Hyperinflation is considered to be the greatest economic problem as it can change production and society. In the early 90s, it had become widespread all over the world when inflation got out of control: prices and wages increased by several times, foreign investments decreased or almost evaporated as financial risks were too high. In the early 1920s Germany suffered the most from hyperinflation as 1923 prices there increased a thousand times (Kosares, n.d.). This writing analyzes inflation in Germany following World War I, examines the recovery tools and discusses the factors that have lead the country’s economy to its present position.
The Great Inflation in Germany (1918-1923)
However, this situation had serious political reasons and even more serious consequences. Germany lost the World War I (1914-1918) and by the Treaty of Versailles agreed to pay huge reparations (“The Seeds of Evil’’, n.d.). The German government has acknowledged that in the event of default, the Entente powers had the right to occupy a significant part of the country’s territory.
In 1922, the reparations payment schedule failed and in January 1923, the Franco-Belgian troops occupied the Ruhr industrial area, where 70 % of the coal was mined (“The Seeds of Evil”, n.d.). As a response, the German government encouraged the residents’ “passive resistance”: not work for the occupiers and not pay taxes. As a result, mass strikes swept the country and price indexes grew leading to the hyperinflation. Tax system was in ruins and budget was filled mainly due to emissions (almost 99% of government income) to allow the government to finance the heavy costs and strikers (Ritschl, n.d.).
Thus, there are several reasons of hyperinflation in Germany after the World War I:
- Lost of a huge number of economically profitable areas: Alsace and Lorraine, the Rhineland and the colonies in Africa.
- Economic blockade of the country’s export and import of industrial goods, limited trade relationships.
- High reparations
- Huge manpower losses after the war
- Mark depreciation
- The birth of the Weimar Republic and extremists parties
- The government issued a flood of additional money causing prices to increase
Being influenced by inflation, businesses operated very quickly and unemployment ceased. Nevertheless, the real wages considerably decreased. Many skilled workers felt the lack of money needed to support their lives. Businessmen left their legal activities and made stock and goods investments. They found it very profitable to lend money from the banks and to buy companies, goods and shares holding the most valuable assets. The result was the so-called “private inflation” that was supported by the Reichsbank speculating against its assets (Ritschl, n.d.). However, by mid- 1923 many businesses collapsed, and unemployment rapidly rose (Ritschl, n.d.).
Currency reform of 1923 helped to stabilize the situation (Ritschl, n.d.). The new established bank (the Rentenbank) issued the Rentenmark ceasing the depreciation of the national currency and inflation rate (“The Seeds of Evil”, n.d.). Despite the fact that small and medium businesses were in ruins, the national economy quickly started to revive. Financial stability was also supported by the winners in World War I who finally realized their mistakes and introduced the Dawes Plan according to which German reparations were reduced to $50 million (“The Seeds of Evil”, n.d.). Additionally, after the United States provided the German government with $200 million loan, investments flowed into the country. The period 1924-1929 was called the “Golden Years” as Germany became progressively peaceful and promoted sustainable economic growth (Ritschl, n.d.).
The stability of the Rentenmark couldn’t grant considerable improvements, however, several fiscal measures kept inflation at satisfactory level: the government abolished loans to industry to prevent speculations, ceased borrowings, and restored normal money circulation. In 1924, the Rentenmark was changed to the Reichsmark, new taxes were introduced allowing the government to develop its economic power (Ritschl, n.d.). The changes influenced most companies and businesses: well-managed companies prospered, credit-relied companies bankrupted (the number of bankrupts increased by 25 times from 1923 to 1924) (Kosares, n.d.). Owing to changes and improvements, GDP ratio was rather high up to 1938 (Kosares, n.d.).
The American crisis in 1929 after the Wall Street Crash had a strong impact on European countries and in the early 1933 it was critical economic situation in Germany (“The Seeds of Evil”, n.d.). Since 1939 prices increased again because of big emissions and government attempts to pay for wars, in which the country had been involved during several decades. The Vietnam War 1965 brought the next wave of inflation. The economic development in the 1960s slowed due to the Berlin Wall and by 1970s Germany’s GDP fell almost by 1.5% (Kosares, n.d.). However, by 1980s the situation started to improve due to the privatization and strong government regulations in the economy. Since 1980s, the country witnessed the stable economic growth and presently it occupies the premier positions among other world countries.
Inflation in Germany (1918-1923) considered to be the most impressive and disastrous in world history. The main reasons of hyperinflation in the country were enormous war spending and endless money emission. It impacted the economic development of the country and took the decades to improve the situation and bring Germany to its present place. Actually, the consequences of German inflation are an instructive lesson for those regimes that are trying to solve their problems through the issue of money and the big inflation. Some economists argued that inflation may have stimulated the development of German industry. However, most country’s wealth was wasted for speculations making it even more difficult to overcome the hyperinflation. However, the country’s experience is still relevant and very important for modern today’s business world.
Kosares, M. (n.d.). The Nightmare German Inflation. Retrieved from http://www.usagold.com/
Ritschl, A. (n.d.). Sustainability of High Public Debt: What the Historical Record Shows. Retrieved from http://personal.lse.ac.uk/
The Seeds of Evil: The Rise of Hitler. (n.d.). Retrieved from http://www.schoolshistory.org.uk/