Ever think how rad it would be to own a money-printing machine? If, say, you owe someone a lot of money, wouldn’t you be tempted to, you know, print a bit of money and just pay them back with that?
Well, in the early 1920s, Germany was the loser coming out of World War One and they were facing some serious war reparations demands from the winners. Germany wasn’t in a hot position to begin with – while France had funded its WWI efforts by imposing its first ever income tax, the German Kaizer had been so confident that they were going to win that he and the parliament decided to fund their war entirely with borrowed money. They were totes going to pay it back once they (obviously) won. Obviously.
This was all happening at a time when Germany’s currency – the Mark – was a gold-backed paper currency. While there were still real, valuable gold Marks in use, most German citizens carried out their daily commerce with convenient “Papiermark” – paper money. This is a story about the real value of those paper Marks, and I’m going to tell it using the Mark / Dollar exchange rate.* (It’s also a story about what happens when inflation goes on steroids. And it’s not pretty.)
Like the US Dollar at the time, the Mark could be converted to gold at any time, a feature that helped people trust this new-fangled paper money that so many nations were starting to adopt. Conveniently, Germany suspended this convertibility to gold when the war broke out. The war and the move to cancel gold conversion knocked the exchange rate a bit – at the start of the war, one US Dollar was worth about 4 Marks. By the end of the war, it was worth just under 9 Marks. The Mark had devalued by more than half, and the real trouble was only beginning.
The Treaty of Versailles was drawn up after the war ended to demand that Germany pay lots of money (and cede territory and industrial assets) to everyone involved in WWI as punishment and reparation for lives lost and economies wrecked (France’s in particular). Germany didn’t get much say as to what went into the Treaty, nor did it really have the option to disagree. The terms were devastating, and (by design) likely to crush Germany for many decades after the war. The total reparations bill came to about 132 billion gold Marks.
After the Treaty was signed, the Mark weakened to 32 to the Dollar in 1919, then 90 to the Dollar in June 1921.
And then the first Treaty payments became due – 2 billion gold Mark per year, plus 26% of Germany’s exports.
Germany was in no position to meet those debts, so it rolled out the printing presses and started printing money as fast as it could. Now obviously the Germans could only print more paper Marks, and the countries demanding reparations were wise to this, demanding to be paid in gold Marks or foreign currency. Nevertheless the Germans ran their printing presses, using piles of fresh-printed Marks to rush out and buy up as much hard foreign currency as they could, over and over again, trying to make a dent in their war debts.
By November 1921, the exchange rate was about 330 Marks per Dollar.
The sheer quantity of Mark notes flying around the German economy was staggering. On payday, a great big open truck of cash would arrive and bundles of notes would be thrown out to workers.
Huge fistfuls of notes, then paper bags of notes, then wheelbarrows of notes became the norm in daily trade. More and more money flooded the German economy, but the amount of food, and the amount of people needing food, stayed the same, so prices just rose and rose. And rose.
Things got so bad there for a while, dentists and doctors stopped asking for currency, seeking payment in butter or eggs instead. But the farmers weren’t keen on trading their produce for paper money either.
Prices rose not just by the day, but by the hour — or even the minute. If you had your morning coffee in a café, and you preferred drinking two cups rather than one, it was cheaper to order both cups at the same time.**
The Mark reached 800 to the Dollar in December 1922.
France and Belgium, noticing the snow-storm of paper money happening in Germany, and realising that the German economy (and, more importantly, its future war repayments) was doomed, decided to take matters into their own hands, rather than wait for further reparations payments that might never come. Together, in January 1923, they made a land-grab, invading the German Ruhr Valley and seizing land and factories, taking their “reparations” in physical goods like coal. Of course, that meant less coal available for German citizens. In winter. And so the price of coal rocketed even higher as ever more paper money chased even fewer goods.
German citizens were cold, hungry and largely resorting to barter to survive. Workers in the Ruhr Valley went on strike, and people who could refused to accept their wages in paper money, demanding food or hard commodities like gold instead.
By November 1923 one US Dollar was worth 4,210,500,000,000 Marks.
This ‘hyperinflation’ in Germany in the early 20’s is legendary for both how bad it was and the human suffering it caused. Depending on which numbers you look at, prices doubled every 6 days or so with a peak monthly inflation rate of 2440% in September 1923.*** The economy didn’t recover until the outbreak of World War Two. The harsh terms of the Treaty and the misery that followed are widely blamed for the rise of Adolf Hitler, who capitalised on deep feelings of resentment among the German people, and a desire to make Germany proud again. Not good outcomes for anybody involved.
Many countries belong to the hyperinflation club (some more than once) but few had it as bad as Zimbabwe did in 2008, when daily inflation reached 98% and prices doubled almost every 24 hours. Like so many countries facing crisis in more modern times, Zim quickly moved to using the US Dollar as its main currency (unofficially at least). This “dollarisation” is actually so common that about half of all US currency actually circulates outside the United States****. Anyway, the reasons behind every hyperinflation are complicated, usually involving war, political turmoil or massive economic regime change (Russia in the 1990’s, anyone?). There’s more to it than just printing money, but certainly the tsunami of now-worthless money is at the core of it.
But consider Greece. Right now they owe various European powers about 340 billion Euro. They’ve failed to pay a first instalment of 1.5 billion Euro, and have signed up for further bailouts (more debt) in the future. Unlike Germany in the 1920’s, Greece can’t print Euros to make their debts cheaper – it gave up that ability when it joined a shared currency.
Printing money (or releasing more money into the economy) to help your economy is part of monetary policy, and it’s an important tool, and a powerful force for economic health if you use it wisely. Obviously nobody should print a snowstorm of worthless cash like Germany did, but right now Greece would give just about anything for the right to print some money and cause a little inflation.
Sometimes you just wish you had a little money-printing machine.
*You see, the US Dollar stayed pretty strong and constant over this time. If you’re swimming at the beach and you pick a flag on the shore, you can see how far you’re drifting because you’re moving, but the flagpole is not. The US dollar is our flagpole as the value of the Mark drifts, and it’s easier to get those numbers than the actual prices of food and other essentials in Germany at the time. But, believe me, those actual prices went up. A lot.
Photo by: Adam Selwood, Keep The Change via flickr.com, CC BY 2.0.