When inflation made the German mark virtually worthless, Germans resorted to barter as a replacement for currency transactions.
In 1923, inflation of the German mark, begun during World War I, reached such proportions that Germans resorted to barter for many of their economic transactions. Stores closed every day at noon so that clerks could change prices on products. Prices often rose during the morning hours to double what they were at opening time. Germans who were paid wages or salaries rushed to buy things with the money, because within hours it would lose half its value. Farmers refused to sell their produce, for the money received had no value except to pay taxes and to pay off any mortgages they had. Businesspeople rushed to take out loans at banks and then hastened to spend the money, buying virtually anything, because by the next day it could be sold for far more than the amount of the loan. People with mortgages on their property paid them off in money that was scarcely worth the paper on which it was printed. Debtors reaped a bonanza, and creditors were impoverished.
The roots of the German hyperinflation go back to World War I. Like all major nations in 1914, Germany was on the gold standard.
Many of the war bonds were discounted (used as collateral for loans) at the banks, which in turn rediscounted them at the Central bank. These bonds provided the “reserves” behind the increasing amount of bank notes issued by the central bank. By the end of World War I, the amount of money in circulation was about five times what it had been in 1914. In neutral markets, where gold redemption still prevailed, the mark was worth no more than half what it had been before the war. The domestic price index rose 100 percent in four years.
Once stable government was restored following the German Revolution of 1918-1919,
One major source of financial problems were the reparations demanded by the Allies, on the grounds that Germany had caused the war. The German government had to make the payments, but it could get the money to do so only by taxing its citizens or by borrowing. Because a large portion of the economic base of Germany was decimated, either through territorial losses or reparations in kind, the nation’s resources to generate taxes were reduced. The German government was required to make cash reparations payments in gold. Because Germany had negligible gold deposits of its own, this gold could be acquired only through a massive excess of exports over imports. Even then, the government somehow had to acquire the gold earned by private firms and individuals through their exporting activities.
The German government resorted to printing money to pay obligations that could be met with marks. The result was inflation of prices and a tremendous increase in borrowing. Private individuals borrowed money to buy things they wanted or needed, knowing that when they had to pay the money back it would be worth far less. Governments at the federal, state, and local levels borrowed money both to finance ongoing operations and to pay off old debt. Any old debt that could be paid off made money for the debtor. Debts expressed in marks required only to be paid off in the same number of paper marks, even though they were worth, in terms of purchasing power, only a fraction of the original indebtedness. Lenders had failed to provide for inflation in setting the terms of their loans. As all these new debt instruments were presented at banks for discount, the banks needed currency to pay them off. They turned to the Reichsbank, which began printing more and more bank notes. In the early fall of 1923, the need for new bank notes became so great that although 30 paper mills and 150 printing plants were devoted exclusively to printing money, they could not keep up with the demand. As the German mark steadily became less meaningful as a way of expressing value, everyone began valuing everything in dollars, based on the exchange rate of the moment.
In January, 1923, the French and Belgians, alleging minor defaults in reparations payments, marched into the Ruhr Valley,
By September, it was clear that something would have to be done. The existing government resigned and was replaced by one headed by Gustav Stresemann. Passive resistance was ended. At the suggestion of Hans Luther, the German finance minister, the government decided to issue a new currency, to be called the Rentenmark, which would be backed by the agricultural and industrial real estate of Germany. The decree authorizing the Rentenmark was issued on October 15, 1923. One month later, paper marks were declared worthless and exchanged at the rate of one trillion Reichsmarks for one Rentenmark, declared to be the equivalent of one gold mark.
A new bank called the Rentenbank was created and authorized to issue up to 3.2 billion Rentenmark notes. Of this sum, 1.2 billion were to be made available to the government for the payment of salaries and other obligations. The remainder was available for loans to business, in an effort to get the economy started again. Over the succeeding six months, Rentenmarks gradually replaced the old paper currency in circulation. As the government reformed taxes, it began to receive revenue in the new, stable currency to carry on its affairs. The entire system was made possible by a moratorium on reparations payments while the issue was studied by an international committee headed by Charles G. Dawes, an attorney and financier who later became vice president of the United States. Eventually, in what is known as the Dawes Plan,
Assessing the impact of the German hyperinflation involves determining who were the winners and who were the losers. Generally, debtors were the winners. These included both public debtors and private debtors. Public debtors included both the central government, the Reich, and state and local governments. Old obligations could be paid off with paper marks worth a fraction of the old marks that were convertible to gold. As a result, the central government, which owed its citizens 98 billion marks in war debt in 1918, reduced its debt to almost nothing. Many states and municipalities also paid off old debts.
Many private debts were also paid off at a fraction of their former worth. Many mortgages contracted in an earlier era were paid off. When debts were bills for purchased goods, late in the inflation the courts began to hold that the constitutional requirement of equity meant that a sum more nearly equal to the current value of the goods in question had to be paid. Large businesses in particular profited from the inflation. Banks had been accustomed to financing much business activity, and the time spread between the date of a loan to buy raw materials or machinery and the time when those raw materials were converted into salable items enormously magnified their value in paper marks. In effect, the interest rate on revalued debts was adjusted to compensate lenders for inflation.
Even the banks made money, thanks to the inveterate Reichsbank policy of keeping interest rates low. Commercial banks could make loans to businesses at relatively high interest rates, then discount the bills at the Reichsbank at a much lower rate. The spread represented a substantial profit.
Losers from the inflation included savers and creditors. Those who had invested their money in mortgages found the mortgages paid off in worthless paper marks. Somewhere between one-fourth and one-half of the German electorate had savings that disappeared in the inflation, and the Germans have never forgotten this. Almost 10 percent of the German population had lived off income from savings and investments prior to World War I. These people were reduced to abject poverty.
After the stabilization plan was put in place, a bitter battle ensued concerning the revaluation of old debts. Initially, many government officials favored a ban on revaluation, but as the outcry of the dispossessed increased, politicians changed their position. Moreover, Stresemann, who became chancellor in August of 1923, opposed a ban. Furthermore, courts were increasingly responding to pleas from creditors that the repayment of debts in worthless paper marks did not accord with equity. Several court decisions in late 1922 and early 1923 required the renegotiation of contracts as a result of the inflation. By November, 1923, the courts were stating unequivocally that creditors were entitled to relief.
The difficulty with revaluation was that the stabilization of the currency would be vitiated if revaluation amounted to any significant percentage of debts. New money would have to be printed to pay the higher debts, and inflation would return. The original proposal called for 10 percent revaluation, but this meager amount resulted in protests forcing upward revision of the percentage. In February of 1924, the government issued the Tax Decree, in which guidelines for revaluation were laid down. The level of revaluation was raised from 10 percent to 15 percent and would include municipal bonds that had been issued for income-producing activities such as gas works. Under pressure from the Social Democratic Party, the government agreed that savings deposits in banks and life insurance policies would also be revalued. This proposal won the support of the banking, industrial, and commercial interests of Germany.
Nevertheless, there was sufficient opposition to these terms in the Reichstag that the government decided to call for a new election, to take place in May of 1924. New claims for revaluation began to be heard from savings banks, the portfolios of which were full of government bonds. They began to demand revaluation of government bonds, given that they were going to have to revalue the savings accounts of their depositors. Churches, especially the Catholic Church, called for substantial revaluation. Many of their charitable activities were financed by endowments, especially mortgages. Moreover, some courts were responding to individual pleas for revaluation and setting their own rates. It was clear that a new mandate from the populace, to be followed by legislation by the new Reichstag, was the only answer.
Unfortunately, the election of May, 1924, yielded no solid majority for any political party or grouping of parties. A weak minority government was formed. It decided to appoint a Committee on Revaluation to draft legislation on the subject. It was now recognized that government bonds would have to be revalued; however, as Finance Minister Luther pointed out, any significant revaluation would reduce the interest rate to a negligible amount. It was now also agreed that mortgages would have to be revalued, with a revaluation rate of 25 percent finding general favor. At the same time that creditors were pressing for upward revision of the revaluation percentages, the U.S. government was working in the opposite direction. Benjamin Strong, governor of the Federal Reserve Bank of New York,
The final compromise on revaluation was reached in a law passed on July 15, 1925. The legislation specified different percentages of revaluation for various kinds of financial assets. Mortgages were to be revalued at 25 percent and industrial obligation bonds at 15 percent (with an additional 10 percent in special cases). Government bonds were revalued at 12.5 percent provided that the holder had purchased the bond before July 1, 1920; bonds purchased after that date were revalued at 2.5 percent. All government bonds were required to be surrendered for new redemption bonds. Repayment of these would not take place until at least 1932. One-thirtieth of the bonds would be repaid each year, with a lottery determining which bonds those would be.
Commercial bank accounts were not revalued. Savings bank accounts were subjected to revaluation according to a complex formula that pooled claims and then divided the repayments according to the size of the claim. The interest rate for private debt was set at 1.2 percent in 1925, with incremental additions until it reached 5 percent in 1928. Employee savings accounts with employers were revalued at varying amounts resulting from individual negotiation.
Although most creditors received something from the revaluation, many remained deeply embittered. Moreover, the burden of repayment falling on the government, the restrictions imposed by the Allies on the operations of the Reichsbank, and the fear of a repetition of the inflationary debacle forced all levels of government to balance their budgets. When the Great Depression hit Germany in 1930, with greater impact in 1931 and 1932, the central government found it impossible to respond with fiscal stimulus. Throughout the twentieth century, German governments remained hampered in their fiscal and monetary policies because of deep-rooted fears of a repetition of the hyperinflation of the 1920’s.
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Feldman, Gerald D. The Great Disorder: Politics, Economics, and Society in the German Inflation, 1914-1924. New York: Oxford University Press, 1997. In-depth examination of the economic crisis in Germany includes discussion of the Dawes Plan. Features illustrations, tables, bibliography, and index. -
Guttmann, William, and Patricia Meehan. The Great Inflation: Germany, 1919-1923. Farnborough, England: Saxon House, 1975. Account of Germany’s financial crisis written in nontechnical language. -
Holtfrerich, Carl-Ludwig. The German Inflation, 1914-1923. Translated by Theo Balderston. Berlin: De Gruyter, 1986. Economist’s account of the German crisis. Highly technical; includes many statistics. -
Hughes, Michael L. Paying for the German Inflation. Chapel Hill: University of North Carolina Press, 1988. Focuses on the struggle over revaluation and presents many details that illuminate who won and who lost as a result of the inflation. -
Ringer, Fritz, ed. The German Inflation of 1923. New York: Oxford University Press, 1969. Collection of materials from other sources provides a handy resource for readers interested in a variety of interpretations of the inflation. Concludes with a section on the contribution of the inflation to Adolf Hitler’s rise. -
Stolper, Gustav. German Economy, 1870-1940. New York: Reynal & Hitchcock, 1940. Provides a wealth of details and a broad perspective on Germany’s financial history. -
Wueschner, Silvano A. Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927. Westport, Conn.: Greenwood Press, 1999. Examination of the influence of Hoover, as secretary of commerce, and Strong, as governor of the Federal Reserve Bank of New York, on U.S. monetary policy, both domestic and international, in the period when the Dawes Plan was formulated. Chapters 2 and 3 include discussion of the Dawes Plan.
France Occupies the Ruhr
Dawes Plan