When inflation burned creditors
And the courts stabbed legal tender legislation with an unlikely dagger
“Darmstadt” probably appeals more to football afficionados than to science geeks, while public policy onlookers may just move along. SV Darmstadt 98, the local club, makes occasional headlines as it strives to return to the national top league. The eponymous city, a former seat of power of sovereign states in Hesse, Germany, boasts an illustrious past in wealth, industry and the arts, and a vibrant present as a “City of Science” – with numerous high-tech affiliated agencies and institutions. One of the several chemical elements initially fabricated there even bears the city’s name[1]. Goals, tackles and a heavy science tilt (that echoes in the relevant wiki page) veil a legal tradition, that had a special moment a century ago.
SV Darmstadt 98 was formed in 1919, by the merge of two older clubs. It remained a middling competitor for the next decades. The Weimar Republic, from the other hand, hit the road running in terms of institutional progressiveness. The 1919 constitution was the avant-garde, la crème-de-la-crème of a pluralistic continental constitutionalism that ushered the mass character of the inter-war polities. Constitutions incorporated the need to balance counterforces, weight interests and temper social tensions. The Weimar Constitution even included a sub-section in its fresh bill of rights, on “Economic Life”[2]. At the same time, the new international order envisioned a monetary system re - anchored in gold, with independent Banks of Issue. In line with the contemporary “best practices” dicta, the Reichsbank was shielded from government control already from 1922. A bitter irony that such brand-new institutional apparatus failed to underpin the first steps of the young Republic.
In plain language, all got fucked-up in 1922-24. Or maybe not “all”, but certainly it seemed so to parts of the population. Some notes on this (hyper)inflation episode: (a) It was not only the “fat government thumb on the printing press”. At the time there were four private and three public banks of issue, and the law of 1922 (another one followed in 1924) tried to resolve an already complex situation, against a deteriorating political backdrop, unrest, external hostility and financial speculation (b) High inflation (at least as far as it was contained) was tolerated - even welcomed? - by some, like certain companies and workers, while the middle class, the traditional “savers”, had it the hardest. And this is where things pick up.
Say you have a mortgage, stipulated in a currency convertible to gold before the War. Come 1923, when its due to repayment. Convertibility has been suspended. Inflation is out of control. Why not wait for few weeks, or months, past the due date? Every day that passes is a gain. The creditor, from the other hand, is squirming on his seat. Ok, now’s the day, here’s the amount in paper money, and you cannot deny it, it’s legal tender. I am overdue? Then sue me, little crying fuck, you are tempted to say (you don’t, you are a sniveling little bastard yourself, but you keep playing it nice, and smirk). The creditors went to the courts, eventually. Plot twist - the notions ended up as an assault to exactly the legal tender aspect of the situation.
The courts were not from another planet, of course. Judges were well attuned to the harsh economic reality, and aware of the towering difficulties to engage it. Currency legislation was generally reserved for the other branches of the administration, so a no-go for starters; the specifics of each loan case were themselves garbled; and most importantly, the doctrine inadequate to tamper with the core of private contracts[3]. The top Court dragged its feet against the task, even as lower courts began to feel the public’s indignation.
The kick-off took place at a certain small city, in Hesse, Germany, just over 100 years ago. In March 1923, the Court of Appeal of Darmstadt said it loud and then dropped the mic. It declared “that the legal tender legislation had been set aside by the force of events themselves, that the satisfaction in paper marks of a mortgage obligation contracted in gold marks conflicted with the requirements of good faith, and that a distinction was no longer possible between simple money obligations and those in which money was exchanged for commodities or services.” Good faith, a somewhat lackluster and very general principle of the Civil Code, offered - as already expected by some legal scholars as early as 1918 - the lever to shift jurisprudence in creditors’ relief. The Court would repeat this reasoning in another judgement, in May. After spring and through the summer, other courts joined the fray.
Another lower court, in August, stressed that the judicial authorities “had properly refrained from intervening so long as there was any hope of stabilization but that with the frustration of all hope, intervention could no longer be postponed.” Political mobilization, legal writers, the lower courts and “a growing awareness that the disorder and loss spreading everywhere could be traced to a cause that had nothing to do with the risks ordinarily assigned or assumed by the parties to private contracts”, all together prompted a move towards some form of rewriting of the latter, to bring them closer to the impossible to foresee, dramatically changed conditions. The culmination came from the highest Court, which passed a landmark judgement in November of the same year: “The principle of good faith takes precedent”, it said, and “the currency legislation must give away.” Paying the nominal amount in paper money, while its purchasing power was but a tiny fraction of what it used to be, no longer qualified as performing in “good faith”. Debts had to be revalued up to at least some percentage of their old gold value.
The judgment was delivered in a deadpan manner, that disguised “the vast upheaval in German legal thinking that had been needed to produce it.” You tell me about the art of understatement, since it also casted the Harry Potter spell retractari privatis contractibus[4] to the judiciary, along with fame. Or was it infamy? A speaker at the German Lawyers Association was scathing: “[T]he courts, under the revaluation doctrine, are running into the danger of becoming institutions to distribute the goods of life under ethical points of view.” The Supreme Court of Austria expressly rejected the idea on similar grounds. Judicial revaluation gave its place to legislative revaluation, while things already were getting better past the 1924 currency reform.
At the time of writing this, SV Darmstadt 98 beat KSV Holstein, on the road of return to the big league.
[1] Such a name also beckons Black Metal, else its writing/ sound would be an artistic waste. It turns out, there is a namesake BM song, by the Finnish group Ruoska.
[2] Property imposes obligations!
[3] The Civil Code of 1900 - the legal pillar of the time, as the constitution was too green yet - was a product of late 19th century liberal, even individualistic, thinking.
[4] Bullshit Latin from online translate: Revise private contracts.