When money dies: Hyperinflation in Germany's Weimar Republic

Learn Crypto Blog Learn Crypto Blog
Learn Crypto Sep 23 · 6 min read
  • Germany's Bill for World War 1
  • Money printing as the solution
  • Hyperinflation in numbers
  • A warning for today

You might think that an account of life in Germany between the two World Wars is best covered by the History Channel rather than a blog about crypto. You’d be wrong. By understanding about hyperinflation during the Weimar Republic - the German State from 1918 to 1933 - when money printing got so out of control that it ceased to function, you might better appreciate the value of digitally scarce money, like Bitcoin, that cannot be printed at will.

Germany lost the first World War and signed a treaty with the victors - principally France, USA and Britain - that essentially accepted responsibility for the loss and damage incurred by the Allies. This was quantified in reparations - a bill for the cost of the war - that amounted to roughly $440bn in today’s terms.

The burden of this massive bill played a huge role in the economic problems that Germany faced as it tried to rebuild itself after defeat. It wasn’t the only factor at play, the political situation after the war was complex, but one short blog piece would never do justice to the complex dynamics that were at play. 

What’s relevant in relation to crypto is the solution that Germany employed for meeting this massive commitment and trying to keep its economy afloat - printing money on an industrial scale - and the dire consequences of that specific policy.


The cost to Germany of World War 1 reparations

Inflation & Hyperinflation

Germany decided to print its way out of their situation. You might think that was sensible. Governments around the world have taken a similar approach to dealing with the crippling impacts of the Covid pandemic and the US government even handed out stimulus checks to every adult.

Money wasn’t printed as in Germany - read this separate article to understand the nuances - but the logic was the same. So what’s the problem?

You can you really dumb down it down as follows: More money chasing the same amount of goods inevitably causes prices to rise.

Inflation means a decline in money’s purchasing power through increased price of goods. Most western economies actually want a little bit of inflation, and set themselves annual targets of around 2%. This is from the belief that it incentivises consumption and business activity.

Hitting that magic number, however, has been really hard as economies are complex systems. Most economies have been flat since the 2008 crisis, and when Covid hit, the response was massive money printing.

The problem with money printing is that there is a thin line between a good amount of inflation and out-of-control inflation aka hyperinflation. Once that invisible line is crossed it can be difficult to stop. Most economies are now starting to see inflation raising the spectre of examples like the Weimar. 

Running out of paper

The German government was convinced that simply printing more money would solve their problems, rather than seeing that it was the problem. It became a vicious spiral as any external confidence in the German Mark (the currency at the time) evaporated, making it almost impossible for them to borrow on financial markets.

Such was the scale of money printing in the Weimar Republic that there were both paper shortages and a lack of official printing capacity. The solution was to sanction other forms of legal tender called Notgeld - emergency money - produced by local authorities.

This led to the creation of the highest denomination coin in history of 1 billion marks.

As Adam Ferguson describes in his excellent account of the causes and realities of hyperinflation in Weimar Germany:

Day and night 30 paper mills, 150 printing firms and 2,000 printing presses toiled away adding perpetually to the blizzard of banknotes under which the country’s economy has already disappeared.

Hyperinflation in numbers

One of the best ways to try and illustrate how insane hyperinflation became in the Weimar Republic is simply through numbers. In 1914 the exchange rate of the US Dollar to the German Mark was 4.2. 

By 1923, at the peak of hyperinflation one US Dollar would buy you 4.2 trillion marks. A trillion at the time being a million-million or one followed by 12 zeros. Think of what 4,200,000,000,000 bank notes would look like? Think of how many you would have needed to purchase a car or a house?

By 1923, at the peak of hyperinflation one US Dollar would buy you 4.2 trillion marks.

It’s almost impossible to wrap your head around those kinds of numbers. The price of goods was rising at 21% per day and the government had introduced 100 trillion mark notes.

Getting paid or transporting money was virtually impossible, requiring wheelbarrows, baskets or suitcases. The process of calculating prices and then counting out the notes was painful with each on their own taking several minutes.

The daily newspapers printed indexes which readers could use to multiply ‘ordinary fares’ to arrive at the new price. For a taxi fare you simply multiplied the stand fare by 600,000 to calculate the the hyperinflated price for that day.

Queues for shops were enormous. As soon as people had money there was a mad dash to spend it before prices increased again. It wasn’t uncommon to go for a meal and the cost to have increased in the time elapsed between ordering and then settling the bill.

Reverting to barter

With local currency worthless people reverted to other stores of value such as cigars, jewellry or paintings. The country was reduced to a barter economy - a cinema ticket could be bought for a lump of coal.

Anything that couldn’t be printed was valued, especially stable foreign currency.

Millions of persons are, I think accurately, reported to be buying foreign currencies in anticipation of fresh tax burdens and to be hoarding foreign bank notes….I hardly know a German of either sex who isn’t speculating in foreign currencies

This quote has an eerie resonance with today, except that the speculation is in cryptocurrency. Equally popular was trading in shares, as people mistakenly assumed that somehow the spiralling value of German companies avoided the same hyperinflation trap. Today stockmarkets are at all-time highs. As are house prices, in fact anything that the government can’t print.

The same was true in Weimar Germany. Businesses invested any local currency for plant and machinery, which held its value. Exporters became the most envied, amassing valuable foreign currency, while farmers stopped selling produce altogether, preferring to hold onto their grain, eggs and meat. The result was urban vigilantes going on rural rampages.

The towns were starving . The countryside had had a bumper harvest, but there it remained because of the farmers’ steadfast refusal to take paper for it at any price.

Germany wasn’t alone in experiencing hyperinflation, Hungary and Austria went the same way and each eventually had to start again with new money, but the repercussions were enormous. 

You might think that the Weimar hyperinflation was 100 years ago and may as well be 1,000 years, given how much the world has changed, but the basic rules of money are the same. Right now Venezuela is experiencing hyperinflation while an estimated 1.2 billion people live with double digit inflation or worse.

As with the situation in Germany after the first World War, it isn’t just about economics but politics, power and influence. This is what cryptocurrency, money based on rules not rulers, is trying to fix.

The Bitcoin Protocol is a set of rules that dictate how many bitcoin will ever exist, and because there is no central authority those rules can be changed. The ability to enforce digital scarcity on money is one of the reasons Bitcoin is heralded as the future of money, as it would make a repeat of the madness of the Weimar Republic far less likely.

There are no guarantees that Bitcoin, or some other crypto can provide a more stable money but history has shown that money always evolves to the soundest form. Just as the Weimar Republic could only dig itself a bigger hole, present governments, focused on short term election cycles, seem intent on printing today and leaving the debt problem for the next generation. The question you have to ask yourself is how long that can continue before money as we know it dies?