German Hyperinflation

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The German hyperinflation of the early 1920s stands as a constant reminder of the monetary insanity lurking beneath the surface of modern systems of money and banking. The German money supply grew during and after World War I. In June 1914 the German marks in circulation stood at 6,323 million, but by December 1918 the number of marks in circulation had grown to 33,106 million. Prices over the same time span more than doubled. Germany had financed the war largely by monetizing government debt rather than raising taxes or borrowing in capital markets.

After the armistice in 1918 German marks in circulation continued to expand and by December 1921 German currency in circulation stood at 122,963 million marks. Prices then were slightly over 13 times the 1914 level. Prices now began to catch up with money growth. By June 1922 German marks in circulation had risen to 180,716 million, but prices were now over 70 times the 1914 level. The Reichsbanks abandoned all pretense of monetary control as marks in circulation rose to 1,295,228 million by December 1922. By June 1923 the number had increased to 17,393,000 million.

After June 1922 price increases broke into runaway inflation. By December 1922 prices stood at 1,475 times their 1914 level, and prices stood 19,985 times their 1914 level by June 1923. Prices were rising so fast that workers were paid at half-day intervals and rushed to spend their wages before they lost their value. Customers at restaurants would negotiate prices in advance because prices could change before the meal was served. Grocery shoppers rolled to the store wheelbarrows laden with sacks of money, which was also balled up and used for fuel. Prices continued to rise into November 1923. A newspaper that sold for 1 mark in May 1922 rose in price to 1,000 marks in September 1923. By 17 November 1923 the same newspaper sold for 70 million marks.

In December 1923 the money supply and prices stabilized. The German government reformed its monetary affairs, issuing a new unit of currency called the rentenmark, equal to 1 trillion marks. The new currency was issued by the Rentenbank, which replaced the Reichsbank as the note-issuing bank. The only asset of the new bank was a mortgage on agricultural and industrial land, and the paper money issue of the new bank was strictly limited.

The inflation began with the stress of wartime finance. After World War I Germany needed to restock its warehouses with imported raw materials and pay war reparations. This led to an outflow of German marks and a depreciation of the German mark in foreign exchange markets. This depreciation caused inflation in the prices of imports, and the inflation spread to the rest of the economy. The Reichsbank kept the money supply rising faster than prices to ward off unemployment. The French occupation of the Ruhr aggravated the matter considerably. The German government encouraged passive resistance, banned reparation payments, and printed money to pay striking miners. The French blockaded the area and Germany lost the tax revenue.

The German experience with hyperinflation was the most spectacular the world had seen. Since World War II Germany can boast of one of the best records for controlling inflation of any advanced industrialized country. In the book Economic Consequences of Peace (1920) John M. Keynes saw the inflation trends and commented:

By a continuing process of inflation, the governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. While the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.

Many observers blame the episode of German hyperinflation for creating the political conditions that led to the rise to power of Hitler. Partly because of the German experience, modern societies consider price stability an important ingredient of social stability.