The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class (24 page)

If the period after the defeat of the Kapp conspiracy represented Germany’s window of opportunity to turn back the tide of inflation – and if there was one, this was probably it – Fehrenbach and his ministers were, sadly, not equipped with the instruments to turn that chance into a reality. Fehrenbach himself was a decent man who had previously been President of the National Assembly and was therefore experienced in crafting compromises. However, for the period of almost a year that followed the June 1920 election, he and his ministers were doomed to spend most of their energy and ingenuity, not getting the country out of its financial hole, but haggling over the interpretation of the Versailles Treaty and the final sum that would soon become due as reparations.

Precisely at the end of June 1920, as fate would have it, the mark reached its most favourable rate against the dollar in more than a year: 37.95. Good news! Except that the improvement caused problems elsewhere in the economy.

That spring, State Secretary Hirsch of the Finance Ministry had been waylaid at a railway station by a Communist agitator carrying a placard that read: ‘See what this “comrade” Hirsch has given you. First, he promised to make the mark strong again. Now it is stronger, but we cannot export any more. Instead of inflation, he has brought us unemployment and hunger.’
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It was certainly true that, although the strengthening mark was in principle a positive development, it did make German goods less competitive on world markets and thereby brought a rise in unemployment. The stronger the mark, the more Germans out of work.

A table comparing unemployment with the exchange rates for 1920-21 shows a pretty precise correlation:

There is evidence that during the late spring/early summer of 1920, foreign customers began to baulk at the international price of German goods; domestic consumers, meanwhile, went on a ‘buyers’ strike’, perhaps in anticipation of even lower prices, but perhaps, because of the hefty price rises that had been imposed during the previous bout of rapid inflation, they really couldn’t afford the goods.
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As a consequence of the uncomfortable situation that the now-unaccustomed health of the mark caused during the period of May to August 1920, it seems that, in fact, the Finance Ministry and the Reichsbank covertly combined their efforts, not to strengthen the currency but to keep the value of the mark from rising any further.

The authorities seem to have seen their job as maintaining the exchange rate at what might be dubbed a ‘Goldilocks’ level – not so high as to inhibit exports, not so low as to increase the economic and financial chaos within the Reich itself. More especially, a reasonable exchange rate against foreign currencies was necessary to keep essential imports of food for the working population affordable. The value during most of this time of 60–70 marks to the dollar apparently represented this ‘not too hot, not too cold’ value that the financial elite in Germany favoured.
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In other words, there was no incentive, even at this relatively favourable point, to actively promote the strength of the national currency and thus start to halt and even reverse the unstoppable march of inflation.

Walther Rathenau, head of the AEG electricals conglomerate founded by his father, heroic co-architect of Germany’s wartime economic effort, bestselling author, and latterly democratic politician, was minuted as having told a meeting at the German Foreign Office in January 1921 that the Anglo-American slump must be prevented from infecting Germany, whatever the cost. The meeting secretary’s note read:

He was not afraid of inflation, if he might make an aside not strictly relevant to the agenda: should the depression that has attacked England with full force spread across to us, we ought to print money a bit faster and start construction works, using the employment these create as a dam against the depression. It was incorrect when people said that printing money was bringing us to ruin.
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Fatal words. For the meantime, however, the fragile stability of the mark was maintained. There were two more changes of government in this time. No new elections, but reshufflings of the political pack.

Fehrenbach’s government collapsed at the beginning of May 1921, when the Allies, meeting in London for the last of seemingly countless post-Versailles conferences, finally presented the big reparations bill that Germany had been kept waiting for since November 1918. It amounted to 132 billion gold marks (around $31.5 billion at pre-war rates). The figure had actually been drastically reduced from an original 269 billion gold marks (around $64 billion) put forward in January 1921. Mind-boggling (and astonishingly variable) as these sums were, everyone took them extremely seriously. Or so it seemed. Certainly, the demand was coupled with an Allied threat to occupy the Ruhr industrial area, should Germany not accept the demand and the payment schedule attached to it.

Despite the Chancellor’s efforts to persuade the German People’s Party to accept the so-called ‘London Ultimatum’, the Fehrenbach government fell apart as soon as a decision was required. The right-liberals of the German People’s Party could accept the Republic as a reality, they could even serve in one of its governments, but they could not - yet - stomach the reality of accepting the Versailles settlement.

The curious thing was that, though the language of the Ultimatum was tough – even two and a half years after the end of the war, there were still those angry French and British voters to think about – its substance, when properly examined, was much less so.

The reparations payment schedule, for instance, divided the payment of German liabilities between three sets of bonds: A, B and C bonds. The A bonds represented the unpaid balance of the 20 billion marks that Germany was supposed to have paid since 1919, but hadn’t. The B bonds were to cover war damages. Both bore interest of 6 per cent and totalled 50 billion gold marks. The other 82 billion gold marks were payable via issuing of so-called C bonds, whose role was left a little vague but was thought to have to do with cancellation of inter-Allied debt. The C bonds, however, would be issued only when Germany had proved itself capable of meeting the other obligations (the A and B bonds). These first-priority obligations would be calculated via a formula involving a fixed annual payment (reckoned at 2 billion gold marks) and a variable payment (a British-created imposition called an ‘export levy’) corresponding to 26 per cent of the value of German exports in any given year (at current 1921 levels around 1 billion gold marks). This made, for 1921, an annual German liability of 3 billion or so.

The almost entirely theoretical nature of the C bonds becomes clear when the actual level of German exports in the straitened, protectionist post-war world economy is taken into account. The average annual level of German exports during 1920–22 was 4.8 billion gold marks. A quarter of that (roughly the amount claimed by the export levy) amounted to around a billion. By one expert calculation, for the issue of C bonds by Germany to be triggered, German exports would have needed to more than quadruple to a total of 22 billion gold marks a year, representing five times current exports and twice what the country had managed to sell abroad even in the highly favourable, liberal peacetime trading conditions of 1913.
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The likelihood of such a number ever being reached was further lessened by the fact that official German government statistics on imports and exports, dependent on figures supplied by businesses, were notoriously unreliable. According to a leading German financial journalist, no less a person than State Secretary Hirsch had admitted this at a meeting:

. . . imports and exports were being falsified for the purposes of capital flight. Imports are exaggerated with the purpose of more easily permitting the actually unused portion to be kept abroad, and at the same time the exports are set at a lower level for the same purpose: to leave the surplus profit abroad.
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The trick with the C bonds meant that the Allies had, in fact, reduced the practical German liability to 50 billion gold marks, or even 41 billion gold marks if sums already paid in cash or in kind by Germany since 1919 are taken into account.
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Of the C bonds, the Belgian Prime Minister of the time reputedly jested that the Reparations Commission ‘could stick [the C bonds] in a drawer without bothering to lock it, for no thief would be tempted to steal them’.
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There were those politicians in Germany who realised immediately that the burden, though still unpleasant and to their minds unjust, was nowhere as bad as most of their fellow countrymen and countrywomen had expected. One Centre Party politician remarked at a party meeting just the day after the London Ultimatum that ‘the Entente will only demand the 50 billion marks, not the rest. They have only called for the rest for domestic political reasons.’
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‘Domestic political reasons’ cut both ways. The public in the Allied countries saw the 132 billion marks in notional reparations and rejoiced. The public in Germany saw the 132 billions, ignored the technical sleight of hand that drastically reduced their country’s actual liability, at least for the foreseeable future, and was enraged. Neither the Allied governments, who wished to conceal their relative moderation from their voters, nor the German government, keen to exaggerate the impossible economic burden of the demand as part of its long-term campaign to avoid payment, felt it in their interests to tell the truth.

All the same, however you reckoned the schedule, 50 billion marks was a great deal of money to come up with. Not only that, but the German government had to hand over a billion in an approved foreign currency (dollars, as it turned out, which were still convertible into gold) or acceptable Treasury bills, by the end of August. This demand was met, but only after a hair-raisingly complicated and difficult set of financial manoeuvres that included putting 560 cases of the Reichsbank’s gold on four steamers just before the deadline, hurriedly selling paper marks in huge quantities on the foreign exchange markets, shaming several large corporations into lending the government money from their own extensive foreign exchange holdings, and, through the offices of the Mendelssohn Bank’s representative in the Netherlands, raising more than a quarter of a billion in hard currency loans from a Dutch-British banking consortium.
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So the government got the money to the Allies in time to avoid default and a possible occupation of the Ruhr, but the procedures it had needed to go through to get the money did not bode well for future cash payments. Moreover, the German government’s sale of so many paper marks within such a short period had spooked the foreign exchange markets, hence ending the period of relative stabilisation in the value of the mark abroad. Germany’s currency declined from around 65 to the dollar in May to 85 in September, with a falling tendency that would further accelerate as autumn came on.

The horrified, and in many cases violent, reaction of the German public to the Allies’ reparations ultimatum brought enormous political problems for the government that succeeded Fehrenbach’s. The right-liberal German People’s Party had walked out in protest at the settlement, after which Josef Wirth, a younger Centre politician, had put together a coalition with the Social Democrats, who were prepared go through the motions of complying with the Allied ultimatum.

The psychological effect on the German nation, and on its confidence in the future – not to mention its currency – was severe and lasting. After almost two years of living in a ‘fools’ paradise’, they finally knew (or thought they knew) the sum they would have to pay, and for which they had signed up in June 1919, in effect issuing a blank and post-dated cheque to the Allies.