The First World War left the economies of the major belligerents in ruins. With the exception of the United States, which lent billions to the British and French war efforts, the European powers confronted depression, unemployment and general misery after the fighting stopped. The victorious Allies were not in a generous – or forgiving – mood, and the terms imposed on Germany under the Treaty of Versailles would prove calamitous to the newly founded Weimar Republic. Born of a traumatic defeat, the German republic would be besieged by political polarisation and runaway inflation that would fuel the rise of Nazism.
In The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class, historian Frederick Taylor tells the story of these volatile years with keen insight. “Nine decades ago, the most populous, technologically advanced and industrious country in continental Europe had suffered a terrible reversal of fortune,” the author writes. ”Germany had fought and lost a great war that cost her two million young men dead, large chunks of territory and vast amounts of treasure. Vengeful enemies had declared their intention to make Germany pay, not just for her own expenses of that war, but for theirs too.”
The terms the Allied inflicted on Germany were certainly harsh – loss of economically vital territory, which amounted to 13 per cent of Germany’s total land area, 10 per cent of her population, a punitive reparations bill, and the acceptance of full blame for causing the war. (The infamous “war-guilt” clause provoked outrage all across the German political spectrum.) Harsh Allied demands would play their part in deranging the German economy. Yet Taylor shows that the roots of the calamitous inflation that would destroy so many lives had its roots in the way Germany financed its war effort, and in the ways it handled its post-war problems.
To fight the war, Germany resorted to borrowing, and suspending the mark’s convertibility to gold. With every expectation of victory – and the spoils that would go along with it – the government assured its citizens that paper money was every bit as good as the gold that once backed it. It was a risky bet that failed badly. Defeated in war, the German government was left drowning in internal debt. Reparations would add to the economic pressures facing the German nation.
Taylor’s appraisal of the situation is measured: “The terms imposed on Germany, if not ruinous, presented a great amount of added economic suffering and consequent political instability in a country that had already run up vast internal debt, and considerable external, debts to pay for the war.”
Still, Germany, though defanged as a military power, emerged from the war as the second-largest economic power in the world. Unemployment remained relatively low. There was even something of an economic boom between 1919 and 1921. The great battles of the war occurred on Belgian and French soil – German infrastructure saw little damage, and industry was poised to rebound. There was great potential for reasonable economic recovery. But the political situation was grave. The far left and far right battled each other in the streets. 1919 was a year of uprisings. The communists tried to take Berlin; Rosa Luxemberg was murdered by right-wing thugs. In Munich, militants declared a “Bavarian Soviet Republic”, which was then violently suppressed. The city would quickly become a hotbed of far-right activity. Here, a young Austrian corporal, who served with distinction on the Western Front, would first make his name: Adolf Hitler.
The violence that rent Germany prompted the leaders of the German Republic to seek social peace at nearly any price. This meant ignoring the inflationary pressures that began to spin out of control in 1921. As Taylor argues, up to a point, Germany had some control of its financial fate, and might have avoided disaster. The reparations bill, however, tipped the balance. In May of 1921, the Allies met in London to tote up the bill – it amounted to 132 billion gold marks.
As Taylor explains, Germany found itself in the middle of a debt merry-go-round. The US had lent the Allies billions, and expected repayment. In turn, Britain, France and Belgium, which had suffered enormous losses during German occupation, financed their debt obligations by footing Germany with the bill. Staggering as this sum was, it was actually a reduced figure. But the German government, “keen to exaggerate the impossible economic burden of the demand as part of its long-term plan to avoid payment”, howled in protest. Now, it is Germany who wags its finger at Greece and Spain, demanding economic fixes; in the early 1920s, it was Germany which was being lectured at.
The mark went into a free-fall. Between October 1921 and December 1923, the mark to the dollar rate zoomed from 150.20 to 4,200,000,000,000. There were winners and losers in such economic conditions. Debtors faired quite well, as did anyone who played the foreign currency markets. Savers and creditors faired poorly. The stratum of the educated bourgeois classes – academics, lawyers, civil servants – known as the Bildungsbürgertum – was devastated by hyperinflation. The decline of the mark obliterated their fixed-rate investments and exerted a “wholly ruinous and politically toxic effect”. The republic made little effort to check such developments.
“In Berlin, the new republican government made no attempt to protect the prudent bond holder and the saver, as occurred in France and Britain. It continued, motivated both by inclination and perceived necessity, to favour both the earning and spending industrial workforce, and to support jobs at all costs, including jobs in the bloated state sector. After all, the welfare of the masses was both the German Republic’s raison d’être and its existential insurance policy.”
The Downfall of Money is spiced with diary entries, newspaper reports and official correspondence. Taylor relates astonishing anecdotes from daily life during the hyperinflation. Money became, quite literally, worthless. Useless paper notes were piled into heaps just to buy basic items such as bread. In early 1923, a correspondent from the Manchester Guardian reported the following: “There is a current story in Berlin of a woman who went shopping with a basket to carry her paper money. She put it down for a minute, and on looking around she found that the basket had been stolen – but the paper money left behind!” Another story circulated about a man who went to a cafe and paid 1,000 marks for a coffee; he read his newspaper and ordered another. When the waiter presented the bill, it was for 2,500 marks – between cups, the price had gone up 50 per cent.
To make due, many urban Germans became foragers, journeying to the countryside to try to round up basic foodstuffs. Members of the benighted middle classes brought heirlooms to showrooms, “where whoever had the money could bid for them”. It was a grim spectacle. “There is some old piece, a picture, a porcelain cast, which appears to the loving but unskilled eye of the owner as a true rarity and who, if she must part with it, wants to receive as much as possible,” observed a reporter. “One now has to tell her that it has neither material nor artistic value, and the sick embittered souls are always inclined to take this as a personal affront and bad will.” Such embittered souls formed the core of the Nazi movement, which began its rise in the 1920s. “Hyperinflation in the early 1920s had nurtured the seed of Nazism,” Taylor writes. “A decade later, depression – accompanied by what might be called hyperausterity – brought the toxic plant into fruit.” However, as Taylor argues, other countries also suffered from post-war inflation – Britain, for example – and survived intact. Indeed, inflation in Germany was “a harsh but more-or-less bearable experience for many, even most, Germans”.
The aggrieved members of the Bildungsbürgertum “passed an understandable and seemingly indelible sense of loss, grievance and injustice on to new generations”. The experiences of this class within a class were transformed into a “unique consensus of universal national catastrophe”, one that would have dire consequences for European history.
Matthew Price’s writing has been published in Bookforum, the Los Angeles Times, The Boston Globe and the Financial Times.