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Hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
affected the
German Papiermark The Papiermark (; 'paper mark', officially just ''Mark'', sign: ℳ) was the German currency from 4 August 1914 when the link between the Goldmark and gold was abandoned, due to the outbreak of World War I. In particular, the Papiermark was t ...
, the currency of the
Weimar Republic The Weimar Republic (german: link=no, Weimarer Republik ), officially named the German Reich, was the government of Germany from 1918 to 1933, during which it was a Constitutional republic, constitutional federal republic for the first time in ...
, between 1921 and 1923, primarily in 1923. It caused considerable internal political instability in the country, the
occupation of the Ruhr The Occupation of the Ruhr (german: link=no, Ruhrbesetzung) was a period of military occupation of the Ruhr region of Germany by France and Belgium between 11 January 1923 and 25 August 1925. France and Belgium occupied the heavily industr ...
by France and Belgium, and misery for the general populace.


Background

To pay for the large costs of the ongoing
First World War World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was List of wars and anthropogenic disasters by death toll, one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, ...
, Germany suspended the
gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from th ...
(the convertibility of its currency to gold) when the war broke out. Unlike
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
, which imposed its first
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
to pay for the war, German Emperor
Wilhelm II , house = Hohenzollern , father = Frederick III, German Emperor , mother = Victoria, Princess Royal , religion = Lutheranism (Prussian United) , signature = Wilhelm II, German Emperor Signature-.svg Wilhelm II (Friedrich Wilhelm Viktor ...
and the Reichstag decided unanimously to fund the war entirely by borrowing. The government believed that it would be able to pay off the debt by winning the war and imposing war reparations on the defeated Allies. This was to be done by annexing resource-rich industrial territory in the west and east and imposing cash payments to Germany, similar to the French indemnity that followed German victory over France in 1870.Evans, p. 103. Thus, the exchange rate of the mark against the
US dollar The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
steadily devalued from 4.2 to 7.9 marks per dollar, a preliminary warning to the extreme postwar inflation. This strategy failed as Germany lost the war, which left the new Weimar Republic saddled with massive war debts that it could not afford, totaling 132 billion gold marks ), later revised under the Young Plan to 112 billion marks (). The debt problem was exacerbated by printing money without any economic resources to back it. The demand in the
Treaty of Versailles The Treaty of Versailles (french: Traité de Versailles; german: Versailler Vertrag, ) was the most important of the peace treaties of World War I. It ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1 ...
for
reparations Reparation(s) may refer to: Christianity * Restitution (theology), the Christian doctrine calling for reparation * Acts of reparation, prayers for repairing the damages of sin History *War reparations **World War I reparations, made from ...
further accelerated the decline in the value of the mark, with 48 paper marks required to buy a US dollar by late 1919. Afterwards, German currency was relatively stable at about 90 marks per dollar during the first half of 1921. Because the
Western Front Western Front or West Front may refer to: Military frontiers * Western Front (World War I), a military frontier to the west of Germany *Western Front (World War II), a military frontier to the west of Germany *Western Front (Russian Empire), a maj ...
of the war had been mostly fought in
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
and
Belgium Belgium, ; french: Belgique ; german: Belgien officially the Kingdom of Belgium, is a country in Northwestern Europe. The country is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeast, France to ...
, Germany came out of the war with most of its industrial infrastructure intact, leaving it in a better position to become the dominant economic force on the European continentMarks, page 53 after an Allied ultimatum to impose economic sanctions that would force Germany to meet payments. The first payment was made when it came due in June 1921, and marked the beginning of an increasingly rapid devaluation of the mark, which fell in value to approximately 330 marks per dollar. The total reparations demanded were 132 billion gold marks, but Germany had to pay only 50 billion marks at the time, as the reparations were required to be repaid in hard currency, not the rapidly depreciating
Papiermark The Papiermark (; 'paper mark', officially just ''Mark'', sign: ℳ) was the German currency from 4 August 1914 when the link between the Goldmark and gold was abandoned, due to the outbreak of World War I. In particular, the Papiermark was th ...
.Marks (1978), p. 237 From August 1921, the president of the Reichsbank,
Rudolf Havenstein Rudolf E. A. Havenstein (10 March 1857 – 20 November 1923) was a German lawyer and president of the Reichsbank (German central bank) during the hyperinflation of 1921–1923. Havenstein was born in Meseritz (Międzyrzecz), Province of Posen. ...
began a strategy of buying foreign currency with marks at any price, without any regards for inflation, and it only increased the speed of the collapse in value of the mark, meaning more and more marks were required to buy the foreign currency that was demanded by the Reparations Commission. In the first half of 1922, the mark stabilized at about 320 marks per dollar. International reparations conferences were being held. One, in June 1922, was organized by US investment banker J. P. Morgan, Jr. The meetings produced no workable solution, and inflation erupted into hyperinflation, the mark falling to 7,400 marks per US dollar by December 1922. The
cost-of-living index A cost-of-living index is a theoretical price index that measures relative cost of living over time or regions. It is an index that measures differences in the price of goods and services, and allows for substitutions with other items as pr ...
was 41 in June 1922 and 685 in December, a nearly 17-fold increase. By fall of 1922, Havenstein found itself unable to make reparations payments. The strategy that Havenstein had been using to pay war reparations was the mass printing of bank notes to buy foreign currency, which was then used to pay reparations, but this strategy greatly exacerbated the
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
of the paper mark.Shapiro, page 187 Since the mark was, by fall of 1922, practically worthless, it was impossible for Havenstein to buy foreign exchange or gold using paper marks. After Germany failed to pay France an installment of reparations on time in late 1922, French and Belgian troops occupied the Ruhr valley, Germany's main industrial region, in January 1923. Reparations were to be paid in goods, such as
coal Coal is a combustible black or brownish-black sedimentary rock, formed as rock strata called coal seams. Coal is mostly carbon with variable amounts of other elements, chiefly hydrogen, sulfur, oxygen, and nitrogen. Coal is formed when ...
, and the occupation was supposed to ensure reparations payments. The German government's response was to order a policy of
passive resistance Nonviolent resistance (NVR), or nonviolent action, sometimes called civil resistance, is the practice of achieving goals such as social change through symbolic protests, civil disobedience, economic or political noncooperation, satyagraha, c ...
in the Ruhr, with workers being told to do nothing which helped the invaders in any way. While this policy, in practice, amounted to a
general strike A general strike refers to a strike action in which participants cease all economic activity, such as working, to strengthen the bargaining position of a trade union or achieve a common social or political goal. They are organised by large coa ...
to protest the occupation, the striking workers still had to be given financial support. The government paid these workers by printing more and more banknotes, with Germany soon being swamped with paper money, exacerbating the hyperinflation even further.


Hyperinflation

A loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923. By November 1923, one US dollar was worth 4,210,500,000,000 German marks. File:50000 mark aachen.jpg, 50,000 marks, Aachen, 1923 File:500000 Mark Leipzig 1923 front.jpg, 500,000 marks, Leipzig, 1923 File:5milmkbk.jpg, A 5 Million Mark coin, Westphalia, 1923 File:DAN-23-Danzig-5MIL Mark (1923).jpg, 5,000,000 marks, Danzig, 1923 File:Notgeld trier 50 millionen mark.jpg, 50,000,000 marks, Trier, 1923 File:500000000MarkDresdenAltstadt.jpg, 500,000,000 marks, Dresden, 1923 File:GER-115-Reichsbanknote-5 Billion Mark (1923).jpg, 5 billion ''(5 Milliarden)'' marks, Berlin, 1923 File:50000000000Plauen1923.jpg, 50 billion ''(50 Milliarden)'' marks, Plauen, 1923 File:GER-127a-Reichsbanknote-500 Billion Mark (1923).jpg, 500 billion ''(500 Milliarden)'' marks, Berlin, 1923 File:Fem biljoner Mark.jpg, 5 trillion ''(5 Billionen, 5×10¹²)'' marks, Stuttgart, 1923 File:50 Billionen Mark Stolberg Eschweiler 001.jpg, 50 trillion ''(50 Billionen, 50×1012)'' marks Eschweiler, 1923 File:5markcounterstamppostWWI.png,
Aachen Aachen ( ; ; Aachen dialect: ''Oche'' ; French and traditional English: Aix-la-Chapelle; or ''Aquisgranum''; nl, Aken ; Polish: Akwizgran) is, with around 249,000 inhabitants, the 13th-largest city in North Rhine-Westphalia, and the 28th ...


Stabilization

The hyperinflation crisis led prominent economists and politicians to seek a means to stabilize German currency. In August 1923, an economist, Karl Helfferich, proposed a plan to issue a new currency, the "Roggenmark" ("rye mark"), to be backed by mortgage bonds indexed to the
market price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
of rye grain. The plan was rejected because of the greatly fluctuating price of rye in paper marks. Agriculture Minister Hans Luther proposed a plan that substituted gold for rye and led to the issuance of the
Rentenmark The Rentenmark (; RM) was a currency issued on 15 October 1923 to stop the hyperinflation of 1922 and 1923 in Weimar Germany, after the previously used "paper" Mark had become almost worthless. It was subdivided into 100 ''Rentenpfennig'' an ...
("mortgage mark"), backed by bonds indexed to the market price of gold. The gold bonds were indexed at the rate of 2,790 gold marks per kilogram of gold, the same as the pre-war gold marks. Rentenmarks were not redeemable in gold but only indexed to the gold bonds. The plan was adopted in
monetary reform Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system. Monetary reformers may advocate any of the following, among other proposals: * A return t ...
decrees on October 13–15, 1923. A new bank, the Rentenbank, was set up and controlled by new German Finance Minister Hans Luther. After November 12, 1923, when
Hjalmar Schacht Hjalmar Schacht (born Horace Greeley Hjalmar Schacht; 22 January 1877 – 3 June 1970, ) was a German economist, banker, centre-right politician, and co-founder in 1918 of the German Democratic Party. He served as the Currency Commissioner ...
became currency commissioner, Germany's central bank (the Reichsbank) was not allowed to discount any further government Treasury bills, which meant the corresponding issue of paper marks also ceased. The discounting of commercial trade bills was allowed and the amount of Rentenmarks expanded, but the issue was strictly controlled to conform to current commercial and government transactions. The Rentenbank refused credit to the government and to speculators who were not able to borrow Rentenmarks, because Rentenmarks were not legal tender.Fergusson, Chapter 13 On November 16, 1923, the new Rentenmark was introduced to replace the worthless paper marks issued by the Reichsbank. Twelve zeros were cut from prices, and the prices quoted in the new currency remained stable. When the president of the Reichsbank,
Rudolf Havenstein Rudolf E. A. Havenstein (10 March 1857 – 20 November 1923) was a German lawyer and president of the Reichsbank (German central bank) during the hyperinflation of 1921–1923. Havenstein was born in Meseritz (Międzyrzecz), Province of Posen. ...
, died on November 20, 1923, Schacht was appointed to replace him. By November 30, 1923, there were 500,000,000 Rentenmarks in circulation, which increased to 1,000,000,000 by January 1, 1924 and to 1,800,000,000 Rentenmarks by July 1924. Meanwhile, the old paper Marks continued in circulation. The total paper marks increased to 1.2
sextillion Two naming scales for large numbers have been used in English and other European languages since the early modern era: the long and short scales. Most English variants use the short scale today, but the long scale remains dominant in many non-Eng ...
(1,200,000,000,000,000,000,000) in July 1924 and continued to fall in value to a third of their conversion value in Rentenmarks. On August 30, 1924, a monetary law permitted the exchange of a 1-trillion paper mark note to a new Reichsmark, worth the same as a Rentenmark. By 1924 one dollar was equivalent to 4.2 Rentenmark.


Revaluation

Eventually, some debts were reinstated to compensate creditors partially for the catastrophic reduction in the value of debts that had been quoted in paper marks before the hyperinflation. A decree of 1925 reinstated some mortgages at 25% of face value in the new currency, effectively 25,000,000,000 times their value in the old paper marks, if they had been held for at least five years. Similarly, some government bonds were reinstated at 2.5% of face value, to be paid after reparations were paid.Fergusson, Chapter 14 Mortgage debt was reinstated at much higher rates than government bonds were. The reinstatement of some debts and a resumption of effective taxation in a still-devastated economy triggered a wave of corporate
bankruptcies Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
. One of the important issues of the stabilization of a hyperinflation is the ''revaluation''. The term normally refers to the raising of the exchange rate of one national currency against other currencies. As well, it can mean ''revalorization'', the restoration of the value of a currency depreciated by inflation. The German government had the choice of a revaluation law to finish the hyperinflation quickly or of allowing sprawling and the political and violent disturbances on the streets. The government argued in detail that the interests of creditors and debtors had to be fair and balanced. Neither the living standard price index nor the share price index was judged as relevant. The calculation of the conversion relation was considerably judged to the dollar index as well as to the wholesale price index. In principle, the German government followed the line of market-oriented reasoning that the dollar index and the wholesale price index would roughly indicate the ''true'' price level in general over the period of high inflation and hyperinflation. In addition, the revaluation was bound on the exchange rate mark and United States dollar to obtain the value of the ''Goldmark''. Finally, the Law on the Revaluation of Mortgages and other Claims of 16 July 1925 (' or ') included only the ratio of the paper mark to the gold mark for the period from January 1, 1918, to November 30, 1923, and the following days. The galloping inflation thus caused the end of a principle, "a mark is worth a mark", which had been recognized, the nominal value principle. The law was challenged in the Supreme Court of the German Reich ('), but its 5th Senate ruled, on November 4, 1925, that the law was constitutional, even according to the Bill of Rights and Duties of Germans (Articles 109, 134, 152 and 153 of the Constitution). The case set a precedent for
judicial review Judicial review is a process under which executive, legislative and administrative actions are subject to review by the judiciary. A court with authority for judicial review may invalidate laws, acts and governmental actions that are incomp ...
in German jurisprudence.


Analysis

The hyperinflation episode in the Weimar Republic in the early 1920s was not the first or even the most severe instance of inflation in history (the Hungarian pengő and
Zimbabwean dollar The Zimbabwean dollar (sign: $, or Z$ to distinguish it from other dollar-denominated currencies) was the name of four official currencies of Zimbabwe from 1980 to 12 April 2009. During this time, it was subject to periods of extreme inflat ...
, for example, have been even more inflated). However, it has been the subject of the most scholarly
economic An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...
analysis and debate. The hyperinflation drew significant interest, as many of the dramatic and unusual economic behaviors now associated with hyperinflation were first documented systematically: exponential increases in prices and interest rates, redenomination of the currency, consumer flight from cash to hard assets and the rapid expansion of industries that produced those assets. German monetary economics was at that time heavily influenced by Chartalism and the German Historical School, which conditioned the way the hyperinflation was analyzed.''Monetary Explanations of the Weimar Republic's Hyperinflation: Some Neglected Contributions in Contemporary German Literature'', David E.W. Laidler & George W. Stadler, Journal of Money, Credit and Banking, vol. 30, pages 816, 818
/ref>
John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
described the situation in ''
The Economic Consequences of the Peace ''The Economic Consequences of the Peace'' (1919) is a book written and published by the British economist John Maynard Keynes. After the First World War, Keynes attended the Paris Peace Conference of 1919 as a delegate of the British Treasu ...
'': "The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance." It was during then that French and British economic experts began to claim that Germany deliberately destroyed its economy to avoid war reparations, but both governments had conflicting views on how to handle the situation. The French declared that Germany should keep paying reparations, but Britain sought to grant a moratorium to allow financial reconstruction. Reparations accounted for about a third of the German deficit from 1920 to 1923 and so were cited by the German government as one of the main causes of hyperinflation. Other causes cited included bankers and speculators (particularly foreign). Hyperinflation reached its peak by November 1923 but ended when a new currency (the Rentenmark) was introduced. To make way for the new currency, banks "turned the marks over to junk dealers by the
ton Ton is the name of any one of several units of measure. It has a long history and has acquired several meanings and uses. Mainly it describes units of weight. Confusion can arise because ''ton'' can mean * the long ton, which is 2,240 pounds ...
"''Americans With Marks Out of Luck'', Cable and Associated Press, Los Angeles Times, 15 Nov 1924 to be recycled as paper. Firms responded to the crisis by focusing on those elements of their information systems they identified as essential to continuing operations. In the beginning the focus was on adjusting sales and procurement arrangements, modifications to financial reporting, and the use of more nonmonetary information in internal reporting. With the continuous acceleration of inflation, human resources were redeployed to the most critical corporate functions, in particular those involved in the remuneration of labor. There is evidence that some parts of corporate accounting systems fell into disrepair, but there was also innovation.


Aftermath and legacy

Since the hyperinflation, German monetary policy has retained a central concern with the maintenance of a sound currency, a concern that had an effect on the European sovereign debt crisis. According to one study, many Germans conflate hyperinflation in the Weimar Republic with the Great Depression, seeing the two separate events as one big economic crisis that encompassed both rapidly rising prices and mass unemployment. The hyperinflated, worthless marks became widely collected abroad. The ''
Los Angeles Times The ''Los Angeles Times'' (abbreviated as ''LA Times'') is a daily newspaper that started publishing in Los Angeles in 1881. Based in the LA-adjacent suburb of El Segundo since 2018, it is the sixth-largest newspaper by circulation in the ...
'' estimated in 1924 that more of the decommissioned notes were spread about the US than existed in Germany.


Causes

The cause of the immense acceleration of prices seemed unclear and unpredictable to those who lived through it, but in retrospect, it was relatively simple. The Treaty of Versailles imposed a huge debt on Germany that could be paid only in gold or foreign currency. With its gold depleted, the German government attempted to buy foreign currency with German currency,Fergusson; ''When Money Dies''; p. 40 equivalent to selling German currency in exchange for payment in foreign currency, but the resulting increase in the supply of German marks on the market caused the German mark to fall rapidly in value, which greatly increased the number of marks needed to buy more foreign currency. That caused German prices of goods to rise rapidly, increasing the cost of operating the German government, which could not be financed by raising taxes because those taxes would be payable in the ever-falling German currency. The resulting deficit was financed by some combination of issuing bonds and simply creating more money, both increasing the supply of German mark-denominated financial assets on the market and so further reducing the currency's price. When the German people realized that their money was rapidly losing value, they tried to spend it quickly. That increased monetary velocity caused an ever-faster increase in prices, creating a vicious cycle.Parsson; ''Dying of Money''; p. 116117 The government and the banks had two unacceptable alternatives. If they stopped inflation, there would be immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order, insurrection and possibly even revolution.Fergusson; ''When Money Dies''; p. 254 If they continued the inflation, they would default on their foreign debt. However, attempting to avoid both unemployment and insolvency ultimately failed when Germany had both.


See also

* Andreas Hermes * Zero stroke


Citations


General and cited sources

* * * * Costantino Bresciani-Turroni, ''The Economics of Inflation'' (English transl.), Northampton, England: Augustus Kelly Publishers, 1937, on the German 1919-1923 inflation

* * * * * * Guttmann, William. ''The Great Inflation''. Saxon House (1975 hardback w/ sources; ) or Gordon & Cremonesi Ltd. Publ., London (1976 paperback w/o sources; ). Germany currency hyperinflation 1919-1923.
When Money Buys Little - Jerry Jensen
Study of the 1923 German postage stamps * Karsten Laursen and Jorgen Pedersen, ''The German Inflation'', North-Holland Publishing Co., Amsterdam, 1964. * * * * * *


External links

* {{DEFAULTSORT:Inflation In The Weimar Republic 1910s economic history 1920s economic history 1923 in economics 1923 in Germany Economic history of Germany Economy of the Weimar Republic Inflation in Germany Man-made disasters in Germany 1923 disasters in Germany 1920s disasters in Germany