What is hyperinflation?

Hyperinflation is a situation in which the general price level of goods and services in an economy increases rapidly and uncontrollably over a short period of time. Hyperinflation can occur for a variety of reasons, including a rapid expansion of the money supply, a collapse in the supply of goods and services, or a loss of confidence in the currency.

Stacks of banknotes during Hyperinflation in Weimar Germany.

Hyperinflation can have severe consequences for an economy and its people. It can lead to a decline in the purchasing power of the currency, making it difficult for people to afford basic goods and services. It can also lead to a breakdown in the financial system, as people lose confidence in the currency and banks become unable to function. Hyperinflation can also have political and social consequences, as it can lead to social unrest and political instability.

Hyperinflation in the Weimar Republic

Hyperinflation occurred in Germany in the 1920s, after World War I. The German government had printed large amounts of money to pay for the war and to meet the heavy reparations payments imposed on it by the Treaty of Versailles.

This led to a rapid expansion of the money supply, which in turn led to a rapid increase in prices and the onset of hyperinflation.

Germany suspended the gold standard (the ability to convert its currency to gold) when the First World War started in order to cover the significant expenditures of the conflict.

German Emperor Wilhelm II and the Reichstag unanimously decided to fund the war exclusively by borrowing, in contrast to France, which enacted its first income tax to pay for the war.

The government thought that by winning the conflict and exacting war reparations from the vanquished Allies, it would be able to pay off the debt.

This was to be accomplished by forcing Germany to pay monetary payments and annexing resource-rich industrial land in the west and east, much like the French indemnity that followed Germany's triumph over France in 1870.

As a result, the mark's value decreased steadily against the US dollar from 4.2 to 7.9 marks per dollar, serving as an early warning of the catastrophic post-war inflation.

The Weimar Republic was left with enormous war debts that it could not pay, reaching 132 billion gold marks (US$33 billion), which were ultimately reduced under the to 112 billion marks (US$26.3 billion).

This approach failed since Germany lost the war. By creating money without any underlying economic resources, the debt issue was made worse. 

The need for reparations in the Treaty of Versailles hastened the mark's value collapse to the point where it took 48 paper marks to purchase a US dollar by the end of 1919.

Decline of the economy

After that, during the first half of 1921, the value of the German mark was rather constant at around 90 marks per dollar. Germany was in a better position to take over as the main economic force on the European continent after an Allied ultimatum to impose economic sanctions that would force Germany to make reparations because the Western Front of the war had been fought primarily in France and Belgium.

The first payment was made when it became due in June 1921, and this signalled the start of a devaluation that would eventually reduce the value of the mark to about 330 marks per dollar. Germany was only had to pay 50 billion gold marks at the time because the reparations had to be paid back in hard money rather than the fast-appreciating Papiermark, even though the total amount of reparations demanded was 132 billion gold marks.

In August 1921, Reichsbank President Rudolf Havenstein started a policy of buying foreign currency with marks at any price, regardless of inflation.

This policy only accelerated the rate of the mark's devaluation, which meant that more and more marks were needed to purchase the foreign currency that the Reparations Commission was demanding.

The mark steadied at roughly 320 marks per dollar in the first half of 1922. There were conferences on international restitution. J. P. Morgan, Jr., a US investment banker, created the first one in June 1922.  

Reichsbank President Rudolf Havenstein.

Getty Images

The discussions failed to find a practical solution, and the mark fell to 7,400 marks per US dollar by December 1922 as a result of hyperinflation. 

The cost-of-living index increased by over 17 times from June 1922 and December, going from 41 to 685. Havenstein discovered that it was unable to make reparations payments by the fall of 1922.

 A one million mark note used as a notepad. Resourceful people used the back of the 1m mark notes to write notes; a notepad would cost billions.

File:Bundesarchiv Bild 102-00193, Inflation, Ein-Millionen-Markschein.jpg - Wikimedia Commons

Havenstein had been producing large quantities of bank notes in order to purchase foreign currency, which was then used to make reparations, but this technique further aggravated the paper mark's inflation.  

By the fall of 1922, the mark was essentially worthless, making it difficult for Havenstein to purchase gold or foreign currency using paper marks. 

Germany's major industrial region, the Ruhr valley, was occupied by French and Belgian forces in January 1923 after Germany failed to pay France an instalment of reparations on time in late 1922. 

The occupation was designed to guarantee the payment of reparations in the form of goods like coal.

In the Ruhr, the German government implemented a policy of passive resistance, ordering workers to refrain from taking any actions that would aid the invaders. This approach effectively amounted to a national strike in protest of the occupation, but the striking employees still needed financial assistance. The government paid these workers by printing an increasing number of banknotes, which caused Germany to quickly become overrun with paper money and exacerbate the hyperinflation.

Effect in Germany

During the hyperinflation, prices in Germany rose at an alarming rate, reaching levels that were unimaginable just a few years earlier. At the end of 1922, a loaf of bread in Berlin cost about 160 Marks.

By the end of 1923, it cost 200,000,000,000 Marks. One US dollar was equal to 4,210,500,000,000 German marks in November 1923.

The cost of living increased dramatically, and people's savings and wages became almost worthless. The value of the German currency, the mark, declined sharply, and people began to lose confidence in it.

Piles of new Notgeld banknotes awaiting distribution at the Reichsbank during the hyperinflation.

Bundesarchiv, Bild 183-R1215-506 / CC-BY-SA 3.0

The German hyperinflation had severe consequences for the country and its people. It led to a decline in the purchasing power of the currency, making it difficult for people to afford basic goods and services. It also led to a breakdown in the financial system, as banks became unable to function and people lost confidence in the currency.

The hyperinflation contributed to the rise of political extremism in Germany, as people became disillusioned with the government and its ability to address the country's economic problems.

In the end, some obligations were revived to somewhat make up for the disastrous decline in value of debts that had been priced in paper marks prior to the hyperinflation. A directive from 1925 allowed some mortgages that had been held for at least five years to be reinstated at 25% of their face value in the new currency, or practically 25,000,000,000 times their worth in the old paper marks. Similar to this, some government bonds were revived with a 2.5% face value payment that was to be made upon the payment of restitution.

Children stand next to a tower of 100,000 marks, equal in value to one US dollar. 1923.

Children playing with stacks of hyperinflated currency during the Weimar Republic, 1922 - Rare Historical Photos

Children play with virtually worthless marks. 1922.


A man uses one-mark notes as wallpaper, a more affordable option than even the cheapest rolls of wallpaper.

Children playing with stacks of hyperinflated currency during the Weimar Republic, 1922 - Rare Historical Photos

Government bonds were reestablished with significantly higher interest rates than mortgage debt. 

A wave of company bankruptcies was brought on by the reintroduction of some debts and the restart of effective taxation in a still-devastated economy.

The German hyperinflation was eventually brought under control in the mid-1920s through the implementation of the Dawes Plan and the establishment of a new currency, the Rentenmark.

However, the legacy of the hyperinflation continued to haunt Germany, and it played a role in the country's economic and political developments in the decades that followed.

The Rentenmark

The Rentenmark was a success because it helped to stabilize the German economy and to restore confidence in the currency. The Rentenmark was pegged to the value of land, which made it more stable and less prone to inflation than the old German currency, the mark, which had been severely devalued by the hyperinflation.

The Rentenmark was also backed by a large reserve of foreign currencies, which further increased confidence in its value.

Two Rentenmark note, issued in line with the Decree of 15 October 1923.

Zwei Rentenmark a - Hyperinflation in the Weimar Republic - Wikipedia

The introduction of the Rentenmark was an important step in the process of stabilizing the German economy, and it was widely welcomed by the German people and the international community. The Rentenmark was eventually replaced by the Reichsmark in 1924, which became the new official currency of Germany.

The Reichsmark was also pegged to the value of land, and it played a key role in the recovery and rebuilding of the German economy in the years that followed.