magnitude. The
crisis was indeed, unprecedented in severity among modern industrial states.
"It may, therefore be said to belong at once to those examples which are
suitable for a text-book, and to those tales of wonder and adventure which
owe their interest to the extravagance of the fact recounted. "The
climax of the inflation was reached in the Autumn of 1923, when the German
exchange had fallen to one billionth [i.e. the British billion - one million-millionth]
of its original value, and the German Mark was no longer accepted in payment
by the population, when grave political trouble and the rapid process of
dismemberment of the Reich threatened.
To emphasise our point that this was a
political expedient, please note that the progress of recovery since Autumn
of 1923 to 1926 was remarkable; by November 16th 1926 the
replacement currency had been firmly established - the budget in equilibrium
and Germany's financial world was working on normal lines, it was thought at
the time, towards prosperity.
The prime cause of the catastrophic fall in
the German Mark? - Demands for Reparation payments, involving forced public
expenditure, without regard to the effect of these payments on State Finance.
Please be aware, though that it would be incorrect to say that Reparation
demands made inflation inevitable, inflation had been resorted to in Germany
during the war years. Reparation demands, whilst they were not an initial
cause, were an aggravating one. We leave it up to the reader to conclude that
it had been realised that inflation served political causes well, both during
and after the war, but for entirely different reasons.
It was and is our contention that inflation
was seen as a useful tool, even back there, despite the crudeness of its
impact. We would further contend that whilst the consequences of an
ill-regulated issue of bank notes was inadequately appreciated, once realised
was allowed to continue, as the "greater" political objective was
History has taught governments well, as we see
from the "controlled" inflation of the last few decades. We
therefore have no doubt, whatsoever, that inflation will be attempted again,
should deflation pose the obvious political threat,
it may well do should it spread from Japan and accelerate in Germany and
develop solidly in the U.S.A.
The question will be,
are the controlling authorities capable of co-ordinating control of it to the
extent needed, in the partially developed "world" economy we have
now? Secondly, do they have effective mechanisms to control the mercurial
money supply in a deflationary climate via the use of inflation to counter
it, without the dreadful collateral damaged suffered then? The signs are
there for this looming battle in these early years of the 21st
After the autumn of 1923 saw the stabilisation
of the currency, recovery commenced directly unrestrained issues stopped. But
until the death of Dr Havenstein and the appointment of Dr. Schacht in his
place as President of the Reichbank, accompanied by the nomination of Dr.
Luther as Minister of Finance, there was no effective financial check, nor
the indication among responsible officials of any correct diagnosis of the
position or of any willpower capable of dealing with the crisis. Dr
Havenstein, then President of the Reichbank, speaking before the Reichsrat on
August 7th 1923 [the pound sterling then stood at 15 million paper
marks.] said: "The Reichsbank today issues 20 thousand milliards of new
money daily. The note issue at present amounts to 63, 000 milliards: in a few
days, therefore, we shall be able to issue in one day two thirds of the total
circulation." This declaration elicited no protest and excited no public
It is of significance to note that the
principal feature of Germany in 1923 [the climactic year of inflation] was
that industry enjoyed the illusion of fortune, while living in a state whose
finance and currency were completely disorganised. The ledgers of German
industry showed enormous paper-mark profits, but in the end it was realised
that the paper it had gained was worthless! At the same time an analogous
process was followed regarding reparations. Cash on delivery was demanded;
the only basis which allowed a permanent flow of profits and cash flow.
Stability in purchasing power was treated with
scant regard. Yes, the Reparation Commission made constant efforts to induce
the German Government to institute a radical reform of taxation and currency,
but they were never prepared to give the German Government a long enough
breathing space to enable them to carry through such a programme. Indeed, one
wonders if it would have suited the German Government to have been able to
implement such reforms.
Theory has it that budgetary deficits and
currency instability are to some extent cause and effect; the greater the gap
in the budget, the greater the necessity of finding the means to fill the
gap. Today, we still have the same formula, but if you can moderate inflation
and give a semblance of stability, one can enjoy the "benefits of
inflation for far longer. However, the 'day of reckoning' inevitably arrives.
In Germany in 1923, the normal
resources of taxation, having been found insufficient, one administration
after another was compelled to resort to abnormal [or indeed
illegitimate] resources, i.e. each attempted to meet current necessities via
the printing press! The general public did not appreciate the extravagance of
the Havenstein statement above, nor apparently did the German financial and
industrial leaders, so commentators at the time believed. However, we would
argue that the benefits to the nation from the easing of
the repayment burden of Reparations was sufficiently overwhelming as
to make the negative impacts tolerable [except to those who suffered
directly]. Indeed, the ignorance bred of myopia and in accord with the
principles of economic thought prevailing at the time, the amount of internal
currency in circulation had little influence on its external value.
The latter was determined, so they wondrously contended, mainly by the
passivity or activity of the trade balance.
With such a paucity of theoretical advice,
sufficient to fool all of the people in the critical time, the German
Government acted on the principle that, as there was an admitted monetary
scarcity, the only way to cure it was to increase the circulation. The
results were remarkably (see Table 1) swift when the size of the reparation
debt was considered. The elimination of an intolerable internationally
enforced debt, within four years, was a feat of ill-considered genius.
In resorting to the printing press, the German
government diminished the value of, not only each individual unit but of the
aggregate total circulation. It was generally realised only later that the
sole way to increase the value of the circulating medium was to raise the
value of the units by the strict limitation of output and by subjecting the
issues to clearly specified conditions.
The pre-war circulation in Germany was
approximately equal to 300 million pounds sterling, whereas from August 1923,
until the period of stabilisation the whole Reichsbank and authorised
government issues could have been bought up, on the basis of GOLD
for a figure of 10 million pounds! The more notes the Reichsbank issued, the
less the aggregate exchange value of the notes in circulation became.
Quality, or value in the world market, decreased more rapidly than quantity
could be increase; and this, although every effort was made to stimulate note
output. France underwent a similar, albeit more moderate development [see
How did Germany carry on business under such
extraordinary conditions? The theory was twofold: -
- The velocity of circulation of the currency
- The currency gap was filled by tokens (Notegeld)
issued by various public administrations and by private persons,
alongside the limited use of foreign banknotes. The
velocity of notes played an important part.
True the population of Germany had diminished by 10
million; territories had been taken away, while business had contracted. On
the other hand, payment by cheque had ceased to exist and there was a flight
from the Mark. Notes were held no longer than could be helped as they were
turned into goods or exchanged against foreign currency.
In practice the degeneration of the Mark had a dramatic impact: -
- Workers had to be paid once or twice daily.
Scenes of workers running to the gates of the factory, giving their pay
to spouses, who put it in prams then ran to the shops to spend it, as
fast as possible, on, literally anything.
- One man went into a restaurant, next to a bank
[who kept in touch with the exchange rate], bought a cup of coffee which
by the time he had finished it had doubled in price.
- One woman went to the shop, and for some reason
put down her bag, full of money, outside the shop. When she returned she
found the money on the pavement but the bag gone.
On July 17th 1922 a law was passed
[amended on October the 26th 1923, permission to issue emergency
tokens was granted by the Minister of Finance - if a real emergency was
recognised to exist, e.g. if the Reichsbank was unable to satisfy the demands
of industry for the payment of wages. As a condition of such issues it was
stipulated that an asset had to be deposited in the Reichskreditgesellschaft
[a semi-official Reich banking institution] in favour of the Minister of
Finance; if and when the tokens were called in, this deposit was released.
But over and above these authorised issues, the whole country was
inundated with unauthorized Notegeld, without any pretence of cover at
all, whose amount in January 1924 was estimated at 159.6 million Gold Marks.
The evil of this inflation was aggravated by the
extraordinary credit policy of the Central Bank of Issue. According to the
terms of the Bank Law of 1875, the Reichsbank note-issue was covered up to
one-third by gold and for the other two-thirds by discounted bills of not
more than three months' date guaranteed by at least two persons of known
solvency. Now it should be known that Treasury bills did not fall under this
category and could not then be used as backing for the note-issue. At the
outbreak of the first World War, because of the realisation of possible
abnormal currency needs, an Act was passed whereby Treasury bills were put on
the same footing as trade bills of exchange. From then on the Reichsbank was
able to hold them against note-issues. The first stage of inflation [the
Helfferich stage] had begun. But it was nothing compared to the Havenstein
stage [Table 3].
No effective measures were taken by the
Reichsbank to put an end to such excessive credit issues. To illustrate the
situation at the time, we refer to the decision taken by the Central
Committee of the bank on August 2nd 1923 were Havenstein stated
that it was not the duty of a Central Bank of issue to make the rate of
interest, but to follow the market rate. He consequently proposed to raise
the Bank rate from 18% to 30%. It is regrettable that Havenstein did not draw
the proper conclusion from his premise, for the current market rates being
3-4% a week, the bank rate should have been raised to nearer 200%. But the
interesting point is that the members of the Committee did not support the
President's motion, not because the rate proposed was not high enough,
but because they were opposed to any increase in the Bank rate at all.
Indeed, throughout 1921, 1922 and the first half of 1923, a majority of the
banking world were either in favour of increased note issues, or regarded
such issues as inevitable. They were hostile to any departure from the
Havenstein policy. Rudolf Havenstein, President of the Reichsbank, is said to
have remarked in 1922 that he needed a new suit, but was not going to order
it until prices fell. Presumably, he never got his new suit; he died on
November 20 1923 - the day the mark sank to its lowest on the Berlin
Exchange. Of course had he done so at the beginning of 1920 and it cost 10
pounds sterling or 1,848 Marks, he would have been able to sell it for
18,000,000,000,000.0 Marks, were he to achieve his cost price at the sale.
Perhaps most unfortunate of all was the fact that
the Capitalist class, which finally lost all its
savings through inflation, was at no time hostile to the steps which led to
this loss. Temporary gain, or the illusion of it, obscured the inevitable
final disaster. This class, including the landed class suffered tremendous
collateral damage. On the one hand, those who were most familiar with
business dealings were able to take advantage of the situation, ensuring
ownership of the production process from basic raw materials through to final
retail sales, so removing the constant dangers of monetary degradation until
the profits had been achieved and translated into more goods or foreign
currencies. On the other hand, many of the landed classes found themselves
dispossessed of lands and estates held for many generations. Thus the seeds
of the dreadful policies of the Hitler era, including the war itself as well
as the anti-Semitic policies, were laid in the social disruptions resulting
from hyper-inflation. Now we turn to another cause of the Mark disaster,
enforced State expenditure. On the budget side the main troubles were: - (a}
From 1920 onwards Germany was called upon to make Reparation payments,
without regard to the question whether such payments could be obtained either
from existing or possible tax revenues or from loan operations of the State,
which would divert to its uses the real, not fictitious, savings of the
people During 1923, the year of supreme disaster, Germany, through political
circumstances not within her own control, made public expenditure on a
colossal scale in the Ruhr. The initial inactivity of the Reparation
Commission between January 10th 1920 and April 30 1921, was reflected in the relative calm of the mark
Exchange during that period. It is true that the general trend of the Mark
was weak, but not disastrously so at that stage. Indeed, the year 1920 and
the first quarter of 1921 were periods of comparative stability.
Article 233 of the Treaty of Versailles
provided that the findings of the Reparation Commission in regard to the
amount of damages inflicted by Germany in the war had to be concluded and
notified to the German Government on or before May 1st 1921. The
Reparation Commission fixed the sum at 132 billion gold marks (6,600
million). An inter-allied conference met in London in May 1921, and
determined the schedule of payments tat the German Government had to meet. An
important provision of the so-called London Ultimatum laid down that Germany
must pay a sum in cash of 1 billion Gold Marks (50 million pounds sterling)
before the end of August 1921. That payment was duly met, but the German
Government had to borrow about two thirds from the firm of Mendelssohn and
Company, repayable before the end of the year. This operation is likewise
reflected in the Exchange Rates.
The year of 1922 led the short path to
disaster. The Committee of Guarantees, set up under the Authority of the
London Conference, instituted a system of ten-day cash payments, each of 31
million Gold Marks (1,1550,000 pounds sterling). This system was continued
under the decisions of Annes Conference (January 1922) until it became
impossible to find the money. By the beginning of May the German Government
had asked for a Moratorium. After a great deal of fruitless discussion, it
was finally decided in August of 1922, that Germany should make out future
Reich's Treasury Bills to the order of the Belgian Government, which were
afterwards paid out of the Gold Reserves of the Reichsbank. The average
monthly rates of exchange for 1922 are in Table 7. It must be noted that
throughout these early reparation years the Reparation Commission constantly
draw to the attention of the German Government to the necessity of covering
their budgetary deficits, but the German Government were either unable or
unwilling, or a combination of both, to give effect to reforms on the
The Reparation Commission, clearly not in a
position to either understand or counter this effective destruction of
Germany's debt, did not give a sufficiently large inducement to the German
government to renounce their policy. It was only realised that this was
needed once a collapse had taken place. The collapse was complete and
precipitated the postponement of reparations until the currency was
effectively stabilised. The fact that reparations were being paid, not out of
tax surpluses, but out of the unrestrained printing of notes - a process
inevitably destructive of the financial capacity of the debtor [unless
repayment can be effected in freshly printed and debauched notes - was therefore
partly responsible for the Mark's disaster. However, a larger responsibility
must be attributed to the weakness of the Reich's financial system and its
tolerance of the wild currency policy of the Reichsbank.
During 1923 the Ruhr Territory was occupied by
Franco-Belgian troops; a foreign administration seized the customs and levied
other imposts. Not only was a valuable economic area from Germany, but
important revenues were destroyed or diverted to foreign treasuries -
destruction occurring to a larger extent than diversion.
The only surprising feature of this
hyper-inflation was that it was not undertaken quicker and more completely so
as to eliminate the Reparation requirements as speedily as possible in the
face of the rapacious greed of the conquering forces. Hence it was to be
expected that - in order to support passive resistance - the Reich elected to
make colossal payments in aid of its citizens in the Ruhr, with a disastrous
effect on the budget and Mark Exchange rate.
Throughout the inflation period no real budgeting
was done; the Government lived on borrowings, open credits being available at
the Reichsbank against Treasury Bills. It was an era of unrestricted and unlimited
We will not discuss the process of recovery
here, which was effective and quick. Needless to say the establishment
of the "Rentenmark" - the currency based on land - and therefore
limited in printability - [so believed at the time] was the means of
expanding money supply, in a less pernicious manner, was established, a feat
which commenced today's system of skyscraper like paper money, based on such
a small foundation of reality. Remember
By : Julian D. W.
– Global Watch
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