People were paid by the hour and hastened to give money to loved ones so that it might be spent before the value had depreciated to the point where it was worthless.
What impact did inflation have on Germany?
Between 1921 and 1923, hyperinflation afflicted the German Papiermark, the Weimar Republic’s currency, particularly in 1923. It resulted in significant internal political unrest in the country, as well as the occupation of the Ruhr by France and Belgium, as well as widespread hardship among the general population.
What caused the German economy to be destroyed by inflation?
The result was spectacular. The German economy was depressed in the latter months of the inflation. Trade had come to a halt, many people in the towns were going hungry, and manufacturing had shut down. As can be observed, trade union unemployment increased from 6.3 percent in August to 9.9 percent in September, 19.1 percent in October, 23.4 percent in November, and 28.2 percent in December. (Technically, inflation ended in mid-November, but its disorganizing consequences continued.) However, trust swiftly returned, as did trade, manufacturing, and employment.
The “stabilization problem,” as described by Bresciani-Turroni and other writers, occurs after inflation has been brought to a standstill. However, any so-called “stabilization crisis” that occurs after hyperinflation has passed a certain point is quite moderate. This is due to the fact that inflation has caused so much economic disorganization. When it is reported that unemployment increased after the mark stabilized, this is only true for one or two months at most. Bresciani-monthly Turroni’s unemployment data expire in December 1923. The following is a timeline of events from October 1923 to June 1924.
A real stabilization crisis existed, but it manifested itself in a different way. One of the things that happens in an inflation, especially a hyperinflation, is that labor is engaged in directions other than the regular ones, and after the inflation is ended, this abnormal demand vanishes. During an inflation, labor is diverted to luxury items such as furs, perfumes, jewelry, high-end hotels, and nightclubs, while many needs are neglected. In Germany, labor was concentrated in fixed capital, new plant construction, and the overexpansion of businesses producing “instrumental” commodities. Then, as one entrepreneur put it frankly, many of these factories were discovered to be “nothing but garbage.” In many situations, it was quickly discovered that keeping them closed in the hopes of reopening later was a mistake. The cost of maintenance alone was prohibitive. It was more cost-effective to demolish them.
In other words, as the inflation disappeared, so did the distortions and illusions that it had created. The economy had been overdeveloped in some areas at the detriment of others. Inflation had resulted in a significant decrease in real wages. Individual worker average wages and employment both increased dramatically in the opening months of 1924. In January 1924, the index of real earnings was 68.1, and by June 1928, it had risen to 124. This resulted in a significant increase in demand for consumer products and a commensurate decrease in capital or industrial goods production. There was an immediate recognition of a massive overproduction of coal, iron, and steel. In these industries, unemployment has set in. However, careful attention was paid to production costs once more, and labor efficiency was restored.
If borrowing rates are any indication, there was a severe scarcity of operating capital. In April and May of 1924, the interest rate on monthly loans in Berlin reached 72 percent per year. However, a major chunk of this reflected continued skepticism about the new currency’s stability. At the same time, only 16% of loans were in foreign currencies. In October 1924, for example, while interest rates on loans in marks fell to 13%, interest rates on loans in foreign currencies fell to 7.2 percent.
It would be difficult to do a better job of summarizing the entire German inflation crisis than Bresciani-Turroni did in the last paragraph of his monumental work on the subject:
“Because of the gap between the internal and external values of the mark, inflation initially boosted production, but eventually it had a disadvantaging effect, disorganizing and constraining production. It extinguished thrift, rendered national budget reform impossible for years, stymied the resolution of the Reparations issue, and obliterated incalculable moral and intellectual values. It sparked a major shift in social classes, with a few number of people amassing money and becoming a class of usurpers of national property, while millions of people were driven into poverty. It was a sad preoccupation and daily torment for countless families; it poisoned the German people by spreading a spirit of speculation throughout all classes and diverting them from good and regular labor; and it was the source of constant political and moral upheaval. It is understandable why the record of the tragic years 1919-1923 has always weighed heavily on the German people.”
These lines appeared in print for the first time in 1931. There’s only one thing I’d like to say. The demoralization caused by the debasement of the currency was a crucial factor in the election of Adolf Hitler in 1933.
Author’s NoteI owe most of the statistics and some of the other information in this article to two books: primarily, Costantino Bresciani-The Turroni’s Economics of Inflation (London: George Allen & Unwin, 1937), and partly, Frank D. Graham’s Exchange, Prices, and Production in Hyper-Inflation: Germany, 1920-1923. (Princeton University Press, 1930, and New York: Russell & Russell, 1967). The majority of the statistics used by these authors came from official sources.
Footnotes
2 Encounter, 1975, reprinted a lecture given in 1942. The money that retailers had received earlier in the day had lost 60% of its worth!
3 Unemployed workers qualifying for unemployment benefits are not included in the data, nor are part-time workers or personnel in public emergency projects. Prof. Gunther Schmlders was kind enough to provide these to me.
What effect did inflation have in Germany throughout the 1920s?
The hyperinflation made day-to-day life difficult for ordinary Germans, the majority of whom were factory workers. Even basic items like bread, meat, and coal to heat homes became impossible to come by due to the exponential price growth. The money you earned one day was frequently useless the next. There are countless tales of Germans hurrying to the bakery or store during their lunch breaks because waiting until the end of the day would result in their money depreciating so much that they would be unable to purchase the things they required. Banknotes that were previously extremely valuable were reduced to fractions of a Pfennig (penny), to the point where they were being used as wall paper or even toilet paper. In his novel Sturm auf Essen: Revolutionary Violence and Inflation, communist novelist Hans Marchwitza wrote on the revolutionary violence and inflationary time “After a loathed, cursed war, came a hated, cursed post-war.”
The period of hyperinflation lasted until 1924, when the conservative foreign minister Gustav Streseman’s coalition government introduced a new temporary currency (the Rentenmark), renegotiated debt repayments to the Allies through the Dawes Plan, and secured new American loans to finance government institutions.
The revolutionary years and hyperinflation are remembered today as one of the most turbulent eras in modern German history, and they continue to influence German fiscal policy. This economic instability is also associated with other forms of turmoil, such as the right-wing myth that the liberal revolutionary government was corrupt “The army was “stabbed in the back” by calling it home in November 1918, while it was supposedly undefeated; there was constant street violence between counter-revolutionaries, communists, and government security forces; and the Great Depression began in 1929. In the view of some Germans, these elements delegitimized the Weimar Republic and liberal-bourgeois democracy. They aided far-right forces, especially the Nationalsozialistische Deutsche Arbeiterpartei (NASDP), better known as the Nazi Party, which went on to win the 1933 elections.
What impact does hyperinflation have?
Due to increasing prices, hyperinflation causes consumers and businesses to require more money to purchase goods. Normal inflation is tracked in monthly price rises, whereas hyperinflation is recorded in exponential daily price increases that can range from 5% to 10% per day.
What caused Germany’s hyperinflation?
The economic whirlwind known as “hyperinflation,” which plagued Germany from 1921 to 1923, was one of the defining elements of early twentieth-century Europe and one of the contributing reasons to World War II. Although the brief period is sometimes forgotten in popular histories of the time, there is no doubting the process’s impact on Germany, Europe, and the world. The impacts of the later worldwide Great Depression were exacerbated in Germany as a result of the 1920s hyperinflation, which ultimately weakened the legitimacy of the Weimar government at least in the eyes of the German people.
The German people looked to organizations on the far right and left of the political spectrum for answers as the Weimar administration struggled to stabilize an economy that seemed to be spiraling out of control. Despite the fact that the painful process of hyperinflation was eventually ended by 1923, the damage had already been done to the Weimar administration, which was already on borrowed time at the time.
Historians and economists have studied Weimar official documents, private business data, and anecdotal sources like as letters in the almost century following Germany’s experience with hyperinflation to assess the breadth of the process and, ultimately, how it began. Scholars have discovered that Germany’s hyperinflation was a multifaceted process with a lot of causes contributing to its onset. Essentially, all of the factors that contributed to Germany’s hyperinflation may be divided into three categories: excessive paper money printing, the Weimar government’s failure to settle World War I obligations and reparations, and local and international political concerns.
How did Germany deal with the effects of inflation?
Stresemann collaborated on the economy with US Budget Director Charles Dawes. The German Reichsbank was restructured on Dawes’ recommendations, and the old money was summoned in and burnt. This brought the hyperinflation to a stop. The Dawes Plan, which granted Germany more time to pay reparations, was also devised by Dawes and Stresemann.
How did Germany deal with the hyperinflationary 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.
In Germany, who profited from hyperinflation?
Winners of hyperinflation Borrowers with mortgages, such as businessmen, landowners, and individuals with company loans, discovered that they could simply repay their loans with worthless money. People who worked for a living were reasonably protected because they had to re-negotiate their pay every day.
What was the impact of hyperinflation on German citizens?
Hyperinflation had a tremendous impact: people were paid by the hour and hastened to give money to loved ones so that it might be spent before the value had depreciated to the point where it was useless. Bartering exchanging something for something else without taking payment became popular. In Medieval times, bartering was very common!
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.