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Rh quircments in absolute necessaries, the country was flooded with foreign articles of luxury. Although masses were facing starvation, the carrying-out of the conditions, first of the Armistice and later of the Peace Treaty, permitted the classes which had profiteered out of the war and the revolution to satisfy their vulgar greed.

The Peace Treaty of Versailles, as adopted by the Allies in May 1919, and imposed on Germany by the threat of renewing the war, completed the work of economic ruin. Germany lost with its territories a total population of 5-3 million souls. With Alsace-Lorraine, moreover, Germany lost nearly three- quarters of its capacity for iron production; out of pre-war deposits of iron ore valued at 2-3 milliards of marks in Germany and Luxemburg (which had a customs treaty with Germany), there remained a value of only 0-403 milliard within the new German frontiers. Germany also lost with Alsace-Lorraine 26 % of its potash. It lost with the transfer of the Saar valley to France roughly 9% of its pit-coal production, and was also obliged to agree to deliver to the Allies large quantities of coal, fixed in Oct. 1920 in Spa at 2 million tons per month. It was threatened with the loss of Upper Silesia, which had produced 23% of German pit-coal, 80% of zinc and 61% of raw zinc. Germany lost, moreover, almost all its commercial shipping, all overseas cables, its colonies, in fact all the bases of its com- merce abroad. Germany lost in the N. and the E. of its empire large agricultural districts which had formerly furnished about 25% of its supply of grain and potatoes, and 10 to 12% of its cattle. And while the Peace Treaty thus raised for Germany the crucial question whether it would be at all possible in future to supply a population now amounting to 61 million souls with nourishment and occupation on German soil whether indeed within its new frontiers it was not really a case, from the economic point of view, of "20 million souls too many" the country also found itself burdened with external financial obligations of unex- ampled magnitude by way of reparation payments to the Allies.

The Depreciation of the Mark. The first effect of the defeat, the internal collapse, and the terms of the Armistice and the Peace Treaty, was the almost total breaking-down of the Ger- man currency system. The depreciation of the mark abroad had pursued a progressive course already during the war. In conse- quence of the blockade, and of increasing demands for war re- quirements in industrial production, German exports had de- clined much more quickly than the imports; and since the cover formerly available for excess of imports, arising from shipping charges, freights, etc., failed entirely and foreign investments were largely unrealizable, it was almost impossible to obtain credit abroad, which in normal times would have covered the deficit. By the end of the second year of the war (summer of 1916) the exchange in Switzerland, for instance, had fallen from a normal rate of 123-46 francs per 100 marks to 95-60 francs, showing a loss in exchange of 22-60%. Though depreciation still went on, in Oct. 1918 the Swiss rate was still as much as 71-50 francs and the loss in exchange not more than 42-10%. But after the end of the war the fall became steeper. The Swiss exchange was 623 francs per 100 marks at the end of Nov. 1918, and the rate descended month by month to 355 francs at the end of May 1919, and then, after a brief reaction, to 26 francs at the end of Sept. 1919, 11-50 francs on Dec. 31 1919, and 6-15 francs (equal to a loss of 95 %) at the end of Feb. 1920. From this point there was again a reaction in the summer of 1920, and on May 31 1920 the Swiss rate was 14-75 francs, but in the autumn of 1920 the depreciation recommenced, and towards the end of June 1921, the Swiss exchange for 100 marks was 8-10 francs. (See EXCHANGES, FOREIGN, for the German exchange.)

German currency depreciation during the war, as well as afterwards, was one of the factors which restricted the possibility of getting help from foreign capital. And though the value of money in Germany itself declined much more slowly than the mark exchange abroad, another result was that foreign pur- chasers were able to buy whatever was obtainable in Germany, stocks of goods and merchandise, town property, securities, plant and machinery, up to complete industrial enterprises, at catas- trophically low prices. Another consequence was an enormous

increase in German indebtedness towards foreign countries. The German mark note became the gambling counter of the world. The German notes went abroad in milliards at ever- falling rates in payment for imported goods, to be bought up by big and little speculators, down to the hotel porter and the domes- tic servant who hoped to profit by any rise in exchange. Enor- mous foreign holdings of mark notes resulted also from credits given by banks in marks, also with an eye on an improvement in the exchange. Only in this way was it possible for Germany to pay for its large excess of imports over exports, which marked the destruction of Germany's economic position in these years of greatly reduced production at home. The price was a foreign indebtedness, the yearly burden of which in interest charges was estimated at the end of 1920 by competent judges at one milliard gold marks and by some critics at an even larger figure.

Apart from all other difficulties attending economic recon- struction after the war, every attempt of Germany to reach a real internal consolidation was hampered by the monetary instability. On the one hand it raised prices, and on the other it depreciated the value of property and income. While, towards the end of the war and just after, wages had often been increased beyond the rise in prices, so that a moderate increase in real wages resulted to the worker, it was not possible to continue this for any length of time in view of the unhappy state of pro- duction. Much less was it possible for people enjoying fixed incomes, officials, civil servants, and brain-workers, to increase their income in proportion with the reduction of money value, and they sank lower and lower in the social scale. The worst sufferers were people relying on incomes from rents. Every reduction in the value of money amounted to a favouring of the debtor at the expense of the creditor. Those who had invested their capital in Government securities, mortgages, etc., at fixed rates of interest, were helpless against the reduction in money value, which reduced their capital as well as the interest to a fraction of its former amount. Producers themselves might be able, through the rise in prices, to obtain some compensation for the reduction in the value of money. But any such compen- sation could only be reached by a very small part of the popula- tion. No doubt, as in all periods of economic revolution, some lucky people found the means of enriching themselves to an extraordinary extent. But the high profits nominally realized by many German companies, if the amount were reduced to the actual value of money, represented not only no advantage, but a loss if compared with pre-war times. The large middle class was hit particularly hard. This class, the main repository of national culture, was in danger of being swallowed by the proletariat.

Such a situation was bound to influence the State finances to a deplorable extent. Whatever services were required had to be paid for at a nominally higher rate. It was necessary too to spend enormous sums on subsidies for reducing the price of neces- saries to the public, for keeping down the cost of transport, and for the relief of the unemployed. On the other hand, uneco- nomic State finance was itself a factor in the decline of money values. The State had to cover its financial requirements in default of taxation by further issues of paper money, increasing from week to week and month to month. 1 It was itself the pro- ducer of the artificial purchasing-power which brought in its train the continued rise in prices. The bank-note press, in sub- stitution for the taxation machine, created a continually growing inflation. It was the uninterrupted use of the printing-press, as a means of meeting the expenditure, that characterized State finance in the first years after the collapse.

Taxation Reform, 1919-20. The National Assembly of the new German Republic had to face the task of laying the foundations of a new financial system and re-creating it out of chaos. The old privileges of the separate states of the Empire, in depriving the central Government of the benefit of the most important sources of tax-revenues, had to go. The German Reich now had

1 On Jan. I 1919, the regular note issue amounted to 22,188 million paper marks (as against 11,467 millions a year earlier) and the loan- bank note issue to 10,109 millions (6,264 millions in 1918). On Jan. i 1922 the total was about 120,000 millions.