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The World's Most Famous Case of Hyperinflation (Part 2 of 2)

The World’s Most Famous Case of Hyperinflation (Part 2)

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

For the first infographic in this series, which summarizes the circumstances leading up to hyperinflation in Germany in 1921-1924, it can be found here: Hyperinflation (Part 1 of 2)

Slippery Slope

“Inflation took the basic law-and-order principles of loyalty and trust to the extreme.” Martin Geyer, Historian.

“As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans.” Karl Helfferich, an economist in 1915.

“There is a point at which printing money affects purchasing power by causing inflation.” Eduard Bernstein, socialist in 1918.

In the two years past World War I, the German government added to the monetary base of the Papiermark by printing money. Economic historian Carl-Ludwig Holtfrerich said that the “lubricant of inflation” helped breathe new life into the private sector.

The mark was trading for a low value against the dollar, sterling and the French franc and this helped to boost exports. Industrial output increased by 20% a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly.

Then, suddenly this “lubricant” turned into a slippery slope: at its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours.

When did the “lubricant” of inflation turn into a toxic hyperinflationary spiral?

The ultimate trigger for German hyperinflation was the loss of trust in the government’s policy and debt. Foreign markets refused to buy German debt or Papiermarks, the exchange rate depreciated, and the rate of inflation accelerated.

The Effects

Hyperinflation in Germany left millions of hard-working savers with nothing left.

Over the course of months, what was enough money to start a stable retirement fund was no longer enough to buy even a loaf of bread.

Who was affected?

  • The middle class – or Mittelstand – saw the value of their cash savings wiped out before their eyes.
  • Wealth was transferred from general public to the government, which issued the money.
  • Borrowers gained at the expense of lenders.
  • Renters gained at the expense of property owners (In Germany’s case, rent ceilings did not keep pace with general price levels)
  • The efficiency of the economy suffered, as people preferred to barter.
  • People preferred to hold onto hard assets (commodities, gold, land) rather than paper money, which continually lost value.

Stories of Hyperinflation

During the peak of hyperinflation, workers were often paid twice a day. Workers would shop at midday to make sure their money didn’t lose more value. People burned paper bills in the stove, as they were cheaper than wood or other fuel.

Here some of the stories of ordinary Germans during the world’s most famous case of hyperinflation.

  • “The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week,” Eugeni Xammar, a journalist, wrote in February 1923. “As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling.”
  • A man who drank two cups of coffee at 5,000 marks each was presented with a bill for 14,000 marks. When he asked about the large bill, he was told he should have ordered the coffees at the same time because the price had gone up in between cups.
  • A young couple took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.
  • Historian Golo Mann wrote: “The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath,” he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. “What was there to trust, who could you rely on if such were even possible?” he asked.

Even Worse Cases of Hyperinflation

While the German hyperinflation from 1921-1924 is the most known – it was not the worst episode in history.

In mid-1946, prices in Hungary doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

Peak Inflation Rates:
Germany (1923): 3.5 billion percent
Zimbabwe (2008): 79.6 billion percent
Hungary (1946): 41.9 quintillion percent

Hyperinflation has been surprisingly common in the 20th century, happening many dozens of times throughout the world. It continues to happen even today in countries such as Venezuela.

What would become of Germany after its bout of hyperinflation?

A young man named Adolf Hitler began to grow angry that innocent Germans were starving…

“We are opposed to swarms of Americans and other foreigners raising prices throughout Germany while millions of Germans are starving because of the increased prices. We are equally opposed to German profiteers and we are demanding that all be imprisoned.” – Adolf Hitler, 1923, Chicago Tribune

About the Money Project

The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.

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The World's Most Famous Case of Hyperinflation (Part 1 of 2)

The World’s Most Famous Case of Hyperinflation (Part 1)

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

Part 2 to this series, discussing the ultimate effects of hyperinflation on the German populous, and other intense cases of hyperinflation, can be found here: Hyperinflation (Part 2 of 2)

The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect.

Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.

The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.

The Treaty of Versailles

Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.

The terms of the agreement, which were essentially forced upon Germany, made the country:

  1. Accept blame for the war
  2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)
  3. Forfeit territory in Europe as well as its colonies
  4. Forbid Germany to have submarines or an air force, as well as a limited army and navy
  5. Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.

“I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.”
– John Maynard Keynes, representative of the British Treasury

Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.

The Catalysts

1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.

This created two separate versions of the same currency:

Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks

Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.
In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.

2. Heavy Debt

Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.

Adding together previous debts with the reparations, debt exceeded Germany’s GDP.

3. Inability to Pay

The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.

Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.

Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.

Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.

4. Invasion of The Ruhr

After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.

French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.

German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone.

On top of that, more and more banknotes had to be printed to pay striking workers.

Hyperinflation

Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.

All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished.
Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2 (released sometime the week of Jan 18-22, 2016).

About the Money Project

The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.

Embed This Image On Your Site (copy code below):