It’s October 1921, and Germany is in crisis: Upper Silesia is about to be divided with Poland, and the German Mark begins to free fall: https://youtu.be/cZBDyrXji5Q
The German republic that emerged from the November 1918 revolution faced crisis after crisis in its first few years. There were uprisings from the left, coup attempts from the right, and political assassinations by fanatical nationalists. The Versailles Peace Treaty also imposed Allied occupation of the Rhineland, disarmament, war reparations payments, and territorial losses. On top of all that, the economy had crashed. In today’s episode we’ll take a closer look at two aspects of the Weimar Republic’s troubles in 1921: the beginning of the world’s most famous case of hyperinflation, and the division of Upper Silesia with Poland – and it all happened exactly 100 years ago.
Before the outbreak of the First World War in 1914 the German Mark was considered a stable and trusted currency backed by Germany’s growing economic power. The strains of total war however, drove down its value and by 1918 the Mark lost half its value. The Imperial German government chose to stop backing its bank notes with gold and instead created new credit institutes and printed more money to finance the war. One of the flaws in this system was that people ad companies could take out almost unlimited credit.
Germany could have tried to combat wartime inflation by raising taxes, but this might have had a negative effect on morale. Instead they tried to raise funds with war bonds which allowed German citizens to lend money to the state. But the financial deficits caused by the war could not be made up by the sale of war bonds, and the money presses kept on running. By 1917, the amount of money circulating in Germany was 5-times higher than it had been in 1913.
Banker and outspoken critic of the reparations Hjalmar Schacht later reflected on the problem:
“One war bond after another turned most of German private wealth into paper obligations for the state. Our enemies, especially England, chose another path. They financed the war through taxes which mostly impacted industries and groups who profited from the war. English tax policy proved to be more socially just than the German policy of war bonds, which lost their value after the war.” (Fergusson 44)
In August 1921 the Vossische Zeitung explained what happened to its readers:
“[…] the reason for the devaluation of our currency and loss of purchasing power of the Mark was neither the balance of trade during the war nor our military situation abroad. It was rather the exploitation of our currency for the purpose of creating money for the [government] by a fictional increase in our total revenue. The country […] constantly created new paper money and new wealth on paper, while the real national wealth was continuously eaten up by the war.” (Fergusson 46)
Once the German Empire collapsed and the armistice was signed in November 1918, the financial bubble burst. In fact even a few days before that, on November 7, one of the first mass demonstrations in Munich was caused by an increase in the price of beer by 6 pfennigs per litre. This was a sign that the population was already reaching the breaking point from losing their purchasing power.
The post-armistice political and economic crisis only accelerated the devaluation of the Mark. German exports were handicapped by the loss of its colonies, the British blockade that lasted until mid-1919, the Allied occupation of the Rhineland, and the loss of important industrial regions to Poland and France. Internally Germany’s economy was paralysed by revolution and counter-revolution, worker strikes, armed insurrections, and frequent demonstrations.
The Mark began to go into free fall. In 1913, 20 German Marks were worth 1 pound sterling. In December 1918, it was 43:1. By December 1919, 185:1 - and that was just the beginning. Meanwhile, living expenses had risen 8-fold since 1913. It seemed to some observers that the German republic was on the verge of bankruptcy.
Another factor in the German crisis came to a head in April 1921. The Allies presented the London Schedule of Payments, the final war reparations bill they expected Germany would pay. The total, which the Germans had negotiated down from previous offers, was 132 billion gold Marks payable in annual installments of 2 billion plus 26% of the value of German exports. If they defaulted the Allies could extend their occupation and charge the Germans more. The announcement sent the Mark crashing again – the exchange rate against the pound was now 268:1. The crisis caused Chancellor Konstantin Fehrenbach’s government to collapse.
It’s worth mentioning that the Republic of Austria was experiencing an even worse case of inflation than Germany in 1921. Austria-Hungary had adopted a similar policy of money-printing during the war, and the dismemberment of the Empire left the new Austrian Republic an economic wreck. Austrian Anna Eisenmenger described the situation in her diary:
“Women bought large quantities of sugar, coffee, or other goods, to protect themselves against price increases. […] Others spent their money willy-nilly, since the next day wine would be more expensive anyway! Prices rose by the hour, and people were possessed by a buying mania…store owners reacted by giving any excuse to close their shops.” (Fergusson 149)
Similar scenes in Germany became much less common in the summer of 1921 as the Mark began to stabilize, but was still worth far less than in 1918.
So by 1921 postwar political instability and economic dislocation in Germany had set in motion increasing inflation which had temporarily calmed in the summer. One factor contributing to the stabilization was the outcome of the plebiscite in the disputed region of Upper Silesia.
The ethnically-mixed province of Upper Silesia was part of Germany that was now a disputed territory with neighbouring Poland. According to the terms of the peace settlement, a vote was held – and 60% of Upper Silesians voted to stay with German rather than join Poland. The Poles claimed the Germans had cheated, but in any case the Allies were not legally bound by the results of the vote.
Differences of opinion soon emerged between the Allies as to where the border should be drawn. France wanted to favour Poland, while the British were more concerned about preserving some of the region’s important industry so the German economy could recover. When it became clear that no compromise could be reached without risking lasting damage to the alliance, France and Britain broke off the talks. Meanwhile, a local proxy war had broken out between pro-German and pro-Polish militias.
Given the deadlock, the future of Upper Silesia was handed over to the League of Nations. Neutral delegates from Belgium, China, Spain and Brazil were selected to determine the border based on objective data – even though the Germans protested they might be pro-French.
After two months of deliberations, the League experts made a recommendation, and the decision was announced on October 20, 1921. The new border left two thirds of Upper Silesia in Germany and one third in Poland. Most of the industrial sector, coal and iron ore mines went to Poland. Neither side was satisfied with the decision, and Germany issued a note of protest. The French also protested on behalf of Poland but the British refused further changes.
The fighting in Silesia stopped. The council had prioritized economic factors over historical, cultural ties and the local Silesian identity, The new border caused further economic dislocation: workers could no longer reach their place of work, suppliers couldn’t reach their customers, and vice versa. Both sides predicted poverty and a rush of unemployed emigrants.
The German government and political parties were outraged, and put little stock in Allied promises that minority and economic rights would be protected on both sides. German Silesian and Centre Party politician Carl Ulitzka expressed his anger to the Reichstag:
“The decision of the Inter-Allied Powers presents itself as a serious, monstrous breach of the law, as a political double-cross, as an unprecedented damage to the German nation. As an Upper Silesian I want to emphasize that it is a mockery of the grandiosely announced and guaranteed right to self determination.” (Neubach 34)
The loss of most of Upper Silesia’s economic potential was yet another blow to the German Mark. The government therefore decided to increase taxes to fight the growing deficit.
Regular German citizens in 1921 had to pay four main taxes, the most important of which was income tax. The taxation system did not mix well with high inflation. As the Mark lost value, the government printed more money. But to regular Germans it was easy to see that prices were going up, and harder to imagine an abstract loss of value for the currency. Furthermore, Salaries and wages rose artificially to compensate, which meant many Germans now had to pay more income tax even though the new money they earned had little value.
For the government, it was not too difficult to apply the higher tax rates to most of the population, but taxing wealthier Germans turned out to be trickier. Although former Finance Minister Matthias Erzberger had reformed the tax system, there were still quite a few loopholes.
If there was one group of Germans to come out of the Great War in a better economic and social situation, it was private industry. Like every other belligerent, Germany had relied on its chemists, engineers, and manufacturers to continue the war, which meant they made financial gains. Now that the military had lost its leading role in society, industrialists and factory owners saw themselves as the new elite – and like the officer class they replaced, they were often no friends of the republic.
The Berliner Tageblatt reported on the ways in which wealthy Germans avoided paying their share of the tax:
“The business taxes bring nearly no income because any kind of expense can be written off...including the cost of private cars for the company owner and directors. The respect for our taxes has fallen so low that many hundreds of thousands of well-off citizens haven’t even paid their taxes for the year 1920. The entire tax system is a shaky house of cards.” (Fergusson 96)
Many wealthy German and foreign industrialists even took things step further, and actively helped to destroy the Mark. They built up credit accounts abroad, where the German tax authorities couldn’t reach them. Often disguised via Dutch bank accounts, they speculated against the Mark through foreign currencies like the Swiss Franc. Even less wealthy Germans began to avoid putting their money in German banks and instead relied on private tax advisors to get them into the foreign speculation market.
British diplomat Joseph Addison commented on the rampant speculation in September 1921:
“There is an enormous increase in speculative activities. According to reports, millions of people in this country are buying foreign currencies and stockpiling foreign bank notes to escape taxation. I barely know any German, no matter their gender, who doesn’t speculate with currencies like the Austrian Krone, Polish Mark and even the Kerenski-Rubel.” (Fergusson 89)
Another technique to evade taxation was to go on a spending spree. Wealthy Germans often threw expensive and extravagant parties to reduce their taxable income. At the same time, unemployment numbers were rising and workers became more and more frustrated. The political left hoped to use the situation to its advantage, and organized demonstrations and strikes. Leftist tactics had the result of pitting city workers against farmers and peasants, and putting the government under more pressure. The authorities feared the radical left’s calls for an end to capitalism and the possibility of more leftwing uprisings after those of 1919 and 1920, so they printed still more money to keep the peace.
The ongoing collapse of the Mark was far more than a crisis for economists and tax departments. For regular Germans, a stable currency represented trust, stability and measurement of value in everyday life. The value of money guaranteed the value of work, the hours spent in a factory each day, or the price of bread – not only today, but tomorrow and the day after that. The absence of these guarantees ate away at the social fabric of an already polarized and violent county.
High inflation, capital flight, the devaluation of the Mark, foreign speculation, and increasing state deficits all painted a bleak picture of the German economy in 1921. The government was proving unable to regain value through taxation, and simply continued to flood the market with fresh money.
In October 1921, a high profile group of bankers and financial experts from Switzerland, Italy and Germany came together to discuss Germany’s inflation problem. Their conclusions were sobering: sooner or later it would be impossible for the German republic to pay war reparations and keep the domestic economy afloat. If the trends continued, eventually Germany would have to declare bankruptcy – perhaps sooner rather than later. The German government owed payments of 113 Billion Marks due in February 1922, but its income was less than 90 Billion. Few Germans could understand what was really happening or see through this so-called “delirium of billions” anymore, even the experts.
Minister Walter Rathenau was one of those at a loss:
“The majority of statesmen and financiers thinks only in terms of paper. They sit in their offices and stare at the papers that lie before them. And on these papers there are numbers which in turn represent paper. They write down zeros, although nine zeroes mean a billion. A billion rolls easily off the tongue and is easy to say, but no one can actually imagine a billion. What is a billion? Are there a billion leaves in a forest? Who knows?” (Ferguson 79)
As Germany plunged further into the inflation crisis in late 1921, Rathenau and millions of other desperate Germans could not know that the worst was yet to come.
Literature and Sources:
- Feldman, Gerald: Vom Weltkrieg zur Weltwirtschaftskrise. Studien zur deutschen Wirtschafts-und Sozialgeschichte 1914-1932. 1984.
- Fergusson, Adam: Das Ende des Geldes. Hyperinflation und ihre Folgen für die Menschen am Beispiel der Weimarer Republik, 1975.
- Grosch, Waldemar: Deutsche und polnische Propaganda während der Volksabstimmung in Oberschlesien 1919-1921. 2002.
- Lewek, Peter: Arbeitslosigkeit und Arbeitslosenversicherung in der Weimarer republik 1918-1927. 1989.
- Michalczyk, Andrezej: Celebrating the nation: the case of Upper Silesia after the plebiscite in 1921.
- Neubach, Helmut: Die Abstimmung in Oberschlesien am 20. März 1921.2002.