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The German Economic Crisis

The German Economic Crisis

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The German Economic Crisis

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  1. The German Economic Crisis By Katherine Kaufold The Mathematics of Finance December 13, 2000

  2. End of World War I • At the end of WWI, there was much political instability because of the revolutions throughout Germany • Germany was really divided politically, socially, and economically • Struggle for power involved lots of violence • Nov 9, 1918 Freidrich Ebert (SPD) gained control of Germany and The Declaration of the Weimar Republic

  3. Entering a Period of Crisis • InternationalContextWith all the war debts, Germany had so many problems with so many countries, they had no help for themselves. • Economic  Extreme inflation led people to blame others and do whatever they had to in order to eat. • Counter Revolutionpolitical instability led people to riot and use violence as a means of control and power.

  4. International Settlements • Treaty of Versailles: gave Germany the sole responsibility for the war guilt and reparations • The Struggle for the Ruhr: France occupied the Ruhr Basin because they felt Germany was not obeying the treaty • Contracts and Agreements: Countries formed agreements with each other

  5. Versailles Treaty: Loss of Territory • Lost 13.1% of its territory and 10% of its population • These territories were rich in agricultural and mineral resources • Loss of Alsace-Lorrain and half of Upper Silesia disrupted some of the most important industrial and transportation systems • Allies had the right to confiscate all German private property in their countries

  6. Results... • Dangerous deterioration in the German balance of payments

  7. Why? • Foodstuffs had to be imported • Minerals previously mined in Germany now had to be imported • No longer export raw materials • Loss of their merchant fleet deprived Germany of foreign exchange that other countries paid them for their fleet services • Loss of the land (money) abroad decreased their profit and interest payments

  8. Versailles Treaty: Reparations • Woodrow Wilson’s 14 Point Plan- “Germany was to undertake reparation of all damage to private property of the Allies with exception of Russia” • This included paying for all of the costs of Allied occupation troops on German territory and pension payments to Allied combatants • This plan did not specify a total $ amount

  9. The London Ultimatum • May, 1921 • Called the “ultimatum” because unless Germany accepted this plan within 6 days, the Ruhr Basin would be occupied. • This was the final payments plan which totaled war reparations at 132 billion gold marks • This was 3 times what Germany was capable of paying

  10. Details of the London Ultimatum • 50 billion in gold mark bonds up front • 2 billion gold marks in the first year plus 26% of the money they made on export duties • 1 billion gold marks over the next few months plus all of their export duty and some other taxes • plan was followed at first, but then they asked for an extention

  11. The Struggle for the Ruhr • Poincare government in France believed that Germany was purposly not fulfilling obligations, and the only way to get them was to go in and get it themselves • Jan, 1923 Poincare occupied the Ruhr Basin, the most industrialized part of Germany

  12. Germany’s reation • Print more money to pay its workers not to work for the French • Germany revolted by stopping all reparations payments to France and Belgium • Thus, the French cut off the Ruhr from all economic communication with Germany and seized all their funds

  13. Results... • Being separated from the most essential raw materials, Germany was in dire straits • Now German government had to: • 1.) feed the workers that were evicted from the Ruhr • 2.) maintain the families of the thousands jailed by the occupiers • 3.) compensate for the industry they no longer had • 4.) continue the reparations to the Allies (excluding France and Belgium)

  14. Imagine... • Imagine the political and economical chaos in Germany in August of 1923 • Cuno cabinet resigned and a new coalition government under Gustav Stresemann came to power • Agreements were finally made between France and Germany and the Ruhr conflict ended, which ended the great inflation!!!

  15. Contracts and Agreements • Huge fear of Germany in the future because of the fighting especially for France • France sets up agreements with countries such as Little Entente with Czech, League of Nations • Germany is the object of these Peace settlements (Germany or Russia not invited) • Therefore, Germany and Russia sign an agreement known as the Rapallo (1922)

  16. The Three Stages of Inflation • War Inflation (1914-1918) • Demobilization Inflation (1919-1921) • Hyperinflation (1922-1923)

  17. War Inflation (1914-1918) • German government decided against financing the war with new taxes, but rather: • 1.) increased war loans with the thought that they could be repaid after the “final victory” • 2.) increased the money in circulation which started breaking the tie between paper money and gold reserves • Wholesale price index rose from 1 in 1913 to 2.17 in 1918, that’s more than double!

  18. Demobilization Inflation(1919-1921) • Cheap-money policy=give money to war victims, anyone who previously owned property in the part of the land that was taken away, and to resettle the ethnic Germans • Still wanted to meet states regular financial commitments (civil servant salaries and welfare benefits) • These policies were financed by cutting the value of the mark in half- INFLATION

  19. Demobilization inflation cont’d • The value of the wholesale price index was now at 4.15 • In May, 1919, the peace conditions of the Versailles Treaty became public • people were in shock and there was major domestic turmoil • By February 1920, the wholesale price index was 99 times greater than it was in 1913.

  20. Demobilization inflation cont’d • In May of 1921, the London Ultimatum was released • In October, they lost part of Upper Silesia • Resulted in the mark to go to 270 by November 1921, but it remained at this rate for a few months because of the partial moratorium on the reparations payments

  21. Hyperinflation (1922-1923) • In 1922 the wholesale price index rose to 341.82 because of domestic and foreign policies • Domestic= over half of the government spending was financed by printing notes • Foreign= disputes over the reparations • In June, after the assassination of Walter Rathenau and large disbursements on reparations, the dollar rate skyrocketed

  22. Hyperinflation cont’d • In July, 1922, for the first time in history, the mark sand below 1% of is original prewar value!

  23. Hyperinflation of 1923 • Losing the battle for the Ruhr • overheated printing press • total loss of confidence of the foreign-exchange market • huge increase in unemployment • hunger riots

  24. 1923 • January: Poincare’s reparations policy made the WPI = 2783 times higher than in 1913 • That means 1 dollar was equal to 18,000 marks • December: WPI = 1261 thousand million times higher!!!

  25. NOTE!!!! • 1.) Inflation began in 1914 as a result of the methods the Wilhelmine government used to finance the war. • 2.) “the inflation of the immediate post-war period had beneficial effects in the short run” economically and socially • 3.) By 1923 there was a complete collapse of currency

  26. Soaring Prices • “It became customary to close shop at lunch time and to reopen in the afternoon with new price tags after the dollar quotation of the day had been reported” • At the peak of the inflation, the printing presses were literally unable to keep up with the demand

  27. Businessman’s Trick • Borrow money from the bank to use towards expanding his own plant or acquiring additional facilities. By the time he had to pay the loan back, the amount he had borrowed devalued so much that is was like paying back a fraction of what he borrowed. • Money had to be spent as soon as it was made because otherwise it would lose its value.

  28. So what happened? • “With the growing speed of depreciation, credits made out in paper marks became an abundant and riskless source of profits and led to the accumulation of huge new fortunes.” • The banks tried to compensate by increasing interest rates on loans. • Calculated the devaluation at 25-85%, but in reality, it was more than 3000% in 1922 and several million and billion % in 1923.

  29. Did anyone profit? • Entrepreneurs because of the businessman’s trick. • Farmers and anyone with mortgaged property because they could pay off debts in valueless money • Possessors of foreign exchange or tangible assets • Some workers (during demobilization) • In the first phase, industry and trade- exports were very profitable

  30. Inflation Victims • All the people who had previously lived on long-term investment interests-government bonds, mortgages, savings bank deposits etc. • While-collar workers and public employees • Salaried middle class sank to poverty • Anyone receiving welfare benefits or pension plans • In the second phase, industry and trade- stocks dwindled

  31. Efforts to Restore the Economy • Stabilization • The “Miracle of the Rentenmark” • The Dawes Plan

  32. Stabilization • September 1923, problems in the Ruhr were beginning to be resolved • Three problems: 1.) Little confidence 2.) No hope of a foreign loan 3.) How to procure resources for the transition time

  33. The “Miracle of the Rentenmark” • When Stresemann comes to power, he starts the rentenmark • based on land, mortgage, industry- thus having value • Government poses limits on how much is made • November 15, 1923 the mark was stabilized at the rate of 1,000,000,000,000 paper marks for 1 gold mark!!!

  34. The Dawes Plan • US, under Calvin Coolidge, realized that they needed to reevaluate the reparations agreement • Sept 1, 1924 a new plan was put into action • More manageable amounts for the first two years • Recognized that Germany was in need of a recovery period • 1929, the Young Plan had a more devinite solution

  35. Peace at Last • In October 1925, Germany was allowed to enter the League of Nations!!!

  36. Questions??????