Stresemann, Gustav
and the aftermath of the 1923 financial crisis He got rid of the old currency, the mark, and replaced it with the Renten (temporary) mark. It halted hyperinflation and restored the value of German currency. People were able to acquire items and get paid on time, which increased their confidence.
How did Germany deal with the 1923 inflation?
The early 1920s hyperinflation in the Weimar Republic was not the first or even the most severe case of inflation in history (the Hungarian peng and Zimbabwean dollar, for example, were both more inflated). It has, nevertheless, been the focus of the most in-depth economic examination and debate. Many of the dramatic and unusual economic behaviors now associated with hyperinflation were first documented systematically during the hyperinflation, including exponential increases in prices and interest rates, currency redenomination, consumer flight from cash to hard assets, and the rapid expansion of industries that produced those assets.
Chartalism and the German Historical School influenced German monetary economics at the time, which influenced how the hyperinflation was evaluated.
The situation was stated by John Maynard Keynes in The Economic Consequences of Peace: “Inflationary pressures in Europe’s monetary systems have reached unprecedented levels. The different belligerent governments, unwilling, frightened, or short-sighted enough to get the resources they required through loans or levies, have printed notes to make up the difference.”
During this time, French and British economists began to claim that Germany purposefully damaged its economy in order to avoid paying war reparations, but both governments disagreed on how to address the problem. The French declared that Germany should continue to pay reparations, but the British requested a moratorium to allow for financial restoration.
Between 1920 and 1923, reparations accounted for approximately a third of the German deficit, and the German government recognized them as one of the main causes of hyperinflation. Bankers and speculators were also mentioned as contributing factors (particularly foreign). By November 1923, hyperinflation had reached its peak, but it was halted when a new currency (the Rentenmark) was created. Banks “handed the marks over to junk dealers by the ton” to be recycled as paper to make space for the new currency.
Firms responded to the crisis by concentrating on the aspects of their information systems that they determined were critical to their ability to continue operations. The first focus was on altering sales and procurement arrangements, financial reporting changes, and the use of more nonmonetary data in internal reporting. Human resources were redeployed to the most vital company tasks, particularly those concerned in labor remuneration, as inflation continued to rise. Some aspects of corporate accounting systems appear to have fallen into disrepair, although there was also innovation.
What happened to Germany after 1923?
The US budget director was Charles Dawes. He was dispatched to Europe in 1923 to help Germany’s economy. The German Reichsbank was restructured on his recommendation, and the old money was called in and destroyed. This brought the hyperinflation to a stop. With Stresemann, Dawes negotiated the Dawes Plan, which granted Germany more time to pay reparations. Most notably, Dawes agreed to the United States lending Germany 800 million gold marks, which helped the German economy get off to a good start.
What steps did Germany take to recover from hyperinflation?
The Rentenbank does not appear to have any gold bullion on hand. Instead, the bank mostly held debt in the form of mortgages on real estate and bonds issued by German companies. The rentenmark could not be exchanged for gold.
The Rentenmark’s key feature was that its value remained similar to that of a “gold mark.” This was accomplished by limiting its issuance if its market value threatened to fall below that parity. The mechanism was a simple supply adjustment.
How did Germany get out of its inflationary situation?
On November 15, 1923, important efforts were made to put an end to the Weimar Republic’s nightmare of hyperinflation: the Reichsbank, Germany’s central bank, stopped monetizing government debt, and a new medium of exchange, the Rentenmark, was introduced alongside the Papermark (in German: Papiermark). Although these efforts were successful in curbing hyperinflation, the Papermark’s purchasing power was entirely damaged. To see how and why this could happen, consider the period leading up to the commencement of World War I.
The mark had been the official currency of the Deutsches Reich since 1871. The gold redeemability of the Reichsmark was suspended on August 4, 1914, when World War I broke out. The gold-backed Reichsmark (or “Goldmark” as it was known until 1914) was replaced by the unbacked Papermark. Initially, the Reich funded its war expenditures in part by issuing debt. The total state debt increased from 5.2 billion Papermark in 1914 to 105.3 billion Papermark in 1918. 1 In 1914, there were 5.9 billion Papermarks in circulation; by 1918, there were 32.9 billion. Between August 1914 and November 1918, wholesale prices in the Reich rose by 115 percent, and the Papermark’s purchasing power fell by more than half. During the same time span, the Papermark’s exchange rate versus the US dollar fell by 84 percent.
The fledgling Weimar Republic was confronted with enormous economic and political difficulties. Industrial production was 61 percent lower in 1920 than it had been in 1913, and it was even lower in 1923, at 54 percent. The Reich’s productive capability had been severely harmed by land losses following the Versailles Treaty: the Reich had lost roughly 13% of its former land mass, and roughly 10% of the German population was now living beyond its borders. In addition, Germany was required to pay reparations. The new and budding democratic governments, on the other hand, aspired to cater as much as possible to the wishes of their constituents. Because tax revenues were insufficient to fund these expenditures, the Reichsbank began printing.
From April 1920 to March 1921, the tax-to-spending ratio was just 37%. Following that, the situation improved slightly, and in June 1922, taxes as a percentage of total spending reached 75%. Then the situation deteriorated. Germany was accused of not delivering restitution payments on time toward the end of 1922. French and Belgian forces invaded and occupied the Ruhrgebiet, the Reich’s industrial heartland, in early January 1923 to bolster their claim. The German government, commanded by chancellor Wilhelm Kuno, urged Ruhrgebiet employees to defy the invaders’ instructions, saying that the Reich would continue to pay their wages. To keep the government liquid for making up revenue shortfalls and paying wages, social transfers, and subsidies, the Reichsbank began generating new money via monetizing debt.
The quantity of Papermark began to spiral out of control in May 1923. It increased from 8.610 billion in May to 17.340 billion in April, 669.703 billion in August, and 400 quintillion (400 x 1018) in November 1923. 2 From the end of 1919 to November 1923, wholesale prices soared to astronomical heights, increasing by 1.813 percent. You could have bought 500 billion eggs for the same money you would have spent five years later for only one egg at the end of World War I in 1918. The price of the US dollar in Papermark had risen by 8.912 percent from November 1923 to November 1924. The Papermark has depreciated to the point of being worthless.
Unemployment was on the rise as a result of the currency depreciation. Since the war’s end, unemployment has stayed relatively low, despite the fact that the Weimar governments kept the economy afloat with aggressive deficit spending and money printing. The unemployment rate was 2.9 percent at the end of 1919, 4.1 percent in 1920, 1.6 percent in 1921, and 2.8 percent in 1922. However, after the Papermark’s demise, the jobless rate has risen to 19.1% in October, 23.4 percent in November, and 28.2% in December. The vast majority of the German populace, particularly the middle class, had been devastated by hyperinflation. People were affected by food shortages and the cold. Extremism in politics was on the rise.
The Reichsbank was the fundamental problem in resolving the monetary dilemma. The Reichsbank’s president, Rudolf E. A. Havenstein, had a life term and was virtually unstoppable: under Havenstein, the Reichsbank continued to issue ever bigger sums of Papiermark to keep the Reich afloat financially. The Reichsbank was thus ordered to halt monetizing government debt and issue new money on November 15, 1923. At the same time, it was decided to make one Rentenmark equivalent to one trillion Papermark (a value with twelve zeros: 1,000,000,000,000). Havenstein died unexpectedly of a heart attack on November 20, 1923. On the same day, Hjalmar Schacht, who would become Reichsbank president in December, took measures to stabilize the Papermark versus the US dollar: the Reichsbank made 4.2 trillion Papermark equal to one US Dollar by foreign exchange market interventions. The exchange rate was 4.2 Rentenmark for one US dollar, because one trillion Papermark was equal to one Rentenmark. Before World War I, this was the exact rate of exchange between the Reichsmark and the US dollar. The “Rentenmark Miracle” signaled the end of hyperinflation. 3
How could such a monetary crisis occur in a civilized and advanced society, resulting in the currency’s total destruction? There have been numerous reasons offered. It has been claimed that reparations payments, persistent balance of payment deficits, and even the depreciation of the German currency in foreign exchange markets were all factors in the currency’s collapse. These justifications, however, do not hold water, as German economist Hans F. Sennholz explains: “Every mark was printed by Germans and issued by a central bank managed by Germans under a wholly German administration.” The policies were primarily the responsibility of German political parties such as the Socialists, the Catholic Centre Party, and the Democrats, which formed successive coalition governments. Of course, no political party can be expected to accept responsibility for any disaster.” 4 Indeed, the German hyperinflation was caused by a deliberate political decision to expand the amount of money in circulation de facto without limit.
What can we learn from Germany’s hyperinflationary experience? The first lesson is that even a politically independent central bank cannot guarantee that (paper) money will not be destroyed. The Reichsbank had been given political independence as early as 1922, ostensibly on behalf of the allied forces in exchange for a temporary suspension of reparation payments. Despite this, the Reichsbank chose to hyperinflate the currency. The Reichsbank’s council decided to provide infinite quantities of money in such a “existential political crisis” since the Reich was increasingly reliant on Reichsbank credit to stay solvent. Of fact, the Weimar politicians’ credit hunger proved to be limitless.
The second point to remember is that fiat paper money is useless. “The introduction of the banknote of state paper money was only conceivable because the state or the central bank committed to redeem the paper money note at any moment in gold,” Hjalmar Schacht wrote in his 1953 biography. All issuers of paper money must make every effort to ensure that gold can be redeemed at any moment.” 5 In Schacht’s words, there is a key economic insight: Unbacked paper money is political money, and as such, it can cause havoc in a free market society. This was long ago pointed out by representatives of the Austrian School of Economics.
Paper money is not only continuously inflationary, but it also promotes malinvestment, “boom-and-bust” cycles, and over-indebtedness since it is created “ex nihilo” and injected into the economy through bank lending. When governments and banks, in particular, begin to struggle under their debt loads, and the economy is on the verge of contracting, printing more money appears all too easily to be a policy of choosing the lesser evil in order to avoid the problems that credit-produced paper money caused in the first place. Looking at the globe today, when many economies have been utilizing credit-produced paper currencies for decades and debt loads are astronomically high, the current issues are strikingly comparable to those faced by the Weimar Republic more than 90 years ago. A monetary order reform is urgently needed now, as it was then, and the sooner the task of monetary reform is accepted, the lower the adjustment costs will be.
- 1. Take a look at what’s here and what’s next. H. James, “Die Reichbank 1876 bis 1945,” in Deutsche Bundesbank, ed., Fnfzig Jahre Deutsche Mark, Notenbank und Whrung in Deutschland seit 1948 (Mnchen: Verlag C. H. Beck, 1998), pp. 2989, esp. pp. 4654; C. Bresciani-Turroni, The Economics of Inflation, A Study of Currency Depreciation in Post-War Germany (Northampton: John Dicken (New York: Russell & Russell, 1967 ).
- 2. To be certain: 400,000,000,000,000,000,000 is a “400” with 18 zeros. It is referred to as a “quintillion” in American and French nomenclature, whereas it is referred to as a “trillion” in English and German nomenclature. The American nomenclature will be utilized throughout this text.
- 3. See Bresciani-Turroni, Economics of Inflation, chap. IX, pp. 334358 for further information.
- 4. H.S. Sennholz, Age of Inflation, Western Islands, Belmont, Mass., 1979, p. 80.
- Kindler and Schiermeyer Verlag, Bad Wrishofen, 1953, pp. 207-208. 5. H. Schacht, 76 Jahre meines Lebens (Kindler und Schiermeyer Verlag, Bad Wrishofen, 1953), pp. 207-208. This is my interpretation.
Why did Germany experience hyperinflation in 1923, and who helped her get out of it?
When Germany’s treasure was depleted as a result of war reparations, the German currency was heavily minted, and the value of the German MARK plummeted. Hyperinflation resulted as a result of this. Germany was hauled out of this situation by the United States.
In 1923, why did Germany experience hyperinflation?
The government just printed additional money to compensate the striking workers. This influx of cash resulted in hyperinflation, as prices soared in tandem with the amount of money generated. Prices began to spiral out of control, with a loaf of bread costing 250 marks in January 1923 rising to 200,000 million marks in November 1923.
How did Germany bounce back?
Germany’s reconstruction was a long process that began after World War II, when the country was destroyed. During the war, Germany had sustained significant losses in both lives and industrial power. 6.9 to 7.5 million Germans were killed, accounting for 8.26% to 8.86% of the population (see also World War II casualties). Heavy bombardment in the latter months of the war badly devastated the country’s cities, and agricultural productivity was only 35% of what it had been before the conflict.
The victorious Allies gave Poland and the Soviet Union around 25% of Germany’s pre-Anschluss territory at the Potsdam Conference. Together with the Germans of the Sudetenland and the German communities spread over Eastern Europe, the German population in this area was removed. Depending on the source, between 1.5 and 2 million people are estimated to have died in the process. As a result, in the “new” Germany that remained after the fragmentation, population density increased.
Germany was attempting to be converted into a pastoral and agricultural nation, with only modest industry allowed, as promised at Potsdam.
As reparations, many factories were disassembled or destroyed (see also the Morgenthau Plan). For several years, both the Western Allies and the Soviet Union employed millions of German prisoners of war as forced labor.
The US conducted a strong effort to harvest all technological and scientific know-how, as well as all patents in Germany, beginning immediately after the German surrender and continuing over the next two years. In his book Science Technology and Reparations: Exploitation and Plunder in Postwar Germany, John Gimbel estimates that the “intellectual reparations” paid by the United States and the United Kingdom totaled close to ten billion dollars, or over 100 billion dollars in 2006. (Also see Operation Paperclip.)
As early as 1945, the Allies focused significantly on “denazification,” or the process of eradicating Nazi influence from Germany.
By mid-1947, the success of denazification and the onset of the Cold War had prompted a policy rethinking, as the Germans were considered as potential allies in the conflict, and it was becoming evident that Europe’s economic recovery hinged on the reactivation of German industry. The Western Allies were able to begin preparing for a currency reform after the rejection of the US occupation decree JCS 1067 in July 1947. The regulation had barred this type of activity to aid the German economy.
The Marshall Plan, formerly known as the “European Recovery Program,” was launched in 1947. Western Europe received $13 billion in economic and technical aid between 1947 and 1952, which is almost $140 billion in 2017. Despite concerns from many recipients, the Marshall Plan was extended in 1949 to include the newly constituted West Germany, albeit in a less generous form of loans. West Germany got $1.45 billion in loans between 1949 and 1955, equivalent to about $14.5 billion in 2006.
With the export of indigenous products, a reduction in unemployment, higher food production, and a diminished black market, the country began a modest but steady rise in its level of living.
The German Mark replaced the occupation currency as the currency of the Western occupied zones in 1948, allowing them to recover economically.
By 1950, the United Kingdom and France had been persuaded to follow the United States’ lead and halt the deconstruction of German heavy industry. Once permitted, the country’s economic recovery under the newly created democratic administration was rapid and effective. The unemployment rate in Germany was so low in the mid-1950s that it prompted an inflow of Turkish immigrants into the country’s work force. Until the 1973 oil crisis, Germany’s economy continued to improve.
In the 1920s, how did Germany recover?
The appointment of Gustav Stresemann to the chancellorship in the autumn of 1923 sowed the seeds of this German comeback. Hans Luther, Stresemann’s finance minister, devised a strategy to halt the hyperinflationary spiral by establishing the Rentenmark, a new currency. The Rentenmark’s worth, unlike the former paper mark, would be tied to gold prices.
The Weimar government also stated that it would meet the Allies’ reparations obligations. Germany was able to reestablish diplomatic ties and renegotiate the reparations number. The Dawes Plan, sponsored by the United States, was finalized in April 1924 and put into effect four months later.
Between 1924 and 1929, more than $25 billion in foreign currency was pumped into the ailing German economy. More than half of the funds originated through American loans, with the majority of the rest enabled by American bankers acting as middlemen. The US government and firms also offered financial and industrial knowledge to Germany.
How did Germany’s economy rebound?
Hyperinflation is coming to an end. The ‘passive resistance’ of German workers in the Ruhr is being called off. This aided Germany’s economy by resuming production and allowing the government to stop printing money to compensate strikers. Promises to resume reparations payments.
What role did the Rentenmark play in Germany’s recovery?
The Rentenmark is a new currency that will be introduced. Because only a limited quantity were printed, prices were stabilized, and money gained value. This aided in the re-establishment of German economic confidence.