Panic, Prosperity, and Progress: Five Centuries of History and the Markets

CHAPTER 10

Billion-Dollar Bread—The Weimar Hyperinflation

There are many aspects to the hyperinflation that gripped Germany in the early 1920s that are remarkable, but two in particular stand out: (1) this was a crisis that didn’t just affect an elite cache of speculators but had a sweeping effect on virtually the entire population of common citizens; (2) it laid the groundwork for one of the largest, devastating, and world-altering wars in history.

Many people, even though unacquainted with important financial events, have heard something about the hyperinflation of this era, but very few people understand its root causes, its effects on the common citizenry, and its subsequent implications. In this chapter we will explore this amazing era of world financial history and why it leaves scars on the German psyche to this day.

■ Funding a War

When Germany went to war in 1914, it made a very bad assumption, similar to the one made by both sides of the United States Civil War: that the fighting would be concluded in a short span of time. Based on this, Germany decided to borrow money in order to fund the war effort, as opposed to having the population pay for it by way of higher taxes.

On July 31, 1914, the Reichsbank (the German central bank) issued an order suspending the right of anyone to redeem German currency notes into gold. On August 4, three days after the Reich had declared war on Russia, parliament passed additional currency acts that allowed it to create an “exceptional” ...