TOPIC – HYPER-INFLATIONARY SCENARIO IN GERMANY

NAME - SAANVI KHANNA

CLASS – X –A

ROLL NUMBER – 26

SUBJECT – ECONOMIC APPLICATIONS

SESSION – YEAR 2020-2021

 CONTENTS :

1. Objective of the project

2. Introduction

3. Body
3.1 What is hyperinflation
3.2 Background
3.3 Causes
3.4 Stabilization
3.5 Revaluation

4. Conclusion

5. Acknowledgement

6. Bibliography
 OBJECTIVE OF THE PROJECT

This project is a report on the hyper-inflationary scenario in Germany from 1914-1923 after the
World War I. The objective of this project is to study the causes and reasons for the hyper-
inflation which occurred. This project also tries to understand the hardships and effects of such a
situation on the people of Germany.
 INTRODUCTION

In economics, inflation is a sustained increase in the general price level of goods and services in

an economy over a period of time . When the general price level rises, each unit of currency buys
fewer goods and services; consequently, inflation reflects a reduction in the purchasing
power per unit of money – a loss of real value in the medium of exchange and unit of account
within the economy.[5][6] The opposite of inflation is deflation, a sustained decrease in the general
price level of goods and services. The common measure of inflation is the inflation rate, the
annualized percentage change in a general price index, usually the consumer price index, over
time.There are four main types of inflation, categorized by their speed. They are creeping,
walking, galloping, and hyperinflation. There are specific types of asset inflation and also wage
inflation.

Creeping or mild inflation is when prices rise 3% a year or less. According to the Federal
Reserve, when prices increase 2% or less, it benefits economic growth. This kind of mild
inflation makes consumers expect that prices will keep going up. That boosts demand.
Consumers buy now to beat higher future prices. That's how mild inflation drives economic
expansion. For that reason, the Fed sets 2% as its target inflation rate.

Walking inflation is a strong, or destructive, inflation is between 3-10% a year. It is harmful to

the economy because it heats-up economic growth too fast. People start to buy more than they
need to avoid tomorrow's much higher prices. This increased buying drives demand even
further so that suppliers can't keep up. More important, neither can wages. As a result, common
goods and services are priced out of the reach of most people

Galloping inflation is when inflation rises to 10% or more, it wreaks absolute havoc on the
economy. Money loses value so fast that business and employee income can't keep up with costs
and prices. Foreign investors avoid the country, depriving it of needed capital. The economy
becomes unstable, and government leaders lose credibility. Galloping inflation must be
prevented at all costs.

Hyperinflation is when prices skyrocket more than 50% a month. It is very rare. In fact, most
examples of hyperinflation occur when governments print money to pay for wars. Examples of
hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and Venezuela in the
2010s. The last time America experienced hyperinflation was during its civil war.
A graph showing different types of inflation

WHAT IS HYPER-INFLATION ?
 In economics, hyperinflation is very high and typically accelerating inflation. It quickly
erodes the real value of the local currency, as the prices of all goods increase. This causes
people to minimize their holdings in that currency as they usually switch to more stable
foreign currencies, in recent history often the US dollar. Prices typically remain stable in
terms of other relatively stable currencies. Unlike low inflation, where the process of rising
prices is protracted and not generally noticeable except by studying past market prices,
hyperinflation sees a rapid and continuing increase in nominal prices, the nominal cost of
goods, and in the supply of currency. Typically, however, the general price level rises even
more rapidly than the money supply as people try ridding themselves of the devaluing
currency as quickly as possible. As this happens, the real stock of money (i.e., the amount of
circulating money divided by the price level) decreases considerably. Hyperinflation is often
associated with some stress to the government budget, such as wars or their aftermath,
sociopolitical upheavals, a collapse in aggregate supply or one in export prices, or other
crises that make it difficult for the government to collect tax revenue. A sharp decrease in
real tax revenue coupled with a strong need to maintain government spending, together with
an inability or unwillingness to borrow, can lead a country into hyperinflation. Some
countries that have experienced hyper inflationary scenario are:
 Zimbabwe: March 2007 - November 2008
 Yugoslavia: April 1992 - January 1994
 Weimar Germany: August 1922 - December 1923
 Greece: May 1941 - December 1945
 China: October 1947 - May 1949
 Peru: July 1990 - August 1990
 France: May 1795 - November 1796

In 1956, Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, the book often

regarded as the first serious study of hyperinflation and its effects. In his book, Cagan defined a
hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%,
and as ending when the monthly inflation rate drops below 50% and stays that way for at least a
year. Economists usually follow Cagan's description that hyperinflation occurs when the monthly
inflation rate exceeds 50% which is equivalent to a yearly rate of 12,874.63%. The International
Accounting Standards Board has issued guidance on accounting rules in a hyperinflationary
environment. It does not establish an absolute rule on when hyperinflation arises. Instead, it lists
factors that indicate the existence of hyperinflation:

 The general population prefers to keep its wealth in non-monetary assets or in a relatively
stable foreign currency. Amounts of local currency held are immediately invested to
maintain purchasing power
 The general population regards monetary amounts not in terms of the local currency but in
terms of a relatively stable foreign currency. Prices may be quoted in that currency;
 Sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period, even if the period is short;
 Interest rates, wages, and prices are linked to a price index; and
 The cumulative inflation rate over three years approaches, or exceeds, 100%
 Factors leading to hyperinflation

BACKGROUND OF THE HYPERINFLATIONARY SCENARIO IN THE WEIMAR REPUBLIC

OF GERMANY

To pay for the large costs of the ongoing First World War, Germany suspended the convertibility
of its currency to gold when the war broke out. Unlike France, which imposed its first income
tax to pay for the war, German Emperor Wilhelm II and the Reichstag decided unanimously to
fund the war entirely by borrowing, a decision criticized by financial experts such as Hjalmar
Schacht as a dangerous risk for currency devaluation. The government believed that it would be
able to pay off the debt by winning the war, as it would be able to annex resource-rich industrial
territory in the west and east and impose massive reparations on the defeated Allies. Thus, the
exchange rate of the mark against the US dollar steadily devalued from 4.2 to 7.9 marks per
dollar, a preliminary warning to the extreme postwar inflation. This strategy failed as Germany
lost the war, which left the new Weimar Republic saddled with massive war debts that it could
not afford, a problem exacerbated by printing money without any economic resources to back it.
The demand in the Treaty of Versailles for reparations further accelerated the decline in the
value of the mark, with 48 paper marks required to buy a US dollar by late 1919.
Afterwards, German currency was relatively stable at about 90 marks per dollar during the first
half of 1921. Because the Western Front of the war had been mostly fought
in France and Belgium, Germany came out of the war with most of its industrial infrastructure
intact, leaving it in a better position to become the dominant economic force on the European
continent. However, in April 1921, the Reparations Commission announced the "London
payment plan", ordering Germany to pay reparations in gold or foreign currency in annual
installments of two billion gold marks plus 26% of the value of Germany's exports; despite
German outcry at these demands, they were accepted the following month after an Allied
ultimatum to impose economic sanctions that would force Germany to meet payments. The first
payment was made when it came due in June 1921 and marked the beginning of an increasingly
rapid devaluation of the mark, which fell in value to approximately 330 marks per dollar. The
total reparations demanded were 132 billion gold marks, but Germany had to pay only 50 billion
marks at the time, as the reparations were required to be repaid in hard currency, not the rapidly
depreciating paper mark. 
From August 1921, Germany began to buy foreign currency with marks at any price, but that
only increased the speed of the collapse in value of the mark, meaning more and more marks
were required to buy the foreign currency that was demanded by the Reparations Commission. In
the first half of 1922, the mark stabilized at about 320 marks per dollar. International reparations
conferences were being held. One, in June 1922, was organized by US investment banker J. P.
Morgan, Jr. The meetings produced no workable solution, and inflation erupted into
hyperinflation, the mark falling to 7,400 marks per US dollar by December 1922. The cost-of-
living index was 41 in June 1922 and 685 in December, a nearly 17-fold increase. By fall of
1922, Germany found itself unable to make reparations payments. The strategy that Germany
had been using to pay war reparations was the mass printing of bank notes to buy foreign
currency, which was then used to pay reparations, but this strategy greatly exacerbated
the inflation of the paper mark. Since the mark was, by fall of 1922, practically worthless, it was
impossible for Germany to buy foreign exchange or gold using paper marks. After Germany
failed to pay France an installment of reparations on time in late 1922, French and Belgian
troops occupied the Ruhr valley, Germany's main industrial region, in January 1923. Reparations
were to be paid in goods, such as coal, and the occupation was supposed to ensure reparations
payments .The German government's response was to order a policy of passive resistance in the
Ruhr, with workers being told to do nothing which helped the invaders in any way. While this
policy, in practice, amounted to a general strike to protest the occupation, the striking workers
still had to be given financial support. The government paid these workers by printing more and
more banknotes, with Germany soon being swamped with paper money, exacerbating the
hyperinflation even further.
CAUSES OF THE HYPERINFLATIONARY SCENARIO IN THE WEIMAR REPUBLIC OF
GERMANY

The cause of the immense acceleration of prices seemed unclear and unpredictable to those who
lived through it, but in retrospect, it was relatively simple. The Treaty of Versailles imposed a
huge debt on Germany that could be paid only in gold or foreign currency. With its gold
depleted, the German government attempted to buy foreign currency with German
currency, equivalent to selling German currency in exchange for payment in foreign currency,
but the resulting increase in the supply of German marks on the market caused the German mark
to fall rapidly in value, which greatly increased the number of marks needed to buy more foreign
currency. That caused German prices of goods to rise rapidly, increasing the cost of operating the
German government, which could not be financed by raising taxes because those taxes would be
payable in the ever-falling German currency. The resulting deficit was financed by some
combination of issuing bonds and simply creating more money, both increasing the supply of
German mark-denominated financial assets on the market and so further reducing the currency's
price. When the German people realized that their money was rapidly losing value, they tried to
spend it quickly. That increased monetary velocity and caused an ever-faster increase in prices,
creating a vicious cycle. The government and the banks had two unacceptable alternatives. If
they stopped inflation, there would be immediate bankruptcies, unemployment, strikes, hunger,
violence, collapse of civil order, insurrection and possibly even revolution. If they continued the
inflation, they would default on their foreign debt. However, attempting to avoid both
unemployment and insolvency ultimately failed when Germany had both. The situation had
worsened so much that a loaf of bread in Berlin that cost around 160 Marks at the end of 1922
cost 200,000,000,000 Marks by late 1923. By November 1923, the US dollar was worth
4,210,500,000,000 German marks.

50,000 marks, 1923

 

500,000 marks, 1923

 
 

5,000,000 marks,1923
 

50,000,000 marks, 1923

 

500,000,000 marks,  1923

 
 

5 billion (5 Milliarden) marks,  1923

 

50 billion (50 Milliarden) marks,  1923

 

500 billion (500 Milliarden) marks, 1923

 


 5 trillion (5 Billionen, 5×10¹²) marks, 1923
 

50 trillion (50 Billionen, 50×10¹²) marks 1923

STABILIZATION OF THE HYPERINFLATIONARY SCENARIO IN THE WEIMAR

REPUBLIC OF GERMANY

When the new currency, the Rentenmark, replaced the worthless Reichsbank marks on
November 16, 1923 and 12 zeros were cut from prices, prices in the new currency remained
stable. The German people regarded this stable currency as a miracle because they had heard
such claims of stability before with the Notgeld (emergency money) that rapidly devalued as an
additional source of inflation. The usual explanation was that the Rentenmarks were issued in a
fixed amount and were backed by hard assets such as agricultural land and industrial assets, but
what happened was more complex than that, as summarized in the following description. In
August 1923, Karl Helfferich proposed a plan to issue a new currency (roggenmark) backed by
mortgage bonds indexed to market prices in paper Marks of rye grain. His plan was rejected
because of the greatly fluctuating price of rye in paper Marks. The Agriculture Minister Hans
Luther proposed a different plan which substituted gold for rye and a new currency, the
Rentenmark, backed by bonds indexed to market prices in paper Marks of gold. The gold bonds
were defined at the rate of 2,790 gold Marks per kilogram of gold, which was the same definition
as the pre-war gold marks. The rentenmarks were not redeemable in gold, but were only indexed
to the gold bonds. This rentenmark plan was adopted in monetary reform decrees on October 13–
15, 1923 that set up a new bank, the Rentenbank controlled by Hans Luther who had become the
new Finance Minister. After November 12, 1923, when Hjalmar Schacht became currency
commissioner, the Reichsbank, the old central bank, was not allowed to discount any further
government Treasury bills, which meant the corresponding issue of paper marks also ceased.
Discounting of commercial trade bills was allowed and the amount of Rentenmarks expanded,
but the issue was strictly controlled to conform to current commercial and government
transactions. The new Rentenbank refused credit to the government and to speculators who were
not able to borrow Rentenmarks, because Rentenmarks were not legal tender. When Reichsbank
president Rudolf Havenstein died on November 20, 1923, Schacht was appointed president of
the Reichsbank. By November 30, 1923, there were 500 million Rentenmarks
in circulation, which increased to 1000 million by January 1, 1924, and again to 1,800 million
Rentenmarks by July 1924. Meanwhile, the old paper Marks continued in circulation. The total
paper Marks increased to 1,211 quintillion in July 1924 and continued to fall in value to one third
of their conversion value in Rentenmarks. The monetary law of August 30, 1924 permitted
exchange of each old paper 1,000,000,000,000 Mark note for one new Reichsmark, equivalent in
value to one Rentenmark.

Karl Theodor Helfferich, the economist who proposed the issuing of the currency "Roggenmark"
which was eventually rejected
 A note of the Rentenmark currency
REVALUATION OF THE HYPERINFLATIONARY SCENARIO IN THE WEIMAR REPUBLIC
OF GERMANY
One of the important issues of the stabilization of a hyperinflation is the revaluation. The term
normally refers to the raising of the exchange rate of one national currency against other
currencies. As well, it can mean revalorization, the restoration of the value of a currency
depreciated by inflation. The German government had the choice of a revaluation law to finish
the hyperinflation quickly or of allowing sprawling and the political and violent disturbances on
the streets. The government argued in detail that the interests of creditors and debtors had to be
fair and balanced. Neither the living standard price index nor the share price index was judged as
relevant.
Eventually, some debts were reinstated to compensate creditors partially for the catastrophic
reduction in the value of debts that had been quoted in paper marks before the hyperinflation. A
decree of 1925 reinstated some mortgages at 25% of face value in the new currency, effectively
25,000,000,000 times their value in the old paper marks, if they had been held for at least five
years. Similarly, some government bonds were reinstated at 2.5% of face value, to be paid after
reparations were paid. Mortgage debt was reinstated at much higher rates than government bonds
were. The reinstatement of some debts and a resumption of effective taxation in a still-devastated
economy triggered a wave of corporate bankruptcies.
The calculation of the conversion relation was considerably judged to the dollar index as well as
to the wholesale price index. In principle, the German government followed the line of market-
oriented reasoning that the dollar index and the wholesale price index would roughly indicate
the true price level in general over the period of high inflation and hyperinflation. In addition, the
revaluation was bound on the exchange rate mark and United States dollar to obtain the value of
the Goldmark. Finally, the Law on the Revaluation of Mortgages and other Claims of 16 July
1925 included only the ratio of the paper mark to the gold mark for the period from January 1,
1918, to November 30, 1923, and the following days. The galloping inflation thus caused the end
of a principle, "a mark is worth a mark", which had been recognized, the nominal value
principle. The law was challenged in the Supreme Court of the German Reich (Reichsgericht),
but its 5th Senate ruled, on November 4, 1925, that the law was constitutional, even according to
the Bill of Rights and Duties of Germans. The case set a precedent for judicial review in German
jurisprudence.

A conversion table showing the conversion of currencies

CONCLUSION OF THE HYPERINFLATIONARY SCENARIO IN THE WEIMAR REPUBLIC
OF GERMANY

The hyperinflationary scenario in Germany caused a lot of hardship to the natives.

Hyperinflation created a situation whereby prices rose almost hour by hour. People were paid
twice in a day and often had to take piles of money to the shops in wheelbarrows. Shopping
stopped becoming about paying for goods with money but developed into an exchange economy
whereby goods were swapped for each other like food for toiletries. Famous examples included
people using bank notes as wallpaper, as this was cheaper than purchasing wallpaper. Children
too were also given large piles of money to play with, some created kites or built towers out of
the money. The more money that the government printed, the more the money became worthless.
This meant that, when other countries exchanged their money to Reichsmarks, it wasn’t worth
anything. As a result, imports to Germany fell and the shortages became worse. Germany could
not import the goods it needed for survival. As money became worthless so too did people’s
savings. For example, if you had saved 500 marks prior to hyperinflation, this amount did not
increase as prices did. The value of these savings stayed at 500 marks. The destruction in the
value of savings particularly hit the middle classes in Germany. However, after all the
revaluation the economy stabilized to some extent.
DIFFERENT WAYS SHOWING HOW VALUELESS MONEY HAD BECOME
 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher Ms. Malik as well as our
principal Ms. Mukherjee who gave me the golden opportunity to do this wonderful project on the
topic of increase in the demand of online shopping, which also helped me in doing a lot of
Research and I came to know about so many new things I am really thankful to them.
Secondly I would also like to thank my parents and friends who helped me a lot in finalizing this
project within the limited time frame.

BIBLIOGRAPHY
https://www.thebalance.com/types-of-inflation-4-different-types-plus-more-
3306109#:~:text=Inflation%20is%20when%20the%20prices,walking%2C%20galloping%2C
%20and%20hyperinflation.&text=Some%20experts%20say%20demand%2Dpull,they%20are
%20causes%20of%20inflation.

https://en.wikipedia.org/wiki/Hyperinflation

https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic#:~:text=Reparations
%20accounted%20for%20about%20a,and%20speculators%20(particularly%20foreign).

https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic#Aftermath

https://researchonline.jcu.edu.au/21599/3/21599.pdf

https://www.tutor2u.net/history/reference/effects-of-hyperinflation