Second Luther cabinet

In the winter of 1925/6, the economic situation deteriorated markedly. Consumption declined as did the utilisation of industrial capacity. Unemployment shot up from 673,000 in early December to 2 million by the start of February. One of the first acts of the new cabinet after the Reichstag had narrowly expressed its confidence in it was to try to stimulate the economy. Its attempts were not very durable as other issues soon took up an increasing share of the cabinet's attention, including the expropriation issue, the flag question and a debate over legal sanctions against duelling.[3]

Luther and Finance Minister Peter Reinhold agreed that tax cuts and other measures to stimulate the economy, such as allowing money from the unemployment fund to be used, were urgently needed. Reinhold suggested a reduction of the value-added tax as well as of the merger tax and the stock exchange tax. He argued that the measures were only possible if the Reichstag was prevented from voting extra expenditures without ensuring offsetting revenues. A change in budget law to make that possible was not able to win approval, and the coalition parties agreed only that decisions having a considerable fiscal impact were to be discussed between the parties and with the cabinet before being proposed.[3]

Protests by winegrowers, at times violent, resulted in a change in the tax law before it was passed in late March. It abolished the wine tax at the cost of limiting the cut in the value-added tax to 0.25 percentage points (from 1% to 0.75%, rather than to the 0.5% / 0.6% originally planned).[3]

Other measures including a state guarantee of exports to the Soviet Union totalling 300 million Reichsmarks were finally settled in July 1926. To boost demand, the cabinet decided to provide intermediate credit of 200 million Reichsmarks to housing construction in order to ameliorate the nationwide shortage of 600,000 housing units. A 100 million Reichsmark loan was given to the national railway system, the Deutsche Reichsbahn. It used the funds to place orders with the steel, wood and quarrying industries. The expenditures were all initial steps towards the large-scale make-work programs begun by the Marx cabinet later that year.[3]

Besides the state of the economy, the most debated domestic issue of the first half of 1926 was the question of compensation for the former ruling houses of Germany. In 1925 the Reichsgericht, Germany's highest court, had declared the expropriation of the House of Saxe-Coburg and Gotha of July 1919 to be unconstitutional and annulled it. In reaction, draft bills had been presented in the Reichstag by the Communist Party (KPD) requesting complete expropriation without compensation. Other proposals gave the states the right to settle the issue with the former noble houses and barred recourse to the courts.[3]

A major conflict erupted in spring 1926 when a referendum on expropriation without compensation was initiated by the KPD and SPD. Before the referendum, representatives of the coalition parties tried to forestall it by offering the SPD an alternative compromise law. It called for a special court in which the conflicts between noble houses and state governments could be addressed. It also included the possibility of declaring a substantial share of the princes' assets to be government property. Both the SPD and the nationalist German National People's Party (DNVP) were unwilling to accept the compromise, and talks on the issue ceased on 28 April. The referendum initiated by the KPD and SPD took place on 20 June, after the Luther cabinet was out of office. Although the vast majority of participating voters voted yes, it failed to achieve the required absolute majority of those entitled to vote and therefore failed.[3]

In early May 1926, Luther secured cabinet approval of a change in the flag law. Members of the Hamburg senate had pointed out to him that German minorities in many Latin American countries, for sentimental reasons, accepted only the black-white-red flag of the former German Empire as the symbol of Germany and often came into conflict with the representatives of the foreign service over the matter. To improve the ties between the expatriate groups and Germany, Luther had suggested in late April the introduction of the black-white-red trade flag (approved by the Weimar Constitution) as a secondary flag at German embassies in addition to the official black-red-gold flag. Massive protests by the parliamentary groups of the Centre Party, SPD and DDP forced him to change the decree so that it would apply only at consular institutions in European ports and in non-European locations. The decree was signed by Hindenburg on 5 May, resulting in the SPD announcing its intention to present a no-confidence vote in the Reichstag against the cabinet. The DDP also demanded that the decree be withdrawn but then seemed to settle for a formal confirmation by the President that the official colours of black-red-gold were not to be questioned.[3]

Hindenburg wrote a letter to Luther in which he confirmed his intention to deal with the flag issue on the basis of the constitution. The DDP was somewhat satisfied but expressed their continued mistrust of Luther. Although the cabinet and the parliamentary groups of the other parties warned against pursuing this issue too far, which could easily lead to the dissolution of the Reichstag or to a presidential crisis, the DDP demanded "personnel change" (i.e. a voluntary resignation by Luther) and a suspension of the flag decree. When the latter was refused by the cabinet, the DDP presented a vote of reprobation directed against the Chancellor in the Reichstag.[3]

Luther had announced in the Reichstag that the decree would be implemented at the latest by the end of July 1926 but that the cabinet would be ready to revoke it if the Parliament and President had found another compromise solution by then. On 12 May, the vote of no confidence initiated by the SPD was rejected in the Reichstag, but the DDP's reprobation vote was accepted with a large majority. Luther decided to resign immediately and refused pleas from the cabinet and Hindenburg to stay on as head of a caretaker government.[3]