Germon Economy Between the Wars

The Treaty of Versailles gives the terms to which Germany officially surrendered. Part VIII of the Treaty in particular is important, dealing specifically with reparations from WWI Due to the fact that determing the exact amount of reparation was nearly impossible, Article 233 simply set a deadline. The amount was to be determined by an Inter-Allied Commission. Article 231 states that, 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 because of the war imposed upon them. Article 232 recognizes Germany's lack of resources, after being reduced by other parts of the Treaty. Yet they still required Germany to make compensation for all damage done as stated in Annex I hereto. That annex gives several different categories under which payment from Germany may be claimed. Paragraphs one, two, three, and eight list damages to injured civilians, including prisoners of war, forced labor, injuries effecting capacity to work, and even death. Paragraphs five, seven, and nine required Germany to pay any military incomes of the Allies as a result of the war, as well as the cost of maintaining Allied forces. It seems unreal to think such a great demand could have been made upon the already struggling German economy.

Article 235 would make Germany pay nearly twenty billion marks before the Inter-Allied commission came up with an exact amount for reparations. At the time of the signing of the treaty on June 28th 1919, with exchange rate of about 14 marks per dollar, this was 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. Despite the extent of its debt, Germany never increased taxes above 35% of expenditure from 1919 to 1923. Instead, 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. With this amount in circulation, the quantity of money fell off a cliff, and with the interest rate decreased, if not eliminated, people's desire to save became almost non-existent. When savings fell, consumption increased and the Aggregate Demand curve shifted to the right. Usually in this type of curve, this shift of aggregate demand would cause the economy to temporarily produce beyond its long-run supply causing an expansionary gap. But 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 cumulative supply before this time, it is impossible to know exactly how much of an expansionary gap this led to. But according to this inflation where aggregate demand shifts to the right, as the price level increases, so does the quantity supplied in the short run. Between 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 capacity by over 90%. In 1922, however, nearly 191 marks equaled the dollar, from 14 after the signing of the Treaty of Versailles. With this inflation, while prices went up, workers' wages remained the same, making it increasingly difficult to keep up. Most people were unaware that others, the entrepreneurial investors and business owners, were gaining so much by the devaluated currency. What most people saw was hunger. And in their hopelessness and misery, the Republic was made a scapegoat, and Adolf Hitler would move in.

To make matters worse, by 1922 Germany found itself unable to continue making its payments. The Allies