Editor's note: During the global economic crisis, politicians and economists in the United States and Britain often criticized Berlin for its reluctance to initiate the kinds of expensive stimulus programs promoted by Washington. One of the most oft-cited reasons in Germany for racking up more debt than necessary to revive the economy was the fear of hyperinflation. From 1922-1923, hyperinflation plagued Germany and helped fuel the eventual rise of Adolf Hitler. The following article about this national trauma has been translated from a special issue of SPIEGEL on the history of money.
You could say journalist Eugeni Xammar had a stroke of reporter's luck when the Barcelona daily La Veu de Catalunya sent him to Berlin in the fall of 1922, a pivotal moment in the country's history. In the months that followed, it was the most exciting place in the world to report from. Germany's financial structures collapsed, and the mark began its descent into near worthlessness.
"The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week," Xammar wrote in February 1923. "As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling. There is only one topic on everyone's lips in Berlin: the dollar, the mark, and prices. ... Have you seen this? For heaven's sake, stop! I've just bought a six-week supply of sausages, ham, and cheese."
Nearly every day the journalist sent home new stories of the hyperinflation he was witnessing; reports of everyday insanity in a country whose currency was going crazy. In 1914, at the start of World War I, the dollar was worth 4.20 marks. From then on the German currency steadily declined, and in the fall of 1922 it went into freefall. By November 1923 the dollar was at 4.2 trillion marks. The nightmare came to an end shortly thereafter, and the dollar was back at 4.20 again, albeit against the new incarnation of the currency: the rentenmark.
Few people understood what had happened. Even today, three generations later, much of it sounds pretty incredible.
Take for example the family that sold its house to emigrate to America. On arrival at the port of Hamburg, they found that the money wasn't enough to pay for their crossing -- in fact, it didn't even pay for their tickets back home. Then there was the man who drank two cups of coffee at 5,000 marks each, only to be presented with a bill for 14,000. When he asked why this was he was told he should have ordered the coffees at the same time because the price had gone up in between. And then there's the story about the couple that took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn't nearly enough. Tickets were now a billion marks each.
At the height of the crisis, the inflation rate was in the tens of thousands -- per month, that is. And this in the era before the invention of the pocket calculator.
The World Coming off the Rails
Few could laugh at "the macabre joke of inflation," as writer Klaus Mann termed it. "What breathtaking fun it is to watch the world coming off the rails," he wrote in undisguised fascination. Germany was now witnessing "the complete depreciation of the only truly credible value in this godforsaken era: that of money."
His brother, the historian Golo Mann, was more concerned with classifying what was happening. "The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath," he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. "What was there to trust, who could you rely on if such were even possible?" he asked.
It is true to say that nothing seemed safe anymore -- all semblance of order went out of the window, and with it faith in the Weimar Republic, in democracy, indeed in the future itself. After all, what was there to look forward to? Most people had seen their life savings wiped out while the state was able to shrug off its debts. "Inflation took the basic law-and-order principles of loyalty and trust to the extreme," says historian Martin Geyer.
The hyperinflation left behind a national trauma that can be felt to this day. The experiences of 1923 have etched themselves into the German psyche. Fear of inflation is widespread, and German economists feel more duty-bound than others to vouchsafe economic stability.
But did it all really have to go so far? Could the catastrophe have been averted? And if so, how?
The seeds of the problem were sown many years earlier. Indeed the ball was first set in motion by World War I, during which Germany spent an estimated 160 billion marks on its men and machinery; an unimaginably large sum. The only way the state could finance this was to acquire money by unconventional means.
On August 4, 1914, just three days after the Reich had declared war on Russia, parliament passed a series of currency acts that would have a fundamental impact on the country's money markets. The new legislation suspended the standard of backing cash with gold "until further notice," claiming that an "exceptional increase in unbacked paper notes" was an "economic necessity" in times of war. In other words, the Reich intended to pay for its war effort by printing more and more money.
Soaring National Debt
The sheer volume of banknotes increased dramatically. Whereas there were just 13 billion marks in circulation in 1913, this had jumped to 60 billion by the end of the war. Unfortunately this still wasn't enough to cover the state's expenditures. "As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans," economist Karl Helfferich said in 1915.
The Reich thus racked up huge debts with its own people, repeatedly issuing government bonds; a total of almost 100 billion marks in all. At first Germans bought these bonds almost unthinkingly, secure in the belief that victory was in sight. The national debt shot up from 5 to 156 billion marks.
"There is a point at which printing money affects purchasing power by causing inflation," warned socialist Eduard Bernstein in 1918. But his words and those of others went unheeded. The mountain of bank notes continued to grow, while the volume of goods gradually declined.
It was a classic constellation. Too much money and too few goods could lead to only one thing: Inflation. A government decree setting a maximum price for important consumables such as grain and coal didn't help either. Such artificial limits simply dammed up inflation, causing the liquidity glut to flood the market with even greater devastation when the economy collapsed after the end of the war.
So although the Weimar Republic was not bankrupt from the outset, its creditworthiness was restricted, and inflation saddled the fledgling state with a congenital defect that would have dire consequences.
Ironically, the monetary depreciation in its milder form initially helped stimulate the economy. With its comparatively low value against the dollar, sterling and the French franc, the cheap mark boosted German exports in the early days of the Weimar Republic. Industrial output increased by 20 percent within a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly. The "lubricant of inflation," as economic historian Carl-Ludwig Holtfrerich put it, breathed new life into the private sector.
The post-war boom was all the more remarkable because the rest of the world economy was sinking into a deep recession. The United States and Britain stabilized their currencies even though it put up to a fifth of their respective working population out of work. The governments of the Weimar Republic took the opposite approach, buying themselves an economic upswing and full employment at the cost of catapulting the mark to dizzying heights. Although it would probably be unfair to suggest the politicians in Berlin deliberately drove inflation forward, they didn't exactly try very hard to rein it in. For a while the strategy proved convenient. But they were playing with fire, as soon became apparent.
The huge budget deficit and growing interest payments restricted the state's freedom of movement considerably. The enormous war reparations that Germany had been saddled with were especially hard on the young republic.
Even before the final figure had been agreed upon, German delegates at the 1919 Paris Peace Conference complained that the proposed reparations would "crush all creative urges, the will to work and all entrepreneurial spirit in Germany forever." However, the row over the size of the reparations only broke out in earnest later.
In 1921, the Allies set Germany's reparations at 132 billion goldmarks (pegged at the value of the mark in 1913). From then until 1932 an estimated 26 billion goldmarks was paid out in cash and goods, corresponding to an annual 10 percent of national income. In other words, although the burden was considerable, it was more-or-less affordable.
It was less the size of its reparations than continued uncertainty about them that destabilized the Weimar economy. The mood was especially vitriolic within the Reparations Commission, with the French --- keen to exact revenge for their military defeat in 1871 -- proving completely intransigent.
It therefore took just a relatively minor delay in the delivery of wood, coal and telegraph poles to escalate the conflict, and in January 1923 France marched 100,000 soldiers into Germany's Ruhr valley, seized control of the mines, and confiscated the coal. "This was a fatal blow to German industrial production," Holtfrerich says.
An entire region ground to a halt, and an important source of tax revenues dried up. Because the Ruhr valley was no longer permitted to deliver coal, Germany was forced to obtain its fuel elsewhere -- often from abroad at great cost, depleting its much-needed foreign currency reserves.
At the same time, millions of Germans were living in abject poverty. "Never in my life have I seen such swarms of starving people wandering about," wrote Franz Geyer, the future mayor of the Ruhr valley city of Bochum. Many young children suffered from deficiency diseases such as rickets, and at times tuberculosis reached almost epidemic proportions. In Mannheim, lung disease was reported in 43 families in one 220-household street alone.
Public opinion was unanimous as to the source of this misery, pinning the blame for all Germany's woes firmly on France and its uncompromising stance. As bitterness turned into open resistance, shopkeepers refused to serve French people, and Germans crossed the street to avoid meeting Frenchmen.