The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class (3 page)

By 1915, the military conflict had settled into a bloody stalemate. German and Allied forces faced each other in the west across no-man’s-land, each huddled into networks of trenches running 700 kilometres from the Belgian coast to the Swiss border. Germany had not triumphed, as so many of her people had expected, but she remained well placed. She controlled all but a tiny strip of Belgian territory. The great cities of Brussels, Antwerp (the port captured in October after a costly siege lasting more than three months) and historic Bruges, and the country’s rich industrial and coal mining area including Charleroi, Namur and Liège, all lay in German hands. The same went for much of northern France, including the major textile-producing city of Lille with a pre-war population of half a million, which finally fell to the Germans in October after vicious to-and-fro fighting.

Although Paris was saved by the ‘Miracle of the Marne’, by the end of 1914 ten of the French Republic’s eighty-seven
départements
lay entirely or partly under German occupation. The more than 14,000 square miles of territory that for almost four years would remain behind the German lines included more than half of French coal mines, two-thirds of her textile manufacturing and 55 per cent of metallurgical production; altogether 20 per cent of the country’s gross domestic product.
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In short, France’s industrial heartland lay for most of the war in enemy hands. Although almost 2 million of the local population fled the German advance, that still left 2.25 million French citizens under an occupation that was to prove bleak, lonely and harsh – sometimes brutally so.
4

On the Eastern Front, after a brief Russian thrust into East Prussia in August 1914 was repulsed at the Battle of Tannenberg, Germany stabilised the general situation, regrouped, and after the war’s first winter began a slow but inexorable advance into the Baltic countries and Russian Poland. Most of the latter, including Warsaw, its capital, was conquered in the course of 1915.

While from a military point of view, at this stage of the war and for a long time to come, Germany still held many advantages, her financial outlook was not nearly so positive. So desperate did the government become to separate its citizens from their hoarded gold that schoolchildren were enlisted into the campaign to cajole adult family members, neighbours and acquaintances to the ‘gold exchange bureaux’, where helpful officials waited to relieve them of their all-too-solid wealth and swap it for paper. One propaganda pamphlet, ‘The Gold Seekers’, was aimed at children via their teachers. It told the fictional story of three teenage high-school (
Gymnasium
) students and their campaign to get a well-off local grain merchant, Herr Lehmann, to part with his gold hoard for the country’s good, so that paper money could be printed for the war effort on the back of the exchange. It went without saying that they would accuse him of being a ‘betrayer of the fatherland’ if he refused to do so.

Initially, Herr Lehmann was shown as resisting their pressure, and expressing scepticism that the Reichsbank would adhere to its side of the bargain by only printing paper money that was covered by the acquisition of gold such as his. After all, he craftily reminded them, though the law might prevent this at the moment, the law could be changed. But the imaginary youngsters were also prepared to do battle against Herr Lehmann’s financial arguments. One of them finally asked Lehmann if he would lend his own money to someone without the resources to repay him, even at a high interest rate. When the merchant said no, of course not, the young propagandist swooped:

Why does everyone take paper as readily as gold, although, for example, even a thousand mark bill is nothing more than a scrap of paper? Because he knows that the Reichsbank is in a position to give gold for it at any moment, because he knows he can count on the Reich. What would happen if the Reich began to print notes without paying attention to its gold stock? It would immediately suffer a loss of confidence. The notes would no longer be accepted, especially abroad, or if accepted, then it would be like those profiteers who supply 750 marks of goods for the 1000 marks you pay them. A mark would only be worth 75 pfennig abroad or, as one would say, the mark has a low value (exchange rate) . . .
5

The words put into the precocious boy’s mouth were meant to sound convincing and, according to the propaganda playbook, they finally convinced Herr Lehmann, too. The last bit about the Reich’s trustworthiness, the bit about how the Kaiser and his Reichsbank would never do anything that endangered the soundness of the currency and the welfare of ordinary Germans, must have done the trick. Unfortunately, it was precisely this part of the argument that was – let us not mince words – a lie.

The fact was that under the Loan Bureau Law of 4 August 1914, the Reichsbank was no longer, in practical terms, limited in its ability to print paper money by the amount of gold it held in its vaults. The Loan Bureau Law relieved the Reichsbank of the duty to provide credits to the individual German states and communities, as it would normally have done before the war. In place of these credits, the law set up a system of ‘loan bureaux’ – to be found, as it happened, in local branches or offices of the Reichsbank – which would provide nominally three-month (but in reality infinitely renewable) credits to these states and communities, backed by guarantees of either goods or securities. These acceptable securities included Treasury bills issued by the German states, some of them very small, and also, crucially, war bonds.

So far, so innocuous seeming. But there was a hook concealed within the stipulations of this so-called Loan Bureau Law. The Loan Bureaux were entitled to issue bureau notes. These bills, which, though not fully legal tender, had the status of currency, were almost universally accepted as such, and rapidly passed into general circulation alongside regular paper money issued by the Reichsbank. The notes would also, inevitably, fall into the hands of the Reichsbank. And when they did, unlike the various other quasi-official bills in circulation, under the Loan Bureau Law they acquired the status of proper money, or as the technical term goes, specie. They became capable, like gold coins held by the Reichsbank, of being used to generate three times their value in normal paper money. So, for instance, there was nothing to stop a state or community using war bonds as security to acquire loan bureau notes, which could then be used to buy more war bonds from the Reichsbank, which could then be used as security to buy more loan bureau notes . . . and so on. And each time, the Reichsbank would increase its ability to print money that could be funnelled into the war effort.

Admittedly, the law of 4 August limited the issue of loan bureau notes to 1.5 billion, but three months later, in November 1914, the ceiling was doubled to 3 billion to coincide with the first war bond drive. From then on, the ceiling was regularly raised. By the end of 1918, loan bureau notes with face value of a little over 15.5 billion marks were in circulation. More than a third of these were held by the Reichsbank, which could therefore legally print 15.7 billion fully legally valid marks on the base of this ‘security’, while still keeping up the façade of ‘sound’ money. Several German economists realised this and tried to protest. At least one had his article suppressed (written for publication in January 1915, it was not published until the war was over in order to ‘protect the public’), while another was told by the Reichsbank’s grandees that if he did not desist, they would be forced to ‘seek the assistance of the military authorities’.
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Herr Lehmann was therefore right in his first arguments, and wrong to have let those pesky kids persuade him to change his mind and exchange his gold for paper. Although a fictional character created for propaganda purposes by a writer doing the bidding of a government desperate for the wherewithal to wage war, the irascible old grain merchant represented millions of real Germans. They, too, would succumb to the blandishments of the official pamphleteers, the tub-thumping politicians and the patriotic press, not to mention the sellers of war bonds. They would give away their solid wealth in exchange for a mess of paper, so that Germany might triumph.

Within a few years, they would feel betrayed. Their patriotic pride would turn to anger; a slow-release anger that would fertilise a post-war harvest of intolerance and totalitarianism.

Footnotes

*
Roughly a billion and a half euros at 2011 values.

2
Loser Pays All

The civilian populations of all the countries involved in the First World War experienced hardship. There were shortages and anxieties, even for those not occupied by the enemy or living close to the fighting zones. All the millions of men who fought – and in huge numbers died – in the war had friends, families, relatives, many of whose waking (and perhaps also their dreaming) hours were filled with apprehension on their behalf. However, especially in Germany and Austria-Hungary, the physical conditions under which civilians lived on the home front while their menfolk fought and died in the trenches and battlefields far away were not merely difficult or austere; hunger stalked Europe from the Rhine to the Vistula, from the Skagerrak to the Danube.

On 1 August 1914, when Britain’s entry into the war was not yet certain, the German shipping journal
Hansa
had predicted that if she did join in on the side of Serbia, France and Russia, ‘economic life [would] suffer a collapse unprecedented in history’.
1
The author of that judgement was proved right within a matter of months. Despite the huge sums that Germany had spent on building up its naval strength, the Reich did not have the surface ships to challenge the Royal Navy and thus to make the trading routes safe for German imports and exports during wartime.

During the first months of the war, the British slowly tightened the screws on German trade by a series of restrictive measures, though these stopped short of a total, indiscriminate blockade. When, however, it became clear that the war was not going to be decided on the battlefield any time soon, the cabinet in London decided to step beyond the accepted rules of conflict. Exploiting the Germans’ declared intention in February 1915 to wage unrestricted submarine warfare against Entente shipping in the North Sea, the British initiated a total ban on imports and exports of all kinds, to and from the territories of the Central Powers, including food and other goods entering via neutral territories such as Holland and the Scandinavian countries. The measures were to be rigorously enforced by the Entente’s navies. On 1 March 1915, a British Order in Council declared ‘the British and French governments will hold themselves free to detain and take into port ships carrying goods of presumed enemy destination, ownership or origin’.
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For the remaining duration of the war, and for the months of armistice that followed, German overseas trade was confined to the Baltic and to occasional forays into the North Sea.

The Reich’s enemies knew perfectly well that before the war Germany had needed to import large quantities of food to supply her population. It became clear that the Entente’s (and especially Britain’s) intention was to bring about Germany’s defeat at least in part by a policy of deliberate starvation. The German civilian population was quite specifically targeted. As Britain’s most senior defence official, Maurice (later Lord) Hankey, asserted in a confidential memorandum from the summer of 1915, ‘Although we cannot hope to starve Germany out this year, the possibility that we may be able to do so next year cannot be dismissed . . .’
3

That the Entente blockade killed large numbers of Germans directly or indirectly, there can be little doubt. The suffering increased as the years went on. It was estimated that in 1915 some 88,000 German civilians died of causes attributable to the blockade, and in 1916 around 121,000. The months straddling 1916-17 were known as the ‘turnip winter’, because of the lack of protein and other vital foodstuffs available to the German population – especially in the country’s cities. By the end of the war the total number of victims was thought to have reached more than 760,000.
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In the city of Düsseldorf, in the northern Rhineland – its adult population a mix of white-collar officials and industrial workers – staples such as potatoes were often unavailable for months at a time.

In 1916, the shortage of fats began in earnest. Legumes such as lentils, barley and peas were available only rarely or not at all. By 1917, ‘war coffee’, which contained no real coffee at all, was the only kind for sale. The city officially allotted one egg to each adult every three weeks, but did not always have them to distribute. All kinds of cheese were scarce; dried fruit was not to be found. The only type of food available steadily in Düsseldorf was vegetables, and the kind and quantity depended on the season.
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By 1917 the diet of the average industrial worker in Düsseldorf compared very unfavourably, as regards both quantity and diversity, with that provided to an adult male in the pre-war poorhouse in the city of Hamburg.
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Germany’s inability to trade meaningfully also reflected her inability to participate in what was left of the global financial system. Britain and France could continue, to some extent, to import and export, and to raise money for the war through borrowing on the international markets. In the four years between 1914 and 1918, Britain earned £2.4 billion from shipping and other ‘invisible’ sources, sold £236 million of its foreign investments, and borrowed almost £1.3 billion abroad.
7
Before August 1914, Germany had held overseas investments of between £980 million and £1,370 million in countries with which she later found herself at war. At least 60 per cent of these were subjected to outright confiscation.
8
Moreover, unlike Germany, Britain and France remained in possession of large overseas empires. This meant that they could also make good any shortfalls in domestic food supplies, as well as calling on vast extra material resources and manpower.