Fist Of History

Archive for the ‘Informative’ Category

German Hyper-Inflation of 1922 to 1923

Friday, February 19th, 2010

An interesting event of the interwar years in Europe (1919 – 1939) was an incident that occurred in the German Weimar Republic between 1922 to 1923, an incident in which the currency of Germany lost almost all real value.  The collapse of the value of Germany’s currency was due to a series of different forces that came together to put an incredible strain upon Germany’s economy between 1919 to 1922.  First Germany, under the Treaty of Versailles, was required to make a series of reparations payments to France and Great Britain, reparations payments that had to be made in gold backed currency.  Second Germany with the end of the First World War had to switch its economy from a wartime economy, based upon heavy government borrowing and spending on items of war, to one of peacetime productivity in which the Weimar government greatly diminished the amount of money the German government pumped into the economy.  Third Germany, due to territorial losses, entered the 1920s with less industrial productivity and a smaller raw materials base upon which to build its economic recovery, although Germany even in this diminished state was still a dominant economic power in Europe.  Fourth Germany from 1919 – 1922 went through a period of strong political unrest, during this period several armed coups and attempts to overthrow the government shook public confidence in the stability of Germany politically and socially.  Fifth, and finally, the Weimar government due to intense political pressure could not raise taxes to meet the expanded social support obligations it had taken on with the end of the First World War, as part of Germany’s movement from a monarchical imperial structure to a socialist republic.  This intense political pressure came from parties on the political right in Germany, who treated any effort to raise taxes by the Weimar government as a form of appeasement to the Allied powers and their demands for reparations, demands many in Germany considered unfair and inflammatory.

So the German Weimar government, unable to raise sufficient capital through borrowing, unable to raise revenue in taxes, needing to finance the private sector’s efforts to change the economy to a peacetime footing, needing to pay for social services and the function of government, and needing to purchase gold to back the banknotes with which it paid the Allied reparations, resorted to the only technique available to it to meet these needs: it simply issued more currency into the economy.  Vast amounts of currency, the collapse of the value of the Reichmark to other currencies was rapid and total, from early 1922 to late 1923 the Reichmark to the US Dollar fell from 7000 marks to the dollar in December 1922 to 4,200,000,000,000 marks to the dollar in December 1923.  This sudden collapse in the value of currency had several interesting impacts on Germany society, first it meant that those who lived on any fixed incomes found the value of their income disappearing quickly.  Those who owed debts on items found the value of that debt collapsing quickly, meaning a debtor could repay a debt with currency worth far less then the currency they had borrowed, in buying power terms.  German businesses often took advantage of this fact to purchase new equipment at effectively deep discounts, paying the debt as late as they could with vastly devalued currency.  The collapse was only arrested from 1924 onwards through careful conservative banking, currency deflation through issuing a brand new currency, and fiscal stringency.  The net effect of this economic collapse though was many Germans coming into the mid-1920s found themselves starting over economically.

Historically this incident is interesting because it has an impact on many key events that happened later in the 1920s and 1930s, first and most critically this incident undermined the faith of the German public in the capacity of the Weimar government to effectively lead Germany.  Although from 1924 until 1929 public confidence increased in the capacity of the Weimar republic to govern, this disaster was blamed on the policies of Weimar and when the Germany economy collapsed again due to the events of the massive global economic contraction of the 1930s, the public took this as further proof the Weimar state could not lead Germany effectively.  The German hyperinflation of 1922 through 1923 hurt Germany’s economic recovery in the mid-1920s, many German businesses having bought considerable new equipment during  the hyperinflation to take advantage of a period of unintentional “discounts” in cost found themselves with too much productive capacity for the demands of the Germany economy.  Germany halting payments on the reparations, in part due to the hyperinflation, lead to the French and Belgian occupation of the Ruhr territory in 1923, an event which further seemed to indicate the weakness of the Weimar government.  (On a side note the policy of passive resistance implemented by the Weimar government, requiring it to pay millions of Germans who agreed not to work to prevent France and Belgium gaining benefits from the occupied productive resources of the Ruhr, simply lead to more expenditures by the Weimar government in worthless currency.)

Finally though the hyperinflation of 1922 to 1923 gave considerable political capital to both of the extreme ends of the German political spectrum, the extreme right and the extreme left.  Many in Germany in reaction to these events, and the future economic collapse of the 1930s, were increasing willing to consider more “radical” political solutions to Germany’s perceived and real problems.  Political capital gained from these events, as well as the apparent weakness of the Weimar government it seemed to indicate to the German public, certainly played a part in the eventual rise of Adolph Hitler to political leadership in Germany.  It certainly lead in part to the political instability Hitler attempted to take advantage of on 9 November 1923 with his failed putsch attempt in Bavaria, an event that helped spark Hitler’s national political career in Germany.


The Coming of the Third Reich, Richard J. Evans

The Weimar Republic and Nazi Germany, Warren B. Morris, Jr.

The Rise and Fall of the Great Powers, Paul Kennedy