German Hyperinflation

Lingfeng Qian, Mingyue Liu, Yiqun Zhang[pic 1]

ECON 201a-2 - Fall 2016

Case Memo

German Hyperinflation

Summary: Other than suffering from the defeat in WWI, Germany was forced to pay reparations, with the amount of 33 billion dollars, to support the Allies’ reconstruction. These payments left Germany a “blank bill” and used up its natural resources. Under this situation, Germany went through the most disastrous hyperinflation in its history. Had the treaties of Versailles was not so harshly against Germany, or more efficient policies had been domestically employed to deal with this hyperinflation, it wouldn’t have turned into a total nightmare.

External reasons:

Payment of reparations exhausted Germany’s resources. 

• Defeated by the Allies, Germany was obligated with a huge reparations totaled 33 billion dollars. Trying to pay for the reparations basically left Germany no gold reserve, and it had to borrow money from Allies to pay the first installment.
• Trying to pay for the reparations basically left Germany no gold reserve, and it had to borrow money from Allies to pay the first installment.
• Germany transferred its raw materials to Allies for their reconstruction. This effort to meet the obligation caused Germany’s natural resources to drain off, which led to difficulties stabilizing domestic production and livelihood.
• Payment in kind was subjected to a highly unspecified value of mark (see chart 1), which caused a more serious problem between Germany and the Allies.

Chart 1

Loss of Ruhr left Germany in a desperate situation. 

• Declaring that Germany was in default of delivering coal and timber, French and Belgian governments sent troops to cut off Ruhr from the rest of Germany, depriving Germany of its most resources-rich and industrialized area.
• Feeding families in Ruhr and compensating companies suffering huge losses left the German government even more overburdened. 

Internal reasons:

Reckless monetary policies:

• With its gold depleted, German government kept printing money, discounting T-bills and levying high tax rates to fulfill enormous reparation burden. However, increasingly money supply and little consumer goods produced made Mark depreciated sharply and commodities price skyrocketed.

Political instability weakened the economy:

• Governmental coalitions were frequently patched and cabinets seemed ephemeral (12 cabinets within 4 years). On the other hand, unsatisfied with the Versailles Treaty, extreme conservatism and nationalism resurged and the military sources seized the chance to set up dictatorship.

Prevention of production rehabilitation:

• French and Belgian troops despoiled resources and occupied Ruhr. What’s worse, the loss of factories and resources resulted in unemployment and low productivity within Germany, further destroying people’s confidence.

Solutions:

Different, more carefully constructed, peace terms

• If Ruhr was not occupied with force by France, Germany would never experience such high unemployment rate and print so much currency (see affix 1). In this sense, Germany was less likely to default on reparation payments. So in this Treaty, Allies can:

• Deduct the reparations that Germany owed and calculate its true value;
• Give more time allowance to Germany payments, until its economy recovered from WWI;

What hyperinflation affected is not only Germany but some other Europe countries. Such behavior could have peace been settled with more humanized term.