As night follows day, any significant outbreak of inflation in Western economies eventually involves an invocation of the hyperinflation experienced by Germany 100 years ago. Since mid-2021, people ranging from tech billionaires to bitcoin enthusiasts have been asking: are we headed for a Weimar hyperinflation moment?
It is not that German hyperinflation was the most severe in history. The inflation apocalypse that engulfed Zimbabwe in 2007 was considerably worse. The German case, however, attracts attention for two reasons. First, it occurred in a modern developed economy. Second, the hyperinflation experience severely damaged the Weimar Republic’s credibility in many Germans’ eyes, thereby contributing to Hitler’s rise to power.
History, Cicero reminds us, is the magistra vitae. It provides us with a repository of experiences from which we can learn and then apply the lessons to our present dilemmas. The parallels between the unraveling of Germany’s financial system in the early-1920s and today’s inflation outbreaks are far from exact. But understanding what happened in Germany does provide us with insights into our current inflationary challenges.
From World War to Monetary Chaos
Few economic events have been as closely analyzed as the decline in the value of the German mark that began accelerating in 1921, before stabilizing in mid-1922, and then falling at a light-speed pace from November 1922 onwards. In December 1921, a loaf of bread cost 4 marks. A year later, the price was 163 marks. By November 1923, it was 201,000,000,000 marks. Like many of Germany’s post-1918 challenges, some of the roots of the problem are traceable to World War I.
Among the many choices confronting Imperial Germany in 1914 was how to pay for the war. In August 1914, the Reichsbank delinked Germany’s currency from the gold standard by formally suspending the convertibility on demand of paper money into gold for the war’s duration. The Papiermark consequently became the only currency in circulation. A law was also passed permitting the Reichsbank to purchase short-term treasury bills and commercial bills of exchange, thereby allowing the Reichsbank to act as a lender of last resort and print new paper money to meet the government’s financial needs.
This move was accompanied by Berlin borrowing large amounts of capital. It struggled to do so abroad, and thus resorted to selling long-term interest-bearing bonds to Germans domestically. The effect was to keep tax increases relatively low but also to create a growing debt burden.
The political calculation behind these decisions was that the German Army would win the war by swiftly conquering France before turning east to defeat Russia. The expectation was that the war’s losers would pay Germany’s wartime debts via massive reparations and territorial concessions. A transition back to the gold standard at the end of a victorious war was also fully anticipated by both government and people. This confidence helped keep inflation somewhat manageable between 1914 and 1918. In August 1914, the U.S. dollar-mark exchange rate was 4.19 marks to the dollar. In November 1918, it was 7.4 to 1. Given how many Papiermarks had been issued since 1914, this was not a terrible number.
But, as we all know, Germany’s strategic gamble failed. The defeated Germany which emerged after four years of brutal war found itself saddled with domestic war debts of 154 billion goldmarks and wondering how to pay them. Six months later, German negotiators at Versailles were informed that Germany had to pay reparations at levels far beyond most Germans’ wildest imaginations. Almost immediately, the mark’s value began wobbling. In January 1919, it was 8.9 marks to the dollar. The mark rate slid to 13.5 following specification of the Allies’ reparations demands. By December 31, 1919, it was 49 to 1.
Two other factors complicated matters. First, the Allies insisted that reparation payments be made in foreign currencies. They were determined not to let Germany inflate its way out of reparations. Germany consequently had to buy foreign currencies with a mark whose value continued to fall. The only way to keep doing this was to print more marks, thereby further devaluing the currency.
Second, the Weimar government—a coalition of Social Democrats, liberals, and the Catholic Center party—was struggling to establish order in a country that was starving, stricken with high unemployment, and being torn apart by labor unrest and violent agitation by Communists and proto-Nazis. The government’s response was to adopt a “pay-whatever-it-takes” strategy to fund the huge wage increases that Germany’s powerful unions demanded for their members, and to keep paying for welfare programs that had grown as a result of needing to pay pensions to wounded veterans, war-widows, and their families.
Germany’s leaders were fully aware of the inflationary consequences of these decisions. They also knew that any return to monetary stability involved measures like cutting government spending to pay down debt, as well as eventually getting the mark back on the gold standard.
Few, however, in the German government believed that the fledgling democracy could withstand the social explosion that would follow implementation of such policies. The resulting acceleration in unemployment alone, they worried, would deliver Germany into the hands of Marxists or extreme nationalists. From this standpoint, inflation was, as the German foreign minister Walther Rathenau told a group of American bankers on June 23, 1922, a “political necessity” if chaos and dictatorship were to be avoided. The very next day, Rathenau, a Jewish-German industrialist who had effectively run much of the German economy during the war, was assassinated by two extreme right-wingers.
Foreign observers were not blind to the dilemmas facing Germany. As Britain’s Chancellor of the Exchequer at the time, Sir Robert Horne, later noted: “The difficulty was that they were in a vicious circle. Germany said she could not stop the emission of paper money and repay her foreign obligations unless she was able to raise a foreign loan, and she could not raise a foreign loan until she could pay her obligations.” The printing press, many German officials believed, was the only way to square the circle. This policy happened to coincide with the firm conviction of the Reichsbank’s president, Rudolf Havenstein, that the central bank’s responsibility was to satisfy the rising demand for money as prices increased as a result of the mark’s declining value. Again, that meant printing money.
The price for this was hyperinflation in what was still the world’s second-biggest economy. After Rathenau’s assassination, the mark to dollar rate was 493. One year later in June 1923, it was 109,966. On November 15, 1923, it reached 2.5 trillion.
Even worse, hyperinflation fueled the very disorder that Berlin had sought to avoid. Savers were wiped out, while borrowers had their debts liquidated. That generated tremendous resentment among creditors towards debtors. In rural areas, farmers hoarded their produce in anticipation of a more stable means of exchange being established. The result was hunger in cities and escalating urban-rural tensions.
Then there were the everyday scenes of disarray. Tourists observed German women rushing to stores with wheelbarrows carrying their husbands’ pay-packets to buy necessities before the prices increased again in a few hours’ time. This need to spend money quickly before it lost more value only accelerated monetary velocity throughout the economy. That in turn generated ever-faster price increases.
One group which suffered terribly was the highly-educated segment of the German middle-class. The Bildungsbürgertum, as it was called, consisted of professionals like civil servants, doctors, lawyers, architects, academics, and scientists. Overwhelmingly drawn from the Protestant upper-middle class, it was deeply patriotic as a rule. Many of their sons—men like the ordo-liberal economists Wilhelm Röpke and Walter Eucken who would save the German economy from oblivion in 1948—served as front-line officers during the war.
The same patriotism had led them to purchase a disproportionately high number of war bonds. As hyperinflation took hold, the anticipated redeemable value of these bonds collapsed, alongside the purchasing power of professional salaries. The Bildungsbürgertum subsequently found themselves selling treasured family heirlooms to pay electricity bills. Such experiences inflicted deep psychological wounds that would come back to haunt the Republic.
Breaking the Spell
By mid-1923, Germany’s leaders recognized that, absent a return to monetary stability, complete social breakdown loomed. Political radicals, they feared, would capitalize on this to overthrow the Republic. Communist uprisings in Saxony and an attempted radical-right putsch in Bavaria, led by an Austrian-born agitator named Adolf Hitler, underscored the reality of this threat.
The decision to act was bolstered by two developments. One was the appointment of the conservative-liberal Gustav Stresemann, as chancellor and foreign minister of a coalition government in August 1923. An economist by training but with broad intellectual interests, Stresemann was respected by groups ranging from moderate Social Democrats to center-right monarchists. He was also determined to curb inflation drastically. Stresemann was helped by America and Britain’s decision to revisit reparations within the context of the monetary disaster unfolding throughout Germany. America also brought pressure on France by effectively telling the French government that Washington would not relent on demanding full repayment of France’s wartime debts to America until Paris adopted more flexibility vis-à-vis German reparations.
This gave Stresemann’s government the space it needed to break the inflation spell. That included sidelining the Reichsbank president by appointing a currency commissioner, Hjalmar Schacht (later Hitler’s economics minister between 1934 and 1937), who promptly turned off the printing presses. Major government spending cuts were also implemented. One and a half million civil servants lost their jobs and deep reductions were made in social spending.
These measures were accompanied by a root-and-branch currency reform. Such reforms are always a risky exercise. The outcome is by no means guaranteed, and some people—in this case, middle-class war-bond holders—end up having their wealth dramatically reduced through no fault of their own. This type of step is generally taken only when governments believe they have no choice, and every alternative is worse. Stresemann’s government, however, decided to make the leap.
An interim currency, the Rentenmark, backed by Germany’s conservative financial establishment, was introduced on November 16, 1923, to replace the worthless Papiermark. That process involved cutting 12 zeros off prices. The subsequent prices quoted in Rentenmark remained stable. On August 24, 1924, the Reichsmark was introduced to replace the Rentenmark and then linked to gold. The new currency rate was 4.20 Reichsmarks to the dollar. Finally, the nightmare was over.
Consequences and Lessons
Overcoming hyperinflation was not a cost-free exercise. Unemployment was already high in late-1923, and the anti-inflationary measures produced more joblessness. That drove some working-class Germans towards the Communists, and others towards ethno-fascism. Some of the worst anti-Semitic incidents of 1924 occurred in Berlin’s working-class suburbs, as unemployed Germans vented their anger by looting Jewish-owned businesses and beating up Jewish shopkeepers.
But the most damaging consequence was middle-class Germany’s disenchantment with Weimar democracy. Hyperinflation destroyed the middle class’s savings while the cure had rendered their war-bonds valueless. The social humiliation which they endured throughout 1923 also left a mark, especially upon the Bildungsbürgertum. From this point on, the democracy-supporting parties could not secure a majority of seats in the Reichstag. When the Great Depression hit in 1929, middle-class Germans had little to fall back on by way of savings. That only made them more susceptible to National Socialism.
The sheer scale of Weimar hyperinflation, the background of a global war, and the naked political violence of the time make the particularities of the German case significantly different from contemporary inflationary conditions. Nonetheless, the Weimar experience does provide us with some important lessons.
The first is that once the inflation genie escapes from the bottle, it is extremely difficult to put it back in. Given the right circumstances, inflation can accelerate very quickly. Once underway, the dynamics that drive inflation are hard to dislodge. Moreover, there is no painless way of reversing them.
Second, Weimar’s inflation catastrophe illustrates that governments can inflate their way out of trouble for a while. For German politicians, printing money was a means to try and diminish the reparations that almost all Germans viewed as unjust. It also allowed the government to placate trade unions, put more people on the public payroll to reduce unemployment, and expand a welfare state that was already large by 1922 standards. As a political strategy, it worked, but only for a while. Eventually, a monetary Armageddon engulfed the country.
Third, Weimar teaches us that many political leaders will only tackle inflation when they believe they have no other choice. Even then, they often have to be pushed to do so. Germany confronted bleak options between 1919 and 1923. Nonetheless, Berlin consistently prioritized many other things above monetary stability. It only acted when inflation was creating such extreme political and economic disorder that not acting became unthinkable.
That is perhaps Weimar hyperinflation’s most poignant lesson for us today. Yes, legislators and central bankers must consider the trade-offs associated with different choices. This means that doing what needs to be done vis-à-vis inflation is not easy, even at the best of times. The immediate costs of reestablishing financial stability may seem too steep to many politicians. It requires, after all, people with courage of the potentially career-ending variety. Looking at today’s public square, I don’t see many such individuals in public office or on the horizon. We probably aren’t heading for Weimar, but monetary mediocrity may well be heading for us.