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A Case of Inflation

In the early 1920s Germany experienced one of the most severe inflations of all time.1 The inflation was not apparent in 1920, but began showing up in 1921. Thereafter it got steadily worse until it came to an abrupt halt at the end of 1923. At its worst in the second half of 1923, prices rose more than fivefold each week.

Some idea of the magnitude of this catastrophe can be seen in table below. During 1920 and early in 1921 the signs of inflation were mixed. The price of food was increasing, but the price of dollars in terms of marks (the mark was the name of the German currency) was dropping, and so were the prices of products bought from the United States. However, the signs of inflation were unmistakable in the next year, from mid 1921 to mid 1922. In this period prices increased about sixfold—that is, it took six marks at the end of the period to buy what one mark would have bought at the beginning. But this rapid inflation, greater than any yearly inflation in the history of the United States, was only a prelude for what was to happen.

Percentage Change in Various Measures of Inflation


Internal Prices

Price of Dollars

Cost of Living*

Feb 1920 to May 1921


May 1921 to July 1922


July 1922 to June 1923


July 1923 to Nov 20 1923


*food until June 1923, thereafter based on all items. These data were calculated by the Statistical Bureau of the Reich. All data are from The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany by Costantino Bresciani-Turroni (Augustus Kelley), pp. 30, 33, 35-6.

From the middle of 1922 until the middle of 1923, prices increased by over 100 times. Measured by the price of food, prices were 135 times higher at the end of the period than they were at the beginning. Measured by how many marks it took to buy a dollar, prices were 222 times higher. Yet even this horrid inflation was mild compared to what happened from July to November of 1923, when prices increased by somewhere between a million and a billion times their previous level.

The rapid increase in German inflation can be seen in the postage stamps that were issued during this period. (See the picture below.) In 1920 the highest valued stamp issued was for four marks. In 1923 the denominations were changing so rapidly that the post office could not design new stamps fast enough and resorted to using old dies and then overprinting them with new values. The highest value reached in 1923 was for 50 billion (50,000,000,000) marks. A great many of these stamps must have been issued and bought, though not necessarily used, because very few of the almost 200 varieties of stamps issued from 1921 to 1923 have more than minimal collector's value. Also, stamps that were postally used during the period have a higher collector's value than stamps that were never used, a pattern that is quite unusual.

German postage stamps, 1921-23

Inflation hurts some people but helps others by redistributing wealth and income. Buyers, for example, are hurt by higher prices, but offsetting this is the gain that the producers get from the higher prices. People on fixed incomes will suffer, as will creditors, who are owed fixed amounts of money in the future. On the other hand, those making fixed payments, such as most debtors, will benefit. The German hyperinflation illustrates the redistribution that inflation causes in a dramatic way. It eliminated the value of all life insurance policies and all savings left in banks. When life insurance policies were paid in 1923, the value of the check was usually worth much less than the stamp used to post the letter. The hyperinflation eliminated all debts that existed prior to 1921. For example, the value of German mortgages in 1913 measured in U.S. dollars was about $10 billion; in late 1923 these mortgages were worth only one U.S. penny.

By 1924 the inflation had radically redistributed the wealth of Germany. The segment of society that was hit the hardest seems to have been the middle class. The poor had little wealth to lose while the rich were often able to get their wealth into forms not adversely affected by inflation. Wealth held in foreign bank accounts, gold and precious metals, and land maintained value.

If redistribution were the only effect of inflation, one could argue that it is not a serious problem. Since for every loser there is a winner, society as a whole may break even (if this redistribution is not seen as being too "unfair"). However, inflation also makes ordinary decisions more difficult to make, and it causes people to change their behavior. The changes in behavior, which cause social losses, are again dramatically illustrated in a hyperinflation.

Coping with a situation in which prices could double in a day meant changes in the way people organized their financial affairs. Wages were paid daily or several times a day, and the whole family would immediately go out and spend the money before it lost value. In The Black Obelisk, a novel set in 1923, Erich Maria Remarque describes this practice:

"Workmen are given their pay twice a day now—in the morning and in the afternoon, with a recess of a half-hour each time so that they can rush out and buy things--for if they waited a few hours the value of their money would drop so far that their children would not get half enough food to feel satisfied."2

Getting rid of money was the key to financial survival since it lost its value so quickly.

Merchants eventually found that they could not mark up prices as fast as they were rising.

"So they left the price marks as they were and posted (hourly) a new multiplication factor. The actual price marked on the goods had to be multiplied by this factor to determine the price which had to be paid for the goods. Every hour the merchant would call up the bank and receive the latest quotation upon the dollar. He would then alter his multiplication factor to suit and would perhaps add a bit in anticipation of the next quotation. Banks had whole batteries of telephone boys who answered each call as follows: '100 milliarden, bitte sehr, guten Tag.' Which meant: 'The present quotation on the dollar is 100 billion marks, thank you, good day.'"3

The great inflation led to a large waste of society's resources. Just coping with the rapid change required resources—the extra bank clerks that Bopp mentions are but one example. Talented people no longer tried to earn money by productive activity, but sought ways to stay ahead of inflation, an activity unlikely to have any social benefits. Fortunes were made by those who speculated on the continued worsening of inflation. People who borrowed heavily almost always did well.

People dislike inflation because it redistributes in ways they consider unfair, because it forces them to take actions to protect themselves, and because it makes decisions more difficult to make. Decisions to buy, sell, or invest are based on a person's knowledge of what normal prices are and this knowledge of normal prices is based on remembering past prices. With inflation, a person must remember not only past prices, but also the dates of those past prices, and then must try to compute what their present equivalents would be. Because our mental capacity to handle large amounts of information is limited, and because inflation requires us to handle more information in order to make decisions, inflation, even when it is perfectly predicted, reduces our ability to make good decisions. People like stable prices because they minimize the cost of making economic decisions.

The German hyperinflation came to an abrupt end in November of 1923. The man who received credit for this achievement was named Hjalmar Schacht, the new currency commissioner of the Weimar Republic. In his autobiography he mentions a little poem that indicated his popularity among common folk:

"Wer hat die Mark stabil gemacht,
Das war allein der Doktor Schacht."

This can be loosely translated as:

Who could make the mark stable?
Only Hjalmar Schacht was able.

He was less popular with those who borrowed heavily on the assumption that prices would continue to rise. Stabilization led to large losses for them, and in some cases unmade huge fortunes that inflation had built.

The German hyperinflation is an example of a major economic catastrophe, one that cries out for explanation. Did some defect in the economic system cause this disaster? Was it accidental, due to an unlikely combination of circumstances? Was it due to error on the part of government policy makers? Can a society take steps to insure that a similar disaster does not happen to it? These are important questions, questions that economists have spent years studying. However, the German hyperinflation is an example of only one type of economic disaster. Another type was illustrated in the United States during the 1930s.

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1 Those interested in trivia may enjoy knowing that Hungary had an even worse inflation in 1945 and 1946 and seems to hold the world record for the biggest inflation.

2 Translated by Denver Lindley (New York: Harcourt, Brace-World Inc, 1957) p. 262.

3 Karl R. Bopp, "Hjalmar Schacht: Central Banker," The University of Missouri Studies, Vol XIV, No. 1, Jan. 1, 1939 p. 13.

Copyright Robert Schenk