Key ideas: Published in 1975. "WHEN a nation's money is no longer a source of security, and when inflation has become the concern of an entire people, it is natural to turn for information and guidance to the history of other societies who have already undergone this most tragic and upsetting of human experiences....
This is, I believe, a moral tale. It goes far to prove the revolutionary axiom that if you wish to destroy a nation you must corrupt its currency. Thus must sound money be the first bastion of a society's defence." (A. Fergusson)
JUST BEFORE THE First World War in 1913, the German mark, the British shilling, the French franc, and the Italian lira were all worth about the same, and four or five of any were worth about a dollar. At the end of 1923, it would have been possible to exchange a shilling, a franc or a lira for up to 1,000,000,000,000 marks, although in practice by then no one was willing to take marks in return for anything. The mark was dead, one million-millionth of its former self. It had taken almost ten years to die....
Not until 1923 did Germany's currency at last go over the cliff-edge of sanity to which it had, as it were, clung for many months with slipping finger-tips. Pursuing the money of Austria and Hungary into the abyss, it crashed there more heavily than either.
The year 1923 was the one of galloping inflation when a kind of madness gripped Germany's financial authorities and economic disaster overwhelmed millions of people. It was the year of astronomical figures, of 'wheelbarrow inflation', of financial phenomena that had never been observed before.
The question to be asked — the danger to be recognised — is how inflation, however caused, affects a nation: its government, its people, its officials, and its society....
If what happened to the defeated Central Powers in the early 1920-3 is anything to go by, then the process of collapse of the recognised, traditional, trusted medium of exchange, the currency by which all values are measured, by which social status is guaranteed, upon which security depends, and in which the fruits of labour are stored, unleashes such greed, violence, unhappiness, and hatred, largely bred from fear, as no society can survive uncrippled and unchanged.
In a lengthy interview many years afterwards with Pearl Buck, Erna von Pustau, whose father was a small Hamburg businessman who ran a fishmarket, made the same point:
We used to say "The dollar is going up again", while in reality the dollar remained stable but our mark was falling. But, you see, we could hardly say our mark was falling since in figures it was constantly going up -and so were the prices — and this was much more visible than the realisation that the value of our money was going down … It all seemed just madness, and it made the people mad...
Most had no choice; but all were encouraged or bemused by the Reichsbank's creed of Mark gleich Mark — paper or gold, a mark is a mark is a mark. If prices went up, people demanded not a stable purchasing power for the marks they had, but more marks to buy what they needed. More marks were printed, and more, and more.
The first stage of inflation took place under the auspices of one Karl Helfferich, State Secretary for Finance from 1915 to 1917. Before 1914, the credit policy of the Reichsbank had been governed by the Bank Law of 1875, whereby not less than one-third of the note issue had to be covered by gold and the remainder by three-month discounted bills adequately guaranteed.
In August 1914 action was taken both to pay for the war and to protect the country's gold reserves. The latter objective was achieved by the simple device of suspending the redemption of Reichsbank notes in gold.
The former was contrived by setting up loan banks whose funds were to be provided simply by printing them. The loan banks would give credits to business, to the Federal states, to the municipalities and to the new war corporations; and, moreover, they were to advance money for war bond subscriptions.
Loan bank notes, whose denominations ranged from one to 50 marks, were to be regarded as legal tender; and those not taken up by the Reichsbank were put into immediate circulation.
However, the most ominous measure for the future was the one which permitted the Reichsbank to include three-month Treasury bills in its note-coverage, so that unlimited amounts could be rediscounted against banknotes.
Thus were the Government's plans drawn up, wilfully and simply, for financing the war — not by taxation, but by borrowing; and with the printing press as the well to supply both the needs of the Government and the growing credit demand of private business....
Dr Hjalmar Schacht, who was later to pull the Weimar chestnuts out of the fire as President of the Reichsbank, and later still to organise the financial power of Hitler's Germany, thus described the mistakes of Helfferich:
"Germany tried to meet the colossal costs of the war by an appeal to the self-sacrificing spirit of the people. 'I gave gold for iron' was the slogan for the surrender of gold ornaments and jewellery. 'Invest in War Loan' ran the appeal to the patriotic sense of duty of all classes. Issue after issue of War Loan transformed the greater part of German private fortunes into paper claims on the State....."
Every German stock exchange was closed for the duration, so that the effect of Reichsbank policies on stocks and shares was unknown. Further, foreign exchange rates were not published, and only those in contact with neutral markets such as Amsterdam or Zurich could guess what was going on.
It was never clear how much the steep rise in domestic prices was due to economy measures and war shortages rather than to inflation — and even the relevance of those prices was rendered dubious by the much higher black market rates.
Only when the war was over, with the veil of censorship lifted but the Allied blockade continuing, did it become clear to all with eyes to read that Germany had already met an economic disaster nearly as shattering as her military one. The scales may have fallen at last from German eyes with the coming of peace, but that did not mean that the difficulties and injustices created by wartime inflation had passed unnoticed.
The depreciation of the Austrian krone advanced during the first postwar years far ahead of that of the mark, and with even less chance of recovery....
That was the institutional background for an immense amount of human misery. At the outbreak of war the Austrian krone had been nearly on a par with the mark. By the war's end inflation had pushed them apart, to the krone's great disadvantage...
In 1914 a pound sterling was worth about 25 kronen. By May, 1922, when the pound could still purchase only 1200 marks, it would have bought 35,000 kronen.
A more telling contemporary account of the scourge of inflation in postwar Vienna is given in the diary, greatly overladen with explanatory translation for English-speaking readers, of Anna Eisenmenger. As the ex-Imperial Army drifted homewards, armed and in revolutionary mood, and as the food shortage of the war years turned to famine, this middle-class widow found herself progressively turning to illegal practices to keep her family going — a war-blinded son, a tubercular daughter, a son-in-law with amputated legs, a hungry grandson, and another son who had become a Communist. She began to resort at enormous expense to the Schleichhcindler — the smugglers — for the most basic foods which, despite ration cards, the State could no longer supply....
Pitifully aware of her family's lowering standard of living and social status, Frau Eisenmenger was nevertheless lucky in having investments which in 1914 brought her nearly 5,000 kronen a year — equal to about £200.
She recorded that in October 1918 when she resolved to cash 20,000 kronen worth for immediate use, her bank manager advised her earnestly to convert all her money into Swiss francs.
However, private dealings in foreign currencies were illegal, and she decided that to break the law against the hoarding of fuel and food was enough.
I must make myself believe [she wrote] that I am really far better off than hundreds of thousands of other women. I am at least immune from material cares and can help my children since I have a small fortune, safely invested in gilt-edged securities. Thank God for that!
She also had a substantial quantity of her husband's cigars, which could be traded for meat or other food as the opportunity arose: an important enough means of survival even during the early months of the postwar blockade....
That month Frau Eisenmenger's legless son received 35,000 kronen in 'caution money', which he decided to keep safely until the value of the krone increased again; but in the meantime he converted it into War Loan. In December, too, as an anti-inflationary measure, all paper money had to be overprinted 'Deutschosterreich'. Frau Eisenmenger, who took what remained of her 20,000 kronen to the bank to be stamped, recorded the first evidence she heard that ruin lay in front of her:
In the large banking hall a great deal of business was being done … All around me animated discussions were in progress concerning the stamping of currency, the issue of new notes, the purchase of foreign money and so on. There were always some who knew exactly what was now the best thing to do!
I went to see the bank official who always advised me. 'Well, wasn't I right?' he said. 'If you had bought Swiss francs when I suggested, you would not now have lost three-fourths of your fortune'.
'Lost!' I exclaimed in horror. 'Why, don't you think the krone will recover again?' 'Recover!' he said with a laugh … 'Just test the promise made on this ao-kronen note and try to get, say, 20 silver kronen in exchange'. 'Yes, but mine are government securities: Surely there can't be anything safer than that?' 'My dear lady, where is the State which guaranteed these securities to you? It is dead …"
'Panic bids defiance to all legal decrees', runs the diary entry for January 1, 1919. Even the most respectable of Austrian citizens now breaks the law, unless he is prepared to starve for the sake of obeying it …
I survey my remaining 1,000-kronen notes mistrustfully, lying by the side of the pack of unredeemed food cards in the writing table drawer. Will they not perhaps share the fate of the food cards if the State fails to keep the promise made on the inscription on every note? The State still accepts its own money for the scanty provisions it offers us. The private tradesman already refuses to sell his precious wares for money and demands something of real value in exchange.
The wife of a doctor whom I know recently exchanged her beautiful piano for a sack of wheat flour. I, too, have exchanged my husband's gold watch for four sacks of potatoes, which will at all events carry us through the winter …
My farmer had hidden the sacks of potatoes under straw on top of which he placed some apples. The apples were duly stolen, but the potatoes reached me safely … I had to give the porter half a sack as hush-money … When the farmer's eyes rested on the grand piano at which Erni [her blinded son] was seated improvising, he took me aside and said: 'My wife has been wanting one of those things for a long time. If you'll give it to me, you shall have all you want for three months.'
All Austrians, but especially those with savings, watched horrified as the value of their money fell, Frau Eisenmenger among them. She noted early in 1919:
The State has been obliged to put 10,000 kronen notes into circulation — each equivalent to two years' income from my capital. A suit costs about six times what it was in 1913, but some things like food are a hundred or two hundred times as much … Paper clothes are being sold. Never had I dreamed it possible that one could purchase so little for 10,000 kronen … Jealousy and envy flourish in this atmosphere, and if one has procured some harmless article of food, one is careful to conceal the fact from one's fellow men. Hunger reigns inexorably and selects its dumb and uncomplaining victims above all from the middle classes …
Twice a day we are all forced to await the quotation of the Zurich bourse. Every fresh drop in its value is followed by a wave of rising prices … The confidence of Austrian citizens in the currency administration of the State is shaken to its foundation. The State which is perpetually printing new banknotes deceives us with the face value …
A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one's purse the article one had intended to buy at the price one had intended to pay.
In November, a year after the Armistice, Frau Eisenmenger wrote that her position was alarmingly worse, the financial situation beyond her understanding. The krone, at 25 Swiss centimes the previous Christmas, was now quoted at one-twelfth of a centime. Her shares, however, were going up. Gambling on the stock exchange had become the fashion — the only way to avoid losing all one's money and perhaps to add to it. Many new bankers were giving people advice, the flight from the krone governing all transactions. 'Meanwhile,' Frau Eisenmenger wrote,
The large numbers of unemployed, their passions fermented by the Communists, are seething with discontent … a mob has attempted to set the Parliament building on fire. Mounted policemen were torn from their horses, which were slaughtered in the Ringstrasse and the warm bleeding flesh dragged away by the crowd … the rioters clamoured for bread and work … Side by side with unprecedented want among the bulk of the population, there is a striking display of luxury among those who are benefitting from the inflation. New nightclubs are being opened.
SIGNED on June 29, 1919, the Treaty of Versailles was denounced in Germany by all sides...
In January 1920, when the treaty came into force, an attempt was made to assassinate Erzberger, still regarded by the Right as one of the principal authors of Germany's shame....
Hitler's rapid rise to influence in Munich was largely based on his attacks upon those who were felt to have betrayed the country in 1918; and the Left was still using the lessons of the immediate past to incite social turmoil wherever the opportunity was offered.
Yet it was the five years of inflation before 1921 which made the soil so fertile for the agitator; and it was the continuing, worsening financial predicament in which so many classes found themselves which governed social and political development in the ensuing period...
Already, though, the reparations question was bearing acutely on German economic life. A few days before the -Rhine ports were occupied, the British High Commissioner in Coblenz reported to London that a large majority of the German people did not realise all that the Treaty of Versailles entailed.
Probably by a large number of the lower classes it was not even read, and the result is that at the present time it has dawned on the population of Germany for the first time that the day of reckoning has arrived.
(Lord Curzon wrote in pencil in the margin of this report: 'The idea of the "lower classes" "reading" the treaty is humorous.')
On April 27 1921, the Reparations Commission fixed Germany's total liability at 132,000 million gold marks, equivalent to £6,600 million.
It was decided that Germany was to be asked to pay 2,000 million gold marks -£100 million — a year and, in addition, a sum equal to 26 per cent of her exports; and these terms were conveyed to Berlin accompanied by the threat of further sanctions — namely the occupation of the Ruhr which the French were pressing for — if compliance did not come within the week.
'THE delirium of milliards' was a phrase of Rathenau's coining. The majority of statesmen and financiers think in terms of paper,' he had written
They sit in their offices and look at papers which are lying in front of them, and on those papers are written figures which again represent papers … They write down noughts, and nine noughts mean a milliard. A milliard comes easily and trippingly to the tongue, but no one can imagine a milliard. What is a milliard? Does a wood contain a milliard leaves? Are there a milliard blades of grass in a meadow? Who knows? If the Tiergarten were to be cleared and wheat sown upon its surface, how many stalks would grow? Two milliards!
Rathenau rightly diagnosed that delirium as an affliction not of the people in general — that was to come — but of those who were supposedly in control of the country's finances, who had raised the note circulation since the beginning of the year from 73 milliard marks to 80 milliard.
'Next November, or next spring,' Rathenau said, 'whenever a large payment comes, exchange will fall again to a still lower level. This cannot go on.'
The mechanism of depreciation had many wheels, however. A close though unnamed confederate of Herr Hugo Stinnes, the industrialist, assessing the situation with great candour a few weeks later said that the real breaking point came immediately after the German government repaid the loan which had been arranged in England by Herr Mannheimer of Mendelssohn's Bank, 'the confidential man' of Dr Rudolf Havenstein, President of the Reichsbank since 1908.
Mannheimer, instructed by his chief, went out in August 1921 and started to buy foreign currency at any price — 'for Germany had any amount of paper marks but no foreign currency.'
This was the first signal of the absolute breakdown in the value of the mark.
The banks, on behalf of their clients and the industrialists, went further and not only sold their marks at any price but also started to speculate.
SOCIAL unrest was one of the obvious symptoms of inflation... Germany's politicians therefore set about relieving the symptoms wherever possible. More measures were brought in so that the government might be seen publicly to be dealing with profiteering. The Prime Minister of Bavaria even submitted a Bill to the Reichsrat to make gluttony a penal offence.
For the purposes of the Bill, a glutton was denned as 'one who habitually devotes himself to the pleasures of the table to such a degree that he might arouse discontent in view of the distressful condition of the population.' It was proposed that such a one 'may be arrested on suspicion, and punished by imprisonment and/or a' fine of up to 100,000 marks (about £75) for a first offence.'
A second outbreak of gluttony was to entail for the offender penal servitude of up to five years, fines of up to 200,000 marks, and the deprivation of civil rights. Provision was also made for punishing caterers who abetted or connived at the crime, and a special section provided that foreigners, on conviction, would be liable to the extra punishment of expulsion from the Reich.
The Bill — reminiscent of a recent Austrian move to tax anyone who gave a luncheon or a tea party — was of little enough importance as it was never enacted. It was indicative, none the less, not only of the great offence caused both by German profiteers and by the foreigners swarming in to take advantage of the exchange rates, but of *the desperate, not to say absurd, lengths to which respectable politicians were already b]eing pushed.*
Mr Seeds reported a similar panic in Munich, where some of the smaller banks and financial concerns had been very hardly hit. 'The press have said that the London financial negotiations are no ground for a sudden improvement in the rate, and are trying to discourage speculation,' he wrote.
But in this respect conditions are hopelessly unhealthy, and the public will continue to be swayed by rumours and to speculate either in goods or in stocks and shares.
As regards dealing in shares, all classes of the population have for months been speculating with a fine disregard for commonsense. Shares have been freely bought in totally unknown concerns, in some cases with the object of exchanging valueless paper money for what was considered a good security, but generally in the hope of profiting by a rise in the stocks. Shares in respectable concerns which had paid a 20 per cent dividend, say, were pushed higher and higher till the final holders could not expect a return of even 1 per cent, with the result that the improvement of the mark has brought not satisfaction but the very reverse.
The previous fall in the mark had also produced unfortunate results by driving the population in shoals into the shops in a mania of purchasing....
Many thought that their money would soon have no value whatever and that it must be exchanged for goods while there was yet time: others realised that the purchasing mania would help the falling rate of exchange to raise prices, and they therefore bought on speculative grounds.
The press pointed out that a disastrous slump in trade could not but ensue when the purchasing power of the population was exhausted, and that meanwhile the poorer classes were suffering.
All efforts, however, were in vain to drive sense into a panic-stricken people, and articles in the shops could be seen being marked up to a higher price day by day.
The rise in prices intensified the demand for currency, both by the State and by other employers. Private banks could not meet the demand at all, and had to ration the cashing of cheques, so that uncashed cheques remained frozen while their purchasing power drained away.
It became impossible to persuade anyone to accept any description of cheque for that reason, and much business quickly came to a standstill.
The panic spread to the working classes when they realised that their wages were simply not available.
The young Ernest Hemingway, however, working for the Toronto Daily Star, crossed the frontier from France at about that time and managed to be equally gloomy from the other side of the fence:
There were no marks to be had in Strasbourg, the mounting exchange had cleaned the bankers out days ago, so we changed some French money in the railway station at Kehl. For 10 francs I received 670 marks. Ten francs amounted to about 90 cents in Canadian money. That 90 cents lasted Mrs Hemingway and me for a day of heavy spending and at the end of the day we had 120 marks left!
Our first purchase was from a fruit stand … We picked out five very good looking apples and gave the old woman a 50-mark note. She gave us back 38 marks in change. A very nice looking, white bearded old gentleman saw us buy the apples and raised his hat.
'Pardon me, sir, he said, rather timidly, in German, 'how much were the apples?'
I counted the change and told him 12 marks.He smiled and shook his head. 'I can't pay it. It is too much."
But the real tragedy of the depreciation may be described as 'the moral effect'. An apparently endless fall in the value of the mark predicted abroad will cause at home an unbearable increase of uncertainty. No economic discussions will pacify the masses, or hide from them the price of bread.
It has long been realised that the printing of notes is the result and not the cause of depreciation, and that the amount of currency, as it increases in bulk, is really decreasing in value.
A point has now been reached where the lack of money has a worse effect than the depreciation itsel.
An alarming picture both of national selfishness bred by inflation and political ineptitude bred by economic uncertainty was painted by Mr O. S. Phillpotts:
The Austrians are like men on a ship who cannot manage it, and are continually signalling for help. While waiting, however, most of them begin to cut rafts, each for himself, out of the sides and decks. The ship has not yet sunk despite the leaks so caused, and those who have acquired stores of wood in this way may use them to cook their food, while the more seamanlike look on cold and hungry. The population lack courage and energy as well as patriotism. During the recent railway strike the authorities applied to an automobile club for volunteers, but none came forward; and to a local firm for the loan of lorries, but these were refused unless the government would buy them.
Anyone who was alive to the realities of inflation, he [Dr Schacht] said, could safeguard himself against losses in paper currency by buying assets which would maintain their value: houses, real estate, manufactured goods, raw materials and so forth.
Wholesale recourse to real values enabled not only the well-to-do but also, and especially, the unscrupulous to preserve and even possibly to increase their assets … As a result of this struggle for self-enrichment and financial self-preservation, based on exploitation of the ignorance of the masses, every aspect of business life was vitiated.
To condemn the individual's struggle for survival in such chaotic circumstances as either selfish, or unnatural, or wrong, was in many ways unjust. When people do not understand what is happening, or why it is happening, and have no idea about what to do about it, and are not told, panic must follow.
Already, however, a new element had joined the economic crisis. For the first time the wages paid for labour began to lag behind the rise in prices, noticeably and seriously, in spite of everything the monopoly of the unions could do about it...
A litre of milk, which had cost 7 marks in April 1922 and 16 in August, by mid-September cost 26 marks. Beer had climbed from 5.60 marks a litre to 18, to 30. A single egg, 3.60 in April, now cost 9 marks. In only nine months, Mr Seeds's chauffeur's weekly bill for an identical food basket had risen from 370 marks to 2,615.
The rise of nearly 100 per cent within the last four weeks [reported the consul] has proceeded by such sudden leaps and bounds that no scheme for a simultaneous increase in wages can well be devised to cope with it: an increase of wages granted at the end of one week would not meet the rise in prices by the following Tuesday for instance, and the working and salaried classes have suffered severely despite their continually increasing remuneration … The wage situation is hopelessly dislocated at present.
Havenstein's speech, made in the closing days of August to the central committee of the Reichsbank, ended with a description of what he still regarded as the most serious task in hand:
The whole extraordinary depreciation of the mark has naturally created a rapidly increasing demand for additional currency, which the Reichsbank has not always been fully able to satisfy.
A simplified production of notes of large denominations [including printing on one side only] enabled us to bring ever greater amounts into circulation. But these enormous sums are barely adequate to cover the vastly increased demand for the:means of payment, which has just recently attained an absolutely fantastic level, especially as a result of the extraordinary increases in wages and salaries.
The running of the Reichsbank's note-printing organisation, which has become absolutely enormous' is making the most extreme demands on our personnel. The dispatching of cash sums must, for reasons of speed, be made by private transport. Numerous shipments leave Berlin every day for the provinces. The deliveries to several banks can be made … only by aeroplanes.
On September 1 the Reichsbank issued a note with a face value of 500 million marks; the new word 'billiard' was coined, joining three more noughts to the old milliard; and 50 million marks were needed to buy one pound sterling.
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.