Hyperinflation in the Weimar Republic

12 Key excerpts on "Hyperinflation in the Weimar Republic"

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  A Short History of the Weimar Republic

  • Colin Storer(Author)
  • 2013(Publication Date)
  • I.B. Tauris

    (Publisher)

  3 THE GREAT INFLATION AND WEIMAR ECONOMICS

  As early as the third century BCE it had been noted that ‘there is nothing new under the sun.’1 Recent events such as the Zimbabwean hyperinflation of 2008–9, the global banking crisis, credit crunch and subsequent recession have evoked the spirit of the Weimar Republic’s economic instability in the minds of many. A quick trawl of the internet offers up numerous online commentators (of various levels of economic expertise) giving dire warnings that the North American and European economies are treading the path followed by Germany in the 1920s. Yet even if news reports of runs on banks, rising prices, unemployment and international intervention to rescue defaulting European economies stir memories of the troubled economic situation in interwar Germany, any such modern crises pale in comparison to those of the 1920s. So traumatic were the experiences of hyperinflation and depression that they have become embedded in German collective memory and culture. There are still people alive today who can remember the hardships caused by the collapse of the German currency, and they and those like them have passed on their memories to subsequent generations, with the result that few Germans have not heard (perhaps apocryphal) stories of worthless paper marks being carried in wheelbarrows (in one oft-repeated account the wheelbarrow is stolen and the money left behind)2 or the hunger and suffering that the inflation and depression engendered. These anecdotes remain powerful today, so how much more powerful must they have been when they were still fresh in the memory?

  The extent to which the collapse of the republic was a consequence of economic or political factors has been hotly contested. While some historians argue that political decisions were ultimately responsible for the violent economic fluctuations of the period, others take the view that Germany’s problems were essentially the result of uncontrollable economic forces. Similarly, there has also been much debate as to whether Germany’s economic troubles were at root the consequence of an invidious international position, or whether it was essentially internal factors – and in particular the excessive power of either organized labour or big business – that were to blame for hyperinflation, economic stagnation and depression. As we shall see, Germany was not unique amongst European nations in facing acute economic difficulties in the aftermath of the First World War. The collapse of the Austrian krone in 1921–2, to give just one example, was just as spectacular as that of the mark and preceded the nadir of Germany’s hyperinflation by almost a year. Furthermore, the origins of the dramatic collapse of the German currency in the middle of 1923 and consequent economic and political crisis, like those of so many of the problems that the republic faced, are to be found in events that occurred and decisions that were taken long before the collapse of the monarchy.

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  Germany, 1914-1933

  Politics, Society and Culture

  • Matthew Stibbe(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  1 The figures indeed speak for themselves. In July 1914 one US dollar was worth 4.2 Marks, in January 1919 8.9 Marks, in January 1920 64.8 Marks, and eighteen months later, in July 1921, 76.7 Marks. After this things grew even worse. In January 1922 one dollar bought 191.8 Marks, in July 1922 493.2 Marks, in January 1923 17,972 Marks, in July 1923 353,412 Marks and in September 1923 almost 99 million Marks. On 15 November 1923 things hit rock bottom when the dollar stood at 4,200 billion old Marks.

  Of course, inflation and hyperinflation are not quite the same thing. Inflation can be defined as ‘the state of an economy in which prices are steadily rising, resulting in a steady fall in the value of money’,2 a process which had already begun during the war and continued thereafter. In the early post-war period there was even something of a consensus between big business, the unions and the state that high levels of inflation might be a good thing, at least for jobs, exports and debt reduction.3 Hyperinflation, on the other hand, which arrived in Germany from July 1922, is

  inflation that is so rapid as to move uncontrollably towards a radical breakdown in the monetary system and the complete collapse of all long-term expectations concerning price, so that in a very short time money is no longer effective as a medium of exchange.

  4

  TABLE 4.1 US dollar quotations for the Mark; selected dates for 1914 and 1919–23

  July 1914	4.2
  January 1919	8.9
  July 1919	14.0
  January 1920	64.8
  July 1920	39.5
  January 1921	64.9
  July 1921	76.7
  January 1922	191.8
  July 1922	493.2
  January 1923	17,972.0
  July 1923	353,412.0
  August 1923	4,620,455.0
  September 1923	98,860,000.0
  October 1923	25,260,208,000.0
  November 1923	4,200,000,000,000.0

  Source: Paul Bookbinder, Weimar Germany. The Republic of the Reasonable (Manchester: Manchester University Press, 1996), p. 255.

  The latter situation had serious consequences, not only for Germany’s relations with other countries, but also for industrial production, which fell by 34 per cent in 1923,5 and for the lives of ordinary citizens. Regarding external relations, the suspicion remained that German financiers and government ministers had deliberately allowed the situation to get out of hand in order to prove the impossibility of meeting the Allies’ demands for reparations. Defaults on payments led, eventually, to the Franco-Belgium occupation of the Ruhr in January 1923 and to an international crisis which came to an end only with the introduction of a new German currency, the Rentenmark, in November 1923, and to a revision of reparations under the Dawes Plan in 1924.6

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  Available until 27 Jan |Learn more

  The Nature of Value

  How to Invest in the Adaptive Economy

  • Nick Gogerty(Author)
  • 2014(Publication Date)
  • Columbia Business School Publishing

    (Publisher)

  16 ) beyond a sustainable point. (To put this into a modern context, as of 2013, Japan has one of the highest government debt:GDP ratios in the world at 2:1.) As the excess currency flows required for debt service became an increasingly large percentage of overall economic network value flows, money for new investment and working capital for real value flow was choked. This led to the economic network suffering a value flow contraction feedback loop or death spiral ending in, network collapse, social chaos, and a political vacuum.

  Eventually the Reichsbank Mark was replaced by the Rentenmark, which saw twelve zeroes cut off the prior notes in the conversion process. Adam Fergusson’s book When Money Dies provides excellent insight into the chaos using insider accounts of Weimar Germany’s hyperinflation.

  More recently, in 1990, Brazil experienced hyperinflation, running at 80 percent a month with prices doubling every thirty-five days. Faith in the future currency value representation and far money collapsed, as price increases became daily events. As in Weimar Germany, people began panic buying, purchasing value in stores as rapidly as they could to get rid of cash. Store clerks would rush through stores with price marking sticker guns constantly updating prices. Many consumers made a point of running ahead of these store clerks in order to get better prices.

  Firms suffer severe stresses managing resource flows during periods like this. A Brazilian beer maker that went out of business because it couldn’t raise prices fast enough to keep up with production costs provides a useful case study. The one- to two-week brewing and production time was too slow relative to the price increases the brewer could pass on to consumers. The internal working capital strains distorted costs and margins, and although this only lasted briefly, it was enough to bankrupt the brewer and many others who hadn’t adapted the resilience capabilities and behaviors needed to survive the hyperinflation shock period. In order to survive, the brewers would have needed to make tough choices for survival: perhaps shrinking the amounts of beer produced to reduce working capital needs, securing very expensive financing, or forcing commercial customers to prepay for their beer. These are all difficult choices in a shrinking money environment.

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  Hyperinflation in Zimbabwe

  Background, Impact, and Policy

  • Tara McIndoe-Calder, Tara Bedi, Rogelio Mercado(Authors)
  • 2019(Publication Date)
  • Palgrave Pivot

    (Publisher)

  1

  Among the episodes of hyperinflations during the inter-war period, Germany’s case is the most discussed in economic literature. Germany’s experience with hyperinflation resulted from policies implemented during the war and post-war years (which historians now call inter-war period). At the start of the war, Germany suspended the convertibility of its currency, the Goldmark , to gold . It financed the war by issuing bonds, which the public purchased in support of the war effort. It was thought that raising taxes would be an unpopular choice due to the ongoing war. However, after signing the Treaty of Versailles in June 1919, Germany had to pay war reparations amounting to 132 billion Goldmarks . As it had to pay for war expenditures and comply with reparation payments, Germany resorted to printing more of its new currency, the Papiermark , to buy foreign currency . This caused the Papiermark to lose value relative to foreign currency . Moreover, although the German economy remained relatively intact after the war, there was a need to re-organise economic resources and support the recovery of industries. Hence, the output remained below potential.

  When Germany failed to pay reparations in 1922, the Ruhr area was occupied by French troops in early 1923. The government’s policy of passive resistance, where workers in the industrial Ruhr region went on strike but were given financial support by the government, resulted in the continued printing of currency, and, more importantly, a decline in output. This meant that as the amount of local currency was increasing quickly, the amount of available goods was declining rapidly, contributing to further rapid price increases. Hyperinflation worsened throughout 1923.

  By mid-1923, the young German Republic was nearing economic collapse. Unemployment rose, real wages declined and left-wing parties gained popularity. However, towards the final quarter of the year, currency reforms were undertaken, first through the issuance of Rentenmark as a means of redenominating the Papiermark , and then finally the issuance of a new gold -based currency, the Reichsmark in 1924. Moreover, the stabilisation programme in Germany also included fiscal reforms that ended monetising government debt

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  A History of Big Recessions in the Long Twentieth Century

  • Andrés Solimano(Author)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  The result of the impasse eventually brought very high inflation, internal economic disorganization, and political uncertainty. There are at least two schools of thought proposed by economists studying the German case regarding the origin of the hyperinflation in the 1920s: 22 one view, represented by Graham (1930), is the balance of pay- ments theory or passive money theory that stresses the fact that war repar- ations and uncertain external financing led to a very steep depreciation of the German mark, which fed into higher wages and prices, validated by an accommodative monetary policy followed by the Reichsbank (the German central bank). In this context, the increases in the money supply followed increases in prices and the exchange rate. The other school of thought, presented by Bresciani-Turroni (1937), is in line with the quan- tity theory of money (money times velocity equals prices times output) and the links between money creation and the financing of the fiscal deficit. In this case, the central bank prints money in exchange for bonds issued by the treasury. This is a fiat money system that relies on the legal tender status of paper money that is unbacked by real assets such as gold. In the quantity theory of money, money printing feeds not only price increases but also an increase in money velocity (due to expectations of future infla- tion), which contributes to inflation. The rise in velocity has, as a counter- part, a decrease in the demand for money as people economize the use of cash balances heavily taxed by high inflation. In this situation, the price level grows at a rate above the money supply, a fact observed in Germany in 1923.

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  Civil Servants and the Politics of Inflation in Germany, 1914–1924

  • Andreas Kunz(Author)
  • 2015(Publication Date)
  • De Gruyter

    (Publisher)

  C H A P T E R S E V E N From Hyperinflation to Stabilization, July 1922 to June 1924 In mid-1922 Germany moved from 'accelerated' into 'hyperinfla-tion. This final phase of the German inflation, which would last eight-een months until stabilization was achieved in December of 1923, did much to establish the subsequent inflation trauma within German society. The social tensions and recurring political crises that character-ized this phase of the inflation, which in the fall of 1923 were seemingly compressed into a general crisis of the Weimar state, were probably as (if not more) important in establishing the inflation trauma than the actual economic and monetary process. T o be sure, the complete destruction of a currency is a traumatic experience by any account, and the German case was the first of its kind in a modern industrial society. But one would still have to caution that the often redrawn picture of German housewives dragging along carriages full of worthless paper money is but one aspect of the social consequences of inflation, or even of hyperinflation, because it describes the situation prevailing at the very end of the inflation process. 1 Adjustment to hyperinflation oc-curred in several stages, however, and only in its final stage did this adjustment process push against certain limits. By then, moreover, stabilization was already in the making and presented an entire set of new problems to German society and its various groups. Owing to the close interdependence between the processes of hyperinflation, espe-1 Understandably, the year of hyperinflation, i. e. 1923, has loomed large in establish-ing an inflation trauma in German society to this day. On this, see the pertinent remarks made by the German writer Heinrich Boll, in an article for the New York Times Magazine, May 2, 1976 entitled The Specter still haunts in Germany: Inflation.

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  Bonds Are Not Forever

  The Crisis Facing Fixed Income Investors

  • Simon A. Lack(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  A vivid example of the societal destruction inflation can cause is the Weimar Republic, Germany’s government in between the two world wars of the first half of the twentieth century. Following its defeat in World War I, the victorious countries imposed punitive reparations on Germany under the Treaty of Versailles, which had the result of accelerating the decline of the German mark against other currencies. The inflation that resulted from the rapidly falling German currency reached such a staggering rate that prices for basic needs such as bread would change in the course of a single day. Photos of German citizens transporting cash in a wheelbarrow to buy food provide a vivid record of the result. The consequent destruction of the country’s productive capacity and societal upheaval led to totalitarianism.

  In his book Monetary Regimes and Inflation – History, Economic and Political Relationships , Peter Bernholz (2003) produces some striking examples of German diary entries written contemporaneously in 1923. A postage stamp costing 2 million marks is expected to cost 5 million tomorrow. An employee received 870 billion marks in salary on Monday, and on Wednesday received double the amount, reflecting the newly depreciated value of the currency. Exchange rates into gold moved during the day, and one writer described rushing breathlessly from the cashier’s to make purchases before his money lost all its value. Some towns and villages in Austria issued their own currency, which had little value in neighboring towns, and increasingly people moved to a barter system. Overnight call money rates on the Berlin Stock Exchange reached 30 percent a day (Homer and Sylla, 2005).

  Alexander Jung recounted poignant tales in Der Spiegel (Jung, 2009). One family sold its house and set out for Hamburg, where they planned to board a ship to America. They were emigrating, leaving the madness behind. And yet they found upon their arrival at the north German port city that the proceeds from the sale of their house were insufficient to pay for the journey by boat to the New World. Even worse, daily inflation had so ravaged their savings that they couldn’t even afford to travel back to their old home town. A man who ordered a coffee for 5,000 marks then asked for a second and was ultimately asked for 14,000 marks because a cup of coffee had risen in price while he was still drinking the first one.

  The hyperinflation of this time had devastating political consequences for Germany and for the whole world, as subsequent events led to the rise of Adolf Hitler. It is hardly surprising that the searing experience on a generation of Germans led to the Bundesbank, Germany’s central bank, being created with a single-minded focus on controlling inflation. This uncompromising DNA was later transferred to the European Central Bank (ECB) when it was created to oversee Europe’s common currency, the euro. Germany’s defining economic experience had a long-lasting impact. By contrast, America’s collective memory of the Depression in the 1930s and the coincident widespread unemployment is why the U.S. Federal Reserve has a dual mandate, of seeking maximum employment consistent with price stability. Neither the Bundesbank nor their successors, the ECB, have any explicit responsibility to promote full employment, which is one reason why Europe’s solutions to the euro debt crisis have been so focused on austerity.

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  The Global Economy

  A Concise History

  • Franco Amatori, Andrea Colli, Franco Amatori, Andrea Colli(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  3 some German historians have stressed that the population perceived military collapse in the autumn of 1918 and the total disintegration of the mark in 1923 as a single “shock defeat”: hyperinflation aggravated the trauma even more than defeat on the battlefields. The short-lived economic euphoria of 1920–1921 (the depreciation of the mark increased exports) gave Germans the illusion that they had escaped from war-time poverty, similar in some ways to the enthusiasm following the Russian defeat and the great Western offensive in spring 1918. Public expectations of success were fanned by the military in the first case and by politicians in the second. On both occasions, however, German citizens were devastated when their illusions were shattered. Hyperinflation came as another devastating blow to German society, a dizzying feeling that everything was spiralling out of control and that previous stability was completely and utterly lost. An entire generation would lose all its moral sense, ready a few years later to abandon any kind of rational attitude and embrace the myths launched by Adolf Hitler if this would ensure a national revival. Hyperinflation therefore generated widespread nihilism and facilitated mass consensus for Nazism (National Socialism) in every social class and across the generations, along with enthusiastic support (or at least silent indifference) for its anti-Semitism.

  Following the Second World War, the new democratic Germany was aware of the moral disgregation into which hyperinflation had plunged the country during the Weimar period. The German Federal Republic was proclaimed on 23rd May 1949, and Article 88 of its constitution defined it as a priority of the Bundesbank to guarantee stable prices; the same principle was also fully embraced by the new European Central Bank.

  Figure 11.1 German children playing with devalued marks

  11.3. Economic expansion in the 1920s

  After the 1921 recession, world industrial output recovered and overtook pre-war levels in 1925, but some significant differences existed between Europe and the rest of the world. Some countries made outstanding progress, like the United States, Japan and the British Dominions, while Central and Eastern Europe returned to the pre-war levels more slowly. European states saw their share of international trade contract: before the Great War, US imports accounted for 50% of the total, but its share had risen to a third in the first half of the 1920s. From 1925 until 1928, expansion was robust and involved Europe more, although the process was not homogeneous everywhere. Industrial output increased by 20% and primary sector output by 10%.4

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  Routledge Library Editions: German History

  • Various(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  The economic and political effects of the inflation thus were transmitted through and modified by the legal system. In response to the inflation the courts developed the concept of re-valuation, which was designed to produce an equitable adjustment of the losses and gains of the inflation. Because of the initiative of the courts a legislative scheme of revaluation was introduced by a reluctant government in 1924/5. 4 The result was a sea of litigation which brought little substantial gain to anyone. If the injustices of the inflation were not undone, they were considerably obscured and diluted. In general, the agitation for redress of the wrongs of the inflation served to undermine the political stability of the Weimar Republic, but did not make a decisive contribution to its downfall. Inflation consists in the expansion of the note supply relative to the supply of goods and services available for purchase. In common with other European countries before the First World War, Germany had 55 56 The Impact of Inflation limited the amount of money in circulation by maintaining the domestic gold standard. The Reichsbank had a statutory obligation to maintain gold cover at a fixed rate for one-third of the note issue. One paper mark was worth one gold mark. Although paper marks were compulsorily acceptable as good legal discharge of debts, they could in theory be redeemed in gold on demand.

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  Studies in the Interwar European Economy

  • Derek H. Aldcroft(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  Overall therefore, it is difficult to believe that the impact of inflation and stabilisation was anything but adverse for German society as a whole, or that the German position could have been much worse under a more orthodox financial policy (cf. Ferguson, 1995, p. 462, 1996, pp. 659-62). The latter argument would only hold if one believes that classical remedies would have brought on social revolution and a collapse of the regime, as some writers have hinted (Holtfrerich, 1986, p. 137; Schuker, 1976, p. 12; Webb, 1987, p. 430). But whether it was necessary to continue inflation much after 1919 to save German democracy has recently been questioned (Ferguson, 1995, p. 448). In point of fact, during these postwar years Germany had suffered more than five years of turmoil, poverty, starvation and tension which scarcely did much for the wealth and health of the German population (Ringer, 1969, pp. 112-18; Rowley, 1994). As Feldman (1993, p. 837) points out, the legacy of inflation was to be found in every corner of German society and many of the conditions to which it gave rise were to persist well into the future and were to play an important part in the destruction of Weimar democracy. Indeed, for a generation or more the Germans lived under the spectre of inflation and their policy reactions, and those of other inflationary countries, to the 1929-32 depression were conditioned in part by the disastrous episode. Moreover, the structural and financial weaknesses arising from the inflationary episode marked the beginning of the disintegration of Weimar capitalism which was completed in the slump of the early 1930s (Balderston, 1985). Thus, the sacrifices made for a temporary boost to activity and employment seem on balance to have been far too high, especially as Germany had then to suffer many of the stabilisation pangs which had been endured by those countries following deflationary policies from the start.

  Austria

  Austria’s inflation was much less severe than the German and of shorter duration. Strong inflationary pressures had been inherited from the war and the subsequent course of inflation was influenced by weak government and lack of faith in the durability of the new republic which had continuous budgetary deficits between 1919 and 1922 (Rothschild, 1947, pp. 19-23).

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  Capital as Will and Imagination

  Schumpeter's Guide to the Postwar Japanese Miracle

  • Mark D. Metzler(Author)
  • 2013(Publication Date)
  • Cornell University Press

    (Publisher)

  It was also during World War I that characteristic institutions of the twentieth-century type of political economy first came together as a system. The new policy package included foreign-exchange controls, deficit spending, managed currencies, and industrial subsidies. This was an essentially inflationary system. Together with these were devices to modulate and enable inflationary financing, including price controls, semicompulsory war bond drives, rationing of goods, and wage indexing. With mass conscription and mass austerity in the offing, state elites also incorporated labor parties into national governing coalitions, for the first time in most of the combatant countries. The worldwide inflations that developed later in the century were a continuation of World War I–style inflation. Wartime materials-mobilization planning, in Germany especially, became a prototype for future economic planning in both the capitalist and socialist countries. This twentieth-century policy package first appeared in Europe. It also took shape to a greater degree than is usually recognized in the United States.

  Postwar inflation in Germany, before it entered its final phase of exponential increase, also functioned as a kind of “forced savings.” This aspect is clearly described in Constantino Bresciani-Turroni’s classic study of the German inflation. Bresciani-Turroni himself worked in Berlin as a member of the Allied financial control apparatus through the period of post–World War I inflation and deflation, and he explained how industrial subsidies drove the inflation, which had the character of an inflationary boom up until 1922. After this, hyperinflation went out of control. Quoting an anonymous German banker, Bresciani-Turroni noted also that inflationary capital creation “gave industry and commerce the opportunity to do without foreign loans.”8 In 1946, Ōuchi Hyōe published a partial translation of Bresciani-Turroni’s book in Japanese as part of his own anti-inflation campaign, and it was also widely read in post–World War II Japan.

  Notably, this institutional package did not come together in Japan during World War I—that happened twenty years later, during and especially after World War II. Wage indexing and the partial accommodation of labor leadership mainly happened after August 1945, as part of a great social battle. Although the immediate institutional effects of World War I were less profound in Japan than in Europe, the inflationary boom itself had a great impact. From 1915 to a peak in March 1920, Japanese retail prices doubled. Wholesale prices increased by about two and a half times. The Japanese government in 1917 suspended the gold standard, which was already a highly managed system, and began to operate an even more purely managed monetary system. Rice prices soared in 1917 and 1918, and nationwide rice riots broke out in August and September 1918.9

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  Finance from Kaiser to Fuhrer

  Budget Politics in Germany, 1912-1934

  • C. Edmund Clingan(Author)
  • 2000(Publication Date)
  • Praeger

    (Publisher)

  Such numbers made the idea of a "fiscal policy" almost meaningless. Somebody had to pay this bill, and there were essentially four options. If the new government had tried to make the wealthy pay or repudiated the debt, it would require a sweeping expropriation. The wealthy also had ways to take their capital out of Germany. A second option would make the middle class pay through a process of inflation that would reduce the value of itsfixedassets until the government could pay its debt at reduced cost. The third choice would burden the poor with crushingly regressive taxation, especially on consumer staples. This would be almost impossible in a democratic system. The fourth option was the old hope of making foreigners pay for the war. This would be difficult with military occupation looming, yet the Germans carried this out through inflation and repudiation of foreign debt. The inflation of the postwar period, while not a deliberate policy, was the inadvertent choice of most people who did not care for the other options. It would take a unique set of circumstances to unleash the hyperinflation of 1923. The socialists leading the revolutionary government turned tofinancialexperts from the imperial period. The first Finance Minister of the Republic was Eugen Schiffer, who had served during the war in the Treasury Office. Schiffer's initial plan to the Council of People's Commissars seemed to follow Option 1: an 80% war-profits tax, a capital gains tax, and a higher income and inheritance tax. This plan angered the states and caused the rich to move their capital abroad. The government stopped well short of ordering expropriation. Perhaps if the revolution had continued and radicalized, the government would have ordered expropriation and diminished inflationary potential. Ironically, the desire of Friedrich Ebert, 20. Ibid., p. 237. The Twelve-Year Crisis 25 President of the new republic, to have a quick, stabilizing vote may have been a factor in the inflation.

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