Cash for capers: German children play with stacks of money in 1923. By the end of that year, the exchange rate was 4.2 trillion to the dollar. Photograph: Hulton Deutsch/Corbis.
Germans were recently asked to rank their anxieties in order of intensity. Their foremost fear, it transpired, was of helplessness in old age. Second – taking precedence over cancer, or terrorism, or unemployment – came the fear of inflation. This extraordinary finding was published by the respected Allensbach Institute, 90 years after the great German hyperinflation came to an end in the autumn of 1923.
It has become commonplace to blame the unrelenting German attitude towards the ills of the eurozone periphery on the economic trauma of the early Weimar years. The German electorate’s phobia determines the actions of its political representatives, and the rest of Europe pays the price. There is truth in all this. But why specifically a German trauma? The German inflation was not unique. At the same time, Austria, Hungary, Russia and Poland all suffered from hyperinflation. In fact, Hungary suffered inflation again after the Second World War, on an even bigger scale. As did Greece. France and Italy have suffered from very damaging inflation. Why does none of these countries carry permanent scars from the experience in the same way as Germany?
The convention, again, has been to look back at the Weimar inflation as a kind of prequel to Hitler, to explain the preoccupation with it as a matter of painfully learned consequences. There is a problem with this argument. It was actually economic depression, not inflation, that put Adolf Hitler in power in 1933. The depression of the early 1930s, accompanied by what might be called hyperausterity, created six million unemployed in Germany and brought the toxic plant of Nazism into flower. If it was an extreme of deflation (admittedly partly rooted in fear of a renewed currency collapse) that finally inflicted the nightmare of Nazism on Germany and Europe, why do German politicians, writers and intellectuals – and with them the broad German public – not have the same fear about austerity and its discontents?
Perhaps we should go back more than 90 years and start the story again.
Less than four years after the most terrible conflict the world had ever seen, an avowedly reforming government was in crisis. It struggled, in the face of near-insuperable political, economic and financial difficulties, to sustain the programme of social betterment that it had promised the war-weary German masses when it came to power.
A major destabilising factor was the often violent opposition of the former establishment and its conservative political representatives, who could not reconcile themselves to losing the power they considered their God-given right. This reached its apogee with the assassination of Foreign Minister Walther Rathenau, a leading member of the elected government and co-founder of what we now call the Weimar Republic. Rathenau was gunned down in the street by a group of young terrorists. These killers and their accomplices were drawn from the ranks of what had previously been the German upper class. It was as if, in the spring of 1949, the Labour foreign secretary Ernest Bevin had been murdered by a militant gang of Wykehamists and Old Etonians.
Rathenau died on the Königsallee, a suburban boulevard in south-west Berlin, on the morning of Saturday 24 June 1922. He was being driven, sitting in the back of a fairly modest open-topped car, to a routine appointment at his office.
The site of the assassination is marked by a simple granite slab and a plaque at a point where the Königsallee enters a sharp curve before joining the Kurfürstendamm. From here, it is a straight run into the centre of Berlin. To make the curve, Rathenau’s car had to slow down, but as it did so a larger vehicle – also with its top down – pulled out to overtake. A young man in a leather coat and cap stood up from one of its rear seats and levelled an automatic rifle at the minister. He fired several shots. As the car accelerated away, another young man threw a grenade. The explosion briefly tossed the minister into the air and then left him sprawled motionless across the back seat. By the time Rathenau’s chauffeur managed to pull over to the side of the road, his passenger was almost certainly dead.
The Königsallee has changed surprisingly little since 1922. It is possible to follow the foreign minister’s route to his death on Google Street View and see that it is still lined with villas and apartment blocks dating from the late 19th and early 20th centuries, when Germany was booming and the country’s bourgeoisie prospering along with it.
In 1914, Germany, with a population of nearly 70 million, occupied second place after the United States among the industrial powers (Britain was third). Despite the conscription of nine million male members of the working population into its armed forces, and although the demands of war production had caused severe economic distortions, postwar Germany remained a major engine of the European and the world economy.
After the overthrow of the kaiser and the monarchical rulers of other German states in November 1918, the new republican government, dominated by the Social Democrats, promised peace, democracy and prosperity. It set two great domestic priorities – to demobilise and re-employ the millions of conscripts who had survived their time in the trenches, and to establish a fairer and more free society. Above all, it promised to recompense ordinary people for their sufferings in the four years of war.
The dream of a democratic Germany, able to cast off its authoritarian, militarist past and reintegrate itself into a peaceful postwar world, received its first big blow in June 1919 with the announcement of the Versailles Treaty. Its terms were harsh. Germany would lose large chunks of territory, including Alsace and the rich, mineral-producing regions of Lorraine (returned to France), the Saar Basin, the industrial area of Upper Silesia (ceded to Poland) and the old Prussian province of Posen, along with a corridor to the sea for the Poles that left East Prussia cut off from the rest of Germany except by sea or air. The Reich lost between 6.5 and seven million people, more than 10 per cent of its pre-war population. It would also be forced to pay reparations, as yet unspecified, but expected to amount to hundreds of billions of pre-war (so-called gold) marks.
A wave of anger swept Germany. Its people were not alone in perceiving Versailles as unjust and destructive. In his book The Economic Consequences of the Peace (1919), J M Keynes – who had resigned from the British delegation to Versailles in disgust at the terms – predicted that the burden of reparations would ruin Germany and thus the postwar European economy. Many others, especially in Britain, agreed with him.
Ernst Troeltsch, a prominent figure of the time in Germany’s ominously small community of liberal academics, described the backlash on the right: “The whole legend was once more spreading abroad that only the defeatists at home, the Jews and the Social Democrats, had broken the backbone of our proud army and that if we had not been so sentimental the most glorious victory could have been ours.”
Within a year of the armistice, a resurgent nationalist right had begun to fight back. When fresh elections were held in June 1920, parties that rejected the Versailles settlement made strong gains. The share of the vote won by the republican “Weimar Coalition” of Social Democrats, the Catholic Centre Party and left liberals fell from 75 per cent the previous February to a little over 50 per cent. In Bavaria, where the unification of Germany 50 years earlier had been widely resented, nationalist paramilitaries and their local political allies began to turn the state into a so-called cell of order. It became a refuge for reactionary forces, including those committed to the violent overthrow of the republic. All this was not just about national pride. It was also about money.
Like all the belligerents, except the United States, Germany had run up enormous war debts. Britain and France borrowed on the international markets, leaving their governments heavily indebted abroad, principally to America, which consequently became the world’s largest creditor (and the dollar the world’s soundest currency). Russia, too, had borrowed abroad before the revolution, but after they seized power the Bolsheviks defaulted in quick order.
The situation for Germany was different. Its capacity to tap the international financial markets had proved extremely limited. The government’s chief source of war finance therefore became the German people. A series of war bond drives, the final one in the autumn of 1918, backed by energetic publicity campaigns that included early cinema advertising, raised upwards of 100 billion gold marks. Most bonds paid roughly 5 per cent over ten years. The patriotic citizen (or institution) helped the government and was guaranteed a return. Germany, like Britain and France, had abandoned the gold standard. Billions more were raised by persuading the nation to exchange its gold for paper marks. An inflationary trend, gentle at first, set in.
Thus, unlike the French and the British, most of the German government’s actual war debt was domestic. However, it was now committed to paying much more, in hard currency, in reparations. That was the difference between winning and losing a war.
Civilian Germany was not psychologically or financially prepared for defeat. As late as the summer of 1918, the army had achieved advances that appeared to put it within reach of victory. The Reich’s military collapse had happened suddenly and the effect was disorientating. Many of the bonds for Germany’s failed war had been bought by business and institutions. Of the individuals who had stepped forward in their country’s hour of need, believing their investments guaranteed by certain victory, a disproportionately large number came from Germany’s exceptionally privileged, academically educated middle class, the so-called Bildungsbürgertum – academics, teachers, higher-ranking civil servants, Protestant clergy, lawyers, doctors. They would suffer most when the war was lost.
The value of the bonds started to fall before the Great War ended. In the years that followed, the returns dwindled to nothing. Simultaneously, professional salaries and fees had begun to decline steeply, provoking loud complaints even while the kaiser was still on the throne.
With the Social Democrats and their nonsocialist, left-of-centre allies in power after 1918, things got worse. The wages and welfare of ordinary workers, manual and clerical alike, were far more important to the new government than the living standards of professors and law officers. Devaluation of the mark, whether tolerated or actively encouraged, led to increased inflation, but ensured that German goods, as they flooded the postwar markets, were highly competitive. After a spike in unemployment following demobilisation, the labour-market situation improved dramatically.
The incomes of the pre-war elite, which had already declined relative to that of the average worker, continued to be eroded by inflation. The crucial element of private wealth, based on property, savings and “safe” fixed-income investments, which for two centuries or more had cascaded down the generations to subsidise this group’s position in the world, evaporated. A correspondent of the Manchester Guardian, reporting from Germany in 1920, wrote:
The yearly salary of the Director of one of the greatest museums in Germany is 30,000 marks, not allowing for heavy taxation. This Director, notwithstanding his keen desire to entertain an English visitor . . . was unable to offer him a sandwich or a biscuit in his almost palatial home. There was practically no food in the house.
Above all, the sons of such men could not afford to study as their fathers and grandfathers had done. Their futures were no longer guaranteed.
The decline in the value of the German mark immediately after 1918 appeared, on the whole, to be manageable. Much more damaging to the national psyche, initially, were the lost war and the political volatility that ensued.
Faced with violence from far-left groups inspired by the Bolshevik revolution, the republican government felt itself forced to call on what was left of the German armed forces. More worryingly, it also recruited so-called Free Corps units, composed of demobilised war veterans. In the Ruhr, Hamburg and central Germany, the Free Corps suppressed communist uprisings, often with great bloodshed. Only after ultranationalist Free Corps leaders tried to seize power in the “Kapp Putsch” of March 1920 did the government move against them. Many went underground, beginning a campaign of assassinations.
The mark-dollar exchange rate, 4.2 to one before the war, had fallen to 50 by the end of 1919. In 1920/21, it plateaued at a slightly higher level. Then it began to decline again, and even more sharply after the assassination of Rathenau undermined foreign confidence in Germany.
The inflation era that followed was a debtor’s paradise. Businesses could borrow money at favourable rates and pay it back in devalued cash. Tax debts dwindled to almost nothing by the time payment fell due. Mortgages could be liquidated for small change.
As for rents, in 1913 they consumed about 20 per cent of the average German’s income. By 1923 – with tenancies still subject to strict controls introduced during wartime – the proportion had slumped to 0.7 per cent. Good for renters, dreadful for landlords. Unionised workers in particular also managed to keep up, more or less, with exchangerate and price changes.
Big business gained other advantages from the plummeting mark. The proceeds of those booming exports could be parked safely abroad in hard currency, or repatriated and used to buy businesses, properties, plant and other assets at bargain prices (until the peak of the inflation, domestic prices lagged considerably behind changes in the exchange rate). This was how Hugo Stinnes, the notorious Ruhr “king of inflation”, became the owner or co-owner of four and a half thousand enterprises, from iron and steel to coal, from newspapers to shipping, and forestry to hotels.
No less favoured was the farming interest. It benefited from the liquidation of debt and from the urban food shortages caused by the fall in food imports, resulting from the collapse in the mark’s purchasing power abroad. The black market flourished. Bavarian peasants were rumoured to keep stables of racehorses.
There are historians who argue that many, if not most, Germans benefited from the inflation, at least until the French invaded the Ruhr in January 1923 and the exchange rate went crazy, falling from thousands of marks to the dollar to millions, then billions and, by November, trillions. This was when all possible advantages disappeared. Unemployment rocketed. Faced with the impossible prospect of an economy based on barter, gold, or foreign currency as the only viable means of exchange, currency reform became unavoidable. In mid-November 1923, the socalled Rentenmark was introduced. The inflation was soon over.
Meanwhile, Germany had undergone a social revolution. The proportion of the nation living off unearned or investment income had tumbled from 15 per cent in 1913 to 3 per cent in 1924. Germany had become more modern and more equal – more like other industrial countries.
The academically educated middle classes, who had benefited spectacularly from the anachronistic distribution of wealth in the pre-war years, recovered neither their income advantage nor their lost investments, be they in war bonds or bank and savings deposits. The German government, which during the war had borrowed over 150 billion gold marks from its citizens, repaid the money in devalued and eventually worthless paper marks. It was reckoned that by the end of 1923, when the currency was reformed (at a rate of 4.2 trillion marks to the dollar and a trillion inflationary marks to one new mark), the entire German domestic debt amounted to a little more than 15 pfennigs in real money. This was confiscation by government on a stupendous scale.
For all the sincere patriotic outrage that moved the young killers of the far right, these thoughts should stay with us when we consider the roots of the “German trauma”. Foreign Minister Rathenau was killed because he was prepared to compromise with the Allies (and because he was a very rich Jew). The other well-known victim of the right-wing terror, the former finance minister Matthias Erzberger (a socially aware Catholic from a humble background), had been murdered the previous year. He was marked for death mostly because he had advocated a compromise peace and helped negotiate the armistice in November 1918. It was also Erzberger, however, who had reformed the taxation system to favour producers over rentiers, in such a way that the devotees of the patriotic right, who to a disproportionate extent belonged to the property-owning, fixed-rate investing, academically educated middle class, were further divested of what they regarded as their birthright.
The two young men who killed Rathenau – Erwin Kern, who had fired the shots, and Hermann Fischer, who had thrown the grenade – died two weeks later in a shootout with police. Kern was the son of a senior Prussian civil servant. Fischer’s father was a professor of fine art. Other participants in the conspiracy went on trial that autumn. They included the driver of the getaway car, 20-year-old Ernst Techow, whose father held an important job in the Berlin city administration. Another of the plotters was Ernst von Salomon, the son of a prominent Berlin police official.
After serving five years for his part in the murder, von Salomon went on to have the most idiosyncratic career of all the conspirators. Though he shared many of the Nazis’ ideals, in 1933 he refused to sign a petition by German writers of “most loyal allegiance” to the new Hitler regime. He was detained for a while and spent the war years in rural obscurity, in the company of a life-partner who under the Nazi Nuremberg Laws was classified as a “full Jewess”. After 1945, von Salomon became a well-known author of novels and film scripts, and a prominent pacifist. His novel-cum-memoir Der Fragebogen (The Questionnaire) was written in the late 1940s as a critical response to the Allied denazification campaign. It represents a striking apologia for the intelligent young men of cultivated background who, like him, had become enemies of the first German democracy. It recalls the inflation, Versailles, national humiliation, a disinherited generation. The book became a bestseller and exercised a profound influence in the new federal republic of West Germany.
After 1918, Germany’s academically educated middle class lost more than any other group. Economic status apart, it suffered from the demise of the elaborate network of monarchical authority, spread over many localised power centres, that had been a particular feature of pre-1914 Germany and in which, as a kind of intellectual seneschal class, it had played a leading role. Its fall therefore took place from a great height. This class lost a position of unchallenged privilege within Europe’s most powerful country and became, in practical terms, just one group competing in a raucous modern political and economic marketplace for which it felt little else but contempt and loathing.
All the same, its children and grandchildren, because of their continuing inheritance of education, of pride and self-confidence, turned out to be a great opinion-forming force over the rest of the century. In 1914, the academically educated middle class made up less than 1 per cent of the population, but what it felt and thought was extremely important, and has remained so. It taught, it wrote, and, even in the changed circumstances after 1918, it knew how to publicise its grievances.
Every old, established and academically educated family in Germany seemed (and seems still) to have a story of how the inflation caused such forfeiture of status and wealth. The collective memory of this highly influential group was – even remains, nine decades later – suffused not just with a sense of economic loss but also one of stark social decline.
The resulting historical echo resonates beyond mere economics or even politics and seems to account in large part for Germany’s lasting neurosis about financial stability. It played an important part in transforming the experience of inflation, which had been a harsh but more or less bearable experience for many Germans – one shared by the populations of many other countries in the 20th century – into a consensus of universal national catastrophe.
This consensus haunts the nation’s collective memory and constitutes a decisive influence on German government policy. After 1945, the Bundesbank was obliged under its constitution to keep the currency stable. Germans turned their strong mark into a fetish. In 1999, most were reluctant to join the new euro, which promptly became known as the teuro (a pun on teuer, German for “expensive”). It meant ceding control of their money to feckless foreigners – a suspicion that was confirmed by the eurozone crisis a decade later. The “fringe countries” had run up huge debts by spending money they didn’t have, and now Germany, which had learned its lesson decades ago, would, it seemed, have to pay for their misdeeds.
Only by acting reassuringly tough with the debtor nations, and so appearing to protect the savings and living standards of her fellow Germans (who are generally much richer and therefore more attached to financial stability than they were 90 years ago), can Chancellor Merkel hope to exercise the leadership that Germany’s industrial strength confers – at least, in a way that is acceptable to her domestic electorate. This makes her very unpopular with the Greeks, Spaniards, the Irish and the other austerityblighted nations, but she sees it as the only way to master the euro crisis without inflicting on Germans the kind of damage they suffered during the early 20th century. It is also, of course, the way she will get re-elected on 22 September.
As the liberal German weekly Die Zeit pointed out on 26 June this year, under the headline “Where is it then, this inflation?”, in no other country does a percentage point or two’s blip in the price index cause a national panic. All the same, it seems that, whoever wins the election, the historic legacy of “the inflation”, and of a vanished class’s sudden ruin, will continue to hold the victor in its grip.
Frederick Taylor’s latest book, “The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class”, will be published by Bloomsbury on 12 September