Hyperinflation in Germany
during the Early 1920's 
by Erin Hubbard










Imagine that after a lifelong of hard work and saving, you find that your lifesavings will not buy more than one cup of coffee.  For a majority of the middle class living in Germany during the early 1920’s this was precisely their experience.  Of course, not all suffered during this period of hyperinflation.  Those who owed money encouraged their government’s expansionary monetary policies, knowing the resulting inflation would effectively cancel their debt.  In fact, it was the Reich itself who had the most to gain from inflation, for it was the biggest debtor of them all. 

In this paper I will show that the German Government did have other options to finance its expenditures aside from simply printing money, but instead decided to implement inflation-causing policies to finance its own debt.  I am not saying that the German Government is entirely responsible for the large extent of the inflation, but it certainly did start the ball rolling. Generally, once inflation starts, it is very hard to stop.  It is like a domino effect that continues at faster and faster rates.  The German Government should have thought of the future consequences and reversed its inflationary policies immediately after the war ended, as the other belligerent countries did.  It is true that none of the other countries fared well during this interwar period, but at least citizens of other countries didn’t find their lifesavings to be utterly worthless. 

The inflation problem actually began at the beginning of World War I.  It was then that the German Government started to accumulate debt and to increase the money supply.  Because they thought they would win the war and intended to force the losers to pay for all costs, they chose to finance the war through borrowing, rather than through taxes.  Furthermore, as soon as the war broke out, the central bank (Reichsbank) declared its currency notes no longer redeemable for gold.  This prevented a run on its gold reserves and allowed it to concentrate on helping the central government finance the war.  However, by suspending the redeemability of its notes, the Reichsbank was no longer restricted in the amount of money it could print.  With this restriction lifted, the German Government ordered the Reichsbank to print more and more money to finance the ever-increasing war expenditures.  As the Reichsbank printed more money, the value of money already in circulation decreased, and people lost purchasing power as they indirectly financed their government’s debt. 


By the end of the war, the amount of currency in circulation had increased 400%.  Although one might expect the price level to have increased by about the same amount, it was actually only about 140% higher than it was at the beginning of the war.  This was due to the fact that, at first, people thought price increases were due to shortages and were waiting for prices to fall to make purchases.  However, as soon as they realized the rise in prices was due not only to goods being less available, but also to inflation of the money supply, they began to spend at faster and faster rates. 

In any economy, once people realize that price levels are rising, a vicious cycle begins.  People will start to ask for higher wages, anticipating higher price levels in the future.  These expectations must necessarily turn into reality, since higher wages mean higher costs of production, which mean higher prices.  FOR THIS REASON IT IS VERY IMPORTANT THAT INFLATION IS NOT ALLOWED TO START IN THE FIRST PLACE.  This is the responsibility of the central bank that directly controls the amount of money that is printed. Since the German Government controlled the Reichsbank during this period, the German Government ALONE holds responsibility for starting the inflation.  

Instead of using monetary expansion to finance the budget deficit, the German Government should have used fiscal policy.  One thing the government could have done was to increase its revenue by raising taxes.  Another option would be to cut back on spending, perhaps by putting off some expenditures.  Lastly, the government could have borrowed.  However, the government, not wanting to upset the people anymore than they already were after losing the war, did not dare resort to any of these fiscal policy measures.   As a result, low revenues combined with high expenditures created high deficits that pushed the German Government farther into debt each year: 


Year Revenue* Expense*Deficit*
1919 2,5598,560 5,999
1920 3,1789,3296,054
1921 2,9276,651 3,676
1922  1,4883,951 2,442
1923**   519 5,2784,690

 * In millions of gold marks       

**April to October only.       


The German Government claimed that the inflation was not their fault.  It was the fault of the Allies they said for imposing such harsh reparation payments upon the German economy.  They claimed that these reparation payments caused the currency to depreciate and that they, therefore, had no choice but to print more money.  It is interesting to point out, however, that according to the following table, the amount of spending going toward reparation payments does not seem as burdensome as the German Government claimed.  In fact, the deficits were much higher than the payments: 


Year Deficit*       Reparations*
1920    6,054   1,850.9
1921  3,676 2,810.3
1922    2,442   1,136.7
1923* *      4,690   742.4 

* In millions of gold marks

**April to October only. 


Even if we admit that the reparation payments were burdensome, did the German Government necessarily have to print more money to finance them?—No! An alternative solution would be for the Government to sit back, and allow the natural economic forces to play out. After some time, a depreciated currency (supposedly caused by reparation payments) would have decreased the amount of imports going into Germany and increased the amount exports.  This would have improved the German current account (and its balance of payments), thereby increasing German output.  The rise in output would, in turn, appreciate the currency.  Of course, this process would not have happened over night.  It probably would have taken some years of unemployment (as happened in Britain during this time) before the economy started to show signs of improvement.  However, at least the hyperinflation would have been avoided, and so many people would not have lost their life savings.          

Which is better unemployment and no inflation or full-employment and hyperinflation?  Neither are good options.  I am not claiming that other economic policies could have made Germany better off.  In fact, we will never know what policy would have brought about the best possible welfare of the German people at that time.  All I am saying is that the German Government did have other options, and that hyperinflation was not a necessary result of the reparation payments that the Allies inflicted on Germany. 


The hyperinflation finally ended in ended in November 1923 when the German Government decided to give up in its struggle for the Ruhr (French and Belgium troops had occupied the industrial area of the Ruhr on the basis that Germany was not keeping up with the reparation payments.  When the workers went on strike, the German government supported them, printing even more money to pay them.  At this point the hyperinflation was at its worst.) and stabilize the currency.  On October 15 the Rentenbank Decree was published, and on November 15 the mark was officially stabilized at the rate of 1,000,000,000,000 paper marks for 1 gold mark.  People wanted so desperately to believe that their currency actually had value, that they did believe it. The central bank upheld its citizen’s confidence by not allowing the government to borrow further. 

Although the "miracle of the Rentenmark" had solved the problem of inflation, the devastating consequences of inflation could not be changed. Not only were millions of the German people much poorer, but also they were discouraged and depressed.  After a lifetime of hard work, they had absolutely nothing to show for it.  The bitterness of the population after losing the war and suffering through the period of hyperinflation would soon play into the hands of Hitler and aid him in his rise to power. 

If the German Government had had put an end to its inflationary policies immediately after WWI, the German people would not have had to suffer through hyperinflation and would have avoided its consequences.  Surely other economic difficulties (perhaps unemployment) would have presented themselves, but at least people would not have lost their entire life savings.  As I said before, it was not the German Government’s fault for the extent of the inflation, but it does hold responsibility for starting it. At first the Reich printed money to finance its debt, but later it had to continue printing the money just to keep up with people’s expectations.  The story of German hyperinflation of the early 1920’s teaches an important lesson about the nature of inflation—that is, once inflation starts, it is very hard to control!  No one understood this lesson, better than the Germans themselves.  In fact, ever since this experience (up until the birth of the Euro), a main priority for the German Central Bank had been to keep inflation to a minimum.  


Works Cited: 

1) Bartlet, Bruce.  “The Great German Inflation.”  Liberty Haven.  1975. (3 Dec 2002). 

2) Goodman, George. “The German Hyperinflation, 1923.” Commanding Heights. 1981. erinflation.html  (3 Dec 2002). 

3) Hardach, Karl.  The Political Economy of Germany in the Twentieth Century.  Los Angeles:  University of California Press, 1980.  (16-29) 

4) Sommariva, Andrea.  German Macroeconomic History, 1880-1979.  New York: St. Martin’s Press, 1987.  (121-135) 

5) Stolper, Gustav.  The German Economy: 1870 to the Present.  New York: Harcourt, Brace & World Inc., 1967.  (74-93)   







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