The History of Hyperinflation in Germany after WWI is Dangerously Wrong. Here's Why That Matters.
TL; DR: The inflation was caused by letting private banks print their own money. And extremism came after years of austerity, not inflation.
Many economists, historians and news articles will seek to explain the dangers of hyperinflation by citing Germany, but the history is almost entirely wrong.
In the mid-1920s, there was a period of hyperinflation in Germany when the value of money dropped so badly that people were wheeling money around in wheelbarrows or used it as wallpaper (all true).
It’s also known that Hitler and the Nazis came to power sometime after this - and people make the mistaken conclusion that hyperinflation led to the rise of fascism and the Second World War. This is totally inaccurate history and is sometimes used as a reason to warn of the dangers of inflation (Keynes also warned of the dangers of inflation in his “Economic Consequences of the Peace”).
This matters for many reasons, and the real story is worth repeating, to get the order of events straight.
In the 1920s, Germany was faced with massive debts to France and Belgium, to pay war reparations.
“According to French and British wishes, Germany was subjected to strict punitive measures under the terms of the Treaty of Versailles. The new German government was required to surrender approximately 10 percent of its prewar territory in Europe and all of its overseas possessions. The harbor city of Danzig (now Gdansk) and the coal-rich Saarland were placed under the administration of the League of Nations, and France was allowed to exploit the economic resources of the Saarland until 1935. The German Army and Navy were limited in size. Kaiser Wilhelm II and a number of other high-ranking German officials were to be tried as war criminals.
Under the terms of Article 231 of the treaty, the Germans accepted responsibility for the war and, as such, were liable to pay financial reparations to the Allies, though the actual amount would be determined by an Inter-Allied Commission that would present its findings in 1921 (the amount they determined was 132 billion gold Reichsmarks, or $32 billion, which came on top of an initial $5 billion payment demanded by the treaty).”
The hyperinflation in Germany is one of the best known such episodes in history. To give an indication of the level of inflation, a loaf of bread that cost 160 marks at the end of 1922 cost 200,000,000,000 (200 billion) marks a year later.
Many economists, historians and news articles will seek to explain the dangers of hyperinflation by citing the German government, but the history is almost entirely wrong.
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