German Hyperinflation Inflation 1923

Wartime debt and fiscal disorder, a passive monetarily accommodating Central Bank and the social and democratic constraints on policy makers.

Germany experienced an acute episode of hyperinflation following the end of the First World War in 1918. It aggravated the political and social disruption that followed Germany’s defeat in war and the revolutionary collapse of the German Imperial monarchy. The social and political disruption generated by the revolutionary conditions in Germany, moreover, contributed to making inflation worse.

Attempting to analyse what happened and trying to unpick the process of causation involved in this extraordinary monetary episode is useful in helping contemporary policy makers and financial practitioners to understand the different factors that shape monetary and price stability, and more important the sort of events and errors that can destroy it.

What Hyperinflation Looks Like: the Price of Bread in Germany 1914-23

The starting point in exploring it must be a recognition that this episode of hyperinflation was not simply a technical failure of monetary policy by a central bank or an ill-judged episode of macroeconomic management. It was instead the product of the consequences of a wartime emergency and fiscal policies that exposed the limits of what can be achieved through orderly monetary policies. 

What is special about the German Weimar inflation was its scale and the consequences of such hyperinflation in a developed industrial market economy. The experience of hyperinflation and people having to collect their wages in wheelbarrows are credited with folk memories in Germany that give it an aversion to inflation. The numerical impact of price changes Weimar Germany is arresting as this table constructed by Stefan Schneider, an economist at Deutsche Bank Research, Higher German inflation: Mission impossible? The price of bread rose from 3.50 Marks in 1922 to 700 Marks in January 1923 and to as much as 670 m (!) in October. The currency reform was called by historians “the largest expropriation for cash holders in German history” (cash, bank and savings deposits were converted in a ratio of 100:6.5)

Imperial Germany’s financing of the First World War

Germany went to war in August 1914, against France, Russia and Britain. Imperial Germany’s military strategy was predicted on a swift victory on the western front that would then enable Germany to focus its full resources on defeating Russia in the east. Imperial German strategy was informed by a perception of Germany's vulnerability in the medium and longer-term as the pre-revolutionary Imperial Russian economy industrialised and both Russia and France increased military spending. This perception of looming German vulnerability was amplified by the domestic political balance of power in the Reichstag. 

The legislature was elected by a broad popular franchise relative to that in other countries at the time. All men over the age of twenty-five could vote in Imperial elections. There was no property qualification in contrast to Britain or in the legislatures elected in the individual German princely states such as Prussia, Saxony and Bavaria. The Reichstag set the budget and military spending envelope. In the election in 1912 the Social Democrats emerged as the largest party. The fear of the Conservative Prussian political elites was that over time a natural socialist majority would emerge that would question spending on Imperial armed forces. So there was merit from this perspective, in a nationalist anti-Russian agenda to provide a non- economic patriotic agenda for the Wilhelminean electorate. The imperative for a swift defensive war. German military planners considered that a further war was inevitable, given their assumption that France would not accept the result of its defeat in the 1870 Franco-Prussian war. The key strategic doctrine was embodied in the Schlieffen Plan, constructed by Field Marshal Alfred von Schlieffen in 1906. This proposed a decisive military offensive against France, where the German army were to invade France through the Netherlands and Belgium rather than across the common border. It would be a replay of Prussia’s success against France in 1870. After defeating France in a swift crippling manoeuvre, the Germany army would then turn and defeat the Russian army in the east. 

This geopolitical and military thinking was the background that framed Wilhelminean Germany’s approach to financing the First World War. It was predicated on the assumption of a short and swift war. A war that could be financed by borrowing rather than through increased taxation. The resulting debt, moreover, would be serviced from the reparations payments that would be inflicted on the defeated powers. Again, this was a direct replication from the playbook of the Franco-Prussian war in 1870. It was French reparations paid in gold in the 1870s that made it possible for the new Reichsbank to place Imperial Germany on the international gold standard.

The decision to borrow was reinforced by the fiscal constraints on the Imperial German Government. The Imperial authorities had access to few sources of buoyant direct revenue such as income tax. Its principal sources were tariffs, some excise duties and inheritance taxes. The German states did have access to buoyant sources of revenue from expenditure taxes and taxes on income but jealously guarded their fiscal autonomy. Germany’s wartime finance ministers first inclination was therefore to borrow, with the tantalising prospect of reassuring patriotic investors that the debt would be paid by the indemnity imposed on Germany’s defeated enemies.

This worked until 1916. When the Imperial German political elites adjusted to full mobilisation of the economy and accepted the Hindenburg Programme in 1916 that recognised that the war would not be short. Germany did not possess the developed money and bond markets that could absorb the borrowing necessary to match its wartime spending. Moreover, unlike Germany’s enemies the Imperial government could not borrow on any scale in neutral financial markets such as those in New York and Switzerland. Nor did Germany have large foreign assets that could be sold to finance its balance of payments. Moreover, the Hindenburg Programme planned to double industrial production to boost the availability of armaments and ammunition. The programme imposed controls not dissimilar to those of a command economy and involved a huge further increase in public expenditure.

1916 represented a watershed in Imperial German war finance. Until the Hindenburg Programme a systematic attempt was made to finance public expenditure through issues of bonds sold to the private sector, on the classic Anglo-Dutch model of national debt war finance, even if the asserted source of debt service, indemnities raised from defeated German adversaries was implausible. After 1916 the façade of orderly debt finance was abandoned. Government debt and public expenditure were monetized as the mechanism for transferring resources into the hands of the state. Inflation was both the consequence of this and the mechanism that brought about the transfer.

How did the Reichsbank respond to the monetary effects of this Fiscal Challenge?

Harold James in his chapter contributing to the Bundesbank’s legacy publication Fifty Years of the Deutsche Mark explores the response of the monetary authorities to the wartime economic and financial crises. In 1914 in common with other belligerent countries, such as Great Britain, Germany experienced a run on banks and had to suspend convertibility into gold and limits were placed on the discounting of Treasury bills. To support liquidity and the continuing operation of money and credit markets local loan bureaux were set up that provided credit secured by public sector paper, including on debt instruments issued by the federal states and by local authorities. The notes issued by these loan bureaux be exchanged at the Reichsbank for Reichsbank notes. At the end of 1918 there 10.1 billion marks worth of loan notes in circulation roughly half that of the 22.2 billion marks of paper currency circulating. As the real value of the currency fell during the war the Reichsbank considered its responsibility was to provide more currency at faster rates as inflation increased demand for its use in transactions. It was a passive accommodating reflex embedded in the doctrine of monetary management that the Reichsbank applied. The result was that by 1918 there was five times as much cash in circulation as there had been in 1913.

After the end of the war in 1918 a bad monetary position become worse

Managing the monetary consequences of Germany’s wartime finance and the decision to abandon sales of debt to the private sector, and instead rely on monetary financing, would have been a challenge to any central bank and finance ministry. Yet in the years between 1918 and 1923, Germany’s fiscal and monetary problems increased. This arose from domestic social and political pressures and from external internal pressures arising from reparation payments to Germany’s former enemies and the enforcement measures that France took to extract the payments, culminating in the occupation of the Ruhr.

Revolution, Weimar, Social Need and the threat of further violent political and social experiments

The collapse of the Imperial monarchy and the political revolution at the end of 1918, resulted in an unstable constitution agreed in Weimar. It was based on a legislature that was elected on a highly proportionate franchise that made the construction of stable governing coalitions with an effective legislative majority difficult. In the first years of the new republic the Social Democratic Party was dominant and well placed to secure enhanced workers rights and increased social expenditure. In many respects these were achieved in the Stinnes-Legien agreement made in November 1918 that entrenched a set of workers’ rights that the German labour movement had campaigned for a long time. These rights included trade union recognition, which facilitated the development of industry wide trade union collective bargaining. 

A government of any political complexion would have faced huge new social costs arising from the war – transfer payments to people disabled by the war, widows’ pensions and the cost of orphaned children. Food was in short supply and the government responded to higher food prices with subsidies. The railways and post office services were financially unviable without huge external public sector support. This was given because of political concern about the social costs and unemployment that would result from a hard external financing constraint. The scale of these interventions is illustrated by the ratio of public spending absorbed by them. By 1920 spending on these rail and postal services, to finance their deficits, accounted for 12 per cent of the Reich’s expenditure. 

The German government after the war ran a full employment policy for social and political reasons. Tax policy and revenue raising measures were constrained by the same political and social concern that guided decisions on spending. Increased taxation was generally opposed by business interests that were militantly opposed to higher corporation and profits taxes. The political anxieties that dominated fiscal policy were not trivial. The political collapse of the Imperial monarchy in Russian had not just resulted in a republic in the Spring of 1917, but a full violent Jacobin overthrow of the social and capitalist order in the Bolshevik Revolution in November 1917. In 1918 and 1919 the pertinent question to ask was which country was going to be next. There were, moreover, Marxian revolutionary experiments in Hungary, Austria and in Bavaria. Even Great Britain experienced awkward strike action in the years after the end of the First World War and at one stage Prime Minister David Lloyd George deployed the army with tanks on the streets of Liverpool in August 1919.

Germany’s reparation payments to the Allies 

Germany agreed to pay reparations to the Allies as part of the Versailles Treaty in 1919. The amount was not fixed in that treaty and agreed in London in May 1921. The bill was 132 Gold Marks. The payments amounted to around a third of the German government expenditure, 32.4 per cent in 1921 and 35.7 per cent in 1922. These external payments were added to a budget that was already structurally unbalanced in 1920. In 1920 some attempt had been made to cut spending and to apply a more realistic tax policy, but the budget remained unbalanced, and the reparation payment aggravated the fiscal challenge further along with the monetary consequences that went with it. The only significant expenditure savings that took place arose from the effect of inflation in radically reducing real debt service costs.

The Reichsbank and Weimar’s Structural Fiscal Crisis

The central bank of its own volition energetically set about accommodating the government’s continuing and growing budget deficit. The government financed its expenditure by issues of short-term debt, so-called floating debt. The central bank continued to discount private sector bills at 5 per cent until 1922. This was a huge negative interest rate. The Reichsbank’s rationale for the low interest rate was that it did not affect the demand for credit given that a rise in interest rates would have led to an increase in the cost of short-term financing, increasing the public sector deficit that it would have to accommodate. The central bank saw its function as accommodating both the government’s and the private sector’s demands for credit. By accommodating the government’s deficits, it enabled the government to avoid necessary adjustments to taxation and expenditure.

The French Occupation of the Ruhr in 1923

The fiscal problems of Germany were further aggravated when the French Government occupied the Ruhr when the German Government failed to make agreed reparation payments in January 1923. To vitiate the economic purpose of the French occupation German workers with the support of the German Government went on strike. The German Government facilitated this passive resistance and paid the workers their wages, effectively paying them not to work or produce. The result was a collapse of the supply of goods production while demand for goods was maintained by government spending. This is a recipe for inflation, Contemporary advanced economies such as the UK and US have experienced similar episodes of inflation resulting from the dislocation of good supply chains, because of covid in a context where household income and that of other economic agents has been maintained by publicly financed support. The Ruhr occupation gave a further leg to what had become Germany’s hyperinflation problem.

How did the German Hyperinflation end?

Hyperinflation was ended by a combination of a change of policy, doctrine, personnel at the central bank, the institutional autonomy of the central bank, pressure and assistance from the international community and a broad political consensus that there was no further benefit from tolerating inflation given the social damage it was perceived to be doing.

The Stresemann Government formed in August 1923 was prepared to take the necessary fiscal measures needed and to use article 48 of the Weimar constitution to act in an emergency, that is to govern by decree. Given the weakness of the Mark on the foreign exchange markets international assistance was needed to stabilise Germany’s external account. This resulted in significant international advice about policy, the independence of the central bank who should be running it. 

The Reichs bank was made autonomous of the Government. Montague Norman the Governor of Bank of England was critical of the Reichsbank’s accommodating polices, which the Reichsbank’s Governor Rudolf von Havenstein insisted on persevering with. Norman supported the Government’s decision to replace Havenstein with Hjalmar Schacht a critic of the central bank’s inflationary policies. Schacht in the first instance could not replace Rudolf von Havenstein, the Reichsbank President was able with the support of the Reichsbank’s Directorate to resist calls for his removal, drawing on the benefits of the central bank’s recently granted independence. 

A new Currency Commissioner, Two new Central Banks and a New Currency

Schacht was therefore given a kind of parallel post, as Reich Currency Commissioner and a decree established an alternative central bank the Rentenbank. This reflected the discrediting of the Reichsbank in Germany and the political recognition of its failure in relation to inflation. The new central bank issued ‘constant-value’ Rentenmarks at the same exchange rate as the Mark was convertible into gold in 1914. Thus 1 Rentenmark equaled 1 trillion paper Marks, issued by the Reichsbank. Central bank credit to the government through the Rentenbank was strictly limited, as was its support for the banking system via the Reichsbank. 

While these measures stopped the inflation, to ensure future monetary stability in a continuingly awkward political, social and economic context the international community had to help Germany reestablish its international monetary credibility. As part of this a further central bank was set up, the Golddiskondtbank. This had a capital of £10 million, most of it made available from British credits. Its function was to provide hard currency loans to German businesses, and it also had the authority to issue its own notes. By 1924 Germany had three separate central banks engaged in stabilisation policy.

The Reichsbank’s analytical failure – continuing to apply the Real Bills Doctrine

The roots of German inflation lay in the decisions made to finance the First World War by deficits that were not fully matched by sales of government bonds. These government deficits were further aggravated by the Weimar Republic’s social spending and full employment programme and by the cost of reparation payments to the allies. The central bank cannot be blamed for this difficult fiscal position. Yet it was the Reichsbank’s antiquated attachment to a version of the real bills doctrine that turned a very severe inflation into hyperinflation. The Reichsbank saw it as its function to accommodate the government and the private sectors’ demand for credit by producing currency. Rudolf von Havenstein explained the real bills doctrine that the central bank held to in a speech to the Reichsbank’s Central Committee in August 1923 –‘it is not disputed that central bank credit increases the circulation of paper; but to the extent to which the central bank gives economically desirable and needed credits, which help production and the sale of goods, it does not create artificial purchasing power.’ 

Reichsbank’s policy was framed around three related intellectual propositions. Germany’ s inflation problem originated in its balance of payments. To tackle the balance of payments problem Germany needed to produce more to export more. The central bank’s role was therefore to give the credit and currency that German businesses needed to produce more and increase exports.

This policy was not imposed on the Reichsbank, it was its chosen course of action. It was the central bank’s modus operandi when it was under the control of the government, after the Reichsbank was given autonomy from the finance ministry and an approach that its senior management remained attached to. As a result Weimar’s political leaders had to take steps to bypass it by setting up parallel central banking institutions when they lost confidence in the Reichsbank. Politicians had in effect to seek new instruments for effective monetary control, because the Reichsbank was incapable of applying the measures needed. Discredited monetary policy was replaced by politicians who turned for help to expert advice outside the central bank.

What lessons have economists taken from the Weimar Hyperinflation?

This episode of hyperinflation in Germany is one of the most studied examples of inflation, the scale of the price change and an episode of classic hyperinflation in an advanced industrial capitalist economy has inevitably attracted the attention of economists and bankers. Weimar is often invoked as a warning. When Britain experienced acute inflation in the mid-1970s, Victor Rothschild, Lord Rothschild, the former head of the UK Cabinet Office’s Central Policy Review Staff, wrote a full page, magisterial article in the London Times warning of the threat of a Weimar style hyperinflation. Much of the research interest is an attempt to catalogue what happened and identify a framework of causation to explain it. Economists have continued to identify interesting features of the dynamics that the inflation threw up. And, interestingly, it is not all bad. In many respects the performance of the Weimar German economy in the early 1920s appears good in relative terms in relation to output and employment.

Milton Friedman: there may have been inflation but markets still worked

Milton Friedman, for example, in a speech delivered in February 1966 to the Detroit chapter of the University of Chicago Alumni Association, explored the lessons of German inflation. He started by referring to Phillip Cagan, a Chicago alumnus, who had published an important study The monetary dynamics of hyperinflation in 1956 in Studies in the Quantity Theory of Money. Cagan defined hyper-inflation as beginning when prices rose more than 50 percent a month. During the height of the German hyper-inflation, Freidman pointed out there were periods when prices were doubling every day. 

Friedman recognised that hyperinflation ‘did tremendous harm of a social kind. It destroyed the German middle classes, and it undoubtedly laid much of the sociological basis for the subsequent emergence of Hitler.’ Yet he went on to observe ‘but from a purely economic point of view, the striking thing about it is that, except for the last few months of the hyperinflation, the level of economic activity remained high. Inflation was open, prices were free to rise, there were no price controls of any kind, and, consequently, people were free to continue to do business. There were certain kinds of inefficiencies produced but you never had any major decline in the aggregate level of production. Indeed, as you may recall, 1920 to 1921 saw a worldwide depression. In the United States prices fell by nearly 50 percent from 1920 to 1921. Germany was almost the only country in the world to escape that depression. While the rest of the world was having a decline in output, Germany was booming. There was an artificial kind of a boom that had great social costs, but from a purely technical point of view, the inflation did not prevent the economy functioning’. Friedman attributed this to the fact that there were no attempts to control prices or wages artificially, which allowed the market to function and clear. Milton Friedman’s early research was on price theory, and he attached much importance to functioning prices as the key to resource allocation so his judgement that even in Weimar’s inflation the price system still functioned is an interesting observation to take on board.

Inflation destroyed debts and stimulated output and employment 

In June 2023 Markus K. Brunnermeier, Sergio A. Correia, Stephan Luck, Emil Verner, and Tom Zimmermann published a NBER Working Paper The Debt-Inflation Channel of the German Hyperinflation. This paper offers a series of fascinating observations. It explores how an episode of unexpected price change can stimulate output by redistributing wealth and changing the real structure of company balance sheets. The paper uses ‘newly digitized macro- and micro-level data from the German inflation of 1919-1923’ to  ‘show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible’. It is a study that sheds light on the underexplored dimensions Weimar economic success in its early years drawing on novel data.

The value of debt is eroded if not destroyed and the future value of earning is increased when there is unexpected inflation. In 1923 Maynard Keynes explored this dynamic in his book A tract on monetary reform published in 1923. Moreover, it formed one of his principal suggestions for remedying British structural unemployment in the interwar years: raise the price level and lower the real value of wages to stimulate employment. Brunnermeier et. al. show how economists such as Maynard Keynes, Irving Fischer and later James Tobin thought that a redistribution of wealth arising from inflation could affect real economic output and could possibly have an aggregate effect in raising it. The authors of the paper write that ‘in theory, unexpected inflation can thus increase economic activity via a debt-inflation channel that can operate even when prices and wages are flexible. While the transmission of inflation to the real economy through financial frictions is well understood theoretically … there is limited evidence supporting the empirical relevance of such a financial channel.’

Relative Success of Weimar Economy in terms of output in early 1920s

Brunnermeier et al share Milton Freidman’s judgement about the relative success of the post -war Weimar real economy. ‘The postwar inflation was associated with a booming economy through the third quarter of 1922, followed by a severe bust starting at the end of 1922’. The chart below ‘plots an index of real GDP per capita for Germany starting in 1918. For comparison, we also plot an index of average real GDP per capita growth for other major industrial economies, weighted by GDP. While the U.S., U.K., and other industrial economies underwent deflation and declining output to maintain or return to pre-war gold parities, Germany’s real GDP per capita rose by 20 percent from 1919 to 1922. Further, unemployment was low from the end of WWI until the last months of 1922.’

Real GDP in Germany and Other Major Economies, 1918-27.

Source Markus K. Brunnermeier, Sergio A. Correia, Stephan Luck, Emil Verner, and Tom Zimmermann published a NBER Working Paper The Debt-Inflation Channel of the German Hyperinflation

The paper identifies what it describes as a ‘striking negative relation between inflation and firm bankruptcies. Bankruptcies fall with rising inflation in 1919, then rise with falling inflation in 1920, before falling as inflation rises from the second half of 1921’. 

Inflation and Firm Bankruptcies

Source Markus K. Brunnermeier, Sergio A. Correia, Stephan Luck, Emil Verner, and Tom Zimmermann published a NBER Working Paper The Debt-Inflation Channel of the German Hyperinflation

Given the authors’ interest in the debt-inflation channel of stimulus in Weimar Germany, the paper categories firms into terciles based on their 1918-1919 average liabilities-to-assets ratio and calculates the average evolution of employment for each group of firms. It shows firms enjoyed strong increased employment between from 1918 and 1923, which is consistent with evidence that the inflation was accompanied by economic strong activity during 1922. However, the authors also show that the greatest increases in employment in the period of inflation took place in firms that exhibited higher rates of leverage, then followed firms with moderate levels of leverage. Employment in firms in the top tercile of the leverage rose by about 30 per cent between 1918 and 1922. While firms in the bottom tercile by leverage exhibited an increase in employment of 8 per cent. 

The German experience of hyperinflation has its routes in the fiscal challenges of financing a long war of attrition when the capacity of using bonds to finance expenditure exposes fundamental questions about money in a modern society. These questions are much bigger and more profound than neat technical taxonomies of open market operations, central bank policy instruments and objectives. They go to the heart of what the social function of money and credit are in a political community. These normally latent questions are only properly exposed during episodes of political and social crisis. The Directorate of the Reichsbank saw its function as supporting the policies of the German government in war and in peace and accommodating the needs of German economic agents in their demands for cash and credit. By tenaciously holding to this and by its attachment to an anachronistic proposition, namely the real bills doctrine, the central bank passively accommodated a hyperinflation. The routes of the problem were fiscal, yet the conduct of the central bank aggravated it and gave it an arresting monetary dimension. The inflation was not brought under control until German monetary policy abandoned the Reichsbank’s erroneous intellectual doctrines and ran a non-accommodating financial policy that ended monetary incontinence in Weimar Germany.

Benefits of looking again at a great and complex event and bringing a fresh eye to it

Revisiting something again and raking the coals is always worthwhile. Like many people when I have looked at Weimar inflation before. My attention has focused on the scale, the apparent monetary incontinence and the social damage done by the sudden change in prices and its effects on rentiers with assets yielding a fixed return such as a conventional bond or living on a pension that was not indexed. I was less alert to the first-round effects where an unexpected inflation may have been a source of a powerful stimulus to both output and employment, of the sort explored by Markus K. Brunnermeier, Sergio A. Correia, Stephan Luck, Emil Verner, and Tom Zimmermann in their fascinating NBER Working Paper The Debt-Inflation Channel of the German Hyperinflation. It is as though Lord Keynes’s famous provocative advice repeated made on several occasions in the in the interwar years as a way of overcoming institutional rigidities in British pay bargaining – a price rise to bring about a real wage adjustment to overcome trade union opposition to such a change – had been applied as a deliberate act of policy in Germany, with not unimpressive success. As Milton Friedman notes there may have been hyperinflation, but the price mechanism was allowed to operate, and prices were not repressed. Although it was plain that the proper pricing of credit and capital was repressed by negative real interest rates. 

How effective was Weimar Economic Policy after 1924?

In the second half of the 1920s under the leadership of Dr Schacht, who eventually became President of the Reichsbank, the German central bank’s emphasis was on gaining international credibility abroad and on anchoring domestic expectations about prices. It followed a set fixed exchange rate rule as part of the international gold standard. This meant that it could not use domestic monetary policy to address German circumstances. The central bank was supported in this by successive Weimar governments. Having experienced hyperinflation, they did not wish to go anywhere near it again. Yet it would mean that in the context of an adverse economic shock the German fiscal and monetary authorities would be effectively paralysed it they stuck to their exchange rate target.

‘Brüning decrees hardship.’ 

This meant that when Germany suffered from internationally generated deflationary shocks in the early 1930s, the German authorities tenaciously held to a non-accommodating fiscal and monetary orthodoxy, at precisely the time when they should have set aside brittle policy straitjackets. Exchange rate pressure and withdrawals of gold were met with tightening of domestic monetary conditions. In the early 1930s the Reichsbank President Hans Luther had been the finance minister that supported the financial stabilisation measures in the Stresemann Government. The Reich Chancellor Heinrich Brüning’s expressed purpose was to liberate Germany from the burden of reparations and foreign debt. This required tight credit and a deflationary reduction of wages and salaries to accomplish an internal devaluation within a fixed exchange rate regime. The deflationary measures created a trade surplus but increased unemployment and poverty; and were accompanied by further reductions in wages and public assistance. Parliament would not vote for these measures, so Brüning persuaded President Hindenburg to apply them through emergency decree under article 48 of the Weimar constitution in the same way that Stresemann did in 1923.

Given the reliance of the German economy on foreign currency loans that flowed from the Dawes and Young plans enabling many German municipalities and enterprises to borrow in dollars, the German economy was more exposed to international deflationary shocks. Yet the experience of the early hyperinflation made German policy makers cautious and hesitant, in contrast to Britain that audaciously left the gold standard and floated sterling in 1931, Germany doubled down on an unsustainable exchange rate. This deflation, depression in output and unemployment created circumstances of deprivation and distress that the political institutions of the Weimar Republic could not manage. While economic and social conditions in the early 1920s were very uncomfortable the German finance ministry and central bank somehow managed to accommodate them. In contrast the recently developed German official taste for orthodoxy aggravated a dreadful economic background and made it all but impossible for the republic’s institutions to function. In the early 1920s the difficult financial decisions that accommodated need managed to keep social relationships sufficiently stable to keep constitutional institutions working. Instead in the early 1930s the public caricatured the government’s emergency economic programme enacted by decree as ‘Brüning decrees hardship.’ 

Maybe we are too quick to dismiss the political acumen of democratic Germany’s first generation of leaders in the early 1920s?

This invites the question: were Germany’s leaders right to be much more accommodating of social and political need in the circumstances of potential revolutionary trauma? And were the deflationary policies of the Brüning government a huge political error given their immense social cost and the political consequences that followed. Collecting your wages in a wheelbarrow is a lot better than living under a National Socialist dictatorship.

A century after these events it is interesting but probably idle to speculate on whether Germany still retains an aversion to inflation. It was always thought that the West German economic miracle was based on price stability. And price stability was entrenched in post-war German politics because of the folk memories of the 1923 inflation. Historical caricatures of countries and political communities tend to linger much longer than the underlying truth that was their original genesis. It is now a century since Weimar’s hyperinflation was broken in November 1923. Germany is a profoundly different country, having been divided in two, reunited and having also agreed to give up its currency and monetary independence. It is interesting to ask just how pertinent in practice price stability is in contemporary Germany compared to other advanced economies. Have the folk memoires atrophied with time or is anxiety about a stable currency still deeply embedded in the German political psyche?

Warwick Lightfoot 

I November 2023

Warwick Lightfoot is an economist and was Special Adviser to the Chancellor of the Exchequer between 1989 and 1992.