Hyperinflation in the Weimar Republic was a three-year period of hyperinflation in the Weimar Republic of Germany between June and January It caused considerable internal political instability in the country, the occupation of the Ruhr by foreign troops as well as misery for the general populace.
To pay for the large costs of the ongoing First World War , Germany suspended the gold standard the convertibility of its currency to gold when the war broke out.
Unlike the French Third Republic , which imposed its first income tax to pay for the war, German Emperor Wilhelm II and the German parliament decided unanimously to fund the war entirely by borrowing,  a decision criticized by financial experts such as Hjalmar Schacht as a dangerous risk for currency devaluation.
The government believed that it would be able to pay off the debt by winning the war, and it would be able to annex resource-rich industrial territory in the west and east.
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Also, it would be able to impose massive reparations on the defeated Allies. The strategy backfired when Germany lost the war. The new Weimar Republic was now saddled with a massive war debt that it could not afford.
That was made even worse by the fact that it was printing money without the economic resources to back it up. German currency was relatively stable at about 90 marks per dollar during the first half of It was, in fact, in a better position to become the dominant economic force on the European continent. The first payment was made, when it came due in June Since reparations were required to be repaid in hard currency, not the rapidly depreciating paper mark , one strategy that Germany used was the mass printing of bank notes to buy foreign currency, which was then used to pay reparations.
That greatly exacerbated the inflation of the paper mark. From August , Germany began to buy foreign currency with marks at any price, but that only increased the speed of breakdown in the value of the mark. In the first half of , the mark stabilized at about marks per dollar. One, in June , was organized by US investment banker J. By fall , Germany found itself unable to make reparations payments since the price of gold was now well beyond what it could afford.
Instead, reparations were to be paid in goods such as coal. In January , French and Belgian troops occupied the Ruhr , the industrial region of Germany in the Ruhr valley , to ensure reparations payments. Inflation was exacerbated when workers in the Ruhr went on a general strike and the German government printed more money to continue paying for their passive resistance. The hyperinflation crisis led prominent economists and politicians to seek a means to stabilize German currency.
In August , an economist, Karl Helfferich , proposed a plan to issue a new currency, the "Roggenmark" "rye mark" , to be backed by mortgage bonds indexed to the market price of rye grain. The plan was rejected because of the greatly fluctuating price of rye in paper marks. Agriculture Minister Hans Luther proposed a plan that substituted gold for rye and led to the issuance of the Rentenmark "mortgage mark" , backed by bonds indexed to the market price of gold. Rentenmarks were not redeemable in gold but only indexed to the gold bonds.
The plan was adopted in monetary reform decrees, on October 13—15, A new bank, the Rentenbank, was set up and controlled by new German Finance Minister Hans Luther. After November 12, , when Hjalmar Schacht became currency commissioner, Germany's central bank the Reichsbank was not allowed to discount any further government Treasury bills , which meant the corresponding issue of paper marks also ceased.
The Rentenbank refused credit to the government and to speculators who were not able to borrow Rentenmarks, because Rentenmarks were not legal tender. On November 16, , the new Rentenmark was introduced to replace the worthless paper marks issued by the Reichsbank. Twelve zeros were cut from prices, and the prices quoted in the new currency remained stable. When the president of the Reichsbank, Rudolf Havenstein , died on November 20, , Schacht was appointed to replace him.
By November 30, , there were ,, Rentenmarks in circulation, which increased to 1,,, by January 1, and to 1,,, Rentenmarks by July Meanwhile, the old paper Marks continued in circulation. The total paper marks increased to 1. On August 30, , a monetary law permitted the exchange of a 1-trillion paper mark note to a new Reichsmark, worth the same as a Rentenmark. By one dollar was equivalent 4. Eventually, some debts were reinstated to compensate creditors partially for the catastrophic reduction in the value of debts that had been quoted in paper marks before the hyperinflation.
Similarly, some government bonds were reinstated at 2. Mortgage debt was reinstated at much higher rates than government bonds were. The reinstatement of some debts and a resumption of effective taxation in a still-devastated economy triggered a wave of corporate bankruptcies. One of the important issues of the stabilization of a hyperinflation is the revaluation. The term normally refers to the raising of the exchange rate of one national currency against other currencies.
As well, it can mean revalorization , the restoration of the value of a currency depreciated by inflation. The German government had the choice of a revaluation law to finish the hyperinflation quickly or of allowing sprawling and the political and violent disturbances on the streets. The government argued in detail that the interests of creditors and debtors had to be fair and balanced.
Neither the living standard price index nor the share price index was judged as relevant. The calculation of the conversion relation was considerably judged to the dollar index as well as to the wholesale price index. In principle, the German government followed the line of market-oriented reasoning that the dollar index and the wholesale price index would roughly indicate the true price level in general over the period of high inflation and hyperinflation.
In addition, the revaluation was bound on the exchange rate mark and United States dollar to obtain the value of the Goldmark. The law was challenged in the Supreme Court of the German Reich Reichsgericht , but its 5th Senate of ruled, on November 4, , that the law was constitutional, even according to the Bill of Rights and Duties of Germans Articles , , and of the Constitution.
However, it has been the subject of the most scholarly economic analysis and debate. The hyperinflation drew significant interest, as many of the dramatic and unusual economic behaviors now associated with hyperinflation were first documented systematically: German monetary economics was at that time heavily influenced by Chartalism and the German Historical School , which conditioned the way the hyperinflation was analyzed.
John Maynard Keynes described the situation in The Economic Consequences of the Peace: The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance. It was during then that French and British economic experts began to claim that Germany deliberately destroyed its economy to avoid war reparations, but both governments had conflicting views on how to handle the situation.
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The French declared that Germany should keep paying reparations, but Britain sought to grant a moratorium to allow financial reconstruction. Reparations accounted for about a third of the German deficit from to  and so were cited by the German government as one of the main causes of hyperinflation.
Other causes cited included bankers and speculators particularly foreign. Hyperinflation reached its peak by November  but ended when a new currency the Rentenmark was introduced. To make way for the new currency, banks "turned the marks over to junk dealers by the ton "  to be recycled as paper. Since the hyperinflation, German monetary policy has retained a central concern with the maintenance of a sound currency, a concern that still affects Germany's attitude to the European sovereign debt crisis from The hyperinflated, worthless marks became widely collected abroad.
The Los Angeles Times estimated in that more of the decommissioned notes were spread about the US than existed in Germany.
The cause of the immense acceleration of prices seemed unclear and unpredictable to those who lived through it, but in retrospect, it was relatively simple.
The Treaty of Versailles imposed a huge debt on Germany that could be paid only in gold or foreign currency. With its gold depleted, the German government attempted to buy foreign currency with German currency,  equivalent to selling German currency in exchange for payment in foreign currency, but the resulting increase in the supply of German marks on the market caused the German mark to fall rapidly in value, which greatly increased the number of marks needed to buy more foreign currency.
That caused German prices of goods to rise rapidly, increasing the cost of operating the German government, which could not be financed by raising taxes because those taxes would be payable in the ever-falling German currency. The alternative was some combination of running a budget deficit and simply creating more money, both increasing the supply of German currency on the market and reduced that currency's price.
When the German people realized that their money was rapidly losing value, they tried to spend it quickly.
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That increased monetary velocity and caused an ever-faster increase in prices, creating a vicious cycle. The government and the banks had two unacceptable alternatives. If they stopped inflation, there would be immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order, insurrection and possibly even revolution.
However, attempting to avoid both unemployment and insolvency ultimately failed when Germany had both. From Wikipedia, the free encyclopedia. Banking and Monetary Statistics Some Neglected Contributions in Contemporary German Literature , David E. Stadler, Journal of Money, Credit and Banking, vol. What's the future of the euro?
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