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Hyperinflation in Post-World War I Germany

Little light has been shone by modern media on the catastrophic state of the German economy after World War I. Often Germany remains in the dark in the post-war narrative as the indefinite antagonist that was vying to overtake Europe and ultimately Germanize the entire continent. And to some extent, this greed was evident in the alliance made between Austria-Hungary and Germany, and evident still in the duo’s inexorable advance into enemy territory, inevitably ensued by the death of millions of civilians. Nevertheless, this greed and radical nationalism weren’t unique to the side of the Central Powers (i.e. Germany, Austria-Hungary and for a short period in 1914, Italy, in which the side was called the Triple Alliance). The infamous Triple Entente, or known more commonly as the Entente (i.e. French Third Republic, Russian Empire and the United Kingdom of Great Britain) was a side with equally imperialistic intentions. Faced against each other, the result was a ruthless war. The loss of this “War to End All Wars” for Germany was disastrous, leaving the nation in a political, social and economic mess.

Hyperinflation in Post-World War I Germany

Image Source: War History Online

With over a million military personnel, World War I was one of the deadliest wars in history. It pummelled the homes and businesses of the countries involved in the Entente (Germany surprisingly, remained free of the physical destructions of war), and above all, killed innocent civilians. This death was the direct result of war for many military personnel and martyrs, but in the case of post-WWI German civilians, it was a slow, torturous murder by the government. More specifically, it was a murder caused by the hyperinflationary economic status in Germany. As the costs of war weighed down on Germany after 1918 (the war bonds that the German population had invested in the duration of the war was expected to be paid back to its rightful owners. Additionally, all the deceased and injured veterans were expected to be paid government pensions for their services), the Treaty of Versailles was also introduced, written mainly by the Allies — what the Entente came to be known as after Italy and the United States entered the war on their side.

The Treaty of Versailles made it clear that the treaty revolved around the theme that Germany was responsible for paying all the costs of the war, including the damages that had been made to French and British lands and industries. More importantly, however, they had to claim “war guilt,” and eternally bear the knowledge that it was Germany that kindled, fueled and ultimately set ablaze the uncontrollable fire that was WWI — a most challenging concession, especially considering the keenly patriotic nature of most Germans at the time.

Evidently, their population saw this armistice as an unjust form of chastisement and felt the British and French were dutifully responsible for sharing part of the blame as well. Yet Germany was not close to a position, politically or financially, to resist a treaty that was written by the Big Four superpowers of the world at the time, particularly when America was experiencing its Roaring Twenties, its economy having been boosted by the necessity for warfare supplies during 1914-5.

Hyperinflation in Post-World War I Germany

The Treaty of Versailles, which blamed WWI primarily on Germany.

Thus, despite the public resistance against the armistice, Germany was bound to sign the treaty if they wanted their land left untouched by the enemy. And the British, French and Americans had their own reasons for wanting the treaty so desperately signed. America had acted as the financial father for France and Britain in 1918, lending the countries billions in money and fresh soldiers in order to defeat Germany. Now, France and Britain needed Germany to fully claim the financial burden of the war and pay them back, so they could, in turn, pay back America. If it sounds like the post-WWI global economy was a beggar-my-neighbour type of economy, you’re correct. Almost every nation involved in the war owed money somewhere, with the exception of the United States. European civilians and politicians both hoped, without use, that America would loosen the knot on its lend deposits, consequently lowering the debt for Germany who already had a massive sum of domestic debt to pay to its citizens as well.  

Hyperinflation in Post-World War I Germany

Thereby, with the signing of the treaty, Germany fell into an even deeper abyss of debt. German civilians, the educated middle class who had so diligently saved their money and invested it in the war bonds, felt betrayed by the government who now had no more marks — Germany’s currency at the time — to repay them with. Thus, the political revolution that seemed inevitable for every nation accelerated in build up and hit Germany without a warning or safety net, during 1918-9. The Reichstag, Germany’s federal bank, was in a unique position: not only were they trying to repay immense domestic and international debt, they were further pressured by the heated political situation. Their only solution to trickle some money back into their defaulting economy was to increase exports. But if almost every country in the post-WWI world was in a desperate fight to increase their own exports in order to run a surplus, who would be running all the deficit? It most certainly wouldn’t be America, who was enjoying a particularly flourishing period in their industrial productivity.

This disastrous plight forced the Reichstag to take the quickest, and also the most dangerous, solution: print more money. It was a temporary solution that would manifest itself in later years as a catastrophe that almost destroyed Germany.

With the falling mark, Germany became irresistibly competitive in the market. Its exports increased, and for a country that just came out of the Great War, Germany had a surprisingly low unemployment rate. Work didn’t equate to luxury, however. The middle class had been stung by the war but was also slowly starting to see the effects of the falling mark. By 1920, its value had already fallen to ten marks a dollar. Product prices, from land to agricultural goods, rose while salaries for workers remained at their original values. Slowly, ordinary Germans felt inflation creep into their economy, first with benevolent intentions but now beginning to shake the already-unstable economy.

Hyperinflation in Post-World War I Germany

1,000 German mark note from 1923. (Image Source: Gold In Auctions)

Political turmoil continued to ravage Germany after the 1918-9 Revolution. The invasion of the German Ruhr area by France and Belgium in response to the unpaid reparations for WWI further fueled German hatred for the French. Uprisings became the norm in Germany, no one wanted to pay the reparations they owed to the Allies, prices kept rising, German debt kept accumulating and the Reichstag kept printing. Well into 1921, the currency had fallen to 100 marks to the US dollar. In a year, this would fall to an even more drastic 1,000 marks to the dollar. By now, it was clear who the winners and losers of this inflation — shockingly still at its tame stage relative to what was to come — were. The winners were almost anyone who owed debt since their money was liquidated by the hyperinflation. This included the debt of the ordinary teacher to the grocer and the debt the government owed to its citizens in war bonds, welfare systems or old age pensions. Many Germans thought and still think to this day, that the inflation was simply a way for the government to, in practical terms, confiscate the money of their citizens and betray them. Other winners of the hyperinflation were the profiteers who saw exchanging currency with the German mark an easy way to make more money.

Nevertheless, the losers of the inflation were far more frequent and they did experience devastating financial losses. Americans who invested in the mark thinking that it could not possibly fall at a lower value than its current states, bought millions of marks with the hope of a profit. Their ambitions were, to say the least, not fulfilled because, by 1923, the currency was well into 10,000 marks a dollar. At this point, farmers often hoarded their produce and resisted supplying food to the stores unless they were paid by foreign, or as they were now referred to as, “hard currency.” Germans vied to buy land and material goods, anything to get rid of the devaluing mark! Some burnt the paper money, made kites out of them or even used them as wallpaper — the paper was worth far more than the currency.

And money continued to be printed, if possible at an even faster rate than before. By August 1923, the value of the mark had fallen to 1,000,000 to the US dollar. Hunger broke out, the struggle for materialism ran rampant, and the Nazi party started to gain a following in the midst of public misery. France, and Britain were unwilling to forgive Germany’s debts in fear of their own debts to America. Nevertheless the Reichstag, like a steady hum in the background, continued to print the now worthless mark. Germans carried bundles and bundles of the paper mark to the store, only to find out that in the hour in took for them to walk there (because traveling by subway would cost far more than their hyperinflation-unadjusted salaries could pay for), the value of the mark had fallen even lower.

Hyperinflation in Post-World War I Germany

By late September, the mark was sitting at a whopping 1,000,000,000 to the US dollar. These zeroes look much milder when typed up on a laptop — in reality, they were the strings that many Germans lived by. One zero more or less meant being able to bring bread home to the table at night or not. When Americans traveled to Germany, they were struck most by the bright, luxurious exterior of the cities — Berlin didn’t seem like the home to the disastrous living conditions the media speculated around so much — but most of all, they were dumbfounded by the cheapness of everything. With four dollars, they were able to survive the day with the highest quality food, extravagant hotels, and lavish entertainment. In fact, the foreign world often talked about Germany as that “cheap holiday,” not the nation that was being strangled by hyperinflation, its citizens dying of famishment or by their own hand.

By December of 1923, even France and Britain couldn’t refuse to accept the devastating state of Germany’s economy. The mark had fallen to a catastrophic 4.2 trillion to a US dollar. One can only imagine the craze banks had to work with daily, with the currency changing by the hour, and the incoming barrels and barrels of paper money — a value everyone was vying to get rid of. In fact, Germany had turned into more of a barter economy, a primitive form of human economies. Desperate Germans traded land for goods, goods for food and food for a chance to take refuge in a foreign country.

Hyperinflation in Post-World War I Germany

The mark only began to stabilize when the political fury calmed down. A new chancellor was elected, Gustav Stresemann, a respected politician and arguably the most influential figure in Germany’s road to economic recovery. He established, with the newly assigned Finance Minister, the Reichsmark (the currency in Germany until it was replaced by the Euro) in 1924 and was a founder in the reconciliation between Germany and France —a feat for which he won a Nobel Peace Prize.

The Reichsmark slowly but surely began to replace the mark, and Germany began to heal. The farmers felt assured supplying their produce to the public, knowing they would be paid in the stable, now actually valuable, currency. The speculators and profiteers of the hyperinflation became heavily taxed and overall tax enforcement policies were intensified on the general public to ensure disaster wouldn’t strike again.

But the loyal, middle-class Germans never got their money back. The war bonds they had invested in, with the hope that they would be repaid with high-interest rates after they won WWI, were lost. Hyperinflation had essentially liquidated all of the government’s debts and stole the savings many Germans had so diligently amassed. The decisive years  post-WWI and the hyperinflation it caused serve as a painful reminder today to the Germans of what can happen if fiscal discipline is lost within the government. The modern German economy is often criticized for running significant amounts of surplus, especially as it means huge deficits for other countries in the European Union. Even regular Germans are referred to have hyperinflation-phobia with the way they manage their money. Yet how could one oppose this nation’s financial nature considering their grueling history? Hyperinflationary Germany is unfortunately engraved into the country’s history book, and when Greece was discovered to have run huge amounts of deficit for the EU, Germany’s chancellor Angela Merkel was referred to as a traitor for the overprotective fashion in which she dealt with the “bail-out.”

Hyperinflation in Post-World War I Germany

Image Source: Dave Granlund

Ultimately, however, Germany is just haunted by its history and the reason for its deflationary economic methods and its watchful Bundesbank (Germany’s federal bank) is due to the fact that it has learned its lesson well. Some say far too well, others say that is simply the course Canadian economy is heading today.

Perhaps the current German economy is far ahead of us.


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