Economics and the Public Welfare. Benjamin M. Anderson

the ability to make systematic payments in the future. The Treaty of Versailles itself imposed reparations payments of a magnitude which not even an economically powerful Germany could have made. But the payments demanded of Germany in her weakened condition were wholly fantastic.

      Heavy Initial Payments in Gold, Railroad Equipment, and Flocks and Herds. Heavy initial payments were made. Part of the gold of the Reichsbank was taken, the German merchant marine was surrendered. Payments were taken in the form of rolling stock of the railroads and flocks and herds—a not unnatural procedure on the part of people who had seen Germany systematically stealing rolling stock of railroads and flocks and herds from France and Belgium while the war was on. And it was not an unnatural procedure to take the merchant marine when the world had seen Germany, in defiance of international law, sinking merchant vessels, even

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      neutral merchant vessels, without warning and without giving aid to the helpless seamen to save their lives.

      Later Payments Made by Selling Paper Marks. But these things did not do the Allies much good, and they greatly impaired Germany’s ability to make further reparations payments. Increasing demands were made for payments, and increasingly the only resource which Germany could find with which to make the payments was the sale of newly created marks in the speculative foreign exchange markets at whatever price they would bring.

      The prewar gold mark had an exchange value of 23.8¢, but when postwar trade in the mark began in the summer of 1919, the mark was offered at 8¢. From then on, progressively, the mark went down.

      German Income Tax System Helpless in Inflation—Contrast with France. The pressure of reparations payments did not constitute the only burden on the German mark. The German tax system, for one thing, admirable in a stable economy, was utterly helpless in a period of rapidly increasing currency depreciation. Germany relied primarily on the income tax, in which the taxes of a given year are based on the income of the preceding year. With rapid currency depreciation, prices rose rapidly and government expenditures rose rapidly while revenues based on last year’s income could never catch up. France, as we shall see, with a much less scientific tax system, one in which the primary reliance was indirect taxes and the revenues from fiscal monopolies, had nonetheless a tax system much better adapted to meeting currency depreciation. French indirect taxes and French revenues from fiscal monopolies were based on prices currently prevailing, and as the franc went down and prices rose, these revenues automatically rose concurrently. As we shall later see, this was a very important factor in saving the French franc from the complete collapse that the German mark went through.

      Weak and Shifting Governments Feed the People with Paper Marks. Germany, like France, had a succession of weak governments based on uncertain and shifting majorities in the Reichstag. The changes of ministry were less frequent in Germany than in France, but the position of the ministry was usually precarious. Weak democratic governments are very likely to yield in times of stress to popular clamor for increasing expenditures for relief and public works. Germany yielded to this pressure, borrowing paper marks from the Reichsbank for the people, and these marks, sold abroad in the foreign exchange markets, brought in year after year a great import surplus to Germany. The German people were kept alive at the expense of speculators in marks in foreign countries.

      The German Inflation. The story of the German inflation has been told many times and it is unnecessary to go into detail with it here.

      The government and the people lived on the credit of the Reichsbank while it lasted. The Reichsbank printed banknotes to supply the government with funds with which to employ and feed the prople. The law with

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      respect to the banknotes issued was scrupulously observed, and the government never took any notes from the Reichsbank without turning over government bonds or other government securities to the Reichsbank in equal amount. As the notes increased in number and in size—1,000-mark notes replacing 10-mark notes, 1,000,000-mark notes replacing 1,000-mark notes, until finally trillion-mark notes were in common circulation (the trillion-mark note being valued at the end at one gold mark)—the notes continued to bear the legend “Verfaelschung gesetzlich verboten” (“Counterfeiting Forbidden by Law”). From the summer of 1919 to the time of the Dawes Plan in 1924, the history of the quotation for marks in the foreign exchange market in New York City is, briefly, as follows. They started in the summer of 1919 at approximately eight cents each. They reached, at the lowest, sixteen trillion marks to the dollar. They were finally stabilized at four trillion marks to the dollar.

      Purchasers of the notes of the Reichsbank finally used them in not a few cases for wallpaper.

      Inflation Produces Economic Demoralization. The effect of this unprecedented and incredible depreciation of paper money upon the economic life of a great industrial nation was utterly demoralizing. Thrift of course disappeared. Thrift became folly. Lloyd George told a story, which he placed in Austria, where a similar inflation took place—although a much more moderate one, because the Austrian crown was finally stabilized at only 14,000 to 1. The story was that of two brothers who shared equally in an inheritance. One was a steady, thrifty lad who, remembering the teaching of his father, saved his money, and put it in the bank. The other was a reckless blade who spent all his inheritance for bottles of wine. He drank up the wine and then he sold the empty bottles for more money than his thrifty brother had in the bank.

      Speculators Grow Rich. It was a situation in which the business manager, the engineer, the producer had very little chance. Production was demoralized, speculation took its place. The most successful speculation was speculation on borrowed money. With the mark declining rapidly the wise thing to do was to go heavily into debt, purchase any kind of real values—real estate, commodities, foreign exchange—hold them for a time, then sell a small part of the purchases and pay off the debt. Huge concentrations of wealth were accomplished in precisely this way, the alert speculators borrowing money and buying up from their necessitous holders businesses, buildings, commodities, and every kind of real values.

      But Are Often Ruined by Zigzag Course of Mark. The fly in the speculator’s ointment came in the fact that the downward movement of the mark was not in a smooth curve but rather a very jagged curve. From time to time there would be convulsive recovery movements in the mark, commodity prices would drop violently, and the thinly margined speculator who had just borrowed a great deal of money would find himself bankrupt. Even Hugo Stinnes, the most notorious and the largest scale

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      operator of this kind, who amassed a vast economic empire while the mark was declining, overplayed his hand, borrowed too heavily in the late stages of the depreciation, and was finally obliged to hand over to his creditors the greater part of his accumulation.

      Economic Middle Class Wiped Out. The German economic middle class was pretty well wiped out in this process. One of the causes of the political weakness of the German democracy in later years was precisely this wiping out of the economic middle class.

      Speculative Building. There was a good deal of feverish construction of a speculative character as the mark declined. Men could speculate in brick and mortar and men could speculate in labor with which to put brick and mortar together. Men engaging in building operations, however, could not plan intelligently to put up buildings that would be serviceable to the German economy, for with the constant violent fluctuation of values and prices there was no foundation for sound calculation.

      Working Capital Disappears. Working capital largely disappeared in Germany during the course of this inflation, and the fixed capital which was created in the form of buildings, factories, and the like proved itself very inadequately adapted to the needs of a postwar Germany after the mark was stabilized and the nightmare was over. The standard of life of the people sank steadily.

      The Fallacy That Progressive Exchange Depreciation Helps Exports. There was an important body of opinion which held that the depreciation of the German mark would stimulate German exports by giving Germany an advantage in competition in the international markets, and that this would stimulate production for export and make for general prosperity. But the figures all