Here is some background about the Weimar repubic from the Book THE GREAT INFLATION : GERMANY 1919-1923 William Guttmann and Patricia Meehan
The Great Inflation : Germany 1919-1923
From the dust-jacket:
Inflation and the depreciation of money is an age-old phenomenon. No less so than in this present age. But never in the history of mankind has it reached such bewildering dimensions as in Germany in the years that followed her defeat in the First World War.
In the Germany of 1923 it was clear that something mysterious and frightening was happening. Money as one of the foundations of society was dying and its death was producing chaos, despair and a kind of collective insanity.
The collapse of the country's currency all but ruined the fabric of German society, produced a social revolution and was at least partly responsible for a political development culminating in the rise of Nazism. Hitler, it has been said, was the foster child of inflation. The great Inflation in Germany was, as indeed inflation is today, the warp and woof of daily life, and it is with the human aspect of the Inflation that this book is largely concerned. The book also plots the actual course of the phenomenon, its acceleration - spinning away into disaster - and then, almost overnight, coming to an end. An incredible recital.
The Great Inflation : Germany 1919-1923
The Road to Ruin
In the classic words of the advice Marshal Trivulzio gave to his master, King Louis XII of France, "There are three things you need to wage war: money, money, and more money." To wage the war that engulfed Europe in 1914 required a very great deal of money indeed.
Wars have a way of producing inflation. A nation at war has to divert its resources and to spend a fabulous sum of money to keep its armies supplied and to satisfy their insatiable appetite for the weapons of destruction, which are themselves destined to be destroyed. As these go up in the smoke of the battlefields and have to be replaced again and again, money pours out to pay for the wasteful and unproductive war effort, while the ordinary needs of the economy have to take second place. The consequence is, that the demand for scarce and urgently needed goods drives prices up and more money has to be created to meet them. This is the climate in which inflation flourishes.
True to tradition, the great German Inflation started almost exactly at the moment the First World War broke out.
Before the fateful August of 1914, the civilised world had lived under the gold standard in a golden age in which a smoothly working system assured, almost without exception, the stability of prices and exchange rates.
Germany, an industrial power ranking high among the trading nations and, in consequence, extremely prosperous, had until then lived under the monetary rules laid down by the Bank Law of 1875. The central bank, the Reichsbank, issued the money required by the economy, and the stability of the currency in circulation was secured by ensuring that a third of the total was backed up by gold, and the remaining two thirds by commercial bills guaranteed by persons of proven solvency. The number of commercial bills taken up by the bank was logically in proportion to the activity of the economy — the resulting circulation expanding or shrinking in accord with the demands of the market. In other words, the money in circulation represented either gold or what later became referred to as Sachwerte— the actual goods that had been exchanged for the bills in the bank's portfolio.
The outbreak of war immediately confronted the German economy with a critical situation. The blockade of the country imposed by the Allies all but killed the international trade on which it had come to rely so much for its prosperity. It was cut off from the sources of most of the imported food and raw materials needed to ensure the productivity and welfare of the nation.
Oddly enough, the Germans, for all their proverbial thoroughness, had not made any provisions or plans for such a contingency. Yet perhaps this was not so odd, for, in common with the other belligerents, Germany believed firmly that the war — the first modern war in which the achievements of war technology were to be used on a massive scale with all the array of deadly weapons, from the super guns like the Big Bertha to Zeppelins, aircraft and poison gas — would be a short one. The slogan "Home by Christmas" was not peculiar to any one of the warring nations. Of course, the Germans thought it would end in victory for them, and victory would solve all the problems.
Germany's certainty of victory was naturally based on her military readiness and planning, which, in contrast to what had been done in the purely economic field, was meticulous. It was confidently expected that the war would be won long before any economic troubles could develop.
Naturally, German planners counted money as a type of ammunition, and the mobilisation of financial resources was planned in the same way as its military counterpart. In 1905 an international crisis had arisen over the question of which European powers should play a dominating role in Morocco. Germany felt slighted by certain Anglo-French arrangements and the danger of a conflagration seemed imminent. This was followed by a second Moroccan crisis in 1911. It was in that context that Rudolf Havenstein, the man who as President of the Reichsbank was the protagonist in the tragedy of the great German Inflation, drew up the financial contingency plans for war.
When, at the end of July 1914, the war fever reached its height and the great powers began to mobilise their armies, certain sections of the German public began to panic and started a run on the Reichsbank to convert their money into gold, as they were then entitled to do under existing legislation. The gold reserves were rapidly drained of over 100 million marks. That was the danger signal; but though, from 31st July onwards, the banks in fact refused to exchange notes for gold coins, it was not until 4th August, when war had been declared and the Reichstag met to put into execution the plans for financial mobilisation in wartime, that legislation was passed to abolish convertibility into gold. That was the opening of the path to inflation.
The German government decided to finance the war by borrowing, and its cynical justification for this decision was that the beaten enemy would pay for everything. Karl Helfferich, Secretary to the Treasury, declared, in a speech before the Reichstag, "After the war we shall not forgo . . . our claim that our enemies shall make restitution for all the material damage (quite apart from everything else) they have caused by the irresponsible launching of the war against us."
The Reichstag approved war credits to the amount of 5,000 million marks. At the same time it was decreed that, henceforward, three-month Treasury bills would be allowed to play the same role as commercial bills, namely to serve as backing for the issue of banknotes. In fact, the Reichsbank was authorised to take up and discount unlimited amounts of these Treasury bills (which, unlike the commercial bills, did not represent any underlying Sachwerte, but simply government obligations, bonds, sold to the Bank and enabling it to create money). In addition, so-called Darlehnskassen (loan banks) were set up for the purpose of giving credit and issuing currency in the form of Darlehnskassenscheine (loan-bank notes) to circulate side by side with the notes issued by the Reichsbank. All these new credit instruments were considered as "backing" for the issue of notes — indeed, the Reichsbank was proud to maintain that the paper money in circulation was properly backed according to the law.
Thus, with the notes issued on the strength of the Treasury bills and the loan-bank credits, the inflation of the currency showed up very early. On 7th August 1914 the amount of money in circulation was 2,000 million marks higher than it had been two weeks before.
In passing, it is interesting to note what happened to the gold coins. Difficult though it is to imagine now, in pre-1914 Europe gold pieces circulated freely as ordinary money; in Germany, 10 or 20 mark gold coins were almost considered a nuisance on account of their weight. Not only did the Reichsbank suspend the convertibility — that is, the sale — of gold, but strenuous efforts were also made to draw as many gold coins as possible out of circulation or private hoards and redirect them into the coffers of the Reichsbank. A vast propaganda machine was set in motion for this purpose with appeals to the patriotism of the citizens — "The gold belongs to the Reichsbank" — and schoolboys were proud of receiving solemn certificates acknowledging that they had collected and delivered to the Reichsbank so many thousands in gold and deserved well of the Fatherland.
Later, patriotism was not enough to ensure the inflow of gold coins, and drastic measures were taken: soldiers, for instance, were promised extra leave in return for the delivery of so many gold coins, something unheard of in militarist Germany. The idea behind this was quite simple: in the first years of the war, a third of the value of banknotes had to be backed by its equivalent in gold, so that, for every 20 gold-mark piece the Reichsbank took in, it was entitled to issue 60 paper marks — a procedure that was not thought likely to endanger the stability of the currency.
Germany's total expenditure during the First World War amounted to the colossal sum of 164,000 million marks, some 147,000 millions of which represented the actual cost of the war. Against this, the accounts show a total income of 121,000 million marks, which leaves a gap of some 40,000 millions, covered by Treasury bills. Some of these bills ended up in the hands of banks, institutions and other bodies, but the remainder were discounted by the Reichsbank, which in turn issued paper money. By the end of 1918, the amount of money in circulation had reached the sum of 35,000 million marks, about five times as much as before the war.
As for the above-mentioned "income", a full 100,000 million marks of this derived from the proceeds of several issues of war loan, which were made at regular intervals, beginning in September 1914. The first four issues, which still benefited from spontaneous or propaganda-inspired patriotic fervour, were successful in mopping up the purchasing power created by the Treasury bills and the ensuing increased circulation of money. (In 1916, the Treasury bills discounted by the Reichsbank amounted to nearly 9,000 million marks' worth, and the currency in circulation had approximately doubled.) But it became increasingly difficult to keep up the public investment in war loans, quite apart from the fact that the ever-rising nominal amounts of successive loans did not compensate for the lower real value of the inflow. The government had to exert more and more pressure to persuade such public bodies as savings banks and local authorities to do their patriotic duty; and they did this, not having sufficient funds of their own, by borrowing on the security of bonds they had had to take up in the past, and merrily adding their own deficit spending to that of the Reich. From the fifth war loan onwards, the proceeds from the subscriptions were regularly less than the value of the Treasury bills issued, and the resulting difference could not fail to exert further inflationary pressure. Shortly before the end of the war, the deficit — that is, the unfunded indebtedness of the Reich — was in the region of 50,000 million marks.
In these circumstances the government retracted its promise to finance the war entirely by borrowing and not by taxation. From 1916 onwards several Acts were promulgated instituting some new direct and indirect taxes, among them taxes on war profits, coal and transport, and a turnover tax. But the results were disappointing, partly owing to the low rates of taxation, due perhaps to the fact that the government only half-heartedly agreed to modify its principles. The total revenue from taxation, old as well as new, was not even sufficient to cover the ordinary, as distinct from war, expenditure of the Reich. To be sure, taxation alone could not have paid for the war — none of the belligerents adopted this method. In Britain only one third of the war expenditure was paid for by taxation. If Germany had resorted to taxation, in preference to the issue of war bonds, for the purpose of skimming off purchasing power, at least the inflationary effect of interest payments would have been avoided. Drastic taxation would also have had important psychological and political consequences in the short as well as the long term. In the first place, by taking away excessive war profits it would have created the impression that all classes were making an equal sacrifice on behalf of the war effort, and therefore mitigated the resentment against those who had benefited from the inflationary boom, a resentment that was carried over with such dire results into the post-war inflation. In the second place, and perhaps with even more importance in view of later . . .
There is some more info and pictures at the ebay link, but it won't be there for long because I just bought it.