The economic impact of World War One

In early 1919 the victorious Allies met to discuss how to punish Germany and on 28 June 1919 the new German government was forced to sign a peace settlement called the Treaty of Versailles. The treaty blamed Germany for the war and punished her militarily, territorially and financially. This impacted enormously on the German economy and led to an economic crisis in 1923.

The terms of the Treaty of Versailles

The main terms of the treaty were as follows (remember BRAT):

BRAT is an acronym for 'Blame, Reparations, Armed forces, and Territory' an easy way to remember the four terms of the treaty of Versailles

Blame - Germany was forced to accept the blame for starting the war under article 231 of the treaty, known as the War Guilt Clause.

Reparations - Germany was to be made to pay for the damage suffered by Britain and France during the war. In 1922 the amount to be paid was set at £6.6 billion.

Armed Forces - Germany’s army and navy were significantly reduced in size and its air force abolished:

  • it was allowed a maximum of 100,000 troops in the army
  • conscription was banned
  • no tanks were allowed
  • its navy was reduced to 15,000
  • it was allowed only 6 battleships, and no submarines

Territory - Germany lost land on all sides of its borders as well as its overseas colonies (other countries under Germany’s control).

Excerpt from the Treaty of Versailles, 1919

French and Belgian occupation of the Ruhr

Germany began to pay reparations in 1922, but after a payment was missed late in the year a chain of events was set off that led to French and Belgian occupation of the Ruhr Valley in Western Germany and hyperinflation.

  • In November 1922 Germany defaulted on its reparations payment as scheduled. The first reparations payment had taken all she could afford to pay. The French believed Germany could make the repayment but were choosing not to, however the German government argued they could not afford to pay.
  • In response, France and Belgium sent troops into Germany’s main industrial area, the Ruhr Valley. Their aim was to confiscate industrial goods as reparations payments.
  • The German government ordered workers to follow a policy of ‘passive resistance’ – refusing to work or co-operate with the foreign troops and in return the government continued to pay their wages.

Hyperinflation

  • Germany was already suffering from high levels of hyperinflation due to the effects of the war and growing government debt.
Photo depicting the extremely high cost of food after the 1923 devaluation in Germany.
The extremely high cost of food after the 1923 devaluation in Germany

  • The Ruhr Valley was Germany’s most productive industrial centre. Throughout the French and Belgian occupation production fell drastically as German workers were encouraged to passively resist (refuse to work) whilst the factories were under foreign occupation. This loss of productivity hurt the German economy hard as fewer goods were produced.
  • The government had promised to pay the striking workers, despite not having any money. The government’s solution was to pay the workers by printing more paper currency. Money was being printed without any matching productive economic activity. This led to people losing trust in the German paper currency; the Deutsche mark, which meant its value decreased even more and prices for goods began to increase.
  • Prices spiralled out of control, for example a loaf of bread, which cost 250 marks in January 1923, had risen to 200,000 million marks in November 1923. At the height of the crisis the cost of a cup of coffee could double whilst somebody waited in the queue!
  • By Autumn 1923 it cost more to print a note than the note itself was actually worth.
  • During the crisis workers were often paid twice per day because prices rose so fast their wages were virtually worthless by lunchtime.
A graph showing the price of bread increasing over time

Hyperinflation winners:

  • Borrowers, such as businessmen, landowners and those with mortgages, found they were able to pay back their loans easily with worthless money.
  • People on wages were relatively safe, because they renegotiated their wages every day. However, even their wages eventually failed to keep up with prices.
  • Farmers coped well, since their products remained in demand and they received more money for them as prices spiralled.

Hyperinflation losers:

  • People on fixed incomes, like students, pensioners or the sick, found their incomes did not keep up with prices.
  • People with savings and those who had lent money, for example to the government, were the most badly hit as their money became worthless.