This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: German Business Cycles, 1924-1933
Volume Author/Editor: Carl T. Schmidt
Volume Publisher: NBER
Volume ISBN: 0-87014-024-8
Volume URL: http://www.nber.org/books/schm34-1
Publication Date: 1934
Chapter Title: The Treaty of Versailles, Inflation and Stabilization
Chapter Author: Carl T. Schmidt
Chapter URL: http://www.nber.org/chapters/c4933
Chapter pages in book: (p. 1 - 24)
GERMAN
BUSINESS CYCLES
1924—1933
CHAPTER ONE
THE TREATY OF VERSAILLES,
INFLATION AND STABILIZATION
THE fateful decade of war, revolution and currency
inflation— 1914—24—witnessed sweeping changes in
the economic life of Germany. On the eve of the
World War, Germany was one of the great economic
powers of the world. In industrial activity, in world
commerce, in international finance, in the aggres-
siveness and resourcefulness of its business leaders,
it challenged or surpassed every one of its rivals.
Ten years later the formerly powerful German
economy was perilously near the brink of chaos.
The tremendous spiritual and material demands of
a disastrous war, the acceptance of the severe
provisions of the treaty of peace, the domestic in-
stability attending political revolution, and the
catastrophic currency inflation—these factors had
wrought havoc in the business life of the nation.
Some notion of the economic consequences of
Germany's defeat in the World War and of its
plunge into the maelstrom of inflation is essential
3]
to an appreciation of the character of the fluctua-
tions in its economy after the return to more stable
conditions, for certain peculiar features of these
fluctuations were intimately related to structural
changes imposed upon it by the War, the peace
treaty and the currency inflation.
i.THE WORLD WAR AND THE TREATY
OF VERSAILLES
Public opinion in Germany has been inclined to
hold the loss of the World War, and the consequent
terms of the treaty of peace, as ultimately responsi-
ble for all the economic difficulties of that nation
since 1918. Thus it was declared in an official mem-
orandum that, because of the Treaty of Versailles,
"all of the favorable conditions of the period before
the War have disappeared; all the unfavorable con-
ditions have been strengthened."' The full impli-
cations of this statement can hardly be admitted to
be correct. Certainly the economic misfortunes of
Germany were to a large extent a part of the gen-
eral economic misfortunes of post-War Europe.
Nevertheless, defeat and the Treaty of Versailles
did result in changes in Germany's economic struc-
ture that were of particular significance in the sub-
sequent course of its economic life.2
I
Deutschlands Wirtschaft, Wdhrung, und Finanzen (Berlin, 1924)
p.
37.
2
On
the post-War changes in German economy see James W. Angell,
The Recovery of Germany (Yale University Press, 1929),
pp.
1—16; F. D.
[4
The loss of European territory, with its attendant
losses of sources of industrial raw materials and pro-
ductive equipment, was serious from the economic
viewpoint. The provisions of the Versailles Treaty
reduced the 1913 area of Germany by 13.05 per
cent. The ceded
had produced 15.7 per
cent of the total value of the German coal output
in
48.2 per cent of the iron ore; 58.8 per cent
of the zinc ore; 25.6 per cent of lead ore.4 Especially
significant for the future of German industry was
the loss of the great Lorraine iron area. The peace
treaty erected national barriers across it, and the
German iron and steel industry was thereby forced
into considerable dependence upon foreign sources
of supply. The separation of the Saar region and of
a part of Upper Silesia had much the same effect.
Self-sufficiency was further limited by the loss of
important arable land, about 15.5 per cent of the
1913 area. As the War and the Treaty reduced the
population by only about io per cent, the area avail-
able for cultivation was thus relatively, as well as
absolutely, smaller than in 1913. The loss of large
Graham, Exchange, Prices, and Production in Hyper.Inflation: Ger-
inony, 1920—1923
(Princeton University Press, 1930),
pp.
16—30; Statis-
tisches Reichsamt, Deutschlands Wirtschaftslage unter den Nachwirk-
ungen des Weltkrieges (Zentralverlag, Berlin, 1923);
Harms, ed., Struk-
turwandlungen der Deutschen Volkswirtschaft
(Reimar Hobbing,
Berlin, 1929).
S The
territories surrendered by Germany in accordance with the Treaty
of Versailles were: Alsace-Lorraine, Eupen and Malmedy, North Schies-
wig, parts of West Prussia, Posen and Silesia, and MemeL
'Wiadimir Woytinsky, Zehn Jahre Neues Deutschland (Rudolf Mosse,
Berlin, 1929),
p.
5]
portions of the Eastern Provinces made for a con-
siderable change in the source of food supplies. Of
the total German agricultural production in
i 913
the ceded territories of East Prussia, West Prussia and
Posen produced 14 per cent of the rye, 6 per cent
of the wheat, 12 per cent of the barley, 6 per cent
of the oats, 14 per cent of the potatoes and 17 per
cent of the sugar beets.5 The inhabitants of these
regions constituted only about
5 per cent of the
total 1913 population of Germany. Domestic food
production was materially reduced and the neces-
sity for additional importations of foodstuffs cor-
respondingly increased6
The loss of industrial equipment that attended
the territorial cessions was not so disastrous as was
at first supposed and was quickly more than restored
in the post-War German territory.7 However, the
domestic market for many industrial products was
relatively smaller than before the War; that is, there
was greater dependence upon sales in
foreign
countries.
Harms, op.
cit., p.
23. See also Woytinsky,
cit., pp.
33—5.
e In fact, the average annual production of rye from 1924
to 1931 was 24
per cent less than the average of 1911,
1912 and
1913 (within
the present
boundaries of Germany); wheat production was i
i per cent less; barley,
2 per cent less; oats, i8 per cent less; only potatoes increased by 5 per
cent. (No comparable data of sugar beet production are available.)
Yield per acre was in most instances less than before the War. (See Statis-
tisches Reichsamt, Statistisches Jahrbuch für das Deutsche Reich, 1928,
Berlin, 1928, pp. 72, 73; and the same source for
pp.
62—3; Son-
derabdruck, Deutscher Reichsanzeiger und Preussisch er Staatsanzeiger,
Nr. 300, December
24,
1931.)
'Harms,
op. cit., p. 22.
[6
obliged to become a heavy borrower of foreign
capital funds.
The implications of these changes—at least so far
as this study is concerned—would seem to be that
(a)
post-War fluctuations in German economy
would be more conspicuously industrial and less
markedly agricultural phenomena than before the
War; (b) such fluctuations would tend to be much
influenced by international factors; (c) the shortage
of domestic capital and the correspondingly great
dependence upon foreign sources would make for
a condition of chronic strain and would lead to ex-
treme sensitivity to changes in world credit condi-
tions.
2.
THE
CURRENCY INFLATION
The period of the currency inflation, lasting from
the end of the War until the autumn of 1923,
was
characterized by further serious modifications of
Germany's economic life—modifications that were
reflected in the business fluctuations of the years
following stabilization. Undoubtedly, the central
factor making for those changes was the deprecia-
tion of the mark—starting slowly, and then proceed-
ing ever faster, until finally the mark was plunged
into the abyss of virtual worthlessness.
The movements of the foreign exchange rates, of
wholesale prices and of ordinary currency circula-
tion, during the period 1919—23,
give
.a fairly ac-
[8
TABLE 1
INDEXES OF FOREIGN EXCHANGE, PRICES AND ORDINARY
CURRENCY CIRCULATION1
1919—1923
(monthly averages)
ORDINARY
YEAR
FOREIGN EXCHANGE WHOLESALE CURRENCY
AND MARKS PER DOLLAR PRICES CIRCULATION
MONTH (Pari) (1913=1) (1913=1)
1919
January 2.03 2.62
5.69
February
2.21 2.70
5.81
March 2.48
2.74
6.14
April 3.05
2.86 6.35
May 3.10
2.97
6.58
June 3.36 3.08 7.04
July
3.57
3.39
6.go
August 4.70
4.22
6.74
September 6.35
4.93
7.00
October
6.55
5.62
7.15
November
9.40
6.78
7.48
December
11.40
8.03
8.27
1920
January 15.4 12.6
8.4
February
23.7
i6.g 9.0
March 20.0
17.1
9.8
April 14.2 15.7
10.3
May
ii.t 15.1
io.6
June
9.3
11.3
July
9.4
13.7
11.5
August
11.5 14.5
11.9
September
15.0
12.5
October
16.2
14.7
12.8
November
18.4
15.1
12.8
December
'7.4
14.4
13.5
91
TABLE 1 (cont.)
INDEXES OF FOREIGN EXCHANGE, PRICES AND ORDINARY
CURRENCY CIRCULATION1
1919—1923
(monthly averages)
ORDINARY
YEAR FOREIGN EXCHANGE
WHOLESALE CURRENCY
AND
MARKS PER DOLLAR
PRICES CIRCULATION
MONTH (Pari) (1913=1)
1921
January 15.5
14.4
13.0
February 14.6
13.8 13.2
March
'4.9
13.4
13.3
April 15.1
13.3
13.4
May 14.9
13.1 13.5
June
16.5
13.7
14.0
July 18.3
14.3
14.3
August 20.1 19.2
14.6
September
25.0
20.7
October 35.6 24.6
16.4
November 62.5
34.2
i8.o
December
45.5
34.9
20.3
1922
January
45.5
36.7
20.5
February
49.0
41.0 21.3
March
67.5
54.3
23.2
April
69.0 63.6 24.8
May
69.0 64.6
26.8
June
76.0 70.3
29.8
July
ii8.o ioo.6
33.5
August
270.0
192.0
41.7
September 350.0
287.0
54.8
October
760.0
79.9
November
1,710.0
1,154.0 126.8
December
i,Sto.o
1,475.0 213.4
1923
January
4,300 2,785
329
February
6,700
5,585
583
March
5,050
4,888
913
[io
TABLE 1 (cont.)
INDEXES OF FOREIGN EXCHANGE, PRICES AND ORDINARY
CURRENCY CIRCULATION1
1919—1923
(monthly averages)
ORDINARY
YEAR
FOREIGN EXCHANGE
WHOLESALE CURRENCY
AND
MARKS PER DOLLAR
PRICES CIRCULATION
MONTH (Pari)
(1913=1) (1913=1)
1923
April
5,850 5,212
i,o88
May
11,400
8,170
1,424
June
26,200
19,385
2,865
July
92,000 74,787
7,231
August
1,110,000
944,041 iio,i8i
September
23.600,000 23,948,898 4,653,115
October 6,ooo,ooo,ooo
7,094,800,000 413,000,000
November
530,000,000,000 725,700,000,000 65,954,000,000
Dccciii ber i ,000,000,000,000
1,261,600,000,000
81,810,000,000
1
AngelI,
cit., pp. 365, 366.
curate impression of the increasingly difficult posi-
tion in which the country found itself. The move-
ments of all other indexes in terms of paper marks
—wages, cost of living, public debt of the Reich,
volume of Reichsbank credit—tell a substantially
similar story.1°
The inflation assumed astronomical dimensions.
At its height, it was a dizzy round of exchange de-
preciation and rocketing prices. Finally, in the mid-
dle of November 1923, when the paper mark
exchanged at the rate of 4,200,000,000,000 to the dol-
Jar, it was replaced by a new currency. Thus the
10For accounts of the course and effects of the inflation, see Graham,
op. cit., AngeU,
cit., pp. 17—60.
11]
I
period of inflation was suddenly closed by the extinc-
tion of the paper mark itself.
The currency inflation had grave repercussions
upon the economic life of Germany. "The distribu-
tion of wealth and income was violently altered, and
in a way which greatly reduced the general buying
power of the German people . . . and
the general
state of industrial technique remained stagnant.
Many of the new enterprises and giant combines
which sprang up during the inflation were also in-
herently unsound, and at the stabilization collapsed
into mere wreckage. Even after all allowance for the
direct effects of the Treaty cessions, industrial Ger-
many was far weaker at the close of 1923 than she
had been at the beginning of 1919.""
The consequences most significant for the cyclical
pattern of the years after the stabilization are those
affecting industrial production, business organiza-
tion and the loss of capital.
During most of the inflation period the progres-
sive depreciation of the currency stimulated indus-
trial activity and kept the mines and factories work-
ing full blast. The margin of industrial profits was
widened by the reduction in capital charges—the
result of the cancellation of long-term debts—and
by the lag of wages and taxes behind the rising com-
modity prices. Demand for industrial goods during
most of this period remained quite active, in part
because of the feverish desire of many persons to
Angell, op. cit., p. 58.
[12
convert the depreciating mark currency into any-
thing that had inherent worth—and in part because
the general lag of wholesale prices behind the
rapidly rising foreign exchange rates made for a
large export market. When, finally, after stabiliza-
tion, this stimulus to exportation disappeared, many
enterprises found themselves in difficulties, for the
crippled buying power of the domestic market re-
vived only slowly.
But the War and inflation, by discouraging the
importation of manufactured goods, gave German
industry considerable freedom from foreign com-
petition in home markets. This, together with rela-
tively low production costs during the inflation,
tended to discourage possible technical and adminis-
trative improvements. "When the stabilization once
more exposed Germany to world competition, she.
found that her industrial technique was years be-
hind, and had to undertake a painful and costly
reorganization." 12
As is indicated in the discussion
of the post-stabilization fluctuations, this reorganiza-
tion was a factor in shaping their pattern, and was
strikingly reflected in unemployment and in busi-
ness mortality.
The inflation period also affected the number
and forms of business organizations. For one thing,
it led to the founding of many new enterprises.
"The chaotic and fluctuating state of prices
. .
gave the shrewd trader innumerable opportunities
Ibid., p.
47.
'3]
to make a profit. .
. But
the chief explanation
was doubtless the fact that large numbers of clerks,
officials, and others with more or less fixed incomes
saw the value of what they received steadily declin-
ing as the depreciation progressed, and concluded
that the only way to survive was to set up in busi-
ness for themselves, where they might benefit in-
stead of suffer from rising prices." Thus new firms,
"mostly small and weak," were rapidly formed. The
number of separate enterprises at the end of the
inflation was "four or five times what it had been
before the War." This was to aggravate the cyclical
fluctuations of the post-inflation period. Inflation
also affected the pattern of German business organ-
ization by encouraging a revival of the cartel move-
ment and a development of enormous combines and
trusts.'3
Finally, the period of inflation witnessed a fur-
ther reduction in national wealth, emphasizing
even more Germany's dependence on foreign capital
and heightening its sensitivity to credit influences.
During the years 1919—23 productivity declined
markedly.'4 Probably almost all of the foreign in-
vestments of Germany remaining after the War were
13Ibid., pp. 49—55.
14
The
1913
national
income (within the confines of the post-War Ger-
man boundaries) has been estimated at approximately 45.7 milliard gold
marks (Statistisches Reichsamt, Das deutsche Volkseinkommen vor und
nach dein Kriege, Einzelschrift Nr. 24
zur Statistik des Deutschen
Reichs, Berlin, 1932).
By 1923, the last year of the inflation, it prob-
ably had fallen to 6o per cent of this sum (in terms of 1913
purchas-
ing power of the mark). One milliard = i,ooo million.
[14
lost during this period. The flight from the mark
led to a very appreciable export of capital and to
a very large transfer of assets from German to
foreign hands. Much of the industrial plant and
equipment erected in desperation during the in-
flation was found subsequently to be a technically
inefficient addition to the country's productive ca-
pacity. Nb really accurate estimates can be made of
the loss of actual and potential capital during the
five years of inflation. However, it
is certain that
the lessened industrial productivity, the export and
the uneconomical investment of capital funds, and
the failure to restore wasted savings—so characteris-
tic of this period—contributed very largely to the
capital poverty of Germany at the end of 1923.
3.
THE YEAR 1923:
RUHR
INVASION AND CURRENCY
STABILIZATION
The last year of the inflation, 1923, witnessed a
series of critical political and economic events: a
military occupation of the Ruhr industrial district,
the complete collapse of the paper mark, currency
stabilization and a deep depression in the autumn.
Particular implications of these events were to be
of importance in the history of the succeeding years.
The reparation. problem came to a crisis in the
last months of 1922.
Germany
was granted a tem-
porary moratorium on cash payments in the au-
15]
tumn, and it was doubtful that any considerable pay-
ments could be made in the following year. The
French government held that coercive measures,
particularly the occupation of additional German
territory, were necessary in order to ensure further
payments. At the Conference of Prime Ministers in
December 1922 and January 1923 France and Great
Britain were unable t'o agree on the problem of rep-
arations. On December 26,
1922 the Reparation
Commission declared Germany in voluntary default
of timber deliveries, and on January
9 it
declared
Germany in default of deliveries of coal. The French
government then asserted that the Treaty of Ver-
sailles entitled France to take independent action,
and French and Belgian troops began to march into
the Ruhr district. By the encl of January 1923,
Franco-Belgian control of the major part of that
highly industrialized region was complete.
The German government contended that the
occupation constituted a violation of the Treaty
of Versailles, and decided to oppose the occupation
by every means except armed resistance.
it sus-
pended deliveries in kind to France and Belgium
on January 13. The Ruhr coal mine owners refused
to continue deliveries, and when the French and
Belgians tried to move the coal and coke already
mined the German government called upon rail-
road and Rhine navigation officials not to transport
these commodities. This measure completely tied up
Ruhr traffic, blocked the Rhine ports with barges,
[i6
and eventually necessitated the operation and man-
agement of the railroads by a Franco-Belgian admin-
istration. Further, local government officials of the
Ruhr refused to cooperate with the French and
Belgians; this movement spread througho'ut the
Rhineland, except in the region occupied by the
British. Hotel- and restaurant-keepers joined with
the shop-keepers in boycotting the troops.
The passive resistance of the German govern-
ment and people called forth coercive measures on
the part of the occupying powers. The Interallied
Rhineland Commission issued a series of ordinances
seizing the coal tax, customs receipts and revenues
from state-owned forests, and placing the coal under
the complete control of the Franco-Belgian mission.
Further retaliation took the form. of fining, im-
prisoning ,and deporting Government officials, in-
dustrialists a.nd mine superintendents, expelling
customs and railway employees, confiscating state
properties, seizing Reichsbank funds, requisitioning
hotels and restaurants, and closing shops.
Such an occupation of the great industrial region
of Germany obviously had serious effects. Many
mines and factories in the Ruhr were closed, and
production was much reduced. A succession of
bloody encounters between the troops and the peo-
ple in the streets, mines and factories aggravated
conditions.
It is evident not only .that unoccupied Germany
must have suffered considerably from this cessation
17]
of industrial activity in the Ruhr but also that the
finances of the Government must have been sub-
jected to intense strain as a result of the policy of
lending monetary aid to those engaged in passive
resistance. Cut off from its principal industrial and
mining center, deprived of
its coal supply and
forced to import large quantities of fuels from for-
eign countries, Germany experienced increasing
difficulty in replenishing its supplies of the necessi-
ties of life, of coal and of raw materials, and in keep-
ing its industrial machinery in operation. In fact,
German economic activity collapsed visibly during
the summer of 1923
under the heavy weight of the
burdens imposed upon it.15
The occupation of the Ruhr had a disastrous ef-
fect also upon the mark currency. In November and
December 1922 between 7,000 and 8,ooo marks
exchanged generally for one dollar. Beginning in
January 1923, however, the price of the dollar rose
so swiftly that at the end of that month 50,000
marks were paid for one dollar. The Reichsbank's
attempt to support the mark exchange was success-
15
Much
valuable information concerning the Ruhr occupation is con-
tained in the publication of the Statistisches Reichsamt, Wirtschaft und
Statistik, Vols.
4
and 5
(Berlin, 1923, 1924, 1925). See also Ludwig
Elster, ed.,
Volkswirtschaflliche Chronik für das Jahr
(Gustav
Fischer, Jena, 1924); Guy Creer, The Ruhr-Lorraine Industrial Prob-
lern
(Macmillan, 1925); Henri Lichtenberger, The Ruhr Conflict (Car-
negie Endowment for International Peace, Washington, 1923);
Ernst
Schultze, ed., Ruhrbesetzung und Weltwirtschaft (Gloeckner, Leipzig,
1927).
[i8
ful for a short time. Within the first two weeks of
February the dollar quotation was brought down
to 23,500 marks, and was held about that point
until April i8, when the entire campaign of the
Reichsbank broke down. The political and eco-
nomic pressure, arising largely out of conditions in
the Ruhr and Rhineland, the paralysis of the most
important industrial regions, the resulting increased
imports and diminished exports—all made it impos-
sible for the bank to support the mark longer. The
financing of the Ruhr resistance was given over to the
printing presses; only an insignificant portion of the
Reich's outlays were covered by taxes. From then on
the currency depreciated rapidly.'6
In July began the repudiation of the mark. Sellers
refused to accept marks, first in the occupied terri-
tories, later throughout the entire country. Many
retail shops closed early in the day; others were open
only a few days of the week. Farmers refused to sell
their products for depreciating marks. The catas-
trophe of the currency developed into a catastrophe
of food and other supplies. Plunderings and riots
occurred almost daily; finally on September 27,
1923, to cope with the social dangers that the col-
lapse of the mark had evoked, the Reich declared
a state of siege.
A Nationalist counter-revolution broke out in
Bavaria. This led to Communist disturbances in
J6
This is best illustrated by the fluctuations• of foreign exchange; see
Table i.
19]
Saxony and Thuringia. In the Rhineland
in
the Palatinate separatist agitation was rife.
The fall of the mark was accompanied by a tre-
mendous rise
in the prices of all commodities.
Measured in terms of gold marks, there was a four-
or five-fold increase in the cost of living during
Measured
in terms of paper marks, the in-
dex of the cost of living rose from 1,120 rn January
to 1,247,000,000,000 on November 26.18 Wages and
salaries lagged considerably behind prices of com-
modities. An ever-increasing number of families
were reduced to a bare minimum of subsistence by
this widespread leveling down of wages and salaries.
During 1923 the number of unemployed work-
ers rose startlingly. Unemployment allowances were
given to 150,220 persons in January. In September,
in the unoccupied territory alone, 534,360 were re-
cipients, and in December, 1,532,065.19 Thus the
purchasing power of the workers was reduced. Con-
tinuing inflation signified the destruction of the sav-
ings of the middle class. The standard of living, par-
ticularly of the urban population, declined seriously.
The decline in purchasing power is evident in nu-
merous indexes. Imports of iron ore, for instance,
fell from 1 1 million tons in 1922 to 2.3 million tons
in 1923. Statistics of foreign trade in 1923 reflect
considerable decreases in the imports of raw rubber,
17
Wirtschaft
und Statistik, Vol.
Nr.
p.
18Materials
for a Study of Germany's Economy, Currency and Finance
(Berlin, 1924),
p.
26.
Elster, op. cit., p. 714,
See
also Wirtschaft und Statistik, Vol.
passzm.
[20
cotton, wool, copper ore and other raw materials.
At the same time the annual imports of coal rose
from 12.5 to 25.3
million
tons—evidence of the sev-
erance of the Ruhr mines from unoccupied Ger-
many.20 Exportation became increasingly difficult.
Many factories were forced to close; others oper-
ated only two or three days a week.
Meanwhile, the German government had been
trying to make satisfactory arrangements regarding
payment of reparations. During the spring and
summer of 1923 at least three offers of various
amounts were made, to be rejected each time by
the French government, which made it clear that
France and Belgium were one in their intention to
stay in the Ruhr until Germany paid the schedule
of reparations fixed in May 1921.
Moreover,
the
French announced that they would not treat with
Germany or discuss any conditions until the latter
abandoned its policy of passive resistance in the
Ruhr.
And the effects of passive resistance proved too
costly to the Germans. The failure of German for-
eign policy and the aggravation of political and
economic conditions led to the fall of the Cuno
Cabinet on August 12. A new cabinet under Dr.
Stresemann supported a policy of currency stabiliza-
tion, which implied the end of the Reich's financial
support of the occupied territories. Obviously the
cessation of this support necessitated abandonment
Schultze, op.
Cit., pp. 194—200.
21]
of passive resistance. On September 26 the Govern-
ment announced that the policy of resistance had
been abandoned.
Since the French had summarily rejected several
attempts of the German government to negotiate,
it was necessary to permit the industrialists in the
occupied regions to attempt a settlement of the
economic impasse. A series of agreements between
the French authorities and the local business leaders
followed. As a result, production in the Ruhr was
gradually resumed and tension relaxed.
In the midst of these difficulties, the German cur-
rency system was suddenly reformed. A decree estab-
lishing the Rentenbank was announced on October
15,
1923. The
Reichsbank ceased further discount-
ing of Reich treasury bills and was relieved of the
care of the Reich finances. The capital of the new
bank, fixed at 3,200,000,000 gold marks, consisted
of mortgages upon all German agricultural and in-
dustrial property. It was authorized to issue notes
that were receivable for governmental dues but not
otherwise legal tender. The Rentenbank began to
function in November. The Government promptly
borrowed 1,200,000,000 Rentenmarks, of which
200,000,000 sufficed to retire discounted Treasury
bills, mostly held by the Reichsbank, at the rate of
one Rentenmark to one trillion paper marks.21 The
Reichsbank then established, at this ratio, inter-
21
The
mint par of exchange of the Rentenmark and the Reichsmark in
United States money is 23.8 cents.
[22
convertibility between paper marks and Renten-
marks. Thus temporary stability of the currency
was effected by the introduction of the Renten-
bank.22
As a publication of the Reichsbank declares, "once
the mark was stabilized, Germany soon came to the
painful realization that the collapse of the currency
had brought about far-reaching and revolutionary
changes in her economic system. Large sections of the
population had lost their resources, and only a very
few had been able to derive any benefit from the in-
flation. Liquid capital had been practically destroyed.
The inflation had put a stop to the formation of
new capital and had eliminated the possibility of
saving, in the generally accepted sense of the term.
The effect
was an unwholesome investment in
tangible assets of all kinds as well as unwarranted
expenditures in
useless luxuries. Germany thus
emerged from the inflation in a very illiquid condi-
tion and practically without any capital in the form
of money." 23 The deflation period, as will be shown
in the following pages, was characterized by deep
depression in 'many industries and by widespread un-
employment.
22
See
H. Schacht, The Stabilization of the Mark (Adeiphi, 1927), for an
interesting account of this reform. See also Viscount D'Abernon, Ger-
man Currency: Its Collapse and Recovery, 1920—1926,
Journal
of the
Royal Statistical Society, Vol. 90, 1927, pp. i—do; Carl Bergmann, The
History of Reparations (Houghton Muffin, 1927), pp. 173—216.
" Quoted by R. L. Buell, Europe: A History of Ten Years (Macmillan,
1929),
p.
174.
23]
While these financial reforms were being ac-
complished, substantial steps were taken in the
direction of a readjustment of the reparation plan
that would remove the problem of reparations from
the field of international politics. During the period
of passive resistance the German government had
proposed the appointment of an international com-
mittee of experts to determine Germany's capacity
to pay reparations. The French government at first
refused to consider this proposal, but, after pres-
sure from the United States and Great Britain, con-
sented in November 1923.
In
this manner the Dawes
Committee came into being.
Thus, drastic action on the part of the Reich
government, together with a late recognition by the
Allied powers that the reparation question was
primarily economic, not political, in nature, saved
Germany from sinking much further into the depths
of economic disintegration.
[24