[15] So far the chervonetz has generally sold at a small premium, the rates being:
| March 15, 1923 | ch. 1 = £1·07 |
| April 17, 1923 | ch. 1 = £1·05 |
| June 15, 1923 | ch. 1 = £0·94 |
| July 27, 1923 | ch. 1 = £1·05 |
The collapse of the currency in Germany which was the chief contributory cause to the fall of Dr. Cuno’s Government in August 1923, was due, not so much to taxing by inflation—for that had been going on for years—as to an increase in the rate of inflation to a level almost prohibitive for daily transactions and quite destructive of the legal-tender money as a unit of account. We have seen that what concerns the use of money in the retail transactions of daily life is the rate of depreciation, rather than the absolute amount of depreciation as compared with some earlier date.
In the middle of 1922 I estimated, very roughly, that the German Government had then been obtaining for some time past the equivalent of something between £75,000,000 and £100,000,000 per annum by means of printing money. Up to that time, however, a substantial proportion of these receipts had been contributed through the purchase of mark-notes by speculative foreigners. Nevertheless the German public itself had probably paid upwards of £50,000,000 per annum in this form of taxation. Since the German note issue was still worth £240,000,000 so lately as December 1920 (see the [table] on p. 51) and had not fallen below £100,000,000 even in the middle of 1922, the rate of depreciation represented by the above, whilst sufficiently disastrous to the mark as a store of value or as a unit of account, had been by no means prohibitive to its continued use in daily life. In the latter half of 1922, however, the public learnt to make enough further economies in the use of the mark as money to reduce the value of the total note issue to about £60,000,000. The first effect of the Ruhr occupation was, as we have seen above ([p. 54]), to bring down the note issue below the minimum to which the public could adjust their habits, which resulted in the temporary recovery of March 1923. Nevertheless by the middle of 1923 the public was able to get along with a note issue worth about £20,000,000. All this time the German Government had continued to raise resources equivalent to round about £1,000,000 a week by note-printing—which meant a depreciation of 5 per cent a week even if the public had been unable to reduce any further the value of the aggregate note issue, and came in practice to about 10 per cent a week allowing for their yet further economies in the use of mark-currency.
But the expenses of the Ruhr resistance, coupled with the complete breakdown of other sources of taxation, had led, by May and June 1923, to the Government’s raising the equivalent of, first, £2,000,000 and then £3,000,000 a week by note-printing. On a note issue, of which the total value had sunk by that time to about £20,000,000, this was pushing inflationary taxation to a preposterous and suicidal point. The social disorganisation, resulting from a rapid movement to do without the mark altogether, quickly resulted in Dr. Cuno’s fall.[16] The climax was reached when, in Dr. Cuno’s last days, the Government doubled the note issue in a week and raised the equivalent of £3,000,000 in that period out of a note issue worth about £4,000,000 altogether,—a performance far transcending the wildest extravagances of the Soviet.
[16] It is necessary to admit that Dr. Cuno’s failure to control incompetence at the Treasury and at the Reichsbank was bound to bring this about. During this catastrophic period those responsible for the financial policy of Germany did not do a single wise thing, or show the least appreciation of what was happening. The profits of note-printing were not even monopolised by the Government, and Herr Havenstein continued to allow the German banks to share in them, by discounting their bills at the Reichsbank at a rate of discount far below the rate of depreciation. Only at the end of August 1923 did the Reichsbank begin to require that borrowers should make good on repayment a percentage of the loss due to the depreciation of the borrowed marks (as reckoned by the dollar exchange) during the currency of the loan.
By the time this book is published, Dr. Cuno’s successors may have solved, or failed to solve, the problem facing them. However this may be, the restoration of a serviceable unit of account seems to be the first step. This is a necessary preliminary to the escape of the German financial system from the vicious circle in which it now moves. The Government cannot introduce a sound money, because, in the absence of other revenue, the printing of an unsound money is the only way by which it can live. Yet a serviceable unit of account is a pre-requisite of the collection of the normal sources of revenue. The best course, therefore, is to remain content for a little longer with an unsound money as a source of revenue, but to introduce immediately a steady unit of account (the relation of which to the unsound money could be officially fixed daily or weekly) as a preliminary to the restoration of the normal sources of revenue.
The recent history of German finance can be summarised thus. Reliance on inflationary taxation, whilst extremely productive to the exchequer in its earliest stages especially whilst the foreign speculator was still buying paper marks, gradually broke down the mark as a serviceable unit of account, one of the effects of which was to render unproductive the greater part of the rest of the revenue-collecting machinery—most taxes being necessarily assessed at some interval of time before they are collected. The failure of the rest of the revenue rendered the Treasury more and more dependent on inflation, until finally the use of legal-tender money had been so far abandoned by the public that even the inflationary tax ceased to be productive and the Government was threatened by literal bankruptcy. At this stage, the fiscal organisation of the country had been so thoroughly destroyed and its social and economic organisation so grievously disordered, as in Russia eighteen months earlier, that it was a perplexing problem to devise ways and means by which the Government could live during the transitional period whilst the normal machinery for collecting revenue was being re-created, especially in face of the struggle with France proceeding at the same time. Nevertheless the problem is not insoluble; many suggestions could be made; and a way out will doubtless be found at length.
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It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit. But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper. The income-tax receipts, which we in England receive from the Surveyor, we throw into the wastepaper basket; in Germany they call them bank-notes and put them into their pocket-books; in France they are termed Rentes and are locked up in the family safe.