Since the seventh loan in September the acceptance of the war loans declined. The propaganda seems to have convinced many, but not all investors.
For the last war loan in September there were only 2. But while the number of subscriptions declined, the money raised by the war loans was still impressive. The eighth loan in March brought 15 billion Marks. It was only with the ninth loan in September , when defeat was imminent, that the volume decreased to The explanation for the success of the war loans may be the lack of alternatives.
Nominal incomes increased during the war, but consumption as well as investment for non-military production was curtailed by the planning system. There were few options for households or corporations to invest their savings. The alternatives to war bonds were saving accounts, short-term government paper, or simply cash holdings. In spite of the wide distribution of war bonds, most of the financial contribution was received from investors who were at the top of the income and wealth pyramid. For statistical purposes the subscriptions for all nine war loans from to can be divided into three classes, a lower class of amounts up to 1, Marks, a middle class from 1, to , Marks, and an upper class of , Marks and more.
In the lower class 81 percent of all subscriptions contributed 10 percent to the total yield; in the middle class 19 percent of the subscriptions contributed 46 percent; and in the upper class 0. The first four loans until March raised more money than was necessary to consolidate the volume of treasury bills and treasury certificates. From September , however, the proceeds from the loans were not sufficient to consolidate the short-term debt.
About half of the short-term debt was placed on the money market, the other half remained in the portfolio of the central bank. This demonstrated a significant difference between financial mobilization in Britain and in Germany.
In the United Kingdom the money market absorbed more treasury bills and thus contributed a greater share to financing the war. A part of the treasury bills and treasury certificates was placed on the money market, but a similar amount of short-term government paper remained in the portfolio of the Reichsbank. Tax increases could be avoided for two years in spite of the rapidly rising government expenditure as only civilian expenditure was to be financed by taxes and similar regular government income.
The war had at first the paradoxical effect that ordinary expenses decreased, as all military expenditure was transferred to the extraordinary budget.
However, interest payments for the government debt were part of the ordinary budget. As the war lasted longer than expected and the public debt increased, the government found it difficult to finance the rapidly rising interest payments.
Chancellor Theobald von Bethmann Hollweg warned in January that the ordinary budget was deteriorating rapidly. New taxes were inevitable to finance the interest payments. The alternative, borrowing money to pay interest on government debt, would be contrary to established fiscal rules. In June and July the Reichstag voted on a series of laws that either created new taxes or increased existing taxes. A war profit tax for corporations and individuals was introduced in June It was a compromise between the central government and the states.
The tax was declared as a single levy on profits earned during the war, similar to the defence levy Wehrbeitrag in ; it was not to become a precedent for a regular income tax.
But as the war continued, the profit levy was renewed in and , so that there was in fact a new central government tax on profits and property. From then on it became a permanent feature of the German tax system. New taxes or tax increases were imposed on tobacco, coffee , tea, beer, wine, sparkling wine, mineral water, coal and railway transport. Some of the new indirect taxes merely shifted payments between the ordinary and extraordinary budgets.
The coal tax and the railway tax reduced the deficit of the ordinary budget, but raised the deficit of the extraordinary budget as they were contained in the prices which the government paid for war supplies. No attempt was made to raise taxes for the rapidly rising war expenditure.
As a consequence of the inflationary method of financial mobilization, 87 percent of total expenditure was on the extraordinary budget and were financed by short-term credits or war loans. Only 13 percent of total expenditure was on the ordinary budget and was financed by taxes and other regular income of the central government. The share of long-term loans, including a small number of medium-term treasury certificates, was 80 billion Marks, the share of treasury bills on the money market was 28 billion Marks and the floating debt in a strict definition, the share of treasury bills or treasury certificates in the portfolio of the central bank , 27 billion Marks.
In addition to the imperial government, states and local authorities had large budget deficits. The government and the Reichsbank made great efforts to convince the public at home and abroad that the suspension of the gold standard was only temporary, and that after the war Germany would return to the gold standard. An important element in the official propaganda was the gold reserve of the Reichsbank. To augment its reserve the central bank attempted to withdraw gold from circulation. This policy was successful; the public changed a large volume of gold coins into bank notes.
When the supply of gold coins was almost exhausted, the Reichsbank started in a campaign to buy gold jewellery, watch chains and other gold objects from patriotic citizens.
But on balance the Reichsbank could increase its gold reserve considerably, in to 1. In the reserve was slightly lower with 2. With the vast afflux of gold, the Reichsbank could maintain for some years a surprisingly solid reserve ratio. In the gold reserve of the central bank was on average 42 percent, and in still 35 percent of the note circulation. Since the central bank had to dilute its primary reserve with loan bank notes and a small number of treasury bills to maintain the legal minimum of one third of the note circulation, as the gold ratio decreased in on average to 27 percent and in on average to 17 percent.
At the end of the cash circulation had increased to The composition of the money supply changed significantly during the war. Reichsbank notes accounted now for 67 percent of the total money circulation and loan bank notes, the typical war money, for 31 percent. Gold coins disappeared from the cash circulation. The total money supply, essentially cash plus sight deposits with the banking system, increased in by 20 percent.
Then the growth accelerated. Apparently many households and corporations held cash balances, rather than buying war bonds or treasury bills. The money supply grew in by 34 percent, in by 55 percent and in by 53 percent.
At the end of the money supply attained But during the war the trend was reversed as the loan banks offered only bank notes, and no deposits. Therefore, the cash circulation increased faster than the total money supply. Price ceilings, rationing and foreign exchange controls worked reasonably well to control inflation during the war. Wholesale prices increased in by 35 percent. Thereafter the price controls became more effective.
The wholesale price increase in was 7 percent, in , 18 percent and in , 21 percent. In the wholesale price index of the mark attained percent of the pre-war level of The controls were not too rigid, and with so much money sitting idly in cash hoards or bank accounts it was not surprising that some people could afford to pay a premium for extra rations. The public complained about rising prices.
Yet the cause of widespread misery was not the inflation, but the real shortage of consumer goods as the national product declined, and a large part of production was consumed by the war. In the war of attrition the transfer of millions of men from civilian employment to the armed forces, the shortage of raw materials, the reduction of investment and other restraints led to a decline of real national product. Net national product was 52 billion Marks in An increasing part of the national product was claimed by the government for the war.
Economic mobilization was organized by a combination of profit incentives and planning. The government paid high prices for arms, ammunition and other supplies. But the conversion of the economy to military production relied not only on the market mechanism. Since the beginning of the war a planning system was established. It began with the control of strategic imports and with price limits for the necessities of life. When the war lasted much longer than expected, the planning system was expanded. Since most sectors of the German economy had been subject to price controls and rationing.