Before the Deluge, Part 3
The big industrialists stood to gain - though the masses of the people were financially ruined.
"Look at me!" blared the capital of the Reich. "I am Babel, the monster among cities! We had a formidable army: now we command the most riotously wicked night life. Don't miss our matchless show, ladies and gentlemen! It's Sodom and Gomorrah in a Prussian tempo. Don't miss the circus of perversities! Our department store of assorted vices! It's phe-nom-e-nal! An all-out sale of brand new kinds of debauchery!"
Here, after six months, is the final post of my 3-part annotated journey through the book, Before the Deluge, overwhelmingly concentrating on the effect the inflation had on the German psyche. The period covered is generally 1918 to 1923. I think some lessons can be learned - or if not learned, at least recognized.
A recurring theme throughout continues here - while the wealthy businessmen often did well during the inflation, the masses were generally wiped out - as William Shirer mentions below.
I'd start with Parts 1 and 2, and see if you are interested enough to want Part 3.
All three posts are free.
The quotes below are all from the book, unless noted otherwise.
“On the vertiginously spiraling ramps of New York’s Guggenheim Museum, there was an exhibition not long ago of the paintings of Laszlo Moholy-Nagy, one of the major figures of the Bauhaus. Most of the paintings were a rather repetitious series of squares, planes, lines, crosses, and three-dimensional variations that Moholy-Nagy called “space modulators.” One picture stood out alone, however. It was a collage, entitled “25 Pleitegeier” (“bankruptcy vultures”), showing a large bird hovering ominously over two silhouetted men. The most striking aspect of the collage was that it had been made entirely out of banknotes.
“In the dismal winter of 1922-23,” Moholy-Nagy said in an explanatory note, “I roomed with Kurt Schwitters in an almost unheatable attic studio in Spichernstrasse, Berlin. The German mark had reached an inflationary value of 25 million. We had no money to buy paint and canvas. So Kurt inspired me to follow his example and use the ‘currency’ of the day to make collages.”
““Thousands of homes had to be abandoned,” says one Berlin businessman, who bitterly remembers how the inflation bankrupted and nearly maddened his own father-in-law. “And who got them? People from Poland or Holland, anybody with foreign money. You could buy a house, which was worth fifty thousand marks, for five hundred dollars. I know whole streets which belonged completely to Czechs, French, Swiss. They bought up all of Berlin, and not just Berlin.”1
The acquisition of foreign currency was not beyond the capacities of Germany’s entrepreneurs, however. Publishers who could sell even a small fraction of their newspapers in Switzerland, for example, could support their whole corporations with the profits; a movie producer who could sell a film to Hollywood became a Croesus. And even apart from foreign earnings, any businessman with good credit could buy supplies with borrowed money, pay his workers minimal wages, and then settle both his debts and his taxes with depreciated currency.
The greatest master of all those who saw opportunity in the national ruin was a dark and stormy man named Hugo Stinnes, Though born of well-to-do parents, Stinnes started out as a clerk, then worked as a coal miner, and finally opened a small coal business in 1893. He had a swarthy skin and a black beard, and even after he became a millionaire, he affected workman’s clothes and heavy boots, prompting Count Kessler to describe him as “a cross between a patriarch, a commercial traveler, and the Flying Dutchman.”
“He kept everything in his pockets,” recalls Hans Staudinger, the economist, demonstrating, filching around in his pockets and bringing out bits and pieces of paper. “Everything, his accounts, names of companies he wanted to buy. And then he telephoned day and night, running all his businesses. He spoke in a high voice, and always very slowly. I asked him once why he always spoke so slowly. He said, ‘Because then people listen.’ The trouble was that he believed in the eternity of inflation. He believed it would never end. And so he lived on credit. He had a bank of his own in Holland, and German businessmen would put their money there for safety, and Stinnes would take it out and buy their own companies from them. He told me so himself.”
But it was the mines that formed the basis of Stinnes’ wealth. The mines produced coal, and coal produced foreign currency, and with foreign currency, one needed only daring and ruthlessness to build an empire. On credit, Stinnes bought everything he could find for sale—shipping lines, factories, country mansions until he had created the biggest industrial trust in Europe. He owned, in all, some two thousand companies. “He had become legendary figure,” according to Kessler’s2 account, “a wizard, a Klingsor who alone possessed the secret of conjuring forth magic gardens from the stony ruins of German industry.”
The above Time Magazine can be yours for just $699 on Ebay. Original price, fifteen cents.
“The question remains: What caused the inflation in the first place?
Germans of a nationalist persuasion have always placed most of the blame on the Allied demands for reparations, and it is undoubtedly true that any currency must suffer when the national wealth and the national production are drained to pay international commitments. More hostile observers, on the other hand, accuse the German government itself of trying to perpetrate a gigantic fraud. “Goaded by the big industrialists and landlords,” as William Shirer put it in The Rise and Fall of the Third Reich:
“…goaded by the big industrialists and landlords, who stood to gain, though the masses of the people were financially ruined, the government deliberately let the mark tumble in order to free the state of its public debts, to escape from paying reparations…Moreover the destruction of the currency enabled German heavy industry to wipe out its indebtedness by refunding its obligations in worthless marks.”
…There are few subjects about which we are so ignorant, even today, as the control of economic cycles, and, more specifically, currency values…So perhaps it was simply Prussian doggedness, rather than Prussian scheming, that led Reichsbank President Rudolf Havenstein to keep printing more and more banknotes.
“Today it requires handcuffs to stay the hand which turns the crank of the printing press,” the British Ambassador, Viscount D’Abernon, observed angrily. “Last week, when, by the blessing of Providence, the printers struck and the printing of notes was perforce interrupted, Havenstein brought in strike-breakers in order to get the presses going again.” That was in the summer of 1922; a year later
Havenstein went before the Reichsrat (Senate) to boast that his round-the-clock operation of the printing presses now enabled him to produce 46 billion marks in new currency every day.
Not a single member of the Reichsrat objected,
and it was only Lord D’Abernon who remarked that any bank president who understood so little about money should have been hanged.
“There was a considerable element of stupidity about economic theory,” says Adolph Lowe, a birdlike figure of seventy-seven, with a tanned face, wispy white hair, and an academic gray sweater underneath his brown tweed jacket. We are sitting on the third floor of the New School for Social Research, in the heart of Greenwich Village. In the lobby downstairs, Maoist students are passing out Maoist pamphlets, but it is very peaceful in Dr. Lowe’s little office, with rain beating on the windows, and Dr, Lowe, who was an official in the Economics Ministry in Berlin, wants to explain the quantity theory of money…the general theory in Germany then was that prices rose or fell by themselves, and the government had to adjust the amount of money to provide what was needed to satisfy the demand for money.”
“Is it possible,” a visitor asks, “for a country’s whole supply of economists to be uniformly wrong?”
Dr. Lowe smiles cheerfully, but the recollection of old arguments still sharpens his voice.
“You must understand that the German universities had cut themselves off from classical economic thinking fifty years earlier,” he says. “They developed instead what was called the ‘historic school’ of economics, and this dominated the universities where all the economists were trained. I tell you, in all of Germany, there were only three teachers who really understood economics, and two of them were not even full members of their faculties.”
“But surely somebody must have seen that the prevailing economic theories weren’t working.”
“Yes, of course,” says Dr. Lowe, “but the wrong theory was very handy for two important groups.
First, those who didn’t want to pay reparations, who thought it was a patriotic duty to destroy Germany’s capacity to pay. And second, the large-scale businessmen, people like Stinnes, though he was not the only one, who financed their business with large-scale borrowing.”
Even if this is true, it remains mysterious why everyone seemed to accept the disaster as an inevitable manifestation of destiny.
At first, of course, the inflation probably appeared relatively harmless, certainly less painful than the large tax increase that would have been needed to stop it. The shopkeeper’s sales went up, and so did the workman’s wages, and the constant upward movement came to be considered normal. This is now known as “the inflation psychology.”
Among government officials, then, it seemed natural to call on bankers and businessmen for advice, and the most prominent among these counselors gave, whether from dogma or from greed, the wrong advice.
And yet the government had to meet its payrolls—it paid not just the bureaucrats but the professors and the clergy and the railroad conductors and now the idled workers of the Ruhr—as well as the compulsory reparations demanded by the Allies. So Chancellor after Chancellor did as he was told and kept the presses running.
There was a time, though, late in 1922, when Chancellor Josef Wirth attempted to get an expert opinion from the outside world. At his request, John Maynard Keynes and three other economists came to Berlin, surveyed the problem, and offered a solution. They recommended, among other things, a two-year moratorium on reparations, stabilization of the mark at three thousand to the dollar, a curb on the printing of banknotes, and a balanced budget.
The only trouble with this cure was that the patient still seemed to prefer his sickness, and so the Keynes report was ignored by Germans and Allies alike.”
“Further investigation into this period reveals an era full of historical echoes that will sound eerily familiar to the modern reader. The final victory over Carthage in the Punic Wars led to rising economic inequality, dislocation of traditional ways of life, increasing political polarization, the breakdown of unspoken rules of political conduct, the privatization of the military, rampant corruption, endemic social and ethnic prejudice, battles over access to citizenship and voting rights, ongoing military quagmires, the introduction of violence as a political tool, and a set of elites so obsessed with their own privileges that they refused to reform the system in time to save it.”
From the Author’s Note in Mike Duncan’s book on the end of the Roman Empire
Berlin, November 6, 1922.—Currency Experts—or, to speak more correctly, people who assume to be oracles on currency—have a sad fate. During life they empty every room in which they hold forth, and death finds them in madhouses.
Berlin has been deluged with these gentlemen for the last week, and still survives, but currency has gone to the devil. We have had two lots of performers—the official reparation experts, who were imposed by Providence, and the free experts, who were selected.
The former are old acquaintances—they have many qualities both of heart and head, but they have one fatal defect—they frighten the mark. The moment they appear the mark bolts: this time it has got quite out of control, in a headlong flight towards the abyss.
This catastrophe cannot fairly be attributed to any action on their part—it occurs before they open their lips. What they say is rather sensible and reassuring than otherwise.
Perhaps it may be attributed to their appearance which is that of undertakers—one cannot avoid the impression that they have come to discuss the rival merits of cremation and interment—with a strong bias towards a “handsome funeral.”
- Edgar Vincent, Ambassador of Peace: Lord D’Abernon’s Diary, Volume 2
“The bloody uproar of the War is over: let's enjoy the carnival of the inflation. It's loads of fun and paper: printed paper, flimsy stuff — do they still call it money? For five billions of it you can get one dollar. What a joke! The Yankees are coming—as peaceful tourists, this time. They purchase a Rembrandt for a sandwich and our souls for a glass of whisky. Messrs. Krupp and Stinnes get rid of their debts: we, of our savings. The profiteers dance in the palace hotels.”
Klaus Mann, The Turning Point
“Still the mark kept sinking. The French occupation of the Ruhr had been a devastating blow, and neither passive resistance nor the suspension of reparations could compensate for the loss of Germany’s basic industry. From a rate of 1 million per dollar on August 1, the mark plummeted every day until it reached 130 billion by the first of November. Two weeks later, the rate was 1.3 trillion.
The bureaucrats kept numbly at their work, and every stamp collector still has specimens of postage stamps costing tens and hundreds of billions. But Germany was now, in effect, without any currency at all. Everything had collapsed. The main question, inevitably, was how to devise some new medium of exchange, and what to use to support it.
Traditionally, of course, a currency was supposed to be backed by gold, but the Weimar government simply didn’t have enough gold, and so there were plans to base the mark on coal, or even potash…
It was Karl Helfferich, the Imperial Treasury Minister who had failed so egregiously to finance the war effort, who finally came up with the basic idea for a solution. He proposed the creation of a National Mortgage Bank (Rentenbank), which would claim a mortgage on all of Germany’s agricultural land and issue banknotes pegged to the price of rye. The Socialist Finance Minister, Rudolf Hilferding, found this an interesting plan but argued that the so-called Roggenmark (rye-mark) would be inordinately beneficial to the rye-growing peasants. Since Hilferding could not provide an alternative solution, however, Chancellor Stresemann replaced him with a less intellectual but more organized Finance Minister, Hans Luther.
Under Luther’s guidance, a program for currency reform was finally worked out: The Rentenbank was to be instituted, as of November 15, and to begin issuing Rentenmarks, backed by a “mortgage” on the nation’s gold supplies, which was to be backed, in turn, by a “mortgage” on all of Germany’s land and assets.
This so-called “mortgage” actually “meant nothing,” says Adolph Lowe in his little office at the New School for Social Research. “It was just a cover for the new money, but the silent majority believed in it. They reduced their spending, and that made it work.”
Another former Weimar official puts it slightly differently: “It was still printed paper, but nicely printed paper. It had confidence.”
At the very moment of change, however, this was still a matter of theory. “I’m not here to boast about my own doings,” Adolph Lowe continues, “but the night before the stabilization, I was at a meeting with the top officials of the ministry, and the mark was then 3.8 trillion to the dollar, and I said, ‘Let’s decrease it still a little more, to 4.2 trillion, and then tomorrow we can wipe out twelve zeros on every bill and re-establish the mark at the prewar level.”
To translate this theory into reality, Luther called on a prickly young financier named Hjalmar Horace Greeley Schacht, then head of the Darmstadt National Bank, and made him Commissioner for National Currency. Schacht promptly moved into a little office in the Finance Ministry, which had previously been a storeroom for cleaning supplies, and set to work. His first task was to suppress the myriad local currencies which various towns and corporations had been issuing on their own authority during the inflation; he simply announced that these currencies would no longer be honored. Then, to stop the speculators who continued to drive the old mark up to a theoretical rate of twelve trillion, he shut off all their credit. Within a month, he had succeeded in holding the new mark to its pegged rate of 4.2 to the dollar.
“What did he do?” Schacht’s secretary and only assistant later explained to a reporter. “He sat on his chair and smoked in his little dark room at the Ministry of Finance, which still smelled of old floorcloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal—he telephoned in every direction and to every German and international place that had anything to do with money…And he smoked. We did not eat much during that time. We usually went home late…Apart from that, he did nothing.”
And so the national madness ended…
At first, money was very tight, unemployment increased sharply, bankruptcies were common—“Bankruptcies were normal,” says one Berlin businessman. “I had to work out balance sheets for lots of my friends. Bankruptcy was not even declared. One paid 10 percent or 20 percent to the creditors, and then one started again on this lower basis.”…Even the mighty Hugo Stinnes suddenly dropped dead, and his whole empire, built on credit and inflation, fell in ruins.
It was an attractive situation for foreign investors, and British and American loans came pouring in with the capital to launch a new boom. Now began the period in which the big industrialists tightened their control on the economy. Six large chemical companies merged in 1925 to form I.G. Farben3. The following year, four steel companies joined to form the gigantic United Steel Works. The cartel—there were eventually two thousand of them became the standard system for organizing business. By 1925, about 2 percent of all enterprises employed 55 percent of all workers.
Smaller profiteers had a harder time, however, and many of the nightclubs on the side streets of Berlin went out of business, Among the streetwalkers on Unter den Linden, only the professionals remained. “Ten years after the Revolution,” one survivor says with a chuckle, “an American journalist asked Ossietzky [the editor of Die Weltbühne] what had really changed. He said that the businessmen were still doing business, and the generals were still generals, and the only thing that was different was that the women of Germany had finally been liberated.””
“The Walpurgis Night of the inflation was over. We had to adapt ourselves, once again, to reasonable figures and modest standards. A spirit of sobriety and disillusionment prevailed; in other words, we had quite a hangover.
At the same time, however, there was a new confidence—a mood of reconstruction and "Let's start all over again!" which gradually spread out and became stronger and finally replaced the hectic bustle of the past few years. The German people began to awake and to recuperate from a nightmare that had been inflicted on them, violently upsetting their moral standards and their bank accounts. They had no Kaiser any more, no German Alsace, no fleet, no army, no generals, no decorations, no titles, no colonies, no illusions. But they had a future.”
And what a future it was.
“At the present rate of exchange, a Canadian with an income of one thousand dollars a year can live comfortably and enjoyably in Paris. If exchange were normal, the same Canadian would starve to death. Exchange is a wonderful thing.” - Ernest Hemingway, 1922
Count Harry Clemens Ulrich von Kessler: “an Anglo-German diplomat, writer, and patron of modern art.“
“I. G. Farben, the largest chemical firm in the world, was the most notorious German industrial concern during the Third Reich. It practically monopolized the German chemical industry while it actively participated in Göring’s Four-Year Plan and by war’s end exploited slave labor at its synthetic rubber plant at Auschwitz and elsewhere. Consequently, I. G. Farben was a key focus of America’s occupation policy regarding the denazifi cation and decartelization of the German industry.“ - Nazi Law: From Nuremberg to Nuremberg
Dr. Havenstein, great essay.
Your role in German and International banking is discussed also in the book "Tower or Basel" by Adam Lebor. I am sure you can find a copy in Hell's library to read
All the best
Marcus
Thanks for writing this.
One idea I liked from that Duncan book is Mos Maoirum - the way of the elders. How inflation played a role in its erosion in Rome rings so many bells today.
I also notice you didn't include any quotes about the German hyperinflation from Dalio's Big Debt Cycles. Ha. I read it a few years ago. It's actually been super helpful to me in making general sense of how currency devals work. Basically he says, and you probably already know that he says this, that the govs never choose austerity. They might say "we're about to choose austerity." But they never do. The book could have been subtitled "Nothing stops this train" borrowing a line from Lyn Alden.