Great Inflation

In late-1922 the German government were forced to ask
the Allies for a moratorium on reparations payments; this was refused, and
she then defaulted on shipments of both coal and timber to France. By

January of the following year, French and Belgian troops
had entered and occupied the Ruhr. The German people, perhaps for the
first time since 1914, united behind their government, and passive
resistance to the occupying troops was ordered. A government-funded strike
began as thousands of workers marched out
of their factories and steel works. The German economy, already under
massive pressure, gave way. The huge cost of funding the strike in the

Ruhr and the costs of imports to meet basic consumer needs were met by the
familiar expedient of the printing pre sses. Note circulation increased
rapidly, and by November 1923 had reached almost 92 trillion marks. With
less than three per cent of government expenditure being met from income
and with the cost of one dollar at four billion marks, Germany was in the
th roes of economic and social chaos. Starvation became a reality for
millions of people, despite a bumper cereal harvest, as shops reverted to
the barter system. Farmers refused to accept the effectively worthless,
banknotes in exchange for grain, and food quickly began to run short in
the cities. Prices rose one trillion-fold from their pre-war level. More
importantly, for the long-term political future of Germany, the middle and
working classes saw their savings wiped out. These were, in essence, the
pe ople who were later to become the hard-core of the Nazi vote.

Economists will argue that runaway hyperinflation has two sources.

Firstly, it arises through a fall in the foreign exchange value of a
currency, when an adverse balance of payments reduces foreign investors
demand for the currency. A falling exchange rat e increases the cost of
imports and, therefore, the cost of living. Wages rise as workers try to
maintain their standard of living, especially if previous institutional
arrangements have linked wages to living costs. Firms paying higher wages
raise the pr ice of the goods they sell, prices rise still further, the
foreign exchange value of the currency falls still more, and the cycle
continues. Secondly, it arises through a large budget deficit which no one
believes will narrow in the future. Faced with the
prospect of budget deficits for many years to come, the usual sources of
credit available to the government decline to make further loans; the
government can no longer borrow to cover the deficit between revenue and
expenditure. The only alternative is t o print more and more banknotes. As
government workers and suppliers present their bills to the Treasury, it
pays them off with newly-printed pieces of paper. This puts more banknotes
into the hands of the public and they then spend them. In Germany, as we
have seen, the problem was that there were trillions of marks worth of
paper currency in circulation. Prices could rise one thousand times
between a worker being paid and his reaching the shops. A common analogy
used is that if one could afford a bottl e of wine today, one should keep
the empty bottle which would be worth more tomorrow than the full bottle
was today.

Eventually, the power to boost government spending by printing money goes.

When the government can no longer gain, even in the short-term, a
budgetary balance through inflation, the situation becomes so intense that
stabilisation through a currency board,
a new finance minister or a link to the gold standard is implemented, and
reform can be successful. It was at this point that some sanity was
injected into the German economy by the election of Gustav Stresemann. He
called a halt to resistance in the Ru hr, and set out to stabilise the
mark. Luther, Stresemann’s Finance Minister, introduced the rentenmark the
value of which was based on Germany’s staple, rye, rather than gold. In
fact the rentenmark represented a mortgage on Germany’s land and industry,
which could never be redeemed. It did not matter. The point was that the
currency was stabilised and became exchangeable at a rate of one billion
old marks to one new mark, and at the pre-war parity of 4.2 marks to the
dollar. The new currency was quickl y accepted by the population, and food
and consumer goods began to appear in the shops. The government could now
attempt to regain budgetary control in a climate of low inflation. The

Dawes Plan was brokered, and a sum of some 39 billion dollars was lent to

Germany of the following five years. However, this new economic