When World War I ended in November, 1918, Germany’s economy was in a shambles. At the Paris Peace Conference in 1919, Germany was obliged to accept defeat and agree to pay a huge amount of money for reparations primarily to France and Belgium, owing to the great destruction and loss of life inflicted on those two countries in particular. Kaiser Wilhelm II abdicated his throne and fled the country. In August, 1919, in the city of Weimar, Germany adopted a constitution, becoming a democracy practically overnight. For the next fifteen years, the Germany economy would go through shocks that resembled some of the war’s terrible battles. It settled down only as a result of the rise of a brutal dictator. But how did the inflation first and deflation later propel Germany, and later all of Europe and America into another more terrible war.
Inflation Begins: Over two million Germans were killed in the war. Further, an influenza pandemic swept through Europe and other parts of the world killing over another 750,000 Germans. Rebuilding the Germany economy was a daunting task made much more difficult with the massive debt from reparations demanded by the French and Belgians. The young republic determined that it would be unable to manage the debts and keep the economy going. But there was one method that would surely work and that was to inflate the value of the currency so that it would take fewer production and labor costs to earn. The pressure was on the young republic to oblige the winners their reparations or face military occupation. So, they printed the money. This seemed to be the answer until inflation got way out of control in 1923.
Inflation Begets Hyperinflation: The demand-pull inflation of a hungry population at the end of a major war gave way to the cost-push inflation of labor demanding higher wages to keep up. The government agreed to the wage increases as it needed labor’s input to bring the economy around. But the only way for them to get there was to print even more money. Inflation grew to the point that stores closed routinely during the middle of the day to bring out more merchandise and raise all the prices. People shopped early in the morning knowing that the price of what they wanted would be higher and perhaps unreachable in the afternoon. The confidence in the new government waned, pushing businesses to avoid taxes with fraudulent record keeping, thereby causing the government to run out of revenue and print even more money. In 1923, France and Belgium decided they were not getting paid their reparations fast enough, and they sent armies to occupy the industrial Ruhr region of Germany. The German government could not block those actions, and faced with a nation-wide strike in protest, simply printed more money. The strike brought the economy to a halt and the government to its knees. Enter hyperinflation.
The Dawes Plan: New political leadership came to power in Germany in 1924 and began to rectify the situation, wiping out the inflation-riddled currency and replacing it with a new currency that was backed up with assets held in reserve. But to get the economy back on its feet and recommence the reparations payments, it took a huge push by the United States in the form of a loan under a plan put together by former General Charles G. Dawes, who chaired a committee of representatives from Belgium, France, Britain, Italy, and the United States. The Dawes plan’s major points were for foreign troops to evacuate Germany, a reorganization of the banking system, and tax revenues to provide for the reparations. The loans from the U.S. to Germany helped to restart the steel industry by providing desperately needed capital, and the German economy revived enough to return to making reparations payments. The Dawes Plan outlived its usefulness by 1929, and was replaced with another plan called the Young Plan, named for Owen Young, founder and former chairman of the Radio Corporation of America.
1929: Before the Young Plan could be adopted, the stock markets in the United States crashed in October, 1929. This resulted in the sudden withdrawal of the credits and other stimulus provided to the German economy in the latter half of the 1920’s. Further, the adoption of the Smoot-Hawley tariff act in the U.S. in 1930 set up major tariff protections for U.S. industries. This protectionism was met with similar laws in other industrialized countries bringing world wide trade to a virtual halt. Simultaneously, the Wall Street financiers that helped the German economy back to its feet had to withdraw the loans, and credits of the previous five years. What happened next was a perilous era of deflation in Germany that brought down the Weimar Republic for good and replaced it with National Socialism. By 1939, Europe was again engulfed in a war that was worse than the first one.
Conclusions: Can the lessons of that time about 100 years ago ever be learned? The economy of the United States does not have war reparations to pay, but nonetheless does have a massive mountain of debt as a result of dismal fiscal policy. And what steps does our government take to help the economy deal with this issue? Think about it—we’re printing money, also known as quantitative easing. It’s done slowly and gradually behind closed doors so as not to upset the investing community. But it isn’t hard to see that inflation is upon us and could be as severe as it was in the 1970’s. The remedy for that sixteen-year episode of inflation was 20% interest rates. Could this all happen again?
Sources: Nasdaq.com, How Weimar Germany Got Hyperinflation—and How America Could, Too, September 10, 2020.
Wikipedia, The Dawes Plan, The Young Plan.