From Princes to Paupers: The German Hyperinflation

The German hyperinflation of the early 1920s was not the first such instance of hyperinflation in the world, nor would it be the worst example of an out-of-control economy to occur; it has been, however, perhaps the most studied instance of hyperinflation, if only due to the international scope of Germany's affairs.

In 1914, just before the start of the Great War, the German mark traded at a value of four marks to one U.S. dollar, a rate roughly similar to the exchange rates of the British shilling, French franc, and Italian lira.[1] With a booming industrial economy, Germany was poised for economic prosperity. However, the start of the Great War changed many things. Anticipating a short war, Germany announced that it would fund its military efforts solely through borrowed funds, rather than increased taxation.[2] While war loans can be used as the sole source of funding for such operations, they rely on the borrowing nation to win the war and be able to impose reparation payments on its defeated foes. By the end of World War I, the German mark was trading at fourteen marks to the U.S. dollar as a result of Germany's borrowing.[3]

Many of Germany's post-war economic woes can be attributed to Germany's overestimation of her own military power. Had Germany won the First World War, it would have been able to impose reparations payments on its defeated foes and used those payments to deal with its internal debt. An overconfident anticipation of victory, coupled with the belief of some German economists that an economic decline that occurred in 1913 heralded the start of a depression cycle, fueled Germany's choice to favor war loans over increased taxation.[4]

Unfortunately for Germany, her military plans failed and 1919 left her facing the combined burden of paying the extensive reparations called for in the Treaty of Versailles as well as an overwhelming internal debt of over 51 billion marks.[5] These burdens were only amplified by the confiscation of "thirteen percent of territory...rich in agricultural and mineral resources"[6] and "74.5 percent of its iron ore, 68.1 percent of its zinc ore, and 26 percent of its coal production."[7] Lacking the political strength to raise taxes to the level needed to meet demands,[8] the Reichstag instead continued printing more and more money, an act that only accelerated the inflation. Some historians suggest this might have been an effort on the part of the Reichstag to undermine the reparations process.[9] Others suggest that the Germans made no actions towards curbing inflation because it staved off unemployment. The Reichstag and German industrialists feared severe unemployment might lead to a Communist takeover of the government.[10]

The extent of Germany's hyperinflation is best presented in examples of the increased prices. A twenty-year insurance policy purchased in 1903 was cashed in and the recipient used it to buy a loaf of bread.[11] An American visitor tipped Leopold Ullstein's[12] cook one dollar: a trust fund was set up in the cook's name and a bank chosen to invest the dollar. At the height of the inflation, workers were paid several times a day and, frantically trying to beat the devaluation of their earnings, workers would rush shops, buying anything they could afford.[13] The hyperinflation snowballed, with the mark's value dropping faster and fast. Karl Hardach sums it up:

It took about five and one-half years from the beginning of the war for the mark to fall to about one-tenth of its prewar value; the next decrease to one-tenth took only two and one-half years; the following one only 108 days; while in October 1923 the mark was down to ten percent of the value of the previous period every 8 to 11 days.[14]

Once the mark hit its peak in 1923, a thousand billion marks to the dollar and more[15], Germany quickly devolved into a junk economy. Barter became the norm as Germany's citizens traded "a pair of shoes for a shirt, some crockery for coffee."[16]

Interestingly, the hyperinflation affected some groups of the Germany population worse than others. Worst hit were those on fixed incomes: widows[17], orphans, and those with money invested in government bonds and savings deposits found that their assets had dissolved into nothing.[18] On the other hand, those citizens who had the foresight to invest money in loans during the early phases of inflation generally prospered. Farmers, for example, used the period to expand their farms with large land-purchases.[19] Businessmen also prospered, using the opportunity to expand their factories with large purchases of new equipment. Hugo Stinnes was one example: the inflation allowed him to "expand and diversify his holdings until he became one of the most powerful men in Germany."[20]

As quickly as the German hyperinflation progressed, the speed with which it ended is particularly impressive. In November 1923, the German mark was beyond hope of recovery, and many believed the easiest way to rectify the situation was to establish a new currency. This currency, called the Rentenmark, was spear-headed by Hjalmar Schacht, the new president of the Reichsbank, and was essentially worthless: it was backed by mortgages on land and factories, but since these commodities could not be "turned into cash or used abroad," the Rentenmark had no real value.[21] Many scholars chalk the success of the Rentenmark up to the sheer desperation of the German people: because the population believed in it, it was accepted by shopkeepers and established a new baseline for prices. Many Germans were excited by the new mark:

"I remember," said one Frau Barten of East Prussia, "the feeling of having just one Rentenmark to spend. I bought a small tin bread bin. Just to buy something that had a price tag for one mark was so exciting."[22]

In addition to the revised currency, stabilization of the German economy came about through the negotiation of the Dawes Plan, named after General Charles C. Dawes. The Dawes Plan offered an "immediate loan of 800 million gold marks"[23] and aimed to resume reparations payments by fixing "annual payments...of a size within the Reich's capacity to pay."[24] The plan, however, removed the Reichsbank and German railways from German control and an American-led Reparations Commission was set up to ensure that payments were made.[25] The plan was, for the most part, a success and by 1927, Germany "was producing at pre-war rates"[26] and by 1929, its production values were surpassed only by the United States.[27] The Dawes Plan was likewise beneficial for America and provided large amounts of revenue for the growing American economy; as German resumed reparation payments, the French and British were able to pay back their debts to American creditors and as the Germans were still required to pay back the money provided by the Plan, American revenues increased substantially.

Despite the swift recovery of the Germany economy, the hyperinflation would deeply affect the German population, such that "the mere mention of inflation in Germany more than seventy years later can topple ministers and raise public alarm."[28] The bitterness and confusion of the hyperinflation left many citizens searching for someone to blame, and the fledgling Nazi party provided the Jewish community as a scapegoat, claiming "speculators who were part of a 'Jewish plot'" were behind Germany's economic woes.[29] Though the attempted Nazi takeover in 1923 would fail, they would be legally elected to 32 seats during the next election year. The Nationalist party, also promising "vengeance on the conspirators," won 106 seats.[30] The actions of these right-wing parties only reinforced the latent anti-Semitism hidden in the German middle-class.

The period of hyperinflation in Germany was short, but powerful. Though some members of the population fared well, most of Germany found the economic prosperity enjoyed by their nation before the War had crumbled into nothingness. Once a prince among industrial nations, the hyperinflation would reduce Germany to a pauper state until the American intervention of the Dawes Plan.

[1] Smith, Adam. Paper Money (New York: Summit Books, 1981), 57.

[2] Bookbinder, Paul. Weimar Germany: The Republic of The Reasonable (Manchester and New York: Manchester University Press, 1996), 162.

[3] Childs, David. Germany Since 1918. (New York: Harper & Row, Publishers, 1970), 29.

[4] Bookbinder, Weimar Germany, 163.

[5] Bookbinder, Weimar Germany, 163.

[6] Bookbinder, Weimar Germany, 164.

[7] Bookbinder, Weimar Germany, 164-165.

[8] Bookbinder, Weimar Germany, 163.

[9] Kolb, Eberhard. The Weimar Republic (London: Unwin Hyman, 1984), 41.

[10] Smith, Paper Money, 59.

[11] Smith, Paper Money, 57.

[12] Smith, Paper Money, 57.

[13] Smith, Paper Money, 59-60.

[14] Hardach, Karl. The Political Economy of Germany in the Twentieth Century (Berkeley/Los Angeles/London: University of California Press, 1976.), 19-20.

[15] Smith, Paper Money, 60.

[16] Smith, Paper Money, 60.

[17] Smith, Paper Money, 62.

[18] Bookbinder, Weimar Germany, 168.

[19] Bookbinder, Weimar Germany, 167.

[20] Childs, Germany Since, 30.

[21] Smith, Paper Money, 61.

[22] Smith, Paper Money, 61.

[23] Childs, Germany Since, 30.

[24] Childs, Germany Since, 30.

[25] Childs, Germany Since, 30.

[26] Bookbinder, Weimar Germany, 169.

[27] Bookbinder, Weimar Germany, 169.

[28] Bookbinder, Weimar Germany, 168.

[29] Bookbinder, Weimar Germany, 170.

[30] Smith, Paper Money, 62.