Weimar Hyperinflation
What is Weimar Hyperinflation?
Weimar hyperinflation was the collapse of the German mark in the early 1920s, when the government printed money to cover deficits and prices doubled in days.
Germany came out of the First World War with enormous debts and reparations, and its government covered the gap by having the central bank print money instead of raising taxes. When French and Belgian troops occupied the Ruhr in the early 1920s, Berlin paid the striking workers there with newly created currency and the money supply exploded. The quantity theory explains the first stage: with real output roughly fixed, a money supply rising many times over drags the price level up with it. The second stage is expectations, because once people knew prices would be higher tomorrow they spent money the moment they received it, raising velocity and making prices climb faster than the money stock itself. It ended only when the government stopped financing itself this way and issued a new currency backed by a believable fiscal plan.
Weimar Hyperinflation: a worked example
At the peak, prices roughly doubled every few days. Suppose they double every three days: over a month that is ten doublings, and 2 to the tenth power is 1,024, so prices end the month more than a thousand times higher, a rise of over 100,000 percent. A worker paid at the start of that month can buy about one thousandth as much with the same notes by the end, which is why workers demanded pay twice a day and spent it immediately. Holding cash became so expensive that people switched to foreign currency and barter, and the real value the government could raise by printing shrank even as it printed more.
The mistake students make with weimar hyperinflation
Many students think hyperinflation is simply very fast ordinary inflation, so the same cures apply. The difference is that velocity itself takes off: people stop holding money at all, which makes prices rise faster than the money supply and means slowing the presses slightly does nothing. Stopping it requires removing the reason money is being printed, which is the budget deficit, and doing it visibly enough that expectations change.
Weimar Hyperinflation questions
What caused the Weimar hyperinflation?
Weimar hyperinflation was caused by a government that financed its spending by creating money rather than raising taxes or selling bonds to willing buyers. War debts, reparations and the cost of paying workers during the Ruhr occupation left a deficit no tax system could close. Once printing became routine, expectations of further inflation pushed people to spend money faster, which drove prices up more quickly still.
How did the Weimar hyperinflation end?
The hyperinflation ended when Germany issued a new currency and cut the deficit that had been forcing the money printing, which together made the promise to stop believable. Because the collapse was driven by expectations, the turnaround came quickly once people trusted that the new money would hold its value. Stabilization also required limits on how much the central bank could lend the government.
Who is hurt most by hyperinflation?
Hyperinflation hurts anyone holding money or owed a fixed number of currency units, so savers, pensioners, bondholders and wage earners paid at fixed intervals lose the most. Borrowers with fixed-rate debts gain, because they repay in currency that is close to worthless. Owners of real assets such as land, machinery and foreign currency largely keep their wealth, so the process transfers real income as much as it destroys it.
Formula / Example
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