2023-11-19 07:11:15
Exactly one hundred years ago, on November 15, 1923, decisive steps were taken to end the sad episode of the Weimar Republic, the nightmare of hyperinflation. The German central bank, the Reichsbank, stopped monetizing the national debt and issued a new currency, the Rentenmark (German: Papiermark), in addition to the paper mark. Although hyperinflation was stopped with these measures, Papiermark’s purchasing power was completely destroyed. In order to understand how and why all this might have happened, we need to review the years before the crisis, that is, the period before the outbreak of World War I. Since 1871, the mark has been the official currency of the German Empire. With the outbreak of the First World War on August 4, 1914, the redeemability of the imperial mark in gold was suspended. The gold-backed Reichsmark (or “Goldmark” as it was called from 1914) became the unbacked Papiermark. In the beginning, the Empire financed its war expenditures largely by issuing debt. The total national debt rose from 5.2 billion paper marks in 1914 to 105.3 billion in 1918. In 1914, the amount of paper stamps in the country was 5.9 billion, and in 1918 it was already 32.9 billion. Between August 1914 and November 1918, wholesale prices in the Empire rose by 115 percent, and the purchasing power of the Papiermark was more than halved. During the same period, the exchange rate of the paper brand depreciated by 84 percent once morest the US dollar. The new Weimar Republic faced enormous economic and political challenges. Industrial production in 1920 was 61 percent of the 1913 level, and in 1923 it further decreased to 54 percent. The land losses following the Treaty of Versailles significantly weakened the production capacity of the Empire: the Empire lost regarding 13 percent of its former land area, and regarding 10 percent of the German population already lived outside the country’s borders. In addition, Germany had to make reparation payments. However, the most important thing was that the new, emerging democratic government wanted to satisfy the wishes of its voters as best as possible. Since tax revenues were not sufficient to finance these expenditures, the Reichsbank began printing. From April 1920 to March 1921, the ratio of tax revenues to expenditures was only 37 percent. After that, the situation improved somewhat, and in June 1922 tax revenues reached 75 percent of total expenditures. Then things turned ugly. Towards the end of 1922, Germany was accused of not fulfilling reparations on time. To support their claim, French and Belgian troops invaded and occupied the Ruhr region, the industrial center of the empire, in early January 1923. The German government, led by Chancellor Wilhelm Kuno, called on the workers of the Ruhr to resist all orders of the occupiers and promised that the Reich would continue to pay wages. As part of the fight once morest the French occupation, the Reichsbank was forced to print more and more banknotes. While there were 8.3 billion marks worth of banknotes in circulation in May 1923, this figure had risen to 400 trillion by November. However, the everyday life of the German people was already quite absurd when the number of banknotes rose to 50 trillion. Wholesale prices soared to astronomical heights, rising 1.813 percent from late 1919 to November 1923. At the end of the First World War, in 1918, 500 billion eggs might have been bought for the same money that would have been paid for a single egg five years later. By November 1923, the US dollar had risen by 8.912 percent in paper marks. Papiermark has actually sunk to scrap value. As the currency collapsed, unemployment rose. The Weimar government was struggling with strong deficit spending, so it tried to keep the economy alive by printing money. The unemployment rate was 2.9% at the end of 1919, 4.1% in 1920, 1.6% in 1921, and 2.8% in 1922. However, with the death of the paper brand, the unemployment rate increased drastically: it reached 19.1 percent in October, 23.4 percent in November, and 28.2 percent in December. Hyperinflation impoverished the great majority of the German population, especially the middle class. People suffered from lack of food and cold. Political extremism grew stronger. The central problem in settling the monetary mess was the Reichsbank itself. Its president, Rudolf EA Havenstein, had a lifetime mandate, and the president was literally unstoppable: under Havenstein, the Reichsbank issued ever-increasing amounts of paper money in order to financially support the Reich. The crisis eased in the winter of 1923, when the state introduced the new currency, the Rentenmark, of which one was exactly equal to 1,000,000,000,000, i.e. one trillion old Weimar paper marks, and the exchange rate of the new mark in the world became roughly the same as the war before it was the old one. On November 20, 1923, Havenstein died suddenly of a heart attack. Hjalmar Schacht (who became president of the Reichsbank in December) took action the same day and stabilized the paper mark once morest the US dollar: the Reichsbank, through foreign exchange interventions, equated 4.2 trillion marks to one US dollar. And since one trillion paper marks was equal to one Rentenmark, the exchange rate was 4.2 Rentenmarks to one US dollar. This was exactly the exchange rate that prevailed between the Reich mark and the US dollar before the First World War. It is almost inconceivable that a monetary catastrophe might have occurred in a civilized and developed society that led to the complete destruction of the currency. Since then, many explanations have been given for the possible reasons for this. One such theory holds that reparations payments, a chronic balance of payments deficit, and the devaluation of the paper mark combined to cause the collapse of the German currency. However, these explanations are unconvincing, as German economist Hans F. Sennholz explains: “All the stamps were printed by Germans and issued by a central bank controlled by Germans under a purely German government. At the same time, no political party can be expected to take responsibility for this misfortune”. German hyperinflation was actually the result of a deliberate political decision to increase the quantity of money without limit. What lessons can be learned from this past tragedy of the Germans? The first lesson is that even a politically independent central bank does not provide reliable protection once morest the “destruction” of (paper) money. The Reichsbank was made politically independent as early as 1922 as a service provided on behalf of the Allied Powers in exchange for a temporary postponement of reparations payments. Yet the Reichsbank council decided in favor of hyperinflation of the currency. Seeing that the Reich had to rely more and more on Reichsbank credit to stay afloat, the Reichsbank council decided to provide an unlimited amount of money in such an “existential political crisis”. As we already know, the Weimar politicians’ hunger for credit proved to be unlimited. The second lesson is that paper money doesn’t work. Hjalmar Schacht noted in his 1953 biography: “The introduction of the state banknote was only possible if the state or the central bank promised to redeem the paper money for gold at any time. (One form of money substitutes is the classic paper money »or state note«, which is money issued by the will of the state, with forced circulation, with forced buyer value, which is not demanded for itself, but typically for the things that can be bought on it. Its important feature is that it is a ticket for gold, it can replace gold and can be exchanged for gold according to its nominal value – editor’s note) Ensuring the possibility of redemption in gold at all times should be the aspiration of every issuer of paper money.” Schacht’s words contain a central economic realization: Unbacked paper money is political money and, as such, a disruptive element in the system of free markets. Representatives of the Austrian school of economics pointed this out a long time ago. Paper money created “ex nihilo” and injected into the economy through bank loans not only causes chronically high inflation, but also bad investments, boom-and-bust cycles, and over-indebtedness. Looking at today’s world – where many economies have been using paper money produced on credit for decades and where debt burdens are overwhelmingly high – the current challenges are in some ways very similar to those of the Weimar Republic more than 90 years ago. Even now, there is an urgent need to reform the monetary system; and the sooner they take on the challenge of monetary reform, the lower the costs of adjustment will be. Cover image: Greengrocer during economic depression, Weimar Republic (Germany), around 1919. (Photo by Albert Harlingue/Roger Viollet via Getty Images)
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