Chapter 3 - economic and social problems 1919-24

Question 1

Intro

Answer 1

• In the aftermath of defeat, revolution and the imposed peace settlement of Versailles, Germany experienced severe economic difficulties
• These problems culminated (resulted) in a hyperinflation crisis, which gripped the country for the majority of 1923

Question 2

Financial problems in the aftermath of the war

Answer 2

• Germany’s defeat plunged the finances of the state into crisis
• For all the countries involved, the war efforts 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 printing more money
• This meant that the 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 (regain) 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
• 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 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 isolating 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 reduce, there were civil servants who had to be paid
• Support for the new republic was considered to be so fragile that governments avoided making civil servants redundant and even extended their welfare benefits
• Given the severe political difficulties Germany faced in the immediate aftermath pf the 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 and 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
• However, allowing inflation to continue unchecked was a policy fraught with (filled with) danger
• Prices, which had doubled between 1918 and 1919, had quadrupled again between 1919 and 1920, reaching a point where they were 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 benefitting from inflation by taking short term loans from Germany’s central bank to expand their businesses
• By the time these loans were due for repayments, their real value had been significantly reduced by inflation
• Inflation had the effect of lessening the government’s burden of debt (but the reparations themselves were not affected) and it is often suggested that German politicians had a vested interest in allowing it to continue unchecked
• In some ways, therefore, inflation was beneficial
• By 1921, unemployment in Germany was only 1.8% compared with 17% in Great Britain
• This encouraged investment, especially from the USA
• However, left unchecked, inflation eventually became uncontrollable and, by 1921, became hyperinflation

Question 3

The political impact of reparations

Answer 3

• 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 reparation commission was set up to determine the scale of the damage caused by 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
• When the report was presented to the German government in 1921, with the ultimatum to accept the terms within 6 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 cabinet which was 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
• This policy was used under successive governments as they calculated that cooperation would win sympathy from the allies and a revision in terms once it became clear that the full payment of the reparations was beyond Germany’s capacity
• This, however, was far from being a final settlement of the reparations issue
• By January 1922, Germany was in such financial 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, the German government asked for a loan of 500 million gold marks and to be released from its obligation for 3 to 4 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 the French and Belgian forces occupied the Ruhr industrial area in an attempt to extract payments by force

Question 4

The economic impact of reparations

Answer 4

• The burden of reparations made a bad situation much worse
• Reparation payments made the 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 reparation 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
• Another possible method of payment was through 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 reserve in foreign currency by increasing its exports to other nations but, the allies hampered Germany’s export trade by confiscating its entire merchant fleet and, later, imposing higher tariffs on goods imported from Germany
• The allies were forcing Germany to pay reparations, but making it difficult for Germany to find the money to do so
• Germany’s response was to print more money which made inflation even worse and caused the value of the mark to fall even further

Question 5

The hyper-inflation crisis of 1923

The Franco Belgian occupation of the Ruhr

Answer 5

• 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
• This was done in order to force Germany 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, during 1923, the numbers of occupying forces grew to 100,000
• They took control of all the mines, factories, steel works and railways, demanded food from the shops and set up machine gun posts in the streets
• The government of Chancellor Wilhelm Cuno knew that Germans could not fight back as the Versailles treaty had reduced the size of the German army and demilitarised the Rhineland-area which the Ruhr was a part of
• Instead, he responded by stopping all reparations payments and ordering a policy of “passive resistance” where no one living in the area, from businessmen and postal workers to railwaymen and miners, would cooperate with the French authorities
• German workers were promised by their government that their wages would continue if they went on strike while paramilitary (groups of civilians organised into a military style group) troops working with the German army secretly organised acts of sabotage against the French
• The paramilitary troops secretly crossed the customs barrier at night and blew up railways, sank barges and destroyed bridges in order to disrupt the French effort
• The scale of the French operation grew as a result of Germany’s response
• The French set up military courts and punished mine owners, miners and civil servants who would not comply with their authority
• Some miners were shot after clashes with the police
• Around 150,000 Germans were expelled from the area
• Altogether, 132 Germans were shot in the 8 months of the occupation, including a 7 year old boy
• The French also brought in their own workers to operate the railways and get coal out of the Ruhr, but this did not prove particularly effective
• In may 1923, deliveries were only a third of the average monthly deliveries in 1922
• Output in the Ruhr had fallen to around a fifth of its pre occupation output

Question 6

The economic effects of the occupation

Answer 6

• The economic results of the occupation and the policy of passive resistance, were catastrophic for the German economy for several reasons:
  • Paying the wages or providing goods for striking workers was a further drain on government finances
  • Tax revenue was lost from those whose businesses were closed and workers who became unemployed
  • Germany had to import coal and pay for it from the limited foreign currency reserves within the country
  • Shortage of goods pushed prices up further
• The combined cost of all this mounted to twice the annual reparations payments
• Since the government refused to increase taxes, its only option was to print more money
• This was the trigger for the hyperinflation that gripped Germany throughout 1923

Question 7

The causes of hyperinflation

Answer 7

1) The economic impact of war
- Germany financed much of the cost of WW1 by printing more money which led to the currency declining in value (inflation)
- After the war, the Weimar government spending remained high as they had to support war widows, injured veterans, and demobilised soldiers
- By 1924, about 10% of the German population were receiving federal welfare payments and more were on regional poor relief
2) The treaty of Versailles
- The treaty of Versailles committed Germany to pay £6.6 billion in reparations starting in 1921
- Reparations had to be paid for in gold which held its value against the declining German currency (mark)
- As the value of the mark became weaker, paying for reparations became ever more expensive
3) Weimar government response
- The German government tried to pay reparations by borrowing and printing more money
- This made inflation even worse, and the value of the mark declined further
- In 1922, the German government sought to pause their reparations payments but were refused permission
- By early 1923, the German government failed to pay its reparations
4) The French invasion of the Ruhr
- French and Belgian governments responded to German failure to pay reparations by ordering a invasion of the Ruhr, a key German industrial region
- Their armies seized raw materials and goods to the value of the reparations
5) Weimar government response
- The German government stopped all reparation payments to France and ordered all German workers and business owners to follow a policy of passive resistance
- The Weimar government paid the wages of the workers who went on strike and compensated owners for lost revenue
- They also had to import necessary stocks of fuel which added to their debt

Question 8

The hyperinflation crisis

Answer 8

• During the hyperinflation crisis, money lost its meaning as prices soared to unimaginable levels
• Printing presses worked continuously to keep banks supplied with worthless paper money
• Workers collected their wages and salaries in wheelbarrows and shopping baskets, and tried to spend their money immediately before prices rose even further
• The rising prices for food had the most serious effects
• Food began to run short as speculators hoarded supplies in anticipation of higher prices in the future which led to, in many areas, breakdown in law and order
• There were food riots where crowds looted shops
• Gangs of city civilians travelled to the countryside to take food from the farms, but they were confronted by angry farmers who were determined to protect their livelihoods
• There was an increase in the number of convictions for theft and people began to exchange their possessions in return for vital supplies

Question 9

Social welfare

Answer 9

• Those involved in the revolution of November 1918 (sailors, soldiers and workers who had helped bring down the Kaiser) were motivated by a desire for a better freer life
• There were also very large numbers of people who needed support as a result of death or injury during the war
• The challenge for those politicians who wrote the Weimar constitution in 1919, and for those who served in later coalition governments, was to enshrine (preserve in a respectful way) those aspirations into legal rights
• One of the key rights set out in the constitution was that every German citizen should have the right to work or to welfare
• This led to a series of reforms to the welfare system and employment rights
• In 1919, a law was passed which limited the working day to a maximum of 8 hours
• In 1919, the state health insurance system, introduced by Bismarck but limited to workers in employment, was extended to include wives, daughters, and the disabled
• In 1919, aid for war veterans incable of working because of injury became the responsibility of the national government. Aid for war widows and orphans also increased
• In 1922, the National Youth Welfare act required all local authorities to set up youth offices with responsibility for child protection and decreed that all children had the right to education
• However, the social welfare budget put a huge demand on the government
• The printing of money was largely to pay out to welfare benefits that the Weimar republic was committed to providing
• This exacerbated (made the problem worse) the hyperinflation crisis

Question 10

The social impact of hyperinflation

Answer 10

• Hyperinflation was not a disaster for everyone as there were winners, but also losers, in the increasingly divided German society

Question 11

Winners of the hyperinflation crisis

Answer 11

• The winners included people who had the means and guile (cunning intelligence) to speculate and manipulate the situation to their advantage
  • There were black marketeers who bought up food stocks and then sold them for vastly inflated prices
  • Those who had debts, mortgages and loans did well as they could pay off the money they owed with worthless currency
  • The situation helped enterprising business people as they took out loans and then repaid them once the currency had devalued further
  • People leasing property on long-term fixed rents gained because the real value of the rents they were paying decreased
  • Owners of foreign exchange and foreign livers in Germany also benefited because the foreign currency they owned was worth a lot more than the German mark
  • Most farmers coped well as food was in demand and money was less important in rural communities

Question 12

Losers of the hyperinflation crisis

Answer 12

• Those relying on savings, investments, fixed income, or welfare support lost out
• Among these people were students, the retired and the sick
  • Pensioners were particularly badly hit, including war widows living on state pensions, because the money saved through pensions was not completely worthless
  • Those who had patriotically lent money to the government in war time through fixed interest rate “war bonds” also lost out because the interest payments decreased in value, so they had essentially lost money
  • Landlords who relied on fixed rent were hit particularly badly because the money being paid to them was worthless
  • Unskilled workers were hit badly too as, although they were given an increase in wages, this did not keep up with the rising prices which caused their standard of living to decline
  • Artisans and small business owners, the Mittlestand, were hit badly as their costs rose but the prices they charged could not keep up with the pace of inflation. They also paid a disproportionate share of taxes
  • The sick were very badly hit as the cost of medical care increased massively and the rapid rise in food prices led to widespread malnutrition. Death rates therefore increased
  • Cases of disease such as rickets and tuberculosis increased as these are associated with dietary deficiency
• The effects of hyperinflation varied between different classes and geographical regions
• This period was an “unreal” time, which left many people uncertain about what the future might hold
• Many, but not all, middle class people became impoverished (poor) as a result of hyperinflation and were left with a sense that they had been affected worst
• Middle class people had grown up believing in hard work, thrift and saving for the future, only to find their savings wiped out and their comfortable lifestyles destroyed