The Weimar Republic and Hyperinflation
Germans tossing their now worthless Papiermarks into a fire
Max Weber and Viktoria Križanová / May 30 2021
(9 min read)
“The economy is a very sensitive organism”
It is not uncommon for images of ruin and destitution to show up when discussing the Weimar Republic, especially in regards to the state’s economic woes in its very infancy. Troubled by political instability, an angry public, angrier neighbours and a flawed if not disastrous paradigm of economic examination, the inflation of the mark during the early days of interwar Germany stamped out the legitimacy of the quantitative theory of money and highlighted how expected inflation can severely impact an economy’s price levels and money velocity. The resulting lesson learned (especially for Weimar economists) was that printing money ad infinitum is not possible and that it is preferable to take a stance compliant to paying back debts rather than to be a combative debtor at the cost of your own economy.
On February 9, 1919, the national assembly met in Weimar, a city in the east of Germany, to elect a new president, Friedrich Ebert, and announce the establishment of the German Reich – a democratic republic that came out of the new Weimar constitution (Britannica, 2020). Guaranteeing equal suffrage for everyone over 20-years-old (both men and women), freedom of expression, right to peaceful assembly, freedom of religion, right of private property and right to equal opportunity and income in the workplace, the Weimar Republic was considered officially a democratic republic. After being defeated by the Allied powers, Germany had to pay huge reparations while having a shortage of finances after many loans and the nation’s production focused on war production, the country started to struggle with the reparations. (Britannica, 2020). Not only did Germans feel shame for being defeated, but they also started to hate other nations for being the ones who suffered the most from the peace resolutions. This left Weimar economists and politicians under the pressure of doing everything possible to prevent the payments of reparations. The truth is, however, that WW1 left the whole of Europe in ruins with their economies close to bankruptcy, meaning that other nations were also willing to do whatever it took to get what they perceived to be their fair due out of Germany.
With high loans and reparations and Germany’s disability to pay them fast enough, French troops invaded the Rhineland territory (Germany’s main industrial area) and started to collect instalments in in-kind payments. Desperate Germany, needed to find a quick solution to enable them faster their war production and later payments of reparations. The German government had opted to follow a policy of peaceful non-compliance, where they encouraged Rhenish workers to strike so that the French wouldn’t be able to collect in-kind payments. Furthermore, the government decreed to simply print new money which would first help them accumulate capital for the ammunition manufacturing and later stimulate the economy of their indebted country.
The decision to print out more money was also dictated by the country’s economic paradigm. More specifically, German economists flat out rejected the quantitative theory of money, or in layman’s terms, Weimar economists disagreed with the notion that printing more money causes an increase (i.e inflation) of prices despite this being a consensus among other economists in the world and even in other parts of the German-speaking world (such as by the Austrian School). For example, the Weimar economist Helffreich attributed the inflation to the French occupation of the Rhineland and this event’s devaluing of the Reichsmark as the cause of the inflation:
“First came the depreciation of the German currency by the overburdening of Germany with international liabilities and by the French policy of violence. Thence followed a rise in the prices of all imported commodities. This led to a general rise in prices and wages which in turn led to a greater demand for currency by the public and by the financial authorities of the Reich and finally, the greater calls upon the Reichsbank from the public and the financial administration of the Reich led to an increase in note issue. In contrast, therefore, to the widely held view, it is not “inflation” [of the currency] but the depreciation of the currency which is the first link in this chain of cause and effect. Inflation [of the currency] is not the cause of the rise in prices and the depreciated currency but the latter is the cause of the higher prices and the greater volume in the issue of paper money” (Helfferich, as cited by Laidler & Stadler, 1998).
Another reason why the Weimar economic paradigm rejected the quantitative theory of money was that it seemed as though despite the Reichsbanks incessant printing of money, there seemed to be an increasing lack of money, and prices were going up. Ergo, German economists wrongly concluded that reparations and the occupation of the Rhineland caused a devaluation of the Mark and that printing more money is necessary for the money supply to catch up to the increasingly rising prices (Laidler & Stadler, 1998). This couldn’t be any further from reality.
As many contemporary economists and many modern economists point out today, the printing of money does cause inflation. However, the described problem of a seemingly increasing lack of money in the German economy (Laidler & Stadler, 1998) seems to contradict notions that the printing of money or an increase in the money supply is what causes prices to go up. This paradox was resolved by certain German-speaking economists by introducing the notion of expected inflation. They argued that as the amount and velocity of Papiermarks in the economy increased, prices rose faster than their actual amount as vendors factored in the ever depreciating value of the currency. Laidler & Stadler (1998) thus describe the process in their paper as the devolution of the economy into a game of Schwarzer Peter, where people tried to get rid of their marks as quickly as possible; people don’t want to hold their marks on a two-fold account of the Reichsbank devaluing the money via rapid-fire printing and vendors increase prices to protect their profits long enough for them to use their marks to buy something with that money. Essentially, the real and expected inflation of the German mark ensured that so long as the currency existed and more bills were being printed the demand for the currency would always be greater than its supply at any given point. It is thus almost unsurprising that a dangerous inflationary spiral came out of this.
In 1922, “the exchange rate of the mark to the dollar (pre-1914 relation: 4.20 marks = $1) fell from 162 marks to more than 7,000 marks” (Britannica, 2020). As a result, in 1923 Germany fell into a state of severe hyperinflation which only worsened the already difficult situation for both the country and their citizens.
With hyperinflation being the main actor in Germany’s economy in the 1920s, people started to be hugely impacted. While the government continued printing new and new money to have enough to pay for reparations, people’s savings disappeared overnight. Even though there was more money in the nation’s economy, the production stayed on pretty much the same level as well, which resulted in a dramatic increase in the price of products. A loaf of bread in Berlin, for example, cost less than a mark in 1918 but more than 200 billion marks in 1923 (McDougal Littell, 2002). People were accumulating an enormous amount of money that had negligible value, going with trolleys full of money to buy basic products. The speed of the devaluation of the mark was so fast that it “depreciated to 160,000 to the dollar on July 1; 242,000,000 to the dollar on October 1; and 4,200,000,000,000 to the dollar on November 20, 1923” (Britannica, 2020). The need for stabilisation of the economy was greater than ever as the Germans hand found themselves out of the frying pan of having to pay for reparations and in the fire of hyperinflation.
An international committee led by the American banker Charles Dawes whose plan provided for a $200 million loan from American banks to stabilise German currency and economy (McDougal Littell, 2002). The plan was for the payments “to be resumed on a scale beginning at 1 billion gold marks in the first year and rising to 2.5 billion in 1928 and subsequent years” (Britannica, 2020). Eventually, Dawes Plan helped to slow down the inflation when put in force in 1924 which resulted in more loans and investments being poured into Germany’s economy mainly by the United States. Meanwhile, German bankers and economists were also working on ways to stabilise their currency.
Under the leadership of Gustav Stresemann, a new currency was implemented with the aim of ending hyperinflation. The new bank, called the Rentenbank issued new Rentenmarks which were readily embraced by the Germans as their value was tied to gold (tutor2u, 2020). This decreased the velocity and volume of money, meaning that prices became more stable as vendors and holders of money no longer feared imminent devaluation of currency should they choose to hold onto their money; people trusted the new mark. In 1924, the Reichsbank was allowed to control the Rentenmark, renaming it to the Reichsmark and “introduced the new Reichsmark currency with the exchange rate of 1 Reichsmark = 1 trillion marks” (Britannica, 2020). This marked the end of Weimar hyperinflation, with two years later, German factories were producing at the same speed and numbers as they did before WW1.
In conclusion, the early days of the Weimar republic showed how a country that is suffering an economic depression and is largely indebted to several other nations shouldn’t go about solving the problem. The irresponsible actions of German economists ended up proving everything au contraire to what they believed along with bringing to light the importance of expected inflation in relation to price stability. If you print out money, prices will go up, and the distrust of currency caused by large-scale inflation will cause an uptick in expected inflation which will even further damage the stability of price levels. The solution to this problem learned was that it is, at least in economic terms, preferable to follow a policy compliant to paying back debt and to have a currency that inflates at moderate and predictable levels.
Bibliography
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Laidler, D. E., & Stadler, G. W. (1998). Monetary Explanations of the Weimar Republic’s Hyperinflation: Some Neglected Contributions in Contemporary German Literature. Journal of Money, Credit and Banking, 30(4), 816–831. https://doi.org/ 10.2307/2601130
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