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Worthless Paper Money - German Hyper-Inflation Starts After WW1 I THE GREAT WAR 1921 - YouTube
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Itâs October 1921, and Germany is in crisis:
Upper Silesia is about to be divided with
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Poland, and the German Mark begins to free
fall.
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Hi, Iâm Jesse Alexander and welcome to The
Great War.
[37]
The German republic that emerged from the
November 1918 revolution faced crisis after
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crisis in its first few years.
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There were uprisings from the left, coup attempts
from the right, and political assassinations
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by fanatical nationalists.
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The Versailles Peace Treaty also imposed Allied
occupation of the Rhineland, disarmament,
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war reparations payments, and territorial
losses.
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On top of all that, the economy had crashed.
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In todayâs episode weâll take a closer
look at two aspects of the Weimar Republicâs
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troubles in 1921: the beginning of the worldâs
most famous case of hyperinflation, and the
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division of Upper Silesia with Poland â and
it all happened exactly 100 years ago.
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Before the outbreak of the First World War
in 1914 the German Mark was considered a stable
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and trusted currency backed by Germanyâs
growing economic power.
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The strains of total war however, drove down
its value and by 1918 the Mark lost half its
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value.
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The Imperial German government chose to stop
backing its bank notes with gold and instead
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created new credit institutes and printed
more money to finance the war.
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One of the flaws in this system was that people
ad companies could take out almost unlimited
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credit.
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Germany could have tried to combat wartime
inflation by raising taxes, but this might
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have had a negative effect on morale.
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Instead they tried to raise funds with war
bonds which allowed German citizens to lend
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money to the state.
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But the financial deficits caused by the war
could not be made up by the sale of war bonds,
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and the money presses kept on running.
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By 1917, the amount of money circulating in
Germany was 5-times higher than it had been
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in 1913.
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Banker and outspoken critic of the reparations
Hjalmar Schacht later reflected on the problem:
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âOne war bond after another turned most
of German private wealth into paper obligations
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for the state.
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Our enemies, especially England, chose another
path.
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They financed the war through taxes which
mostly impacted industries and groups who
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profited from the war.
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English tax policy proved to be more socially
just than the German policy of war bonds,
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which lost their value after the war.â
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(Fergusson 44)
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In August 1921 the Vossische Zeitung explained
what happened to its readers:
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â[âŠ] the reason for the devaluation of
our currency and loss of purchasing power
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of the Mark was neither the balance of trade
during the war nor our military situation
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abroad.
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It was rather the exploitation of our currency
for the purpose of creating money for the
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[government] by a fictional increase in our
total revenue.
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The country [âŠ] constantly created new paper
money and new wealth on paper, while the real
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national wealth was continuously eaten up
by the war.â
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(Fergusson 46)
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Once the German Empire collapsed and the armistice
was signed in November 1918, the financial
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bubble burst.
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In fact even a few days before that, on November
7, one of the first mass demonstrations in
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Munich was caused by an increase in the price
of beer by 6 pfennigs per litre.
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This was a sign that the population was already
reaching the breaking point from losing their
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purchasing power.
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The post-armistice political and economic
crisis only accelerated the devaluation of
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the Mark.
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German exports were handicapped by the loss
of its colonies, the British blockade that
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lasted until mid-1919, the Allied occupation
of the Rhineland, and the loss of important
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industrial regions to Poland and France.
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Internally Germanyâs economy was paralysed
by revolution and counter-revolution, worker
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strikes, armed insurrections, and frequent
demonstrations.
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The Mark began to go into free fall.
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In 1913, 20 German Marks were worth 1 pound
sterling.
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In December 1918, it was 43:1.
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By December 1919, 185:1 - and that was just
the beginning.
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Meanwhile, living expenses had risen 8-fold
since 1913.
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It seemed to some observers that the German
republic was on the verge of bankruptcy.
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Another factor in the German crisis came to
a head in April 1921.
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The Allies presented the London Schedule of
Payments, the final war reparations bill they
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expected Germany would pay.
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The total, which the Germans had negotiated
down from previous offers, was 132 billion
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gold Marks payable in annual installments
of 2 billion plus 26% of the value of German
[349]
exports.
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If they defaulted the Allies could extend
their occupation and charge the Germans more.
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The announcement sent the Mark crashing again
â the exchange rate against the pound was
[362]
now 268:1.
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The crisis caused Chancellor Konstantin Fehrenbachâs
government to collapse.
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Itâs worth mentioning that the Republic
of Austria was experiencing an even worse
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case of inflation than Germany in 1921.
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Austria-Hungary had adopted a similar policy
of money-printing during the war, and the
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dismemberment of the Empire left the new Austrian
Republic an economic wreck.
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Austrian Anna Eisenmenger described the situation
in her diary:
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âWomen bought large quantities of sugar,
coffee, or other goods, to protect themselves
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against price increases.
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[âŠ] Others spent their money willy-nilly,
since the next day wine would be more expensive
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anyway!
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Prices rose by the hour, and people were possessed
by a buying maniaâŠstore owners reacted by
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giving any excuse to close their shops.â
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(Fergusson 149)
Similar scenes in Germany became much less
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common in the summer of 1921 as the Mark began
to stabilize, but was still worth far less
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than in 1918.
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So by 1921 postwar political instability and
economic dislocation in Germany had set in
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motion increasing inflation which had temporarily
calmed in the summer.
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One factor contributing to the stabilization
was the outcome of the plebiscite in the disputed
[449]
region of Upper Silesia.
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The ethnically-mixed province of Upper Silesia
was part of Germany that was now a disputed
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territory with neighbouring Poland.
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According to the terms of the peace settlement,
a vote was held â and 60% of Upper Silesians
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voted to stay with German rather than join
Poland.
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The Poles claimed the Germans had cheated,
but in any case the Allies were not legally
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bound by the results of the vote.
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Differences of opinion soon emerged between
the Allies as to where the border should be
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drawn.
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France wanted to favour Poland, while the
British were more concerned about preserving
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some of the regionâs important industry
so the German economy could recover.
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When it became clear that no compromise could
be reached without risking lasting damage
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to the alliance, France and Britain broke
off the talks.
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Meanwhile, a local proxy war had broken out
between pro-German and pro-Polish militias.
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Given the deadlock, the future of Upper Silesia
was handed over to the League of Nations.
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Neutral delegates from Belgium, China, Spain
and Brazil were selected to determine the
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border based on objective data â even though
the Germans protested they might be pro-French.
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After two months of deliberations, the League
experts made a recommendation, and the decision
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was announced on October 20, 1921.
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The new border left two thirds of Upper Silesia
in Germany and one third in Poland.
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Most of the industrial sector, coal and iron
ore mines went to Poland.
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Neither side was satisfied with the decision,
and Germany issued a note of protest.
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The French also protested on behalf of Poland
but the British refused further changes.
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The fighting in Silesia stopped.
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The council had prioritized economic factors
over historical, cultural ties and the local
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Silesian identity, The new border caused further
economic dislocation: workers could no longer
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reach their place of work, suppliers couldnât
reach their customers, and vice versa.
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Both sides predicted poverty and a rush of
unemployed emigrants.
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The German government and political parties
were outraged, and put little stock in Allied
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promises that minority and economic rights
would be protected on both sides.
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German Silesian and Centre Party politician
Carl Ulitzka expressed his anger to the Reichstag:
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âThe decision of the Inter-Allied Powers
presents itself as a serious, monstrous breach
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of the law, as a political double-cross, as
an unprecedented damage to the German nation.
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As an Upper Silesian I want to emphasize that
it is a mockery of the grandiosely announced
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and guaranteed right to self determination.â
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(Neubach 34)
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The loss of most of Upper Silesiaâs economic
potential was yet another blow to the German
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Mark.
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The government therefore decided to increase
taxes to fight the growing deficit.
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Regular German citizens in 1921 had to pay
four main taxes, the most important of which
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was income tax.
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The taxation system did not mix well with
high inflation.
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As the Mark lost value, the government printed
more money.
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But to regular Germans it was easy to see
that prices were going up, and harder to imagine
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an abstract loss of value for the currency.
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Furthermore, Salaries and wages rose artificially
to compensate, which meant many Germans now
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had to pay more income tax even though the
new money they earned had little value.
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For the government, it was not too difficult
to apply the higher tax rates to most of the
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population, but taxing wealthier Germans turned
out to be trickier.
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Although former Finance Minister Matthias
Erzberger had reformed the tax system, there
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were still quite a few loopholes.
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If there was one group of Germans to come
out of the Great War in a better economic
[708]
and social situation, it was private industry.
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Like every other belligerent, Germany had
relied on its chemists, engineers, and manufacturers
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to continue the war, which meant they made
financial gains.
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Now that the military had lost its leading
role in society, industrialists and factory
[728]
owners saw themselves as the new elite â and
like the officer class they replaced, they
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were often no friends of the republic.
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The Berliner Tageblatt reported on the ways
in which wealthy Germans avoided paying their
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share of the tax:
âThe business taxes bring nearly no income
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because any kind of expense can be written
off...including the cost of private cars for
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the company owner and directors.
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The respect for our taxes has fallen so low
that many hundreds of thousands of well-off
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citizens havenât even paid their taxes for
the year 1920.
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The entire tax system is a shaky house of
cards.â
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(Fergusson 96)
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Many wealthy German and foreign industrialists
even took things step further, and actively
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helped to destroy the Mark.
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They built up credit accounts abroad, where
the German tax authorities couldnât reach
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them.
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Often disguised via Dutch bank accounts, they
speculated against the Mark through foreign
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currencies like the Swiss Franc.
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Even less wealthy Germans began to avoid putting
their money in German banks and instead relied
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on private tax advisors to get them into the
foreign speculation market.
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British diplomat Joseph Addison commented
on the rampant speculation in September 1921:
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âThere is an enormous increase in speculative
activities.
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According to reports, millions of people in
this country are buying foreign currencies
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and stockpiling foreign bank notes to escape
taxation.
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I barely know any German, no matter their
gender, who doesnât speculate with currencies
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like the Austrian Krone, Polish Mark and even
the Kerenski-Rubel.â
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(Fergusson 89)
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Another technique to evade taxation was to
go on a spending spree.
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Wealthy Germans often threw expensive and
extravagant parties to reduce their taxable
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income.
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At the same time, unemployment numbers were
rising and workers became more and more frustrated.
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The political left hoped to use the situation
to its advantage, and organized demonstrations
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and strikes.
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Leftist tactics had the result of pitting
city workers against farmers and peasants,
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and putting the government under more pressure.
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The authorities feared the radical leftâs
calls for an end to capitalism and the possibility
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of more leftwing uprisings after those of
1919 and 1920, so they printed still more
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money to keep the peace.
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The ongoing collapse of the Mark was far more
than a crisis for economists and tax departments.
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For regular Germans, a stable currency represented
trust, stability and measurement of value
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in everyday life.
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The value of money guaranteed the value of
work, the hours spent in a factory each day,
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or the price of bread â not only today,
but tomorrow and the day after that.
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The absence of these guarantees ate away at
the social fabric of an already polarized
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and violent county.
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High inflation, capital flight, the devaluation
of the Mark, foreign speculation, and increasing
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state deficits all painted a bleak picture
of the German economy in 1921.
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The government was proving unable to regain
value through taxation, and simply continued
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to flood the market with fresh money.
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In October 1921, a high profile group of bankers
and financial experts from Switzerland, Italy
[950]
and Germany came together to discuss Germanyâs
inflation problem.
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Their conclusions were sobering: sooner or
later it would be impossible for the German
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republic to pay war reparations and keep the
domestic economy afloat.
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If the trends continued, eventually Germany
would have to declare bankruptcy â perhaps
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sooner rather than later.
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The German government owed payments of 113
Billion Marks due in February 1922, but its
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income was less than 90 Billion.
[987]
Few Germans could understand what was really
happening or see through this so-called âdelirium
[994]
of billionsâ anymore, even the experts.
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Minister Walter Rathenau was one of those
at a loss:
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âThe majority of statesmen and financiers
thinks only in terms of paper.
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They sit in their offices and stare at the
papers that lie before them.
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And on these papers there are numbers which
in turn represent paper.
[1016]
They write down zeros, although nine zeroes
mean a billion.
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A billion rolls easily off the tongue and
is easy to say, but no one can actually imagine
[1027]
a billion.
[1028]
What is a billion?
[1030]
Are there a billion leaves in a forest?
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Who knows?â
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(Ferguson 79)
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As Germany plunged further into the inflation
crisis in late 1921, Rathenau and millions
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of other desperate Germans could not know
that the worst was yet to come.
[1047]
The anti-Bolshevik peasant rebellions of the
Russian Civil War are a fascinating and overlooked
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topic that we are glad we can bring to you
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Iâm Jesse Alexander and this is The Great
War 1921, a production of Real Time History
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