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Wall Street History
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06/16/2000
The German Currency Crisis of 1922-24
The new European Central Bank has set an inflation target of 2%
for its member nations. And, with inflation currently running at
1.9%, the ECB recently raised interest rates significantly in an
effort to slow the pace of growth in the Euro economies, even
though some say the growth is far from robust.
And then I saw where new Russian President Vladimir Putin was
recently in Germany, Russia''s largest creditor, to seek debt
relief.
Finally, there have been rumblings of another currency crisis,
possibly starting in Asia, just as in 1997.
Put it all together and there is only one thing to do. Take a look
at the fall of the deutsche (or German) mark during the period
from 1922-24! It is truly amazing.
But to understand this story, one has to take a quick look back at
the aftermath of World War I.
At the end of the war, Germany was crushed; Britain and
France exhausted winners. And there were a lot of common
questions, 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. The treaty stated that
Germany was responsible for the outbreak of war and France, in
particular, demanded that Germany pay in more ways than one.
The German military was reduced to a shell of 100,000
volunteers and about 6 cruisers and the German government had
to pay reparations of some 132 billion marks, as well as other
payments such as one fourth 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 nations
like France and Belgium had (though, obviously, had paid a
heavy price in human capital) wanted to restore the fledgling
German Republic to reasonable economic strength. 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, or the "War Guilt
Clause," was especially trying. Henry Kissinger comments:
"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 ascribed to some evil which had to be punished."
Germany had to surrender 13% of its prewar territory. The key
industrial sector of Upper Silesia was turned over to a newly
created Poland. Germany also lost Alsace-Lorraine to France
and the Rhineland was demilitarized. And Germany was 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 noted author
William Shirer. In his view, Versailles left Germany
geographically and economically largely intact and preserved her
political unity and her potential strength as a great nation.]
So Germany was reduced to economic chaos after the armistice.
In 1920, prices plummeted around the world in a great deflation.
Both price and wage deflation were 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.
In Germany, tax revenues were low because the economy was so
weak and outflow of payments in gold fueled inflation as the
government began to sell inflated currency for gold on the
foreign exchange market.
And it 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 that 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 four-fifths 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 191.8
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. [I often eat
lunch at 11:30 these days so I would have received a better deal.]
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 wiped out people with fixed incomes and
small savings they had put aside for retirement. The bonds,
which had been sold to finance the war effort, were worthless.
The faith of the people in the economic structure of German
society was destroyed. Author William Shirer remarks:
"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 even in part by direct taxation but 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
and a Chicago banker, Charles Dawes, played a huge role.
Dawes was the chief architect behind, guess what, the Dawes
Plan which 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. In turn 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 Charles 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 about $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."
So said Adolf Hitler.
Sources: "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
Brian Trumbore
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