Hyperinflation

HYPERINFLATION

• The hyperinflation in the Weimar Republic was a three-year period of hyperinflation in Germany (the Weimar Republic) between June 1921 and January 1924.

• In order to pay the large costs of the First World War, Germany suspended the convertibility of its currency into gold when that war broke out. Unlike France, which imposed its first income tax to pay for the war, the German Kaiser and Parliament decided without opposition to fund the war entirely by borrowing, a decision criticized by financial experts like Hjalmar Schacht even before hyperinflation broke out. The result was that the exchange rate of the Mark against the US dollar fell steadily throughout the war from 4.2 to 8.91 Marks per dollar. The Treaty of Versailles, further accelerated the decline in the value of the Mark, so that by the end of 1919 more than 6.7 paper Marks were required to buy one US dollar.
• German currency was relatively stable at about 60 Marks per US Dollar during the first half of 1921. Because the Western theatre was mostly in France and Belgium, Germany had come out of the war with most of its industrial power intact, a healthy economy, and in a better position to become the dominant force on the European continent. However the "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.
• Beginning in August 1921, Germany began to purchase foreign currency with Marks at any price, but that only increased the speed at which the Mark declined in value.The lower the Mark sank on foreign exchanges, the more marks were required to buy the foreign currency demanded by the Reparations Commission.
• During the first half of 1922, the Mark stabilized at about 320 Marks per Dollar. This was accompanied by international reparations conferences, including one in June 1922 organized by U.S. investment banker J. P. Morgan, Jr. When these meetings produced no workable solution, the inflation changed to hyperinflation and the Mark fell to 800 Marks per Dollar by December 1922. The cost-of-living index was 41 in June 1922 and 685 in December, a 15-fold increase.
• In January 1923 French and Belgian troops occupied the Ruhr, the industrial region of Germany in the Ruhr valley to ensure that the reparations were paid in goods, such as coal from the Ruhr and other industrial zones of Germany. Because the Mark was practically worthless, it became impossible for Germany to buy foreign exchange or gold using paper Marks. Instead, reparations were paid in goods. Inflation was exacerbated when workers in the Ruhr went on a general strike, and the German government printed more money in order to continue paying them for "passively resisting."
• By November 1923, the American dollar was worth 4,210,500,000,000 German marks.
• As a result of hyperinflation, there were news accounts of individuals in Germany suffering from a compulsion called zero stroke, a condition where the person has a "desire to write endless rows of [zeros] and engage in computations more involved than the most difficult problems in logarithms."
• Although the inflation ended with the introduction of the Rentenmark and the Weimar Republic continued for a decade afterwards, hyperinflation is widely believed to have contributed to the Nazi takeover of Germany and Adolf Hitler's rise to power. Adolf Hitler himself in his book, Mein Kampf, makes many references to the German debt and the negative consequences that brought about the inevitability of "national socialism". Some economists, however, point out that Hitler's rise was immediately preceded by the 1931 economic crisis, which, while also being partially triggered by Germany's debt, was, unlike the hyperinflation crisis of 1923, characterized by massive deflation created by a government austerity program. Paul Krugman concurred that the "1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation and depression." The inflation also raised doubts about the competence of liberal institutions, especially amongst a middle class who had held cash savings and bonds. It also produced resentment of bankers and speculators, whom the government and the press blamed for the inflation crisis. Some Germans called the hyperinflated Weimar banknotes "Jew confetti".
• Later German monetary policy showed far greater concern for maintaining a sound currency, a concern that even affected Germany's attitude in resolving the European sovereign debt crisis from 2009 onwards.
• The hyperinflated, worthless Marks became widely collected abroad. The Los Angeles Times estimated in 1924 that more of the decommissioned notes were spread about the United States than existed in Germany.

Sources: http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

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