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The Treaty of Versailles and Subsequent Hyperinflation in Germany: Finding the Culprit (continued) During the lamentable months of 1923, half-starved Germans meandered around the streets studded with disabled beggars, while the more fortunate engaged in gambling, dancing, drinking, and debauchery as a reaction to the past and the anxieties of the future. The birth rate plunged, and death and abortion increased, along with tuberculosis and rickets from malnutrition. Landlords sold their possessions for food and the bourgeoisie lost the value of their life savings and income, as speculators and businessmen profited from the cheap credit by buying factories and creating industrial connections. The initial knee-jerk reaction of the German population was the blame the appalling conditions on the severity of the Versailles Treaty and the callousness of the Allies, especially the ruthless French, who wanted nothing better than to bleed Germany dry and trample on her corpse. However, the quagmire is more properly attributed to her incompetent financial administration before and during the war, the emotional revulsion of assuming responsibility for the war and consequent reparations, the negative political trends which considerably undermined the German spirit, miscommunication and misinterpretation, the lack of incentive to pay indemnities, and her inexperienced post-war government, plagued by internal separatism and political fiascoes. The troubles dawned upon the ratification of the War Finance Laws of August 1914, as Germany geared for an impending war which most politicians and analysts predicted would be short. At that time, the President of the Reichsbank, Rudolf von Havenstein, considered extensive coinage circulation dangerous for financial mobility and encouraged through education and propaganda the use of paper notes and non-cash transactions. The Reichstag suspended all restrictions on the production of notes lacking basis in gold. On August 4, 1914, the Loan Bureau Law established a parallel loan bureau system that was authorized to issue notes in exchange for gold and war bonds, with a note issuance ceiling of 1.5 billion marks, which could be adjusted at any time. To sponsor the war effort, the German government relied heavily on domestic war loans, which they anticipated would accelerate the accumulation of funds and reduce civilian resistance. The above factors contributed to a 50% increase in the amount of notes in circulation between 1913 and 1917. In short, whenever the German government needed money, it turned to the printing press. In 1915, the government began to recognize the depreciation of the mark, and authorized specialist Julius Hirsch of the War Food Office to set national price guidelines. This “suppressed inflation” justified lower wages and encouraged savings, but it had a decidedly negative impact: there were no price incentives, resulting in lowered agricultural investments, a decreasing quality of food, and the rise of the black market. By 1917, the price control was still stubbornly unyielding of any ameliorative effects on the value of the mark. Also, the wage-price spiral, where enormous government production demands were coupled with labor shortages, relentlessly drove inflation. As critic Franz Eulenberg observed: [a war economy] is only possible for a certain amount of time and threatens to come to an end because of its own exhaustion. ... [inflation is] merely the external expression of the self-generated purchasing power and demand produced through the Reich through its credit ...14  
Copyright ©2001-2003, Allegra H., all rights reserved. Please contact me via e-mail if you wish to reproduce this material.
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