Great Depression/Addendum

Germany

(with supplementary material from Hans-Joachim Braun (1990) ).

The severe depression faced by the German economy in the 1930s was partly due to the problems of recovery from the war. War expenditure had been almost completely financed by loans and the money supply had been quadrupled in the period from 1914 to 1918. Inflationary pressures that had started during the war, intensified year by year and culminated in the disastrous German hyperinflation of 1922-233 . By the time that prices were stabilised by Hjalmar Schacht's establishment of the "rentenmark" , extensive damage had been done and the banking system had been seriously weakened. In 1923, shortfalls in Germany's payments of reparations had prompted French, Italian and Belgian governments to attempt to seize resources by occupying the Ruhr. The dispute was eventually settled by acceptance of the Dawes Plan of 1924, under which payments would be rescheduled and Germany would be provided with massive loans, mainly from the United States. American financier J. P. Morgan floated the loan on the U.S. market, which was quickly oversubscribed. Over the next four years, U.S. banks continued to lend Germany enough money to enable it to meet its reparation payments to countries such as France and the United Kingdom. These countries, in turn, used their reparation payments from Germany to service their war debts to the United States. Subsequent recovery had been heavily dependent on imported capital.

It was in late 1926 that the German authorities decided to restrain the subsequent expansion of economic activity. According to Peter Temin the President of the Reichsbank, Hjalmar Schacht, became worried about stock market speculation and took action that was more severe than that undertaken by the United States' Federal Reserve Bank in 1928, by withdrawing tax exemption from foreign holders of German bonds and forcing banks to reduce discounting. The German stock exchange crashed in 1927, and when the the downturn of economic activity in the United States started in 1929, economic activity in Germany was already declining.

In 1930 the wartime allies agreed to the Young Plan , that rescheduled Germany's reparation payments, but gave priority to the repayment of debts to the United States. Hjalmar Schacht resigned in protest and, in an article in a London magazines, John Maynard Keynes commented that it would " weigh on Germany much more heavily than the Dawes Plan, which it was agreed she could not support".

In order to stay on the gold standard action was taken in 1930 to stem the outflow of gold and correct a persistent balance of payments deficit. The Reichsbank raised its discount rate to well above British and American rates and there was a sharp reduction in the money supply, and for the next two years (according to Temin (1989) page 31, Chancellor Brüning pursued a relentless policy of highly restrictive budgets.

From April to June 1931, as a result of three years of deflation and the withdrawal of American funds many banks found themselves with insufficient reserves to pay depositors. In June, President Herbert Hoover announced a one year moratorium on international payments-reparations and war debts-and also provided a $150 million credit to the Reichsbank, but withdrawals continued.

The Reichsbank's discount rate was raised to 15% in July to little effect and there was a run on the German banks and savings banks followed. After a few hours the banks paid out only 20 per cent of the sums demanded by customers; and the government announced a two day bank holiday. A "credit crunch intensified the depression which continued until the Nazi party came to power in 1933

Lausanne Conference

On an index of 1928 = 100,consumer prices fell to 77 in 1933; and industrial production rose to 110 in 1929, fell to 59 in 1932. Unemployment rose from about 5% in 1929 to 30% in 1932 and did not return to 1929 levels until 1936, and industrial unemployment averaged about 22% compared with France's 10% and The United States' 26% .