Case Study

German Hyperinflation

Table of Content:

Introduction, History – P.3

What Caused The Hyperinflation – P.5

The Hyperinflation 1922-1923 – P.6

The Solution, Lessons Learnt – P.7

References – P.6

Introduction:

We were asked to choose any topic that is related to banking and economics. And the topic I chose for this is: The German Hyperinflation.

I’m going to discuss how the hyperinflation started in Germany, what happened at the peak on this hyperinflation. Then we’re going to see what caused it. And how did Germany solve the problem and stopped this inflation. Lastly, what are the lessons learnt from this hyperinflation.

History:

By the end of World War 1 Germany had been punished to pay reparations because of the war. Germany had to pay £6,600,000,000 (which is larger than Germany’s GDP) and by signing the Treaty of Versailles Germany agreed to installments of 2 billion, the first was paid in 1921, though, it was paid mostly by actual materials such as coal and iron.

But Germany couldn’t pay the second installment. The allies didn’t believe it, and on 1922 France and Belgium invaded the Ruhr, which is the most valuable industrial area in Germany. The German government ordered workers to strike and people to resist the invaders. This led to killing 132 people and expelling 150,000 from their homes.

And because Ruhr is the most valuable industrial area in Germany, the strike made Germany suffer. The striker had to be paid to, also the expelled people from Ruhr. Because of that, Germany began to print money.

By July 1922 prices risen 700% and the German central bank continued printing money, but the prices were rising much faster than the money printed.

What Caused it?

The simple way to answer this is the issuing loads of new money that caused the prices to go up. And also, the workers strike and the German government, didn’t want to raise the taxes so, their solution was to produce more money.

Like other governments, Germany borrowed a lot, to cover the war’s cost. And this led to inflation.

Hyperinflation 1922-1923:

The hyperinflation began and raged from the mid of 1922 until November 1923. The central bank of Germany (Reichsbank) thought that the problem was with the decreased value of the marks in terms of foreign currencies, which was caused by the cruel reparations that Germany had to pay.

As the inflation rise, the U.S. dollar worth 4.2 trillion German mark.
This hyperinflation caused many problems to Germany. Wages were paid by the hour, so people can by the day-to-day necessities, because prices keep going up. Because of it also, people life savings all became worthless. People had to carry lots of money to buy, for example a loaf of bread would cost two hundred billion marks when the hyperinflation was at it peak on November 1923.

So people started bartering, exchanging goods, since the money became worthless.

The Solution:

The solution to end this hyperinflation was to make a new currency, because that’s what Germany needed. In November 1923, a new bank was established; Rentenbank, and this bank issued the new currency Rentenmark and at first 2.4 Rentenmark were created.

The new currency as the German government stated that its value is fixed and it is backed up by real estate.

Also, Germany’s new chancellor Gustav Stresemann, ordered the workers in Ruhr to start working again.

Furthermore, the U.S. government lent Germany $200, and Dawes Plan was announced, this plan was more realistic to pay Germany’s reparations, the plan also included: That the Allies troops evacuate Ruhr, and the German central bank will be supervised by the Allies. Also, instead of paying £2 Billion, they had to pay £50 Billion.

Lessons Learnt:

There are many lessons to learn from what happened with Germany. It is always not the best solution to just print money, the government should think in other ways rather than just increasing the money.

Also, the inflation’s main reason was the war, and how it was forced to pay reparations had a great impact on Germany. So it wasn’t the government to blame for the inflation.

The solution to the problem, first to start working again, because if workers are not working, then the production is less, that will raise the prices even more. Thus, it was the right call to order workers to end their strike.

Finally, even though this hyperinflation had a great impact on Germany, and the suffering from the second world war, Germany now one of the best economies in the world.

References:

http://www.usagold.com/germannightmare.html

http://www.historylearningsite.co.uk/hyperinflation_weimar_germany.htm

http://en.wikipedia.org/wiki/Inflation_in_the_Weimar_Republic