World War I and the Seeds of Hyperinflation

The current debt crisis in Europe evokes painful memories of the German hyperinflation. Price increases began with the start of World War I in 1914 and ended in disaster in 1923. The event still influences sentiment about monetary policy in the country today.

There’s a number that illustrates the brutal dynamics of the hyperinflation of 1923 better than anything else. It’s the number four. In the fall of 1923, prices were doubling in Germany approximately every four days.

Grotesque price increases have occurred in other countries and at other times, such as in Greece in 1944, China in 1949 and Zimbabwe in 2008. But hyperinflation has left behind deeper scars in Germany than anywhere else. Three generations after the collapse of the German mark, the fear of hyperinflation is more alive today than ever before.

The global glut of money as a result of the financial crisis has evoked painful memories of the great inflation that began with the beginning of World War I in 1914 and ended in chaos in 1923. Each new report on the need for billions in Europe’s crisis-ridden countries reignites concerns over the stability of money. According to a poll by the Allensbach opinion research firm, Germans fear inflation even more than life-threatening diseases like cancer.

The ‘Delirium of Billions’

Perhaps the most important reason is that the middle class suffered the most from the hyperinflation of 1923: white-collar workers, government employees and the self-employed, all diligent savers, who became completely impoverished and drifted into the “delirium of billions,” as the later Foreign Minister Walter Rathenau described the state of emergency.

Families today still remember the horrifying reports of what once happened to grandparents and great-grandparents. The fate of someone like Berlin author Maximilian Bern illustrates the extent of despair.

In 1923, Bern withdrew his savings, more than 100,000 marks, from the bank. But 100,000 wasn’t much compared with the 2.5 quintillion marks in circulation at the end of October. Years earlier, the money would have been enough to pay for Bern’s retirement, but now it was worth no more than the price of his last subway ticket. Bern went home, locked his door and died of hunger.

Doctors, teachers and professors had not only lost everything they owned, but also their confidence in the state. In 1914, many had gone to war with enthusiasm, and they had bought bonds, which generally yielded a five-percent return. The government collected 98 billion marks, but not a pfennig of the money was repaid.

An Obsessive Pursuit of Stability

But probably the greatest impact of the experiences of 1923 is on German monetary policy, even if Bundesbank President Weidmann tends to downplay this today. The Bank of the German States, the precursor to the Bundesbank, also set clear priorities. The stability of the currency was paramount, while stimulating the economy and fighting unemployment were secondary. The first Bundesbank president, Wilhelm Vocke, was all but obsessive in pursuing this course.

Vocke became the director of the Reichsbank, Germany’s central bank, in 1919 at the age of only 33 and would stay until 1945. He was appalled at how, in 1923, the central bank leadership focused its energy on the smooth operation of the printing presses, and at how spending policy in the Third Reich led “straight to inflation.” Vocke was subsequently forced to leave the Reichsbank. After the war, he was in a perfect position to help launch the new currency.

In 1948, the Allies had decreed that the Bank of the German States was not to be “subject to the directives of any political entities or public agencies, with the exception of the courts.” It was something then Chancellor Konrad Adenauer could never accept. He persistently tried to exert pressure on Vocke, such as in May 1956, when the Bundesbank tightened the reins as the economy threatened to become overheated. Vocke, as self-confident as the chancellor, remained unimpressed. The chancellor, he later joked, was “a complete novice in this difficult field. I let him talk.” The Bundesbank’s independence promoted so much confidence in the currency that the Germans, despite their fears of inflation, became a nation of savers. has the full article

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