Main menu:
Dark Side 4 Chapter 2
The war had left 11 million dead soldiers and 21 million wounded. Nine million civilians had died of cold, hunger and decreased resistance to epidemics. Germany and France´s economies had contracted by 30% , while the U.S.´s blossomed. Before the war, its GDP of $40 billion per year roughly equaled Britain, France and Germany combined. By 1919 it was 50% larger. Europe had spent $200 billion in four years on war, almost half of their GDP.
The end of the war came as a surprise. In June of 1918, Germany broke through allied lines and came within 50 miles of Paris. The German public had been given a distorted picture of the war, fully expecting victory. A month later the allies counterattacked and the German army seemed to crumble. By October, the Kaiser was forced into exile by his generals.
Berlin that day was like an armed camp. A general strike had been declared and thousands of workers and soldiers paraded the streets demanding a Republic. By January there was fierce street fighting between communist revolutionaries and the army. The Junker class that had dominated the country was discredited, its power swept away.
(page 104) The question of war reparations was to dominate European politics for 20 years. At first it was thought France, having suffered the most, would push for the harshest terms, but Britain, pushed by a jingoistic press led by the Times and the Daily Mail, pushed harder. France had been invaded by Germany twice in 50 years and wanted to weaken it by any means possible, but Germany was younger, more dynamic, and 50% larger, 60 million to 40 million. The American contingent counseled moderation, arguing that punitive measures would retard not only German, but European recovery. The reparations council met for ten weeks but could come to no agreement. It finally disbanded, leaving a committee to arrive at a figure by May 31, 1921.
Hjalmar Schacht, who would become head of Germany´s central bank, perhaps lulled by the lofty speeches of President Woodrow Wilson, thought that reparations would be moderate and that the main economic problem after the war would be the tremendous debt overhang which would lead to a general European bankruptcy.
(page 108) When the terms were announced in May of 1919 the whole of Germany exploded in shock and anger. It was to lose one-
The most devastating attack on the peace terms was given by John Maynard Keynes in ¨The Economic Consequences of the Peace¨. Keynes argued that in order for Germany to earn money to pay the allies, it would have to sell more goods than it bought, that its trade partners would have to absorb this large influx of goods, with potentially crippling consequences for its own industries. The book became a best seller and was translated into 10 different languages.
(page 114) Toward the end of the war, Keynes became increasingly pessimistic and disgusted with the ally´s refusal to negotiate an end to the war. In 1917 he wrote his mother that the continuation of the war ¨probably means the disappearance of the social order we have known hitherto. With some regrets I think I am on the whole not sorry. The abolition of the rich will be rather a comfort and serve them right anyhow. What frightens me is the prospect of general impoverishment… I reflect with a good deal of satisfaction that because our rulers are as incompetent +civilization is very nearly over.¨
(page 116) Even before the Peace Conference adjourned in June 1919, the British began to try to soften the terms, as that nation of shopkeepers began to realize the centrality of Germany in the European economy. The French could not be softened toward their ancient enemy, and as the U.S. withdrew into isolationism and Britain became increasingly sympathetic to Germany, France found itself isolated.
(page 118) In May 1921 the terms were finally set and agreed on by Germany: $12.5 billion, with Germany to pay $600 to 800 million annually, a little over 5% of its GDP. Despite their agreement, the Germans thought this debt intolerable and made little effort to meet its terms.
Germany at this time was run by a series of weak coalition governments. It had large social commitments to pay for in addition to reparations. The proverbially prudent and responsible Germans began to print money to pay their bills, known as ¨monetizing the debt¨. In 1914 the mark stood at 4.2 to the dollar. After the inflationary war financing had worked its way through the system it took 6.5 marks to buy one dollar.
The mark stabilized briefly, but in the middle of 1921 French inflexibility over reparations and a campaign of political murder by right-
In early 1923 Germany failed to deliver 100,000 telephone poles to France and 40,000 French and Belgian troops occupied the Ruhr Valley, Germany´s industrial heartland, as the Versailles treaty permitted. Germany responded with a program of passive resistance, perhaps understandable, but forcing it to pay unemployment benefits to the idle workers. The budget deficit doubled to $1.5 billion. In 1922, $1 trillion marks and in 1923 $17 trillion marks were printed. By November 1923 a dollar would buy 630 billion marks. A ride on a Berlin street car, one mark before the war, now cost 15 billion marks. People began to go shopping with wheelbarrows or baby carriages full of money, in spite of the 100 billion mark notes in circulation. In the last three weeks of October 1923, prices raised ten thousand fold. In the time it took to drink a cup of coffee its price may have doubled. Money received at the beginning of the week lost nine tenths of its purchasing power by the end of the week. Workers were paid daily, large truck loads drove from the printing presses to the factories and bundles of money were tossed to the workers who had half an hour to go shopping for anything they could buy, later to be bartered in one of the flea markets springing up around the city.
(page 122) Foreigners could live extravagantly. A Berlin apartment worth $10,000 before the war could be bought for $500. A Texan hired an evening of the full Berlin Philharmonic Orchestra for $100. The contrast between the British, French, Polish, Czech and Swiss tourists lives and that of the average German fed resentment against the Versailles Treaty further speculators enriched themselves beyond their wildest dreams. With the devaluation of money came the slippage of other values. Unrest and fanaticism were fed by extravagant ideas. As Keynes quoted in his book ¨Lenin was right. There is no surer means of overturning the existing basis of society then to debauch the currency.¨
What was the president of the Reichsbank thinking? Did he envision the self-
The upper middle class, doctors, professors, upper civil servants were hit the hardest. A lifetime savings became worthless. They had taken lodgers and their daughters became prostitutes.
(page 126) If a certain amount of inflation is good for business, Germany passed that point in 1923. Without a functional currency, commerce became impossible. Unemployment ran around 3% until the fall of 1923, when it shot up to 20%. By then Germany was able to expand its money supply by 60% in a single day. German finance, traditionally so sober and prudent, had gone down the rabbit hold with Alice.
Britain had gone into the war as the ¨world´s banker¨, control of over $20 billion in foreign assets. Through it passed 2/3 of the trade credit that kept goods flowing around the world, and 1/2 of the world´s long term investment. France had an overseas portfolio of $9 billion, with $5 billion of that invested in Russia. Both countries had to liquidate a large portion of its overseas assets and borrow huge amounts of money from the U.S. to pay for the war. By the end of the war the European allied powers – 16 countries in all – owed the U.S. about $12 billion, of which $5 billion was from England and $4 billion from France. Britain was owed $11 billion by seventeen countries, including $3 billion from France and $2.5 billion from Russia, the Russian debt essentially uncollectable after the Bolshevik revolution.
The allies tried to link these war debts to the U.S. to the reparations due them from Germany, indicating that they would reduce the level of reparations due from Germany if the U.S. would reduce the level of loans due to it. The U.S. refused and the two issues continued to bedevil efforts at recovery. Europeans became increasingly cynical about U.S. motive, accusing it of waiting until Europe was close to bankruptcy before entering the war, having financed it up to that point.
By the summer of 1919 Britain was only slowly adjusting to the peace. Bread and sugar were still rationed, and the initial optimism at the war´s end was being replaced as the reality of the new balance of financial power sunk in. The aristocracy that had ruled Britain for the previous century was badly damaged. Many of their sons were junior officers, who had had a casualty rate three times higher than the enlisted men. They had been hurt by inflation, land prices had collapsed and many large estates had been put up for auction.
(page 139) The war debts continued to poison relations between countries. When the U.S. and Britain met to negotiate, the U.S. delegates were instructed by Congress to accept no less than $0.90 on the dollar and the British delegates were instructed by the cabinet not to go any higher than $0.60 on the dollar. They agreed on $0.80, though Maynard Keynes advised the British to hold out. The British, anxious to get the U.S. back in Europe and to maintain its reputation for probity, had settled in late January ( ). France held out until1926 and settled for $0.40 on the dollar and Italy, also in 1926, agreed to pay $0.26 on the dollar. The economic realities made it difficult for Britain to forgo collecting from France and Germany, for France to forgo reparations from Germany, and led Europe into a vicious cycle of claims and counter claims.
(page 155) Europe and the U.S. desired to return to the gold standard after the war, but the mountain of paper currency issued to pay for the war made that difficult. In 1913 the total amount of money in circulation in Britain – gold and silver coins, notes issued by the Bank of England and by the large commercial banks and the largest category, bank deposits – amounted to the equivalent of $5 billion. This was backed by $800 million in gold, only $150 million of which was held in the vaults of the Bank of England, the remainder being coins in circulation or held by commercial banks. By the end of the war, the Bank of England had loaned the government so much money that the total money supply now equaled $12 billion, which had in turn driven prices up two and a half times. Britain did not have enough gold to return to the gold standard at the old exchange rate.
(page 156) Every nation involved in the war faced the same dilemma, even the U.S. There were essentially only two ways to restore the past balance between the total money supply and the value of the gold reserves. One was to put the process of inflation in reverse and deflate the monetary bubble by actually contracting the amount of money in circulation. This led to a period of dramatically tight credit and high interest rates which led to recession and unemployment until prices were forced down.
The other was to devalue the currency, but that was to cheat investors and creditors out of the true value of their savings, and to leave a stain on the reputation of the country, meaning it would have to pay higher interest in the future to borrow money. Whether to deflate or devalue became the central economic decision for every country after the war. The burden of deflation fell on workers, businesses and borrowers, and that of devaluation on savers. The U.S. and Britain took the route of deflation, Germany and France that of devaluation.
The U.S. had allowed its currency to expand by 250% during the war, and prices to double, but it had also seen its gold reserves double due to the enormous European purchase of war materials and the flight of private gold to safety. Thus, the U.S. was able to return to the gold standard as soon as the war ended. The U.S. consumer went on a buying binge during 1919 and 1920 and in order to head off inflation the Fed tightened credit policy drastically by raising interest rates to 7% and keeping them there for a full year. This was accompanied by a move by the federal government to bring its budget into balance. The combination plunged the economy into recession, and over two and a half million men lost their jobs, and bankruptcies soared. By 1921, with prices down by a third, the economy began to recover. During the next seven years the U.S economy, led by new technologies such as automobiles and communications, experienced an unprecedented growth with low inflation.
Germany had expanded its money supply by 400% during the war, and 1920 prices were ten times higher than in 1913. There was little hope of deflating that amount of money. But instead of a massive devaluation to rebuild its finances, the German´s adopted a policy of systematic inflation. France had expanded its currency by 350% during the war, pushing up prices equivalently, but she avoided hyperinflation by limiting the issue of new currency, which resulted in a drastic plunge in the French workers and peasants standard of living.