This PDF is a selection from an out-of-print volume from the NationalBureau of Economic Research

Volume Title: German Business Cycles, 1924-1933

Volume Author/Editor: Carl T. Schmidt

Volume Publisher: NBER

Volume ISBN: 0-87014-024-8

Volume URL: http://www.nber.org/books/schm34-1

Publication Date: 1934

Chapter Title: The Treaty of Versailles, Inflation and Stabilization

Chapter Author: Carl T. Schmidt

Chapter URL: http://www.nber.org/chapters/c4933

Chapter pages in book: (p. 1 - 24)

GERMAN

BUSINESS CYCLES

1924—1933

CHAPTER ONE

THE TREATY OF VERSAILLES,

INFLATION AND STABILIZATION

THE fateful decade of war, revolution and currencyinflation— 1914—24—witnessed sweeping changes inthe economic life of Germany. On the eve of theWorld War, Germany was one of the great economicpowers of the world. In industrial activity, in worldcommerce, in international finance, in the aggres-siveness and resourcefulness of its business leaders,it challenged or surpassed every one of its rivals.Ten years later the formerly powerful Germaneconomy was perilously near the brink of chaos.The tremendous spiritual and material demands ofa disastrous war, the acceptance of the severeprovisions of the treaty of peace, the domestic in-stability attending political revolution, and thecatastrophic currency inflation—these factors hadwrought havoc in the business life of the nation.

Some notion of the economic consequences ofGermany's defeat in the World War and of itsplunge into the maelstrom of inflation is essential

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to an appreciation of the character of the fluctua-tions in its economy after the return to more stableconditions, for certain peculiar features of thesefluctuations were intimately related to structuralchanges imposed upon it by the War, the peacetreaty and the currency inflation.

i.THE WORLD WAR AND THE TREATYOF VERSAILLES

Public opinion in Germany has been inclined tohold the loss of the World War, and the consequentterms of the treaty of peace, as ultimately responsi-ble for all the economic difficulties of that nationsince 1918. Thus it was declared in an official mem-orandum that, because of the Treaty of Versailles,"all of the favorable conditions of the period beforethe War have disappeared; all the unfavorable con-ditions have been strengthened."' The full impli-cations of this statement can hardly be admitted tobe correct. Certainly the economic misfortunes ofGermany were to a large extent a part of the gen-eral economic misfortunes of post-War Europe.Nevertheless, defeat and the Treaty of Versaillesdid result in changes in Germany's economic struc-ture that were of particular significance in the sub-sequent course of its economic life.2I Deutschlands Wirtschaft, Wdhrung, und Finanzen (Berlin, 1924) p. 37.2 On the post-War changes in German economy see James W. Angell,The Recovery of Germany (Yale University Press, 1929), pp. 1—16; F. D.

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The loss of European territory, with its attendantlosses of sources of industrial raw materials and pro-ductive equipment, was serious from the economicviewpoint. The provisions of the Versailles Treatyreduced the 1913 area of Germany by 13.05 percent. The ceded had produced 15.7 percent of the total value of the German coal outputin 48.2 per cent of the iron ore; 58.8 per centof the zinc ore; 25.6 per cent of lead ore.4 Especiallysignificant for the future of German industry wasthe loss of the great Lorraine iron area. The peacetreaty erected national barriers across it, and theGerman iron and steel industry was thereby forcedinto considerable dependence upon foreign sourcesof supply. The separation of the Saar region and ofa part of Upper Silesia had much the same effect.

Self-sufficiency was further limited by the loss ofimportant arable land, about 15.5 per cent of the1913 area. As the War and the Treaty reduced thepopulation by only about io per cent, the area avail-able for cultivation was thus relatively, as well asabsolutely, smaller than in 1913. The loss of largeGraham, Exchange, Prices, and Production in Hyper.Inflation: Ger-inony, 1920—1923 (Princeton University Press, 1930), pp. 16—30; Statis-tisches Reichsamt, Deutschlands Wirtschaftslage unter den Nachwirk-ungen des Weltkrieges (Zentralverlag, Berlin, 1923); Harms, ed., Struk-turwandlungen der Deutschen Volkswirtschaft (Reimar Hobbing,Berlin, 1929).S The territories surrendered by Germany in accordance with the Treatyof Versailles were: Alsace-Lorraine, Eupen and Malmedy, North Schies-wig, parts of West Prussia, Posen and Silesia, and MemeL'Wiadimir Woytinsky, Zehn Jahre Neues Deutschland (Rudolf Mosse,Berlin, 1929), p.

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portions of the Eastern Provinces made for a con-siderable change in the source of food supplies. Ofthe total German agricultural production in i 913the ceded territories of East Prussia, West Prussia andPosen produced 14 per cent of the rye, 6 per centof the wheat, 12 per cent of the barley, 6 per centof the oats, 14 per cent of the potatoes and 17 percent of the sugar beets.5 The inhabitants of theseregions constituted only about 5 per cent of thetotal 1913 population of Germany. Domestic foodproduction was materially reduced and the neces-sity for additional importations of foodstuffs cor-respondingly increased6

The loss of industrial equipment that attendedthe territorial cessions was not so disastrous as wasat first supposed and was quickly more than restoredin the post-War German territory.7 However, thedomestic market for many industrial products wasrelatively smaller than before the War; that is, therewas greater dependence upon sales in foreigncountries.

Harms, op. cit., p. 23. See also Woytinsky, cit., pp. 33—5.e In fact, the average annual production of rye from 1924 to 1931 was 24per cent less than the average of 1911, 1912 and 1913 (within the presentboundaries of Germany); wheat production was i i per cent less; barley,2 per cent less; oats, i8 per cent less; only potatoes increased by 5 percent. (No comparable data of sugar beet production are available.)Yield per acre was in most instances less than before the War. (See Statis-tisches Reichsamt, Statistisches Jahrbuch für das Deutsche Reich, 1928,Berlin, 1928, pp. 72, 73; and the same source for pp. 62—3; Son-

derabdruck, Deutscher Reichsanzeiger und Preussisch er Staatsanzeiger,Nr. 300, December 24, 1931.)

'Harms, op. cit., p. 22.

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The reduction in national wealth during the Warand its continuing outflow in fulfillment of the rep-aration provisions of the peace treaty was perhapsthe most significant change.3 This shrinkage in pro-ductive wealth made it impossible for Germany todischarge its international obligations and recon-struct its economy solely by means of its own re-sources. Beginning in 1924—that is, as soon as thedomestic, political and economic situation was morefavorable—it became an eager borrower of foreigncapital. Germany was thus transformed from "oneof the world's great creditor nations . . . to theworld's largest debtor nation on both governmentaland private account."

Economically, the Germany of 1920 was thus dif-ferent from the Germany of 1913, more specialized,less self-sufficient. Its population was reduced, butits area was reduced even more. This loss placedgreater emphasis upon the finishing processes ofGerman industry and less upon the production ofraw materials; it made Germany less of an agricul-tural nation; it narrowed the domestic market forfinished goods and increased the pressure to exportthem. That is, Germany was more dependent uponfoodstuffs and raw material imports, and, at thesame time, more dependent upon foreign marketsfor the export of its industrial products. It was8 See Ch. II, Part B, Sec. i, b, for estimates of the losses in national wealthin the period 1914—23.

Angell, op. cit., p. 301.

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obliged to become a heavy borrower of foreigncapital funds.

The implications of these changes—at least so faras this study is concerned—would seem to be that(a) post-War fluctuations in German economywould be more conspicuously industrial and lessmarkedly agricultural phenomena than before theWar; (b) such fluctuations would tend to be muchinfluenced by international factors; (c) the shortageof domestic capital and the correspondingly greatdependence upon foreign sources would make fora condition of chronic strain and would lead to ex-treme sensitivity to changes in world credit condi-tions.

2. THE CURRENCY INFLATION

The period of the currency inflation, lasting fromthe end of the War until the autumn of 1923, was

characterized by further serious modifications ofGermany's economic life—modifications that werereflected in the business fluctuations of the yearsfollowing stabilization. Undoubtedly, the centralfactor making for those changes was the deprecia-tion of the mark—starting slowly, and then proceed-ing ever faster, until finally the mark was plungedinto the abyss of virtual worthlessness.

The movements of the foreign exchange rates, ofwholesale prices and of ordinary currency circula-tion, during the period 1919—23, give .a fairly ac-

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TABLE 1

INDEXES OF FOREIGN EXCHANGE, PRICES AND ORDINARYCURRENCY CIRCULATION1

1919—1923

(monthly averages)

ORDINARY

YEAR FOREIGN EXCHANGE WHOLESALE CURRENCY

AND MARKS PER DOLLAR PRICES CIRCULATION

MONTH (Pari) (1913=1) (1913=1)1919

January 2.03 2.62 5.69

February 2.21 2.70 5.81

March 2.48 2.74 6.14

April 3.05 2.86 6.35

May 3.10 2.97 6.58

June 3.36 3.08 7.04

July 3.57 3.39 6.go

August 4.70 4.22 6.74

September 6.35 4.93 7.00

October 6.55 5.62 7.15

November 9.40 6.78 7.48

December 11.40 8.03 8.27

1920

January 15.4 12.6 8.4

February 23.7 i6.g 9.0

March 20.0 17.1 9.8

April 14.2 15.7 10.3

May ii.t 15.1 io.6

June 9.3 11.3

July 9.4 13.7 11.5

August 11.5 14.5 11.9

September 15.0 12.5

October 16.2 14.7 12.8

November 18.4 15.1 12.8

December '7.4 14.4 13.5

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TABLE 1 (cont.)

INDEXES OF FOREIGN EXCHANGE, PRICES AND ORDINARYCURRENCY CIRCULATION1

1919—1923

(monthly averages)ORDINARY

YEAR FOREIGN EXCHANGE WHOLESALE CURRENCY

AND MARKS PER DOLLAR PRICES CIRCULATION

MONTH (Pari) (1913=1)1921

January 15.5 14.4 13.0

February 14.6 13.8 13.2

March '4.9 13.4 13.3

April 15.1 13.3 13.4May 14.9 13.1 13.5

June 16.5 13.7 14.0

July 18.3 14.3 14.3

August 20.1 19.2 14.6

September 25.0 20.7October 35.6 24.6 16.4November 62.5 34.2 i8.oDecember 45.5 34.9 20.3

1922January 45.5 36.7 20.5

February 49.0 41.0 21.3

March 67.5 54.3 23.2

April 69.0 63.6 24.8

May 69.0 64.6 26.8

June 76.0 70.3 29.8

July ii8.o ioo.6 33.5August 270.0 192.0 41.7September 350.0 287.0 54.8October 760.0 79.9November 1,710.0 1,154.0 126.8

December i,Sto.o 1,475.0 213.4

1923January 4,300 2,785 329

February 6,700 5,585 583

March 5,050 4,888 913

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TABLE 1 (cont.)

INDEXES OF FOREIGN EXCHANGE, PRICES AND ORDINARYCURRENCY CIRCULATION1

1919—1923

(monthly averages)ORDINARY

YEAR FOREIGN EXCHANGE WHOLESALE CURRENCY

AND MARKS PER DOLLAR PRICES CIRCULATION

MONTH (Pari) (1913=1) (1913=1)1923

April 5,850 5,212 i,o88May 11,400 8,170 1,424June 26,200 19,385 2,865July 92,000 74,787 7,231August 1,110,000 944,041 iio,i8iSeptember 23.600,000 23,948,898 4,653,115October 6,ooo,ooo,ooo 7,094,800,000 413,000,000November 530,000,000,000 725,700,000,000 65,954,000,000Dccciii ber i ,000,000,000,000 1,261,600,000,000 81,810,000,000

1 AngelI, cit., pp. 365, 366.

curate impression of the increasingly difficult posi-tion in which the country found itself. The move-ments of all other indexes in terms of paper marks—wages, cost of living, public debt of the Reich,volume of Reichsbank credit—tell a substantiallysimilar story.1°

The inflation assumed astronomical dimensions.At its height, it was a dizzy round of exchange de-preciation and rocketing prices. Finally, in the mid-dle of November 1923, when the paper markexchanged at the rate of 4,200,000,000,000 to the dol-Jar, it was replaced by a new currency. Thus the10For accounts of the course and effects of the inflation, see Graham,op. cit., AngeU, cit., pp. 17—60.

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I

period of inflation was suddenly closed by the extinc-tion of the paper mark itself.

The currency inflation had grave repercussionsupon the economic life of Germany. "The distribu-tion of wealth and income was violently altered, andin a way which greatly reduced the general buyingpower of the German people . . . and the generalstate of industrial technique remained stagnant.Many of the new enterprises and giant combineswhich sprang up during the inflation were also in-herently unsound, and at the stabilization collapsedinto mere wreckage. Even after all allowance for thedirect effects of the Treaty cessions, industrial Ger-many was far weaker at the close of 1923 than shehad been at the beginning of 1919.""

The consequences most significant for the cyclicalpattern of the years after the stabilization are thoseaffecting industrial production, business organiza-tion and the loss of capital.

During most of the inflation period the progres-sive depreciation of the currency stimulated indus-trial activity and kept the mines and factories work-ing full blast. The margin of industrial profits waswidened by the reduction in capital charges—theresult of the cancellation of long-term debts—andby the lag of wages and taxes behind the rising com-modity prices. Demand for industrial goods duringmost of this period remained quite active, in partbecause of the feverish desire of many persons to

Angell, op. cit., p. 58.

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convert the depreciating mark currency into any-thing that had inherent worth—and in part becausethe general lag of wholesale prices behind therapidly rising foreign exchange rates made for alarge export market. When, finally, after stabiliza-tion, this stimulus to exportation disappeared, manyenterprises found themselves in difficulties, for thecrippled buying power of the domestic market re-vived only slowly.

But the War and inflation, by discouraging theimportation of manufactured goods, gave Germanindustry considerable freedom from foreign com-petition in home markets. This, together with rela-tively low production costs during the inflation,tended to discourage possible technical and adminis-trative improvements. "When the stabilization oncemore exposed Germany to world competition, she.found that her industrial technique was years be-hind, and had to undertake a painful and costlyreorganization." 12 As is indicated in the discussionof the post-stabilization fluctuations, this reorganiza-tion was a factor in shaping their pattern, and wasstrikingly reflected in unemployment and in busi-ness mortality.

The inflation period also affected the numberand forms of business organizations. For one thing,it led to the founding of many new enterprises."The chaotic and fluctuating state of prices . .

gave the shrewd trader innumerable opportunitiesIbid., p. 47.

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to make a profit. . . But the chief explanationwas doubtless the fact that large numbers of clerks,officials, and others with more or less fixed incomessaw the value of what they received steadily declin-ing as the depreciation progressed, and concludedthat the only way to survive was to set up in busi-ness for themselves, where they might benefit in-stead of suffer from rising prices." Thus new firms,"mostly small and weak," were rapidly formed. Thenumber of separate enterprises at the end of theinflation was "four or five times what it had beenbefore the War." This was to aggravate the cyclicalfluctuations of the post-inflation period. Inflationalso affected the pattern of German business organ-ization by encouraging a revival of the cartel move-ment and a development of enormous combines andtrusts.'3

Finally, the period of inflation witnessed a fur-ther reduction in national wealth, emphasizingeven more Germany's dependence on foreign capitaland heightening its sensitivity to credit influences.During the years 1919—23 productivity declinedmarkedly.'4 Probably almost all of the foreign in-vestments of Germany remaining after the War were

13Ibid., pp. 49—55.14 The 1913 national income (within the confines of the post-War Ger-man boundaries) has been estimated at approximately 45.7 milliard goldmarks (Statistisches Reichsamt, Das deutsche Volkseinkommen vor undnach dein Kriege, Einzelschrift Nr. 24 zur Statistik des DeutschenReichs, Berlin, 1932). By 1923, the last year of the inflation, it prob-ably had fallen to 6o per cent of this sum (in terms of 1913 purchas-ing power of the mark). One milliard = i,ooo million.

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lost during this period. The flight from the markled to a very appreciable export of capital and toa very large transfer of assets from German toforeign hands. Much of the industrial plant andequipment erected in desperation during the in-flation was found subsequently to be a technicallyinefficient addition to the country's productive ca-pacity. Nb really accurate estimates can be made ofthe loss of actual and potential capital during thefive years of inflation. However, it is certain thatthe lessened industrial productivity, the export andthe uneconomical investment of capital funds, andthe failure to restore wasted savings—so characteris-tic of this period—contributed very largely to thecapital poverty of Germany at the end of 1923.

3. THE YEAR 1923:RUHR INVASION AND CURRENCY

STABILIZATION

The last year of the inflation, 1923, witnessed aseries of critical political and economic events: amilitary occupation of the Ruhr industrial district,the complete collapse of the paper mark, currencystabilization and a deep depression in the autumn.Particular implications of these events were to beof importance in the history of the succeeding years.

The reparation. problem came to a crisis in thelast months of 1922. Germany was granted a tem-porary moratorium on cash payments in the au-

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tumn, and it was doubtful that any considerable pay-ments could be made in the following year. TheFrench government held that coercive measures,particularly the occupation of additional Germanterritory, were necessary in order to ensure furtherpayments. At the Conference of Prime Ministers inDecember 1922 and January 1923 France and GreatBritain were unable t'o agree on the problem of rep-arations. On December 26, 1922 the ReparationCommission declared Germany in voluntary defaultof timber deliveries, and on January 9 it declaredGermany in default of deliveries of coal. The Frenchgovernment then asserted that the Treaty of Ver-sailles entitled France to take independent action,and French and Belgian troops began to march intothe Ruhr district. By the encl of January 1923,Franco-Belgian control of the major part of thathighly industrialized region was complete.

The German government contended that theoccupation constituted a violation of the Treatyof Versailles, and decided to oppose the occupationby every means except armed resistance. it sus-pended deliveries in kind to France and Belgiumon January 13. The Ruhr coal mine owners refusedto continue deliveries, and when the French andBelgians tried to move the coal and coke alreadymined the German government called upon rail-road and Rhine navigation officials not to transportthese commodities. This measure completely tied upRuhr traffic, blocked the Rhine ports with barges,

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and eventually necessitated the operation and man-agement of the railroads by a Franco-Belgian admin-istration. Further, local government officials of theRuhr refused to cooperate with the French andBelgians; this movement spread througho'ut theRhineland, except in the region occupied by theBritish. Hotel- and restaurant-keepers joined withthe shop-keepers in boycotting the troops.

The passive resistance of the German govern-ment and people called forth coercive measures onthe part of the occupying powers. The InteralliedRhineland Commission issued a series of ordinancesseizing the coal tax, customs receipts and revenuesfrom state-owned forests, and placing the coal underthe complete control of the Franco-Belgian mission.Further retaliation took the form. of fining, im-prisoning ,and deporting Government officials, in-dustrialists a.nd mine superintendents, expellingcustoms and railway employees, confiscating stateproperties, seizing Reichsbank funds, requisitioninghotels and restaurants, and closing shops.

Such an occupation of the great industrial regionof Germany obviously had serious effects. Manymines and factories in the Ruhr were closed, andproduction was much reduced. A succession ofbloody encounters between the troops and the peo-ple in the streets, mines and factories aggravatedconditions.

It is evident not only .that unoccupied Germanymust have suffered considerably from this cessation

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of industrial activity in the Ruhr but also that thefinances of the Government must have been sub-jected to intense strain as a result of the policy oflending monetary aid to those engaged in passiveresistance. Cut off from its principal industrial andmining center, deprived of its coal supply andforced to import large quantities of fuels from for-eign countries, Germany experienced increasingdifficulty in replenishing its supplies of the necessi-ties of life, of coal and of raw materials, and in keep-ing its industrial machinery in operation. In fact,German economic activity collapsed visibly duringthe summer of 1923 under the heavy weight of theburdens imposed upon it.15

The occupation of the Ruhr had a disastrous ef-fect also upon the mark currency. In November andDecember 1922 between 7,000 and 8,ooo marksexchanged generally for one dollar. Beginning inJanuary 1923, however, the price of the dollar roseso swiftly that at the end of that month 50,000marks were paid for one dollar. The Reichsbank'sattempt to support the mark exchange was success-15 Much valuable information concerning the Ruhr occupation is con-tained in the publication of the Statistisches Reichsamt, Wirtschaft undStatistik, Vols. 4 and 5 (Berlin, 1923, 1924, 1925). See also LudwigElster, ed., Volkswirtschaflliche Chronik für das Jahr (GustavFischer, Jena, 1924); Guy Creer, The Ruhr-Lorraine Industrial Prob-lern (Macmillan, 1925); Henri Lichtenberger, The Ruhr Conflict (Car-negie Endowment for International Peace, Washington, 1923); ErnstSchultze, ed., Ruhrbesetzung und Weltwirtschaft (Gloeckner, Leipzig,1927).

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ful for a short time. Within the first two weeks ofFebruary the dollar quotation was brought downto 23,500 marks, and was held about that pointuntil April i8, when the entire campaign of theReichsbank broke down. The political and eco-nomic pressure, arising largely out of conditions inthe Ruhr and Rhineland, the paralysis of the mostimportant industrial regions, the resulting increasedimports and diminished exports—all made it impos-sible for the bank to support the mark longer. Thefinancing of the Ruhr resistance was given over to theprinting presses; only an insignificant portion of theReich's outlays were covered by taxes. From then onthe currency depreciated rapidly.'6

In July began the repudiation of the mark. Sellersrefused to accept marks, first in the occupied terri-tories, later throughout the entire country. Manyretail shops closed early in the day; others were openonly a few days of the week. Farmers refused to selltheir products for depreciating marks. The catas-trophe of the currency developed into a catastropheof food and other supplies. Plunderings and riotsoccurred almost daily; finally on September 27,1923, to cope with the social dangers that the col-lapse of the mark had evoked, the Reich declareda state of siege.

A Nationalist counter-revolution broke out inBavaria. This led to Communist disturbances inJ6 This is best illustrated by the fluctuations• of foreign exchange; seeTable i.

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Saxony and Thuringia. In the Rhineland inthe Palatinate separatist agitation was rife.

The fall of the mark was accompanied by a tre-mendous rise in the prices of all commodities.Measured in terms of gold marks, there was a four-or five-fold increase in the cost of living during

Measured in terms of paper marks, the in-dex of the cost of living rose from 1,120 rn Januaryto 1,247,000,000,000 on November 26.18 Wages andsalaries lagged considerably behind prices of com-modities. An ever-increasing number of familieswere reduced to a bare minimum of subsistence bythis widespread leveling down of wages and salaries.

During 1923 the number of unemployed work-ers rose startlingly. Unemployment allowances weregiven to 150,220 persons in January. In September,in the unoccupied territory alone, 534,360 were re-cipients, and in December, 1,532,065.19 Thus thepurchasing power of the workers was reduced. Con-tinuing inflation signified the destruction of the sav-ings of the middle class. The standard of living, par-ticularly of the urban population, declined seriously.The decline in purchasing power is evident in nu-merous indexes. Imports of iron ore, for instance,fell from 1 1 million tons in 1922 to 2.3 million tonsin 1923. Statistics of foreign trade in 1923 reflectconsiderable decreases in the imports of raw rubber,17 Wirtschaft und Statistik, Vol. Nr. p.18Materials for a Study of Germany's Economy, Currency and Finance(Berlin, 1924), p. 26.Elster, op. cit., p. 714, See also Wirtschaft und Statistik, Vol. passzm.

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cotton, wool, copper ore and other raw materials.At the same time the annual imports of coal rosefrom 12.5 to 25.3 million tons—evidence of the sev-erance of the Ruhr mines from unoccupied Ger-many.20 Exportation became increasingly difficult.Many factories were forced to close; others oper-ated only two or three days a week.

Meanwhile, the German government had beentrying to make satisfactory arrangements regardingpayment of reparations. During the spring andsummer of 1923 at least three offers of variousamounts were made, to be rejected each time bythe French government, which made it clear thatFrance and Belgium were one in their intention tostay in the Ruhr until Germany paid the scheduleof reparations fixed in May 1921. Moreover, theFrench announced that they would not treat withGermany or discuss any conditions until the latterabandoned its policy of passive resistance in theRuhr.

And the effects of passive resistance proved toocostly to the Germans. The failure of German for-eign policy and the aggravation of political andeconomic conditions led to the fall of the CunoCabinet on August 12. A new cabinet under Dr.Stresemann supported a policy of currency stabiliza-tion, which implied the end of the Reich's financialsupport of the occupied territories. Obviously thecessation of this support necessitated abandonment

Schultze, op. Cit., pp. 194—200.

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of passive resistance. On September 26 the Govern-ment announced that the policy of resistance hadbeen abandoned.

Since the French had summarily rejected severalattempts of the German government to negotiate,it was necessary to permit the industrialists in theoccupied regions to attempt a settlement of theeconomic impasse. A series of agreements betweenthe French authorities and the local business leadersfollowed. As a result, production in the Ruhr wasgradually resumed and tension relaxed.

In the midst of these difficulties, the German cur-rency system was suddenly reformed. A decree estab-lishing the Rentenbank was announced on October15, 1923. The Reichsbank ceased further discount-ing of Reich treasury bills and was relieved of thecare of the Reich finances. The capital of the newbank, fixed at 3,200,000,000 gold marks, consistedof mortgages upon all German agricultural and in-dustrial property. It was authorized to issue notesthat were receivable for governmental dues but nototherwise legal tender. The Rentenbank began tofunction in November. The Government promptlyborrowed 1,200,000,000 Rentenmarks, of which200,000,000 sufficed to retire discounted Treasurybills, mostly held by the Reichsbank, at the rate ofone Rentenmark to one trillion paper marks.21 TheReichsbank then established, at this ratio, inter-21 The mint par of exchange of the Rentenmark and the Reichsmark inUnited States money is 23.8 cents.

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convertibility between paper marks and Renten-marks. Thus temporary stability of the currencywas effected by the introduction of the Renten-bank.22

As a publication of the Reichsbank declares, "oncethe mark was stabilized, Germany soon came to thepainful realization that the collapse of the currencyhad brought about far-reaching and revolutionarychanges in her economic system. Large sections of thepopulation had lost their resources, and only a veryfew had been able to derive any benefit from the in-flation. Liquid capital had been practically destroyed.The inflation had put a stop to the formation ofnew capital and had eliminated the possibility ofsaving, in the generally accepted sense of the term.The effect was an unwholesome investment intangible assets of all kinds as well as unwarrantedexpenditures in useless luxuries. Germany thusemerged from the inflation in a very illiquid condi-tion and practically without any capital in the formof money." 23 The deflation period, as will be shownin the following pages, was characterized by deepdepression in 'many industries and by widespread un-employment.22 See H. Schacht, The Stabilization of the Mark (Adeiphi, 1927), for aninteresting account of this reform. See also Viscount D'Abernon, Ger-man Currency: Its Collapse and Recovery, 1920—1926, Journal of theRoyal Statistical Society, Vol. 90, 1927, pp. i—do; Carl Bergmann, TheHistory of Reparations (Houghton Muffin, 1927), pp. 173—216." Quoted by R. L. Buell, Europe: A History of Ten Years (Macmillan,1929), p. 174.

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While these financial reforms were being ac-complished, substantial steps were taken in thedirection of a readjustment of the reparation planthat would remove the problem of reparations fromthe field of international politics. During the periodof passive resistance the German government hadproposed the appointment of an international com-mittee of experts to determine Germany's capacityto pay reparations. The French government at firstrefused to consider this proposal, but, after pres-sure from the United States and Great Britain, con-sented in November 1923. In this manner the DawesCommittee came into being.

Thus, drastic action on the part of the Reichgovernment, together with a late recognition by theAllied powers that the reparation question wasprimarily economic, not political, in nature, savedGermany from sinking much further into the depthsof economic disintegration.

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