by on Saturday, January 8th, 2011 | Comments Off on The Weimar Republic: A Case Study in Hyperinflation

Once upon a time, at the end of the first world war, a little country by the name of Germany was beset by a government that demonstrated a startling inability to manage the nation’s finances. Since there was not enough gold mined throughout history, and likely not enough residing in the crust of the earth in its entirety, these politicians, in their infinite wisdom, unpinned the value of their currency from gold, an action tantamount to turning on the printing press spigot and watching all the useless bits of paper float away in the wind.

The basic problem with removing a country from the gold standard is that the continued financial survival of the currency relies on the judgment and conscience of the politicians. Compared to that, throwing gasoline on a fire seems a conservative choice. Following the end of the war, the German Central Bank (Reichsbank) suspended the redeemability of currency for gold. Now they could print away money to their heart’s content to try to dig out of the economic mess they were in. Since the Reichsbank did not want to instigate riots in the streets with heavy new taxes, it chose to borrow money instead, in addition to printing, printing, printing.

By the end of World War I, the amount of currency in circulation in Germany had increased by a factor of four. Inflation wasn’t terrible yet, but it was coming, and the central bank’s debt had swollen from 3 billion to 55 billion marks. For various reasons, inflation hadn’t hit hard yet: people hoarded marks because of wartime financial hardships, millions of men on the battlefield reduced the size of population the marketplace, but, perhaps most importantly, citizens had not lost faith in the mark yet.

After the war, Germany received a harsh measure of war reparations, dictated by the victorious forces, initially causing a depreciation of German money against the other major world currencies. People began to lose faith in their leaders and the native currency, which eventually ushered in spiraling inflation, especially through the years of 1921 to 1924, which saw the reality of people using marks to start their cooking and heat fires during the winter, because it was cheaper to burn money than firewood. The wholesale price index sat at a baseline of 1.0 in 1914, but had reached 726,000,000,000.00 by November of 1923.

What is life like in hyperinflation? Stay tuned and we’ll tell you all about it.

The American Monetary Association Team

Flickr / purpleslog