The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class (2 page)

Of course, there are differences between the current disorder and the crisis that followed the First World War. The problems of the 1920s originated in the destruction of a hitherto stable global trading system, with Europe at its heart, as the consequence of an appallingly bloody and morally pernicious breakdown of peaceful relations between the great powers. Those of the early twenty-first century can be seen as occurring against the backdrop of something like the opposite: the onset of a new global trading system, with the Pacific and Asia at its centre, coinciding with the end of the long, credit-fuelled boom that the West indulged in after the end of the Cold War in Europe and the outbreak of peace between the great powers. It might have been wars between the great powers that ruined the twentieth century, but in the first years of the twenty-first it was arguably the lack of them.

So much for the ‘big picture’. However, what really matters to the individual or family or community in any war or economic crisis is not what these events signify for the world order, but what they mean for them. Whether the victim is the Greek engineer reduced to poverty by twenty-first-century austerity, the Irish civil servant sent to the unemployment queue, the American auto worker whose home has been foreclosed on, or the debt-laden British university graduate unable to find a job, every economic crisis feels personal. The same went for the Germany of the 1920s: the university teacher, once a high-status and prosperous figure in society, whose fees and salary no longer put food on his family’s table or offered a decent future for his children; the war widow whose pension became worth less with every passing week – even, towards the end, every passing day – until it was literally worthless; the small craftsman, his business turnover plunging, ransacking the attic for family possessions, however humble, to sell at auction and so get through the week. The big picture, on proper examination, is actually a vast mosaic of microscopic scenarios, all intense and urgent for those lonely millions who struggle to inhabit them.

So this is the story of generals and bankers and politicians. And, equally, of clerks and industrial workers and widows and soldiers and small business people. Their society is historically distinct from ours, yet all too easily recognisable.

The downfall of money proved, in the final analysis, to augur the downfall of all. We can only hope that, decades from now, when the story of our own anxious times is properly told, it has a happier ending.

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Finding the Money for the End of the World

Not so long ago, a friend sent me a postcard from Berlin. I still have it pinned to my office wall. The card carries a close-up, almost intimate view of the great Berlin thoroughfare Unter den Linden. It is dated 1910.

The photograph reproduced in that postcard captures the zenith of Kaiser Wilhelm II’s rule over Germany. The country, united for a mere forty years, but buoyed by sensationally rapid industrial development and possessed, by consensus, of Europe’s most effective army, seemed destined for world-power status. Nevertheless, the scene on Unter den Linden is a relaxed one. In the picture it is summer. Dapperly dressed flâneurs and their ladies saunter along the leafy boulevard or disport themselves on benches. To use a classical comparison, this city looks like Athens, not Sparta. The time, according to the public clock, is half past noon.

Across the wide street, for 200 years Berlin’s most glamorous thoroughfare, we see Café Bauer, the best known of the Viennese-style coffee houses that had gained in popularity towards the end of the nineteenth century. Perhaps the café is the true target of the photographer, rather than the elegant Berliners who people the foreground. This may even be a publicity shot – the Bauer family had recently sold their establishment to a large catering company – which is why it has been preserved and immortalised in a commercial postcard and why the street, the café, and even the human beings in the image look their very best. All the same, the air of prosperity, stability and optimism that permeates the scene is convincing. These are, by the look of them, enviable human beings living in an enviable city in an enviable country, at a time when Germany was continental Europe’s most powerful and efficient country, and Europe itself still ruled the world.

That world was, as we now know, approaching its end. Soon it would be gone for ever. Astonishingly, considering how favourable the fundamentals of the country seemed at that juncture, this was the last time until well into the latter half of the twentieth century that Germany would be simultaneously fully solvent, fully employed and fully at peace.

Four years later, in much the same season, the flâneurs had gone. In their place, crowds thronged to watch young Berliners parade, smartly dressed this time not in elegant summer suits but in field-grey uniforms and spiked helmets, off to war. At the end of July 1914, the latest in a series of diplomatic crises – in this case arising out of the assassination of the heir to the Austro-Hungarian imperial throne by Serb nationalists – had finally tipped Europe over the edge. The interlocking mechanism of alliances and their concomitant military imperatives had turned a regional problem into a continent-wide conflagration. This was a war that seemed to promise much for the Kaiser’s Germany but would end instead in military defeat, human catastrophe and economic ruin.

Such a terrible outcome must have seemed inconceivable to the vast majority of Wilhelm II’s subjects. As she entered the war, Germany appeared to be blessed with great strengths. The Reich boasted rich iron and coal deposits (much of it in areas annexed from France in 1871), a booming industrial base, a skilled and industrious population of some 68 million, and, of course, a feared and admired military machine. Even before general mobilisation, the German army disposed of half a million men under arms. Millions more trained former conscripts could be – and were – summoned to the colours within weeks and distributed to the various fronts by way of an efficient Germany-wide railway system that had been adapted and extended with precisely such military needs in mind.

Every German knew these things. What most did not realise was that she also suffered from weaknesses, weaknesses that her enemies were either spared, or shared only in part. First, Germany was tied to the moribund Austro-Hungarian Empire, whose gilded façade concealed a snake-pit of warring nationalities, and whose frantic attempts to hold on to its recently acquired Balkan territories had caused the war in the first place. In her alliance with Austria-Hungary, Germany was, as the saying in Berlin went, ‘shackled to a corpse’. Second, despite frantic attempts to build a German navy to rival Britain’s, the Reich and her allies, known collectively as ‘the Central Powers’, were essentially landlocked, susceptible to a British sea blockade that would gradually reduce their populations to a state of semi-starvation. And third, for all her confidence and martial excellence, in the final analysis Imperial Germany was short of the money she would need to fight this war, and more lacking still in ways of acquiring it.

Those who controlled the Reich’s finances were well aware of the problems that would arise if the country undertook a major war against the ‘Triple Entente’ of France, Russia and Britain. So far as such a conflict’s military side was concerned, the Imperial General Staff had a scheme to deal with this by means of a massive, no-holds-barred attack through neutral Belgium against France, delivering a swift knockout blow that would enable Germany to turn its full strength quickly against the ‘Russian steamroller’ to the east. The original plan had been developed almost ten years earlier under the late Chief of the Prussian General Staff, Field Marshal Count Alfred von Schlieffen, and though it had been modified since, in the history books it still bears his name. Likewise, the financial mandarins at the Reichsbank in Berlin – founded after German reunification in 1871 to manage the value and volume of the new nation’s currency – had reacted to the increasingly unsettled international scene by developing a secret blueprint that would enable the country to rise above its financial limitations for the duration.

Of course, like all the major powers that went to war in the summer of 1914, Germany believed that, if she had to fight, she would win quickly. So, any radical measures taken to secure the financial sinews of war would, it was thought, be pretty short term in nature.

The planners’ way of thinking seemed justified by past events. During the hundred years since the twenty-year struggle against Napoleon had been decided at the Battle of Waterloo, Prussia and its German allies had needed to fight no war longer than a few months in duration. Two out of the three wars that Otto von Bismarck, Chancellor of German unification, had won during the forced march to nationhood (against Denmark and against Austria) lasted a matter of weeks. Even the third, the defeat of France, though dragged out to six months, from the outbreak of war on 19 July 1870 to the formal surrender of Paris on 28 January 1871, had been all but decided from a military point of view by the second week of September.

Just as the Schlieffen Plan was put into action by the Imperial General Staff (in an arguably fatally modified form) during the last days of July and first days of August 1914, so the men who ran the Reichsbank set in motion the modifications of the banking and currency system that would make it possible, they hoped, for Germany to survive the breakdown of the hitherto extremely open global economy for long enough to win the war.

The first part of this financial plan of campaign involved abandoning the gold standard.

For decades, the routine convertibility of Germany’s paper currency – two-thirds of the money in circulation by July 1914 – into solid gold (or silver) coinage had meant that notes were not money in themselves but, because exchangeable, represented real and constant (precious metal) value. And, indeed, the amount of paper money issued could, by law, never exceed two-thirds of the money in circulation. The remaining one-third had to be backed directly by gold. This was the promise, so the theory went, that for the previous forty years had kept the value of the German currency, like those of other major countries before 1914, concrete and graspable.

Exactly why the Reichsbank’s drastic step away from the gold standard was necessary would have been clear to any interested observer who, as Europe teetered on the edge of war, had found themselves at No. 34–38 Jägerstrasse. Here, hard by the historic Gendarmenmarkt in the heart of Berlin, stood the Reichsbank’s imposing neo-classical head offices. Concerned citizens, alarmed by the headlines in the newspapers during the first part of July, had begun to form lines at the doors of the country’s private banks, and finally at the Reichsbank itself, which was also a retail bank, though a very privileged and special one. The threat of war had revived old anxieties about paper money, inspired a desire for the tangible, the immutable. They wanted to exchange their mark notes for gold and silver coins, those ancient, reliable stores of value.

With war on the near horizon, Hans Peter Hanssen, a member of the German Reichstag, finished a meal in a Berlin restaurant. He offered the waiter a hundred-mark note in payment. The waiter refused it. Everyone, he said, seemed to be paying in notes and wanting coins in return. The next day, in another restaurant, Hanssen tried to pay with a twenty-mark note. The waiter, like his colleague the previous day, was displeased, but went off to look for change. He came back fifteen minutes later, empty-handed. The restaurant had run out of coins. Hanssen was forced to ask for credit.
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Despite attempts by the government-guided press to convince them of the solidity of the everyday currency, many Germans suddenly didn’t trust paper any more. They wanted the security of the gold that the currency was alleged to represent. In the first weeks of July, around 163 million gold marks
*
were redeemed from German banks and stuffed under the nation’s collective mattress.
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On Friday 31 July 1914, the doors of the Reichsbank were closed (private banks had already stopped exchanging currency for gold three days earlier) and they did not reopen until the following Tuesday – by which time there was no point in demanding gold for your paper money, because the bank would not give you any. On 4 August a raft of emergency currency and financial laws formally declared the convertibility on demand of paper money to gold suspended for the duration of the conflict. It was at this point, actually, that the term ‘gold mark’ came into usage, referring to the actual gold coin worth, by metal weight, either five, ten or twenty marks. There were also one-, two-, three- and five-mark coins struck from 900/1000 silver, and their convertibility was suspended as well. After all, until then all notes had been convertible, merely representing a gold value, so there were only ‘marks’.

Paper currency – fiat money, it has often been called – now rapidly became the only currency in circulation. Gold coins, from now on, were either hoarded by individuals, therefore being removed from circulation, or became the property of the government, which was from the start keen to persuade an often reluctant populace to hand over whatever gold it still had, whether in the form of money or valuables. Gold represented, to the German government, something they could trade internationally, for precious militarily important minerals and products that had to be purchased abroad. Most important of all, under the Loan Bureau Law (
Darlehenskassengesetz
) that had also been included among the 4 August measures, the more gold the government had in its vaults, the more paper money it could issue while still maintaining the all-important appearance of a gold-backed currency.

The problem was that, although the Reichsbank knew that 5 billion gold marks were in circulation at the outbreak of war, even by the end of 1914, after several months of an intensive propaganda campaign to persuade citizens to exchange gold for paper (‘gold for the Fatherland!’), it held only 2 billion of that total. Although all over the country patriots had obediently given up their gold and silver coins, many other Germans – especially in rural areas – proved immune to patriotic blandishments. They held on to the value they knew they could rely on, whatever the outcome of the developing European catastrophe. Somewhere, a lot of gold and silver was being hoarded.