Book
Review
Title: The Downfall
Of Money- Germany’s hyperinflation and the destruction of the middle
class.
Author:
Frederick Taylor
Publisher:
Bloomsbury, Great Britain 2013
Price:
25 pounds sterling, Rs. 599/- in India.
Rendered
Worthless
This is the 100th anniversary of the start of
the First World War, also known as the ‘Great War’. It was billed as the war to
end all wars. But with its horrific loss of life, including that of nearly
70,000 Indians, amongst nearly 20 million others, along with the destruction of
the pre-war economy, it effectively sowed the seeds of the Second World War
just twenty years on .
It was also a time in which the German Gold Mark, worth
4.2 to the US dollar in 1914, collapsed utterly, to the extent that it was
trading at over 4 trillion to the dollar by the autumn of 1923.
A big part of the problem was the war debt. Quoting historian Frederick Taylor: ‘Germany had
financed her campaign mainly by domestic war loans, with some foreign borrowing
from neutrals… but she relied on foreign money far less than the Entente’. And:
‘True, the German government owed its own people vast sums, but who was going
to enforce the repayment of that?’
Then, there was the heavy reparations. “Part of the
problem arose from the web of inter-Allied debt… The United States had lent the
European Allies around $1o billion…By the end of the war, France owed $4
billion to the United States directly, and $ 3 billion to Britain. Britain in
turn owed $4.7 billion to America, while being owed $11.1 in total by the other
Allied powers. Britain was… relying on getting paid by France… while France was
counting on getting reparations from Germany’.
Taylor reflects on the crippling reparations bill: ‘ If
we take the pre-war gold mark/dollar
rate as 4.2, then it comes out that the Allies owed America 42 billion gold
marks’. When the ‘damage’ done by the German occupation of northern France is
added in, an estimated 38 billion gold marks comes into play forming a ‘running total of 80 billon gold
marks’.
What could Germany, well off the gold standard since
2014, do except ‘print money’? But
this was a ‘bold’ move that shortly fuelled the hyperinflation. The final reparations demand came out at 132 billion gold marks… and this after being
slashed from 269 billion put forward in
January 1921.
The debt was divided between A, B, and C categories, with
the last, about 82 billion, more or less waived. Still, Germany had to pay
about 50 billion gold marks and probably thought its best course was to sharply
depreciate its currency.
More and more
notes were printed without being anchored in anything of value, and inflation
started spiralling. Exports now began to do well on the back of the cheapening
currency, even in a moribund Europe, and business started to ‘boom’. Still, the
standard of living fell because of the runaway inflation.
‘Germany of the inflation was paradise for anyone who
owed money’, But for creditors, for savers, investors locked into a fixed
return, it was very bad. And it was understood that no German politician who
did not want to be accused of ‘treachery’ should be interested in finding ways
to pay reparations!
But the eventual hyper- inflation promoted by the
Government also destroyed the domestic economy. The Government however was
concentrating on creating employment in the post-war scenario, helping business
and industry in the process, rather than the middle-class savers and b0nd holders.
But the next stage
caused severe harrdship, with the mark ‘plunging like a stone’ and the economy
and employment no longer growing as a result.
This remarkable season of ‘Weimar
hyperinflation’, ended with the
introduction of the ‘Rentenmark in
November 1923’. By the end of August 1924, Germany had a stable currency again.
This was the Reichsmark, on par with the Rentenmark, and put the country back
‘on the gold standard’, abolished since 1914. The inflation era paper marks, traded
at an official fixed rate of 1 trillion to the new currency, disappeared
gradually. But with inflation stopped in its tracks, unemployment rose sharply.
In 1928, the standard of living of working Germans
actually reached levels comfortably above what they were before the War. But, austerity eventually
brought on economic depression, ushering in Adolf Hitler to the Reich
Chancellery in 1933. Hyperinflation in the early 1920s nurtured the seeds of
Nazism. A decade later, depression and
hyperausterity brought it to power.
And now, in 2014, Germany is once again watching the
results of over-leveraging and debt-fuelled growth in many parts of the EU, in
which it has become the richest economy. The debtor countries in the EU today
have a common currency in the Euro, and cannot, like Germany, inflate their way
out of debt. And, ironically, it is Germany and France, the main lender
countries, who are left holding the bag and calling for their Greek and Spanish
debtors to pay up.
(797 words)
March
10th, 2014
Gautam
Mukherjee
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