Hyperinflation in Germany

On 14 June 1923 the official rate of the US dollar on the Berlin stock exchange passed 100,000 marks for the first time. On 1 June a dollar had still cost just under 75,000 marks; by 30 June it cost 154,500. Before the war, in July 1914, it had cost 4.20 marks. In June 1923 the German inflation that had been under way since the start of the war entered its final, catastrophic phase. By November money had lost all value: a dollar cost 4.2 trillion marks, a loaf of bread hundreds of billions, and people spent in the evening what they had earned in the morning. The great inflation has no single date. Chronicles usually record it under June 1923, when the mark began losing value from one day to the next. 14 June, when the official dollar rate crossed the threshold of 100,000 marks, may be taken as the symbolic day. Some popular accounts state that the dollar had already reached 100,000 marks on 9 June, but according to the official quotations of the Reich Statistical Office it stood at 84,000 that day.

Money from the printing press

The roots of the inflation lay in the war. The Empire, confident of victory, had financed the war almost entirely by borrowing rather than taxation. The debts were to be repaid out of indemnities exacted from the defeated. In 1914 the convertibility of the mark into gold was suspended, and the Reichsbank accepted Treasury debt paper as cover for its note issue. During the war the money supply grew several times over, and the mark lost roughly half its value against the dollar. Defeat reversed the calculation: it was Germany that now had to pay reparations, and the state’s debt exceeded the annual national income.

The governments of the Weimar Republic were unwilling, and in practice unable, to balance the budget. They had to pay for demobilisation, pensions for millions of disabled veterans and widows, and subsidies for food and the railways, while higher taxes threatened revolt. Neither the left nor the right wanted to impose them on its own voters. The missing money was printed. In January 1920 a dollar cost about 40 marks, and in the autumn of 1921, after the acceptance of the London Ultimatum with its schedule of payments totalling 132 billion gold marks, more than 100 marks. Moderate inflation had its advantages: industry worked at full capacity, unemployment was low, German exports were cheap and the state’s debts melted away. Some politicians and industrialists saw the weak mark as an argument that Germany was unable to pay reparations. France accused Berlin of deliberately ruining its own currency.

In the summer of 1922 inflation spun out of control. Foreign bankers refused Germany loans until reparations were reduced, and on 24 June 1922 nationalists murdered the foreign minister, Walther Rathenau. Confidence in the mark collapsed. In June 1922 a dollar cost about 300 marks, in December about 7,500. That was when hyperinflation in the strict sense began – that is, prices rising by more than half within a month.

1923

The decisive blow was the occupation of the Ruhr. When France and Belgium occupied Germany’s most important industrial district in January 1923, the government of Chancellor Wilhelm Cuno called for passive resistance and promised that the Reich would pay for the idleness. It paid the salaries of officials, benefits for those expelled, a large part of the wages of miners and steelworkers, and credits for the works. At the same time it lost the tax revenue of the richest region and had to buy abroad the coal it could not mine at home. All this was financed by the Reichsbank, which bought up Treasury bills and printed banknotes. At the end of January the dollar jumped to 49,000 marks.

The government tried to defend itself. From February the Reichsbank under its president, Rudolf Havenstein, threw gold and foreign currency onto the market and for two months held the dollar at around 20,000–21,000 marks. On 18 April the support operation collapsed because the reserves ran out. In May the dollar already cost several tens of thousands of marks, on 14 June more than 100,000, at the end of July 1.1 million. In June regulations were introduced to curb currency speculation, but they changed nothing. The mark kept falling because ever more of it was being printed and no one wanted to hold it.

Living amid a madness of numbers

From the summer onwards prices rose no longer from month to month but from hour to hour. According to figures cited in German studies, in Berlin in the first half of June an egg cost 800 marks, a litre of milk 1,440, a kilogram of potatoes 5,000 and a tram ride 600 marks. A loaf of bread that had cost about 160 marks at the end of 1922 cost about 200 billion in November 1923. The Reichsbank could not print fast enough: dozens of private printing works and paper mills worked for it, and banknotes of ever higher denominations were printed on one side only. Million-mark notes appeared in the summer, billion-mark notes in the autumn, and finally notes of a hundred trillion. Towns, municipalities, railways and companies issued their own emergency money, Notgeld. Wages were paid daily, even twice a day. Wives waited at the factory gates so as to run straight to the shops before prices rose again. Money was carried in suitcases, baskets and wheelbarrows. Sellers held back goods, because every sale meant a loss. Farmers would not hand over grain for paper, so the towns ran short of food. Anyone who had dollars, Swiss francs or goods to barter lived well. Anyone who had only marks grew poorer by the day.

Those who suffered most were the people who had saved all their lives: civil servants, teachers, pensioners, rentiers, widows living on interest, and holders of the war bonds they had bought out of patriotism. Their savings, insurance policies and securities evaporated. The wages of workers and officials could not keep up with prices, and pensions and benefits lost their value before they reached the recipients. The winners were debtors, who paid off old debts in worthless marks, owners of land, property and factories, and speculators. The industrialist Hugo Stinnes, who bought up mines, steelworks, newspapers and hotels with borrowed and rapidly depreciating marks, became the symbol of profiting from misfortune. The government itself gained too: the Reich’s war debt, denominated in marks, practically vanished.

Poverty bred anger. In the summer of 1923 a wave of strikes and food riots swept across Germany, and in August the so-called anti-Cuno strikes contributed to the fall of his government. The far right looked for culprits among the “profiteers”, who in its propaganda were above all Jews. On 5 November 1923 in Berlin’s Scheunenviertel district, home to poor Jews from the east, a crowd of unemployed people who had not been paid their benefits, incited by a rumour that the Jews had bought up the money, looted Jewish shops and beat the residents. The communists were preparing a “German October”, and in Bavaria and the Rhineland movements seeking to break away from Berlin were gaining strength.

The Rentenmark

On 13 August 1923 Gustav Stresemann became chancellor. His grand coalition concluded that no currency reform could be carried out without ending the struggle in the Ruhr. On 26 September the government announced the end of passive resistance. In September and October inflation reached its peak: in October a dollar cost billions of marks, at the beginning of November hundreds of billions. Meanwhile work on a new currency went ahead. Karl Helfferich, a former imperial Treasury secretary and a nationalist, proposed a rye mark based on the price of grain. Hans Luther, minister of agriculture and from October minister of finance, reworked this plan into a gold-based currency. A decree of 15 October established the Rentenbank, whose capital was secured by a mortgage on agricultural land and industrial assets. The bank was to issue Rentenmarks, not convertible into gold but reckoned at the value of the pre-war gold mark.

On 15 November 1923 the Rentenbank began issuing the new money. One Rentenmark was equal to a trillion paper marks, and on 20 November the dollar rate was fixed at 4.2 trillion marks, or 4.20 Rentenmarks – the same as before the war. The crucial point was that this time the amount of money was strictly limited and the state stopped covering its deficit by printing. Control over this was entrusted to the currency commissioner, Hjalmar Schacht, who after Havenstein’s death (20 November) also became president of the Reichsbank in December. The government cut spending drastically and dismissed officials. People believed in the new money, and inflation stopped almost overnight, which was called the “miracle of the Rentenmark”. The Coinage Act of 30 August 1924, passed together with the laws implementing the Dawes Plan, introduced the Reichsmark, equal to the Rentenmark. A law of July 1925 restored to creditors part of their former claims – mortgages, for example, up to 25 per cent of their former value – but for most savers this was meagre compensation.

The dispute over the causes

Economists have been arguing about the hyperinflation for a hundred years. The Reichsbank and many German economists of the 1920s maintained that the culprit was a balance of payments burdened by reparations: the mark fell because Germany had to make payments abroad, and printing was merely a response to rising prices. Supporters of the quantity theory, such as Ludwig von Mises and later Costantino Bresciani-Turroni, replied that the cause was a budget deficit covered by printing money. Today most historians believe that reparations were an important factor but not the only one. In 1919–1922 Germany paid relatively little in cash, and in 1923 it paid France and Belgium nothing at all. The catastrophe was decided by political choices: financing the war through debt, the post-war reluctance to tax, and in 1923 the decision to pay for passive resistance with the printing press.

Significance

The hyperinflation was short-lived, but its memory lasted for generations. It ruined the German middle class – the very people who should have been the mainstay of the republic – and undermined their faith in the state, in democracy and in honest money. Many Germans associated the “great inflation” with the republic, with reparations and with the Treaty of Versailles, rather than with the policy of the Empire, which had begun financing the war with the printing press. The crisis of 1923 gave Adolf Hitler his first great opportunity: in November he tried to seize power in Munich. At that point he still lost, because stabilisation came quickly.

The long shadow of inflation fell across the 1930s. Fear of a repetition meant that during the Great Depression Chancellor Heinrich Brüning pursued a harsh austerity policy, cutting wages and prices and refusing to expand the money supply, which deepened unemployment. It was the mass unemployment of 1930–1932, and not the inflation of 1923 itself, that brought the NSDAP millions of votes. But people who had lost everything in 1923 were later more inclined to listen to those who promised to destroy “the system”. Paradoxically, it was Hjalmar Schacht, the architect of stabilisation, who in the 1930s, as president of the Reichsbank and Hitler’s economics minister, financed German rearmament, hiding its costs in special bills of exchange.