Institutionalized Incompetence: Hyperinflation in the Weimar Republic
Richard Wagner: Tannhäuser Overture
In the modern lexicon the term “Weimar” has become a euphemism for government waste, ineptitude, and general incompetence. The origin of the term comes from the German government that was born in the city of Weimar and lasted from the end of World War I until the National Socialists took power in 1933. The period of the Weimar Republic was a dark time in German history as it was marked by hyperinflation, corruption, and violent political clashes. Today, most people know little about the details of the Weimar Republic, but some of its most salient features continue to impress the minds of those interested through graphic photos that include: people burning marks in the family furnace because the currency was worth more as kindling than money; people bringing wheelbarrows full of money to the store to buy small items such as sausage and milk; the Berlin cabaret; and the numerous street demonstrations, which often turned violent between far left and far right political factions. Although the Weimar Republic was short-lived, it left a lasting legacy in Germany, Europe, and the world through its monetary and government policies that played a role in severe econmic problems that paved the way for Hitler to come to power. A brief examination reveals that at the core of the Weimar Republic’s problems was its mishandling in monetary policy that resulted in one of the worst cases of hyperinflation in modern history that although brief – it took place from 1921-23 – put the government in a hole from which it was unable to emerge.
The Process of Hyperinflation
The process of inflation is a natural feature of modern capitalist economies; it is essentially a situation where the price of commodities and goods increases at a disproportional rate with the currency. In other words, as the price of goods, such as produce, increases the amount that a dollar can buy decreases; as the value of goods increases, the currency losses its value. During the period of 1921-23 the Weimar Republic found itself in the throes of an inflationary cycle, in what economists define as “hyperinflation.” For the most part hyperinflation works under the same principles as normal inflation, but the marked difference was defined by the economist Charles Maier as an increase in prices by over 1,000% per year. Economists have formulated different theories to explain the presence of hyperinflation in modern history, some of which include the following: the quantity of money or currency available in a particular economy; income levels; and influences in the international exchange rate. Some of these and other factors that contributed to the hyperinflation of the Weimar Republic will be discussed more thoroughly below, but first some of the raw numbers and the historical perspective must be considered.
By the end of the Weimar hyperinflation period in 1923 the mark, which was the German currency at the time, was worth only one trillionth of its value from when World War I began in 1914. The Weimar hyperinflation process was marked by two primary aspects: a phenomenal increase in prices in excess of the increase in the valued of the currency and a rapid rise in the exchange rate. To sum up in concrete, tangible terms what hyperinflation meant to the avrage German, for instance, a loaf of bread cost about 29 pfenning (29 cents) in 1914, but by November 1923 it cost 428 billion marks! The economic situation was obviously grim in the Weimar Republic if one had to be a billionaire just to buy a loaf of bread, but the situation was compounded and at least partially the result of Germany’s loss in World War I.
After Germany found itself on the losing side in World War I it was forced to sign the Treaty of Versailles, which many people believed, including American president Woodrow Wilson, would put an end to major wars. The Treaty was both humiliating and crippling to the German people and the Weimar government because the German military was disarmed, the state lost 13% of its territory, and most importantly the Weimar government was saddled with 132 billion marks in reparations, mainly to France and Belgium. Unfortunately for the Weimar government, the reparations were fixed, which meant that the government was unable to pay with inflated marks. Truly the Treaty of Versailles played a role in the Weimar Republic’s hyperinflation period, but there were several other factors that contributed in varying degrees to the general problems of the 1920s.
The Causes of Weimar Hyperinflation
An examination of hyperinflation in the Weimar Republic reveals that there were several factors that caused the cycle to take place and that each one taken alone may not have done much damage, but when they all converged it had the effect of a tsunami that laid waste to Germany for over ten years. One of the major factors that contributed to the Weimar hyperinflation was the same one that has led to inflation in most modern economies – excessive printing of money. After World War I Germany was no longer on the gold standard, which meant that the amount of currency was no longer limited to the amount of gold the German government had in its reserves. No longer being on the gold standard was not a cause of Weimar hyperinflation in itself, although economist Albert Hahn argued that it could have been a solution to the problem, but the lack of “hard-money” apparently relaxed any inhibitions that German politicians and government officials had towards printing excess paper money. To pay for numerous social programs the Weimar government was essentially a coalition of center left and right political parties who believed that the key to their survival was the creation of numerous social programs. In order to fund social programs governments are forced to find revenue streams, which usually comes via taxation, but in the case of the Weimar government, which held the reins of government precariously at best, raising taxes was not an option so it took the other available route – printing more money. The high rate of government spending in the Weimar Republic combined with a low rate of agricultural and industrial output and excessive printing of currency led to the devaluation in the mark, but other political factors also played a role in the hyperinflation of the early 1920’s.
Among the political events in the early 1920’s that further exasperated the economic morass that Germany faced was the assassination of the Weimar foreign minister, Walther Rathenau in 1922. Rathenau’s assassination set off a speculation crisis that saw the value of the German mark plunge further in world currency markets; then in 1923 the French and Belgium armies occupied the mineral rich Ruhr Valley of Germany in efforts to force the Weimar government to pay reparations owed to the two countries from World War I. The Weimar Republic was truly plagued by poor economic policies within its own government and other events that it may or may not have had control of, but the looming specter that probably contributed most to the Weimar hyperinflation was the large debts and reparations it inherited as the result of World War I.
Perhaps the biggest irony in the saga of the Weimar Republic was that it was not the government that brought about World War I; in fact many of its leaders were opposed to the war, but unfortunately for them they would have to bear the brunt of the responsibility. As mentioned above, the Weimar government was saddled with a 132 billion mark reparation payment, which no doubt contributed immensely to the hyperinflation of the early 1920s, but this was further compounded by another 150 billion mark debt the previous German government incurred to fund its war effort. With so much debt set at a fixed price the Weimar government was unable to pay and probably more importantly, it was unable to come to terms with the new international monetary system in which they participated. The Weimar government soon found that the new international system was extremely volatile and their dependency on it meant that they were under the control of forces that they failed to fully understand and certainly could not control.
The Results of the Weimar Hyperinflation
After 1923 the Weimar government was able to stabilize the inflationary cycle through a number of different applications, but in the end it was like trying to put a band aid on a hemorrhage as the economy limped on until depression ravaged Germany. The Weimar government was able to coordinate its fiscal and monetary policies to stabilize prices on goods primarily by introducing a new currency called the “Rentenmark.” The Rentenmark was different than its predecessor because it was backed by land and real estate so it had a concrete, tangible value. The Rentenmark may have solved Germany’s currency problems, but the reparations for World War I continued to be a problem that needed to be addressed or the country may have suffered another cycle of hyperinflation.
Since Germany is one of the larger and more politically important European nations, the international community finally began to see the importance of stabilizing the Weimar government and by extension its economy. American financiers, who were for the most part neutral towards Germany unlike most Europeans, proposed a couple of different plans that were intended to keep all parties happy by lessening the payments Germany had to make while still recognizing that the obligations still existed. The first of these plans became known as the Dawes Plan for the American financier, Charles Dawes, who proposed the plan in 1924. The Dawes Plan called for Germany to make reparations according to its financial abilities, but even as the inflation cycle waned, the German economy continued to languish. Because of the continuing dire economic situation in Germany a new repayment plan was proposed by another American financier. The second plan is known as the Young Plan for its author Owen Young who proposed that Germany’s reparation payments be reduced by 75%. Despite the seemingly generous plan the Weimar Republic was still unable to pay the reparations and when the National Socialists came to power in 1933 they repudiated all debts. Although the Weimar Republic was able to stabilize the hyperinflation of 1921-23, it was unable to stop the ensuing economic depression.
In 1925-26 Germany was hit with an economic depression that resulted in massive unemployment. In particular, union workers saw their unemployment rise to as high as 20% and although the Germany economy recovered once more from that cycle, a recession gripped the country from 1932 through 1938 that caused overall unemployment rise to eight million. Unemployed factor workers asked the Weimar Republic questions that it could not answer, but they did find answers in the various communist and fascist organizations that were cropping up throughout Germany in the 1920s. As the Weimar Republic limped through one economic disaster after another, which started with the hyperinflation cycle, more and more Germans began to see the government as weak and inept. The Weimar government could do nothing about the anemic economy and it sat idly by as violent street fights, which left hundreds dead in the 1920s, between communist and fascist organizations became daily occurrences on the streets of German cities. Perhaps the Weimar Republic was doomed to fail, but economists and historians will all point to the cycle of hyperinflation as the beginning of its decline and the opening that helped bring Hitler and the National Socialists to power a decade later.
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