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Financial Consequences of the First World War on Germany

Financial Consequences of the First World War on Germany

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             All through the First World War, the German imperial government did not foresee a long duration of the conflict and did not elaborate plans in this sense. In a first stage, from a financial viewpoint, it refused to significantly increase taxes in order to finance the military effort. This operation was completed due to credits by means of war bonds and cash vouchers delivered by Reichsbank. It was only in 1916 that the government allowed for the national debt to increase. Thus, at the end of the war, Germany had an enormous war debt. Furthermore, in a period when there were hardly any unemployed people, the economy was dependent upon the production of weapons instead of satisfying the consumers’ requests. Those practices led to a deterioration of the German mark.

The defeat of Germany in the First World War was unexpected. In November 1918, the German troops were still in France and Belgium, in several places on the same positions they had been four years before. Germany had also had a great victory in the East by the complete defeat of the Russian Empire and by imposing the humiliating conditions of the peace of Brest-Litovsk. As well, great parts of Eastern Europe were at the end of the war under German control. Then, how could the German people explain this defeat? The answer was pertinent, that is “Germany was backstabbed”. By who? This was a legend deliberately maintained by the conservatory elites, particularly by the military men. They presented the defeat of Germany as being not the action of the allied armies, but of internal enemies: the socialists, the Jews, and other convenient scapegoats.

The revolution that started at the end of 1918 led to the abdication of the Kaiser. In the meantime, the “famine blockade” imposed by the allies extended until June 1919, when the peace treatise was signed.

Picture2

 Berlin, 1918: hungry people cut up the carcass of a horse. Hunger in Germany was above all due to the British blockade.

The harsh conditions imposed on Germany in June 1919 by means of the peace treatise aimed at never letting Germany become a competitor on world market or to ever question again the supremacy of France and England in Europe.

The government of the Republic of Weimar accepted, after bitter debates, the treatise, making it clear that it was doing it just because they needed to ease the difficulties the German citizens were in due to the “inhumane blockade” imposed. The policy of economic choking of Germany was not actually deactivated after the signature of the peace treatise. This reflected the winning powers’ fear of future, especially France’s, and their striving to keep down their rival by a preventive war, using other means than the military ones. Essential means in this sense were the financial ones.

Soon, the terms of the treatise proved to be inapplicable for Germans. They hoped that the peace expected would be an honourable one, in the context of the 14 points stipulated by the American president Wilson. Instead of those, Germany was burdened with the exclusive guilt of having started the war, which was false, and with the payments of the damages.

The defeat had left the Republic of Weimar the burden of solving the huge war debts. To these were added the damages, which, if they had not been the initial cause of the unprecedented inflation that followed, was an aggravating one. The government of Weimar decided to print money and to sell it in exchanges abroad, with a view to increase the power of the currency for its payment. Germany was summoned to pay the damages without delay, on the one hand, whence those values could be obtained, and on the other hand off taxes or operations of crediting the state. In order to reduce the huge difference between the income and the expenses of the government, the control of the inflation and the currency reform could only be accomplished by means of increasing the taxes or by reducing the expenses. Considering the internal situation of Germany after the First World War, none of the alternatives was convenient, as both would have estranged the support to the young republic, would have weakened the economy and the unemployment rate would have increased. Consequently, the policy of financial deficit was continued and the inflationist trend was perpetuated. Thus, Germany made out of inflation a weapon against the clauses concerning the damages in the Peace Treatise of Versailles. The damages were paid at this stage not by means of an increase in taxes, that is by increasing takings, but by ceaselessly printing bank notes.

But before the end of the year 1922, Germany informed that it could no longer pay the annuity for the next year. Following an ultimatum, the French and Belgian troops, without consulting the other allies, occupied the industrial region Ruhr. Consequently, the government of Weimar asked the population of Ruhr to give up all industrial activity, thus initiating a remarkable but destroying policy of “passive resistance”. It urged the workers to declare strikes and to refuse the cooperation with the French.

Picture1

Ruhr, 1923: a French infantryman on a requisitioned coal train

Instead, the government continued to pay their wages. In order to do that, the German government continued to print money to such a rate that it soon became useless. In 1923, the German mark was so down, that regular German citizens needed wheelbarrows to carry the necessary banknotes for simple shopping. The inflation reached rates beyond any understanding. It is illustrative in this sense the evolution of the price of a kilo of bread between December 1919 – December 1923:

Date

Cost in Marks

December 1919

0.8

December 1920

2.37

December 1921

3.9

December 1922

163.15

January 1923

250.00

April 1923

474.00

July 1923

3,465.00

August 1923

69,000.00

September 1923

1,512,000.00

October 1923

1,743,000,000.00

November 1923

201,000,000,000.00

December 1923

399,000,000,000.00

The crash of the German mark in 1923 led to an exchange rate of 10,000 marks for one dollar at the beginning of the occupation, 25,000 in April 1923, 110,000 in June, 350,000 in July, 4.6 million in August, 4,200 milliard in November. The average monthly rates of mark parity to the pound were as follows:

Year 1923

1 pound

January

83,190

February

130,750

March

99,526

April

113,584

May

219,821

June

507,567

July

1,594,760

August

21,040,000

September

449,375,000

October

112,503,000,000

November

9,604,000,000,000

December

18,349,000,000,000

The currency voids were covered with signs (Notegeld), delivered by different public administrations and by private persons.

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In 1923 inflation in Germany (and in most other European countries) was out of control. Money had almost no value to buy things and people got more heat from burning their paper money than from the coal they could buy with it.

 During this period of hyperinflation, restaurants did not display the prices, as the food already cost more at the moment when the customer finished eating. Germany was essentially reduced to a society based on barter.

 However strange it might seem, there were also categories that gained from hyperinflation. There were those segments that could pay their debts, mortgages, and loans with money affected by the inflation. It advantaged businessmen, landowners and landlords, in other words owners of fixed capital.

In august 1923, amid total chaos, president Ebert asked Gustav Stresemenn, head of the DVP (Deutsche Volkspartei – German Popular Party) to form a new government to solve the crisis. He held the position of chancellor until November 1923, when he became Minister of External Affairs, until he died in 1929.

Stresemann was ready to make difficult decisions that were necessary to work out the economic problems. He put an end to the passive resistance in Ruhr and promised to start to pay for the damages again. On November 15th, 1923 a currency reform took place, that is one thousand billion marks became a rent mark (Rentenmark) that corresponded approximately to the golden mark of 1913.

In October 1924, a new currency was settled, Reichsmark, which equaled the old gold mark and had unlimited power of payment, thus laying the basis on which the critical economic situation of the republic of Weimar could be internationally negotiated.

The payments for the damages could be operated easier due to the acceptance by the Reichstag of Dawes Plan in mid-1924, a plan initiated by the American banker Charles G. Dawes, by means of which Germany was offered a credit of 800 million gold marks. The plan stipulated the withdrawal of the French and Belgian troops of the Ruhr area, which was completed in 1925.

However, the spectacular economic recovery of Germany between 1924-1928 disguised its structural weaknesses. It was a fragile recovery, in the sense that the funds that made it possible, the external credits, could be quickly withdrawn. That became obvious even before the moment of the Wall Street financial crash in October 1929. The decline, which became evident as early as 1928, was due to the American economic boom that neutralized the attractiveness of investments in German economy. Beginning with the spring of 1929, a re-phasing became necessary in Germany’s restoration. It was during that year, a few months before Stresemann’s death, that he negotiated another discount of the amount necessary for the restoration as part of the Young Plan, proposed by the American banker Owen D. Young. Germany was however due to pay 120 billion marks (28,800,000,000 $) over a period of 59 years.

The diplomatic influence exerted and the economic development that Stresemann initiated were struck by a great bad luck, when in 1929 the Republic of Weimar was faced not only with another crisis, known everywhere since then as The Great Depression, but also with the fact that Stresemann died at that crucial moment, in October, a few days before the crash of the Wall Street stock exchange.

The governments that followed, led by Müller, Brüning, von Papen, and von Schleicher, had no parliamentary support and, in their turn, were confronted with economic depression, which emphasized the deficiencies resulted due to the extreme dependence of the German economy on external credits.

The trauma caused by the crisis and the hyperinflation of the period 1919-1923 were not yet cured, and the German Republic was once again insecure in the years of the great economic crisis in 1929-1933. Any loyalty towards the regime disappeared and the crash had become imminent.

As the economic failures accumulated, in the atmosphere of quasi-permanent political crisis and the German antidemocratic traditions, it was easy for demagogues to state that the Republic of Weimar was a failure of democracy. The questions one should answer are the following: were the economic failures the cause of the end of the Republic of Weimar? If yes, why was Nazism its necessary substitution?

 

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Gerin, Rene, Les responsabilités de la guerre. Quatorze résponses par Raymond Poincaré, Payot, Paris, 1930.

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Vasile, Radu, Economia mondială. Drumuri și etape ale modernizării, Ed. Albatros, București, 1987.

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