I’m Winston Wolfe – I solve problems.
Harvey Keitel [quote from the film; Pulp Fiction]
The Man with Two Names
Horace was a complicated character. Not an easy man to read, perhaps because he never really knew himself or perhaps because he did, yet changed with the weather like and philosophical cameleon. While unquestionably intelligent, maybe he lacked conviction and confidence or what we call “political spine”. His background and upbringing was atypical for a German growing up in the early twentieth century. Even his name was something of an enigma. His father, who had lived in America, had named him Horace Greely, after the famous activist politician and anti-slavery campaigner. But apparently a rather unruly grandmother insisted he be called by a Danish first name – Hjalmar. So from then on he was known as Hjalmar – but one wonders if he secretly preferred Horace.
His education was equally hard to pin down. Having studied Medicine, then Philosophy, then Politics, he was not the obvious choice for President of the Reichsbank in 1923, where the main contingent came directly from an education in economics. Germany was suffering from bouts of hyperinflation so violent, they were literally tearing the country to shreds, this was no time for an amateur at the helm. But perhaps it was time to think outside the box. He was appointed by an interesting duo; two of the three most powerful men in German politics at the time (the third being Adolf Hitler). The first was President Hindenburg, who many considered to be the only viable opponent capable of disrupting and defeating Hitler’s rise to power. The second was Chancellor Gustav Stresemann, an extremely influential liberal politician who subsequently won a Nobel Peace Prize after brokering a peace deal between France and Germany following the Occupation of Ruhr (a herculean healing effort) and subsequently seeing Germany’s re-admission to the equivalent of the UN, or the League of Nations, as it was then called.
These two men of German political prominence, President Hindenburg and Chancellor Stresemann, must have recognised that solving the hyperinflation problem was not about continuing a textbook approach to economics or politics. Not only was the country in a mess, it was a complicated sociological, economic and political mess that school and theory does not prepare you for. After Queen Victoria’s son-in-law Emperor Wilhelm II loaded up on debt and printed the heck out of the currency, Germany’s Gold Standard collapsed along with its economy after WWI (as described in an earlier post – Turbo-printing). Printing more paper money for WWI repatriations had sucked Germany into the swirling vortex of a hyperinflation death-spiral. Furthermore, the German financing mechanism was destroyed and, even if she wanted to go back to the gold standard, there was simply no gold left in its banking coffers. Perhaps a tough and immeasurable problem needed a tough and immeasurable man to tackle it.
Enter The Wolf
I could go into detailed into on Schacht’s life but let’s just say he had a chequered history having just been fired by his previous employer, General Karl von Lumm, the Banking Commissioner for the then Occupied Belgium. Schacht had allegedly favoured his old employer, Dresdner Bank, for financing state transactions in Belgium. But Schacht’s reputation as an extremely proficient trouble-shooter or “fixer-of-problems” echoed through the halls of the then Weimar Republic with an imposing resonance. Despite his past, it speaks volumes of both the stature of his intelligence and the desperation of the times that he should be Hindenburg and Stresemann’s go-to-man for what basically seemed like Mission Impossible (cue the music). Perhaps we could view him as the Early-Twentieth-Century German-Politico-Economic Equivalent of The Wolf, in Pulp Fiction. You got a problem that needs fixing but looks impossible to fix…? Call The Wolfman… and he should be with you directly…
I’m fascinated by Schacht’s strange mixture of intelligence, humility, arrogance and cowardice. Despite his position and the enormity of the challenge before him, Schacht incredulously had no staff, save for his secretary, a certain Fraulein Steffeck, and set up his office in an old cleaning lady’s cupboard. Fraulein Steffeck’s occasional sideways gaze as he paced around the fog of his own cigarette smoke would provide a unique insight into the profile of a man deep in thought, with the weight of a giant nation on his shoulders. Even by Schacht’s exemplary standards, this challenge was a BIG one. In case there is any doubt about the magnitude of the task before him, let’s just quote a passage from Adam Ferguson’s legendary book from 1975, When Money Dies (a fascinating but perhaps not-so-gentle read for the beach?) which described the monumental “hospital ball” he’d received.
Schachter was faced with incredible disorder. During the previous ten days expenditure had exceeded revenue by 1,000 times. The floating debt had been increased fifteen times. The government would shortly be unable to pay cash wages to the Army, to the police or to its own officials. Already the officers of the Ministry of Finance itself were being paid in part in potatoes. The budgetary estimates included on every page the outrageous reminder, in brackets, that all figures were in quadrillions…
Enter the Rentenmark
What would you do, if you were Schacht, dear reader? I’m not too ashamed to admit that, I’d revert to my special “baby defence mechanism”…I’d soil my pants, throw up and then start wailing in despair until Fraulien Steffeck came to clutch me close to her warm and welcoming bosom. And yet Schacht did none of this. Instead he would conjure a solution to all Germany’s monetary woes with a shockingly simple master stroke. Enter the Rentenmark.
There is a, quite wonderful, quote from a Forbes Magazine article entitled In Hyperinflation’s Aftermath, How Germany Went Back to Gold where the author in turn quotes the great Adam Fergusson’s cult book.
“Dr. Schacht sat in a single room which had once been used as a charwoman’s cupboard, looking on to a backyard in the Ministry of Finance. From this post he transformed the German financial system from chaos to stability in less than a week. His secretary, Fraulein Steffeck, was later asked to describe his work as commissioner:
What did he do? He sat on his chair and smoked in his little dark room which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal–he telephoned in every direction and to every German or foreign place that had anything to do with money and foreign exchange as well as with the Reichsbank and the Finance Minister. And he smoked. We usually went home late, often by the last suburban train, traveling third class. Apart from that he did nothing.”
Farmers accepted the rentenmark in trade for their crop, and the crisis was resolved. A new reichsmark replaced the rentenmark a year later, at 1:1, putting Germany’s return to a gold standard on a more long-term basis.
So we see that it takes almost nothing to adopt a gold standard system. The Rentenbank held little if any gold. The rentenmark was not convertible into gold. No preparation was necessary. No staff was necessary. No time was necessary. The only thing that was necessary was a clear policy, namely to maintain the value of the rentenmark equivalent to a prewar gold mark, and a clear means to accomplish this policy, by restricting the supply of rentenmarks to maintain its value.
Renten is the German word for “mortgage”. What Schacht did was audacious. He needed a mechanism to stabilise the currency, but there was no gold supply left to back the currency. So he effectively backed the German Rentenmark with the only thing with more quantifiable, more transparent supply than gold: German land. The very agricultural land farmers were using to yield crops, the very commercial land manufacturers and service-providers were using to produce output became the yardstick to which German money supply was pegged. I’ll admit, it was a bit of a confidence trick. But isn’t all modern monetary policy? In any case, it worked. At inception, one Rentenmark started out its life equal to one trillion of the old German paper Marks and strict limits were put on how and when to print more currency.
What followed was quite an astonishing turnaround. Indeed, the only thing more remarkable than the speed of Germany’s economic collapse was the speed at which Germany was able to rebound, once a currency of trustworthy supply was in place. It is worth bearing in mind that only a few years after a complete annihilation of the economy, Germany had amassed a military machine on a scale the World have never before seen.
And the rest, as they say, is History…
Which guy in this picture looks the happier? Hitler’s largest political obstacle, indeed I think it fair to call him Hitler’s political adversary, was President Hindenburg. But he was getting old and by the time he was re-elected he was 84 years old, understandably weak and the weight of warfare and political turbulence seemed to have literally sucked the life out of him.
Schacht played an interesting role here too and this is where the complexity of Schacht’s character is hard to fathom. Schact clearly supported Hitler apparently from a strategic perspective – because he felt the country needed strong leadership. But was he just a cowardly populist and political momentum junkie? Hindenburg would use what strength he had in him to subdue Hitler’s insistence on wanting a prominent seat at the table and openly stated that “a presidential cabinet led by Hitler would necessarily develop into a party dictatorship with all its consequences for an extreme aggravation of the conflicts within the German people”. Alas, at 85 years of age, physically weak and mentally exhausted, Hindenburg eventually caved in to political pressure from his inner circle and appointed Hilter as Reich Chancellor.
Hindenburg died only a year later, in 1934 leaving a power-vacuum Hitler was all too quick to step into – announcing himself as Head of State and Head of Government only 2 hours after Hindenburg’s death. Schacht would eventually became Hitler’s banker and Minister of Economics and his deft stewardship of both the German economy and facilitation of Hitler’s financial might led him to become a recipient of the honorary membership to the Nazi Party and was awarded the somewhat dubious honour of the “Golden Swastika” in 1937. There is no doubt in my mind, Schacht did a lot to pave an economic pathway to pay for Hitler’s rearmament policies.
How much Schacht supported Hitler’s eventual brand of Facism is another matter open to debate. Schacht’s vision of “strong leadership” was clearly different to Hitler’s and he opposed The Fuhrer’s seemingly profligate military expenditure and the nature of his rule. Schacht would eventually become part of a stealthy collective who would form the Resistance Movement in Germany – their ultimate aim being to end Hitler’s reign in a violent coup d’etat. But, 72 years ago, the 20th July assassination attempt failed and thus opposing Hitler, even politically, was a dangerous place to be in Germany. Schacht was arrested and spent the rest of WWII in concentration camps.
Still, it’s hard to place Schacht’s views politically or make sense of his philosophical or ideological direction. Schacht said, in 1946, once the war was over:
I have never believed in war. It is a crime against humanity whether you win or lose. I just read an article in this magazine I have in my hands that one day the moon will fall on the earth, but it is my feeling that until then, we should try to make the world a better place to live in.
But perhaps we should leave the judgement of his character and political ambition to others closer to the matter, such as Chief Prosecutor at the Nuremberg Trials and US Solicitor General and Attorney General, Robert H Jackson, who described him as…
The most dangerous and reprehensible type of all opportunists, someone who would use a Hitler for his own ends, and then claim, after Hitler was defeated, to have been against him all the time. He was part of a movement that he knew was wrong, but was in it just because he saw it was winning.
A pretty damning assessment of his character indeed. Schact had managed to produce a monetary magic trick but he was not a politico-economic Winston Wolfe. Winston Wolfe was a comic book hero in a Quentin Tarantino movie, but this was no movie… and this was no comic.
Learning from History…
However, this is not the place to dissect Schact’s character or his political integrity, I’ll leave that to the historians to debate. What we are interested in is that, from an economic perspective, two things are clear:
- How utterly intertwined monetary policy is to political policy to the point, at times, it is hard to decipher when one ends and the other begins.
- How startlingly effective a supply standard (be it Gold or not Gold) was in bringing to heel even the most parabolic inflation of an out-of-control currency supply.
But we should end on an economic note, so I leave you with quotes, once again, from our friend, the great economic historian, Adam Fergusson [emphasis mine].
The important thing about the Schact Reforms was that the Reichsbank stopped discounting treasury notes and so inflation stopped “just-like-that” with astonishing speed…
… the effect of having the Rentenmark and a currency everyone believed in was very remarkable. In the first place, because people believed in it, the food started flowing from the country into the towns again…
… it had another effect, that all the revolutionary movements that were taking place in Germany at the time (and Hitler’s beer cellar Pusch) that had happened in early November [of 1923]… …With the introduction of the Rentenmark… all these political movements left or right, ceased to trouble… which was, again, an extraordinary thing. It was at that point, then when something began to grow again…
There are a million random walks I could have taken. I’m sure in the future I will read this all again and take a different journey through the history of money. That’s the beauty of reviewing our monetary ancestors. But, my dear and patient readers, we have gone from Caveman Capital, the Birth of Money and the First Bankers… to Roman Emperor Nero’s Debauchment of the Denarius… to Marco Polo’s account of Kublai Khan’s “flying paper money”… to The World’s First Central Bank, thanks to William of Orange … to a descendent of that, somewhat Germanic, British monarchy, Emperor of Prussia Wilhelm II, and the First World War and the subsequent Weimar Republic and Hyperinflation… and then, in this post, to Schacht’s Monetary Magic Trick and Germany’s economic rebound…
Where on Earth will we go next? I tell you, the chapters to come are the most enthralling of all…