The Crisis of 1931 and the Collapse of the Weimar Republic

Pittaluga and Seghezza show how in 1929 the inflow of foreign capital into Germany dried up. In an effort to reduce foreign deficits, the coverage of which had become problematic, Brüning initiated extreme austerity measures and adopted a foreign policy more aggressive toward the Allies. This led to a loss of confidence in Germany’s intention to fulfil its Reparation commitments. Hence, a sudden stop which threatened the convertibility of Reichsmark and forced the Reichsbank to simultaneously defend the exchange rate and the stability of the banks, whose liquidity was dried up. The impossibility of this task made the currency and banking crisis of 1931 inevitable. This crisis and fiscal austerity pursued by the government led to a significant fall in output and employment rates.