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As the average German struggled to survive during the crippling period of hyperinflation during the early 1920s, government leaders and economists searched for its cause in order to rectify the situation. They quickly found that there was not one single cause, but instead the cycle was brought forth by a number of contributing factors that combined to form a perfect storm of economic collapse. As noted above, the first place to look during any inflationary cycle is the amount of currency in circulation. In Germany’s case, one must first understand the historical context of the cycle. Before World War I, Germany was on the “Classical Gold Standard” system, which meant that all of its currency in circulation had to be backed by physical gold. Nations that were part of the Gold Standard – which included nearly every industrialized nation-state and their colonies in the nineteenth and early twentieth centuries – generally saw very little inflation because the requirement to back all currency with gold placed restraint on the printing of money. Once the world entered World War I, though, the Gold Standard was quickly scrapped by countries that needed funds to pay for their war efforts. Germany was one such nation.
To fund its war effort, the Imperial German government incurred a 150 billion mark debt. It also began a policy of excessive currency printing so that by the end of the war there was six times more money in circulation than when the war began. <ref> Widdig, p. 10</ref> Once the war was over, the new German government – commonly referred to as the “Weimar” government for the capital it chose – continued the policy of excessive printing in a move to manipulate its currency in order to help the struggling economy. Weimar economists theorized that devaluing their currency would help Germany’s industrial sector rebuild because the prices of its exports would be more attractive to foreign investors. Foreign investors could simply buy more German exports with their own currency, which was worth much more than the Reichsmark. <ref> Rickards, James. <i>[https://www.amazon.com/gp/product/1591845564/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=1591845564&linkCode=as2&tag=dailyh0c-20&linkId=a4478af6e0e6271b1884ca0cd0f3b1c1 Currency Wars: The Making of the Next Global Crisis].</i> (New York: Penguin, 2012), p. 57</ref> The economists were correct in that German exports temporarily increased, but they failed to consider the plethora of other factors that were driving the inflationary cycle.
As one of the “losers” in World War I, Germany was forced to pay exorbitant reparations to the “winners,” primarily France and Belgium, for the damage done to those countries. The reparations payments, which were putative more than anything, resulted in an adverse balance of payments in Germany. The Weimar government, as well as German corporations, had difficulties obtaining credit abroad to fund industries that could inject money into the economy needed to make the payments, which combined with a loss of territory under the Treaty of Versailles, meant that Germany needed to import more raw materials to keep its industry going. The result was a further devaluation of the Reichsmark. As with the domestic debts it incurred from the war, the German government saw devaluation of the currency as a viable option, but the reality was that it gave itself little room for economic maneuvering. <ref> Laidler, David E., and George W. Stadler. “Monetary Explanations of the Weimar Republic’s Hyperinflation: Some Neglected Contributions in Contemporary German Literature.” <i>Journal of Money</i> 30 (1998) p. 819-20</ref>
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The fiscal corner that the Weimar government found itself in as the result of wartime debts incurred by and reparations forced upon the previous government, was further exacerbated by its own leaders’ inability to grasp the complexity of the situation that was rapidly unfolding. The Weimar government became extremely myopic and was plagued with what seemed to be eternal gridlock in the halls of the Reichstag (the German parliament). The left and right wing parties were nearly equal in the Reichstag in 1921. To many people today, this may seem like the optimal form of “checks and balances,” but in early 1920s Germany it resulted in political stalemate where neither side was willingly to give ground. Among some of the most fundamental issues that neither side could agree upon was the need to raise taxes for social services, such as the payment of military pensions for veterans.
In order to rectify the situation, the government decided to print more money, which in turn devalued the already plummeting Reichsmark. The inability to provide for basic social services with non-inflated currency stemmed from the Weimar government’s inability to grasp the scope of the situation. Officials and economists in the Weimar government viewed Germany’s economic woes through the lens of the nineteenth century instead of seeing it as it really was – an economic process taking place within a complex system that was integrated with the economies of the other industrialized nations. <ref> McNeil, William C. “Weimar Germany and Systematic Transformation in International Economic Relations.” In <i>[https://www.amazon.com/gp/product/0813386071/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0813386071&linkCode=as2&tag=dailyh0c-20&linkId=b545415096c0d15efd80dde8364facb4 Coping with Complexity in the International System].</i> Edited by Jack Snyder and Robert Jervis. (Boulder, Colorado: Westview Press, 1993), p. 193</ref>
The final nail in the German economy’s coffin of the early 1920s was actually two unforeseen events that took place both inside and outside of Germany’s borders. The first event was the assassination of German foreign minister Walther Rathenau in June 1922. The assassination caused political panic in the increasingly unstable Germany and set off a speculation crisis that saw the Reichsmark plunge in value on world currency markets. Rathenau’s assassination was followed by the occupation of the Ruhr Valley by French and Belgian military forces in January 1923. The French and Belgian governments hoped that by occupying the mineral and industrially rich Ruhr Valley they could force the Germans to make reparations payments; but the occupation had the opposite effect. The occupation of the Ruhr further crippled industrial output, which in turn devalued the German currency even more. By November 1923, the Reichsmark was worth only one-trillionth of its pre-World War I value. <ref> Overy, Richard. <i>[https://www.amazon.com/gp/product/0140513302/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0140513302&linkCode=as2&tag=dailyh0c-20&linkId=4f47a9323454f3b5b21d3d10e471cf62 The Penguin Historical Atlas of the Third Reich].</i> (London: Penguin, 1996), p. 130</ref>
===The End of the Cycle and Its Results===
[[File: Freikorps.jpg|400px460px|thumbnail|left|Freikorps Preparing for Action on the Streets of Germany in the 1920s]]
Although Germany’s bout with hyperinflation was a gradual process and took a while to peak, it ended rather quickly. After numerous failed attempts to alleviate the process, the Weimar government introduced a new currency known as the Rentenmark in 1923. Unlike the Reichsmark, which was not backed by gold or any other tangible asset, the Rentenmark was back by real estate. When the Rentenmark was first introduced in October 1923, one bill was worth an astonishing one trillion Reichsmarks! <ref> Widdig, p. 11</ref> Although the Weimar government was able to effectively end the hyperinflation by the end of the year, the damage had already been done to the German economy, political system, and greater society.
