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Weimar Germany
Brian Trumbore

While inflation doesn't appear to be a problem these days, more than a few experts are beginning to warn that it could be one as early as perhaps 2004. This may be hard to understand, especially while some on the other side are still talking of deflation, but one can't escape the fact that at least when it comes to monetary policy, the U.S. Federal Reserve has been running full tilt in priming the money pump.

With this in mind, and in conjunction with a series on appeasement before World War II that I am currently running on my "Hott Spotts" link, I thought I'd take a second look at a piece I did back in June 2000 concerning Germany's Weimar Republic, perhaps the single best example of hyper-inflation in world history. Don't worry, no one is forecasting this kind of monetary disaster in the future, but the tale is fascinating and worth retelling at this time.


At the end of World War I, Germany was crushed, Britain and France emerged exhausted winners, and there were a lot of big questions at the time, such as, would revolution in Russia spread to the rest of Europe? Would Britain and France recover? Would Germany attempt a war of revenge?

Enter the Treaty of Versailles, June 1919, which placed responsibility for the war on Germany, while France demanded that Germany pay in more ways than one. The German military was to be reduced to a shell of 100,000 volunteers and about 6 cruisers, plus the government was to pay reparations of some 132 billion marks (about $35 billion.depending on how you value the currency at this time), along with other payments such as of all extracted coal. French Prime Minister Clemenceau said, "We will squeeze the German lemon 'til the pip squeaks.'"

Britain, which hadn't suffered the physical damage that France and Belgium had, for example, wanted to restore the fledgling German Republic to reasonable economic strength, feeling that in view of the perceived threat posed by the Russian Revolution, Germany could be a force for European stability.

But the French position largely won out and Versailles was a total humiliation for the Germans. Having to admit responsibility for the outbreak of the war, the "War Guilt Clause," was especially trying. Henry Kissinger commented:

"18th century peacemakers would have regarded 'war guilt clauses' as absurd. For them, wars were amoral inevitabilities caused by clashing interests. In the treaties that concluded 18th century wars, the losers paid a price without its being justified on moral grounds. But for (U.S. President) Wilson and the peacemakers at Versailles, the cause of the war of 1914-1918 had to be abscribed to some evil which had to be punished."

Germany was forced to surrender 13% of its prewar territory. The key industrial sector of Upper Silesia was turned over to a newly created Poland. Alsace-Lorraine was handed to the French and the Rhineland was demilitarized. Germany was also forced to pay for pensions of war victims and some compensation for their families, an unheard of provision. Economists warned of the implications but the populations of the victors wanted revenge.

[An opposing viewpoint to all this is supplied by author William Shirer. In his view, Versailles left Germany geographically and economically largely intact and preserved her political unity and potential strength as a great nation.]

Germany was reduced to economic chaos after the armistice. In 1920, prices plummeted around the world in a great deflation. This price and wage deflation was reinforced by the economic policies of conservative governments. Germany's new Weimar Republic inherited the vast burden of debt and the crushing weight of reparations. Add in the fact that tax revenues were low due to the weak economy, while the outflow of payments in gold-fueled inflation.

It also quickly became apparent that Germany would be unable to meet its reparation obligations. In July 1920 the German mark plunged dramatically as the Weimar government informed the Allies it could not meet the schedule of payments, but that it would continue disbursements of coal and other natural resources. With the U.S. pressuring Britain and France to repay their own war debts, the Allies grew all the more determined that Germany pay up. France's new premier, Raymond Poincare, accused Germany of deliberately withholding payments and trying to force the Allies to make concessions by ruining its own currency.

On January 11, 1923, French and Belgian troops (against the advice of the British) occupied the Ruhr, a region which furnished 4/5's of Germany's coal and steel production. The miners refused to work for the enemy and the Germans simply printed more money with which to pay them not to, allowing inflation to spiral completely out of control. The economy was strangled and the free fall in the mark was incredible. Following is the historic slide:

July 1914.4.2 marks to the dollar
January 1919.8.9
July 1919.14.0
January 1920.64.8
July 1920.39.5
January 1921.64.9
July 1921.76.7
January 1922.1919.8
July 1922.493.2
January 1923.17,972
July 1923.353,412
August 1923.4,620,455
September 1923.98,860,000
October 1923.25,260,208,000
November 15, 1923.4,200,000,000,000.yes, trillion.

[Source: Gordon Craig, "Germany 1866-1945"]

By late 1923, the German government required 1,783 printing presses, running around the clock, to print money.

Germans wheeled shopping carts filled with literally trillions of marks to pay for a single loaf of bread. Employees asked to be paid their wages each morning so that they could shop at noon before merchants posted the afternoon price rises.

The New York Times ran a story on October 30, 1923, datelined Berlin, which told the tale of an American who went into a restaurant and handed the waiter a dollar, asking for "all the food an American dollar will buy." The waiter recovered from his astonishment and began to serve the guest.

"Soup, several meat dishes, fruit and coffee were served. While the guest was smoking his cigar the waiter brought another plate of soup, and later another meat dish.

" 'What does this mean?'" the astonished and satisfied guest asked.

"The waiter bowed politely and replied: 'The dollar has gone up again.'"

Spiraling inflation also wiped out people on fixed income along with the small savings they had put aside for retirement.

"Annuities, pensions, proceeds of insurance policies, savings accounts in the banks, income from bonds and mortgages - every form of revenue which had been arranged for at some time in the past, and which often represented the economy, foresight, and personal planning of many years - now turned to nothing. The middle class was pauperized and demoralized."

[Source: "A History of the Modern World"]

William Shirer adds:

"What good were the standards and practices of such a society, which encouraged savings and investment and solemnly promised a safe return from them and then defaulted? Was this not a fraud upon the people?"

Some say that the inflation could have been halted by balancing the budget, hard as that may have been given the crushing debt loads. But the cost of the war - 164 billion marks - had been met not just by direct taxation, but rather 93 billion by war loans, 29 billion out of Treasury bills and the rest by increasing the issuance of paper money. But not everyone suffered in Germany. Again, Shirer:

"Big industrialists and landlords goaded the government to deliberately let the mark tumble in order to free the State of its public debts, to escape from paying reparations and to sabotage the French in the Ruhr. The destruction of the currency enabled German heavy industry to wipe out its indebtedness by refunding its obligations in worthless marks. The fall of the mark wiped out war debts and thus left Germany financially unencumbered for a new war. The masses of the people only knew that a large bank account could not buy a straggly bunch of carrots, a few ounces of sugar. In their misery the Republic was made the scapegoat for all that had happened."

Finally, in 1924 German inflation was brought to a sudden end with the help of a Chicago banker, Charles Dawes. Dawes was the chief architect behind what came to be known as the Dawes Plan, one that left the Reichsbank partially under the direction of an American commissioner who was to oversee German reparation payments. It did not lower the amount Germany was expected to pay, but the U.S. reduced the debt obligations of its Allies by 30-80%. The plan helped improve relations between the Allies and Germany and, for this, Dawes earned a share of the 1925 Nobel Peace Prize (the other recipient being Sir Austen Chamberlain of Britain).

But the Dawes Plan wasn't without cost. The banking consortium he put together reaped 10% of the face value for underwriting costs, the motto being, "business, not politics."

Over the next 5 years, Germany paid out about $1 billion in reparations and received loans of $2 billion, a sizable portion from the U.S. In effect, America was paying Germany's reparations, while Germany used the surplus from American loans to modernize its industry.

Reparations, then, did not necessarily ruin the economy, but their psychological impact in Germany did a number on the people and damaged the very republic the vast majority of the Allied population wanted to succeed. Confidence in open, democratic institutions was weakened fatally in central Europe.

At the height of the currency crisis an interested spectator commented:

"The government calmly goes on printing these scraps of paper because, if it stopped, that would be the end of the government. Because once the printing presses stopped - and that is the prerequisite for the stabilization of the mark - the swindle would at once be brought to light. Believe me, our misery will increase. The scoundrel will get by. The reason: because the State itself has become the biggest swindler and crook. A robbers' state!.If the horrified people notice that they can starve on billions, they must arrive at this conclusion: we will no longer submit to a State which is built on the swindling idea of the majority. We want a dictatorship."

Thus spoke Adolf Hitler.


"Diplomacy" Henry Kissinger
"The Rise and Fall of the Third Reich" William Shirer
"Twentieth Century" J.M. Roberts
"A History of Modern Europe" John Merriman
"The Great Wave" David Hackett Fischer
"Wall Street: A History" Charles Geisst
"The New York Times Century of Business" Floyd Norris and Christine Bockelmann
"A History of the Modern World" R.R. Palmer, Joel Colton, Lloyd Kramer
"The Encyclopedia of World History" Edited by Peter N. Stearns

Wall Street History will return next week.

Brian Trumbore


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