Hyperinflation crippled numerous economies in the 20th century and continues to do so to this day. One of the most severe, and the one that is perhaps the most recounted to this day occurred in Germany following its defeat in the First World War. That episode of hyperinflation, like all the others, was most directly caused by the excessive printing of money. Illustrating the extent of the excess, whereas the total face value of the currency in circulation in Germany before the war stood at six billion marks, by November 1923, a kilogram of butter alone cost over six trillion marks.
To stop the runaway prices, the German state introduced a new currency called the ‘rentenmark’. Though it succeeded in halting the hyperinflation, this was only possible given the renewed commitment to fiscal restraint and the reduced burden of Germany’s post-war reparations payments following a renegotiation of their terms. Nonetheless, the episode illustrates the importance of several institutional factors to the stability of any system of currency.
The root of the German hyperinflation dates to before the Treaty of Versailles. Indeed, while prior to the start of the First World War, the German mark was backed by gold, that arrangement ended when the gold standard was abandoned in 1914. The end of the monetary standard was intended to allow the mark to depreciate in the face of large wartime fiscal deficits. This was the approach employed by Germany to finance the war. The country relied on debt financing even more than other belligerent nations as its government did not introduce new taxes or meaningfully raise existing ones to reduce its wartime borrowing needs. During the war, the government did not even collect an income tax.
The unlinked mark became known as the ‘papiermark’, in contrast to its gold-backed predecessor, the ‘goldmark’. Enlarged military expenditures and the floating currency caused some inflation during the war years; prices doubled between 1914 and 1919. However, there were still more meaningful signs of a monetary breakdown. The uncertainty brought on by the war along with rising prices caused a hoarding of silver by the public which in turn led to shortages of coinage. Filling the void were ‘notgeld’, currencies issued by private banks and other institutions besides the Reichsbank, Germany’s central bank. This loosened grip on the currency proved to be a harbinger of future trouble.
However, the worst of the breakdown awaited in the future. Upon its defeat in the war, Germany was required to pay the Allies some fifty billion marks in reparations. Conscious of the inflation underway, the Allies required that the sum be paid in pre-war, gold-standard-era marks. Back then, one gram of gold had a value of just under three marks. At that valuation, there were twenty marks to the British pound and just over four to the US dollar. Thus, the reparations were for the equivalent of 570 million ounces of gold, 2.5 billion pounds sterling, or 12 billion US dollars.
It was immediately clear that this amount would be nearly impossible to pay but it didn’t help matters that the punitive fine coincided with a socialist revolution in Germany. Though the revolt was successfully put down, it damaged the state’s willingness to keep public expenses under control. In order to maintain order, food and fuel were subsidized, at high cost to the new Weimar Republic that replaced Imperial Germany.
Unable to pay the post-war reparations through the public budget, Germany made the payments by issuing papiermarks and using the proceeds to purchase hard currencies and commodities with which to meet its obligations. The country also liquidated some of the Reichsbank’s assets. In the process, the value of the mark fell in tandem with the new issuance and the depletion of the central bank’s reserves. For example, in the late summer of 1922, the Reichsbank’s assets stood at $220 million, equivalent to the foreign exchange value of the papiermarks in circulation but a far cry from their actual face value in terms of the old goldmarks.
Nonetheless, printing money at an accelerating rate caused the decline in the currency to always be one step ahead of inflation, enhancing exports and allowing Germany to run the current account surpluses with which to accumulate hard currency. However, despite this, inflation was never far behind. By August 1922, the mark had fallen to 3,000 to the British pound and 650 to the US dollar. Attempts to postpone the reparations payments were unsuccessful in the face of French insistence that the sum be paid in its entirety.
Cuno and Stresemann
No doubt adding to the volatility of the situation was the changing political leadership of the country. In November 1922, a technocratic government was established by incoming Chancellor, Wilhelm Cuno. Many hoped that Cuno, the former head of the Hamburg America Line, and his cabinet of economists, would bring fiscal discipline and successfully sort out the government’s perilous financial condition. However, he still had to contend with annual reparations payments of two billion marks, roughly 10% of German GDP and exceeding the sum of the entire country’s annual pre-war public sector spending. By year-end 1922, the foreign exchange rate was nearly 30,000 marks to the pound and circumstances were only going to get worse before they improved.
Most critically, Cuno was unable to renegotiate the indemnity required under the Treaty of Versailles and Germany fell behind on payment of reparations that winter. In response, the Ruhr, Germany’s largest industrial region along the Rhine, was seized by France and Belgium in January 1923. The occupation led to general strikes as a form of passive resistance by German workers in the region. Unbelievably, these strikes were financed by the broke German state, putting even further strain on its finances, forcing further printing of money, and accelerating inflation still further. Rapidly rising prices were also breaking down the state’s ability to collect taxes as levies on incomes and tariffs on trade were based on out-of-date wages and prices. The fiscal situation was in meltdown as the public sector deficit ballooned to 22% of GDP.
Following a vote of no-confidence, Cuno was replaced by Gustav Stresemann, who became Chancellor in August 1923. Unlike Cuno, Stresemann was prepared to take on the hefty reparations payments as best the German economy would allow. His government cut state spending, causing 700,000 state employees to lose their jobs and called off the general strike in the Ruhr. This was contentious as unemployment rose from around 10% at the time of his spending cuts to over 28% by year-end 1923. In addition to the cuts, taxes were raised. However, these policies did little to stop the spiraling inflation which amounted to a 20% daily rise in the price level by the autumn of 1923, a doubling of prices every four days.
It was a fantastical scene; coins were being minted with denominations of one-trillion marks. Some banknotes had one-hundred-trillion-mark denominations. This was the peak of Germany’s hyperinflation and society adapted by intriguing means. First, workers insisted on being paid in the morning rather than in the afternoon since the latter would amount to a hefty pay cut. They would arrange for their spouses to meet them at pay time so they could hurry off and spend the money before its purchasing power diminished. Some workers were paid twice a day. There were even stories of men ordering their coffees two at a time for fear prices would rise if they ordered their second only after finishing the first. These cases aside, one of the more significant adaptations and one that would help bring an end to the inflation was the indexing of more and more transactions to changes in the price level.
In the summer of 1923, a German economist proposed a new national currency, called the ‘roggenmark’, which would be linked to the price of grain. This idea was inspired by the growing popularity of inflation-linked financial instruments. The previous year, a private bank was founded, called the Roggenrentebank, which issued notes denominated in pounds of rye. Several German cities, including Berlin and Dresden, and private entities as well were already issuing loans denominated in units of grain.
As an example, a bank in Oldenburg issued bonds priced at the equivalent of 125 kgs of rye in June 1923 to be repaid in four years at the equivalent of 150 kgs of rye, for a yield of just over 4.5% in rye. This practice utilized other commodities too; the city of Hannover issued a loan indexed to the price of wheat and other such commodity-linked loans were indexed to coal and potash prices. The roggenmark would simply be the extension of these commodity-linked loans into a banknote form.
The idea may have seemed absurd but conditions were requiring immediate action by the government. For one, farmers were refusing to accept paper money for their crops following the harvests of 1923. However, a return to the gold standard was untenable given the scarcity of reserves and the roggenmark idea did not catch on. Nonetheless, a change had to occur and the abandonment of the papiermark by the Reichsbank began that November. It would be replaced by what amounted to a new currency, the ‘rentenmark’, fixed to the pre-war valuation of the German mark at 4.2 to the US dollar.
This new currency was to be linked to gold but not directly backed by it. That is to say, it would not be convertible into the precious metal but the state would attempt to maintain its value in terms of gold. Actually backing the notes was a portfolio of 3.2 billion goldmarks worth of mortgages, called ‘rentenbriefes’, and other bonds held by the newly established Deutsche Rentenbank. These underlying loans were linked to gold, much like the commodity-linked loans that inspired the roggenmark idea. Further, issuance of rentenmarks was strictly limited. This inspired enough confidence that the protesting farmers began to accept it as a new currency.
The rentenmark was the idea of Hans Luther, Germany’s Finance Minister under Stresemann, and a German banker named Hjalmar Schacht. However, as originally conceived, it was not intended to be legal tender itself. Rather, the rentenmark was convertible into one-trillion papiermarks and vice versa. The idea was that it would arrest the hyperinflation by fixing the papiermark to something of more tangible value but leave the papiermark the actual circulating currency. However, very quickly the rentenmark took that roll. The novelty of buying an item for something less than a billion marks was too enticing to pass up.
“I remember 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.” – Frau Barten of East Prussia
While the rentenmark abruptly ended the hyperinflation. The end for the papiermark didn’t officially come until 1924, when it was replaced by the new reichsmark. That year, the Dawes Plan reduced Germany’s reparations payments to one billion marks annually, from two billion previously. Together, the new currency and the reduced reparations payments created the confidence in the German economy necessary to allow the government to return to debt markets. No longer would the state have to print money to fund fiscal deficits and this allowed for a strong economic recovery. To highlight just one aspect of the rapid improvement, unemployment, which had peaked at the end of 1923 at over 28% of the labor force fell almost as fast as it had previously risen, returning to under 10% by mid-1924.
Some may argue that Germany’s hyperinflation proved the efficacy of the gold standard in maintaining stable prices. However, nations have abandoned monetary standards on numerous occasions before and since and only rarely has hyperinflation been the result. Indeed, it seems there is nothing holding governments to a monetary standard other than their own willingness. Even under a gold standard, a government can simply adjust the peg to gold on a daily basis; any monetary restraint is only as good as the state’s commitment to it. In the end, Germany was able to arrest its hyperinflation without returning to a gold standard. Fiscal restraint, functioning debt markets, and a new commitment to monetary stability proved sufficient defenses against inflation, ones that have served Germany well in the century since.
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1. Fortune, Peter. “The Weimar Hyperinflation: Germany after World War I.” 2015.
2. Franco, Gustavo H. B. “The Rentenmark ‘Miracle’ and the German Stabilization.” Hyperinflations The Experience of the 1920s Reconsidered, 1989, pp. 241–273.
3. Goodman, George J. W. “Paper Money.” G.K. Hall, 1981, pp. 57–62.
4. Hetzel, Robert L. “German Monetary History in the First Half of the Twentieth Century.” Federal Reserve Bank of Richmond Economic Quarterly, vol. 88, no. 1, 2002.