The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class (30 page)

‘Have you heard?’ he asked, clearly bewildered. ‘Rathenau has been murdered.’ My father was equally stunned, in fact it was as if he had been struck by lightning. He declared it a terrible crime. The two neighbours discussed the event for another half an hour, and agreed that ‘this man’ was the only one who could have been trusted to ‘get the cart out of the mud’.
23

There was no doubt that the vast majority of Germans, except for the extreme right, experienced Rathenau’s assassination as an unequalled atrocity. Unlike the murdered Finance Minister Erzberger, who for all his talents had indulged in dubious dealings in both business and politics, Rathenau was obviously a paragon of competence and integrity and his death was a cruel blow to the young Republic.

Sebastian Haffner wrote, passionately but perhaps overenthusiastically, that ‘If we had called on those same masses on that day to put an end to those people - who at that time were called “reactionaries” but in truth were already Nazis - they would have done it without further ado, quickly, drastically, and thoroughly.’
24

The reactionary government in Bavaria immediately and predictably objected to the new laws, claiming they undermined its sovereign jurisdiction. The legislation, which finally completed its passage through the Reichstag a month after Rathenau’s death, fed a continuing crisis between the Reich government in Berlin and the increasingly separatist (and militantly right-wing) Bavarian government, which would drag on into the middle of the decade. In response, the defiant government in Munich actually passed a set of its own laws which, while reflecting the basic stipulations of the Reich government’s legislation, crucially undermined its effectiveness by transferring the power to prosecute and sentence from the Reich ‘State Court for the Protection of the Constitution’ to higher Bavarian courts (which were notoriously lacking in rigour when dealing with far-right criminals). The central government complained, but other than invade Bavaria there was little Berlin could do about it.

As for the killers of Rathenau, they were young former Freikorps volunteers, as were so many of the assassins involved in Organisation Consul. Twenty-three-year-old Erwin Kern, son of a Prussian civil servant and former wartime naval officer, at the time registered as a law student, had wielded the machine pistol. Hermann Fischer, son of a Professor of Fine Art from Dresden, aged twenty-six and a graduate in engineering, had also served at the front during the war. He tossed the grenade into Rathenau’s car.

The assassins had been forced to escape on foot after their car broke down, not far from the scene. After a failed attempt to catch a steamer to Sweden, they went on the run through northern and central Germany, sometimes sleeping rough, sometimes staying with sympathisers, staying one step ahead of the biggest manhunt Germany had ever seen and with a price of a million marks on their heads. They were run to ground on 17 July 1922, more than three weeks after the murder, at Burg Saaleck, a castle in Saxony-Anhalt about 230 kilometres south-east of Berlin, where they had been granted refuge by an Organisation Consul supporter. Betrayed by local peasants – the reward for their capture had meanwhile risen, through public subscription, to 4 million marks – they were besieged by local police. Kern was killed in the ensuing shoot-out, while Fischer, having first arranged his comrade’s body in what he perceived to be a more dignified position, took his own life to avoid arrest.

In the end some thirteen young men, from impeccably respectable backgrounds, were tried for their involvement in Rathenau’s murder. Their number included Ernst von Salomon, son of a senior police official, who would much later become a well-known writer and pacifist, and the driver of the car used in the murder, twenty-year-old Ernst Werner Techow, who came from a well-connected Berlin legal family and whose father held a high position in the capital’s administration. They were tried by the ‘Court for the Protection of the Republic’, and given relatively severe sentences compared with those usually inflicted on nationalist conspirators by the Weimar courts, who were notoriously ‘blind in the right eye’.
25
Techow narrowly escaped the death sentence by making a last-minute confession, and was possibly helped by the publication of an extraordinarily forgiving letter of sympathy written by Rathenau’s mother to his. The two women were apparently mutually acquainted from the pre-war Berlin social scene.
26

Chancellor Wirth, who had served as his own Foreign Minister until Rathenau was appointed in January, took the helm of foreign affairs once more. His government limped on.

Footnotes

*
Black was the colour of the Catholic Centre Party.

*
Essentially this meant that the government could no longer force the Reichsbank to print money.

*
Literally, ‘dog’s throat’. At the time a forested area near the south of the Königsallee with a famous hunting lodge of the same name.

16
Fear

On the front page of the
Vossische Zeitung
(‘Evening Edition’) of 24 June 1922, beneath the banner headline, the first, slightly garbled reports of Rathenau’s murder, and early details of arrangements for a service of mourning at the Reichstag, a final sub-headline inevitably read: ‘Effect on the Exchange - Dollar reaches 355’.

The rate moved to 402 on 1 July. By the end of July it was 670. There was worse - much worse - to come. Economic fundamentals apart, a country whose finest political minds are regularly murdered does not find it easy to inspire confidence in the rest of the world.

Ominously, with no indication of a recovery in the mark’s value for the foreseeable future, the ‘inflation mentality’ had now finally begun to take a grip on the German population.

Expectations of price rises were becoming built into the system. Until this year, domestic prices had lagged behind the exchange rate, meaning that foreign money, changed into marks and quickly put to work, bought goods, assets and services inside Germany at bargain prices.

Now, with merchants, workers and officials alike all moving quickly to adjust wages and prices, many prices in Germany rose more or less instantly. In the civil service, at national, state and municipal levels, and in the state-owned railways and post office, unions were demanding regular supplements in wages and salaries to compensate for price increases. In tune with the principle of social peace at any price, the government, the states and the cities were, moreover, granting them.

All this meant a further steep increase in the printing of money. In the private sector, businesses had become accustomed to frequent wage rises, paid for by price hikes to consumers. In dealings between businesses, pricing had become subject to sliding scales, causing much bitterness among customers who, given the time elapsing between contract and delivery, ended up paying much more than the original agreed cost for goods and services.

The external mark advantage had diminished, and with it a lot of Germany’s recent competitive edge in world markets. The inflation was losing what benefits it had hitherto conferred on Germany, but the government was terrified of the economic and social (which meant ultimately political) price to be paid for stabilising the currency.

‘Germans,’ as one leading economic historian has put it,

were now living in fear of both the depreciation and appreciation of the mark. The former was causing prices to skyrocket so that . . . the workers themselves did not know what kind of wage increases to ask for, and the employers, who were fleeing from the marks into goods and engaging in hectic activity, had no choice but to give in. The public appeared totally surprised by the suddenness and rapidity of the latest depreciation. At the same time, everyone was fearful that domestic prices were beginning to reach world-market levels and that the entire inflation boom would collapse.
1

Foreigners understood the changed situation only too well. Attempts to support the mark through action by the German authorities on the currency exchange markets had enjoyed only very limited success before 24 June.
2
With Rathenau, at this time the one German political figure of real international status, cruelly removed from the scene, there was little to stop panic taking over. Ludwig Bendix, an American-based German-born financial expert close to the German government, reported from New York on 3 July: ‘While the standing German offer of marks, relatively speaking, found willing acceptance until the middle of last month, there has been a complete absence of any demand for German currency since that time. With this has been lost an important support which the mark had previously enjoyed.’
3

Shreds of foreign confidence had survived into 1922. Now, with the formerly proud, orderly Germany increasingly beginning to resemble a Banana Republic – a term that at the time had existed for around twenty years, used to describe violent, unstable Latin American states, often with unsound currencies – it was not surprising that the mark was finding fewer and fewer takers.

The hitherto ever-refreshing financial spigot of foreign speculative inflow had finally been turned off. As Georg Bernhard, a leading economic commentator and, as editor of the
Vossische Zeitung
, reputed to be one of the highest paid journalists in the world, said on 14 July 1922, ‘We face a situation in which there is only one source of money in Germany left, and that is the Reichsbank.’
4

The Reichsbank duly continued accepting the vast flow of government Treasury notes, although now no longer constrained to do so, and despite the fact that they were becoming ever harder to place with investors. It also went on extending credit to industry, all the time printing money in order to do these things. The amount of domestic bills and cheques held by the Reichsbank had increased sevenfold between the end of December 1921 and the end of July 1922, from 922 million to 6.58 billion.
5

The British and the Americans seem to have begun to accept, by this point, the German argument that she desperately needed further moderation of the reparations terms in order to avoid national bankruptcy.
6
Not so the French. Combined with a renewed surge in capital flight from Germany into safer jurisdictions abroad, nothing about the increasingly chaotic financial situation seemed calculated to convince the ever-suspicious Poincaré that the German government was not cheating. He believed that Germany was not really unable to meet her reparations bill but was deliberately simulating ruin in order to avoid paying France the money she still owed her. So was this a question of can’t pay, or won’t pay? The French preferred to assume the latter.

Perhaps it didn’t matter now. In any case, the process had acquired its own momentum. With the mark losing value by the week, Germans now wanted foreign currency not so much to pay reparations or to buy goods from abroad but as a way to secure a safe store of value and a steady means of exchange. State Secretary Hirsch, as usual, had spotted the trend at the beginning of July 1922.

Hirsch attributed the decisive role to ‘pessimism’ and came to the conclusion, especially after reports from New York showing very little speculative activity against the mark there, that the depreciation’s ‘single truly permanent source’ lay in Germany itself. The huge demand for foreign currency in Germany was no longer a result of what it needed to pay abroad but, rather, of the demand for foreign currency in internal transactions. Like the increasingly unmarketable Reich Treasury notes which were backing up on the Reichsbank, so the entire inflation was backing up on the German people themselves.
7

All the fatal symptoms were starting to show. In the course of July 1922, prices inside Germany rose 50 per cent, month on month – the generally accepted definition of hyperinflation.

17
Losers

The Germany of the inflation was paradise for anyone who owed money. Times were good for highly leveraged businessmen like Hugo Stinnes, for mortgage holders whose contracted payments were shrinking by the month and even the week, and for anyone agile enough to move between money and goods – those magic ‘material assets’ – and back as required, especially if they also had access to foreign currencies.

By the same token, this was a very bad time for creditors of all kinds, for savers, and for investors depending on a fixed return. That meant large numbers of the old German middle and upper middle classes suffered a drastic, even catastrophic, fall in their standard of living. If the inflation in Weimar Germany brought about a social revolution in the country, it was these people who came off worse in the great re-arrangement.

Looking at the situation of the manual workers, to use a shorthand term for those paid weekly, although wages remained on average lower than before the war, they had benefited from the shorter working hours and more job security after the revolution. During the early post-war years it seems that for the most part, despite the odd wobble, they survived and in some cases even (relatively speaking) prospered. This was especially true if they were unionised. A section of the poorest, however, found themselves in a far worse situation than before the war.

Pensioners, theoretically quite generously provided for in Weimar Germany compared with elsewhere in Europe, also suffered badly from the inflation, though the state tried to make regular compensation for price increases.