GERMAN HYPERINFLATION Ė 1923
By Guy de la BťdoyŤre
Everyone who studies the history of
But WHY did this crazy situation happen? Iím interested in finding an easy way of explaining it.
In fact, the explanation is in many ways very complicated, but underlying those complicated parts of the story is a very simple one.
It all boils down to a very simple equation:
m x v = p x q
m is available cash
v is the speed it circulates (i.e. is used for spending)
p is prices
q is available goods
Increasing any one of those factors causes one side of the equation to become bigger. Since this is an equation the other side must increase too. Of course in reality they donít increase by exactly the right amount so each side continues to increase in an attempt to catch the other side up.
Iíve created an imaginary place called
Letís imagine a very simple economy on a German desert island, which weíll call Weimar Island. There are ten families. Five grow and prepare food, and the other five make things like tools and equipment. Each family makes 10 marks-worth of food or goods per year, which they buy and sell amongst one another.
10 families x 10 marks = 100 marks per annum in the island economy.
In order to buy and sell their goods, the Weimar Island families print 100 marks in money. The result is a BALANCE between cash (money) and production (goods). The islandís economy generates 100 marks-worth of food and goods, represented by 100 marks in cash available to buy and sell these goods. For every marks-worth of production, a cash mark can be printed. The cash mark is BACKED by the production of goods or food.
OUT OF BALANCE
All is fine on Weimar Island for several years. Then one day a catastrophic storm wrecks the houses of the families who make tools and equipment and badly damages the crops of the other families who grow the food.
In the year of the storm the island only produces 50-marks-worth of food and goods because each family now only generates 5 marks-worth of food or goods each:
10 families x 5 marks = 50 marks in the year of the storm
Thatís only half as much as before. But there
are still 100-marks in money circulating on
One food-making family spots what is happening, and doubles the price of its food. To begin with, the others stay away and buy from families who havenít yet put the price up. But soon their supplies run out and only the higher-price food is left. But since everyone has already spent most of their money they realise they canít afford the higher-price food.
Until, that is, one of the tool-making families decides to print some more money. So they do. And along they go to the family with the higher-price food and buy some. Now there is even less left so the food-making family doubles the price again. By now everyone has realised there is a chronic shortage so they put their prices up too.
GUESS WHAT HAPPENS NEXT?
You guessed right. The Weimar Island families print even more money. Even worse, another storm wrecks the next set of crops, and so damages the tool-and-equipment families that by the following year the total output is down to 2.5 marks per family, while there are now 300 marks in circulation thanks to the extra printing of money. So:
10 families x 2.5 marks = 25 marks-worth of food and goods being chased by 300 marks in money. Once 10 marks bought 10-marks-worth of food or goods. Now each family has to spend 30 marks to buy food and goods that used to cost 2.5 marks.
Next year it gets worse, and worse, and worse. The islanders print more and more money, and production gets less and less. By the end of the following year they have printed 10 million marks, or enough for each family to have 1 million marks to spend, but that only buys what once cost 1 mark because production has collapsed.
Eventually the islanders realise they need
help. They send to another, bigger, island which hasnít been damaged whose
inhabitants agree to lend the
HAPPENED IN THE REAL
Times were tough after the First World War.
50 MARK NOTE,
Things went ballistic in 1922:
Industrial production in the
∑ This got totally out of control, and as prices rose the government printed more and more money, creating banknotes with ludicrous face values running into billions of Marks.
Result: the German economy got SMALLER but money supply got LARGER. The economy was OUT-OF-BALANCE.
Aluminium 500Ėmark coin of 1923, mintmark A for
See the 500 mark note above for how worthless this was by the end of the year.
5 BILLION MARK
(130x65mm). IN NOVEMBER 1923 A GERMAN NEEDED 40 OF THESE TO BUY A LOAF OF BREAD.
WHATíS THE SOLUTION?
The simple answer is to restore the BALANCE in the economy by:
∑ Growing more food to sell
∑ Repairing and rebuilding the factories to make more goods to sell
∑ Backing the currency with gold or silver
Then you can print more money to go with the
extra food and goods, and the bullion. Put very simply you can print 1 new mark
for every extra 1-mark-worth of food and goods, or 1-mark-worth of gold or
silver. Just as it was for the imaginary
HOW DO YOU DO THAT?
The usual answer is to borrow money from an economy where the cash is backed by production of food and goods and/or bullion (gold and silver), to invest in increased production. After World War I in 1918 the only good source of that sort of money was the USA. And thatís what Gustav Streseman did, under the Dawes Plan. It worked fine so long as the Americans could afford to loan cash in dollars to Germany. The dollar was stable, so its value wasnít declining. The price of a loaf of bread in Germany in US dollars in 1923 was about the same as it had been in 1918.
1 Rentenmark = 10,000,000,000,000 old Marks (1 trillion)
Rentenmarks were still produced for several years afterwards after 1924.
5 RENTENMARK NOTE, DATED 2 JANUARY 1926 BERLIN
Introduced on 30 August 1924 to replace the Rentenmark, but Rentenmarks were still made for some time and remained in use until 1948. Reichsmarks were used by the Nazis.
10 REICHSMARK NOTE, DATED 22 JANUARY 1929 BERLIN
The system worked well until 1929 and the Depression when the US economy collapsed and the loans were called in. Naturally, inflation started up once more because there was an imbalance between the available paper money and production in Germany which was once again in ruins, with high unemployment. This time though, chronic hyperinflation didnít happen because the German government had learned how catastrophic printing money was as a solution. Even so, the crisis was bad enough to play into the hands of the Nazis who promised the Germans that they would restore the economy and affluence.
With the currency reformed, coins were also struck. These date from the Nazi era (left to right): silver 5 Reichsmarks (1937 Ė mintmark G for Karlsruhe), silver 2 Reichsmarks (1937 intmark J for Hamburg), aluminium 50 pfennigs (1/2 Reichsmark) (1940), aluminium-bronze 5 pfennigs (1941)
This webpage is designed to keep the story simple and to the point. In reality there were many other factors at play in how German inflation got out of control though the underlying principle isnít affected. Inflation is a normal part of most economies, but at only a few percentile points per annum (say 3Ė5%). Thatís why a chicken cost about half-a-crown (12.5 pence) in the early 19th century in England, and today a free-range equivalent would cost about £7-£9, or around 60-70 times as much.
We can cope with that, and adapt slowly as we
go along because we scarcely notice it. But that sort of inflation has taken
almost two centuries, whereas in 1923 a German might see the same rise happen
in a single day. These days a country like Zimbabwe is suffering some of the
same problems. Its economy is in ruins and the government is printing money to
pay its bills. By May 2006 inflation there was 1000%, meaning prices were
rising by ten times over a year. Nothing like