Chapter 3 Flashcards
Effect of defeat on economic situation
Germany’s defeat plunged the finances of the state into crisis. For all the countries involved, the war effort required unprecedented levels of government spending. In Britain, this was financed through a combination of higher taxes and government borrowing. In Germany, however, wartime governments chose to finance the war through increased borrowing and by printing more money. This meant that government debt grew and the value of the currency fell. This highly risky strategy was based on a simple but flawed calculation - that Germany would win the war and would be able to recoup its losses by annexing the industrial areas of its defeated enemies and forcing them to pay heavy financial reparations. Defeat for Germany not only deprived the country of this repayment method, but also imposed a heavy burden of reparations and the loss of some industrial areas.
Dilema for the republic about tackling financial problems
In 1919, the new government of the Weimar Republic was faced with a debt of 1.44 billion marks. In situations where the national debt needs to be reduced, governments can either raise taxes or reduce spending, or they can do both. In the context of the political instability of the early years of the Weimar Republic, both of these policies carried serious risks. A rise in taxation would risk alienating support for the new republic as anti-republican parties would be able to claim that taxes were being raised to pay reparations to the Allies. It was also very difficult for governments to reduce spending.
Although military expenditure was dramatically reduced, there were civil servants to be paid. Support for the new republic was considered to be so fragile that successive governments avoided making civil servants redundant and even extended welfare benefits.
Debt in 1919
In 1919, the new government of the Weimar Republic was faced with a debt of 1.44 billion marks.
Why didn’t the government take unpopular measures? (2)
Given the severe political difficulties Germany faced in the immediate aftermath of war, it is hardly surprising that the governments of the Weimar Republic did not try to address economic issues with unpopular measures such as raising taxes or cutting spending. Although national debt was high, unemployment had virtually disappeared by 1921 and there was a rapid recovery in economic activity. In many ways, the German economy coped with the transition from war to peace much more successfully than other European economies.
Increase in prices and why politicians had allowed
However, allowing inflation to continue unchecked was a policy fraught with danger. Prices, which had doubled between 1918 and 1919, had cuadrupled again between 1919 and 1920, reaching a point 14 times higher than in 1913. The reason why governments allowed this to happen was partly political. The 1920 coalition, led by Konstantin Fehrenbach, was dominated by the Centre Party which was supported by many powerful German industrialists. They were benefiting from inflation by taking short-term loans from Germany’s central bank to expand their businesses. By the time the loans were due for repayment, their real value had been significantly reduced by inflation. Furthermore, inflation had the effect of lessening the government’s burden of debt (although the reparations themselves were not affected because these were paid in gold marks or goods) and it is often suggested that German politicians had a vested interest in allowing it to continue unchecked.
How was inflation beneficial?
In some ways, therefore, inflation was beneficial. By 1921, unemployment in Germany was only 1.8 per cent compared with nearly 17 per cent in Great Britain. This in turn encouraged investment, especially from the USA.
However, left unchecked, inflation eventually became uncontrollable and, by 1923, Germany’s high inflation became hyperinflation.
How had prices increased?
Prices, which had doubled between 1918 and 1919, had cuadrupled again between 1919 and 1920, reaching a point 14 times higher than in 1913.
Fixing of reparations amount
The Treaty of Versailles included the requirement that Germany would have to pay reparations, in both cash and goods, but it had not fixed the actual amount.
A Reparations Commission was set up to determine the scale of the damage caused by the German armed forces in Allied countries. The Reparations Commission’s report concluded that Germany should pay 132 billion gold marks, or £6.6 billion, to be paid in annual instalments.
Political impact of reparations amount
When the report was presented to the German government in 1921, with the ultimatum to accept the terms within six days, it caused a political crisis in Germany. The cabinet of Fehrenbach resigned in protest at what it considered to be excessively harsh terms and was replaced by another led by Chancellor Joseph Wirth. Just as in 1919, with the Allied ultimatum to Germany to sign the Versailles Treaty, there was no alternative to acceptance and the new government signed unwillingly.
Germany made its first payment soon after. This was the start of the German policy of fulfilment of the Treaty of Versailles under which successive German governments calculated that cooperation would win sympathy from the Allies and a revision in the terms once it became clear that full payment of the reparations was beyond Germany’s capacity.
Dispute regarding economic assistance of Germany with reparations
This, however, was far from being a final settlement of the reparations issue. By January 1922 Germany was in such economic difficulties that the Reparations Commission granted a postponement of the January and February instalments. In July, the German government asked for a further suspension of the payments due that year. In November 1922, it asked for a loan of 500 million gold marks and to be released from its obligations for three to four years in order to stabilise its currency. The French were deeply suspicious that this was simply an excuse and refused to agree to Germany’s requests. This dispute set the scene for a major clash over reparations in 1923, during which French and Belgian forces occupied the Ruhr industrial area of western Germany in an attempt to extract payment by force.
Why were reparations so hard to pay
The burden of reparations undoubtedly made a bad situation much worse.
Reparations payments made repayment of the huge government debt resulting from the war even more difficult. In addition, Germany’s gold reserves were inadequate for the scale of the reparations payments that had to be made in gold.
Another part of the reparations payments had to be made in coal, but Germany had lost a large part of its coal reserves in the Versailles Treaty. A further possible method of payment was in manufactured goods, but workers and manufacturers in the Allied countries would not agree to this as they regarded it as a threat to their jobs and businesses. Germany might have been able to increase its reserves of foreign currency, in order to make the payments, by increasing its exports to other nations. However, the Allies hampered Germany’s export trade by confiscating its entire merchant fleet and, later, by imposing high tariffs on imports of German goods. The Allies were forcing Germany to pay reparations, but making it difficult for Germany to find the money to do so. The response of the German government was to print more money, thereby making inflation even worse and making the value of the mark fall even further.
Keynes’ view of the reparations issue
The English economist John Maynard Keynes was highly critical of the Allied demand for £6.6 billion in reparations. He calculated that £2 billion was a ‘safe maximum figure of Germany’s capacity to pay and he predicted that the burden of reparations would not only damage the German economy but also the economies of Allied countries, since it would hamper economic recovery across the continent. However, the modern historian Peukert (1991) has argued that the final figure for reparations was actually quite manageable for Germany since it amounted to only 2 per cent of its gross national product. His view is that the effects of reparations have been exaggerated. It is certainly the case that German governments in the immediate post-war years allowed inflation to spiral since it suited their foreign policy objectives. They could use the rapid decline in the value of the German currency to support their case that reparations should either be abolished altogether or, at least, reduced and rescheduled to give Germany more time to pay.
What was the Ruhr?
the heavily industrialised area of western Germany that includes the towns of Dusseldorf, Essen and Dortmund; at that time, it generated 85 per cent of German coal and also had many large iron and steel works and engineering factories
The Franco-Belgian occupation of the Ruhr
By the end of 1922 Germany had fallen seriously behind in its payment of reparations to France in the form of coal. This prompted the French, together with the Belgians, to send a military force of 60,000 men to occupy the Ruhr industrial area in January 1923 in order to force the Germans to comply with the Treaty of Versailles. Their aim was to seize the area’s coal, steel and manufactured goods as reparations. These troops occupied the whole Ruhr area and, in the course of 1923, the numbers of occupying forces grew to 100,000. They took control of all the mines, factories, steelworks and railways, demanded food from the shops and set up machine-gun posts in the streets.
Paramilitary meaning
a group of civilians organised into a military style group with uniforms and ranks;
such groups take on military functions
