Great Inflation Essays - Reparations, Inflation, Weimar Culture

Great Inflation annon In late-1922 the German government were forced to ask the Allies for a moratorium on reparations payments; this was refused, and she then defaulted on shipments of both coal and timber to France. By January of the following year, French and Belgian troops had entered and occupied the Ruhr. The German people, perhaps for the first time since 1914, united behind their government, and passive resistance to the occupying troops was ordered. A government-funded strike began as thousands of workers marched out of their factories and steel works. The German economy, already under massive pressure, gave way. The huge cost of funding the strike in the Ruhr and the costs of imports to meet basic consumer needs were met by the familiar expedient of the printing pre sses. Note circulation increased rapidly, and by November 1923 had reached almost 92 trillion marks. With less than three per cent of government expenditure being met from income and with the cost of one dollar at four billion marks, Germany was in the th roes of economic and social chaos. Starvation became a reality for millions of people, despite a bumper cereal harvest, as shops reverted to the barter system. Farmers refused to accept the effectively worthless, banknotes in exchange for grain, and food quickly began to run short in the cities. Prices rose one trillion-fold from their pre-war level. More importantly, for the long-term political future of Germany, the middle and working classes saw their savings wiped out. These were, in essence, the pe ople who were later to become the hard-core of the Nazi vote. Economists will argue that runaway hyperinflation has two sources. Firstly, it arises through a fall in the foreign exchange value of a currency, when an adverse balance of payments reduces foreign investors demand for the currency. A falling exchange rat e increases the cost of imports and, therefore, the cost of living. Wages rise as workers try to maintain their standard of living, especially if previous institutional arrangements have linked wages to living costs. Firms paying higher wages raise the pr ice of the goods they sell, prices rise still further, the foreign exchange value of the currency falls still more, and the cycle continues. Secondly, it arises through a large budget deficit which no one believes will narrow in the future. Faced with the prospect of budget deficits for many years to come, the usual sources of credit available to the government decline to make further loans; the government can no longer borrow to cover the deficit between revenue and expenditure. The only alternative is t o print more and more banknotes. As government workers and suppliers present their bills to the Treasury, it pays them off with newly-printed pieces of paper. This puts more banknotes into the hands of the public and they then spend them. In Germany, as we have seen, the problem was that there were trillions of marks worth of paper currency in circulation. Prices could rise one thousand times between a worker being paid and his reaching the shops. A common analogy used is that if one could afford a bottl e of wine today, one should keep the empty bottle which would be worth more tomorrow than the full bottle was today. Eventually, the power to boost government spending by printing money goes. When the government can no longer gain, even in the short-term, a budgetary balance through inflation, the situation becomes so intense that stabilisation through a currency board, a new finance minister or a link to the gold standard is implemented, and reform can be successful. It was at this point that some sanity was injected into the German economy by the election of Gustav Stresemann. He called a halt to resistance in the Ru hr, and set out to stabilise the mark. Luther, Stresemanns Finance Minister, introduced the rentenmark the value of which was based on Germanys staple, rye, rather than gold. In fact the rentenmark represented a mortgage on Germanys land and industry, which could never be redeemed. It did not matter. The point was that the currency was stabilised and became exchangeable at a rate of one billion old marks to one new mark, and at the pre-war parity of 4.2 marks to the dollar. The new currency was quickl y accepted by the population, and food and consumer goods began to appear in the shops. The government could now attempt to regain budgetary control in a climate of low inflation. The Dawes Plan was brokered, and a sum of some 39 billion dollars