The real origins of Weimar hyperinfl ation

failing to deliver to France the agreed volume of wood for telegraph poles, as well as a minor shortfall in coal deliveries.6

THE REAL ORIGINS OF WEIMAR HYPERINFLATION

Following the murder of Rathenau, the gold mark rate by July 1922 plunged internationally to 493 Marks to the U.S. dollar, as confi dence in political stability in Germany sank to a new post-Versailles low. The Reichsbank began dramatically expanding the money supply, in a frantic attempt to meet unpayable London reparations demands, while maintaining employment and a strong export industry domestically to service the reparations requirements imposed. By December, the mark had fallen to the alarming level of 7,592 to the dollar.

Then, on January 9, 1923, the Reparations Committee voted 3 to 1 (with Britain formally on record as opposing France, Belgium and the newly installed Mussolini government of Italy) that Germany was in default of her reparations payments. On January 11, Poincaré ordered the military forces of France, with token participation from Belgium and Italy, to march into Essen and other cities of the German industrial Ruhr to occupy it by force. England hypocritically denounced the occupation, though she had threatened precisely the same action in 1921.

In reaction, the German government called on its citizens to engage in universal passive resistence to the occupation. The government ordered all German offi cials, including Reichsbahn personnel, to refuse to take orders from the occupying authorities. Workers refused to work the steel mills and factories of the Ruhr. To support the families of striking miners and other workers, the government resorted to expanded printing of money. The area occupied was merely 100 kilometers long and some 50 kilometers wide, yet it contained 10 per cent of the entire German population, produced 80 per cent of Germany’s coal, iron and steel and accounted for fully 70 per cent of its freight traffi c.

The French occupation brought the industrial activity of Germany almost to a grinding halt. It took until the end of 1923 for French troops and engineers to bring production in the Ruhr to even a third of the former level of 1922. More than 150,000 Germans were deported from the Ruhr occupation zone, some 400 were killed and more than 2,000 wounded.

The economic strain of the German resistance was incalculable. The French occupation forces had cut off the Ruhr economically

from the rest of the nation. Funds of German banks and Reichsbank branches, and inventories of factories and mines, were all seized. Germany ceased all reparations payments to France, Belgium and Italy for the duration of the resistance, but scrupulously maintained its payments and deliveries in kind to Britain.

Germany’s currency became utterly ruined as a consequence. As we have noted, already by the end of 1922, when it became obvious that France’s Poincaré government wanted to force a military occupation, the mark’s value had begun to fall. By January, after the Ruhr occupation, the mark had dropped to 18,000 to the dollar. Attempts by the Reichsbank to defend the currency at all costs held the level somewhat until May, when all possibilities had been exhausted. By May the results of the Ruhr economic losses became so catastrophic that Berlin was forced to abandon efforts to save the currency.

From that point onward, the situation was totally out of control. By July, the mark had fallen exponentially to 353,000 to the dollar; by August, it had reached the unbelievable level of 4,620,000 to the dollar. The plunge continued until November 15, when it hit 4,200,000,000,000 to the dollar. No such phenomenon had ever before been experienced in the economic history of nations.

With some months’ time lag, German wholesale prices increasingly began to refl ect the collapse of the currency. From an index-level of 100 in July 1922, just after the Rathenau assassination, prices increased some thirty-fold by the onset of the Ruhr occupation at the end of January 1923, to 2,785. By July, prices had soared to the unbelievable level of 74,787 compared with the level of 100 a year earlier, by September to 23,949,000 and fi nally by November to 750,000,000,000. The savings of the entire population were destroyed. Living standards collapsed. While a few were able to build immense fortunes at the beginning, the vast majority sank into poverty. Government bonds, mortgages, bank deposits—all became worthless. The entire stable middle stratum of the country was pauperized.

By September 1923, the government, now under a coalition headed by Gustav Stresemann, ordered an end to the passive resistance. In November 1923, a formal agreement with France and the other occupying forces was signed. The hyperinfl ation had peaked. But this was only the softening up of Germany for what was to appear a welcome relief.

In October 1923, the U.S. secretary of state, Charles Evans Hughes, former chief counsel to Rockefeller’s Standard Oil, recommended a new scheme to President Calvin Coolidge to continue the reparations

pyramid of debt collection which had been shaken since the April 1922 Rapallo shock. Hughes won the appointment of a banker tied to the J.P. Morgan group, General Charles C. Dawes, a man whose prior career had been tainted with corruption and Republican Party payoff scandals in Illinois.

Dawes, as chairman of what came to be called the Dawes Committee, presented his plan to the Allied Reparations Committee on April 9, 1924. His plan was immediately seized by all parties, including the exhausted German government. France’s Poincaré lost in the May elections, but a cabinet under Edouard Herriot immediately agreed to the Dawes reparations scheme. On September 1, the Dawes reparations plan formally began. The Dawes Plan was the fi rst major indication of the growing Anglo-American agreement to consolidate and join forces in the post-Versailles period. London had wisely reckoned it better to let the Americans take center stage, while preserving its powerful infl uence on American policy.7

The Dawes Plan was the Anglo-American banking community’s reassertion of full fi scal and fi nancial control over Germany. It was vastly more effective than Poincaré’s soldiers, but had required the military intervention and the attendant hyperinfl ation crisis to enable its enactment.

By November, 1923 a German banker, Hjalmar Schacht, had been named commissioner of the currency. Schacht, who had developed a close correspondence at this time with Montagu Norman, governor of the Bank of England, implemented the Rentenmark, in an attempt to stabilize the mark by a fi ction of declared real estate backing. On November 20, the day the Rentenmark stabilization plan was made public, the Reichsbank president, Rudolf Havenstein, who had headed the Reichsbank since 1908, died, in the fi rst of a remarkable series of such events. Stresemann and Finance Minister Rudolf Hilferding had repeatedly attempted to get the unwilling Havenstein to step down. It soon became clearer why.

On December 4, 1923 the Reichsbank board of governors voted their overwhelming choice that Karl Helfferich, the former Deutsche Bank director and architect of the Baghdad railway project before the war, be named successor to Havenstein. Stresemann and the government had other preferences. On December 18, 1923, his choice, and the friend of the Anglo-American Morgan interests, Hjalmar Schacht, was named president of the Reichsbank. The way was ready for the Dawes Plan to proceed. Helfferich died a few months later in a suspicious train accident.8