Stresemann and the Solution

 

Stresemann’s 102-day stint as Chancellor from August to November 1923 is regarded as the turning point in the crisis. He has been given credit as an extraordinary German statesman, akin to Bismarck, but is his role in ending Hyperinflation overstated?

                                                                     

                                              Chancellor and Foreign Minister Gustav Stresemannn

  

Stresemann’s bold decision to send the Ruhr strikers back to work, while promising to resume reparations payments, was pivotal in restoring German industrial output. It also relived the government of paying the strikers, reducing the need to devalue the currency further.

However, as Pfleiderer explains, the stabilisation of the currency, can be credited to the ideas of economist Helfferich, finance minister Luther’s implementation of these ideas and Reichsbank President Schacht’s clever monetary policy. It involved issuing a new Rentenmark, backed by mortgage bonds indexed to the price of gold. This perfectly converted the new mark to be 4.2 to the dollar, as opposed to the old 4.2 trillion!

Stresemann’s tenure as Chancellor ended prematurely, with the SPD withdrawing support for him. However, in his new role as Foreign Minister, he had success in finalising the 1924 Dawes Plan. Which resumed reparations payments, but in smaller instalments for the near term, while securing a loan of 800 million marks from the US.

                                                                        

                                        Diagram showing the reasoning behind the Dawes Plan

Both Stresemann and the financial experts contributed significantly to ending the inflation crisis. Although, in many ways they paved the way for Germany to be adversely impacted by the Great Depression. Stresemann pursued closer economic relations to the US, and the German economy became heavily dependent on US capital, which was withdrawn in the wake of the Wall Street Crash. While the return to the Gold Standard helped to stabilise an out-of-control currency, it also led to the much worse deflationary crisis Germany would experience in the early 1930’s, which along with Brunings austerity policies, brought Hitler to power in 1933.

Stresemann had many great achievements as a diplomat, including gaining admission to the League of Nations and winning a Nobel Prize, however his economic policies and excessive use of Article 48 created greater problems that wouldn’t materialise until after his premature death in 1929.

                                                                      

                               Hjalmar Schacht with Hitler in his later role as Minister for Economics

Winners and Losers of German Hyperinflation

 

The middle classes have traditionally been labelled as the biggest losers in the German Hyperinflation of 1923. Jones  argues those with savings and fixed incomes which became worthless, came out the worst.

                                                                           

                                A 100 Billion Mark Bank Note, worth $0.04 at the Mark's lowest value

This is a rather simplistic argument which Hubbard challenges. The German middle classes of 1923 were too diverse a group to easily classify as they often were both creditors and debtors. The perceived destruction of the middle classes relates primarily to civil servants, who were the most studied social group, with data showing that senior civil servants real wages were 82% of pre-war levels in 1924.

Some supposed winners of the inflation certainly didn’t feel that way at the time. Farmers repaid mortgages cheaply but were frustrated as they couldn’t afford to purchase more land or machinery. Urban landlords likewise repaid debts easily but saw the rental value of their properties evaporate and were put under pressure by government-imposed rent caps.

The greatest benefactors of hyperinflation were industrialists. They held real assets, were able to cut production if needed and were able to reinstate the 12- hour working day, due to the conditions of workers who were desperate for an increase in nominal pay.

                                                                          

                                                Hugo Stinnes, a leading industrialist on the cover of Time

Conversely, the working classes felt the most severe impact of the inflation. Data suggesting an increase in real wages was flawed due to the short lived 8 hour working day, while excluding non-unionised workers and those not working full time hours. They also were the group most likely to experience hunger and unemployment because of the inflation.

To conclude, the middle classes as a whole saw declines in their status due to the inflation, and perhaps are viewed as the greatest victim due to them having a more prominent role in society than the working classes, who ultimately suffered the most hardship.

 Playing with stacks of worthless notes

                                          

Ferguson on German Fiscal Policy

Ferguson argues the Weimar Government’s fiscal policy and reluctance to pursue “stabilization” of the currency were responsible for the hyperinflation crisis. He claims these policies were pursued based on exaggerated political benefits of low unemployment, and an attempt to make reparations cheaper, while making exports more competitive.

                                                                      Niall Ferguson

Holtfrerich in contrast, contends that Germany’s inflationary boom in 1920/21 was an overwhelming positive, as they received capital inflows of $1.8bn from abroad, which they repaid with devalued marks. Ferguson contended that this capital inflow, made recovery easier for Weimar politicians as it was in excess of what West Germany received in Marshall Aid post WW2, but gives policymakers no credit for Germany avoiding the deflationary slump faced by the UK and USA in this period. While Holtfrerich (boldly) asserts that Weimar policy helped the world avoid a depression at this time.

Ferguson’s claim that 82 billion marks of reparations were “purely notional” can only be made with hindsight. Had Germany followed Ferguson’s suggestions, the government’s reward would have been to pay considerably more in reparations. Payments on the initial 50 billion marks accounted for 2/3 of Germany’s 1921 deficit, displaying that they were unsustainable.

                                                  Erzberger in a cartoon of the "stab in the back" myth

Ferguson’s most flawed arguments surround the exaggerated risk of revolution, caused by socially unpopular policies. Finance Minister Erzberger, responsible for raising taxes, was murdered by far-right terrorists. Fears of Bolshevism were placated with excessive numbers of public sector jobs, while food and housing subsidies were implemented by the SPD. Stinnes described this as “Inflation or Revolution”. Unemployed, hungry Germans would later turn to Nazism in droves, buoyed on by the slogan “Bread and Work”, clearly showing the value of Weimar policies.

Trachtenberg’s point that Woodrow Wilson wanted German integration to the liberal capitalist world order, would’ve been a goal shared by Weimar politicians of the time, to do so they needed to overcome revolutionary socialism and traditional imperialism. Ferguson’s conclusion that Germany should have adopted an authoritarian government in 1920, while referring to the Weimar period as “13 luckless years” sells short the efforts of politicians who bridged the gap between regimes responsible for both World Wars.

Nazi propaganda poster

 

 

 

German Hyperinflation Causes, Versailles vs Monetary Policy

Article 231 of the 1919 Treaty of Versailles placed sole responsibility for WW1 onto Germany. Consequently, Germany had to pay reparations to the Allies, totalling 132bn Gold Marks (31.4bn USD). This debt represented 120-130% of national output, placing an economic burden on the relatively foreign debt free Germany. Keynes referred to the Reparations Commission as “an instrument of oppression and rapine” (due to its deviation from Wilson’s Fourteen Points.) Adding to Germany’s domestic debts, war pension liabilities and ordinary expenses, this evidently appeared unrealistic, particularly given the political volatility of the time.

                                       Signing of the Treaty of Versailles

P. Michael et al, pinpoint the start of hyperinflation as July 1922, shortly after the murder of  foreign minister Rathenau, who believed high inflation “took from those who had and gave to those who had not”. This was also a time when Germany halted reparations payments and escalated their printing of notes, both to profit from seigniorage and increase the money supply, as Germany’s negative balance of payments drove up prices and wages, weakening the mark against foreign currencies. Allan Young contended that inflation was the result, not the cause of the mark’s depreciation, as price levels rose in excess of the increase in money supply.

                                               Graph showing the Mark's steep decline in Value

The French occupation of the Ruhr in late December 1922 further deepened the crisis, as national output fell by 50%, while resisting workers had to be paid by the government. The mark sharply rose to 500,000 per dollar vs 272 in June. Further evidencing that Germany’s politicians had little freedom in economic policy, they once again had to choose inflation over revolution, for the democratic government to survive threats from the far left and right.

                               French troops occupy the Ruhr, a key industrial area