More than any other thread that links the two world wars, the history of the inflation is a reminder that for the nation which supremely promoted both of them, the second was merely an extension of the first, reinforcing the adage that the seeds of battle are planted in peace treaties. Inflation for Germany was an unwitting part of the process of stoking the emotional boilers for a resumption of hostilities when the power to wage war returned. Not only did the loss of their former affluence and status, and the destruction of the old moral ethic, sour and humiliate the human pillars and foundations of German society: in German minds democracy and Republicanism had become so associated with financial, social and political disorder as to render any alternatives preferable when disorder threatened again.
When war came back, so did inflation. With inflation alone, noted Günter Schmolders,* (The German Experience', essay in Inflation (Ed. C. Lowell Harriss, The Acad. of Polit. Science, New York, vol 31, IV, I975.)) can a government extinguish debt without repayment, or wage war and engage in other non-productive activities on a large scale: it is still not recognised as a tax by the tax-payer. Thus did Hitler resume deficit spending to finance armaments in 1938, and the experience begin again. As in the first case, the second inflation was a ten-year affair, although huge price inflation did not start in earnest until the eighth and ninth years, when cigarettes took over as the medium of exchange.
In terms of public perception, however, the second inflation travelled much faster. By 1948 the Reichsmark was abandoned, and ten Reichsmarks were traded in in cash against the new Deutschmark, while bank accounts were credited with only 6.50 Deutschmarks for every 100 Reichsmarks. Disaster had struck the holders of money values once again, but the agony was contained very much more quickly. The pass to which the Reichsmark had come in 1947-1948, the loss of nine-tenths of its value, had been achieved by its predecessor, the mark, as early as 1919.
Her new war indemnities apart, Germany was once again an almost debt-free country; and once again, with stability regained, great foreign loans were available to haul her out of her economic difficulties. Once again the repudiation of debt, conscious or unconscious, had been shown to be no more than a stage on the hyper-inflationary road. In the Toronto Star Weekly in December 1923, Ernest Hemingway described a street auction of inflation banknotes -- German marks, Austrian kronen, Russian roubles — which the citizens of Toronto were being urged to buy in the hope, of which Germans, Austrians and Russians had long since been brutally robbed, that when sanity returned the banknotes, too, would retrieve their old values:
No one explained to the listening men that the cheap-looking Russian money had been printed in million-rouble denominations as fast as the presses could work in order to wipe out the value of the old imperial money and in consequence the money-holding class. Now the Soviet has issued roubles backed by gold. None of these in the hands of the barkers …
To say that inflation caused Hitler, or by extension that a similar inflation elsewhere than in a Weimar Germany could produce other Right or Left wing dictatorships, is to wander into quagmires of irrelevant historical analogy. The comparable, coincidental, financial and social circumstances of Austria and Hungary do not, in any case, support such a notion, telling in other matters as are some of the parallels which may be found. On the other hand, the vast unemployment of the early 19305 gave Hitler the votes he needed. Just as the scale of that unemployment was part of the economic progression originating in the excesses of the inflationary years, so the considerable successes of the Nazi party immediately after stabilisation and immediately before the recession were linked (pace the observations of the Consul-General Clive) with its advances in 1922 and 1923.
It is indisputable that in those inflationary years Hitler felt his political strength as a national figure and first tried his fingers for size on the throat of German democracy. Indeed, as Mr Clive perceptively reported, 'in the course of 1923 he succeeded in rousing more passions and stirring up more bad blood than far greater men than he have done in a lifetime.' The Consul-General might with justification have added that Hitler should go far. Germany only needed a new dose of economic misfortune for the Nazis to seize power, quasi-constitutionally, the second time round.
Inflation did not conjure up Hitler, any more than he, as it happened, conjured it. But it made Hitler possible. It is daring to say that without it Hitler would have achieved nothing: but so is it daring to assert that, had enormous post-war unemployment not been held at bay for years by financing the government's deficits and by an ungoverned credit policy, bloody revolution would have occurred, leading presumably to an equally bloody civil war whose outcome can only be guessed at. In all these matters, it was anyway touch and go.
That Germany inflated deliberately in order to avoid the costs of reparations is not a proposition that bears examination. The evidence is wholly against it. First, the rate of inflation was enormous long before reparations were an issue. Secondly, industrial pressure to inflate, largely self-interested, had nothing directly to do with the war debt. Thirdly, it was correctly recognised that, although customs receipts by the Allies were perforce in paper money, reparations had to be paid either in kind or in gold equivalents: British and French war debts to America had themselves to be rendered in gold or gold equivalents, America's high tariffs making payment in goods impracticable.
Fourthly, at no time did Germany's financial authorities so much as hint, privately or publicly, that their policies derived from cynicism (which would have had to be shared by their counterparts in Austria and Hungary) rather than incomprehension and incapacity. That the government and the Reichsbank were dominated by the notion that a huge 'passive' balance of payments made constant devaluation inevitable hardly seems sufficient explanation of their total, blind refusal to connect the mark's depreciation with the money supply — yet, as Lord D'Abernon wrote even in 1922: 'Knowledge of currency laws -- particularly of the quantitative theory — is incredibly absent in all German circles'; or, as Brescioni-Turroni noted, the budgeting deficits of Reich and states alike were considered by writers and politicians 'not the cause, but the consequence of the external depreciation of the mark.'
It is irrelevant to this that the German workers who produced the reparation payments in goods or in bills of exchange were paid for their efforts in depreciating paper, with considerable though transient advantages for German industry and commerce — and frequently to the disadvantage of their foreign competitors. To that extent, reparations encouraged inflation. The 'transfer problem', involving the adverse economic effects of reparations on creditor countries, was only hesitantly being recognised by the Allies in the spring of 1923; and until then it was not suggested by them (or feared by German industrialists) that the excessive sale of subsidised exports for reparation payment purposes might lead to the erection of tariff barriers against Germany, much as other forms of Valutadumping' were castigated.* (Schacht, in My First Seventy-Six Years, Chap 21, reports Reginald McKenna, formerly Asquith's Chancellor of the Exchequer and then, in 1923, Chairman of the Midland Bank, as saying: 'Since Germany can only make payments by means of exports, she would be compelled to export to such an extent that British industry would suffer intolerably.')
While the reparations burden and the uncertainties it led to were advanced as a cause of inflation, so was inflation pressed as one of the conditions which made reparations difficult to pay — and in both claims there was a certain justice, although neither told more than a fraction of the story. D'Abernon, who did not exonerate the French government under Poincare from some of the blame for Germany's financial troubles (he accused Paris alternatively of 'Shylockism, bad information, or possibly, profound policy'), roundly condemned Berlin's 'folly and ignorance'. Indeed, it was inconceivable that Germany ever knowingly embarked on a course of economic and financial suicide to escape war indemnities, or that such motives were entertained by Rathenau. In practice, inflation proved no means of escaping foreign obligations except in so far as it contributed to the economic collapse of 1932 which wrecked the reparations programme for good.
The Reichsbank's display of naivete in its credit policies of 1922 and 1923 should finally dispel any suspicions of financial Machiavellianism on the part of Havenstein and his associates. They staunchly denied that higher discount rates would moderate the inflation and, on the contrary, opined that they would merely raise the costs of production and push up prices further. Loudly as they later asserted that these inexplicably cheap credits were given principally for 'profitable' projects, the favoured firms who benefitted from this largesse turned the money to their best advantage — either by turning it into material assets or into foreign exchange, or simply using it to speculate against the mark and drive it downwards. The only financial conditions which Havenstein understood were those which prevailed before 1914.
How great does inflation have to be before a government can no longer control it? Most economists accept that mild inflation has certain therapeutic advantages for a nation which must deal with the social and economic problems to which industrial democracies are usually subject. Most electorates still accept the statements of their politicians' pious intentions in regard to controlling ever rising prices: and yet the Deutschmark, the currency of the country which had most reason to fear inflation, lost two-thirds of its purchasing power between 1948 and 1975. The pound lost almost half its purchasing power between 1970 and 1975. In neither instance, however, did such depreciation represent a deliberate, cynical policy; which, no doubt, would also have been claimed by the German bankers and governments of the early 1920, who looked for causes of their monetary difficulties beyond their own printing press and tax system — and found them, without difficulty and to their complete intellectual satisfaction. It remains so that once an inflation is well under way (as Schmb'lders has it) 'it develops a powerful lobby that has no interest in rational arguments.' This was as true for Austria and Hungary as for Germany.
There was no moment in Germany between 1914 and the summer of 1923 when in theory currency stability could not have been secured, if necessary by the establishment of a new bank of issue for which sufficient backing was still available. Until the later date, despite the demands made by the Entente and the necessity to find substitutes for the Ruhr's iron and coal, German gold and foreign currency reserves always constituted a substantial proportion of the exchange value of the circulating paper, no matter how fantastically its volume grew. After the war was over, however, there were always practical difficulties which had little to do with the refusal of Germany's monetary authorities to see the connection between depreciation and money supply.
Long before the Ruhr invasion, and perhaps even before the preliminary meetings of the Reparations Commission, there came a stage when it was politically impossible to hah inflation. In the middle of 1920, after the brief post-Kapp Putsch period of the mark's stability, the competitiveness of German exports declined, with unemployment beginning to build up as a result. The point was presumably not lost on the inflators. Recovery of the mark could not be achieved without immediate repercussions in terms of bankruptcies, redundancies, short-time working, unemployment, strikes, hunger, demonstrations, Communist agitation, violence, the collapse of civil order, and thus (so it was believed) insurrection and revolution itself.
Much as it may have been recognised that stability would have to be arranged some day, and that the greater the delay the harder it would be, there never seemed to be a good time to invite trouble of that order. Day by day through 1920, 1921 and 1922 the reckoning was postponed, the more (not the less) readily as the prospective consequences of inflation became more frightening. The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both.
The longer the delay, the more savage the cure. Austria by the end of 1922 was in the hands of the receivers, having regained a stable currency only under the absolute direction of a foreigner. Hungary, too, had passed any chance of self-redemption, and later on was to undergo an equal degree of hardship and suffering, especially for her public servants. Stability returned to Germany under a military dictatorship when much of the constitution had been suspended -- although the State of Emergency was only indirectly necessitated by the destruction of the nation's finances. To all three countries stability and then recovery came. All had to be bailed out by others. Each was obliged to accept a greater degree of economic disruption and unemployment than need ever have been feared at the time when the excessive printing of banknotes might still have been stopped. In all three cases, after inflation reached a certain advanced stage, financial and economic disaster seems to have been a prerequisite of recovery.
The take-off point in the inflationary progress, after which the advent of hyperinflation was but a matter of time, the point indeed when it became self-generating and politically irreducible except for short periods, was not indeed to be found on the graph of the currency depreciation, or of the velocity of its circulation, or of the balance of payments deficit. Nor in Germany's case did it notably coincide with some ultimate crisis of confidence in the mark, at home or abroad — Rathenau's murder, or the occupation of the Rhine ports, or the London Ultimatum, all of which had immediate seismic effects upon it. Rather it lay on the falling curve of political possibility, with which was closely linked the degree of political power and courage that the government, sorely pressed as it was, was able to muster.
What really broke Germany was the constant taking of the soft political option in respect of money. The take-off point therefore was not a financial but a moral one; and the political excuse was despicable, for no imaginable political circumstances could have been more unsuited to the imposition of a new financial order than those pertaining in November 1923, when inflation was no longer an option. The Rentenmark was itself hardly more than an expedient then, and could scarcely have been introduced successfully had not the mark lost its entire meaning. Stability came only when the abyss had been plumbed, when the credible mark could fall no more, when everything that four years of financial cowardice, wrong-headedness and mismanagement had been fashioned to avoid had in fact taken place, when the inconceivable had ineluct-ably arrived.
Money is no more than a medium of exchange. Only when it has a value acknowledged by more than one person can it be so used. The more general the acknowledgement, the more useful it is. Once no one acknowledged it, the Germans learnt, their paper money had no value or use — save for papering walls or making darts. The discovery which shattered their society was that the traditional repository of purchasing power had disappeared, and that there was no means left of measuring the worth of anything. For many, life became an obsessional search for Sachverte, things of 'real', constant value: Stinnes bought his factories, mines, newspapers. The meanest railway worker bought gewgaws. For most, degree of necessity became the sole criterion of value, the basis of everything from barter to behaviour. Man's values became animal values. Contrary to any philosophic assumption, it was not a salutory experience.
What is precious is that which sustains life. When life is secure, society acknowledges the value of luxuries, those objects, materials, services or enjoyments, civilised or merely extravagant, without which life can proceed perfectly well but make it much pleasanter notwithstanding. When life is insecure, or conditions are harsh, values change. Without warmth, without a roof, without adequate clothes, it may be difficult to sustain life for more than a few weeks. Without food, life can be shorter still. At the top of the scale, the most valuable commodities are perhaps water and then, most precious of all, air, in whose absence life will last only a matter of minutes. For the destitute in Germany and Austria whose money had no exchange value left existence came very near these metaphysical conceptions. It had been so in the war. In All Quiet on the Western Front, Müller died 'and bequeathed me his boots — the same that he once inherited from Kemmerick. I wear them, for they fit me quite well. After me Tjaden will get them: I have promised them to him.'
In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.
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