Lords of Finance

Meanwhile, the Reparations Commission, established in Paris in mid- 1920, finally put a figure of $33 billion on the table as its estimate of the amount Germany should pay. The Germans responded by subjecting this figure to a series of adjustments to take into account what they had already paid—so transparently bogus as to embarrass even its own representatives in Paris—and concluded this meant they now owed the Allies just $7.5 billion, provoking Lloyd George to say that if the discussions continued any further in this vein, Germany would soon be claiming reparations from the Allies.

In May 1921, British Treasury officials developed a proposal that they believed to be so reasonable that Germany would find it difficult to turn down. The reparations bill was to be set at the equivalent of $12.5 billion, roughly 100 percent of the German prewar GDP. To meet the annual interest and principal repayments on this new debt, Germany was required to pay between $600 million and $800 million, a little over 5 percent of its annual GDP.

In May 1921, the British proposal was accepted at a conference in London. It seemed as if agreement had finally been reached. The German delegation, led by Foreign Minister Walter Rathenau, made much of the new departure in policy. Henceforth Germany would abandon its resistance to the terms of the treaty, and instead would adopt a policy of “fulfillment.”

The problem was that the Germans never really believed that they could meet even this commitment. Despite the fact that the new reparations bill was now closer to the amounts originally proposed by liberal commentators such as Keynes, German officials remained convinced that even $12.5 billion of reparations would prove an intolerable burden. As a consequence, they made no real effort to meet the terms of the London schedule. They paid on schedule just once. Within six months of the London settlement, they were in arrears and back before the Reparations Commission, pleading for a moratorium. Of the $1.2 billion that Germany owed during the first eighteen months of the schedule, it paid little more than half.

WHILE GERMANY WAS grimly trying to negotiate relief from the burden of reparations, its domestic economic policy, bad as it had been during the war, became worse. The country was in perpetual turmoil, constantly on the brink of revolution, run by a series of weak coalition governments, and was quite unable to control its finances. In addition to large residual expenses from the war—pensions to veterans and war widows, compensation for those who had lost private property in the territories forfeited under the Treaty of Versailles—the governments took on enormous new social obligations: an eight-hour day for workers, insurance for the unemployed, health and welfare payments for the sick and the poor. Germany’s financial problems were mostly self-inflicted. Nevertheless, reparation payments made what was already a difficult fiscal situation impossible. To finance the gap, the various governments of Germany resorted to the Reichsbank to print the money.

In 1914, the mark

stood at 4.2 to the dollar, meaning that a mark was worth a little under 24 cents. By the beginning of 1920, after the full effects of the inflationary war finance had worked through the system, there were 65 marks to the dollar—the mark was now worth only 1.5 cents—and the price level stood at nine times its 1914 level. Over the next eighteen months, despite an enormous budget deficit and a 50 percent increase in the amount of currency outstanding, inflation actually slowed down and the mark even stabilized. Foreign private speculators, betting that the mark had fallen too far, moved some $2 billion into the country. After all, this was Germany, not unjustly viewed before the war as the epitome of discipline, orderliness, and organization. It seemed inconceivable that it would allow itself to sink into an orgy of monetary self-abasement and give up on restoring order.

“Nothing like this has been known in the history of speculation,” wrote Maynard Keynes. “Bankers and servant girls have been equally involved. Everyone in Europe and America has bought mark notes. They have been hawked . . . in the streets of the capitals and handled by barbers’ assistants in the remotest townships of Spain and South America.”

A series of events, however, in the middle of 1921—French inflexibility over reparations, a campaign of political murder by right-wing death squads—broke the public’s confidence that Germany’s problems were soluble. It abandoned the mark in droves.The foreign speculators who had bought marks the previous two years also bailed out, losing most of the $2 billion they had pumped in. A visitor in the late 1920s to the game rooms of Milwaukee or Chicago would find the walls papered with German currency and bonds that had become worthless.

As the mark plummeted, Germany became caught in an ever-deepening downward spiral. On June 24, 1922, the architect of fulfillment, Foreign Minister Walter Rathenau, one of the most attractive political figures in Germany—cultured, rich, scion of a great industrial family—was gunned down in his car by yet another group of crazed reactionaries. Panic set in. Prices rose fortyfold during 1922 and the mark correspondingly fell from 190 to 7,600 to the dollar.

In early 1923, when Germany was late in meeting a reparations payment for that year—the precipitating incident was the failure to deliver one hundred thousand telephone poles to France—forty thousand French and Belgian troops invaded Germany and occupied the Ruhr valley, its industrial heartland. The chancellor, Wilhelm Cuno, powerless in every other way, launched a campaign of passive resistance. The budget deficit almost doubled, to around $1.5 billion. To finance this shortfall required the printing of ever-increasing amounts of ever more worthless paper marks. In 1922, around 1 trillion marks of additional currency was issued; in the first six months of 1923 it was 17 trillion marks.

Wrote one observer: “In the whole course of history, no dog has run after its own tail with the speed of the Reichsbank. The discredit the Germans throw on their own notes increases even faster than the volumes of notes in circulation. The effect is greater than the cause. The tail goes faster than the dog.”

The task of keeping Germany adequately supplied with currency notes became a major logistical operation involving “133 printing works with 1783 machines . . . and more than 30 paper mills.” By 1923, the inflation had acquired a momentum of its own, creating an ever-accelerating appetite for currency that the Reichsbank, even after conscripting private printers, could not meet. In a country already flooded with paper, there were even complaints of a shortage of money in municipalities, so towns and private companies began to print their own notes.

Over the next few months, Germany experienced the single greatest destruction of monetary value in human history. By August 1923, a dollar was worth 620,000 marks and by early November 1923, 630 billion.17

Basic necessities were now priced in the billions—a kilo of butter cost 250 billion; a kilo of bacon 180 billion; a simple ride on a Berlin street car, which had cost 1 mark before the war, was now set at 15 billion. Even though currency notes were available in denominations of up to 100 billion marks, it took whole sheaves to pay for anything. The country was awash with currency notes, carried around in bags, in wheelbarrows, in laundry baskets and hampers, even in baby carriages.

It was not simply the extraordinary numbers involved; it was the dizzying speed at which prices were now soaring. In the last three weeks of October, they rose ten thousandfold, doubling every couple of days. In the time that it took to drink a cup of coffee in one of Berlin’s many cafés the price might have doubled. Money received at the beginning of the week lost nine-tenths of its buying power by the end of the week.

It became meaningless to talk about the price of anything, because the numbers changed so fast. Economic existence became a race. Workers, once paid weekly, were now paid daily with large stacks of notes. Every morning big trucks loaded with laundry baskets full of notes rolled out of the Reichsbank printing offices and drove from factory to factory, where someone would clamber aboard to pitch great bundles to the sullen crowds of workers, who would then be given half an hour off to rush out and buy something before the money became worthless. They grabbed almost anything in the shop to barter later on for necessities in the flea markets, which had sprung up around the city.

Having to calculate and recalculate prices in the billions and trillions made any sort of reasonable commercial calculations almost impossible. German physicians even diagnosed a strange malady that swept the country, which they named “cipher stroke.” Those afflicted were apparently normal in every respect except, according to the New York Times, “for a desire to write endless rows of ciphers and engage in computations more involved than the most difficult problems in logarithms.” Perfectly sensible people would say they were ten billion years old or had forty trillion children. Apparently cashiers, bookkeepers, and bankers were particularly prone to this bizarre disease. Most people simply turned to barter or to using foreign currency. Every middle-class housewife knew up to the latest hour the exchange rate for the mark against the dollar. At every street corner, in shops and tobacconists’, even in apartment blocks, minute bureaux de change sprang up, with blackboards outside, advertising the latest exchange rates.

With the mark falling faster than domestic prices were rising, foreigners were able to live grotesquely well. Berlin apartments worth $10,000 before the war could be bought for as little as $500. Malcolm Cowley, an American literary critic then living in Paris, in Berlin to visit his friend the journalist Matthew Josephson, wrote, “For a salary of a hundred dollars a month, Josephson lived in a duplex apartment with two maids, riding lessons for his wife, dinners only in the most expensive restaurants, tips to the orchestra, pictures collected, charities to struggling German writers—it was an insane life for foreigners in Berlin and nobody could be happy there.” For one hundred dollars, a Texan hired the full Berlin Philharmonic for an evening. The contrast between the extravagance of foreigners, many of them French or British, but also Poles, Czechs, and Swiss, and the daily struggles of the average German to make a living only fed the resentment against the Versailles settlement further.

Inflation transformed the class structure of Germany far more than any revolution might have done. The rich industrialists did well. Their large holdings of real assets—factories, land, stocks of goods—soared in value while inflation wiped away their debts. Workers, particularly the unionized, also did surprisingly well. Until 1922, their wages kept up with inflation and jobs were plentiful. It was only in the last stages, from the end of 1922 into 1923, when the implosion of confidence caused the monetary system to seize up and the economy reverted to barter, that men were thrown out of work.

Those who made up the backbone of Germany—the civil servants, doctors, teachers, and professors—were hit the worst. Their investments in government bonds and bank deposits, carefully accumulated after a lifetime of prudence and discipline, were suddenly worthless. Forced to scrape by on meager pensions and salaries, which were decimated by inflation, they had to abandon their last vestiges of dignity. Imperial officers took jobs as bank clerks, middle-class families took in lodgers, professors begged on the streets, and young ladies from respectable families became prostitutes.

The people who truly raked it in were the speculators. By buying up assets—houses, jewelry, paintings, furniture—at throwaway prices from middle-class families desperate for cash, by cornering the market in goods that were in scarce supply, profiteering in imported commodities and gambling on a further collapse in the currency, they enriched themselves beyond their wildest dreams.

As German society was overturned, the traditional values that had made it so conservative and ordered a community were jettisoned. Stefan Zweig, the writer, tried to capture the mood of that time in his autobiography: “How wild, anarchic, and unreal were those years, years in which, with the dwindling value of money, all other values in Austria and Germany began to slip. It was an epoch of high ecstasy and ugly scheming, a singular mixture of unrest and fanaticism. Every extravagant idea . . . reaped a gold harvest.”

THE OFFICIAL MOST responsible for the reckless policy of inflation was none other than Rudolf von Havenstein, the sober and dedicated president of the Reichsbank who had so disastrously overseen Germany’s wartime finances. When the war ended in disaster, Von Havenstein fully expected to lose his job. A Prussian official closely identified with the imperial administration, he did not conceal his lack of sympathy for the new government led by the Social Democrats. Nevertheless, during the revolution of 1918, he went out of his way to cooperate with it, even allowing one of the new workers’ and soldiers’ councils to form within the Reichsbank. During those days of violence and turmoil, he also used a squad of revolutionary sailors to guard the Reichsbank’s gold reserves to convey the message that it was the “people” who controlled the nation’s treasure, though the word was that he had secretly booby-trapped the safes with poison gas just in case the sailors’ loyalty wore thin.

Having successfully maneuvered to keep his job, Von Havenstein found himself in the classic dilemma of the dutiful civil servant. He was now working for a government fo

r which he had little liking, one that was pursuing a social agenda he did not believe in and thought Germany could ill afford. Worst of all, the government had decided to make its best efforts to pay the Allies’ demands—the so-called policy of fulfillment. Nevertheless, despite these fundamental disagreements, Von Havenstein acceded to the government’s requests and allowed the Reichsbank to print money to finance the budget gap.

Why did Von Havenstein submit without any apparent effort to resist? Two very conflicting pictures have been drawn of his motives: that he deliberately engineered the whole monetary explosion as a way of destroying the financial fabric of Germany, a collective self-immolation designed to prove to the Allies that reparations were uncollectible, or alternatively, that his conduct reflects nothing subtler than sheer economic ignorance. Trained as a lawyer, he had learned the banking business during the gold standard era, when the rules of monetary policy were dictated by the requirement that the Reichsmark be kept convertible at a fixed gold equivalent, and was completely at sea in a world not hitched to gold.

The truth seems to be more complex than either explanation. Von Havenstein faced a very real dilemma. Were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germany’s current fragile state might precipitate a real political convulsion. As the prominent Hamburg banker Max Warburg, a member of the Reichsbank’s board of directors, put it, the dilemma was “whether one wished to stop the inflation and trigger the revolution” or continue to print money. Loyal servant of the state that he was, Von Havenstein had no wish to destroy the last vestiges of the old order.

Alternatively, if by standing firm against the government he forced it to raise taxes or cut domestic expenditures, he would be accused, particularly by his nationalist friends on the right, of being a tool of the blood-sucking Allies, who all along had been insisting that Germany could pay reparations if it would only cut its domestic expenditures and raise taxes. In effect, Von Havenstein would be in the position of doing the Allies’ dirty work—he just could not bring himself to act as the collection agent for his country’s enemies.

Faced with these confusing and competing considerations, Von Havenstein decided to play for time, supplying the government with whatever money it needed. Contrary to popular myth, he was perfectly aware that printing money to finance the deficit would bring on inflation. But he hoped that it would be modest, and that in the meantime, something would turn up to induce the Allies to lower their demands or at least agree to a moratorium on actual payments, giving Germany some breathing space.