In the economy, inflation occurs when the money supply exceeds equilibrium, and the progress of this is hyperinflation. There are states in history that have been subjected to hyperinflation. Hungary, Yugoslavia, Greece, and Zimbabwe are among these countries. Hyperinflation in Germany after the Second World War is the most pathetic example of history. Germany started printing money as a solution to finance its debt and could not avoid this situation later. As the money pressed, the money began to devalue and hyperinflation ensued. They had a very difficult time and they found a solution to the transition to a new currency. Countries follow different policies against hyperinflation and Germany’s attitude towards hyperinflation will be explained in this article.
WHAT IS HYPERINFLATION?
Hyperinflation is a time frame when prices of goods and services rise by more than 50 percent per month. It is distinguished from other inflation types because it is the most severe form of inflation that has lost its value.
How does hyperinflation come about?
The most important reason for hyperinflation is excessive monetary expansion. When the economy of a country starts to pay for government spending, this is a reason for the beginning of hyperinflation. The government prints more money to pay for spending rather than to squeeze the money supply. When consumers understand what it is, they think it is inflation. Consumers buy more to avoid a high price at the next time, so the demand is out of control. This acceleration causes scarcity and, it causes inflation to turn into high inflation(hyperinflation).
GERMAN HYPERINFLATION
Germany had emerged from the First World War in defeat. War reparations were imposed on the problems of a postwar economy with low yields and low tax revenues, loaded by victorious countries like France and Britain. The German government was trying to finance the budget deficit, which had reached a large sum, by pressing money (Anonymous, November19,2016).”
But they did not know that it would cause hyperinflation and that everyone would be badly affected by it. They continued to print money and their money depreciated in an unbelievable way. Unemployment increased, and old people died from starvation. Stresemann, the German Central Bank manager, found the solution in a new currency to resolve the crisis and the Rentenmark emerged. In addition, Dawes cut Germany’s debt by half. Stresemann and Dawes have done great things for the German economy.
Years 1919–1921
German military spending had to pay to finance it. The currencies, unfounded by the German government, caused inflation to begin slightly. Germany was defeated in World War I and this was a disappointment for many Germans. Some of the soldiers felt themselves knocked on their backs because of the defeat, and they went to the right-parties like Nazis. Germany had to pay heavy debts to its allies because of the Treaty of Versaille.
Years 1922–1923
By 1922, the Reichsbank (the Federal Reserve Bank) had lost control of the situation and inflation turned into hyperinflation. Reichsbank has begun to take out how much convertible money they have found, and yet they have not been able to pay for war compensation payments. “In 1923, it is possible that having 4,7 trillion Marks for a dollar. (Bozan, E. 2016, February 23).”
Prices were rising rapidly in that market. In fact, while drinking a cup of coffee, the price of coffee could double before the coffee runs out. People were carrying money with hand trucks. In a situation like this, the value of money surpasses its own printing value. For example, 30 marks were spent to print 20 marks… The money started to print one-sided to reduce the cost of ink.
A lot of incredible images came out. People who make money to warm up in the streets, children who play with money, and who cover their walls with money because the cost of the wall is more expensive are some examples of the situation. The restaurants were out of menus, and the price tags disappeared in the shops because prices were constantly changing. In short, the money had completely lost its function and value.
While this chaos continued, France and Belgium occupied Germany’s Ruhr valley where is the most important industrial region in order to guarantee their war reparations.
“The German mark is the same as the snow leftover from the US Dollar. On November 19, 1923, 1 US dollar was 4.2 Trillion German Marks. In January 1922, the price of a drink that can be bought by 1 Mark rose to 192 million Marks in November 1923( Ozgun, S. 2013, February 8 ).”
In November 1923, Germany withdrew RentenMark as an alternative currency which idea put forward by Gustave Stresemann. The aim here was to try to stop inflation. RentenMark first entered the market with paper marks. Mortgages on the property and industrial resources of the country were shown as Rentenmark. The name is already coming from here. Rentenmark was only used for internal payments. Paper markers collapsed after a short time and RentenMark was worth about 1 trillion Marks.
“The crisis forced the collapse of two cabinets as ministers bickered about the best way to end the crisis. Newly appointed finance minister Hans Luther produced the eventual solution. In October, Luther ordered the formation of a new reserve bank (Rentenbank) and a new currency (the Rentenmark). The value of the Rentenmark was indexed to the value of gold — though it could not be redeemed in gold since the government had no gold reserves. One Rentenmark was initially valued at one billion ‘old’ Reichsmarks, while foreign exchange was pegged at 4.2 Rentenmarks to one US dollar. Eager to bid farewell to hyperinflation of 1923, the German public embraced the new currency, allowing prices and wages to gradually normalize (Llewellyn, J., Southey, J., & Thompson, S., 2016, May 09).”
GOLD AND SILVER VALUE VERSUS GERMAN MARKS
Source: R.L. Bidwell Currency Conversion Tables: A Hundred Years of Change(London: Rex Collings,1970).
The graph shows the rise of the precious gold mine during the period of hyperinflation in Germany at the beginnings of the 1920s. When we see the chart, the German mark, rapidly depreciating against gold, has become about a million times more worthless at the end of 1923.
Likewise, the wholesale price index has been subject to this extreme rise, as prices have risen in parallel with the speed at which the money was printed. So the government could not be blamed. This led to reduced confidence in the mark. For the next 15 months after 1920, the price index remained stable, indicating that Mark was valued against other currencies. Later, inflation and prices went up again. After 1922, the period of hyperinflation began and confidence in the money completely disappeared. Then, the price index quickly increased.
Source: Bullion Mark
We compared the value of the German mark in the previous table and against gold and accordingly the wholesale price index. When we look at the value of silver against the German mark, a similar picture emerges. We see that silver is increasingly valued and the mark is worthless.
“In the event of recovery, Stresemann then managed to persuade the Allies to agree to the Dawes Plan. This plan was produced by an American banker, Charles Dawes, in order to resolve the problems of how Germany was going to pay the reparations. It was a program of loans from US bankers to help the German economy recover and was signed in April 1924. 25 million marks were invested in Germany over the next five years, whilst cutting down the amount of reparations Germany had to pay to £50 million per annum ( Michaelides, S. 2006, February 14). ”
With this practice, Germany relaxed economically. It is said that two people rescued Germany, these are Gustav Stresemann and Charles Dawes who is the budget director of ABD. Stresemann brought reforms such as new business centers and unemployment salaries to increase people’s well-being. Later, the International Locarno Agreement was signed (1925) and Germany was accepted into the League of Nations. This helped to increase the foreign trade of Germany.
THE SECRET OF THE MIRACLE RENTENMARK
First, the government said the new currency would be “stable wert best”. People who hunger for money available accept it. Second and most importantly, the government restricted the amount of Rentenmark that can be allocated and it stopped the problem. Finally, after April 1924, the ReishsBank restricted loans for businesses promoting inflation.
Hyperinflation caused the German economy to collapse. Unemployment has increased, wages have decreased. Other states fearing the emergence of a revolutionary system in Germany have prepared a payment plan for Germany because the Communist Party of Germany started to have a large number of members. Real wages, however, reached 1913 levels in 1928.
Unemployment has reached enormous proportions as the ever-increasing supply of money, which is the reason for the growth of the economy, has come to an end.
“ The great economic crisis of 1929 caused the small and middle bourgeoisie to go bankrupt. The revolutionary situation in Germany emerged, but the Communists and the Social Democrats declared each other a hostile enemy, so the Nazis succeeded in getting rid of them and coming to power to drag Germany into a paradox. (Anonymous, November19,2016).”
As a result, Germany was faced with a huge debt after the First World War when it was defeated. The economy was pushing money to finance it. This led to the beginning of inflation. Inflation soon turned into hyperinflation. All people have been badly affected by it. The German mark continued to depreciate rapidly against gold, silver, and all the other currencies. Stresemann found the remedy to go to another currency. Rentenmark was born. With the help of Dawes, Germany has stepped into a new plan. The majority of the people began to slip towards the right cut. In such a case, switching to a new currency seems to be the most logical thing to do, because they are trying to catch the old economy with new money. Moving on to a new plan will have much more positive consequences rather than continue with worthless money At the same time, Hitler was preparing his own place, and he had little time to drag Germany into a great deal of trouble.
REFERENCES:
Bozan, E. (2016, February 23). Hitler Dönemi: Nazi Almanya Ekonomisi
Lewis, N. (2011, June 09). In Hyperinflation’s Aftermath, How Germany Went Back to Gold
Llewellyn, J., Southey, J., & Thompson, S., (2016, May 09)
Michaelides, S. (2006, February 14). What steps did Stresemann take to solve the Ruhr Crisis and stabilise the German economy in 1923–1924?
Ozgun, S. (2013, February 8). Almanya ve Hiperenflasyon
Sennholz, H. F. (2006, October 06). Hyperinflation in Germany, 1914–1923
