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The hyperinflation of 1922-3 is often presented as a consequence of excessive money printing but it would be more accurate to say that the excessive money printing was a desperate attempt to catch up with the fall in the value of the existing German currency, the paper mark. But what did it mean to say that the value of the mark was falling? It was falling in relation to the internationally agreed value of gold. The importance of gold was that it established what could be described as an internationally acceptable currency, a fixed criterion by which the value of the different national currencies could be measured. The problem for Germany was that it was heavily reliant on imports both for food and for raw materials for its large scale industry. According to the account by Richard Overy: 'the territories lost to Poland and France contained three-quarters of Germany's iron ore and one third of her coal; 90 per cent of the German merchant fleet was confiscated; all Germany's overseas assets, totalling 16 billion marks, were forfeited.' (5) It had a heavy debt burden from the loans issued to finance the war. It had to pay heavy reparations and the problem was exacerbated when, owing to the difficulty of paying the reparations, its most productive remaining territory, the Ruhr valley was occupied by the French and the German government pursued a policy of subsidising the local population to refuse co-operation with the occupier.

(5) R.J.Overy: The Nazi economic recovery, 1932-1938, Cambridge University Press, 1996 (first published 1982), p.6

An account is given in an article published in 1927 by Edgar Vincent, then Baron d'Abernon of Esher, who was British Ambassador to Berlin from 1920-25:

'The Reparation Commission fixed the sum at 132 thousand millions of gold marks (£6,600 millions). An interallied conference met in London in May, 1921, and determined the schedule of payments that the German Government had to meet. An important provision of the so-called" London Ultimatum" laid down that Germany must pay a sum in cash of 1 thousand millions of gold marks ($50 millions) before the end of August, 1921. That payment was duly met, but the German Government had to borrow about two-thirds from the firm of Mendelssohn and Company, repayable before the end of the year. This operation is likewise reflected in the exchange rates ...' (6)

(6) [Edgar Vincent, Baron d'Abernon of Esher ]: 'German Currency: Its Collapse and Recovery, 1920-26' Journal of the Royal Statistical Society, 1927, Vol. 90, No. 1 (1927), p.9.

A table showing the exchange rate of the paper mark to sterling shows the figure rising from 247 marks to the pound in May to 1,041 in November, falling again to 794 in December. 

'The year 1922 was fated to lead to disaster. The Committee of Guarantees, set up under the authority of the London Conference, instituted a-system of ten-day cash payments, each of 3I millions of gold marks (£I,550,000 - [this was the mark as it would be if struck in gold specie - PB]). This system was continued under the decisions of the Cannes Conference (January, 1922) until it became impossible to find the money. By the middle of May the German Government had asked for a moratorium ...'

The exchange rate now rose from 811 in January to 34,858 in December.

'During 1923 the Ruhr territory was occupied by Franco-Belgian troops; a foreign administration seized the Customs and levied other imposts. Not only was a valuable economic area separated administratively from Germany, but important revenues were destroyed or diverted to foreign treasuries - destruction occurring to a larger extent than diversion. At the same time, the Reich - to support passive resistance - elected to make colossal payments in aid of its citizens in the Ruhr, with disastrous effect on the budget and the mark exchange.'

83,190 in January to I8,349,000,000,000 in December.

D'Abernon subscribes to the printing money argument, saying that the government was resorting to the printing press instead of taxation to make up its budget deficit. But where was the taxation money to come from when the major industries, deprived of access to raw materials, access to markets, access to investment finance, couldn't function, with the inevitable catastrophic consequences for the smaller domestic consumer industries. In fact the collapse in the value of the mark was a collapse in its value on the foreign exchange market, its ability to pay for imports. The German citizen holding, say, 4,000,000 marks was in much the same position as he would have been a couple of years earlier holding 4 marks, except that he had to get rid of it quickly before it fell yet further in value. The problem was a problem of 'velocity' - the speed at which the money no-one wanted was circulating. No-one was going to want to save, no-one wanted to possess large quantities of it. In the end it was, as d'Abernon's own account shows, largely solved by printing money - by creating a new currency, independent of gold, and, though d'Abernon doesn't stress this, of the foreign exchange market - the 'rentenmark.'

D'Abernon stresses the problem of the depletion of Germany's gold reserves, first to pay for reparations as confidence in the paper currency was destroyed, then to pay for the resistance in the Ruhr:

'The great characteristic of this period was the depletion of the Reichsbank gold reserves and foreign bills portfolio ... during eleven months the gold reserve diminished by a sum of 538 millions of gold marks (£26,900,000), but it would be incorrect to suppose that all this gold was used to intervene in support of the mark. There were other pressing claims that had to be met ... Four Treasury bills for the account of the Belgian Government, duly endorsed by the Reichsbank, were paid out of the gold reserve [March to June 1923. This was the method adopted at the time for payment of reparations - PB] ... Of the remaining 33I.4 millions of gold marks, part of that sum - it is impossible to indicate the exact amount, but it is estimated at one-third - was used to meet Government imports necessary to maintain the spirit of passive resistance in the Ruhr, e.g. imports of food and of British coal for the railways.

'The occupation of the Ruhr played havoc with Germany's power to export, and consequently jeopardized that share of export bills of exchange that accrued to the Reich under the system of export control that had been set up (so-called "Aussenhandelsstellen"). These foreign bills formed the normal source from which the "Devisenbeschaffungsstelle" met the Government imports of foods, fats, and such-like necessaries ...

'By the end of the first week of September the exchange had reached 240 millions of paper marks for £1. A new crisis had intervened, and it was then resolved to resort to extreme measures and to seize foreign currencies wherever they were to be found. To this end Dr. Fellinger was appointed "Devisenkommissar" with plenary powers, three paragraphs of the Reich's constitution being suspended to allow him full scope. People's houses and cafes were searched, letters opened, bill-brokers' transactions scrutinised, while bills of exchange accruing from exports were now centralised in the Commissioner's hands. It is estimated that these drastic measures produced about 100 millions of gold marks (£5 millions)'


'On September 26, 1923, Dr. Stresemann took the plunge by announcing the complete abandonment of the policy of passive resistance; it was admitted that it was doing more harm to Germany than to France. In the beginning of October he attempted another step, viz. the adoption of an "Enabling Act" (Ermachtigungsgesetz), giving extensive extra-constitutional powers to the Government, for he perceived that nothing less than a virtual dictatorship was now necessary to meet the situation. The Socialists resigned from the Ministry, and Dr. Stresemann, again being called upon to form a Government, invited this time to the Finance Ministry Dr. Luther, who proved to be the man of the hour. Under threat of dissolution, Dr. Stresemann forced the Reichstag to pass the "Enabling Act," which was to herald a new era.'

The rentenmark was the development of a solution originally proposed by Karl Helfferich formerly Minister of Finance then Minister of the Interior and Vice-Chancellor during the war and now a leading member of the monarchist and anti-semitic (Jews could not join it) German National Peoples Party. His proposal was that a new currency be issued based not on gold but on rye - the Roggenmark, rye-mark (people were already shifting to local unofficial currencies including one based on rye (7)). Helfferich's proposal was taken up, against the opinion of most of his economic advisers, including Hjalmar Schacht, by the Minister of Finance, Hans Luther, Hilferding's successor and later, under Hitler, ambassador to Washington. But instead of rye, 'with a rare and an admirable understanding of the metaphysical elements, Dr Luther chose the term "rentenmark" whose basis, consisting of a lien on German agriculture and industry, inspired the public with adequate confidence' (d'Abernon, p.24).

(7) 'the Rye-Annuities Bank, founded in August 1922, issued annuity bonds on a rye-value basis. In addition, other obligations were issued based on various material values (i.e. coal, potash). Only in June 1923, when the purchasing power of the mark had already sunk to less than a ten-thousandth of its previous value, was the law on stable-value mortgages promulgated. It permitted borrowing through mortgages based on rye, wheat or fine gold; "fine gold'" was at the time in fact a synonym for the dollar.' Otto Pfleiderer: 'Two Types of Inflation, Two Types of Currency Reform: The German Currency Miracles of 1923 and 1948' Zeitschrift für die gesamte Staatswissenschaft / Journal of Institutional and Theoretical Economics, September 1979, p.354.

By 'metaphysical' d'Abernon really means 'psychological'. The rentenmark could be described as a confidence trick (if we don't already believe that the gold standard is itself a confidence trick. What matters is not any intrinsic value money might have but the confidence people have in it). The Rentenbank, which issued the new currency 'acquired on all agricultural properties a mortgage, expressed in gold, of 4 per cent. of the value of the property as assessed for the purpose of the Imperial Defence Levy (Wehrbeitrag) of 1913. The mortgages bore interest at 6 per cent, payable in Rentenmarks according to their gold value at the time of payment. On all industrial, commercial, trade, banking and transport undertakings, bonds in favour of the Rentenbank were made out to the same gold-mark amount as the total mortgage burden placed on agriculture, such bonds bearing interest at 6 per cent.' 

Its value was determined by the simple device of striking twelve noughts off the value of the mark which on November 20th had reached one billionth (taking a billion in the old English sense of a million million) of its pre-war value (the old paper marks continued in circulation, exchangeable with the new currency at a rate of a billion to one).

As d'Abernon says: 'The real value of the mortgage guarantee was doubtful' and later he says 'Confidence was created mainly through restriction [a legal limit was placed on the amount of notes that could be issued - PB], assisted by a more or less illusory mortgage.' It was not redeemable in gold. Nor (and d'Abernon only remarks on this in passing but it seems to me to be of crucial importance) could it be used internationally: 'the rentenmark was never made legal tender (though it was accepted up to any amount in payment of taxes etc), this quality being alone held by the paper mark which for the purposes of foreign exchange remained the sole official currency.' In August 1924, the paper mark was reissued as the gold-based 'reichsmark', now with the same one for one value as the rentenmark. This was the achievement of Hjalmar Schacht, Reich currency commissioner and soon to be President of the Reichsbank. According to the Wikipedia entry 'The Rentenbank continued to exist after 1924 and the notes and coins continued to circulate. The last Rentenmark notes were valid until 1948.'

To summarise. For all the confidence building theatre about agricultural and industrial mortgages, the rentenmark was a pure fiat, non-gold based currency and as such could not be used outside the frontiers of the domestic economy. The paper mark was used internationally and therefore its value in relation to gold - as the internationally recognised standard of value - mattered. The cause of hyper-inflation wasn't money printing - that was an apparently inescapable consequence - it was the collapse of the productive capacity of the nation, whose major industries were deprived of access to the necessary raw materials. An export driven economy that couldn't export and an import dependent economy that couldn't import, with no quarter being given in the demand for reparations. 

The main virtue of the rentenmark was to slow down the velocity of money, providing the domestic market with a currency people were willing to hold in their pockets for longer than a couple of hours, and this tided the economy over until late 1924, when the reichsmark could be introduced as a stable currency that could be used both domestically and internationally. The rentenbanks however continued to exist and to issue money - even as late as 1937, with the rentenmark accepted a a domestic currency until 1948 (Wikipedia).

The introduction of the reichsmark had been made possible by the new arrangements for reparations agreed in August 1924 under the Dawes Plan which set up a sort of circular arrangement in which the money being sent to the US from the wartime allied countries in payment of war debts then came to Germany in the form of intensive capital investment which, in theory at least, enabled the Germans to develop a balance of payments surplus, enabling them to pay reparations to the wartime allied countries.

The arrangement was not quite as favourable to Germany as that might appear. According to Richard Overy: 

'After the inflation, German interest rates remained at what were then perceived to be exceptionally high levels. The high cost of money reflected a shortage of savings following the inflation, and an understandable reluctance to run risks on the part of German investors. Although capital shortages were made good to some extent by large imports of money from abroad, the investment ratio in the 1920s remained well below the pre-war level, while smaller industrial producers, artisans and peasant farmers were left short of capital or were forced to pay for funds at usurious rates. Since craftsmen and peasants made up well over one-third of the working population, the problems they faced acted as a serious drag on the overall performance of the economy ... Public spending provided some cushion against the slow growth of demand and rising unemployment. In 1928 public authorities were responsible for 47 per cent of all building work in Germany. Road-building, electrification and the development of municipal services all helped to maintain business activity and stimulate demand as they were to do later under the Nazi regime, but they did so at the price of drawing in large foreign loans during the 1925-9 period that left the German economy very vulnerable to shifts in the world economy.' (pp.7-8)

The element that was strengthened by this foreign investment was, then, the cartel - large scale, specialised industry relatively free of the rigours of competition - as opposed to the smaller scale competition based agriculture, crafts and shopkeeping.