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German Hyperinflation

Q1

Who is to blame for the German Hyperinflation?

German Hyperinflation came from a unique and complex set of circumstances.
There are a number of political and economics reasons why it happened; it can
primarily be blamed on the government and the central bank. Also to blame are, the
political situation, the Allies and the powerful industrialists. Hyperinflation is when a
government runs out of all sources of money – after taxes become ineffective and
other forms of debt dry up – the only choice left is the printing press.

During the war the government did not want to raise taxes, instead they would
pay for the war by raising debt. After the war the government ran up a large deficit
from the reparations, the promise to improve the country’s infrastructure and an
unwillingness to raise taxes. It had no choice but to raise money on the bond market.

During the war the Reichsbank suspended the convertibility of the Mark from
gold in order to protect their reserves. The Mark was devalued, however this was in
line with other European currencies. In response to the deficit the bank tried to raise
debt however it failed to do this in the international market and subsequently devalued
the Treasury bills. This in turn started to further devalue the Mark and increased
inflation. The bank was left with little choice but to monetise the debt by printing
money. As the hyperinflation started to take hold, the mark depreciated against
foreign exchange. The bank bought Marks on the foreign exchange however as the
currency spiralled this was simply a waste of the gold reserves as the money had lost
its value.

The political situation was very unstable; there were 12 cabinets in five years,
seven lasted less than six months. There was social unrest, political assassinations and
extremism. The communists, spurred by the successful Russian revolution, were
trying to take advantage of the economic problems. The fascists were fuelling the
unrest and adding to the instability, the Kapp Putsch was an attempt to topple the
government. The army dealt with the former severely but were unwilling to fight the
ex-servicemen members of the fascist right.

Germany had survived the war with much of it’s industry intact. Following the
Treaty of Versailles and the London Ultimatum, the Allies made a demand for
reparations of 33 billion marks. This was to be taken in payment and in raw goods and
materials, so the Allies could rebuild their countries. The government attempted to
pay off these huge amounts by taking out loans from the Allies. As Germany failed to
keep up with payments Great Britain proposed dropping the payments, however
France and the US were determined. The rising inflation also caused a disparity in
accounting for the payments; at one stage Germany believed it had paid 10 billion
marks, while France accounted it as 2 billion. Following this France occupied the
Ruhr – one of Germany most productive areas. The workers went on general strike,
which the government supported, adding another huge burden to the overstretched
deficit.

Finally many industrialists took advantage of the rising inflation. They argued

December 2010

However they were also taking advantage of cheap debt and transferring their money into long-term assets. December 2010 . These industrialists made a great profit during the inflationary period.that they were fighting communism by keeping unemployment down.