German Hyperinflation
Int’l Finance
5/4/11 Country Report
One of the most interesting and devastating phenomena to take place in a country was during the post World War I German Hyperinflation from 1918 – 1923. Germany had lost the war and the Allies were forcing them to make reparations. “The central government in Germany, which did not impose income taxes, financed the war almost completely by issuing debt” (Hetzel, 2). Since Germany refused to impose high taxes on their people, they had to pay for the war and the cost of losing the war by printing money. This resulted in an extreme deficit for Germany since the Allies could collect interest on the German debt. Germany was stuck in a vicious cycle of increasing the money supply, which then led to an inflation of prices, depreciation of the mark, reduction of purchasing price parity of its citizen’s income and revenues, which results in increasing the money supply more. “By the end of 1918 the mark had fallen more than 50% against the dollar” (Economist Millennium issue: German hyperinflation, Dec 23rd 1999). The depreciation in currency made German exports cheap to foreigners and prices would keep rising for the Germans. The people in Germany wanted to get rid of their marks because of the opportunity cost of holding them.
“By November 5th 1923, a loaf of bread cost 140 billion marks. Workers were paid twice a day, and given half hour breaks to rush to the shops with their satchels, suitcases or wheelbarrow, to buy something, anything, before their paper money halved in value yet again”(Economist, Millennium issue). The present value of their money was depreciating so rapidly that they had to buy whatever they could as soon as they could because it was more useful to have real tangible items instead of the currency.
Since the price level rose so quickly, confidence was lost in their currency. They preferred to buy gold, silver or even barter as a medium of exchange. “The resulting fall in the
5/4/11 Country Report
One of the most interesting and devastating phenomena to take place in a country was during the post World War I German Hyperinflation from 1918 – 1923. Germany had lost the war and the Allies were forcing them to make reparations. “The central government in Germany, which did not impose income taxes, financed the war almost completely by issuing debt” (Hetzel, 2). Since Germany refused to impose high taxes on their people, they had to pay for the war and the cost of losing the war by printing money. This resulted in an extreme deficit for Germany since the Allies could collect interest on the German debt. Germany was stuck in a vicious cycle of increasing the money supply, which then led to an inflation of prices, depreciation of the mark, reduction of purchasing price parity of its citizen’s income and revenues, which results in increasing the money supply more. “By the end of 1918 the mark had fallen more than 50% against the dollar” (Economist Millennium issue: German hyperinflation, Dec 23rd 1999). The depreciation in currency made German exports cheap to foreigners and prices would keep rising for the Germans. The people in Germany wanted to get rid of their marks because of the opportunity cost of holding them.
“By November 5th 1923, a loaf of bread cost 140 billion marks. Workers were paid twice a day, and given half hour breaks to rush to the shops with their satchels, suitcases or wheelbarrow, to buy something, anything, before their paper money halved in value yet again”(Economist, Millennium issue). The present value of their money was depreciating so rapidly that they had to buy whatever they could as soon as they could because it was more useful to have real tangible items instead of the currency.
Since the price level rose so quickly, confidence was lost in their currency. They preferred to buy gold, silver or even barter as a medium of exchange. “The resulting fall in the