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The Treaty of Versailles originally demanded German reparations of ℳ 226 billion:
In January 1921, the Allied Powers grew impatient and established the reparation sum at 226 billion gold marks. The Germans countered with an offer of 30 billion.
This was later reduced to ℳ 132 billion:
The London Schedule of Payments of 5 May 1921 established "the full liability of all the Central Powers combined, not just Germany alone," at 132 billion gold marks. This sum was a compromise promoted by Belgium-against higher figures demanded by the French and Italians and the lower figure the British supported-that "represented an assessment of the lowest amount that public opinion… would tolerate".
The Goldmark (gold mark) was the currency of the German Empire, and Versailles fixed the values of the "papiermark" at 1914 prices.
In order to relate this to today's economics I would be interested to know what 226 billion was as a percentage of overall German GDP. The only figure I can obtain is expressed in 1960 US dollars. I need to know what it was in Gold Marks.
Does anyone know of a way of finding out?
Simon Kuznets only came up with the GDP in the 1930's and he was not particularly happy with the measure he created. GDP for any time before that, therefore, is more of an estimate as economists need to reverse engineer what they can from census data and similar statistical information.
German GDP in 1913 is established as by Myszczyszyn in 'Use of econometric modelling to evaluate the impact of the railways on economic growth of German reich (1879-1913)'. I am not fully convinced as these numbers don't make sense. I'm also not sure about the reference to "1956".
Overall GDP grew much faster than per capita; in 1879 it amounted to 18.08 bln marks (M), while being 845 bln M in 1913-1956. The average annual GDP growth rate during that period was 3.01%, which meant the product doubled within approximately 24 years.
GDP per capita, which is a better measure for determining social welfare, grew much slower; it was 475 bln M in 1879 and it reached 873.76 bln M in 1913, the average annual growth rate was 1.73%. That was due to rapid population growth in Germany.
When I try the same geometric progression from 1879 to 1913 for the GDP, I get a 1913 value of ℳ 51.0 bln. Even extending this to 1956 only gives a total of 177 bln. The GDP per capita geometric progression makes sense (I get the same value), but the "bln M" claim is preposterous. These numbers should, therefore, be treated with the uttermost care!
Alternatively, the net national product (NNP) is estimated as a compromise value of ℳ 53.7 bln by Burhop and Wolff in 'A Compromise Estimate of German Net National Product, 1851-1913, and Its Implications for Growth and Business Cycles'. However, the NNP is a wildly different measure to the GDP and not very helpful in determining the other.
How the Great War affected German GDP is a tough question and the answer doesn't seem to be clear-cut. Baten and Schulz estimated that the GDP in 1917 was 69% of the 1913 value. 1918 would have reduced this further and the territories lost in the peace treaty would have had a similar effect.
Most of the other research that comes up only cites relative values -- percentage of the Net Domestic Product compared to 1913. As such, we also have:
The oft-cited work by Hoffman is 'Das deutsche Volkseinkommen 1851-1957', and nearly all values are quoted with respect to this. I suspect it may contain better numbers, but it only seems to be available on paper as well as in German.
If we take the above estimates of 1919 NDP being about 72% of the 1913 values (quite close agreement!) and assume that the NNP, GDP, and NDP went through similar declines through the war period (I'm already able to guess what some of the below comments are going to say… ), we get a value of ℳ 38.6 for the NNP in 1919 (in 1913 Goldmark).
The original Versailles' Treaty value of ℳ 226 is nearly six years' worth of NNP, while the reduced ℳ 132 bln is 3.5 years' NNP. I speculate that the ratio might hold even if the actual GDP is different. Better economists than me can point out how wrong this comparison is.
Lastly, a note on Goldmark conversion from the Bundesbank:
The Goldmark is a special case insofar as it was neither a legal unit of currency nor legal tender, but a short name for the monetary value (price) of a given amount of fine gold payable in monetary tokens of the relevant official currency, ie the Mark from 1876 to 1924, and the Reichsmark from 1924 to 1948. Generally speaking, a Goldmark corresponded to the price of 1/2790 kilogram of fine gold.
Up to the outbreak of the First World War, the legal gold parity at the time meant that one Goldmark was equivalent in value to one Mark. When the Reichsbank suspended the exchange of banknotes for gold on 31 July 1914, the value of the Goldmark in paper Mark increased with rising inflation according to developments in the US dollar exchange rate. On 20 November 1923, the Mark's exchange rate against the Goldmark and the US dollar, which was likewise on a gold standard, was stabilised. Subsequently, and until the introduction of the Reichsmark on 11 October 1924, the Goldmark had a consistent value of 1 trillion Mark.
The accompanying 'Purchasing power equivalents' notes (alongside "major uncertainty") that ℳ 1 in 1913 would have been worth €5.40 in 2019 on PPP while ℳ 1 in 1919 would have been worth €1.10 though in the above research, most people took care to reference the 1913 Goldmark.
You said that you could only find the answer in 1960 US dollars. I found a site (https://www.usinflationcalculator.com/) that gives us the value of a 1960 dollar compared to 2020 (866%) so you should be able to find the value by simply multiplying it by 8.66. You might want to double-check me though.
The UK, Germany and France: GDP over history
The Chancellor said recently that he expected that by 2030 the UK would be a bigger economy than Germany. If so, that would be the first time since the 1950s, as this chart above shows.
And here’s the same chart, in terms of GDP per capita (eg adjusted for population):
And finally, for some perspective, here is the same chart – GDP per capita – for the UK, the US and China (y axis is $ in 1990 prices):
All charts courtesy of the amazing Maddison project.
To appreciate the wider context and character of the Great Depression, it is necessary to situate it in a wider context both within and beyond the period between World War One and World War Two. In the globalized world economy of the 20th century, as Findlay and O’Rourke 2007 shows, international trade relationships played a powerful role, and the breakdown of these relationships after 1929 proved critical in explaining why the world economy failed to recover. However, economists and historians have also highlighted the central role of international capital in oiling the wheels of global commerce and trade, and what happened after it dried up after 1929. This is convincingly suggested by the work of Eichengreen 2008 and Graff, et al. 2013 who offer a useful introduction to key concepts. Since the turn of the millennium, a new sensitivity emerged to the relationships that bind the world economy together, exemplified by the exploration of globalization by James 2001. A flourishing interest also appeared in the architecture of global governance and “world orders.” Clavin 2013 offers an archive-based account of transnational and institutional ties that developed between the wars to understand global economic variations and to combat the Great Depression. Aldcroft 1977 remains the best introduction to the impact of World War One which forms an important backdrop to global changes. A recent, detailed account is offered by Harrison and Broadberry 2005, with McElvaine 2004 offering a useful reference resource.
Aldcroft, Derek H. From Versailles to Wall Street, 1919–1929. London: Allen Lane, 1977.
Although dated in its treatment of the monetary aspects of the Depression, this remains an accessible and well-written introduction to the global economic and financial impacts of World War One for students who are new to the period and to economic concepts.
Clavin, Patricia. Securing the World Economy: The Reinvention of the League of Nations, 1920–1946. Oxford: Oxford University Press, 2013.
This text offers a helpful perspective on states’ economic and financial policies viewed through the lens of the world’s first multipurpose intergovernmental organization and on the role played by networks of economists and bureaucrats who sought to combat the economic nationalism that gripped the world economy in the interwar period.
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 2008.
Written by one of the world’s most renowned economists, this book explores the changing character of the international monetary system and its critical role in shaping the international economy. It helps readers understand why the ideology of the classical gold standard continued to be popular in the period after 1918, with catastrophic results. Readily accessible to students with a basic grasp of macroeconomic theory.
Findlay, Roland, and Kevin O’Rourke. Power and Plenty: Trade, War, and the World Economy in the Second Millennium. Princeton, NJ: Princeton University Press, 2007.
An ambitious study of how international trade has shaped the modern world. Treatment in chapter 8 of the deglobalization of world trade between 1914 and 1939 affords an excellent overview of current scholarship, situated within the broader framework of the global economic history of the modern world.
Graff, Michael, Alan Kenwood, and Alan Lougheed. Growth of the International Economy, 1820–2015. 5th ed. London: Taylor and Francis, 2013.
Now in its fifth edition, this is widely recognized as the best introduction to the ways in which economic growth is diffused between nations. It is especially clear on the character and role played by international investment in facilitating the growth of the West and on the patterns of international trade.
Harrison, Mark, and Stephen Broadberry, eds. The Economics of World War I. Cambridge, UK: Cambridge University Press, 2005.
The first systematic comparison of the wartime economic performance of Germany, Austria-Hungary, the Ottoman Empire, the Netherlands, France, Britain, Russia, Italy, and the United States. The book is primarily focused on exploring the degree to which economic development determined the outcome of the war (the answer is a great deal) however, it also teases out the effects of the war on development in the longer term.
James, Harold. The End of Globalization: Lessons from the Great Depression. Boston: Harvard University Press, 2001.
This book offers a sobering perspective on the ways in which economic depression can unleash forces that cause the connections of the modern, globalized economy to break down through an incisive and commanding investigation of capital flows, trade, and migration.
McElvaine, Robert, ed. Encyclopedia of the Great Depression. 2 vols. New York: Macmillan Reference USA, 2004.
An entry-level encyclopedia that is richly illustrated and addresses the cultural, social, and political dimensions of the crisis, as well as its more immediate economic and financial history. Although especially strong on the history of the US Depression, it also contains useful introductions to the history of the Great Depression around the world.
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The difficult inter-war period and the political instability of Weimar Germany provided the historical context for the rise of Nazism. The decade following World War I was one of the most tumultuous periods in European history. The war left more than 15 million dead, devastated national economies and shattered many existing political systems. Returned soldiers filed home to find their countries turned upside down, economically exhausted by four years of total war. The dynastic monarchies of Germany, Austro-Hungary and Russia were overthrown, replaced by new and unstable forms of government. International tensions and hostility continued long after the armistice of November 1918. The poisoned relationships between European nations hindered rebuilding and the restoration of diplomacy and trust. No country suffered greater amounts of animosity and mistrust than Germany, which shouldered much of the blame for the catastrophic war.
Within Germany itself, the dominant post-war issue was the composition of the new national government. Kaiser Wilhelm II had abdicated in November 1918, leaving a power vacuum that both the Social Democratic Party (SPD) and Communist Party (KPD) rushed to fill. The SPD formed a government under Frederich Ebert but faced challenges from radicals. In early 1919 many communist groups revolted and seized power in several cities and regions around the country. In January, the KPD attempted to gain control of Berlin and the national government. The SPD managed to stave off a communist revolution by calling on units of ex-soldiers, called Freikorps, to crush the uprising. By August most communist revolts had been crushed, and the situation was stable enough for an elected assembly to draft and enact a new constitution. Under this new system, drafted in the city of Weimar, Germany would become a democratic republic with an elected president, who would act both as head of state and commander-in-chief of the military. An elected legislative assembly, the Reichstag, would pass laws and represent the people. A cabinet of ministers, headed by the chancellor, would lead the government.
The constitution they drafted in 1919 created one of the most liberal political systems ever attempted to that point in history. But in a period beset by political division and turmoil, this proved to be its greatest weakness. The proportional voting system used to elect the Reichstag allowed several smaller parties to win seats – so the assembly contained representatives from more than a dozen different groups, rather than two or three dominant parties. During the entire Weimar period (1919-33) no single party won enough seats to hold government in its own right. The closest any party came was the Nazis, who would win just over one-third of Reichstag seats in 1932. Weimar governments had to rely on coalitions between different political parties, in order to pass legislation. These coalitions were fragile and routinely collapsed, leading to political instability and many changes in government. In the years between 1919 and 1933 there were nine general elections, while the chancellor and cabinet were replaced 15 times.
The 1920s were also a bitter decade for international relations. After World War I, the victorious Allies sought retribution rather than reconciliation, and Germany felt this vengeful spirit most of all. Its people were starved by an Allied food blockade which extended beyond mid-1919, many months after the ceasefire. German politicians were coerced into signing the Treaty of Versailles and its humiliating ‘war guilt’ clause (in effect, a national confession that Germans had single-handedly started the war). The treaty also required Germany to pay reparations, mainly to France and Belgium. The final reparations bill, confirmed in 1921, was a staggering 270 billion marks – the equivalent of 100 million kilograms of gold. The German people were also stripped of their foreign colonies, while some important industrial territories were also lost. Berlin was ordered to scrap its air force and submarine fleet Germany’s navy was downsized and its army restricted to just 100,000 men.
The severity of these terms created an uproar within Germany. Many former soldiers believed the armistice was a compromise to protect Germany’s civilian population, which through 1918 had suffered from dire shortages of food and fuel. The German military had not been defeated in the field no foreign force had invaded Germany itself. The nationalist press fumed about the terms of the Versailles treaty when its contents were leaked in May 1919. There were demands German officials boycott treaty negotiations and refuse to sign any final agreement. Conspiracy theories about the German military being ‘stabbed in the back’ by civilian politicians (see picture) began to circulate. Former soldiers, nationalists and right-wing political groups began to voice opinions that Germany’s ‘defeat’ was really caused by the machinations of corrupt liberals, socialists and Jewish agents.
Post-war exhaustion and the penalties imposed by the Allies caused Germany to slip into economic depression in the early 1920s. The Weimar government struggled to meet the three-monthly reparations instalments by early 1923 it had already defaulted on several payments. This led to France and Belgium ordering troops into the Ruhr, one of Germany’s most significant industrial regions, to seize raw materials and manufactured goods in lieu of reparations payments. This foreign occupation sparked unrest across Germany, particularly among nationalists and ex-soldiers. The Ruhr’s industrial workers also began an indefinite general strike, in protest against the French occupation. The Weimar government pledged to continue paying the striking workers, as a show of support – but with almost no cash reserves, the government ended up relying on large print runs of banknotes. This initiated the hyperinflation crisis of late 1923. As the Weimar regime released more banknotes into circulation, paper money lost its value and prices sharply rose. There were cases of food prices rising as quickly as 50 per cent in an hour. Wages and other payments had to be spent immediately, lest they lose much of their value. The worst of the hyperinflation crisis came in October and November 1923, when loose paper money was effectively worthless large bags or boxes of banknotes were needed to buy ordinary goods.
The situation was rectified in 1924, though only superficially. Wiser heads in the government scrapped the old banknotes and replaced them with a new currency, the Rentenmark, which was backed by the gold standard. They also sought the assistance of foreign governments, particularly the United States, to resolve Germany’s economic woes. The US-led Dawes Plan (1924) and Young Plan (1929) were diplomatic agreements that reduced Germany’s reparations figure and negotiated more flexible payment schedules. Massive loans from foreign banks and financiers, the majority of them American, were provided to German industries. This injection of cash and capital allowed industrial production to recover and grow. New factories were built, jobs were created and living standards began to improve. German cities were revitalised and cultural outlets such as music, cabaret, art and cinema began to flourish. The prosperous five-year period between 1924-29 would later become known as the ‘Golden Age of Weimar’.
But the prosperity of the late 1920s was based on a false economy. The Weimar government and German industrial employers were both propped up by foreign money – and any global economic crisis would have devastating effects within Germany. When the Great Depression unfolded in America in late 1929, Germany’s economic lifeline withered and the country tumbled into years of unemployment, deprivation and misery. Lurking on the fringes of German politics, Adolf Hitler’s Nazi Party was able to exploit the dire conditions of the early 1930s, to attract and expand its popular support.
1. The Weimar period of the 1920s saw Germany disrupted by political instability and economic failure.
2. In 1919 a communist revolution was put down by nationalist ex-soldiers, many of whom later joined the Nazi Party.
3. The terms of the Treaty of Versailles, particularly the final reparations figure, rankled with many nationalists who believed Germany had been unfairly punished.
4. In 1923 the nation was paralysed by the French occupation of the Ruhr, general strikes and devastating hyperinflation, which destroyed much of the wealth of the middle class.
5. The German economy recovered from 1924, but only with the assistance of US schemes and foreign loans, which tied Germany’s fate to that of other nations.
Imports were forbidden unless vital to survival and then heavily discouraged, with research established to reproduce these goods from inside Germany as soon as possible. No more bread was imported from Poland, so that meant more German bread was needed, creating new jobs for farmers and bakers who were needed to produce enough to supply the German nation.
By July 1935 almost seventeen million Germans were in brand new jobs, though they were not well paid by anyone’s standards. But nevertheless, these jobs provided a living wage, compared with just eleven million Germans who were in employment just two years before.
In the space of four years, Nazi Germany changed from a defeated nation, a bankrupt economy, strangled by war debt, inflation and lack of foreign capital into full employment with the strongest economy and biggest military power in Europe.
What were the reparations of the Treaty of Versailles?
(1) The surrender of all German colonies as League of Nations mandates. (2) The return of Alsace-Lorraine to France. (3) Cession of Eupen-Malmedy to Belgium, Memel to Lithuania, the Hultschin district to Czechoslovakia. (4) Poznania, parts of East Prussia and Upper Silesia to Poland.
Likewise, when reparations were forced on Germany in the Treaty of Versailles? Treaty of Versailles It forced Germany to "accept the responsibility for causing all the loss and damage" of the war. Germany was forced to disarm, give up land to France, and to pay reparations of 132 billion Marks (around $442 billion in 2014 money).
People also ask, what was included in the Treaty of Versailles?
The Treaty of Versailles (French: Traité de Versailles) was the most important of the peace treaties that brought World War I to an end. The treaty required Germany to disarm, make ample territorial concessions, and pay reparations to certain countries that had formed the Entente powers.
Is Germany still paying reparations for ww1?
Germany is finally paying off World War I reparations, with the last 70 million euro (£60m) payment drawing the debt to a close. Interest on loans taken out to the pay the debt will be settled on Sunday, the 20th anniversary of German reunification.
The Interwar Years 1919 to 1939
The &ldquowar to end all wars&rdquo was finally over in 1919 with the execution of the Treaty of Versailles. Europe was at peace. It would remain at peace for twenty years. It turned out the &ldquowar to end all wars&rdquo only set up Europe for the next conflict which was even greater. World War II would officially start in 1939 with Germany, led by Adolph Hitler, invading Poland. Winston Churchill, Britain&rsquos lord of the admiralty in WWIand its Prime Minister in WWII, stated the Second World War should have been easy to prevent because the Western Democracies only needed to enforce the Treaty of Versailles to stop Germany from rearming. Along with economic errors and the Great Depression, these flawed decisions paved the way to World War II.
After the Great War of 1914 to 1918, with its attendant slaughter of at least 8 million soldiers, the people of the United Kingdom, France, and the United States tried fixing the world in an attempt to prevent a repeat of WWI. To that end, the governments of the great powers including Great Britain, France, Germany, Japan, and the United States entered into arms limitations treaties to prevent arms races. Under these various agreements, the major world powers agreed to limit the tonnage of warships constructed, among other items. The League of Nations involved itself in keeping the peace through diplomatic efforts. Large peace organizations formed in America, England, and France to keep their countries out of wars. &ldquoPeace at any price&rdquo was their motto.
As it happened, the great powers would not have the money to engage in arms races. The Great Depression deprived the nations of funds needed to construct and field large armies or invest in extremely expensive weapons systems. No money equals no arms races. Peace seems to require the bankruptcy of all.
After the Great War, America, England, and France disarmed to a large degree and went back to civilian budgets. In America the US Army shrank dramatically, but the navy did somewhat better because nations usually avoided scrapping battleships like beer cans. Germany was stripped of its army and Austria-Hungary ceased to exist. Turkey also faced financial problems that limited its ability to rearm. In the USSR under Stalin, the Soviets began a massive rearming and rebuilding of its army. Its secret arms buildup included development of the excellent T-34 tank. During this period between 1919 and 1929 an economic boom of sorts was underway, and the nations of the world prospered. Europe could trade once more, even though Germany was on the ropes, and the USSR took itself out of international trade under their communist regime. Money was available for investing, and companies expanded to meet growing consumer demand.
From 1919 to 1933, the United States tried another experiment in abolishing evil. Just as the nation abolished slavery it would now abolish drunkenness by making sales of liquor illegal. The Eighteenth Amendment to the US Constitution, approved on January 29, 1919, prohibited the sale of alcohol in America. This forced many distilleries, bars, and transportation companies out of business or into other businesses. The law made some very expensive property valueless. Legally owned property became contraband overnight. Once again, the government did not pay for the property it made worthless. After all, the property was not seized by the government for public use. Washington DC just said it was illegal to use any property for the now illegal production of alcohol. The great experiment of taming drunkenness fell flat, and in 1932 Roosevelt and the Democrats ran on a platform of overturning the Eighteenth Amendment. Roosevelt was elected in a landslide in 1932 because of the Depression, but one might wonder how many voted Democrat because it would bring back booze (Even I may have voted for that. How dumb are these Republicans anyway?).
The Great Depression 1929-1942?
From 1919 to about 1929, the world economic situation seemed okay. England and France were recovering from the war, supplies of food and manufactured products were plentiful, and living standards were going up. In the USA, President Calvin Coolidge&rsquos administration was running a financial surplus, cutting taxes dramatically, and experiencing a growth in real income per person of 2.1 percent. Underneath however, things were not so rosy. The world&rsquos economic system developed dynamic cracks that were growing and endangering the global economic system.
The Great War devastated France, destroying large swathes of land requiring millions of francs to restore. France had taken on massive war debts with England and the United States which had to be repaid, but these large debts caused devaluation of the franc making repayment difficult.France was counting on Germany to pay for everything through repatriations (&ldquoGermany will pay all&rdquo the French government proclaimed) however, the expected repatriations did not show up. Germany was broke. Payments were much lower than agreed and slow in coming. The problem of German repatriations dogged the European powers throughout the 1920s. Germany could not repay England and France, and America would not cancel Allied war debts. Several conferences were held, but no real solutions to the financial problems were ever found. The 1932 Lausanne Conference, held in the middle of the Great Depression, terminated the wrangling over German repatriations by requiring one final payment from Germany. Today it is clear that Germany received more in American loans than she paid in repatriations. Never trust accountants mixing with politicians.
Britain experienced critical economic problems as well. In 1922 the Conservatives called for protective tariffs, a move which would surely damage international trade. This was contrary to England&rsquos traditional free trade policy. At the urging of Winston Churchill, Chancellor of the Exchequer, Britain went back onto the Gold Standard in 1925, but this also failed to re-establish stability in the world&rsquos money markets. As trade began to shrink more nations enacted protective tariffs further damaging international trade.
On the financial front, credit markets were getting tight because the money supply was lessening as the decade wore on, businesses were worried about getting loans, and the supply of investment capital was drying up. This was taking place worldwide, and some of the problems included the debts being carried from WWI. In Germany, super inflation was threatening European economic stability. When the economic future turns bleak people with investment money pull back thus, investment capital was vanishing. Except for Germany&rsquos inflation, most of the problems were sub-rosa and not a concern for the public&mdashat least, that is what the elite leaders of the world believed.
Britain&rsquos Empire also proceeded to give Britain trouble. Former colonies now wanted independence and nationhood. England responded by giving many colonies more independence, including a parliament and independence in foreign policy, while still maintaining a close relationship to the mother country. Those former colonies included Canada, Australia, New Zealand, and the Union of South Africa. Most notable in not gaining additional independence was India. The new nations often refused to follow Britain&rsquos foreign policy, thus complicating matters for Britain in the 1930s.
Political problems erupted all over Europe because of growing radical leftist and rightist movements in several European nations. Adolf Hitler, a Germany radical rightist who led the Nazi party, languished in prison in 1925 after a failed coup d&rsquoétat. While there he wrote Mien Kampf (MyBattle) detailing his thoughts about the future of Germany. Hitler&rsquos radical ideas would eventually lead his Nazi party to winning elections in Germany, eventually gaining control of the nation itself. In his book he set out his future plans for conquest, however, few read the tome. Unfortunate, because Hitler adhered to this published plan after he assumed the office of Chancellor of Germany. Due to a good world economy during the early to mid-1920s neither the rightist nor the leftist movements made headway in Europe or Asia, but as the economic situation grew dire things changed. Communist movements gained ground with the result that rightist also attracted followers concerned about the Reds taking over. It was during the crisis of the Great Depression that men like Hitler gained power through the support of the common person who wanted a return to stability. The Great Depression brought on worldwide radical political changes, so please understand this unprecedented economic collapse was a globe changing event and a major reason for WWII.
In the 1920s, England and France were having money problems and sought loans from the United States, or loan extensions, to cover war debts and other matters. American bankers extended the loan payments and gave new loans to Europe keeping the nations economies afloat. It seemed to most these loans were good business because the future looked bright and money was being made everywhere. The banks thought that as the world economy continued improving the money would come flowing in. These assumptions of a bright future proved false.
We will now start an analysis of the Great Depression&rsquos causes however, they are still widely debated and unresolved. Many economists argue the 1920&rsquos era displayed real growth, while others think it was an era of false prosperity&mdashprofitless prosperity&mdashbecause business profits were weak even though the economy was booming. Raw data from the 1920&rsquos indicate real profits and real growth, as manufacturing output rose over 23 percent, but underneath it all something else was eating at the foundations. That something else was the money supply. The Federal Reserve (Central Bank or Fed) was making money easy to get in the mid-1920s by increasing the money supply, and the Fed injected money into the credit markets. This, some say, created a boom economy based on money supply growth and easy loans, not business growth in real terms (whatever &ldquoreal&rdquo means).
Economist Milton Friedman says the Fed reduced the money supply and raised interest rates after the 1929 crash, thus making the downturn worse other economists say the Fed increased in money supply after the crash and propped up failing businesses, thus increasing the severity of the debacle. The cold facts: Between 1921 and 1927, the money supply increased 60 percent. That is a lot by historical standards, and made loans easy to obtain. Starting in 1928, the Fed began tightening the money supply by raising the discount rate (the rate paid to borrow money) from 3.5 percent to 5 percent, thus making loans harder to get. Then came the 1929 stock market crash. In 1931 the money supply was decreased 30 percent or more, and in 1936 the central bank doubled the reserve requirements (the amount of money a bank has to keep on deposit as a safety net against failure) thus, taking more money out of the financial system. Those differentials represent a large swing in the supply of money between 1927 and 1936. Note that the Feddecreased the money supply after the crash. Private business capital investment also fell to zero, creating a situation where money was almost impossible to obtain. Everyone was living hand to mouth. Sounds like Milton Friedman was right. The Federal Reserve took money out of the system before and after the crash, just when it needed money the most, thereby increasing the severity of the Great Depression. The problem in studying the Great Depression revolves around the chosen economic theory, because that determines which statistics are the most important, and how they are interpreted. One thing is certain, the crash of 1929 became a worldwide disaster throwing people out of work in great numbers and causing starvation and fear on a world wide scale.
We must now look at a few economic concepts that are central to understanding the Great Depression.
Money supply and money value are esoteric economic and banking concepts of major importance to the modern world, and understanding how the Great Depression is analyzed. A nation&rsquos money supply is the amount of money in circulation in the nation&rsquos economy. This is important because it determines the amount of money available for bank loans. A nation&rsquos central bank tries to control the nation&rsquos money supply, among other things. If money is easily available to banks they will try and loan it out by dropping interest rates, because loans are how banks make money. When there is less money available banks reduce lending and borrower&rsquos interest rates rise.
Another key factor is the value of money. Strange as it may seem, money does vary in value in relation to other currencies, especially if they are &ldquofloated&rdquo (not backed by gold or silver) which allows money to rise or fall in value with the strength of a nation&rsquos economy. If one nation&rsquos economy is strong its money will have more value than an economically weak nation. Note what happens during value changes. As the value of a nation&rsquos money increases, its merchants can buy more goods from other nations because the outside products cost relatively less, however, it makes it harder to sell goods because the cost of its products rise with the value of its money. When the value of money shifts then buying power shifts. When a nation just prints money without backing it up with gold the value of its money decreases because there is more of it. If the supply of money decreases, the value of money will normally increase because there is less of it. All this can be very obscure, as everything from cash flow to emotion impacts the increase or decrease in the value of money, and often in ways not fully agreed upon by economists.
In general, the central bankers would rather that the value of money remains stable, but many elements of a society push and pull on the government to favor their position. Debtors, like farmers, want &ldquoeasy money&rdquo so they can borrow dollars and then watch their value fall because of inflation, thus paying back their debt in cheaper dollars than they borrowed. Creditors, such as people selling farm equipment, want &ldquotight money&rdquo so the value of the money stays the same allowing them to receive full value for their loans even if they are paid off over time. In any event, numerous factors influence the value of money, so its value changes a lot. For example, I once purchased a German Olympic air rifle at what I thought was a high price. Checking the price of the air rifle one year later it had jumped over 30 percent. The product was no different, but the value of the Euro (a European currency) increased relative to the US dollar thus, increasing the price in US dollars. However, the price of US made air rifles stayed the same thereby making them more competitive. If a US merchant imported those German air guns, he would pay 30 percent more than a person selling the same air gun in Germany. However, a German air gun merchant could import US made units for 30 percent less because of the growth in value of his nation&rsquos money. In theory, when a country&rsquos money increases in value the money begins to leave the country because its citizens can buy items abroad cheaper.
In 2010, a controversy continues between the US and China because China keeps the value of its currency artificially low compared to US dollars thus, keeping the prices of their goods low. This value differential angers US merchants who say China is cheating in trade competition and driving US manufactures out of business. Now the US central bank is lowering the value of the dollar causing more turmoil in the world money markets. As one can see, monetary value and supply is serious stuff in international relations.
Money supply and money value tie to another economic idea, the gold standard. This simply means that when a nation is on the gold standard that nation&rsquos paper money can be traded for gold bullion (you know, the real stuff). Many economists claim the 1800s and early 1900s were prosperous because most nations adhered to the gold standard. In America, for example, the government promised its paper money was redeemable for gold at a rate of $20.67 per ounce. Having a currency on the gold standard helps stabilize its value, stabilizes the money supply, contains inflation, and makes international trade easier. Using the gold standard, a nation can only print money up to the value of the amount of gold it holds. Since the amount of gold and the amount of paper money must be equal, excess money cannot be printed and this controls inflation. Since a nation on the gold standard cannot just print money the belligerents in WWI went off the gold standard, allowing them to print more money to pay for the war. This, of course, led to economic problems in the 1920s and 1930s as nations tried to readjust by going back on the gold standard. During WWI, nations incurred big debts with devalued money (money printed without backing by gold) and were paying the debts back after the war in high value money (money backed by gold). This split in money value contributed to instability in the financial markets in the 1920s. Few nations today are on the gold standard.
Instability in the value of money greatly affects international trade. What many overlooked in 1929 was the interconnected nature of the world economy. No nation stood alone any longer in the economic world. Events in one nation often had worldwide ramifications. As events would soon show, the interconnectedness ran deep.
interest rates are another economic concept we should try to understand. Once again, interest rates influence business and personal loans. Private banks borrow funds from the central bank at set interest rates and then loan the money to their customers. The banks then add a few percentage points to the federal loan percentage and then loan the money to the private sector. Thus, as the central bank increases their interest rates to banks, the banks have to increase their interest rates to their customers, and it becomes harder for businesses and individuals to obtain a loan.
This is important to the national economy because, like the money supply, it affects a bank&rsquos willingness and ability to loan. As loan funds dry up businesses find it harder to expand, hire new workers, or buy better equipment. On the other hand, if too much money is available and being loaned out below market rates this causes an economy to &ldquoheat up&rdquo or begin expanding faster than it should, resulting in inflation hampering the economy and destroying its ability to function if the malady gets bad enough. A nation&rsquos central bank tries to ensure that enough money is available for loans, at reasonable rates, so the economy grows at a steady but sustainable rate, without much inflation, and no hefty contractions (depressions and deep recessions). This is difficult, because economies respond slowly to changes in the money supply, interest rates, and changes in monetary valuation. Months can pass before economic changes become evident, and by then some other change may be necessary to keep the economy on track (steady but reasonable expansion without much inflation and reasonable contractions or corrections). 
When the money supply gets tight and loans are hard to obtain businesses stagnate and often stop hiring or start laying workers off to save money. Fewer employed people results in other businesses selling fewer items and they start to lay off workers. This cycle, if continued, can trigger a depression and destroy an economy. When the money supply is easy and loans are easy to obtain businesses may borrow to expand and hire more workers. More employed people means more goods are sold. If many people try to buy the same items the prices will increase under the rules of supply and demand. If these prices continue to rise they can cause runaway inflation which can also destroy an economy. It is a tricky balancing act to keep economies on track.
Prior to the advent of the central bank concept, financial markets set the interest rates banks could charge for loans without government interference. Coupled with the gold standard, the market handled the variables of money supply, monetary value, and the interest rates charged for loans very well before the depression. During the Great Depression, nations went off the gold standard and began economic manipulation, eliminating the free market financial mechanisms setting interest rates and other monetary variables. This was a major and permanent change in the financial world.
Tariffs are critical to international trade. tariffs are a financial charge placed on goods coming in from foreign nations, thus making foreign-made goods more expensive. The international community knows that if one nation raises tariffs the nations negatively impacted will also raise tariffs. In practice, England might raise tariffs 10 percent on cars from the United States, and in response the United States will raise tariffs on English tea by 15 percent. Then England will retaliate for that US move, and back and forth it goes until both nations price themselves out of the markets for tea and cars. In 1930, the Congress of the United States passed very high tariffs on goods from other nations in the Smoot Hawley Tariff Act. This could not have come at a worse time. The world&rsquos nations responded by rising their tariffs and international trade began to implode, especially for exports from the United States. Fewer export goods sold because the overseas price took buyers out of the market. This tariff act, along with retaliatory acts passed by other nations, prolonged and increased the severity of the depression and made the disaster truly global.
The Contraction Starts
By 1929 in the United States businesses faced new problems getting loans because the money supply was shrinking. Tariffs were going up and decreasing trade. The same was happening around the world. In essence, business was shutting down, markets were contracting, the economies of the world were starting to collapse, and business investment was falling precipitously. Somehow, this economic earthquake remained silent until October 25, 1929.
In October of 1929, all illusions came to an abrupt end. The US Stock Market crashed. Billions were lost on the New York Stock Exchange in just one day. Industrial stocks peaked at a high of 452 in 1929, but by 1932 industrial stocks were at 58. By 1932 in the US 23 million were out of work. The 1929 crash started a panic and millions of institutions and individuals began selling stock causing a continuing and precipitous market decline. Many paper millionaires, because of their extensive stock holdings, found themselves paupers within a few days. Some large banks failed because they held substantial stock investments. The panic spread to the middle class who owned few stocks but kept savings accounts in local banks. A bank does not keep enough money on hand to pay all its depositors their money at the same time. Banks loan out the deposited money, retaining only a small amount in demand deposits to pay the few customers coming into the bank on a normal day wanting cash. Because of the stock market crash thousands of depositors descended on banks demanding their money. The banks could not pay consequently, banks began to failby the hundreds all over the nation. When the local banks failed they took the depositor&rsquos money with them into default causing people all over the United States to lose their life&rsquos savings. As a result, fewer people put money into banks resulting in more money going out of circulation (and under mattresses) further decreasing the money supply and making money harder to obtain. As fear of the economic future took hold fewer people purchased items not absolutely needed, the business community suffered a greater slowdown, and more people experienced layoffs. Therefore, the descending economic spiral began and would not stop.
The economic crash became worldwide. American loans to Europe, previously easily extended, were now called. The American banks needed that money, but the European nations could not pay. The chaos in the world economy caused even more trouble, and as manufacturing declined more people were laid off, and with more layoffs fewer goods were bought (people without work stop buying) causing more layoffs. Things began to look very bleak. This was a downward spiral that fed on itself. Stopping this cycle became the major focus of economists all over the planet, but classical economic theories of the 1920s seemed unable to explain it. Unfortunately, governments were already trying to &ldquosolve&rdquo the crisis.
Hoover and Roosevelt&mdashThe Twins of Economic Failure
Governments around the world responded poorly to the crisis. In America, President Herbert Hoover began lobbying businesses to maintain high wages. He was certain if wages remained high people would keep buying, the national economy would right itself, and things would be fine. As the downward trend continued Hoover instituted government work programs and raised taxes to pay for them. President Hoover tried many things to overcome the Depression that no president before him dared attempt. In fact, his intervention into the economic system was unmatched until his successor took office. When Hoover lost the presidency to Franklin D. Roosevelt the new administration went far beyond what Hoover tried, but the focus of the effort was fundamentally the same. Under Roosevelt the Congress instituted massive work programs, tried to control wages and prices, tried to prop up farm-produce prices, supported union organization of labor in large industries, and raised taxes far more than Hoover&rsquos administration to support new and larger government programs. Roosevelt created regulatory programs stifling competition in an attempt to raise prices because competition kept them down. The National Recovery Act, a centerpiece of Roosevelt&rsquos economic plan, created business cartels with fixed prices and criminal prosecution for anyone trying to undercut the set price. The US Supreme Court ruled the act unconstitutional. An enraged Roosevelt moved to &ldquopack&rdquo the Supreme Court with additional justices favoring his programs. The Court converted under this pressure, approving New Deal legislation even if it breached Constitutional standards.
Roosevelt fought to end the Depression and tried everything his economic advisors&mdashmostly university professors&mdashcould think up. Experimentation with everything became acceptable because of the national emergency. If a program failed they would try something else, but everything they tried involved deep government interference with the capitalist market economy. Most of the interference came under the philosophic heading of corporatism, or tripartite control. Corporatism means government combined with big business to create cartel like situations limiting competition and imposing price controls. Under a typical tripartite scheme government, big business, and big unions join together to decide production levels, wages, prices, and regulatory oversight routines. With both corporatism and tripartite concepts the government has the ultimate say so, and it can enforce the decisions of the group with government power. These concepts were implemented in the Great Depression, WWI and WWII, although less effectively in the US than in the nations of Europe. Both ideas, like socialism, destroy the free market.
Strangely, if Hoover and Roosevelt had done nothing the Depression in the United States may have ended in a year to perhaps three years. Today there is little doubt that government interference with the market economy prolonged and deepened the Great Depression. Sharp downturns occurred in previous years under various presidents, but the government sat still allowing the recessions to run their course. Usually, they cut taxes and just rode out the problem for a few months. From 1854 to 1919, the averagedownturn was over in 17 to 24 months (see stlouisfed.org). From 1873 to 1879 a severe panic hit the nation however, the government allowed the economy to punish marginal businesses, and the recovery, although delayed, was very robust. In 1920 through 1921 another panic hit and unemployment reached a high of 11.7 percent, but the government, under President Coolidge and Treasury Secretary Mellon, remained aloof and the adjustment was swift. Unemployment fell to 2.4 percent in 1923. After World War I bigger government was the rule, and some intellectuals (university professors) thought the government could solve the economic hardships, overturn the rules of classical economics, and build a bright tomorrow. They were very wrong. Nearly everything the government did under Hoover and Roosevelt was wrongheaded and backfired in ways beyond imagination. Huge voting majorities continued to back Roosevelt and the Democrats because they were &ldquodoing something&rdquo about the Depression. Roosevelt&rsquos propaganda was excellent, and the public failed to understand the harm done by its well-meaning, but economically ignorant, government leaders.
By the mid to late1920s America increased production by 24 percent and real income grew by 2.1 percent that is real prosperity. The next ten years stood in stark contrast to the prosperous 1920s. Even after the 1930s and 1940s America&rsquos problems continued, and the nation&rsquos return to true prosperity occurred in the 1950s.
A few statistics should help focus the issue:
1929 Unemployment 3.3%
1933 " 24.9 (Roosevelt takes office in March)
1938 " 19.0 (5 years in office)
1941 " 9.9 (8 years in office)
Clearly, the chart shows FDR&rsquos New Deal did not solve America&rsquos economic problems until after 1941.
By interfering with the economy, the government destroyed the economy&rsquos ability to adjust. Wages, for example, must be allowed to fall along with prices in economic downturns (classical economics&mdashsee Economic Theory below). This allows businesses to maintain their employment levels even though their goods are selling for less, otherwise (if wages stay artificially high) employers must lay off employees as earnings fall. The result of Hoover&rsquos high wage policies was more jobless people. Raising taxes took money away from consumers who would normally spend the funds for goods, and businesses who could have maintained higher employment levels. The drop in consumer spending, in part because of high taxes, severely affected the business community. High taxes rob funds from private enterprise normally used to create jobs and additional goods. Lowering taxes during economic downturns increases funds available for consumers and businesses. Raising taxes as Hoover and Roosevelt did was the worst possible economic move.
Roosevelt&rsquos interventionist policies created substantial monetary, regulatory, and economic chaos. This led to increasing uncertainty in the business world and accordingly prolonged and deepened the depression. No one knew what was coming next, and new programs constantly came out of Washington that reduced profits and destroyed business flexibility. All these programs imposed massive additional administrative and legal requirements on business consequently, predicting the future business environment became impossible. Those borrowing or investing large amounts of money need reliable business projections. If tomorrow brings more chaos, higher taxes, fewer markets, more regulation, and the like businesses cannot make reliable projections and avoid investing money or otherwise accepting risks. Fear of unexpected government moves can shut down business as effectively as enormous taxes. As a result, private investment in industry fell to zero percent (that&rsquos right&mdash0%) through most of the depression, and in 1938 it was actually 800 billion less than zero. Investment from private sources went very negative after the crash.
Liberal economist and politicians roundly reject the classical economic theories supported above. They endorse Keynesian economics or outright socialism. (See: FDR&rsquos Folly, Powell, Jim, 2003, Three Rivers Press). Under their analysis of the Great Depression Hoover failed because he refused to do enough, but Roosevelt&rsquos programs succeeded however, they also contend Roosevelt&rsquos success was tempered by a lack of spending. Keynesians argue that if Roosevelt had spent much more much sooner, like the government did in WWII, the Depression would have ended in two or three years (by 1936).
At least one factor going unanalyzed in the Great Depression is the impact of the great 1919 influenza pandemic. Falling populations can cause economic downturns, and the deaths of 100 million people worldwide could have contributed to the Great Depression. Over 500,000 may have died in the United States, 250,000 in Britain, 400,000 in France, and over 17 million in India. This all took place between 1918 and 1920, and the Great Depression arrived in 1929 thus, most will automatically believe there was no correlation. Still, the deaths of 100 million people (probably 5 percent of the world&rsquos population) should have an economic impact. I know of no studies on this issue.
There are at least six major economic theories floating around, and each made a difference in how governments approached the crisis. Here is a quick survey of the basic positions:
1. Capitalism: is a system of private ownership of property, including the means of production, coupled with a small amount of government intervention in the economy. Capitalism does not aim for social justice. Unlike other economic ideas, capitalism&rsquos aim has nothing to do with concepts of justice or equality. Capitalism recognizes human selfishness and claims it is good when harnessed correctly. It is a classless theory, where people make money by competing and not by government action. Economic control is by private market competition, where individuals or corporations compete against others to bring goods and services to the market desired by private citizens (they hope). This is a decentralized economic system where central planning is minimal. The markets are thought to regulate themselves. Regulation of business is the key form of government control under capitalism, but this regulation is to insure a &ldquolevel playing field&rdquo and to protect the public against crime, but little else. This system was in use in America since its inception as a nation and was only de-railed by the Great Depression and the New Deal era. During the Great Depression, the USA passed many laws governing the economic life of the nation, but left the basic concepts of capitalism in place. In modern capitalist societies &ldquowelfare capitalism&rdquo has evolved, wherein the government provides safety nets for people who are out of work or otherwise unable to support themselves. Prior to the Great Depression the USA was, for decades, the world&rsquos fastest growing and strongest economy.
2. Socialism: is a system of government ownership of most businesses and central planning of the economy. It is also a system of social justice. Under socialist thinking, equal property distribution is justice which will uplift the lower classes and bring universal peace accompanied by the reconciliation of all peoples (no joke). In this summary we will only deal with the economics of socialism. Socialist think the community as a whole should own the means of production however, as applied in Europe in the 1930s, it generally meant the government nominally controlled the largest businesses but required very high taxes and the redistribution of wealth through social welfare programs. Governments embracing socialism guarantee free or low cost medical care, housing, food and other essentials to the populous. England, France, and other European economies began turning to socialism after World War I. Modern socialism continues to stress the importance of full employment, generous benefits to laborers, and high taxes to support the educational, medical, and welfare aspects of society. Central planning forces the production of products the government deems desirable, or prevents the manufacture of products deemed undesirable. This utopian dream of universal peace is yet to be achieved.
3. Marxism: was developed by Karl Marx and Friedrich Engels. Its aims include the liberation of workers from exploitation, coercion, and misery. The theory opines societies&rsquo fundamental elements are determined by their methods of production. The method of production eventually decides the property relationships of society, and these property relationships determine everything else&mdashincluding religion, politics, and classes of persons in that society, et al. In modern capitalist societies of the late 1800s, Marx and Engels believed history was reaching its climactic moment, as these societies would soon succumb to violent overthrow by the working classes. The proletariat (working classes) would establish the final society&mdashone without classes&mdashwhere each person worked and gave to others freely as their needs dictated. In this final classless society, ownership does not exist. Marx and Engels theorized the proletariat revolution was inevitable. This theory of an ultimate unavoidable utopian society eventually developed into Soviet style communism unlike anything envisioned by Marx. No nation has installed a utopian Marxist government, and no society ever managed anything like the utopia Marx and Engels imagined.
4. Communism: is a philosophy flowing from Marxism requiring the vesting of all property and authority in the community at large (the state). Its aims are justice, freedom, and humanity. In pure Marxism, each gave according to his ability, while the wealth of society was given according to ones needs, and without intervention by state authority (it did not exist) however, all communist states allow government acquisition of all property and all authority (power), making the state all powerful. This results in an autocratic centrally planned society. The government controls all aspects of life (for the good of all&mdashof course). Prior to Stalin, the political bureau of the communist party was the sole determiner of the &ldquowill of the people&rdquo according to the Constitution of the USSR. In the Stalinist USSR of the 1930s and to Stalin&rsquos death in the 1950s, only Stalin determined the will of the people in spite of the USSR&rsquos Constitution (what document ever stopped a murderer?). After Stalin, the Soviet leaders partially melted into the political bureau for collectivist decision making, but the real and final power always rested with the leader of the party. As an economic system it has failed many tests, including the Soviet Union, Red China, and North Korea.
5. Mercantilism: an economic theory developed in the 1600s stressing the importance of international trade to acquire gold or silver hence, shoring up a nation&rsquos currency and economy. The ideal economy required importing raw materials at low prices and exporting finished goods at high prices, thereby attracting money (read, precious metals) into that nation&rsquos economy. By maintaining a favorable balance of trade (exporting far more than importing), a nation would remain economically strong. Huge theoretical problems surfaced in the 1750s, because the Mercantilist theory assumed a fixed amount of trade thus, attaining more trade for your nation required taking it from others. Later economists argued the size and strength of a nation&rsquos economy determined its &ldquowealth&rdquo not the amount of gold in its vaults. Economists also determined the amount of international trade was not fixed thus, killing mercantilism as a theory. However, the reader should note that many nations in 2010 still operate on a quasi mercantilist theory by stressing the development of heavy industry, and adopting policies that make exports more important than imports (in the 1930s many nations were doing the same). Japan and China are the key modern examples&mdashalthough they would deny using this theory. Both China and Japan stress the development of heavy manufacturing for export, and the import of low cost raw materials for manufacturing purposes.
6. Fascism: is a political philosophy requiring individuals be subservient to the state, and controlling the state was a strong leader executing the desires of the people (Stalin took a shortcut, he just executed the people). Social justice is feigned by fascists, but it is not a central concern. It is highly nationalistic and glorifies war. This becomes an economic philosophy because heavy industry is subject to state control, and getting everyone to work is a major goal of this political ideology. The Fascist would not care about a bicycle shop, but they became very concerned about what the nation&rsquos major industries were producing, and they would order the major industries to produce what was good for the expansionist Fascist state. Under the Italian form of fascism industries were organized by type, and a committee of government and industrial bosses ran each economic sector through these committees&mdashalthough the government had the ultimate say. Modern corporatism is said to be a form of fascism. Germany was the premier Fascist state in the 1930s however, Benito Mussolini had introduced fascism into Italy years before Hitler initiated it in Germany. It totally failed as an economic and political philosophy however, it is not dead. Many nations actually practice fascism while calling it something else. Cuba under Castro is an example of a fascist state calling itself communist.
Note the key distinctions between capitalism and, as a group, socialism, communism, and Marxism: Every one of capitalisms&rsquo competitors stress social and economic justice. These philosophies stress the harm capitalism brings to workers through exploitation, economic oppression, and misery. To gain &ldquojustice&rdquo property owners in non-capitalist systems are separated from their money and property by the state. As a necessity, the three counter-capitalist philosophies emphasize the group is superior to the individual, otherwise the government cannot justify seizure of the capitalist&rsquos property. Somehow, they think that once capitalism is dead something beautiful automatically takes its place. Once capitalism is gone human nature will change, all evil will be wrung out of the world, and a society without problems will bloom. In stressing the communal over the individual, the groups&rsquo power increases to totally submerge individuals. The Greeks who faced down the Oriental tyrants of Persia would not have agreed with the communal standard. They argued, with word and sword, that the individual is superior to the group. Capitalism agrees with the ancient Greeks. So does Ayn Rand and others.
In capitalist societies several theories exist concerning the interface between the economy and government. One is minimal government interference or laissez faire economics&mdashsometimes called classical economics. This was advocated by Adam Smith in TheWealth of Nations, published in 1776, and was the dominate capitalist economic theory until the 1850&rsquos, after which governments took more economic control. Classical economic theory held that an economy would recover from downturns automatically. During the Great Depression the theory came under attack. JohnMaynard Keynes submitted another theoretical approach to capitalism in 1936. Keynes argued classical laissez faire economics failed in situations like the Great Depression. His theory explained that an economy would not correct itself automatically and could spiral down indefinitely if not stopped. The economy needed a kick, and that kick was to increase aggregate demand by increasing government spending (or by lowering taxes). Keynes felt the potential total economic output could be measured against the actual output, and if there was a significant gap that gap could be bridged by government spending. Thus, like Hoover and Roosevelt, the theory tells the government to spend its way out of economic problems. In 2009 the United States under President Obama spent money in the trillions to escape an economic recession. Obama spent more in 2009 than all the previous administrations combined, building the national debt to 12.4 trillion. In 2010 it is obvious the strategy failed. A society cannot spend its way out of economic trouble.
Capitalism started yet another economic theory that gained popularity in the 1980s under President Ronald Reagan&mdashsupply side economics. Under supply side economics, high taxes and government spending are economic negatives because they destroy incentives that encourage work and savings. Supply side economists think governments must scale back significantly, thereby allowing investments, savings, and innovation to pull the economy along or out of a depression. This theory wants the government to encourage high production, savings, and productivity through low taxes, few regulatory restrictions, and an improved infrastructure. It differs from laissez faire economics because it believes government must work toward encouraging high production and productivity with proper taxing and regulatory policies. Laissez faire economics wanted a super small government doing nothing to encourage or discourage economic outcomes. Supply side ideas seem to originate with theories advanced by Ludwig von Mises and Friedrich Hayek in 1974, then termed the business cycle theory. Business cycle theory claims action by a central bank harms the economy, and interest rates are better set by free markets. Only free markets can truly determine the rates of saving and borrowing that can safely take place. Mises and Hayek thought central banks commonly set interests rates improperly, usually causing quick economic upturns (bubbles) that eventually collapse. By allowing the markets to take care of themselves they can better regulate the credit markets and prevent the cycles of boom and bust.
One great difference between classical and Keynesian economics revolves around the theory of wages. Should government allow wages to fall during an economic downturn? Classical economist argue wages must drop to keep people employed conversely, Keynes argued that if wages drop it decreases incomes followed by in a drop in demand, which in turn decreases production further dropping income and demand in a never-ending downward spiral. Keynes theorized the way forward was to stop the downward cycle by a jolt of government intervention, translation&mdashthe government should spend a lot of money. Keynes&rsquo theory, for the first time in economic history, attempted to show why classical economics could not reverse a depression cycle. Classical economists claim both Hoover and Roosevelt tried Keynes&rsquo methods, to different extents, and they flopped. Keynesian economists argue his ideas were not properly implemented by either administration, and they say Roosevelt&rsquos actions did work to relieve the depression.
Modern liberal economists argue that classical economics failed in the Great Depression, and that Keynes&rsquo methods were not really tried as the government did not spend enough money. The student of history should note that classical economics were not tried atall. Hoover did not decrease taxes, lower regulations, lower tariffs, or otherwise get the government out of the economy as recommended by classical economics. In fact, Hoover and Roosevelt raised taxes, increased tariffs, increased regulatory intervention, increased uncertainty in the business world and did everything the classical economists said NOT to do. Even today, governments the world over do not respond to economic trouble by getting out of the way and decreasing taxes and regulations. Some of this stems from the Great Depression and the concept that classical economics failed. If they knew history they would know otherwise. This false concept still influences government economic decisions. History, and a real understanding of what actually happened, is critical for decision making.
European Government&rsquos under Stress: Fascist and Communist
The economic chaos of the Great Depression led to disillusionment with democratic governments in Europe, and radical governments began to replace democracies. Pushing this change was a new ideology supported by a major world power, the USSR. The communists in Moscow formed revolutionary cells in nations throughout Europe and the world. These cells agitated for the overthrow of capitalist governments and their replacement with communist regimes. Communists preached that capitalism had led to World War I and the economic disaster that engulfed the world following the Great War. People seemed ripe for a change.
In response, radical movements grew up to oppose communism. Fascist parties appeared with the idea that government should control major industries and insure full employment, but the fascist rejected revolutionary change pushed by the communists. Owners of industries feared a workers revolution seizing their property. The fascists made headway, in part, because propertied people feared communism. They had good reason to, because in the USSR millions of murders followed the implementation of communist ideology. Fascists came to power in Italy (1922&mdashMussolini), Germany (1933&mdashHitler), and Spain (1934&mdashFranco). How could the people of Europe know they were opting for one group of dictators and murderers, the fascists, over another group of dictators and murderers, the communists?
The Western Democracies: England, Canada, France, and the United States being the major ones, faced a frightening future. In a very few years, the world changed spectacularly with new untried economic and social philosophies being implemented, and murdering dictators running major world powers. England was frightened of Communist Russia (the USSR) and wanted a strong power in Central Europe to offset growing Soviet power. Since WWI dismembered Austria-Hungary into a hive of competing small nations, only Germany remained to potentially offset the USSR. Hitler assumed power in 1933, and immediately began rebuilding Germany&rsquos military nonetheless, Britain and France restrained their objections hoping Germany could counterbalance Soviet power. And so Germany could have if someone other than a demented dictator had assumed the helm.
Hammered in WWI, France wanted to avoid another war, especially against Germany. They wanted to stop Hitler&rsquos rebuilding Germany, but they could not muster backing from their voters, or England, to oppose Hitler&rsquos violations of the Versailles Treaty. Without England, France could not move. Hitler&rsquos words were soothing, praising peace, but his actions threatened war. Hitler was rebuilding his army along with developing a large, modern air force and navy. The world&rsquos newest weapon, the airplane, became war&rsquos focal point. Germany could not rival England&rsquos massive navy however, airplanes could render the Royal Navy irrelevant. For the first time in history England&rsquos navy could be leapfrogged by a major weapon system&mdashthe airplane. France expended vast sums on defense by constructing the Maginot Line, leaving little for aircraft and tanks.
Hitler then started making unreasonable territorial demands on neighboring nations. This went unchecked by the Western Democracies because their voters and intellectuals opposed arms races, increases in military spending, or standing up to Hitler. Virulent antiwar movements preached &ldquoPeace at any price&rdquo because of the sacrifices of the First World War. &ldquoHow horrible, fantastic, incredible it is that we should be digging trenches and trying on gas masks here because of a quarrel in a faraway country between peopleof whom we know nothing,&rdquo stated England&rsquos Prime Minister, Neville Chamberlain, on September 27, 1938. This sums up the feeling of the antiwar groups. Nothing was worth another conflict. Unfortunately, these attitudes threw away the sacrifices of WWI.
Meanwhile, Axis nations (the Axis: Germany, Italy, Japan) cheated on arms limitations agreements while the Western Democracies disarmed beyond the treaty requirements. Germany developed aircraft, submarines, and tanks in secret. Japan constructed super battleships in violation of the treaties. Unknown to the rest of the world, the Soviet Union was also preparing for war. In total secrecy the USSR developed the world&rsquos best tank (the T-34) and a massive army. Stalin then decided to shoot the army&rsquos officers, and for no reason.
The world stage began grimly drawing back the curtain on a catastrophe surpassing WWI. Once again, the world&rsquos leading nations utterly mishandled the growing crisis, missing several chances to avoid war. Since 1900 Europe&rsquos great powers, and the United States, had failed to stop WWI, the Great Depression, the ascension of brutal dictators, or the invasions of Ethiopia, Korea, and Manchuria. A decade long string of deadly decisions by European leaders triggered WWI, and similar decisions made it impossible to halt. Economic mismanagement produced the Great Depression, and it deepened because of governmental malfeasance. Now the Western Democracies chose to appease Hitler and ignore Japan. The West hoped Hitler and the Japanese warlords were rational, desiring peace, but diplomatic solutions meant nothing to the hungry dictators. Poor decisions by the major democratic powers led the world into a war in which the stakes were far higher than WWI.
English propaganda during the Great War portrayed German and its allies as an utter scourge however, the Central Powers were more like their opponents than unlike them. Germany was no more a world scourge than England. No matter who prevailed in WWI, the world was safe from murdering, depraved dictators.
The enemies faced by the Western Allies in WWII were a scourge. The leaders of Germany, Italy, and Japan despised democracy. Hitler believed world conquest was his destiny, and Japan&rsquos militarists thought Asia should be theirs. Mussolini was visualizing a new Roman Empire for himself around the Mediterranean. The Axis and Soviet dictators murdered massive numbers of people. Mild jokes about the Nazi regime often led to arrests and most unpleasant prison terms. To Hitler, Stalin, and militarist Japan, human life was meaningless. To these godless dictators every aspect of life was a part of the state while the individual was nothing. Life&rsquos sole purpose was to serve the state, because an individual&rsquos life belonged to the state. The modern dictators enjoyed new faces, new technology, new methods, new ideologies, but the same ancient goals of ultimate personal power over vast empires. This danger was very real and far worse than anything faced in WWI.
World War I destroyed the old order, and the new order was frightening beyond all measure. The Soviets, Nazis, and Japanese, using the machinery of the modern state (the bureaucracy), began controlling populations to a degree never before imagined. Their complete ruthlessness eliminated millions with assembly line efficiency. Thus, populations of entire world regions bowed to the whims of one man (or in Japan&rsquos case one group of men&mdashthe militarists). Nearly everything done by these dictatorships was racist in nature. In Japan and Germany, the racist populations viewed themselves as deserving an exceptional place in the world. In both nations, those not of a certain assumed superior race were considered much lower forms of life and therefore could be brutally treated. The results included Japanese bayoneting babies in the Philippines, torching American prisoners of war just prior to liberation, and subjecting girls to vile sexual mistreatment. In Europe it meant the destruction of the Jews, gypsies, Slaves, and many more.
In the Soviet Union, the target was control rather than race. The Soviets shot anyone having a capitalist thought. Under the paranoid Stalin each budding rival faced quick eradication. At a party congress with 1,010 members attending, a secret ballot vote resulted in about one hundred (100) delegates voting no confidence in Stalin. Stalin had all 1,010 delegates murdered. Stalin routinely shot generals for losing a battle. Most consider Hitler the worst dictator of the era, but Stalin easily murdered many more and was more brutal and paranoid. Stalin is the most destructive and evil man who ever walked the face of the earth, especially if we credit the millions of deaths caused by the spread of communism to him.
The Western Democracies in the 1930s were in real peril. Their economic decline resulted in decreased spending on military training and equipment, and reduced the size of their armed forces. The democratic nations were not keeping pace with technological advances or new combat methods. Many of these new combat methods originally came from the British and French military however, the Nazis adopted these formally theoretical methods and actually put them to use. Germany rearmed and planned to use aircraft, tanks, artillery, and infantry together on the battlefield in a new kind of lightening war (Blitzkrieg).
Japan developed a modern aircraft carrier force with some of the best fighters (the Zero), dive-bombers, and torpedo planes in the world. Japan developed the best torpedo used in WWII. Germany developed new methods of submarine warfare (the wolf pack). The West played catch-up from 1936 on. The dictators had no worries about popular opinion and began spending on military expansion as soon as they came to power.
Japan Taken Over By Militarists
Japan&rsquos power expanded during World War I. By astute diplomacy Japan joined the victor&rsquos side early on, and by rendering a minor amount of assistance managed to gain a bonanza of territory from Germany and China. Japan&rsquos economy prospered during the war and during the 1920s. Japan had tried a parliamentary-style government with a Diet (the legislature) and a prime minister however, all was not well with the government as the military continued exerting more control over decisions than desired by the civilian authorities. Radical elements in the military murdered two prime ministers who attempted to stop the war in China, but the civilian government held on tenaciously in an unsuccessful attempt to limit military influence.
As Japan prospered the military&rsquos control waned however, after the stock market crash of 1929 Japan&rsquos prosperity vanished. Japan depended on external trade, and as the world markets failed so did Japan&rsquos economy. As in Europe, this economic downturn helped radical elements expand their influence in the government. Eventually, the army and navy took complete control of the civilian politicians. The prime minister found his appointments subject to approval by the army, as the army controlled the cabinet. Japanese parliamentary government was a dead, rotting corpse by May of 1932. The militarists expanded the war in China and decided Japan must attack the Western Allies blocking Japan&rsquos control of resources in the South Pacific. After France fell, believing the West remained focused on Hitler, Japan moved to improve her economic and military position by seizing key territory in Indo-China and the Pacific.
Japan&rsquos desire to conquer China put her on a collision course with the United States of America. Japan attacked the United States mainly because it refused to acknowledge Japan&rsquos claims to China, continually demanded Japan stop murdering the Chinese, and wanted Japan to surrender Chinese territory won since 1937.
The Future Goes Dark
Popular opinion about the future of the West soured in the 1930s. The Great Depression continued and memories of the Great War haunted everyone. In 1900 the future appeared brilliant, now it emerged dark and menacing.
The Impressionist art movement started bringing new vigor to the art world. The normally bright and colorful paintings of the Impressionist, made outdoors when possible, emphasized the immediate and the present. Previous art emphasized the classical world and great moments in history and not the actions of everyday folks. The pre-Impressionist painters normally worked in a studio, spending long hours perfecting the paintings so everything looked very lifelike. The Impressionist changed everything by recording seemingly unimportant events going on around them, working outside, and making paintings look like a bunch of paint splotches close up however, when the viewer stood back, the paint splotches blended together by the eye transformed the painting into a glorious burst of originality, color, and substance.
After WWI art trends began to change, and a world of disjointed darkness, often with unrecognizable features, started to flow from the painter&rsquos brush. Painting no longer bound itself to realism. Abstract painting started before WWI (about 1910) and foresaw the disruption of the modern world long before it happened. After WWI, life&rsquos lack of meaning became a major theme in art. Another art form became important in the pre-WWI years&mdashthe motion picture. The stars of the silver screen became worldwide icons making enough money to qualify as royalty. The movies set forth popular themes such as romance, comedy, the futility of war, or living in the modern world. The dictators used the new art form for propaganda to keep the populace believing the party line. Governments used this instrument of the modern world for the modern purposes of suppression and mind control. Worst of all, it worked.
Science, so obvious in motion pictures, became more evident in everyday life. Overnight, it seemed, the world invented skyscrapers, electricity, hot water heaters, cars, inside plumbing, better medical care, wonder drugs, flushing toilets, vacuum cleaners, and a host of other modern tools and conveniences. During the Great Depression many great public works projects started construction, such as the Hoover Dam in the United States, and the autobahn in Germany.
The world was a strange mix of worry and wonder. The stress on society by the new fast-changing world, the frightening nature of world politics, the wonder of science and its fantastic accomplishments, the warnings coming from artists and writers of pending chaos, and the seemingly unending economic misery all swirled together creating a disconcerting world. Predictability was gone. Recall the world of ancient Egypt, the steadfastness of it all with the unchanging centuries slipping easily into history&rsquos vastness. The ability to adapt may be humanity&rsquos best trait, but that adaptation was accomplished over long spans of time. Now humans were adapting in months to titanic changes.
From 1850 to 1950, the changes were staggering. From fire light to light bulbs, horses to cars, balloons to jet aircraft, muskets to machine guns, dirt roads to paved roads, stage plays to movies and then television, brooms to vacuums, wash boards to washing machines, and much more. A person born in 1850 and living to the age of one hundred would see all these changes if they lived in the United States or Europe. A person living in Egypt in 2000 BC could live to the age of five hundred and never see any change (except a Pharaoh or two).
This review only scratches the surface of the changes going on after 1919, but this is the Super Summary so we cannot go too far. The tenor of the age was one of change and great improvement but the long shadow of WWI, the Great Depression, and the darkening clouds of WWII put the stamp of uncertainty on the era. Once the dictators were in power, the world became ever more frightening and ever more deadly.
Let Us Learn
The Great Depression teaches us economies fail, often very fast. Even a stable economy can collapse with blinding speed. It also taught us the financial world is very complex and very important. Have some money in a safe place in case of economic decline. Trying to spend your way out of debt, or into prosperity, is folly. Two American presidents and their super educated advisors made that mistake. Learn from their errors. If hard times hit, cut spending. Do not follow the government&rsquos example they never get it right anyway.
The depression era shows we are all captives of our theories. Recall that the economists of the 1930s analyzed the crisis through the prism of their assumptions (theories). Many people never try to figure out what theories (assumptions) they use for analysis. For example, what is your theory of human nature? Are people fundamentally good or evil? Does life operate on cause and effect relationships that is, if one is good to someone will they be good back? If we work hard, will rewards follow? Each of these questions, among others, discloses theories concerning life. Be aware of the theories binding your thought processes.
Watch events in other countries, because even small far away occurrences can affect the entire globe. The murder of one man plunged the world into the hell of World War I. Hitler came to power after winning one German election and torched the world. Stay alert to world events and unusual trends.
Watch for big trends and try to analyze them. A trend to worldwide dictatorship is not good. A trend toward bank failures should raise your concern. Very large trends usually have large impacts. Population trends within various nations, and the world, often foretell of critical changes.
Finally, the interwar era teaches that aggressors must be immediately confronted, and if war is necessary to prevent their exploitation, then war it must be. If one wants peace prepare for war. What seems like an ideological oxymoron is actually a primer on human nature. The strong will take advantage of the weak. The prepared will crush the unprepared. So it has been, so it is now, and so it will always be. To forget these facts is folly.
Books and Resources on the Great Depression
and the Rise of the Third Reich:
See http://www.euronet.nl/users/wilfried/ww2/1939.htm for excellent information on the state of European affairs just before WWII.
See http://history1900s.about.com/library/photos/blygd24.htm for excellent history and photographs of the Great Depression
The Rise and Fall of the Third Reich, William L. Shirer. The classic, but not so easy to read.
The Coming of the Third Reich, Richard J. Evans, 2005, Penguin.
The Third Reich in Power, Richard J. Evans, 2006, Penguin. I like this book. It records many laws that were on the books under Hitler&rsquos murderous regime. It records the nightmarish existence under the Nazi regime.
The Gathering Storm, Winston Churchill. Churchill is always easy to read, but beware of some of his concepts. Churchill was very English and very supportive of the concept of the English Empire.
FDR&rsquos Folly, How Roosevelt and His New Deal Prolonged the Great Depression, Powell, J., 2003, Three Rivers Press. I actually enjoyed this book more than The Forgotten Man by Shlaes. FDR&rsquos Folly gives more economic background.
The Forgotten Man, Shlaes, Amity, 2008, Harper. Excellent, but concentrates on personalities in the place of more economic facts.
The Politically Incorrect Guide to the Great Depression and the New Deal, R. Murphy, Regnery, 2009. Like all PIG books this one will raise your consciousness about the Great Depression, and may raise the hair on the back of your neck as well.
Against Leviathan, Government Power and a Free Society, Higgs, Robert, 2004, The Independent Institute. Wonderful book. A must read.
Churchill, Hitler, and The Unnecessary War: How Britain Lost Its Empire and the West Lost The World, Buchanan, P., Three Rivers Press, 2009. For a completely different take on the run up to WWII.
Reform of the mark
The reform of the mark was considered since 1920. Many called for the return of the goldmark, others suggested backing by other means. By the year 1922, in agricultural areas like Mecklenburg an Oldenburg, prices and rents were based on a pound of rye and several districts issued bonds quoted in the price of rye. Other commodities like coal or potash were also used to back loans and bonds.
The escalating economic situation with plundering and revolts called for action. On the 27th September, 1923, the government declared a state of emergency and abdicated. A new government completed the reform plan: the new currency should be the Rentenmark, based on gold. It was not declared legal tender, no conversion ratio with the paper mark was set, nor was it actually backed by gold - there was not enough of it in Germany. The issuing bank, the "Deutsche Rentenbank" was independent from the outset. The new money was not based on the state, but on the economy itself. The agricultural sector and the industries each took on a half of the bank's capital in the form of debt - mortgages in the value of 4% of all lands used for agriculture and forestry, and debt issued by the industries, crafts and trades, each in amount of 1600 million goldmark. The basic capital of 3200 million mark was the backing of the Rentenmark, and the bank could issue up to this amount of the new money (but the top limit was never reached, the maximum in circulation was 2.1 billion Β] ).
Anyone who would deliver at least 500 Rentenmark could redeem them for "Rentenbriefe" - bonds with a 5% interest rate, quoted in goldmark. The Rentenbank issued them in an amount equal to its capital. It could issue money (the Rentenmarks) only up to the amount of Rentenbriefe it held. In this way, the Rentenmark should be a bridge to a new golden mark.
The Rentenbank was founded on 15th October of 1923 and Hjalmar Schacht was put into a key government position to execute the reform plan. The stabilisation was done according to the exchange rate to the dollar on the Stock Exchange in Berlin, which was at the 20th November 4200 billion mark. Ώ]
Cities have produced metal money during the war and after it. With the ever-growing devaluation of the currency, the demand grew correspondingly.
The Reichsbank had to call upon private printing works for the production of banknotes, in 1923 were 30 paper factories and 133 printing works busy with their production. The number of printing presses (1723 running day and night in autumn 1923) could be still increased, but the capacities for the special paper for banknotes could not keep up with the demand. The Reichsbank therefore welcomed and in many cases supported the issue of Notgeld (emergency money) by municipalities, districts, provinces and private enterprises. It was estimated, that at the end of 1922 there were about 20 billion in circulation - as opposed to 1280 billion of official money. By the end of 1923 there were 400 to 500 billion of Notgeld in value of about 500 million goldmark, so about the same amount as the official banknotes. There was also "value-stable" money in the same amount. The Notgeld was not only used to assist the Reichsbank, but many produced it to great profit.
In November, 1923, the Reichsbank stopped accepting the Notgeld, and wanted to exchange its sizable reserves in their places of issue, causing a great outcry. It took until the end of October, 1924, to exchange most of the Notgeld and the economy could finally stabilize. Ώ]
What was German GDP in 1919 in Goldmarks? - History
Following World War I, the republic emerged from the German Revolution in November 1918. The “Weimar Republic” is the name given by historians to the federal republic and parliamentary representative democracy established in 1919 in Germany to replace the imperial form of government. It was named after Weimar, the city where the constitutional assembly took place. Its official name was the German Reich (Deutsches Reich).
In its 14 years the Weimar Republic faced numerous problems, including hyperinflation, political extremists (with paramilitaries — both left and right wing), and hostility from the victors of World War I, who tried twice to restructure Germany’s reparations payments through the Dawes Plan (1924) and the Young Plan (1929).
1921-24: Hyperinflation and Weimar Germany
Not all countries enjoyed prosperity. The Weimar Republic, like many other European countries, had to face a severe economic downturn in the opening years of the decade, because of the enormous debt caused by the war as well as the Treaty of Versailles.
In order to pay the large costs of World War I, Germany suspended the convertibility of its currency into gold when that war broke out. Unlike France, which imposed its first income tax to pay for the war, the German Kaiser and Parliament decided without opposition to fund the war entirely by borrowing. The result was that the exchange rate of the Mark against the US dollar fell steadily throughout the war. The Treaty of Versailles, however, imposed war reparations which accelerated the decline in the value of the Mark. The “London ultimatum” (World War I reparations) in 1921 demanded reparations in gold or foreign “hard” currency and not the rapidly depreciating Papiermark , to be paid in annual installments of 2 billion goldmarks plus 26 percent of the value of Germany’s exports. One strategy Germany employed was the mass printing of bank notes to buy foreign currency which was in turn used to pay reparations, greatly exacerbating inflation rates of the paper mark. That was the beginning of an increasingly rapid devaluation of the Mark. The total reparations demanded amounted to 132 billion goldmarks which was far more than the total German gold and foreign exchange.
It was during this period of hyperinflation that French and British economic experts began to claim that Germany destroyed its economy with the purpose of avoiding war reparations (they accounted for about 1/3 of the German deficit), but both governments had conflicting views on how to handle the situation. The French declared that Germany should keep paying reparations, while Britain sought to grant a moratorium that would allow for its financial reconstruction.
The inflation ended when a new currency (the “Rentenmark”) was introduced. In order to make way for the new currency, banks “turned the marks over to junk dealers by the ton” to be recycled as paper!
Hyperinflation Syndrome, AKA ‘Zero Stroke’ or ‘Cipheritis’
As a result of hyperinflation, there were news accounts of individuals in Germany suffering from a compulsion called zero stroke, a condition where the person has a “desire to write endless rows of zeros.” Cashiers, bookkeepers and bankers were the ones that were most prone for the Zero stroke.
The 1923 crisis
In 1923 the Weimar Republic nearly collapsed. The crisis began when Germany missed a reparations payment in 1923. This situation spiralled out of control and once again the German people were unhappy and in financial difficulty, so uprisings occurred throughout the country. In 1923 French and Belgian troops occupied the Ruhr, the industrial region of Germany in the Ruhr valley to ensure that the reparations were paid in goods, such as coal from the Ruhr and other industrial zones of Germany. Because the Mark was practically worthless, it became impossible for Germany to buy foreign exchange or gold using paper Marks. Inflation was exacerbated when workers in the Ruhr went on a general strike, and the German government printed more money.
Unsurprisingly, the hardships created by hyperinflation led to many uprisings as groups struggled to take power from Weimar.
- A nationalist group called Black Reichswehr rebelled in Berlin.
- A fascist group called the Nazis attempted a putsch in Munich.
- Communists took over the governments of Saxony, Thuringia, the Rhineland and declared it independent.
Hyperinflation is widely believed to have contributed to the Nazi takeover of Germany and Adolf Hitler’s rise to power. Adolf Hitler himself in his book, Mein Kampf, makes many references to the German debt and the negative consequences that brought about the inevitability of “national socialism”. The inflation also raised doubts about the competence of liberal institutions. It also produced resentment of bankers and speculators, whom the government and the press blamed for the inflation crisis. Some Germans called the hyperinflated Weimar banknotes “Jew confetti”.
After the Dawes Plan was put into operation (1924), it became apparent that Germany could not meet the huge annual payments, especially over an indefinite period of time. The Young Plan which set the total reparations at $26,3 Billion to be paid over a period of 58.5 years was thus adopted by the Allied Powers in 1930 to supersede the Dawes Plan.
Germans who did not want to make any reparations payments at all opposed the Young Plan, and they put it on a ballot question. An alliance (known as the Hartzburg Front) was formed in an effort to defeat the Young Plan. The alliance was composed of the Nazis, conservatives nationalists, and the Stahlhelm, a right-wing veterans. Although the Young Plan was approved by a national plebiscite, Hitler had gained valuable allies for the Nazis.
In 1929, Germany’s Weimar Republic was hit hard by the depression, as American loans to help rebuild the German economy now stopped. Unemployment soared, especially in larger cities, and the political system veered toward extremism. The unemployment rate reached nearly 30% in 1932, bolstering support for the anti-capitalist Nazi (NSDAP) and Communist (KPD) parties, which both rose in the years following the crash of 1929.
Repayment of the war reparations due by Germany were suspended in 1932. By that time, Germany had repaid 1/8 of the reparations. Hitler and the Nazi Party came to power in 1933, establishing a totalitarian single-party state within months and initiating the path towards World War II, the most devastating conflict in world history.
Germany eventually repaid a reduced amount of the reparations required of the Versailles Treaty, with the last payment being made on 3 October 2010.
Primary Sources: Weimar Economics
Germany emerged from World War I with huge debts incurred to finance a costly war for almost five years. The treasury was empty, the currency was losing value, and Germany needed to pay its war debts and the huge reparations bill imposed on it by the Treaty of Versailles, which officially ended the war. The treaty also deprived Germany of territory, natural resources, and even ships, trains, and factory equipment. Her population was undernourished and contained many impoverished widows, orphans, and disabled veterans. The new German government struggled to deal with these crises, which had produced a serious hyperinflation.
By 1924, after years of crisis management and attempts at tax and finance reform, the economy was stabilized with the help of foreign, particularly American, loans. A period of relative prosperity prevailed from 1924 to 1929. This relative “golden age” was reflected in the strong support for moderate pro-Weimar political parties in the 1928 elections. However, economic disaster struck with the onset of the world depression in 1929. The American stock market crash and bank failures led to a recall of American loans to Germany. This development added to Germany’s economic hardship. Mass unemployment and suffering followed. Many Germans became increasingly disillusioned with the Weimar Republic and began to turn toward radical anti-democratic parties whose representatives promised to relieve their economic hardships.