Hyperinflation in the Weimar Republic

Inflation during the First World War To pay for the large costs of the First World War, Germany suspended the gold standard (the convertibility of its currency to gold) 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. The meetings produced no workable solution, and inflation erupted into hyperinflation, the mark falling to 7,400 marks per US dollar by December 1922. ==Hyperinflation==

paper marks per gold mark; values on logarithmic scale. A loaf of bread in Berlin that cost around 160 marks at the end of 1922 cost 200 billion marks by late 1923. File:50000 mark aachen.jpg|50,000 marks, Aachen, 1923 File:500000 Mark Leipzig 1923 front.jpg|500,000 marks, Leipzig, 1923 File:5milmkbk.jpg|A 5 Million Mark coin, Westphalia, 1923 File:DAN-23-Danzig-5MIL Mark (1923).jpg|50,000 marks, Danzig, 1923 File:Notgeld trier 50 millionen mark.jpg|50,000,000 marks, Trier, 1923 File:500000000MarkDresdenAltstadt.jpg|500,000,000 marks, Dresden, 1923 File:GER-115-Reichsbanknote-5 Billion Mark (1923).jpg|5 billion marks, Berlin, 1923 File:50000000000Plauen1923.jpg|50 billion marks, Plauen, 1923 File:GER-127a-Reichsbanknote-500 Billion Mark (1923).jpg|500 billion (500 Milliarden) marks, Berlin, 1923 File:Fem biljoner Mark.jpg|5 trillion marks, Stuttgart, 1923 File:50 Billionen Mark Stolberg Eschweiler 001.jpg|50 trillion marks Eschweiler, 1923 File:5markcounterstamppostWWI.png|Aachen, 1,000,000 mark сounterstamp on 5 mark coin ==Stabilization==

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" ("rye mark"), 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 ("mortgage mark"), 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. 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 (1,200,000,000,000,000,000,000) in July 1924 and continued to fall in value to a third of their conversion value in Rentenmarks. By 1924 one dollar was equivalent to 4.2 Rentenmark. ==Revaluation==

Eventually, some debts were reinstated to compensate creditors partially for the catastrophic reduction in the value of debts that had been quoted in paper marks before the hyperinflation. A decree of 1925 reinstated some mortgages at 25% of face value in the new currency, effectively 25,000,000,000 times their value in the old paper marks, if they had been held for at least five years. Similarly, some government bonds were reinstated at 2.5% of face value, to be paid after reparations were paid. Mortgage debt was reinstated at much higher rates than government bonds were. The reinstatement of some debts and a resumption of effective taxation in a still-devastated economy triggered a wave of corporate bankruptcies. One of the important issues of the stabilization of a hyperinflation is the revaluation. The term normally refers to the raising of the exchange rate of one national currency against other currencies. As well, it can mean revalorization, the restoration of the value of a currency depreciated by inflation. The German government had the choice of a revaluation law to finish the hyperinflation quickly or of allowing sprawling and the political and violent disturbances on the streets. The government argued in detail that the interests of creditors and debtors had to be fair and balanced. Neither the living standard price index nor the share price index was judged as relevant. The calculation of the conversion relation was considerably judged to the dollar index as well as to the wholesale price index. In principle, the German government followed the line of market-oriented reasoning that the dollar index and the wholesale price index would roughly indicate the true price level in general over the period of high inflation and hyperinflation. In addition, the revaluation was bound on the exchange rate mark and United States dollar to obtain the value of the Goldmark. Finally, the Law on the Revaluation of Mortgages and other Claims of 16 July 1925 (' or ') included only the ratio of the paper mark to the gold mark for the period from 1 January 1918, to 30 November 1923, and the following days. The galloping inflation thus caused the end of a principle, "a mark is worth a mark", which had been recognized, the nominal value principle. The law was challenged in the Supreme Court of the German Reich (''''), but its 5th Senate ruled, on 4 November 1925, that the law was constitutional, even according to the Bill of Rights and Duties of Germans (Articles 109, 134, 152 and 153 of the Constitution). The case set a precedent for judicial review in German jurisprudence. ==Causes==

Historians and economists differ over the causes of the German hyperinflation, particularly on the subject of whether it was caused by reparations payments. The Treaty of Versailles had imposed an undefined debt on Germany, which the London Schedule of Payments agreed in May 1921 had determined to be essentially 50 billion marks in A and B bonds payable partly in-kind with goods like coal and timber, and partly in gold and hard-cash. From June 1921, when a single payment of 1 billion gold marks was paid (roughly 1.4% of Germany's nominal 1925 GNP), until the agreement of the Dawes plan in late 1924, only relatively small cash payments were made by Germany, though partial in-kind payments continued. For example, of the 300 million gold marks due under a variable annuity in November 1921, only 13 million was paid, and of the roughly 3 billion gold marks total due under payments in 1922, only 435 million were paid in cash. The government and the banks had two unacceptable alternatives. If they stopped inflation, there would be immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order, insurrection and possibly even revolution. If they continued the inflation, they would default on their foreign debt. However, attempting to avoid both unemployment and insolvency ultimately failed when Germany had both. ==Aftermath and legacy==

The hyperinflation episode in the Weimar Republic in the early 1920s was not the first or even the most severe instance of inflation in history. However, it has been the subject of the most scholarly economic analysis and debate. The hyperinflation drew significant interest, as many of the dramatic and unusual economic behaviors now associated with hyperinflation were first documented systematically: exponential increases in prices and interest rates, redenomination of the currency, consumer flight from cash to hard assets and the rapid expansion of industries that produced those assets. Since the hyperinflation, German monetary policy has retained a central concern with the maintenance of a sound currency, a concern that had an effect on the Euro area crisis. According to one study, many Germans conflate hyperinflation in the Weimar Republic with the Great Depression, seeing the two separate events as one big economic crisis that encompassed both rapidly rising prices and mass unemployment. The hyperinflated, worthless marks became widely collected abroad. The Los Angeles Times estimated in 1924 that more of the decommissioned notes were spread about the US than existed in Germany. Firms responded to the crisis by focusing on those elements of their information systems they identified as essential to continuing operations. In the beginning the focus was on adjusting sales and procurement arrangements, modifications to financial reporting, and the use of more nonmonetary information in internal reporting. With the continuous acceleration of inflation, human resources were redeployed to the most critical corporate functions, in particular those involved in the remuneration of labor. There is evidence that some parts of corporate accounting systems fell into disrepair, but there was also innovation. == See also ==

• • • • Costantino Bresciani-Turroni, The Economics of Inflation (English transl.), Northampton, England: Augustus Kelly Publishers, 1937, on the German 1919–1923 inflation. * • • • • • Guttmann, William. The Great Inflation. Saxon House (1975 hardback w/ sources; ) or Gordon & Cremonesi Ltd. Publ., London (1976 paperback w/o sources; ). Germany currency hyperinflation 1919–1923. • [http://www.aape.org/exhibit_view_frame.asp?intExhibitNumber=13&intCurrentFrameNumber=1 When Money Buys Little – Jerry Jensen Study of the 1923 German postage stamps • Karsten Laursen and Jorgen Pedersen, The German Inflation, North-Holland Publishing Co., Amsterdam, 1964. • • • • • • == External links ==