Hyperinflation in the Weimar Republic
affected the German Papiermark, the currency of the Weimar Republic, between 1921 and 1923, primarily in 1923. The German currency had seen significant inflation during the First World War due to the way in which the German government funded its war effort through borrowing, with debts of 156 billion marks by 1918. This national debt was substantially increased by 50 billion marks of reparations payable in cash and in-kind under the May 1921 London Schedule of Payments agreed after the Versailles treaty.
This inflation continued into the post-war period, particularly when in August 1921 the German central bank began buying hard cash with paper currency at any price, which they claimed was to pay reparations in hard cash, though little in the way of cash reparations payments were made until 1924. The currency stabilised in early 1922, but then hyperinflation took off: the exchange value of the mark fell from 320 marks per dollar in mid 1922 to 7,400 marks per US dollar by December 1922. This hyperinflation continued into 1923, and by November 1923, one US dollar was worth 4,210,500,000,000 marks. Various measures were introduced by German authorities to address this, including a new currency called the Rentenmark, backed by mortgage bonds, later itself replaced by the Reichsmark, and the blocking of the national bank from printing further paper currency.
By 1924 the currency had stabilised and German reparations payments began again under the Dawes Plan. As the catastrophic fall in the value of the mark had effectively wiped out debts owed, some debts were revalued so that the lenders could recoup some of their money.
Hyperinflation caused considerable internal political instability in the country. Historians and economists are divided on the causes of this hyperinflation, particularly the extent to which it was caused by reparations payments.
Background
Inflation during the First World War
To pay for the large costs of the First World War, Germany suspended the gold standard when the war broke out in 1914. Unlike France, which imposed its first income tax to pay for the war, German Emperor Wilhelm II and the Reichstag decided unanimously to fund the war entirely by borrowing rather than risk angering the public with new taxes.This decision was based on the assumption that Germany would easily win the war, allowing it to impose 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. However, the exchange rate of the mark against the US dollar steadily devalued from 4.2 to 7.9 marks per dollar between 1914 and 1918, a preliminary warning of 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: the national debt stood at 156 billion marks in 1918. The debt problem was exacerbated by the new government being forced to print money without any economic resources to back it.
John Maynard Keynes characterised the inflationary policies of various wartime governments in his 1919 book The Economic Consequences of the Peace as follows:
Inflation immediately after the First World War
The value of the German currency continued to fall in the immediate aftermath of the war. By late 1919, the German government had signed the Treaty of Versailles, which included an agreement to pay substantial reparations to the Allied powers both in hard cash and in in-kind shipments of goods such as coal and timber. By then, 48 paper marks were required to buy a US dollar. In May 1921 the amount to be paid by the Central Powers as a whole was fixed at 132 billion gold marks under the London Schedule of payments which set quarterly deadlines for payments. Of this, 50 billion gold marks was listed in A and B bonds payable under the quarterly deadlines in the schedule; the remaining sum, about 82 billion gold marks, was listed as C bonds that were somewhat hypothetical and not payable under the schedule but instead left to an undefined future date, with the Germans being informed that they realistically would not have to pay them.The German currency was relatively stable at about 90 marks per dollar during the first half of 1921. Because the Western Front of the war had been mostly fought in France and Belgium, Germany came out of the war with most of its industrial infrastructure intact, leaving it in a better place economically than neighbouring France and Belgium.
The first payment of one billion gold marks was made when it came due in June 1921. At this point, customs posts in the west of Germany were occupied by Allied officials, so that the schedule of payments could be enforced. However, following the first payment the Allied officials were withdrawn from everywhere but Düsseldorf, and whilst some payments in kind continued, only small cash payments were subsequently made for the remainder of 1921–22.
From August 1921, the president of the Reichsbank, Rudolf Havenstein, began a strategy of buying foreign currency with marks at any price, without any regard for inflation, and it only increased the speed of the collapse in value of the mark. German officials claimed this was in order to make cash payments owed to the Allies using foreign currency. British and French experts stated that this was in an effort to ruin the German currency and, as well as escaping the need for budgetary reform, avoid paying reparations altogether, a claim supported by Reich Chancellery records showing that delaying the currency and budgetary reform that could have addressed hyperinflation was seen as advantageous. Whilst ruinous to the economy and politically destabilising, hyperinflation had advantageous aspects for the German government as, although the war reparations were not listed in paper currency, domestic debts owed from the war were listed, meaning that inflation greatly reduced this debt relative to revenues.
In the first half of 1922, the mark stabilized at about 320 marks per dollar. International conferences were 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 was 41 in June 1922 and 685 in December, a nearly 17-fold increase.
After Germany failed for the thirty-fourth time in thirty-six months to pay an installment of in-kind reparations of coal, in January 1923 French and Belgian troops occupied the Ruhr valley, Germany's main industrial region. 900 million gold marks of reparations were ultimately secured this way.
The German government's response was to order a policy of passive resistance in the Ruhr, with workers being told to do nothing which helped the French and Belgians in any way. While this policy, in practice, amounted to a general strike 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 billion marks by late 1923.By November 1923, one US dollar was worth 4.2105 trillion German marks.
Stabilisation
German monetary economics was at that time heavily influenced by Chartalism and the German Historical School, which conditioned the way the hyperinflation was analysed. 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", to be backed by mortgage bonds indexed to the market price 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, 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 decrees on 13–15 October 1923. A new bank, the Rentenbank, was set up by Hans Luther when he became Finance Minister.
During the final stages of hyperinflation, widespread loss of confidence in the mark led people to use alternative forms of exchange. Among these were commodity-based monies, such as a cigarette-based currency. Cigarettes, due to being easily divisible and internationally acceptable, bought goods that paper marks could not. Although never formally declared as legal tender, cigarettes became widely accepted as a medium of exchange. Cigarettes began to be widely viewed as "good money" while the depreciating Reichsmark was seen as "bad money," partially reversing Gresham's law. People also held coins and other tangible goods in anticipation of a currency reform.
After 12 November 1923, when Hjalmar Schacht became currency commissioner, Germany's central bank 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.
On 16 November 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, died on 20 November 1923, Schacht was appointed to replace him. By 30 November 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 in July 1924 and continued to fall in value to a third of their conversion value in Rentenmarks.
On 30 August 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.