The Great Inflation



In late-1922 the German government were forced to ask the Allies
for a moratorium on reparations payments; this was refused, and
she then defaulted on shipments of both coal and timber to
France. By January of the following year, French and Belgian
troops had entered and occupied the Ruhr. The German people,
perhaps for the first time since 1914, united behind their
government, and passive resistance to the occupying troops was
ordered. A government-funded strike began as thousands of workers
marched out of their factories and steel works. The German
economy, already under massive pressure, gave way. The huge cost
of funding the strike in the Ruhr and the costs of imports to
meet basic consumer needs were met by the familiar expedient of
the printing presses. Note circulation increased rapidly, and by
November 1923 had reached almost 92 trillion marks. With less
than three per cent of government expenditure being met from
income and with the cost of one dollar at four billion marks,
Germany was in the throes of economic and social chaos.
Starvation became a reality for millions of people, despite a
bumper cereal harvest, as shops reverted to the barter system.
Farmers refused to accept the effectively worthless, banknotes in
exchange for grain, and food quickly began to run short in the
cities. Prices rose one trillion-fold from their pre-war level.
More importantly, for the long-term political future of Germany,
the middle and working classes saw their savings wiped out.
These were, in essence, the people who were later to become the
hard-core of the Nazi vote.

Economists will argue that runaway hyperinflation has two
sources. Firstly, it arises through a fall in the foreign
exchange value of a currency, when an adverse balance of payments
reduces foreign investors demand for the currency. A falling
exchange rate increases the cost of imports and, therefore, the
cost of living. Wages rise as workers try to maintain their
standard of living, especially if previous institutional
arrangements have linked wages to living costs. Firms paying
higher wages raise the price of the goods they sell, prices rise
still further, the foreign exchange value of the currency falls
still more, and the cycle continues. Secondly, it arises through
a large budget deficit which no one believes will narrow in the
future. Faced with the prospect of budget deficits for many years
to come, the usual sources of credit available to the government
decline to make further loans; the government can no longer
borrow to cover the deficit between revenue and expenditure. The
only alternative is to print more and more banknotes. As
government workers and suppliers present their bills to the
Treasury, it pays them off with newly-printed pieces of paper.
This puts more banknotes into the hands of the public and they
then spend them. In Germany, as we have seen, the problem was
that there were trillions of marks worth of paper currency in
circulation. Prices could rise one thousand times between a
worker being paid and his reaching the shops. A common analogy
used is that if one could afford a bottle of wine today, one
should keep the empty bottle which would be worth more tomorrow
than the full bottle was today.

Eventually, the power to boost government spending by printing
money goes. When the government can no longer gain, even in the
short-term, a budgetary balance through inflation, the situation
becomes so intense that stabilisation through a currency board, a
new finance minister or a link to the gold standard is
implemented, and reform can be successful. It was at this point
that some sanity was injected into the German economy by the
election of Gustav Stresemann. He called a halt to resistance in
the Ruhr, and set out to stabilise the mark. Luther, Stresemann∆s
Finance Minister, introduced the rentenmark the value of which
was based on Germany∆s staple, rye, rather than gold. In fact the
rentenmark represented a mortgage on Germany∆s land and industry,
which could never be redeemed. It did not matter. The point was
that the currency was stabilised and became exchangeable at a
rate of one billion old marks to one new mark, and at the pre-war
parity of 4.2 marks to the dollar. The new currency was quickly
accepted by