Post-war Reparations and Hyperinflation
Updated: May 4, 2019
We, who were born and raised in the United States, were fortunate to have inherited a stable democracy. This fate is the exception and not the rule throughout mankind. Fledgling democracies frequently end up transitioning into dictatorships within a few years. It usually takes decades, even centuries for democracy to firmly establish itself within a country—then it must be carefully nurtured or it could easily wither and die.
The new Weimar Republic that governed Germany from 1919 until Hitler took over as dictator lasted only 14 tumultuous years. The World War One peace treaty with Germany imposed massive reparations, which could only be paid in gold or foreign currency. With great effort, Germany managed to make the first payment in 1921. After that, the German leaders decided to make those payments by printing paper money, which they then exchanged for foreign currency. The result was that the German Mark’s value rapidly decreased against other currencies. Eventually, the cost of goods and services within Germany rose rapidly. When the people realized that their money was losing value, they tried to spend it as soon as they got it. This created the vicious cycle of hyperinflation. By November 1923, a single U.S. dollar was worth an astounding 4,210,500,000,000 German Marks.
Photo below shows men transporting the pay for one business from the bank in five wheeled carts.
Imagine you are a member of a hard-working German family at the end of the first World War. You consider yourself fortunate to have only lost one son to the brutal trenches of the Western Front. For the last year of the war, food and other essentials were difficult to obtain and very expensive. You’ve used up all of your savings and have struggled to make ends meet during years immediately after the war. Then hyperinflation occurs. Each day you watch as your wages or the profit from your small business buy less and less. What are you going to do?
The politicians in your new democracy seemed to have no solution to what they perceive to be a no-win situation—if they implement a hard currency solution, bankruptcies, unemployment, strikes, hunger, violence, insurrection and possibly even revolution will probably occur. If they stop printing ever increasing amounts of paper money, they will default on their foreign reparations.
Germany got both inflation and instability on a monumental scale. By 1925, the introduction of money with real value helped stabilize the economic situation. The political influence of extremists of the right and left faltered. By 1929, the Nazis got only 2.5% of the vote and it looked as if Hitler and the Nazis would end up being a mere footnote in history. In the 1920s, German scientists and men of letters won more Nobel prizes than any other country. By 1929, Germans were optimistic about the future—they thought the bad old days were behind them.
Then, the American Stock Market Crash of 1929 brought economic and then political chaos back to Germany. Two radical political ideologies—Communism and National Socialism exploited this situation. This battle for the hearts and minds of the German population was actually being fought on the streets of Germany with clubs, knives and pistols as the new year 1930 arrived. The final victory did not occur until 1990 when a free democratic Germany was reunited.