The German hyperinflation
Inflation describes and measures the rate at which the prices of goods and services rise in an economy. The consequence of this increase is the loss of purchasing power of the economy’s currency. You are experiencing inflation when you have to pay more for the same goods or services than you previously paid. Your currency has less value because the prices of the goods and services you need to buy have risen.
Extreme inflation results in hyperinflation, which requires us to describe and quantify instances of rapid, excessive, and seemingly uncontrollable inflation. The term “hyperinflation” is used when a monthly price increase exceeds 50%.
Hyperinflation is not something most people associate with Europe and Western countries in general, but that has not always been the case.
Interestingly, one of the most prominent examples of hyperinflation in modern history occurred in Germany between 1921 and 1924 (the Weimar Republic), where the prices of goods and services doubled daily, and the currency (mark) rapidly lost value against other foreign currencies, such as the USD.
The exchange value of the mark fell from 320 marks per dollar in mid-1922 to 7,400 marks per US dollar by December 1922. This hyperinflation continued into 1923; by November 1923, one US dollar was worth 4,210,500,000,000 marks. Yes, wheelbarrows were used to transport money for some goods and services.
Most people reading this today will undoubtedly struggle to imagine what life was like for those who lived through the hyperinflation of Germany in the 20s. Just think about these:
Prices changed so much that it was literally impossible to make plans. For example, a loaf of bread that cost 250 marks in January 1923 was sold for 200 billion marks by November of the same year. To cope with the struggles of payment, buying, and selling, German workers were paid multiple times daily to buy what they needed before prices increased.
In a vicious cycle fuelled by fear and uncertainty, some farmers and traders refused to sell, worrying they might not receive fair value for any price they accepted. This hoarding naturally worsened the dire situation. The value of the currency was so low and volatile that those who could resorted to barter, exchanging their jewellery, clothes, and other items for food and other essentials. Some even burned banknotes for fuel, as these notes were cheaper than firewood.
Many people, especially the middle class, saw their life savings wiped out, as all they had put in the bank was now worthless. Many businesses went bankrupt, further reducing the supply of goods and services. Jobs were lost, and many people became poor and even homeless.
Faith in government and the existing order went to an all-time low, and crime, riots and protests grew in Germany more than ever before. Democracy and capitalism were seen as weak and incapable of solving the general malaise. Many turned to Communism, and the Nazi Party began growing almost as much as the inflation plaguing the country.
To survive, those who had the courage or connections to do so emigrated to find work and a better life outside Germany. They went to the UK, the USA, and everywhere they could go.
The genesis of the German hyperinflation can be summarised in the following connected socio-political and economic factors.
In general education, the list of causes for Germany’s economic woes often begins with the enormous financial burden imposed on Germany by the Treaty of Versailles. While this is factual, the order is incorrect. In truth, Germany’s difficulties commenced with the expense of financing World War I, leading the nation to adopt some audacious, if not reckless, monetary policies. Therefore, it is more accurate to state that the Treaty of Versailles compelled an already indebted and troubled Germany to pay massive reparation debts after its defeat in World War I.
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The pressures of the war debt and dealing with a war-torn economy led the government to print vast amounts of money to run the country. Unfortunately, the drastic increase in the money supply without a corresponding increase in the supply of goods and services meant more money was chasing the same or a lesser amount of goods and services, causing the currency to lose its purchasing power. There were fewer goods and services because the war had destroyed much of Germany’s infrastructure and industrial production.
Caught in a spiral of self-perpetuating inflation, workers who witnessed an increase in the prices of goods and services demanded a rise in wages, and their demand was met to quell protests and riots. However, this well-intentioned but economically unsound solution did not alleviate the situation; rather, it complicated an already dire circumstance.
The general confusion led to political instability and a loss of confidence in the political system, the mark, and the various government policies. For a fuller description, see my “Economic History of Germany from Weimar to Hitler” by Anthony Kila.
This list would be incomplete without mentioning the 1923 Occupation of the Ruhr by French and Belgian troops. They took control of the highly industrialised region of Germany due to the latter’s inability to pay the reparation debt that was agreed upon, or shall we say imposed, in the Treaty of Versailles. In response to the military occupation, German workers embarked on strike actions and embraced passive resistance.
These anti-Ruhr Occupation stances further reduced the production and availability of goods and services, thus making inflation worse.
Like the causes, the key people and policies that helped save Germany from the gory claws of hyperinflation were a combination of internal reforms, foreign assistance, and economic restructuring, which can still be a source of lessons for many today. Here are some lessons:
Towards the end of 1923, Germany replaced its new worthless Papiermark with the Rentenmark, but it was little about the name. The new currency was backed by tangible and productive agricultural and industrial assets instead of gold.
Under the influence and leadership of Hjalmar Schacht, a banker and finance expert, the German Central Bank (Reichsbank) shifted towards disciplined and deliberate policies to curb inflation. Money printing was halted, public spending was drastically reduced, and tax reforms were introduced.
Bringing the house in order was essential; however, it was not enough. It required international assistance through the Dawes Plan of 1924 to provide the game-changing contributions of foreign capital and technical assistance to rebuild the economy.
Named after Charles G. Dawes, an American banker and Vice President of the United States who chaired the committee that drafted the plan, the Dawes Plan was an economic and financial initiative designed to assist Germany in meeting the reparations imposed by the Treaty of Versailles and to alleviate the severe economic situation in the country. The plan allowed Germany to restructure its loan obligations and increase payments as its economy improved whilst also providing access to foreign loans. In exchange, Germany permitted international agents to oversee its financial operations.
The Dawes Plan and its advantages immediately provided Germany with significant socio-economic and political benefits; however, these effects lasted until the Great Depression of 1929. But that is another story…
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- Anthony Kila is a Jean Monnet Professor of Strategy and Development at the Commonwealth Institute of Advanced and Professional Studies.
