The Great Inflation
 
In late-1922 the German government were forced to ask the Allies 
for a moratorium on reparations payments; this was refused, and 
she then defaulted on shipments of both coal and timber to 
France. By January of the following year, French and Belgian 
troops had entered and occupied the Ruhr. The German people, 
perhaps for the first time since 1914, united behind their 
government, and passive resistance  to the occupying troops was 
ordered. A government-funded strike began as thousands of workers 
marched out of their factories and steel works. The German 
economy, already under massive pressure, gave way. The huge cost 
of funding the strike in the Ruhr and the costs of imports to 
meet basic consumer needs were met by the familiar expedient of 
the printing presses. Note circulation increased rapidly, and by 
November 1923 had reached almost 92 trillion marks. With less 
than three per cent of government expenditure being met from 
income and with the cost of one dollar at four billion marks, 
Germany was in the throes of economic and social chaos. 
Starvation became a reality for millions of people, despite a 
bumper cereal harvest, as shops reverted to the barter system. 
Farmers refused to accept the effectively worthless, banknotes in 
exchange for grain, and food quickly began to run short in the 
cities. Prices rose one trillion-fold from their pre-war level. 
More importantly, for the long-term political future of Germany, 
the middle and working classes saw their savings wiped out.  
These were, in essence, the people who were later to become the 
hard-core of the Nazi vote. 
 
Economists will argue that runaway hyperinflation has two 
sources. Firstly, it arises through a fall in the foreign 
exchange value of a currency, when an adverse balance of payments 
reduces foreign investors demand for the currency. A falling 
exchange rate increases the cost of imports and, therefore, the 
cost of living. Wages rise as workers try to maintain their 
standard of living, especially if previous institutional 
arrangements have linked wages to living costs. Firms paying 
higher wages raise the price of the goods they sell, prices rise 
still further, the foreign exchange value of the currency falls 
still more, and the cycle continues. Secondly, it arises through 
a large budget deficit which no one believes will narrow in the 
future. Faced with the prospect of budget deficits for many years 
to come, the usual sources of credit available to the government 
decline to make further loans; the government can no longer 
borrow to cover the deficit between revenue and expenditure. The 
only alternative is to print more and more banknotes. As 
government workers and suppliers present their bills to the 
Treasury, it pays them off with newly-printed pieces of  paper. 
This puts more banknotes into the hands of the public and they 
then spend them. In Germany, as we have seen, the problem was 
that there were trillions of marks worth of paper currency in 
circulation. Prices could rise one thousand times between a 
worker being paid and his reaching the shops. A common analogy 
used is that if one could afford a bottle of wine today, one 
should keep the empty bottle which would be worth more tomorrow 
than the full bottle was today. 
 
Eventually, the power to boost government spending by printing 
money goes. When the government can no longer gain, even in the 
short-term, a budgetary balance through inflation, the situation 
becomes so intense that stabilisation through a currency board, a 
new finance minister or a link to the gold standard is 
implemented, and reform can be successful. It was at this point 
that some sanity was injected into the German economy by the 
election of Gustav Stresemann. He called a halt to resistance in 
the Ruhr, and set out to stabilise the mark. Luther, Stresemanns 
Finance Minister, introduced the rentenmark the value of which 
was based on Germanys staple, rye, rather than gold. In fact the 
rentenmark represented a mortgage on Germanys land and industry, 
which could never be redeemed. It did not matter. The point was 
that the currency was stabilised and  became exchangeable at a 
rate of one billion old marks to one new mark, and at the pre-war 
parity of 4.2 marks to the dollar. The new currency was quickly 
accepted by the population, and food and consumer goods began to 
appear in the shops. The government could now attempt to regain 
budgetary control in a climate of low inflation. The Dawes Plan 
was brokered, and a sum of some 39 billion dollars was lent to 
Germany of the following five years. However, this new economic 
prosperity had its basis in foreign investment, and thus the fate 
of Germany was now effectively held in the hands of Wall Street.  
 
The consequences of the Great Inflation to Germany are many fold, 
and there is no doubt that politically, the first warning signs 
of a move away from fascism were seen. In the elections of May 
1924, both the Nazi and Communist Parties made gains at the 
expense of the centre.  The faith of the people in the Republic 
suffered a severe blow. As Shirer points out: What good were the 
standards and practices of such a society, which encouraged 
savings and investment and solemnly promised a safe return from 
them and then defaulted? Was this not a fraud on the people? And 
was not the democratic Republic, which had surrendered to the 
enemy and accepted the burden of reparations, to blame for the 
disaster?  Upper middle class savings in Germany were wiped out 
during the  hyperinflation. Such savings had usually been 
invested in bonds and bank accounts, so the collapse of the real 
value of the mark carried with it the collapse of the value of 
the bonds. Debtors benefited substantially, for their debts were 
effectively wiped out. The relatively small, financially 
unsophisticated savers who made up Germanys upper middle class 
had nothing left. This may have been the most important aspect of 
Germanys early-1920s hyperinflation. People who are not rich but 
are comfortably off, pillars of their community, in middle-age, 
who have done well in life and saved enough to feel comfortable 
were the strongest supporters of relatively democratic, 
relatively liberal governments. Having learned the lessons of the 
Great Inflation, these were the people who remembered 1923 when 
the mark collapsed for the second time. These were the people who 
voted for the Nazi Party in their millions. 
 
 The causes, then, of the Great Inflation are not perhaps the 
reparations clauses of the Treaty of Versailles which are 
commonly blamed for Germanys ills. German financial practices 
during the war undoubtedly sowed the seeds of the disaster which 
was to strike in 1921. The failure of her Republican governments 
to act, by implementing austerity measures, through a fear of 
their own weakness of position, led to the inflationary printing 
of more paper money. The reparations clauses were clearly side-
stepped by the very same governments who pleaded they did not 
have the means to pay. This suited the government, and also 
Germanys industrialists and landowners who profited immensely 
from inflation. Avoidance of reparations, in fact, became more 
important than the welfare of the German people. The Republic was 
built on weakness: the idea that the fledgling Republic had 
stabbed Germany in the back by surrendering was widespread, and 
therefore led to the perceived necessity of avoiding 
reparations. This policy was doomed to failure, particularly in 
the face of French belligerence. More short-sightedness was to 
blame for the passive resistance in the Ruhr. Whilst clearly 
wishing to prevent German production from falling into French 
hands, it is clear that the government could not afford to 
finance the resistance for long and, as we have seen, this was 
the proverbial straw which broke the camels back. There were, of 
course, external influences: the manipulation of the mark by 
foreign speculators was a side effect, as was Allied insistence 
on reparations. These were, however, merely a side-show to the 
main event. The fault of the inflation rests firmly in the hands 
of the government. In terms of the consequences of the inflation, 
the signposts to the future were in place. It was clear that a 
relatively well-off middle and upper middle class had little of 
no interest in anything other that centrist democracy. The swing 
towards extremism in 1924 was an indicator of what was to come in 
1930. This is demonstrated by the gains made by the Nazis and 
Communists in May 1924, but also reflected in their poor 
performances in the golden years of late-1924 to 1928. 
Following the second collapse of the mark in 1929, both these 
parties made huge gains at the expense of the centre. Voters do 
have memories, and those memories of two financial disasters in 
less than a decade were extremely strong. Finally, the fate of 
Germany, which since 1918 had been held in the hands of foreign 
governments, was essentially transferred into the hands of 
international financial institutions. The same people who 
structured the loans which helped to end the Great Inflation were 
the very same as those who speculated Germany - and, to be fair, 
the rest of the world - into the financial collapse of 1929. 
Germany, kept militarily weak by the allies, financially weak by 
her government and her industrialists was waiting in the wings 
for her moment to come. When that moment came, the twenty year 
truce was ended by Adolf Hitler. That isperhaps the most damning 
indictment of both Republican mismanagement and world indecision 
that can be made. 
 
John Maynard Keynes, The Economic Consequences of the Peace, 
(London: 1920), p.64. 
 
 William R. Keylor, The Twentieth Century World, (Oxford: 1984)., 
pp. 84-85.  
 
 William Gutteman and Patricia Meehan, The Great Inflation: 
Germany 1918 - 1923, (London: 1976), p.71. 
 
 Eberhard Kolb, The Weimar Republic, (London: 1995), pp. 39 - 
41.  
 
William L. Shirer, The Rise and Fall of the Third Reich, (New 
York: 1980), pp. 58-61. 
 
David Hackett Fischer, The Great Wave, (Oxford: 1996), pp. 192-
193. 
 
Erik Achorn, European Civilization and Politics since 1815, 
(London: 1935), pp. 561 - 562. 
 
 Kolb, op. cit., pp. 40 - 41. 
 
 Shirer, op. cit., p. 63. 
 
 David Fischer, op. cit., p. 193 
 
The argument in this paragraph is drawn from David Fischer, op. 
cit.,  pp193 -194, Paul Kennedy, The Rise and Fall of the Great 
Powers, (London: 1989, pp. 357 - 373, and D. H. Aldcroft, From 
Versailles to Wall Street, (New York: 1977), chs. 1 & 2. 
 
David Blackman, European Inflationary Trends: 1815 - 1945, 
(London: 1954), pp. 321 -322. 
 
David Fischer, op. cit., pp. 194 - 5. 
 
Kolb, op. cit., pp. 194 -195. 
 
Shirer, op. cit., p. 61. 
 
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PAGE  1 
 
Footnote Text 
iy, the provisions of the Treaty of Versaillesflation 
profiteering. Successive German governments failed to implement 
anti-inflationary policies and, it has been argued, this 
represented the cynical use of inflation as a reason for 
reducing, or not meeting, reparations payments. This is not to 
say that the reparations clauses did not have an effect on the 
German economy - of course they did. The Allies, however, failed 
to set a final reparations figure until the London Ultimatum of 
1921; this long delay produced, as William Keylor argues: 
widespread economic uncertaintyForeign and domestic investors 
were understandably reluctant to commit their savings to an 
economic system that was saddled with an uncertain, and 
potentially enormous, claim on its productive resources.  In 
terms of the broader consequences of the Great Inflation, it is 
easily argued that the control of Germanys fiscal affairs 
ultimately passed into the hands of the international banking 
community, which was to have disastrous long-term effects on 
Germany. It is also arguable that, as the foster-child of the 
Great Inflation, Adolf Hitler would come to power as a long term 
effect. 
 
 The total cost of the First World War to Germany was, it has 
been calculated, in excess of 164 billion marks. This massive 
cost was met by raising some 93 billion marks in war loans, 29 
billion from discounted Treasury Bills and the balance by the 
simple - if potentially disastrous - expedient of printing paper 
money.  By late-1918 over 35 billion paper marks were in 
circulation, and more paper money was used to invest in yet more 
Bills. There was little fear that inflation - already beginning 
in Germany - would have a serious long-term effect on the 
economy. This financial mismanagement was justified by the 
belief, in both  financial and government circles, that the 
defeated enemy would pay for the cost of the war. Germany had 
already indicated her willingness to fund her wars in this way, 
as can be seen in the terms of the Treaty of Brest-Litovsk and 
her treaty with France in 1871. Karl Helfferich, Reich Secretary 
to the Treasury, had said in a wartime speech to the Reichstag: 
After the war we shall not forego our claim that our enemies 
shall make restitution for all the material damage they have 
caused by the irresponsible launching of this war against us.  
However, because of the inflationary means by which the imperial 
government had financed the war, the German mark in 1919 was 
worth less than 20 per cent of its pre-war value. After the 
formation of the Republic in 1919that can be made.  
 
 John Maynard Keynes, The Economic Consequences of the Peace, 
(London: 1920), p.64. 
 
William R. Keylor, The Twentieth Century World, (Oxford: 1984)., 
pp. 84-85. 
 
William Gutteman and Patricia Meehan, The Great Inflation: 
Germany 1918 - 1923, (London: 1976), p.71. 
 
Eberhard Kolb, The Weimar Republic, (London: 1995), pp. 39 - 
41.  
 
William L. Shirer, The Rise and Fall of the Third Reich, (New 
York: 1980), pp. 58-61. 
 
David Hackett Fischer, The Great Wave, (Oxford: 1996), pp. 192-
193. 
 
Erik Achorn, European Civilization and Politics since 1815, 
(London: 1935), pp. 561 - 562. 
 
Kolb, op. cit., pp. 40 - 41. 
 
Shirer, op. cit., p. 63. 
 
David Fischer, op. cit., p. 193 
 
The argument in this paragraph is drawn from David Fischer, op. 
cit.,  pp193 -194, Paul Kennedy, The Rise and Fall of the Great 
Powers, (London: 1989, pp. 357 - 373, and D. H. Aldcroft, From 
Versailles to Wall Street, (New York: 1977), chs. 1 & 2. 
 
David Blackman, European Inflationary Trends: 1815 - 1945, 
(London: 1954), pp. 321 -322. 
 
David Fischer, op. cit., pp. 194 - 5. 
 
Kolb, op. cit., pp. 194 -195. 
 
Shirer, op. cit., p. 61. 
 
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