The only thing
that could happen in Germany and Austria-Hungary following World War I and the
imposition of virtually unlimited reparations is precisely what did happen: the
collapse of the financial system, the ruin of the economy, and complete
political chaos. It was a situation ripe
for the rise of anyone who could promise stability and have some chance of
achieving it. As Germania, a large Berlin newspaper, reported on July 27, 1923, “It
is a situation for a dictator. The
conditions call for a Mussolini in bullet-proof armor with a revolver in either
hand.”
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| German coinage, World War I |
The collapse
did not happen all at once. During the
war, the German population had patriotically turned in the predominantly gold
currency and even personal gold jewelry in exchange for paper notes of the Loan
Bank and the Reichsbank. To keep
financing the war, the government continued to issue additional paper currency,
keeping the lid on inflation by implementing rationing and price controls. The war debt at the time of the Armistice
amounted to 147 billion Reichsmarks, payable in gold Reichsmarks, of which 89
billion Reichsmarks was in the form of “war loans” bearing heavy interest
payments which fell due every year. The
remaining 58 billion Reichsmarks was “floating debt,” with large blocks of it
coming due every few weeks.
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| "1920 Five Pfennigs Not-Money, Artificial Mark" |
After the war,
but before the blockade was lifted, controls were brought to an end along with
the government that had imposed them. As
a result, there were constant shortages of the necessities of life and a
super-abundance of paper money backed only by the former government’s promise
to pay. Prices doubled before the
blockade was lifted, and then doubled again before the end of 1919, increasing
in less than a year more than they had during the entire war. Furthermore, with her productive capacity in
ruins, Germany was forced to import goods as fast as possible as soon as the
blockade was lifted, just to keep people alive.
As Hjalmar Schacht analyzed the situation,
There was no
tax base sufficient to retire the indebtedness, and there were no savings to
refinance it. Certainly no foreign
investor would take a chance on German government bonds. The government had two choices: repudiate the debt, or pay it off by printing
currency. The government chose to pay
off the debt with newly printed notes of the Reichsbank, and the ensuing
inflation effectively repudiated the debts, anyway!
[A]t the end of the
war the mark was worth about half as much as at the beginning of
hostilities. A gold mark (the standard
on which the paper currency is based) was worth 2.02 paper marks. But in November 1923 a gold mark was worth
one trillion paper marks. . . .
Within five years the
German Reichsmark had sunk to a five hundred billionth of its value. At the end of the was one could, in theory,
have bought five hundred billion eggs for the same price as that for which,
five years later, only a single egg was procurable. (Schacht, Confessions,
op. cit., 151.)
What the
domestic government-sponsored inflation did not finish off, the reparations
did. The first 1 billion Reichsmarks payment,
in gold, in August 1921, followed by the second payment of 362 million Reichsmarks
in March 1922 and the Treasury Bills hypothecated to Belgium in August, 1922 in
the amount of 254 million Reichsmarks (a total of 1,622 million Reichsmarks, or
about U.S. $500 million) finished off the Reichsmark once and for all.
During the rest
of 1922, the Reichsmark fell steadily against other currencies. A U.S. Dollar comparison is useful. In July 1921, the Reichsmark was pegged at 81
to the Dollar. In June 1922, with the
assassination of German statesman Doctor Walther Rathenau, the Reichsmark plunged
to 600 to the Dollar. After the first reparation payment was made
in July 1922, the Reichsmark went down to 670 to the Dollar. In October, after the payment to Belgium, it
dropped to 45 hundred, then 8 thousand a month later. On January 9, 1923, when the Allied
Reparations Commission confiscated the industrial might of the Ruhr Valley
until Germany met demands for payment (rather like locking up a debtor in
prison until he can pay), the Reichsmark fell to 10,200 to the Dollar, and in
July 1923, it had hit 1 million Reichsmarks to the Dollar.
April 1923
marked the beginning of the hyperinflation.
Prices began rising at an unbelievable rate. Simply transporting enough currency to
purchase a single item became a serious problem. Even wheelbarrows were insufficient. Printing presses began working day and night
simply to turn out enough high-denomination notes to make transactions easier
to carry out, but the task was hopeless.
The inflation rate was rising so fast that it was impossible to provide
enough currency to match the prices. By
October 1923, 50 Million Reichsmark notes were being printed. In February 1924, notes of 100 Billion Reichsmarks
were in circulation.