Hyperinflation in Germany during the Early 1920's
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. ...