Never before have so few owed so much to so many. These are not Churchill legendary words in thanks to the Royal Air Force pilots who defended England from German invasion during World War II. This inversion of Churchill legendary statement applies itself well to the conditions at least partly responsible for that Second World War. It is made in reference to the 1919 Treaty of Versailles. The many, represented by a group of Allied delegates, without relent blamed one nation for the imperialistic mindset dominating Europe, which eventually brought the world to war. The few, the damned, were the German people forced to accept full responsibility for World War I despite their relative lack of choice in joining the war due to Russia quickness to supply military force in support of a country whose revolutionary had assassinated the successor to the throne of Germany closest ally.
So much was Germany forced to pay that it threw the country into desperate conditions that were later exploited by Hitler. What is at issue here is neither who was responsible for the war, nor anything leading up to the Armistice of November 11, 1918 when German troops surrendered, thus ending the fighting, but instead to look at the Treaty of Versailles, particularly those portions pertaining to the German economy and finally the effects thereof. But it is important to remember that œThe real world is incredibly more difficult than this simplified picture of supply and demand ? (Love) that will be portrayed here.
The Treaty of Versailles states the terms under which Germany officially surrendered. Part VIII of the Treaty deals specifically with reparations. Because of the recognized complexities in determining an exact amount of reparation, Article 233 merely sets a deadline by which that amount is to be determined by an Inter-Allied Commission under the guidelines set forth in the Treaty. Article 231 states in part that, œ ¦Germany accepts the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments ¦have been subjected to as a consequence of the war imposed upon them ¦. ? Article 232 goes on to recognize Germany lack of resources, after being reduced by other parts of the Treaty, to make complete reparations. Still they require Germany to œmake compensation for all damage done ¦as defined in Annex I hereto ?. That annex specifies several different categories under which compensation from Germany may be claimed. Paragraphs one, two, three, and eight named damages to injured civilians, including victims of imprisonment, internment, forced labor, injuries effecting capacity to work, and even death, as well as damages payable to dependents of the aforementioned.
Paragraphs four and six account for damages pertaining to prisoners of war and their dependents. Most shocking are paragraphs five, seven, and nine under which Germany is required to pay any military pensions incurred upon the Allies as a result of the war, as well as the cost of maintaining Allied forces with the exception of supplies. Perhaps a case of hindsight being 20/20, it seems mind boggling that such a great demand could be made upon the German economy, which undoubtedly was under strain already from the war itself and other provisions within the treaty. Article 235 calls for Germany to make payment equivalent to twenty billion marks as a down payment of sorts while the Inter-Allied commission decided on an exact amount. At the time of the signing of the treaty on June 28th 1919, with exchange rate of almost 14 marks per dollar, this equated to approximately 1.43 billion dollars. In 1921, the Inter-Allied Commission valued the cost of German reparation payments at thirty-three billion dollars. In January of 1921 the average monthly exchange rate was 64 marks per dollar. This meant Germany owed 2.112 trillion marks.
A summary of the exchange rates can be seen in Figure 1 based on Gordon Craig book Germany: 1866-1945. Despite the enormity of its debt, German taxes never exceeded 35% of expenditure between 1919 to 1923. In order to cover the difference the German government printed more money. In November of 1918 there were 29.2 billion (29,200,000,000) notes in circulation. Within five years the number of notes in circulation had increased to 497 quintillion or 497 with 18 zeros after it (Economist 92). That over seventeen billion times as many notes in just five years! With the amount of M1 in circulation increased, the quantity of money demanded plummeted.
With the interest rate decreased (if not all but eliminated), people desire to save fell considerably. Because income is equal to savings plus consumption, when savings fell, consumption increased and the Aggregate Demand curve shifted to the right. Ordinarily this shift of aggregate demand would cause the economy to temporarily produce beyond its long-run aggregate supply causing an expansionary gap. But according to the Dawes Committee Report, which will later be further elaborated on, Germany at this time had been producing well below potential output. The report also contains evidence that the potential output had been increasing as well, meaning a rightward shift in the long-run aggregate supply curve.
Without knowing where Germany stood in relation to the actual long-run aggregate supply prior to this time its impossible to know exactly how much of an expansionary or contractionary gap this expansion led to.
But according to demand-pull inflation, when aggregate demand shifts to the right, the price level increases, as does the quantity supplied in the short run. Between its low point in 1919, when production was at only 37% of the prewar level, and 1922, when it was up to 71% of prewar production, Germany had increased productive volume by over 90%
In 1922 it took 191 marks to by a single dollar, up from 14 after the signing of the Treaty of Versailles. While the inflation proved fruitful for the entrepreneurial income, it was at the expense of the workers wages. This was because while prices were going up, the price of many resources, namely labor, remained fixed, allowing employers to enjoy the extra money. The workers however found it increasingly difficult to buy even the necessities as wages were unable to keep up with inflation. Most people were unaware that others were gaining so much by the devaluated currency.They knew hunger ¦And in their misery and hopelessness they made the Republic the scapegoat.
Such times were heaven-sent for Adolf Hitler ? To complicate matters worse, by 1922 Germany found itself unable to continue making its payments. The Allies in general felt that this was just a cheap attempt by the German government to get out of its obligation. Overall the attitude of the world was still rather anti-German. Even so, according to The Economist from December of 1999, the Times from 1922, known for chastising Germany for not disarming, was warning that perpetuation of Allied demands would lead Germany towards Moscow, meaning a communist revolution as had recently happened in Russia.
The Economist, in retrospect, recognized that it instead led to Auschwitz, synonymous for the atrocities of World War II. Even the Times was warning that the Allied demands would lead to ˜Further production of paper marks on a massive scale that would mean a big step on the way to Moscow to Auschwitz, in the event In vain: the victorious powers shut their ears ? The French specifically still had a deep-seated anger toward Germany left over from the war. This anger manifested itself in military action when the French Premier, who coincidentally was President during the war, ordered troops into the Ruhr after Germany failed to make a scheduled deliver of timber as reparation payment.
In January of 1923, French troops were in control of the Ruhr. The Ruhr was Germany industrial heartland, producing four-fifths of Germany coal . The use of force in the Ruhr angered many Germans. Occupying the Ruhr, France committed a glaring violation of the Versailles Treaty ?
Contrary to what Hitler would claim to be the best move, the then German government adopted a policy of passive resistance to the French. All people in the Ruhr were ordered to not help the French in any way whatsoever, but also to not openly confront them. On January 27th, 1923, a German editorial on the occupation of the Ruhr asked if, the resistance in the Ruhr can be carried out only through comprehensive strikes, will it be possible to pay the workers wages from Germany.
The editorial continued by suggesting that worst case the 45 billion marks could be provided by the printing press. Germany took this worst approach. By continuing to print more paper marks, continued to a more severe degree. While increasing the aggregate demand by printing more money, Germany short-run aggregate supply fell dramatically because of the lack of production of coal.
Without knowing the amount of change in the aggregate demand and short-run aggregate supply, the only conclusion to be drawn is an increase in the price level far more drastic than anything Germany had yet experienced. The growing exchange rates support this concept. As previously stated, in 1919 it took 14 marks to equal one dollar, in 1921 it took 64, and 191 marks in 1922. The price of a dollar jumped to 17,972 marks by January 1923 and on to 353,412 marks per dollar by that July. Unfortunately this was far from the worst it would get. The increased price level is best realized through a selection entitled? or overwrought Nerves ? published in a German newspaper on August 26th, 1923. When the marks per dollar ratio had risen to 4.6 million, Friedrich Kroner writes: It pounds daily on the nerves the big stone city will be shopped empty again. Rice, 80,000 marks yesterday, costs 160,000 marks today, and tomorrow perhaps twice as much
The piece of paper, the spanking brand-new bank note, still moist from the printers, paid out today as a weekly wage, shrinks in value on the way to the grocer shop ?.
A month later in September, inflation had raised the price of a dollar to 98.86 million marks, and onward to 25.26 billion by October 1923. By November 1923, workers were paid twice a day, and given half-hour breaks to rush to the shops ¦to buy something, anything, before their paper money halved in value yet again ?
The ratio of marks to dollar had soared by this point to 4.2 trillion, an increase of 16,527% in just one month! Something had to be done. In mid-November of 1923 the German government issued a new currency called the Rentenmark. Each Rentenmark was worth 1,000 billion paper marks, restoring the exchange rate to its 1914 level. To prevent the uncontrolled inflation as had happened with the paper marks, and reinstall faith among the German people in a national currency, the Rentenmark was backed by American gold.
Then in 1924, the Dawes Committee, headed by American Charles Dawes, made its report regarding the issue. Dawes was also the first director of the US Federal Budget in 1921. The committee begins by stating that under the current conditions it doubts any practical means exists to ensure German economic stability. The conditions being referred to were the œlimitations on her fiscal and economic rights over part of her area , likely including the occupation of the Ruhr and steep reparation costs. It also recognizes that the stability of the Rentenmark will not endure if other measures are not taken. But it by no means attempts to cast away the concept of German reparation payments. In fact they opposed the idea that Germany full domestic demands constitute a first charge on her resources ?
Leaving only the surplus to be used for reparations. Though they did warn that if Germany were forced to pay an amount œbeyond her taxable capacity, budget instability would ensue the currency would lose stability. The committee therefore settled on the principle that the appropriate amount for Germany to pay in reparations would be œthe difference between the maximum revenue and minimum expenditure for Germany own need. The concept of the difference between maximum revenue and minimum expenditure was created under the assumption that Germany at this time was not producing at her potential output level. In fact it states that their task would be hopeless if the present situation of Germany accurately reflected her potential capacity. They base their belief in growing industrious population, wealth of material resources, increased technology in modern plants, and an infrastructure in which experts reported œexpense had not been spared . In order for the amount of reparations to correlate with the expected increase in revenue, built in to the Dawes Committee plan were automatic stabilizers. The overall plan for payment included a small fixed annual payment upon which a variable amount based on a composite index figure would be added. In this way, when Germany prosperity index increased the amount of reparations payable would increase as well. Furthermore, before the revised reparations schedule would take effect, the Dawes Committee called for a recuperation period of one year, during which the German economy could gain strength after just coming out of such extreme hyperinflation.
This eased the tensions and led to the withdrawal of French troops from the Ruhr to help increase production. The Dawes Plan is credited with saving the German economy. Charles Dawes received a Nobel Peace prize in 1925 for the plan. William Shirer in The Rise and Fall of the Third Reich found life in Germany after the Plan to be œmore free, more modern, more exciting than any place I had ever seen.
Such were not the ideal conditions for Hitler, who had just recently been released from prison for a failed putsch, to persuade people to join his cause; as he had been reduced to mainly the butts of jokes in reference to that failed putsch. But where had the money come from to finance this model city? Between 1924 and 1930 Germany borrowed approximately seven billion dollars, mostly from the United States. Hitler was confident that prosperity would not endure because, as he put it, Germany was dependent on the strength of America, œfrom whose swollen coffers loans were pouring in.
At the time, Shirer continues, neither American investors nor the Germans had given much thought to how Germany was to repay these debts. This dependency of the German economy on that of America was only prosperous if America prospered. But with the stock market crash of 1929, so too plummeted the German economy once again. Those who had already been followers of Hitler and the Nazi movement put renewed faith behind a man who had been as constant as the northern star in his dedication to restore the Fatherland to its rightful glory. The Nazi party, formerly the smallest party in parliament based on the 1928 elections which polled 810,000 votes and 12 members in the Reichstag, had swelled in the 1930 elections yielding 6,409,600 popular votes and 107 seats in the Reichstag making it the second largest political party. For Hitler, The suffering of his fellow Germans was not something to waste time sympathizing with, but rather to transform, cold-bloodedly and immediately, into political support for his own ambitions
Indian Economy Reality and Fiction 