Great Inflation Essay Example For Students

Great Inflation Essay annonIn late-1922 the German government were forced to askthe Allies for a moratorium on reparations payments; this was refused, andshe then defaulted on shipments of both coal and timber to France. ByJanuary of the following year, French and Belgian troopshad entered and occupied the Ruhr. The German people, perhaps for thefirst time since 1914, united behind their government, and passiveresistance to the occupying troops was ordered. A government-funded strikebegan as thousands of workers marched outof their factories and steel works. The German economy, already undermassive pressure, gave way. The huge cost of funding the strike in theRuhr and the costs of imports to meet basic consumer needs were met by thefamiliar expedient of the printing pre sses. Note circulation increasedrapidly, and by November 1923 had reached almost 92 trillion marks. Withless than three per cent of government expenditure being met from incomeand with the cost of one dollar at four billion marks, Germany was in theth roes of economic and social chaos. Starvation became a reality formillions of people, despite a bumper cereal harvest, as shops reverted tothe barter system. Farmers refused to accept the effectively worthless,banknotes in exchange for grain, and food quickly began to run short inthe cities. Prices rose one trillion-fold from their pre-war level. Moreimportantly, for the long-term political future of Germany, the middle andworking classes saw their savings wiped out. These were, in essence, thepe ople who were later to become the hard-core of the Nazi vote. Economists will argue that runaway hyperinflation has two sources. Firstly, it arises through a fall in the foreign exchange value of acurrency, when an adverse balance of payments reduces foreign investorsdemand for the currency. A falling exchange rat e increases the cost ofimports and, therefore, the cost of living. Wages rise as workers try tomaintain their standard of living, especially if previous institutionalarrangements have linked wages to living costs. Firms paying higher wagesraise the pr ice of the goods they sell, prices rise still further, theforeign exchange value of the currency falls still more, and the cyclecontinues. Secondly, it arises through a large budget deficit which no onebelieves will narrow in the future. Faced with theprospect of budget deficits for many years to come, the usual sources ofcredit available to the government decline to make further loans; thegovernment can no longer borrow to cover the deficit between revenue andexpenditure. The only alternative is t o print more and more banknotes. Asgovernment workers a nd suppliers present their bills to the Treasury, itpays them off with newly-printed pieces of paper. This puts more banknotesinto the hands of the public and they then spend them. In Germany, as wehave seen, the problem was that there were trillions of marks worth ofpaper currency in circulation. Prices could rise one thousand timesbetween a worker being paid and his reaching the shops. A common analogyused is that if one could afford a bottl e of wine today, one should keepthe empty bottle which would be worth more tomorrow than the full bottlewas today.Eventually, the power to boost government spending by printing money goes. When the government can no longer gain, even in the short-term, abudgetary balance through inflation, the situation becomes so intense thatstabilisation through a currency board,a new finance minister or a link to the gold standard is implemented, andreform can be successful. It was at this point that some sanity wasinjected into the German economy by the election of Gustav Stresemann. Hecalled a halt to resistance in the Ru hr, and set out to stabilise themark. Luther, Stresemann’s Finance Minister, introduced the rentenmark thevalue of which was based on Germany’s staple, rye, rather than gold. Infact the rentenmark represented a mortgage on Germany’s land and industry,which could never be redeemed. It did not matter. The point was that thecurrency was stabilised and became exchangeable at a rate of one billionold marks to one new mark, and at the pre-war parity of 4.2 marks to thedollar. The new currency was quickl y accepted by the population, and foodand co nsumer goods began to appear in the shops. The government could nowattempt to regain budgetary control in a climate of low inflation. TheDawes Plan was brokered, and a sum of some 39 billion dollars was lent toGermany of the following five years. However, this new economic prosperityhad its basis in foreign investment, and thus the fate of Germany was noweffectively held in the hands of Wall Street.The consequences of the Great Inflation to Germany are many fold, andthere is no doubt that politically, the first warning signs of a move awayfrom fascism were seen. In the elections of May 1924, both the Nazi andCommunist Parties made gains at the ex pense of the centre. The faith ofthe people in the Republic suffered a severe blow. As Shirer points out:‘What good were the standards and practices of such a society, whichencouraged savings and investment and solemnly promised a safe return fromthe m and then defaulted? Was this not a fraud on the people? And was notthe democratic Republic, which had surrendered to the enemy and acceptedthe burden of reparations, to blame for the disaster?’ Upper middle classsavings in Germany were wiped out dur ing the hyperinflation. Such savingshad usually been invested in bonds and bank accounts, so the collapse ofthe real value of the mark carried with it the collapse of the value ofthe bonds. Debtors benefited substantially, for their debts were effectively wiped out. The relatively small, financially unsophisticated saverswho made up Germany’s upper middle class had nothing left. This may havebeen the most important aspect of Germany’s early-1920s hyperinflation. Civil Disobedience Essay William R. Keylor, The Twentieth Century World, (Oxford: 1984)., pp. 84-85.  William Gutteman and Patricia Meehan, The Great Inflation: Germany 1918 1923, (London: 1976), p.71.  Eberhard Kolb, ‘The Weimar Republic’, (London: 1995), pp. 39 41.  William L. Shirer, ‘The Rise and Fall of the Third Reich’, (New York: 1980), pp. 58-61.  David Hackett Fischer, ‘The Great Wave’, (Oxford: 1996), pp. 192-193.  Erik Achorn, ‘European Civilization and Politics since 1815’, (London: 1935), pp. 561 562.  Kolb, op. cit., pp. 40 41.  Shirer, op. cit., p. 63.  David Fischer, op. cit., p. 193 The argument in this paragraph is drawn from David Fischer, op. cit., pp193 -194, Paul Kennedy, ‘The Rise and Fall of the Great Powers’, (London: 1989, pp. 357 373, and D. H. Aldcroft, ‘From Versailles to Wall Street’, (New York: 1977), chs. 1 2.  David Blackman, ‘European Inflationary Trends: 1815 1945’, (London: 1954), pp. 321 -322.  David Fischer, op. cit., pp. 194 5.  Kolb, op. cit., pp. 194 -195.  Shirer, op. cit., p. 61. Footnote Text:iy, the provisions of the Treaty of Versaillesflation profiteering’. Successive German governments failed to implement anti-inflationarypolicies and, it has been argued, this represented the cynical use ofinflation as a reason for reducing, or not meeting, reparations payments. This is not to say that the reparations clausesdid not have an effect on the German economy of course they did. TheAllies, however, failed to set a final reparations figure until the LondonUltimatum of 1921; this long delayproduced, as William Keylor argues: ‘†¦widespread economicuncertainty†¦Foreign and domestic investors were understandably reluctantto commit their savings to an economic system that was saddled with anuncertain, and potentially enormous, claim on its productive resources.’ In terms of the broader consequences of the GreatInflation, it is easily argued that the control of Germany’s fiscalaffairs ultimately passed into the hands of the international bankingcommunity, which was to have disastrous long-term effects on Germany. It i s also arguable that, as ‘the foster-child ofthe Great Inflation’, Adolf Hitler would come to power as a long termeffect.The total cost of the First World War to Germany was, it has beencalculated, in excess of 164 billion marks. This massive cost was met byraising some 93 billion marks in war loans, 29 billion from discountedTreasury Bills and the balance by the simple if potentially disastrous expedient of printing paper money. Bylate-1918 over 35 billion paper marks were in circulation, and more papermoney was used to invest in yet more Bills. There was little fear thatinflation already beginning in Germany would have a serious long-term effect on the economy. This financialmismanagement was justified by the belief, in both financial andgovernment circles, that the defeated enemy would pay for the cost of thewar. Germany had already indicated her willingness to fund her wars in this way, as can be seen in the terms of theTreaty of Brest-Litovsk and her treaty wit h France in 1871. KarlHelfferich, Reich Secretary to the Treasury, had said in a wartime speechto the Reichstag: ‘After the war we shall not forego our claim that our enemies shall make restitution for all thematerial damage they have caused by the irresponsible launching of thiswar against us.’ However, because of the inflationary means by which theimperial government had financed thewar, the German mark in 1919 was worth less than 20 per cent of itspre-war value. After the formation of the Republic in 1919that can bemade.  John Maynard Keynes, The Economic Consequences of the Peace, (London: 1920), p.64.  William R. Keylor, The Twentieth Century World, (Oxford: 1984)., pp. 84-85.  William Gutteman and Patricia Meehan, The Great Inflation: Germany 1918 1923, (London: 1976), p.71.  Eberhard Kolb, ‘The Weimar Republic’, (London: 1995), pp. 39 41.  William L. Shirer, ‘The Rise and Fall of the Third Reich’, (New York: 1980), pp. 58-61.  David Hackett Fischer, ‘The Great Wave’, (Oxford: 1996), pp. 192-193.  Erik Achorn, ‘European Civilization and Politics since 1815’, (London: 1935), pp. 561 562.  Kolb, op. cit., pp. 40 41.  Shirer, op. cit., p. 63.  David Fischer, op. cit., p. 193 The argument in this paragraph is drawn from David Fischer, op. cit., pp193 -194, Paul Kennedy, ‘The Rise and Fall of the Great Powers’, (London: 1989, pp. 357 373, and D. H. Aldcroft, ‘From Versailles to Wall Street’, (New York: 1977), chs. 1 2.  David Blackman, ‘European Inflationary Trends: 1815 1945’, (London: 1954), pp. 321 -322.  David Fischer, op. cit., pp. 194 5.  Kolb, op. cit., pp. 194 -195.  Shirer, op. cit., p. 61.