The German hyperinflation took place between 1922-1923 and is one of the most famous examples of hyperinflation in history. The Reichsmark lost all of its purchasing power in a matter of months as Germany struggled to pay its war debt and make war reparations under the Versailles Treaty.
The German hyperinflation led to the destruction of the middle class in Germany and was accompanied by starvation, food riots, petty crime and the total loss of savings of many German citizens.
In order to finance World War I, Germany temporarily halted redeemability of paper money into gold. This meant, Germany effectively went off the gold standard in order to increase military spending.[1] Taylor, Frederick: The Downfall Of Money. Germany’s Hyperinflation And the Destruction Of The Middle Class (2014), pp. 288f.
Before World War I, Germany was one of the most powerful countries in the world, both politically and economically. Germany, which started World War I, was overly confident that it would win the war and took on excessive levels of debt. Additionally to issuing war bonds, it expanded the money supply to finance the war.[2] Gross, Stephen: Confidence and Gold. German War Finance 1914-1918, in: Central European History 42 (2009), pp. 227ff.
The plan of the government was to pay off its debt and make up for the expansion of paper money by confiscating the gold supplies and wealth of nations it was at war with, such as France and the United Kingdom.
It turned out that Germany underestimated the length and intensity of the war. Once the war ended and Germany was defeated by the allies, the once powerful nation was in a dire situation.
The allies, with France at the forefront, demanded war reparations. Under the Versailles Treaty, it was decided that Germany had to shoulder the sole responsibility for the war, including all damage that was inflicted. This meant, additionally to its own war debt, Germany had to pay war reparations to France and other countries which many people at the time, including John Meynard Keynes, considered excessively high and unreasonable.[3] Keynes, John Meynard: The Economic Consequences of the Peace (1920), pp. 46ff.
Under the pressure of the Versailles Treaty, and facing an insurmountable level of war debt, Germany resorted to printing money.
If Germany defaulted on its debt and didn’t pay the demanded war reparations, France threatened to invade Germany and confiscate large parts of its industry.[4] Taylor, Frederick: The Downfall Of Money. Germany’s Hyperinflation And the Destruction Of The Middle Class (2014), pp. 234f. Given that default wasn’t an option, Germany had to resort to the printing press and further inflate the money supply that was already heavily inflated during World War I.
Additionally to its war debt and reparations, Germany was facing other economic troubles. As millions of German soldiers returned from the front, defeated and disillusioned, political pressure and tensions within Germany grew.
There was lots of unemployment, strikes, attempted putsches and talk of revolution by communist groups. At the same time, brigades known as the Freikorps, wearing Swastikas on their helmets, a precursor to the National Socialist movement, vowed to defend their country against communist uprising.[5] Taylor, Frederick: The Downfall Of Money. Germany’s Hyperinflation And the Destruction Of The Middle Class (2014), pp. 83ff.
This internal political tension, the war debt, reparations under the Versailles Treaty and a growing tendency of the government to resort to the printing press to solve problems, contributed to the German hyperinflation.
During the hyperinflation, the general public didn’t really understand what was going on. Many blamed foreign speculators, Jews and profiteers for the inflation.[6] Fergusson, Adam: When Money Dies. The Nightmare of the Weimar Hyper-Inflation (1975), pp. 69ff.
As the inflation gradually increased, many Germans and even foreign investors still had faith that the Reichsmark, the currency used in Germany at the time, would recover.
This false trust in the government and its currency led many Germans to hold onto the currency far too long. Investors from abroad bought Reichsmarks and invested in Germany, speculating that the currency was undervalued and would recover. While there were occasional signs of hope when the Reichsmark gained value against foreign currencies, these temporary increases were followed by rapid drops in the exchange rates of Reichsmark against the US dollar and pound sterling.
As confidence in the Reichsmark continued to fade, and it became increasingly clear that the Reichsmark would never recover its purchasing power against other currencies, citizens as well as foreign speculators unloaded their Reichsmarks as fast as they could.
They fled to hard assets, foreign currencies and even simple everyday commodities like shoes, pianos and food. This loss of trust in the currency led to even more rapid price increases as the velocity of money increased.
When workers received their wages, their wives would quickly spend the money on food and other basic necessities before prices went up.
Business owners, rapidly facing increasing prices in production and raw material, raised their own prices to remain profitable. As trust in the Reichsmark continued to deteriorate, and people realized that it was worthless paper nobody wanted to hold, the final and most devastating phase of the hyperinflation unfolded.
In order to keep the economy going and prevent a complete economic collapse, the German government continued printing money at a staggering rate.
The government couldn’t print money fast enough and deliver it to banks, which led to several forms of emergency money being issued throughout various parts of the Weimar Republic.
The denominations grew to billions and eventually trillions. A loaf of bread cost 163 mark at the end of 2022. The same loaf cost 200,000,000,000 mark at the beginning of 2023, when the hyperinflation reached its peak.
Apart from the rapid price increases and the total loss of confidence in the Reichsmark, the German hyperinflation lead to unspeakable misery.
The German middle class and workers suffered most. Pensioners and those living on fixed incomes lost everything. What used to provide a comfortable middle-class income could barely buy a loaf of bread by the end of the hyperinflation.
There are stories of pensioners that locked themselves in their apartments and starved because they were too ashamed to admit they needed financial help.
There were food riots because stores were empty and farmers hoarded their produce.
Black markets emerged for foreign currencies as well as meat and other luxury foods which were taken for granted a few years ago.
Petty crimes and prostitution were present everywhere throughout Germany. Life savings, pensions, and in many ways, the entire middle class of Germany, was wiped out in a matter of a few years.
There were of course, as with every economic crisis, profiteers. Foreigners visited Germany and dined in luxury restaurants to benefit from the low prices, denominated in their own currencies like dollars, Francs or pounds.[7] Fergusson, Adam: When Money Dies. The Nightmare of the Weimar Hyper-Inflation (1975), pp. 75f.
This problem got so bad that the government outlawed public demonstrations of excessive wealth and made it punishable for anyone to “show off” or engage in gluttony.
But the real profiteers were capitalists like Hugo Stinnes, a German industrialist, who borrowed large amounts of Reichsmark to buy up businesses.
The money Stinnes borrowed lost most of its purchasing power by the time it had to be paid back. This allowed Stinnes to amass huge fortunes during the hyperinflation, based on debt that stayed the same in nominal terms but completely vanished in real terms.[8] Taylor, Frederick: The Downfall Of Money. Germany’s Hyperinflation And the Destruction Of The Middle Class (2014), pp. 206ff.
Speculation on the stock market was common, and while some people were able to preserve wealth this way, many lost money. While they made millions, and it seemed like they became rich, the Reichsmark was loosing purchasing power at a faster rate than the stock market “melted up”.
Preserving and creating wealth was extremely hard during the German hyperinflation. Foreign speculators, domestic speculators and those who had no investable assets and relied on fixed incomes, lost most of their purchasing power.
While wage workers successfully demanded higher wages, and viewed increases as a victory, their wage increases in reality didn’t keep up with inflation.
At the peak of the Germany hyperinflation, children built kites using paper money or created large towers using stacks of Reichsmarks or emergency money.
Others used paper money to decorate their walls or fire up their stoves. This shows the complete loss of trust in the currency.
Paper money was available in such large quantities that wage workers picked up their wages in large bags and handed it over to their wives who quickly rushed to exchange the entire wage for food and basic necessities.
Once everyone, including the German government, lost hope in the Reichsmark ever being used or trusted as a currency, the government decided to pull all Reichsmarks out of circulation and destroy them.
The Reichsmark was replaced with the Rentenmark, a new government-issued currency that was backed by agricultural and industrial mortgages.[9] Taylor, Frederick: The Downfall Of Money. Germany’s Hyperinflation And the Destruction Of The Middle Class (2014), pp. 317
The new Rentenmark was adopted relatively quickly, marking the end of the German hyperinflation.
Given the immense amount of suffering, it is remarkable how quickly Germany recovered from the hyperinflation. However, while often exaggerated, the hyperinflation did help pave the path for Hitler and the Nazis. Antisemitism was common during the hyperinflation, which was often blamed on jewish speculators.
It took almost another decade, the Great Depression and other political tensions for Hitler to finally rise to power.
The German hyperinflation remains an important reminder of what can happen when governments engage in excessive money printing.
