Children play with wads of cash in Germany, 1923. (© Universal History Archive/UIG/Rex)
The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class by Frederick Taylor (Bloomsbury, £25)
The hyperinflation experienced by the Weimar Republic, Germany’s fledgling democracy, in 1923, was later far exceeded by the collapse of monetary values in Hungary in 1946, Yugoslavia in 1994 and Zimbabwe in 2008. But it has often been argued that its consequences were more deadly than those of any of these more precipitate descents into financial chaos. It was the loss of their income and savings, many people subsequently concluded, that drove the German middle classes into the arms of the Nazis, who promised to cure Germany’s economic ills, restore prosperity, and rescue the German people from economic instability after years of financial chaos and impoverishment.
The statistics themselves are mind-boggling: by the height of the inflation, a pound of bread cost three billion marks and a glass of beer four billion. In November 1923, you needed 2.5 trillion marks to buy a US dollar, by December 4.2 trillion. Families collected their pay packets in baskets or even wheelbarrows and spent them all immediately on enough supplies to last them until the next payday, before they lost their value. The government’s printing presses could not keep up with the rapidly changing denominations of notes, from thousands to millions to billions, and local authorities started producing emergency banknotes, printed on one side of the paper only.
In his new study, The Downfall of Money, aimed at a wide readership, Frederick Taylor argues that the inflation destroyed democracy as well as monetary value. By the time the inflation reached its height, he says, “everyone wanted a dictatorship.” And certainly, as the value of the mark spiralled downwards in 1923, it looked to some as if the political system was disintegrating: communists and socialists threatened an uprising in Saxony and Thuringia, and actually staged one in Germany’s second-biggest city, Hamburg; the French were occupying the industrial heartlands of the Ruhr, taking what they could in the way of coal and other products, and ruthlessly suppressing the ultra-nationalist resistance movements that were beginning to take action against them; above all, Hitler, hitherto an obscure far-right politician in Munich, staged a putsch against the authorities, marching from a beer hall on the outskirts of the town with the aim of taking over its administrative centre by force.
Yet only a few months later, Hitler was in prison, the far-left provincial governments had been overthrown, the Hamburg uprising had failed, and the French had withdrawn from the Ruhr. The inflation had come to an end, and industry was beginning to produce again, helped out by American loans.
The immediate cause of the hyperinflation had been the French invasion, launched because Germany had failed to keep up with the reparations payments she was supposed to make to compensate France after the First World War. As industrial production ground to a halt in a campaign of passive resistance against the French, too much money was chasing too few goods, and international confidence in the German economy crashed. The government of Gustav Stresemann, coming to power at the height of the crisis, restored confidence by a policy of “fulfilment,” negotiating a settlement with the French and agreeing to pay reparations in full, while the financial wizard Hjalmar Schacht restored confidence by introducing a new currency, the rentenmark.
So, contrary to the popular assumption, the hyperinflation did not destroy democracy after all. In fact, its end inaugurated a period of relative stability that lasted almost to the end of the 1920s. Reparations continued to be a running sore on the body politic; indeed, German governments’ refusal to raise taxes earlier in the decade, because raising money to pay the French would have spelled electoral suicide, was one of the main contributory factors to the inflation itself. But reparations too were renegotiated, being scaled down twice before being suspended altogether in 1932, many months before Hitler came to power.
If the immediate political impact of the hyperinflation was transitory, then why was it so important? Taylor’s answer lies in a revamped version of the traditional thesis of the impoverishment of the German middle classes.
Of course, he is aware of the many paradoxes of the inflation. On the one hand, many people’s savings, especially if they had invested in war bonds, as many of them had, were effectively wiped out. Those on fixed wages and salaries suffered as their pay rates struggled to keep pace with the galloping inflation of the currency. As early as April 1920, the Observer newspaper’s correspondent noted that while it cost 40,000 marks to hire a car and drive it from Berlin to Cologne, the annual salary of the Director of one of Berlin’s leading museums was only 30,000 marks a year, and that before tax. It was calculated that the real value of such salaries was by this time only 20 per cent of what they had been before the war.
On the other hand, the middle classes also had assets, and if they were paying for them by instalments, or through a mortgage, then they acquired them for virtually nothing.
In the large private rental sector—covering the majority of German town-dwellers—strict rent controls had been introduced before and during the war, so that the real cost of housing fell dramatically with the value of the mark. In 1907, for instance, rent accounted for nearly 20 per cent of the household expenditure of working-class families; by late 1923 it made up no more than 0.3 per cent. Yet rented accommodation was not just for the working classes; huge swathes of the lower middle class rented as well.
Moreover, except in the chaotic final stages of hyperinflation, unemployment remained low, as German businesses, often having acquired plant and equipment through loans, profited from the inflation and boosted their exports. The more adventurous members of the middle class could avoid impoverishment through nimble speculations on the international currency markets; they could rent or sublet rooms in their capacious dwellings; if they paid monthly rather than weekly they could buy cheaply when they got their salary cheques, stockpiling necessities whose price would have increased vastly in only three or four weeks, before they collected their next, similarly inflated salary cheque; a luxury not available to the working classes, who were paid on a weekly or even a daily basis.
The industrial and mercantile middle classes may therefore have been able to escape the worst effects of the inflation, and even the “educated middle classes”—professionals, civil servants, teachers, lawyers, doctors and the like—were far from uniformly affected.
Taylor suggests that they suffered badly, and that this drove them into the arms of the radical opposition to the Weimar Republic. The best he can provide by way of evidence is the fact that the young men who provided the foot-soldiers of the assassination squads that killed leading liberal and left-wing politicians such as Walther Rathenau or Matthias Erzberger were children of prominent members of the middle-class establishment. Yet these assassinations were carried out before the hyperinflation; they were not the result of angry middle-class parents passing on their resentment at the loss of their savings to a younger generation. Instead, they were the result of that younger generation feeling that Germany’s defeat in the war and the overthrow of the Kaiser and his regime required radical and unconditional action against what they regarded as traitors manipulated by a Jewish world conspiracy into destroying their country.
What the inflation did do politically was to fragment the middle classes, drastically reducing support for the liberal and mainstream conservative parties and spawning a whole range of new, special interest or “unpolitical” splinter groups, like the “Economy Party.”
Middle-class voters might, in time, have returned to the political mainstream, but in 1929 the fragility of Germany’s post-inflationary recovery was demonstrated when the Wall Street Crash caused American banks to withdraw the loans on which Germany depended, causing bankruptcies, business failures and mass unemployment on a scale never seen before. It was the Depression, not inflation, that drove voters into the arms of the Nazis: and they came from all sectors of the population, not just the middle classes.
At the same time, Hitler had learned his lesson. His beer hall putsch in 1923 had failed because he had neglected to secure the backing of the army, the police, the civil service and the business community. He did not make the same mistake 10 years later.
It is no easy task to write a readable and original study of the German hyperinflation; much of the literature is highly technical, and the whole subject was given a thorough going-over in the 1980s by the American economic historian Gerald D Feldman and an enormous team of researchers, backed by a series of massive research grants.
Taylor has consulted some of this literature, but many major studies remain unreferenced in his notes and bibliography, and his interpretation oversimplifies events at too many points. Moreover, to avoid being dull, he digresses for scores of pages at a time into a general history of the Weimar Republic, especially its early years of violent instability—instability that had little or nothing to do with the process of monetary inflation. Broader and deeper research would have enabled him to deploy his undoubted narrative skills in a more illuminating and more entertaining way than he does here.
In the end, this is a story that has been told many times before, often much better. And the best reason for re-telling it gets far too cursory a treatment from Taylor: many German commentators have admitted that the reluctance of Angela Merkel’s government to boost the eurozone economy stems ultimately from the lasting trauma caused by the hyperinflation in Germany 90 years ago. An exploration of how and why this has led to deflation and austerity as the German recipe for curing the eurozone’s ills would have made interesting reading.
