German Hyperinflation-Case 3

Harvard Business School 9-798-048
Rev. June 14, 1999
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The German Hyperinflation of 1923
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This case presents a compilation of primary and secondary sources, as well as a set of data exhibits, on
the German hyperinflation of 1923. The hyperinflation represented a defining moment in German history and
certainly one of the two or three most important economic events of the twentieth century. Memories of it
continue to shape economic policymaking in Germany to this day. Equally important, the story of the world’s
most spectacular hyperinflation is rich in lessons about the many interconnections between money, prices,
production, and politics in a modern capitalist economy.
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Keynes on the Political Significance of Inflation
In late 1919, soon after the close of the First World War, John Maynard Keynes published a masterful
little book entitled The Economic Consequences of the Peace. The book sold extremely well and was translated
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into eleven languages within a single year. Its success stemmed from its stark message delivered in clear and
powerful prose. Keynes accused the victorious Allied powers (Britain, France, and the United States) of
maliciously overburdening Germany with war reparations. He characterized the peace treaty (the Treaty of
Versailles) as a "Carthaginian peace" and predicted that it would wreck the economies of central Europe and
provoke German retaliation: "If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare
predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction
and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into
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nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation."
Although Keynes's apparent prophesy about the coming of the Second World War has attracted a great deal of
attention, his insightful (and near-prophetic) treatment of post-war European inflation is much less well
known. The following excerpts are from John Maynard Keynes, The Economic Consequences of the Peace (New
York: Penguin Books, 1971 [1919]), pp. 235-236. Reprinted with permission.
Lenin is said to have declared that the best way to destroy the Capitalist System was to
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debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and
unobserved, an important part of the wealth of their citizens. By this method they not only confiscate,
but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.
The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the
equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond
their deserts and even beyond their expectations or desires, become "profiteers," who are the object of
the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the
proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month
to month, all permanent relations between debtors and creditors, which form the ultimate foundation
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Professors David A. Moss and Julio J. Rotemberg compiled this case from existing sources as the basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation.
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798-048 The German Hyperinflation of 1923
of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-
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getting degenerates into a gamble and a lottery.
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Lenin was certainly right. There is no subtler, no surer means of overturning the existing
basis of society than to debauch the currency. The process engages all the hidden forces of economic
law on the side of destruction, and does it in a manner which not one man in a million is able to
diagnose.
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Historical Background: Germany in the Aftermath of WWI
As Keynes predicted, the peace proved traumatic for Germany. The new Weimar Republic, a fledgling
democracy, was threatened by powerful (and sometimes violent) forces on both the right and the left; and
mounting inflationary pressures further undermined its credibility. The next set of excerpts surveys German
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economic and political history in the years leading up to the hyperinflation. They are drawn from John E.
Rodes, Germany: A History (New York: Holt, Rinehart and Winston, 1964), pp. 497-503. Reprinted with
permission.
Political Instability
The first five years of the [Weimar] republic revealed an alarming instability in the new
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regime. Governmental coalitions were patched together at frequent intervals, but none proved viable.
Of the twelve cabinets between 1919 and 1924, only two lasted about a year; seven others survived
less than six months ...
“The shameful dictate of Versailles”—coupled with the legend of the stab in the back1, with
fear of communism, and with the disillusionment of demobilized veterans—produced ... a strong
resurgence of extreme conservatism and nationalism. This was evident in the electoral results of the
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period 1920-1924 as well as in the formation of numerous small groups of extreme nationalists,
dedicated to anti-Semitism, anti-Bolshevism, the annihilation of democracy, and the abrogation of the
Treaty of Versailles. One such group, founded in 1919, was the German Worker’s party, which later
became the National Socialist German Workers’ party (NSDAP) and which Hitler turned into his
instrument for power. This antidemocratic mood provided the background for a series of attempts to
overthrow the young republic from the Right and replace it by some type of dictatorial regime.
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THE KAPP PUTSCH Among the more spectacular of these attempts was the Kapp Putsch of March
1920. A small group of army and naval officers ... and groups of old-line conservatives brought
together by the same Wolfgang Kapp who had sponsored the German Fatherland party in 1917 ...
decided to overthrow the national government. As their shock troops, they enlisted the aid of a
disaffected army brigade ... Its members had fought as a Free Corps [a private paramilitary group]
against the Communists in Poland during 1919, and were now threatened with unemployment, since
the brigade was marked for disbandment in accordance with the disarmament clauses of the peace
treaty. Hence they were readily persuaded to try to topple the government. The prospect of such an
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1 This legend involved the claim that the German Army had been “undefeated in the field” in World War I and
that the surrender of Germany represented a betrayal by its civilian government officials. The spread of this
legend may have been fostered by the absence of a decisive battle at the end of the War, by the German Army’s
continued occupation of territory from France to the Crimea, and by the resignation of Kaiser William II two
days before the Armistice was signed on November 11, 1918. [This footnote, as well as all others, added by the
editors.]
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The German Hyperinflation of 1923 798-048
insurrection was welcomed by many conservatives, who, however, cautiously withheld overt support
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until its outcome could be foreseen.
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When the insurrectionists marched on Berlin, the government requested the commanders of
the regular army to organize the defense of the capital. Their reply was ominous for the future of the
republic. Although willing to fight against Communist mutinies, they rejected the suggestion of
dispatching the Reichswehr (regular army unit) against fellow soldiers, albeit rebellious ones. …
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Left without armed support, President Ebert and the Socialist chancellor Gustav Bauer ...
appealed to the workers and to members of the SPD [Social Democratic Party] to “paralyze the
economic life” of the nation by a general and complete strike and to “strangle the reactionary clique
and fight with all available means against the return of [Emperor] William II.” The members of the
government then fled from the capital in order to escape possible imprisonment. Unhindered by
police and regular army, the insurrectionists seized Berlin and announced the formation of a new
government under the dictatorship of Kapp. But the workers rose to the defense of the Weimar
Republic. Socialist, Catholic, and Independent unions called a general strike, which was also
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supported by the liberal and left-wing parties. Only the Communists withheld cooperation: chaos
and revolution were favored by Lenin as means of achieving Communist ends. The general strike
was extremely successful. Life in the capital came to a halt, and communications stood still. Kapp
proved incapable of imposing his dictatorship on a passive population. After a few days he fled and
was eventually jailed. Ebert and the cabinet returned to Berlin and persuaded the workers to return
to their jobs. The Kapp Putsch had failed.
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But the rapid collapse of the insurrection hardly concealed the sickness of the regime. ...
Labor demanded action on a program of nationalizing heavy industry, democratizing the civil
service, and substituting a popular militia for the Free Corps and the Reichswehr. The government
made promises, but in the end met none of the demands. It appeared that even the Kapp Putsch did
not modify [President] Ebert’s overriding fear of sovietization. ... When violent Communist uprisings
in the Ruhr followed on the heals of the Kapp Putsch in the spring of 1920, Ebert found no hesitation
among the military when he dispatched them to subdue the rebellion ...
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The Communist uprisings in the Ruhr were widely supported by non-Communist workers.
They were crushed mercilessly by the army and the Free Corps, an event that further disillusioned
the proletariat about their government. The hapless republic, fighting against both extremes, was
thus faced with a constantly shrinking base of power. And the French gleefully added to its troubles.
Although the French government would hardly have welcomed the establishment of communism in
the Rhineland, it insisted that the Germans had violated the Treaty of Versailles by sending troops
into the demilitarized zone. In reprisal, French troops occupied Frankfurt on the Main and some
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towns in the Ruhr for a period of six weeks. The effect on Germany was a further weakening of the
government’s prestige and an increase of power for the vociferous nationalists.
Armed attacks on the republic from Left and Right continued during the next years at a
subdued pace, until they flared up with greater violence in the troubled year 1923. The friction with
France over reparations and the Franco-Belgian occupation of the Ruhr, coupled with runaway
inflation, brought the Weimar Republic to the brink of dissolution by the autumn of that year.
Supported by French and Belgian troops, a new wave of separatism, similar to the movement that
had failed in 1919, swept over the Rhineland. Pro-French elements established a Rhineland Republic,
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claiming independence from Prussia. The movement ultimately collapsed in January 1924.
Meanwhile Saxony went temporarily Communist, and a monarchical restoration was plotted in
Bavaria. The famous Beer Hall Putsch of November 1923, in which Hitler and his National Socialists
... attempted unsuccessfully to gain control of the Bavarian government, was but one more in a series
of attacks on the Weimar Republic. And the government’s actions in each case were similar. The
attacks from the left were crushed ruthlessly, while Hitler, for example, was jailed for less than a year.
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POLITICAL MURDER Political instability also manifested itself in the inability of the government to
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ferret out subversive elements and maintain law and order. In the summer of 1920, the government
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was finally able to comply with Allied demands that the Free Corps be outlawed. ... But even after
they were officially disbanded, many of them continued to flourish under various disguises, such as
gymnastic clubs, trucking firms, or other cover organizations. They could thus retain their weapons
and their esprit de corps, and be ready to engage in street fighting when it seemed opportune.
Frustrated in gaining their immediate objective of overthrowing the republic, some of these
organizations specialized in political murders. In secret meetings, they condemned to death leaders
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who, because of leftist leanings or willingness to fulfill the obligations imposed upon Germany by the
Treaty of Versailles, had become “traitors to the fatherland.” As [two famous socialists] Rosa
Luxemburg and Karl Liebknecht had been shot in 1919, and Hugo Haase, the leader of the USPD
[Independent Social Democratic Party], murdered shortly thereafter, so the roll call of death
continued in the early 1920s. Matthias Erzberger, the former leader of the Center, who had accepted
the armistice terms, was shot in 1921, and even his widow continued to be persecuted by the
nationalist fanatics with written threats to desecrate the tomb of her husband. These same elements
tried to intimidate government ministers with letters threatening to execute all “traitors” who
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accepted the imposed reparations and complied with Versailles. Walter Rathenau, who had helped
organize the German war effort in 1913 and served as foreign minister in 1922, was assassinated in
the heart of Berlin. Similarly, the leader of the separatist Rhineland Republic was murdered in
January 1924. Besides these party leaders, innumerable lesser known liberals fell victims to political
assassination.
The government seemed incapable of stemming the activities of these fanatic exterminators,
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the forerunners, as it were, of Hitler’s Gestapo ...
Financial Instability and the Question of Reparations
THE DILEMMA OF REPARATIONS Besides suffering from the consequences of war and defeat and
from short-sighted imperial financial policies, the economy wobbled under the indeterminate
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reparations claims of the Allies. Versailles had, in fact, presented Germany with a blank bill. Neither
methods of payment nor a total and final amount had been stipulated. Hence neither the German
government nor the business community could—if they had wished to—devise meaningful plans for
settling their obligations. Initially, the Germans simply surrendered to the Allies the small gold
reserves they had left, together with foreign assets, manufactured goods, and quantities of remaining
raw materials. Meanwhile the Reparations Commission held interminable conferences to bring order
to the Allied demands. At various meetings during 1920 and 1921—at Spa, Paris, and London—the
Allies agreed on a division of the spoils. France was to receive 52 percent of the total, the British
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empire 22 percent, with the remaining 26 percent to be divided among Italy, Belgium, and other
nations. The United States demanded no share. The Allies tacitly accepted the French proposal of
sanctions against Germany if it should default on the imposed payments, and finally arrived at a total
bill of 33 billion dollars, in gold marks2 as well as reparations in kind, to be paid over a period of
thirty years.
This staggering demand produced an immediate government crisis in Berlin. The

semiconservative German People’s party resigned, forcing the formation of a new cabinet in which,
significantly, a major role was again played by the Social Democrats, one of the few parties willing to
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accept the onerous obligations of defeat. The Allies threatened to invade the Ruhr unless Germany
accepted the reparations bill. Hence the new cabinet signed the schedule of payments and promptly
borrowed 250 million gold dollars in London in order to pay the first installment under the new
arrangement.
2 This gold-linked currency adopted in 1873 by the German empire no longer circulated in 1920.
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Borrowing from the Allies in order to pay reparations or floating bonds in Allied capitals for
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similar purposes became one of the customary ways in which Germany paid some of the reparation
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demands. Similarly, foreign speculators, especially Americans, invested heavily in Germany, buying
up German industrial shares, real estate, and paper marks. Between 1919 and 1922, about 1 billion
dollars flowed into German hands, which the government turned over to the Allies as reparations.
Considering in addition the complicated picture of inter-Allied loans contracted during the war, in
which the United States and Great Britain alone had each loaned out some 7 billion dollars, one can
get some idea of the intricacies of international finance during this period.
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But Germany did not pay reparations merely out of Allied investments and loans. It
transferred to the Allies railroads, real estate, buildings, equipment, ships, and raw materials in the
ceded territories, and it also made annual deliveries of coal, chemicals, timber, ships, rolling stock,
machinery, and vast quantities of other supplies demanded by the Allies for the reconstruction of
their industries. These payments in kind produced further economic problems inside Germany, and
led to sharp discord with the Allies, since no agreement could be reached on their exact value.
Germany’s inflation was continuing and the mark was further depreciating. Whereas before the war,
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the ratio of the mark to the dollar had been 4 to 1, and 8 to 1 by early 1919, it stood near 250 to 1 by
late 1921. Under these conditions, the assessed value of deliveries in kind varied considerably
between Allies and Germans. For the first three postwar years, the Germans calculated the value of
total payments in kind at 10 billion, whereas the Reparations Commission set their book value at only
2 billion dollars.
Accepting the lower assessment of the Reparations Commission, France constantly accused
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the Germans of being in arrears with deliveries. In March 1921, the French seized Düsseldorf and
surrounding towns in reprisal against Germany’s defaulting on its deliveries, a charge heatedly
denied by the Germans. During 1922, Franco-German friction over reparations became more acute.
The German mark began to collapse. By August it stood at almost 2000 to the dollar, and the
Reparations Commission agreed to grant a temporary moratorium on payments and deliveries. Great
Britain, growing gradually more sympathetic to Germany, offered to cancel all war debts and
withdraw all reparation demands, provided the Allies, in particular the United States, would do the
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same. The response of the United Sates to this proposal is well summarized through President
Coolidge’s succinct remark “They hired the money, didn’t they?” Since the United States refused to
cancel any debts—agreeing only to lower interest rates and lengthened periods of repayment—the
Allies continued to press for reparations from Germany. England and France had already lost heavily
when Lenin had repudiated all Russian debts, and France, in particular, was in no mood to
accommodate the Germans. Prime Minister Poincaré’s whole policy of reconstruction was based on
expectation of German payments. Despite British pleas for reasonableness and Italian proposals for a
compromise, Poincaré was willing to grant a moratorium on reparations payments only in return for
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French acquisition of German factories and mines. On this basis he thought France could satisfy some
of its demands for deliveries in kind and prevent Germany from completely defaulting on
reparations.
... The Entente Cordiale [between England and France] was crumbling, giving some Germans the
hope of ending the years of “encirclement” and regaining a place among the western powers. But
Poincaré remained adamant. In December 1922, he declared Germany in default in deliveries of coal
and timber, and in January 1923, he sent French and Belgian troops to occupy the [natural-resource-
rich and heavily industrialized] Ruhr and operate the German mines and factories for the benefit of
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France. England refused to participate in these measures and, in fact, criticized the French action.
Occupation of the Ruhr and German Resistance
The next paragraphs are from Gustav Stolper, Karl Hauser, and Knut Borchardt, The German
Economy, 1870 to the Present, trans. Toni Stolper (New York: Harcourt, Brace & World, 1967), pp. 78-83.
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For the first time Germany went into open revolt against a measure taken by the victors. The
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moment the French and Belgian troops entered the Ruhr the German government stopped all
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reparations payments to these two countries and forbade all German officials, including Reichsbahn
[state railroad] personnel, to take orders from the occupying authorities. These responded by evicting
all German officials from the Ruhr district. They organized a civil and railroad administration of their
own and cut off the Ruhr from economic communication with the rest of Germany. Funds of the
banks and Reichsbank branches and inventories of mines and factories were seized. After passive
resistance, which at first had been ordered for the civil servants only, had spread to the workers in
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mines and factories, the occupying authorities tried to keep up activities in the workshops partly by
force, partly with their own men.
The Ruhr struggle plunged Germany into dire straits. She was now separated from her most
essential raw material resources. Moreover, the government had to feed the workers and civil
servants who had struck in the Ruhr territory or had been evicted from it, to maintain the families of
thousands who had been jailed by the occupiers, and, on top of all this, to compensate industry
heavily for the losses incurred in the conflict. And yet, reparations deliveries in kind to the Allies,
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except to France and Belgium, together with payments under the British Recovery Act, were kept up
until August, 1923. ...
Financial Reforms
[Throughout this ongoing crisis,] the German government had made serious attempts from
time to time ... to rid itself of budget deficits. The Reich Treasury was overburdened by reparations,
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the service of the huge war debts, and the relief for war victims. Decisive financial reforms were
undertaken in 1920 but even before that several taxes, chiefly the turnover tax, had been increased
and export duties had been introduced. In December, 1919, the Reichstag voted a capital levy, the
Reich Emergency Levy (Reichsnotopfer); it was to take up to 65 per cent from the largest properties
while also reaching down to the smallest ...
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Only too soon the intrinsic weakness of a financial policy that defined taxes in terms of
nominal money values at a time of progressive currency depreciation was to become apparent.
Necessarily, there are considerable delays between the assessment and the payment of a tax, and
meanwhile actual revenue will shrink to a fraction of expected returns. This weakness was especially
marked for the Emergency Levy because long-drawn-out installment payments had to be granted.
The purchasing power of the mark did not vary much during 1920, but began to decline in 1921 and
continued at such a rate that soon it was no longer worthwhile to enforce payment. Accordingly,
installment payments on the levy were suspended in 1922 and replaced by a property tax ...
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... When, during 1922, the momentum of the mark’s decline had mounted, there was a
renewed political struggle for a large-scale capital levy. The Socialist parties demanded it in the belief
that the levy could be protected against depreciation by tapping so-called real property values
(Sachwerte). This rather nebulous term was at the time meant to designate all property titles not
immediately affected by money valuations, such as factories, stocks of commodities, and real estate.
The “bourgeois” parties were opposed since they sensed the danger of a partial socialization of
business under the guise of fiscal measures, which would nevertheless fail to solve the financial
problems. The eventual compromise provided for a compulsory loan to the government of one
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billion gold marks, in the first three years bearing no interest, later 4 to 5 per cent. As this loan was
written in “gold marks,” the fictitious notion of “mark equals mark” was officially abandoned for the
first time. Once more, however, depreciation between assessment and payment was so rapid that
again the scheme remained largely on paper.
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Thus all financial efforts had mostly negative results as long as the inflation proceeded. Tax
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increases, the emergency levy, and the forced loan notwithstanding, fiscal receipts dropped off
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hopelessly when the devaluation of the currency had become catastrophic. [See Exhibit 5.]
From May, 1919, when the peace conditions became known, to February, 1920, the dollar
quotation (parity 4.20 marks)3 moved from 13.5 to 99 marks. This period was characterized, on the
one hand, by the shock that followed the announcement of the terms of the peace treaty, and on the
other hand, by the domestic turmoil which culminated in the Kapp putsch of March, 1920. After this
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putsch had been successfully put down in the same month, the dollar rate rapidly improved to 40
marks in June 1920, and then oscillated between 60 and 70 marks for an entire year. ... Two events
that deeply depressed the German people, the London Ultimatum of May, 1921, and the partition of
Upper Silesia in October of the same year, sent the dollar quotation up to 270 marks in November,
1921. A short interval of receding foreign exchange rates followed when the German government
was granted a partial moratorium on reparations payments. But in June, 1922, following large
disbursements on reparations account and the assassination of Walter Rathenau amidst growing
domestic tensions, the dollar rate resumed its upward surge. In July, 1922, the mark sank for the first
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time below 1 per cent of its original value; and when Raymond Poincaré’s reparations policy was seen
to drive straight toward conflict, the plunge became ruinous. By January, 1923, after the Ruhr
adventure had begun, the dollar rate had reached 18,000 marks. Then, surprisingly, the exchange
market quieted down somewhat. ... But after May, 1923, the economic consequences of the Ruhr
resistance on finance and business became so catastrophic that support for the mark had to be
discontinued. A new break followed, and now nothing could hold the downward race of the mark.
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Hyperinflation and the Conduct of Business
The inflationary spiral that gripped Germany in 1923 profoundly affected the conduct of business. In
the following paragraphs, the noted economist (and member of the Reparations Commission) Constantino
Bresciani-Turroni summarizes the impact. These paragraphs are drawn from his book, The Economics of
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Inflation, trans. Millicent E. Sayers (London: G. Allen & Unwin, 1937), pp. 215-216.
The Increase Of Unproductive Work
Owing to the effect of the monetary depreciation unproductive work acquired ever increasing
proportions. It appeared in various characteristic forms:
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The hypertrophy of commercial organization.—The number of middlemen increased continually

at a time when the buying and selling of goods, thanks to the very rapid increase of prices, created the
possibility of quick profits. Besides legitimate commerce which already comprised a very long chain
of middlemen, there grew and blossomed in the hothouse of the currency depreciation clandestine
commerce, which was devoted to bargaining in all sorts of foodstuffs, useful articles, artistic objects,
gold and silver goods, etc.
We can see from the statistics of the joint-stock companies that their increase was most rapid
in commerce; the number of joint-stock companies in this branch of economic activity (including the
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banks) jumped from 933 to 4,226 in the period 1919-25, that is from 10.3 per cent to 29.6 per cent of
the total number. The foundation of companies of this nature was made very easy during the period
of inflation; the law required only a small capital. Similar developments appeared in the number of
limited liability companies.
3 This is the exchange rate that prevailed in 1913.
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The hypertrophy of the banking system.—For reasons easy to understand, a great number of new
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small banks grew up in Germany during the inflation. The number of private foreign exchange firms
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was multiplied. Even the existing banks increased the number of their branches, especially in new
localities. They extended their premises or even constructed imposing new palaces, continually
employing new people. Here are some figures:
Table A
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Establishment of Numbers employed
†
New Banks in the “D” banks
1914 42 14,223
1919 49 23,339
1920 65 30,489
1921 67 36,608
1922 92 45,430
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1923 401 59,833 (autumn)
1924 74 30,266 (end of year)
†
The “D” banks are the Deutsche Bank, the Dresdner Bank, and the Discontogesellschaft – Germany’s three largest banks at the time.
It was estimated that the number of persons employed in all the banks jumped from about
100,000 in 1913 to 375,000 in the autumn of 1923.
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The increase in banking business was not the consequence of a more intense economic
activity. The work was increased because the banks were overloaded with orders for buying and
selling shares and foreign exchange, proceeding from the public which, in increasing numbers, took
part in speculations on the Bourse. The banks did not help in the production of new wealth; but the
same claims to wealth continually passed from hand to hand.
An index of this increase in banking activity is given by the very great increase in the number
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of current accounts4 during the inflation. When the money was stabilized, the number of current
accounts rapidly diminished, as the following figures (which refer to the three biggest “D Banks”)
show:
Table B
End of year Number of Current accounts

1913 552,599
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1919 1,227,934
1920 1,489,497
1921 1,609,572
1923 2,500,000 (estimated figure)
1924 646,229
Hugo Stinnes: Inflation as a Weapon Against Bolshevism

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Hugo Stinnes, a powerful German industrialist and a prominent public figure in Germany, claimed
that the government’s inflationary policy served as an unfortunate but necessary weapon against Bolshevism.
Stinnes appears to have benefited from the inflation in part because his enterprises received credits from the
4 Current accounts, held mainly by businesses in Germany, allowed firms both to deposit funds and to draw on
flexible lines of credit when necessary.
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Reichsbank, and he was sometimes referred to as “the Inflation King.” However, he was not alone in justifying
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inflation against the specter of Bolshevism. In 1922, the five-year-old Bolshevik experiment in Russia
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constituted an ever-present threat to capitalist and democratic systems world wide. The following excerpts are
from Hugo Stinnes, “On His Interview with the American Ambassador, June 23, 1922,” reprinted in Fritz K.
Ringer, The German Inflation of 1923 (New York: Oxford University Press, 1969), pp. 90-91.
As I entered the Hotel Esplanade from the Reichstag, I was addressed by the Belgian
representative on the Reparations Commission, Mr. Bemmelmans. He informed me that relations
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with the Entente had become very serious. In his opinion we had neglected to bring the sharp slump
in Ruhr production punctually to the attention of the French, and the same was true of the decline in
deliveries of coal from the part of Upper Silesia which has become Polish, so that the Guarantee
Commission, which had no power to make decisions on its own, had no alternative but to file a report
on the facts ...
Just as Mr. Bemmelmans and I parted, I was telephoned at 10:15 by [Foreign Minister Walter]
Rathenau from the American Embassy and asked to come to the American Embassy as soon as
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possible for a thorough discussion of the coal problem with the American ambassador and the
American representative on the Reparations Commission ...
The greater part of the conversation dealt with the reparations problem, rather than with the
coal situation. At Dr. Rathenau's request I expressed my views on the several aspects of the
reparations problem ...
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First the reasons why Germany carried on the inflation policy which it did after the war were
established. I pointed out that after the lost war it had been absolutely necessary for Germany to
bring four million men then in the field, out of the habit of regular work, back into the regular
routines of useful activity; and for that raw materials and employment were necessary. To get the
raw materials and obtain the markets for production, it was necessary to sacrifice some capital for the
purpose of sustaining the life of the nation, if it could not be avoided; for if the masses had remained
unemployed, then doubtless Bolshevism would have seized Germany. And however dreadful the
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ravages of Bolshevism had already been in Russia, there is no doubt they would have been even
worse in Germany, because in Germany it was a matter of a predominantly industrial country, where
the effects of food shortages, caused notably by the maintenance of the blockade, would have brought
a far worse manifestation of Bolshevism than in agrarian Russia.
I also informed the gentlemen that the weapon of inflation would have to be used in the
future too, without regard to the resulting extraordinary capital losses, because only that made it
possible to give the population orderly and regular activity, which was necessary to preserve the life
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of the nation.
It was further established in the discussion that the American gentlemen had been told not
only by Germans but especially by the French that I deliberately aimed at growing inflation as
something economically desirable, whereas in their view the growing inflation meant an
extraordinary loss in national wealth.
I called the gentlemen who had expressed views like that to the American gentlemen fools;
and Dr. Rathenau, who in all respects took the same positions I did, compared the situation of
Do
Germany to that of an army which is completely surrounded, and which to preserve its existence
must break through, however great its losses, so as to get air and a chance at life for the whole.
9
t
Reichsbank President Rudolf Havenstein
Defending the Policies of the German Central Bank
os
In the late summer of 1923, the Reichsbank (Germany's central bank) came under sharp attack. Many
critics blamed the mounting inflationary crisis on the Reichsbank's extremely lax monetary policy. Rudolf
Havenstein, president of the Reichsbank, denied these charges and, on August 25, vigorously defended his
policies. The following excerpts are from Rudolf Havenstein, “Address to the Executive Committee of the
rP
Reichsbank, August 25, 1923,” reprinted in Fritz K. Ringer, The German Inflation of 1923 (New York: Oxford
University Press, 1969), pp. 93-96.
It is said ... that the Reichsbank bears ... a large part of the blame for the disorganization of the
currency and the still increasing inflation. We are unanimously of the opinion that all these reproaches
are unjustified ...
The credit policy of the Reichsbank is supposed to be an essential cause of the inflation;
yo
attention is drawn to the Reichsbank's apparently great and rapidly growing holdings in commercial
bills. [See Exhibit 4.] These holdings have in fact climbed to 49 [trillion] marks, but about 1/4 of this
consists of checks and very short-term bills, for which the Reichsbank is certainly not a source of credit,
figuring merely as a depository. The credits covered by the remaining bills amount to little more than
one hundred million peacetime marks, calculated at the time of the discounting, as against a peacetime
portfolio of about one billion. That the extension of credit by a bank of issue increases the circulation of
paper money is doubtless true; but insofar as the bank gives economically justified and necessary credit
which serves the production and sale of goods, it creates no artificial purchasing power. What matters is
op
that unjustified bills be kept out of the Reichsbank. The Reichsbank has hitherto made every effort to
reach this goal through the most careful examination and restriction.
As a source of inflation, the Reichsbank credits are completely insignificant in comparison to the
fundamental cause of our inflation. This fundamental cause, insofar as it does not rest on the balance of
payments, is ... the boundless growth of the floating debt and its transformation into the means of
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payment ... through the discounting of the Reich Treasury bills [by] the Reichsbank. The root of this
growth, the enormous burden of reparations on the one hand, the lack of sufficient sources in income for
the ordinary budget of the Reich on the other, are known.
Here too the Reichsbank is alleged to be guilty, because it has not opposed the Reich
government and fiscal administration by refusing to continue the discounting of Treasury bills. This
reproach is also unjustified and completely misjudges the actual situation. The Reichsbank has done all
it could do with any chance of success. For years ... it has continually called attention to these conditions
No
and demanded a remedy in the most serious and urgent way, but it was not in a position to stop the
discounting of Treasury bills as long as the Reich had no other available means to cover its deficit, and as
long as all groups in the legislature were not fully convinced that such means absolutely have to be
found. For the Reich must live, and real renunciation of discounting in the face of the tasks set by the
budget ... would have led to chaos. The threat of a general refusal to discount Treasury bills would have
been nothing but a futile gesture. Only very recently, under pressure of dire necessity, have all groups
in the legislature been convinced ... that fiscal policy absolutely must be based upon adequate sources of
income. This has made it possible for the Reichsbank in principle to envision and actually to prepare the
ground for a recovery of its position as purely a central bank of issue. But it is also clear to us even now
Do
that, given the enormous tasks which confront the Reich government and fiscal administration, this
solution will take time, and that for the present we must anticipate a further extraordinary growth of the
floating debt and of the paper flood ...
The deterioration of economic conditions and the devaluation of the mark have called forth an
ever more passionate demand from the people for drastic measures in the banking and currency fields.
Everyone believes that salvation lies in the concepts of "gold credits" and "gold accounts," although
everyone must admit that a real improvement requires far more general, deeper and more inclusive
10
measures. As a beginning, the Reichsbank has introduced the so-called "stable value credits" for its own
t
operations and for those of the Loan Banks. The credits will be both given and repaid in paper marks;
os
on both occasions, amounts must be calculated in a stable currency—at present the pound. In this way
both the Reichsbank and the receiver of credit risk a loss, the latter if the mark deteriorates, the former if
it improves. As long as the Reichsbank must make its payments in paper marks, it can grant stable
value credits only if the debtor guarantees (to repay) the amount of paper marks received for the event
that the pound should sink below the rate current at the time credit was extended. Although everyone
who owes paper marks runs this risk, the ruling is considered somewhat one-sided in business circles,
rP
and not entirely without reason. The Reichsbank therefore believes that it must offer a certain quid pro
quo, whereby the debtor in turn is not made responsible for the full amount of the depreciation, but
only for 4/5 of it, and interest is charged only on the sum originally advanced in paper marks, not also
on the depreciation. Finally, the Reichsbank will begin as soon as possible to set a much lower rate of
interest for these credits than for credits in paper marks ...
Until July 28, 1922, we maintained the discount rate of 5%, which prevailed since December
1914. We found this necessary because until that time the easy availability of currency caused cash
yo
payments to become customary, and the demands made upon us by industry and commerce were
relatively small and had no significance in comparison to the Reich's demands for credits. In mid-1922,
the conditions of the money market changed. The reliance of the business community upon the
Reichsbank increased. The use of commercial bills became, though only gradually, common again, the
purpose being to supplement operating capital which was reduced by the increasing currency
depreciation. In the past months, the discount rate of the Reichsbank has followed the rates of private
exchange ... only gradually and at a still significant distance. We did this because, in view of the ever
op
growing scarcity of credit, the central bank of issue, the economy's ultimate and most fertile source of
credit, had to take the condition of the overall economy and of its several parts into account in the setting
of its discount rate. It could set only one discount rate, and a way had not yet been found completely to
exclude those borrowers who, despite all scrutinies and restrictions, were still able to derive unfair
profits from the currency depreciation through the cheap paper mark credits of the Reichsbank ...
The wholly extraordinary depreciation of the mark has naturally created a rapidly increasing
tC
demand for additional currency, which the Reichsbank has not always been able fully to satisfy. A
simplified production of notes of large denominations enabled us to bring ever greater amounts into
circulation. But these enormous sums are barely adequate to cover the vastly increased demand for the
means of payment, which has just recently attained an absolutely fantastic level, especially as a result of
the extraordinary increases in wages and salaries.
The running of the Reichsbank's note-printing organization, which has become absolutely
No
enormous, is making the most extreme demands on our personnel. The dispatching of cash sums must,
for reasons of speed, be made by private transport. Numerous shipments leave Berlin every day for the
provinces. The deliveries to several banks can be made ... only by airplanes.
The Death of Money and the Political Birth of Adolf Hitler
From a political as well as an economic standpoint, the monetary crisis proved terribly destabilizing.
Do
In fact, many students of German history maintain that the hyperinflation of 1923 set the stage for Adolf
Hitler's rise to power. According to the writer Pearl Buck, "Inflation finished the process of moral decay which
the war had started. ... When inflation was over, the psychological preparation for fascism was complete, the
minds of the people were prepared for the Nazis."5 In the following excerpts, Konrad Heiden paints a similar
5 Pearl Buck, "How it Happens," reprinted in Fritz K. Ringer, The German Inflation of 1923 (New York: Oxford
University Press, 1969), p. 125
11
interpretive portrait but from a unique historical perspective. These are drawn from Konrad Heiden, Der
t
Fuehrer: Hitler's Rise to Power, translated by Ralph Manheim (Boston: Hougton Mifflin Company, 1944), pp.
os
v and 125-126. Reprinted with permission.
It is twenty-three years now since I first attended a National Socialist meeting, saw (without
particular enjoyment) Herr Hitler at close range, and listened to the flood of nonsense—or so it then
seemed to me—that he was spouting. It was only gradually that the effects of these speeches made
me realize that behind all the nonsense there was unrivaled political cunning ...
rP
In the summer of 1923, Hitler told a story in a large meeting: ‘We have just had a big
gymnastic festival in Munich. Three hundred thousand athletes from all over the country assembled
here. That must have brought our city lots of business, you think. Now listen to this: There was an
old woman who sold picture postcards. She was glad because the festival would bring her plenty of
customers. She was beside herself with joy when the sales far exceeded her expectations. Business
had really been good—or so she thought. But now the old woman is sitting in front of an empty shop,
crying her eyes out. For with the miserable paper money she took in for her cards, she can’t buy a
yo
hundredth of her old stock. Her business is ruined, her livelihood absolutely destroyed. She can go
begging. And the same despair is seizing the whole people. We are facing a revolution ... ’
This was the story of the end of the world—seemingly the story of an old woman, but really,
in seven or eight phrases, the story of the destruction of German, indeed of European, self-reliance
and dignity. The truths which had seemed most certain, the multiplication table and the difference
between good and evil, vanished before the eyes of the uncomprehending individual. [I]t was the
op
story of the German inflation, which reduced the supposedly eternal value of the German mark from
$0.24 to $.000,000,000,024; or, in other words: an object which had previously been worth twenty-four
cents, now cost a sum which would formerly have equaled three times the national wealth. ... This
was the twilight of the age of progress: the death of money.
tC
No
Do
12
EX H IBIT 1
t
The M ark's Loss in V alue,
Janu ary , 1913 - N ov em ber, 1923
os
M easured By
M arks Per D ollar W holesale
†
Exchange Rate Index Price Index
D ate (1913 = 1.0) (1913 = 1.0)
rP
Janu ary , 1913 1.0 1.0
Janu ary , 1916 1.4 1.5
Janu ary , 1919 2.1 2.6
Janu ary , 1920 15.4 12.6
Ju ly , 1920 9.4 13.7
Janu ary , 1921 15.4 14.4
Ju ly , 1921 18.3 14.3
Janu ary , 1922 45.7 36.7
yo
Ju ly , 1922 117.0 101.0
Janu ary , 1923 4,279.0 2,785.0
Ju ly , 1923 84,150.0 74,787.0
A ug ust, 1923 1,100,100.0 944,041.0
Septem ber, 1923 23,540,000.0 23,949,000.0
O ctober, 1923 6,014,300,000.0 7,095,800,000.0
N ovem ber, 15 1923 1,000,000,000,000.0 750,000,000,000.0
†
In 1913, the nom inal exchange rate w as 4.20 m arks to the dollar.
op
Source: A d apted from G ustav Stolper, K arl H auser, and K nut B orcha rd t (T ransla ted by T oni Stolp er), T he G erm an E conom y,
1870 to the Present, (N ew Y ork: H arcourt, B race & W orld, 1967), p. 84; John Parke Y oung, E uropean C urrency and Finance
[U .S. Senate, C om m ission of G old and Silver Inquiry, Foreign C urrency E xchange Investigation, Serial 9, V olum e I]
(W ashington: G overnm ent Printing O ffice, 1925), p. 395.
EXHIBIT 2
tC
Short-Term Interest Rates (annual rates), 1918-1923

Interest Rates (percent)
Period Reichsbank Overnight
Discount Rate Loans
1918 - IV 5.0 na
1919 - IV 5.0 na
1920 - IV 5.0 na
No
1921 - IV 5.0 4.2

1922 - I 5.0 4.4
- II 5.0 4.5
- III 6.3 6.4
- IV 9.3 8.4
1923 January 12.0 11.0
February 12.0 26.0
March 12.0 11.0
April 18.0 13.0
May 18.0 20.0
Do
June 18.0 19.0

July 18.0 92.0
August 30.0 283.0
September 90.0 1606.0
October 90.0 1825.0
November 10.0 na
na = not available
Source: Adapted from Steven B. Webb, Hyperinflation and Stabilization
in Weimar Germany (New York: Oxford University Press, 1989), pp. 6-7.
13
t
os
EXHIBIT 3
The Supply of Money in Germany during the Inflation Years

Period Currency Price Level Real Currency
(billion paper marks, end (1918=1.0) (billions of 1918
of period) paper marks)
rP
1918 - IV 33 1.0 33.00
1919 - I 37 1.1 33.06
- II 43 1.3 34.20
- III 42 2.0 20.91
- IV 50 3.3 15.20
1920 - I 60 6.9 8.65
- II 68 5.7 12.02
yo
- III 76 6.1 12.41
- IV 82 5.9 13.91
1921 - I 80 5.4 14.70
- II 85 5.6 15.20
- III 95 8.4 11.31
- IV 123 14.3 8.63
1922 - I 140 22.1 6.33
- II 181 28.9 6.25
333
op
- III 117.6 2.83
- IV 1,295 616.2 2.10
1923 January 2,015 1,171.9 1.72
February 3,552 2,351.1 1.51
March 5,558 2,031.6 2.74
April 6,617 2,162.9 3.06
May 8,654 3,029.8 2.86
tC
June 17,400 7,316.5 2.38

July 44,000 32,754.6 1.34
August 692,000 421,504.5 1.64
September 32,890,000 10,036,147.4 3.28
October 3,042,997,000 3,289,585,736.1 0.93
November 518,500,000,000 345,522,959,183.7 1.50
No
Source: Adapted from Steven B. Webb, Hyperinflation and Stabilization in Weimar Germany
(New York: Oxford University Press, 1989), p. 11.
Do
14
t
EXHIBIT 4
os
Selected Government and Private Assets of the Central Bank (Reichsbank), 1921-1923
(Billions of Current Marks)
Treasury Bills as
Treasury Bills Commercial Paper Total
Percent of Total
1921 January 50.59 2.74 53.34 95%
rP
July 79.98 1.14 81.12 99%
1922 January 126.16 1.59 127.75 99%
February 134.25 1.86 136.11 99%
March 146.53 2.15 148.68 99%
April 155.62 2.40 158.02 98%
May 167.79 3.38 171.17 98%
yo
June 186.13 4.75 190.88 98%
July 207.86 8.12 215.98 96%
August 249.77 21.70 271.47 92%
September 349.17 50.23 399.40 87%
October 477.20 101.16 578.36 83%
November 672.22 246.95 919.17 73%
December 1,184.46 422.24 1,606.70 74%
op
1923 January 1,609.08 697.22 2,306.30 70%
February 2,947.36 1,829.34 4,776.71 62%
March 4,552.01 2,372.10 6,924.11 66%
April 6,224.90 2,986.12 9,211.02 68%
May 8,021.90 4,014.69 12,036.60 67%
tC
June 18,338.00 6,914.20 25,252.20 73%

July 53,752.00 18,314.00 72,066.00 75%
August 987,219.00 164,644.00 1,151,863.00 86%
September 45,216,224.00 3,660,094.00 48,876,318.00 93%
October 6,578,650,939.00 1,058,129,855.00 7,636,780,794.00 86%
November 189,801,468,187.00 39,529,577,254.00 229,331,045,441.00 83%
No
Source: Adapted from John Parke Young, European Currency and Finance [U.S. Senate, Commission
of Gold and Silver Inquiry, Foreign Currency Exchange Investigation, Serial 9, Volume I] (Washington:
Government Printing Office, 1925), p. 528.
Do
15
t
Exhibit 5
Real Government Revenues and Expenditures, 1919-1923
os
(millions of 1913 marks)
1919 1920 1921 1922 1923 Q1 1923 Q2 1923 Q3
Total Revenues 3328 3171 6237 4032 2508 2976 1656

Total Taxes 1648 1944 4338 2235 1068 1728 804
Income Tax 0 390 972 828 360 588 216
rP
One-Time Levies 0 267 879 45 0 0 276
Other Taxes 1648 1290 2481 1365 708 1176 576
Railroad Revenues 1288 960 1509 1533 1260 1008 816
Total Expenditures 11524 7098 10395 6240 6732 7188 12252

Interest 1408 477 495 93 12 12 0
Railroad (gross) 0 0 2724 2034 2652 3048 4716
Other Domestic Outlays 0 0 5016 2400 3900 5160 10812
yo
plus RR Subsidy
Versailles Treaty Expenses 0 1236 3369 2226 1572 1008 624
Budget Surplus -8196 -3927 -4158 -2208 -4224 -4212 -10596
Note: Because some annual figures were extrapolated from incomplete quarterly data, column sums do not always equal totals.
Quarterly data have been annualized.
op
Source: Adapted from Steven B. Webb, Hyperinflation and Stabilization in Weimar Germany (New York: Oxford University
Press, 1989), p. 33 and 37.
E X H IB IT 6
tC
G erm an G overnm ent D ebt during the Inflation Y ears

N o m in a l G o ve rn m e n t D e b t R e a l G o ve rn m e n t D e b t
P e rio d (billion paper m arks, (billions 1913 m arks)
end of period values)
1918 - IV 146 5 7 .8 0
1919 - IV 174 1 7 .3 0
1920 - IV 230 1 6 .0 0
No
1921 - IV 310 8 .7 0
1922 -I 330 5 .6 2
- II 349 4 .1 5
- III 484 1 .2 0
- IV 1 ,4 0 3 0 .9 5
1 9 2 3 Ja n u a ry 1 ,9 8 6 0 .1 1
F e b ru a ry 3 ,3 9 4 0 .6 5
M a rch 6 ,2 9 2 1 .3 0
A p ril 8 ,0 4 8 1 .3 4
M ay 9 ,6 8 3 0 .9 0
Do
Ju n e 2 0 ,4 3 2 0 .6 8
Ju ly 5 4 ,1 3 0 0 .2 9
A u g u st 9 2 8 ,3 0 4 0 .4 3
S e p te m b e r 3 1 ,3 0 7 ,0 6 0 0 .4 1
O cto b e r 5 ,1 1 9 ,1 6 0 ,0 6 1 0 .2 1
S ource: A dapted from S teven B . W ebb, H yperinflation and S tabilization in W eim ar G erm any
(N ew Y ork: O xford U niversity P ress, 1989), p. 49.
16
t
E X H IB IT 7
S h o rt-te rm G o v e rn m e n t D e b t, D e c e m b e r 1 9 2 2 - N o v e m b e r 1 9 2 3
os
T re a s u ry B ills
P e rc e n t h e ld
T o ta l O u ts ta n d in g H e ld b y th e R e ic h s b a n k
E n d o f M o n th b y th e
(in m illio n s o f m a rk s ) (in m illio n s o f m a rk s )
R e ic h s b a n k
rP
D e c e m b e r, 1 9 2 2 1 ,4 9 4 ,9 0 0 1 ,1 8 4 ,5 0 0 7 9 .2
J a n u a ry , 1 9 2 3 2 ,0 8 1 ,6 0 0 1 ,6 0 9 ,1 0 0 7 7 .3
F e b ru a ry , 1 9 2 3 3 ,5 8 8 ,2 0 0 2 ,9 4 7 ,4 0 0 8 2 .1
M a rc h , 1 9 2 3 6 ,6 0 1 ,1 0 0 4 ,5 5 2 ,0 0 0 6 9 .0
A p ril, 1 9 2 3 8 ,4 4 2 ,0 0 0 6 ,2 2 5 ,0 0 0 7 3 .7
M ay, 1923 1 0 ,2 7 5 ,0 0 0 8 ,0 2 2 ,0 0 0 7 8 .1
June, 1923 2 2 ,0 2 0 ,0 0 0 1 8 ,3 3 8 ,0 0 0 8 3 .3
J u ly , 1 9 2 3 5 7 ,8 4 9 ,0 0 0 5 3 ,7 5 2 ,0 0 0 9 2 .9
yo
A u g u s t, 1 9 2 3 1 ,1 9 6 ,2 9 5 ,0 0 0 9 8 7 ,2 1 9 ,0 0 0 8 2 .5
S e p te m b e r, 1 9 2 3 4 6 ,7 1 6 ,6 1 6 ,0 0 0 4 5 ,2 1 6 ,2 2 4 ,0 0 0 9 6 .8
O c to b e r, 1 9 2 3 6 ,9 0 7 ,5 1 1 ,1 0 3 ,0 0 0 6 ,5 7 8 ,6 5 0 ,9 3 9 ,0 0 0 9 5 .2
N ovem ber 15, 1923 1 9 1 ,5 8 0 ,4 6 5 ,2 2 1 ,1 0 0 1 8 9 ,8 0 1 ,4 6 8 ,1 8 7 ,0 0 0 9 9 .1
S o u rc e : A d a p te d fro m J o h n P a rk e Y o u n g , E u ro p e a n C u rre n c y a n d F in a n c e [U .S . S e n a te ,
C o m m is s io n o f G o ld a n d S ilv e r In q u iry , F o re ig n C u rre n c y E x c h a n g e In v e s tig a tio n , S e ria l 9 ,
op
V o lu m e I] (W a s h in g to n : G o v e rn m e n t P rin tin g O ffic e , 1 9 2 5 ), p . 3 9 5 .
E X H IB IT 8
P ro d u c tio n in G e rm a n y , 1 9 0 9 -1 9 2 3
tC
Real Net
Year D o m e s tic P ro d u c t
(b illio n s o f 1 9 1 3 m a rk s )
1 9 0 9 -1 3 4 4 .7
*
1 9 1 4 -1 7 4 2 .1
*
1918 3 8 .1
1919 3 4 .2
No
1920 3 7 .7
1921 4 0 .4
1922 4 2 .1
1923 3 7 .9
*
A n n u a l A v e ra g e
S o u rc e : A d a p te d fro m S te v e n B . W e b b ,
H y p e rin fla tio n a n d S ta b iliz a tio n in W e im a r G e rm a n y
(N e w Y o rk : O x fo rd U n iv e rs ity P re s s , 1 9 8 9 ), p .7 6 .
Do
17

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Harvard Business School 9-798-048

Rev. June 14, 1999

Financial Instability and the Question of Reparations

This staggering demand produced an immediate government crisis in Berlin. The

Occupation of the Ruhr and German Resistance

The Increase Of Unproductive Work

The hypertrophy of commercial organization.—The number of middlemen increased continually

3 This is the exchange rate that prevailed in 1913.

End of year Number of Current accounts

Hugo Stinnes: Inflation as a Weapon Against Bolshevism

The Death of Money and the Political Birth of Adolf Hitler

Short-Term Interest Rates (annual rates), 1918-1923

1921 - IV 5.0 4.2

June 18.0 19.0

The Supply of Money in Germany during the Inflation Years

June 17,400 7,316.5 2.38

June 18,338.00 6,914.20 25,252.20 73%

Total Revenues 3328 3171 6237 4032 2508 2976 1656

Total Expenditures 11524 7098 10395 6240 6732 7188 12252

Budget Surplus -8196 -3927 -4158 -2208 -4224 -4212 -10596

G erm an G overnm ent D ebt during the Inflation Y ears

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