Hyperinflation: The Monster Your Kids See Under The Bed

Berlin, August 11, 1922: One of the comedy-tragedy episodes of the visit of the Committee of Guarantees to Berlin was the payment by the German Government of their railway expenses, including their special car, which waited here six weeks. This was done in 20-mark notes, and it required seven office boys with huge waste-paper-baskets full of these notes to carry the full sum from the office down to the railway station . . . .

-- Lord D'Albernon, 'An Ambassador of Peace'

When the value of a currency decreases extremely rapidly, it is called hyperinflation.

During and after World War I, Germans discovered that poverty doesn't end when poor people have handfuls of money stashed under the bed. Inflation takes care of that.

It all began at the dawn of World War I with the German Government's management of the war chest. The Reichsbank, the Central Bank of Germany, was allowed to "suspend the rights of an individual to convert banknotes to gold, and ... use government and commercial paper as part of the reserves it was required to hold against newly issued notes." (usagold.com). This was, in effect, spitting in the eye of the gold standard. This is important. It means that when the mark falters, the Government has nothing to support it with.

At the conclusion of World War I, Germany slid into an era of turmoil. The German economy was in tatters after years of warfare and economic sanctions. When war broke out in 1914, the German mark was valued at US$1 to 4 marks. By the end of the war, the ratio was US 1:18 marks and sliding. For those with a less economic bent, let us use the Loaf of Bread Index, where at the current time, one loaf of bread was worth 0.63 German marks:

1918
Loaf of Bread Index: 0.63 marks.

The Weimar Government was conceived in 1918, and the Allies forced it to to concede to the crippling Treaty of Versailles. Among the clauses of the treaty was a demand for reparations to the victors; Britain and France wanted to rebuild their nations and needed to repay their loans to the USA. The total figure was not determined at the time that the Weimar Government was forced to sign the treaty; instead, a committee was created to determine the amount.

January 1921
Loaf of Bread Index: 10 marks.

The reparations figure arrived in May 1921: £6,600,000,000 or 132,000,000,000* German marks. Germany was to pay reparations until 1987. For awhile there, it looked as though she was going to make it. In 1921, Germany almost managed to pay her entire first installment of £2 billion. Almost; and for a time, that was enough.

January 1922
Loaf of Bread Index: 163 marks.

Afraid of a backlash at the polling booth, taxes were never raised, and never exceeded 35% of expenditure. But spending was never cut, because reducing services would anger the voters. So the Government's income remained at the bare necessary minimum. There wasn't a mark to spare.

February 1922
Loaf of Bread Index: 250 marks.

Consumers began to realise that something was amiss and tried to withdraw their banknotes as gold, only to realise that they weren't allowed. Everything that had hitherto happened continued to happen, only a lot more prominently.

July 1922
Loaf of Bread Index: 3,465 marks.

By December 1922, Germany could not afford the crippling reparations repayments; she was due to pay coal and timber to France that she simply didn't have. When you default on a car payment, you risk getting your car repossessed; when you default on a reparations payment, your country gets repossessed. France, supported by Belgium and Italy, used Germany's non-compliance as an excuse to occupy the German territory of the Ruhr.

The Ruhr, to the west of the Rhine, was Germany's industrial centre. Metal factories (mainly iron and steel), coal mines and railways were all maintained in the area. When France occupied the Ruhr, Germany lost its ability to manufacture anything: its factories came under French control. Without factories, Germany lost its primary source of trade and income. Residents of the Rhine were forced out of their homes or imprisoned. Thousands of workers became unemployed and homeless.

Meanwhile, the mark slid to $US1 to 8,000 marks.

Germany reacted to the occupation of the Ruhr with indignation, and called for passive resistance against France. Workers in the industrial area immediately went on strike. France and Belgium responded by cutting economic ties with Germany. Several economic superpowers realised that Germany could not afford to repay its debts. Foreign loans were called in and foreign investments were cancelled.

What was the Treasury doing? The German Treasury attempted to combat the crisis by maintaining four minting presses that operated twenty-four hours a day, seven days a week. (Kids, don't try this at home.) As the amount of money in circulation increased, the value decreased. Rapidly.

The height to which prices have climbed may be shown by the fact that as of February 15 1923, wholesale prices have risen on average 5967 times the peacetime level, those of foodstuffs to 4902 times, and those for industrial products 7958 times.

-- Franz Bumm of the Reich Department of Health, quoted in F. K. Ringer, 'The German Inflation of 1923'

September 1923
Loaf of Bread Index: 1,500,000 marks.

The value of the mark plummeted. When single mark notes became worthless, the Treasury minted 200 mark coins, then 1,000 cloth notes, then 20,000 mark bonds, and these became worthless too. "By the end of the 1923 hyperinflation," said historian Jonathan Tennenbaum, "the total nominal national debt of Weimar Germany was worth the equivalent of a few pennies or less." Got any spare change? I just need to fix the national debt.

November 1923
Loaf of Bread Index: 200,000,000,000 marks.

At November 1923, the height of the crisis, one American dollar was worth roughly 4,200,000,000,000* marks.

The horror stories about this hyperinflationary period are true. Menus in restaurants bore no prices because the currency fluctuated so rapidly that a meal could triple in value between ordering it and and paying for it. Paper currency was used to keep fires because the bulk of the currency was greater than the wood that it bought. If our sense of the culinary was higher at the time, we might have made pesto out of it.

May I give you some recollections of my own situation at that time? As soon as I received my salary I rushed out to buy the daily necessitities. My salary . . . was just enough to buy one loaf of bread and a small piece of cheese or oatmeal. On one occasion I had to refuse to give a lecture at a Berlin city college because I could not be assured that the fee would cover the subway fare to the classroom, and it was too far to walk. On another occasion, a private lesson I gave to the wife of a farmer was somewhat better paid - by one loaf of bread for the hour.

An acquaintance of mine, a clergyman, came to Berlin from a suburb with his monthly salary to buy a pair of shoes for his baby; he could only buy a cup of coffee.

-- Dr Frieda Wunderlick, in G. Bry, Wages in Germany 1871 - 1945

Fixing Hyperinflation; or How I Stopped Worrying...

Gustav Stresemann, a man of vision and great intelligence, repaired Germany's problems in 1924. Stresemann became the Chancellor of Germany in 1924. He began by sending the workers of the Ruhr back to work in order to kick-start industrial production. He re-evaluated the German currency by abolishing the mark and introducing a new currency known as the Rentenmark; one Rentenmark was worth 1,000,000,000,000* marks. He stopped mass currency production and encouraged foreign investment.

Stresemann also helped to develop the Treaty of Locarno, the Young Plan and the Dawes Plan; together, these plans reduced Germany's reparations debt and reduced the pressure placed on Germany by the Treaty of Versailles. He also successfully campaigned to bring Germany into the League of Nations.

Stresemann's strong leadership and clear-headed economic thinking led Germany into a brief but shining golden era that lasted until his death in October 1929, the same month that the Great Depression began. (Coincidence? I think not.)

1924
Loaf of Bread Index: 0.5 Rentenmarks.


* Due to the differences between the European and North American definitions of billion and trillion, I have quote large numbers in terms of 000's. Names for large numbers have never been so much fun!

Log in or register to write something here or to contact authors.