The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class (18 page)

Wages and prices kept drifting upwards, despite the huge numbers of returned servicemen that the labour market was being forced to absorb.

One of the features of the Weimar Constitution, finally approved in August 1919, was a paragraph (§163) not only granting ‘the right to work’ but also a dole in case of involuntary unemployment:

Every German has the moral duty, without prejudice to his personal freedom, so to exercise his mental and physical strength as the welfare of all requires. Every German should be given the opportunity to earn his living through economic work. To the extent that appropriate job opportunities cannot be demonstrated, means will be provided for his necessary upkeep.
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Unemployment rose sharply between October 1918, the final month of full-scale war production, and January 1919. War contracts were cancelled or not renewed, and there were widespread shortages of coal and raw materials owing to chaotic circumstances in some of the industrial areas (Alsace-Lorraine and the Saar were occupied by the French, and there was fighting with the Poles in the important industrial region of Upper Silesia). The inevitable switch from turning out armaments and materiel of war back to making goods for civilian consumption, the production of which had diminished dramatically during the war years, had not yet begun.

However, in the period of slightly less than five months that passed between the opening of the National Assembly in Weimar at the beginning of February 1919 and the signing of the Versailles Treaty at the end of June 1919, the percentage of male unemployed (or, at least, the number of unemployed who were trade union members) fell from 6.2 to 2.8 per cent.
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These figures, though somewhat rosy due to under-reporting, showed a trend that was both undeniable and surprising.

Some of this reduction was achieved by a policy of dismissing female workers wherever possible and replacing them with men. As the war went on, and more male workers were conscripted to the front, women had, in fact, taken on industrial tasks that before 1914 few would have thought them capable of successfully performing. These included strenuous labouring jobs in the mines and steel smelters, and it is clear that they were reliable and hard-working (and generally accepted lower pay than men). This did not stop the authorities from insisting on their dismissal.

At Krupp in Essen, for instance, 52,000 workers were dismissed within weeks of the end of the fighting. Of those made unemployed, almost 30,000 were women, leaving just 500 still employed at the company. They were clearly, in many cases, reluctant to return to the old domestic life. A somewhat sheepish bureaucratic report admitted that the women were ‘diligent and skilful’ while ‘the men were more choosy’: ‘They [the men] refused to accept heavy or dirty work or left it after a short time. Thus it required especially vigorous measures to remove women from the coking plants, where they were employed at jobs completely unsuitable for them.’
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The apparently positive male employment picture was also due to widespread underemployment, whether this meant full-time workers doing relatively little or actual short-time working. A twenty-four-hour week was encouraged in the Demobilisation Decree as an alternative to dismissals of surplus workers.
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And the employers, many of whom had done very well out of the war, and whose sense of vulnerability in the new post-revolutionary state inclined them to a temporary generosity, could be persuaded to help. One report on army demobilisation stated that ‘the chief burden of the readjustment losses was borne by commerce and industry’, and went on:

The relatively good position of the labour market was only upheld by the fiction that industry could employ the larger portion of the workers. In actuality, this was impossible given the halved coal supply, the raw-materials shortage, the continuation of the blockade, the uncertainty of the situation. The cost of the transition, therefore, had to be covered by the reserves of industry. These were probably not small in the case of a large number of plants because of the wartime boom.
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It was also assumed, by most manufacturers, that they could pay the increased wages required to keep the industrial peace in these politically unstable times, and compensate by putting up the prices of the goods they sold – in other words, by feeding inflation.
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The government, while recognising the problems that rising prices brought, was so concerned with the simple demands of keeping order and feeding the population that it openly espoused a similar ‘pay-what-it-takes’ strategy. Once some food imports were permitted in the spring of 1919, it was clearly vital that the railways needed to be kept running in order to transport these essential supplies into the country. Without them, the labour force threatened to become too physically weak to keep the country’s mines working and her factories producing. However, in May, Germany’s railway workers – their numbers vastly inflated during the war years – went on strike for more pay.

During a crisis meeting at the Reich Food Ministry in Berlin on 5 May – two days before the shock announcement of the peace treaty terms at Versailles – the moderate Social Democratic Prussian Finance Minister, Albert Südekum, was brutally, and not especially elegantly, frank:

Every price and every kind of concession is justified to prevent the shutdown of railroad traffic in Prussia. What is not feasible through the ending of the inflation is feasible, and can be carried out, if work becomes possible as a result of improved provisioning with food. In this regard, there is no reason to consider the exchange rate, since every foreign merchant is really only influenced by his mistrust of the general conditions in Germany.
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In other words, inflation came a long way second to social peace. Social peace at, literally, any price.

But where was the Reich to get the money, when it was already almost 160 billion marks in debt as a direct result of war spending?

Erzberger’s revolutionary tax reforms constituted at least part of the answer. With the presentation of his programme in July 1919, he proposed to decisively assert the supremacy of the central Reich government in taxation matters and thus make possible, for the first time in German history, some kind of clear coincidence between the central government’s policies and the raising of the money required to carry them out.

The new Republic was still a federation, with large powers still reserved to the individual states – be they the enormous Prussia, with, at more than 40 million, two-thirds of the country’s population, or tiny Schaumburg-Lippe, with a mere 50,000 or so – but clearly no coherent management of the country’s finances was possible if the normal means of taxation were the preserve mainly, or even to a significant extent, of these historic (and stubbornly independent) entities.

The Reich took control of income tax, sales taxes, inheritance tax and land purchase taxes among others, and also empowered itself to enforce one-off emergency and windfall taxes on those perceived to be capable of paying them.

Compared with other countries, post-revolutionary Germany became a very highly taxed nation. Erzberger quite specifically targeted war profiteers and speculators, the kind of smartly dressed people that visitors to Berlin and other major cities saw stuffing themselves with black-market food in upmarket restaurants while the majority of Germans struggled to feed and clothe themselves. He provided the legal and administrative basis for the modern German tax system. However, he did not solve the government’s problems with debt and deficit.

Only inflation, as it turned out, could do that.

Erzberger set out his tax reforms before the National Assembly on 8 July 1919. The next day, 9 July, the Versailles treaty was ratified by 209 votes to 116. The tax reforms would be passed piecemeal in different legislative packages between September and the following March.

The bespectacled, overweight but infuriatingly cheerful and self-confident Finance Minister had presented his proposals with remarkable energy, clarity and determination. He immediately found himself (arguably, put himself) in the eye of a storm that saw a rising tide of rage on the nationalist right against the Versailles treaty and at the same time against the fiscal reforms. The new taxes would particularly affect the old landowning, industrialist and property-owning classes, from which the nationalist right drew a great deal of its support.

Erzberger was the man who had proposed the ‘Peace Without Annexations’ resolution in 1917, who in November 1918 had signed the scandalous armistice, who had, moreover, then openly preached acceptance of the
Schmachfrieden
(literally ‘shame peace’) of Versailles. Many held him responsible for weakening the Reich’s morale and its bargaining position in its hour of greatest need. Now he was also the man who demanded that the burden of tax on the less wealthy be moderated, while the classes that formed the backbone of Germany (certainly in their own view) should be hit harder in their tax liabilities. ‘Income from capital,’ Erzberger declared, ‘must bear a much greater share of the burden than income from labour.’
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But for what? To pay unjust reparations to the vengeful Allies! Thus, despite Erzberger’s protests that such sums would be ring-fenced, argued the resurgent nationalist right. And it was hard to deny their claim. Whatever the technicalities of what was collected and where it was supposedly spent, it was true that reparations amounted to ‘a tax collected from German citizens by the German government acting as the Allies’ fiscal agent’.
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The propaganda connection between the Republic, its new, more egalitarian tax system, and the national humiliation of Versailles was personified by Erzberger. He was a gift for the enemies of the treaty and of the Republic. Now that Liebknecht and Luxemburg had been killed, he in many ways became an even greater hate figure for the reactionary extremists than any other Weimar politician.

Especially unpopular among the anti-republican middle and upper classes was Erzberger’s so-called
Reichsnotopfer
(literally ‘Reich Emergency Sacrifice’ but perhaps better translated as ‘Emergency Capital Levy’), a one-off property tax levied on all individual citizens (it began at 10 per cent but rates from upwards of 7 million marks in taxable assets reached 65 per cent) or corporate entities of various kinds (levied at a flat 10 per cent), which became law in December 1919. The levy unleashed outrage even though it could be paid off in instalments (admittedly subject to interest) over a period of up to thirty years.

Erzberger’s reforms were courageous and necessary, they were passed by the National Assembly even in the face of the right’s vigorous opposition and they were implemented. However, they did not solve the country’s problems, though they may have prevented them from getting even worse.

Erzberger was nonetheless full of ideas to bring stability and what he considered fairness to Germany’s finances. Apart from the new taxes, and the rise in tax rates for the better off, he was also concerned to plug the widening hole in the national wealth created by capital flight. This was a process that increased in 1919 as wealthy German individuals and corporations, disturbed by the revolution, by the threat of high taxation and by the continuing slide in the value of the mark, began to place more and more of their money and assets abroad. Apart from tightening up the requirements for banks to report and explain foreign currency transactions, Erzberger had another part-answer to this: high-value banknotes and securities would be called in by the banks and overstamped or replaced with new paper; the old or unstamped ones would become invalid. This would inhibit capital flight, as well as forcing the peasant with the proverbial concealed stocking full of money to bring his hoard out into the light for inspection.
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The stubborn opposition of the Reichsbank, which viewed such a process as technically impracticable, would eventually result in Erzberger’s banknote-recall plan being reluctantly dropped, but in the meantime the idea was out in the public sphere and contributed to a further deterioration of the currency. The problem was that, while conversion of marks by Germans into foreign currency was a bad thing, because it meant that German wealth was leaving the country, the proposed remedy would also affect the existence of large and small holdings of marks by foreigners in other countries, which were actually a good thing – these holdings by foreigners served to buttress the external value of the currency and thereby contributed to keeping domestic inflation at bay. When, as a consequence of measures such as that proposed by Erzberger, foreigners started selling marks, because they were frightened that their holdings might suddenly become worthless, it undermined confidence in the German currency.

A respected Lübeck merchant, L. Possehl & Co., described this knotty problem to the Minister of Commerce in September 1919:

Foreign speculation in mark notes is our only salvation today given stagnating exports. It was our good fortune that every peasant in Denmark bought mark notes and securities in the hope that the value of the mark would go up again after peace was restored . . . The situation is similar in Sweden, where many large and small speculators took advantage of the low value of the mark to purchase it. All these people place their hopes in the arrival of normal conditions in Germany and then consider an increase in the exchange value of the mark to be self-understood . . . The rumours reaching Sweden that the mark notes would be stamped called forth a real panic . . . Even many northern banks had the idea that the bank notes in their possession could become worthless if they overlooked some formality. In any case, countless persons decided to free themselves from holdings which were threatened with confiscation and enormous holdings of marks were thrown onto the market.
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