Hyperinflation is happening and is going to change everything, Jack Dorsey, the former CEO of Twitter tweeted a few months back and Germany’s central bank, the Bundesbank confirmed the existence of super high inflation by releasing a report last month where said, “the signs of a recession for the German economy are multiplying.” Though most economists believe that the world is not heading toward hyperinflation still investors are worried as commodities and daily goods continue to get expensive.
Around 90 countries have hiked repo rates this year as fear of recession looms. The European Central Bank has hiked interest rates by a total of 125 basis points in the previous two meetings and has promised future hikes as soaring food and energy costs continue to hurt the economy. Germany’s inflation soared to 10.9% last month, considerably above estimates for a reading of 10%, bolstering the argument for another 75 basis point hike.
The rate at which the cost of goods and services increases in a particular economy is known as inflation. Economists believe that moderate, steady inflation is a beneficial component of a rising economy.
When inflation reaches hyperinflationary levels, it is no longer moderate or steady. Out-of-control inflation is referred to as hyperinflation, and it can indicate that an economy is overheating, a currency is crumbling, and a catastrophic economic disaster is on the horizon.
“Inflation” is a particularly horrible word in Germany, conjuring up sad memories.
The Weimar Republic in Germany in the 1920s had hyperinflation, which is probably the most well-known instance of the phenomenon. The German government printed 92.8 quintillion paper marks to cover Germany’s war obligations from the start of World War I until November 1923. The value of the mark plunged from around 4.2 marks per US dollar to over 4.2 trillion marks per dollar between 1914 and 1923.
In October 1923, the monthly inflation rate reached roughly 29,500%, and with an average daily rate of 20.9%, it took around 3.7 days for costs to double.
Germany was a prosperous country before World War I, with a gold-backed currency, booming industry, and world dominance in optics, chemicals, and machines. The German Mark, British shilling, French franc, and Italian lira all had roughly equal worth and could be swapped for four or five dollars.
That was back in 1914. At the height of German hyperinflation in 1923, the rate of exchange between the dollar and the Mark was one trillion Marks to one dollar, and a cartload of cash could not even purchase a newspaper.
Though several people believe that the Weimar Republic’s hyperinflation was caused directly by the government printing money to pay war debts, the roots of the country’s terrible inflation condition formed years earlier.
Germany stopped backing its currency with gold in 1914 and began supporting its war operations via borrowing rather than taxation. Prices already had doubled by 1919, and Germany had lost the war, yet the currency remained reasonably stable between 1919 and 1921, compared to the years that followed.
The Treaty of Versailles mandated war reparations to be paid for either gold or foreign currency equivalents rather than German paper marks, so the state could not merely inflate their way out of their obligations. To acquire foreign currencies, the government, however, utilised government debt-backed paper marks, hastening the depreciation of their currency.
French and Belgian forces invaded the heavily industrialised Ruhr Valley in January 1923 when the Germans fell behind on their payments and demanded reparation payments in hard assets. This led to worker strikes and passive resistance, which made the situation worse. With European governments divided on how to handle the issue, Germany’s economy swiftly disintegrated, and the nation was in a position of hyperinflation for nearly a year and a half.
Prices soared; for example, a piece of bread that cost 250 marks in January 1923 had climbed to 200,000 million marks in November 1923. By the autumn of 1923, it was more expensive to produce a note than it was worth. Workers were sometimes paid twice each day during the crisis because prices grew so quickly that their paychecks were almost worthless by noon.
Businessmen, landowners, and those who had mortgages and borrowed money discovered they could repay their debts with worthless money with ease. People on pay were reasonably safe since their earnings were renegotiated every day. Farmers fared well since their products were still in demand, and they earned more money for them when prices rose.
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People with fixed incomes, such as students, retirees, or the ill, discovered that their earnings did not keep pace with inflation. The worst affected were individuals with savings and those who had given money, for instance, to the government, as their money became valueless.
The Weimar government was forced to face the prospect of extinction as a result of hyperinflation. There were discussions that the administration may be deposed by a democratic revolution or a military coup. In early November 1923, an attempted coup in Munich by Adolf Hitler and the National Socialists (NSDAP) seemed to foreshadow what was to come.
An early twentieth-century economist, Lionel Robbins, wrote “Hitler is the foster child of inflation.” Although disputed, he attempted to indicate in this statement that continued hyperinflation in Germany created the path for Hitler to rise to power as head of the Nazi party and then as chancellor of Germany. It is said that Hitler took advantage of the German people’s tremendous suffering as a result of hyperinflation and the consequent unreasonably high cost of living. He promised them brighter days ahead, as well as a total reprieve from the scourge of inflation. For a dictator like Hitler, inflation may have ultimately proved to be a blessing in disguise.
The crisis triggered the resignation of two cabinets as ministers disagreed on how to effectively resolve the crisis. Hans Luther, the newly appointed finance minister, came up with the optimal solution.
Luther authorized the creation of a new currency (the Rentenmark) and reserve bank (Rentenbank) in October. The Rentenmark’s value was linked to the value of gold, but it could not be exchanged for gold since the government lacked gold reserves. One Rentenmark was initially worth one billion ‘old’ Reichsmarks, and the exchange rate was set at 4.2 Rentenmarks to one US dollar.
The German people welcomed the new currency, eager to put an end to hyperinflation. This allowed for a gradual normalisation of prices and salaries.