Economic history · When Money Stops Working
Seven steps, about ten minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
This part takes as read the mechanism. Money a government spends but has not raised is made for it by the bank that issues the currency, and it is in the shops as soon as it is spent.
The last part left one question open: why did any of these governments need that much money?
In Germany the answer starts in 1914. The war was paid for by borrowing rather than by taxing, with the Reichsbank taking the government's IOUs and paying for them with new notes. Reparations to the states Germany had fought then became the biggest single item it was spending on. And in January 1923 France and Belgium occupied the Ruhr, the centre of German industry, so Berlin paid the workforce there to stop working.
Zimbabwe got to the same place by a shorter route. There the bank that made the money was itself the spender. Its own annual report lists what it paid for: farm equipment, grain, the response to a cholera outbreak, and the logistics of the 2008 general election and the school examinations. None of that spending sat in the government's own accounts for 2008.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 7
Germany's began in August 1914. The Reichsbank, the German , was allowed from then on to issue notes against the government's own IOUs as well as against gold.
Until then the Reichsbank paid gold out on demand for its notes, and about a third of the money in circulation was backed by gold the bank held. From 4 August 1914 the state's own IOUs were admitted as cover too, so the government could borrow from the bank that made the money.
It had stopped paying out the gold four days before that, on 31 July 1914. Loans from the public and short-term government IOUs then covered almost the whole cost of the war.
The Federal Reserve Bank of San Francisco reports the share of the extra wartime spending met by direct taxation at 14 per cent. The rest was borrowed, and the Reichsbank was by then allowed to hold the state's IOUs as cover for its notes.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
Germany paid for four years of war. Where did the bulk of the money come from?
A dollar cost 4.2 marks in 1914. By November 1923 the was fixed at 4.2 trillion of them. The German for that is „4,2 Billionen Papiermark“, because a Billion in German is a trillion.
The reason was the same all the way through. The state went on spending more than it raised and taking on fresh credit to cover it, and the Reichsbank went on discounting the Treasury paper the state issued.
At the start of November 1922, eight years into that, a dollar cost about 9,000 marks. Everything after that happened inside a single year.
A saver who lent the state 4.2 marks in 1914, by buying a war loan, held marks that had lost more than 99 per cent of their value against the dollar by November 1922. The months people remember had not started yet.
The mark went from 4.2 to the dollar in 1914 to 4.2 trillion in November 1923. How did it get there?
German became the single biggest item in the after the war, ahead of armaments, and stayed there from April 1920 to March 1923.
The Treaty of Versailles left the amount open, and an Allied commission fixed it in 1921. Each year's payment then came out of the same budget as everything else, and pushed aside the item that had been largest until then.
Armaments had been the largest item in the German budget until then, and reparations displaced them within two years of the peace. The San Francisco Fed records France holding military spending at a much higher share of its own budget into the early 1920s, to enforce the claim.
The German Historical Museum puts the Reich's debt service at 126 per cent of state revenue, which is more than the state took in. Fresh credit had to be raised to pay for everyday government.
Reparations were the biggest single item in the German budget between 1920 and 1923. Roughly how much of the budget did they take?
France and Belgium occupied the Ruhr, the centre of German heavy industry, in January 1923. The German government called on the workforce there to stop working, and paid them for it.
The stated reason was a missed delivery of timber, telegraph poles and coal. The German Historical Museum calls that an excuse, and Germany's federal agency for civic education says France meant to set German industry back. Berlin proclaimed passive resistance, the occupiers shut plants and banned strikes, and the workers still had to eat.
Around 60,000 French and Belgian soldiers went in, on the German Historical Museum's count, and Germany's federal agency for civic education dates the entry to 11 January 1923. The San Francisco Fed, which gives no day, puts the force at more than 60,000.
The occupation put a region's wages on a budget where reparations had been taking nearly half for three years, and stopped that region's taxes and coal arriving at the same time. The German Historical Museum records that the cost of the resistance ran far past what the Reich's finances could carry.
Germany's answer to the occupation was to call on the Ruhr to stop work. What did that decision do to the government's finances?
By 1923 the gap between what the German state spent and what it raised was three things at once. It was a war it had borrowed to fight, a bill it had been sent, and a region it was paying to stand still.
That gap is what a deficit is, and the three parts of this one arrived in order and none of them went away. The war loans had been outstanding since 1914, reparations were taking nearly half the budget from 1920, and the Ruhr came in January 1923.
Each of the three had to be paid in something different. The war loans were owed at home in marks, the reparations abroad in foreign currency, and the Ruhr wages in cash, week after week, for as long as the resistance held.
The occupation began on 11 January 1923 and the resistance was called off on 26 September. Over those months a dollar went from about 21,000 marks in the spring to 160 million by the end of September.
By 1923 Germany had to find that money somewhere. Which way of finding it was still open?
Zimbabwe's central bank did the spending itself in 2008, under a section of its own Act allowing it to carry out transactions on behalf of the State.
The German money crossed a boundary: the government issued IOUs, the Reichsbank bought them, and two separate institutions signed. Zimbabwe had no boundary to cross. The Reserve Bank paid for the programmes directly, so the spending and the money for it were one act.
The Bank names its own authority in the Foreword to its 2008 annual report. A section of the Reserve Bank of Zimbabwe Act empowers it "to carry out transactions on behalf of the State if so requested".
The puts the Reserve Bank's 2008 subsidies to the public sector, to producers and to firms selling abroad at US$1,135m. Everything the government itself collected that year came to US$133m.
A government that wants to spend money it has not raised needs its central bank to agree. In Zimbabwe in 2008, what happened at that point?
The Reserve Bank of Zimbabwe published the list in its own 2008 annual report, under its own heading: Extra Ordinary Interventions, with Operations after it.
The Foreword names seven of them. Farm mechanisation; grain, fuel, electricity and farm chemicals; the fight against a cholera outbreak. Then the 2008 school examinations, the infrastructure for the 2008 general elections, a food programme called BACOSSI, and a first step towards using foreign currencies.
BACOSSI, the food programme, reached 1,578,365 households, which the Bank puts at 77 per cent of the 2,049,410 its own provincial count establishes. Its own staff went to every province to hand the food out.
The same report gives a 2008 central government budget surplus in Zimbabwe dollars, on expenditures that leave the quasi-fiscal spending out. Elsewhere the Bank says the whole lot is written off, "fully amortized" in its words. Nothing is left, it says, "to be transferred as burden on the fiscus", meaning the public purse.
Three of these were paid for by the Reserve Bank of Zimbabwe and listed in its own annual report. Which one was not?
Module 3 of 7 in When Money Stops Working
When Germany's began
August 1914Share of Germany's extra war spending met by direct taxation
14%What a dollar cost in 1914, and the fixed in November 1923
4.2 marks, then 4.2 trillionShare of the German taken by , 1920 to 1923
48%French and Belgian troops in the Ruhr from January 1923
around 60,000What Zimbabwe's paid out in subsidies in 2008, against the state's whole revenue
US$1,135m against US$133mWhat the Reserve Bank of Zimbabwe called its own spending
quasi-fiscal operationsYou met seven terms in this module
, , , , , ,
Two states, two routes, one arithmetic. What each of them blamed is another story, and so is everything that had nothing to do with money.
[1] How Germany paid for the war, in its own national museum's figures: Deutsches Historisches Museum, LeMO: Die Inflation (Stand 14 September 2014) and Die Ruhrbesetzung (Stand 10 May 2022). Both pages fetched, cached and read as rendered HTML. Every German figure below is quoted with its own original beside it, because an extraction slip between Milliarde and Billion is three orders of magnitude. War costs: „die stetig ansteigenden Kriegskosten, die sich schließlich auf 164 Milliarden Mark beliefen. Deren Finanzierung erfolgte vor allem durch Anleihen (97 Mrd. Mark), Schatzwechsel, Schatzanweisungen und ähnliche Schuldverschreibungen (57 Mrd. Mark), aber nur zu einem kleinen Teil durch Kriegsabgaben und Steuererhöhungen (10 Mrd. Mark).“ The 1914 mechanism: „Am 31. Juli 1914 stellte die Reichsbank die Einlösung von Banknoten und Scheidemünzen in Gold ein“ and „Zur Banknotendeckung wurden jetzt Schuldverschreibungen des Reiches zugelassen“. Debt service: „Der Schuldendienst des Reiches lag bei 126 Prozent der Staatseinnahmen.“ The Ruhr: „Mit dem Einmarsch von rund 60.000 Soldaten“ and „Die Kosten des passiven Widerstands überstiegen die Reichsfinanzen bei weitem.“ The fixed dollar rate: „Der Kurs für einen Dollar wurde auf 4,2 Billionen Papiermark ... festgesetzt“ -- festgesetzt, set rather than reached. LeMO also gives a reparations total, „Mehr als 132 Milliarden Goldmark“, and it is not printed. LeMO also records what the bill had to be paid in, which is what beat 5 rests on: „Mehr als 132 Milliarden Goldmark wurden vom Deutschen Reich als Kriegsentschädigung in Dollar ($), Pfund (£) und Franc (FF) gefordert“. On the totals, the Federal Reserve Bank of San Francisco gives 123 billion gold marks and the Bundesarchiv „269 Milliarden Goldmark“ for what is nominally the same obligation, none of the three acknowledges the others, and the budget share is uncontested where the total is not. Four things read off these pages on 5 September. The gold cover: „Etwa ein Drittel des Geldumlaufes war durch Gold gedeckt, der Rest durch andere Sicherheitsmechanismen“, and the Reich's debt certificates were „zugelassen“ as note cover alongside it rather than in place of it. The Ruhr: „Die alliierte Reparationskommission stellte Ende Dezember 1922 einen geringfügigen Lieferrückstand deutscher Reparationen an Frankreich fest; dies bot im Januar 1923 den Vorwand für den Einmarsch“ -- slight, and a pretext. The Reichsbank's part after the war: „Die Reichsbank diskontierte die Schatzanweisungen des Staates“. And „Oft erfolgten die Lohnzahlungen täglich“, which is about wages generally and names no payer, so no step attributes it to the state. TWO FIGURES IN THE READER'S PATH ARE THIS BUILD'S OWN DIVISION AND NEITHER INSTITUTION'S: 'about one mark in every seven' restates the Fed's 14 per cent, and 'more than 99 per cent' at beat 2 is 4.2 against 9,000, both of which print in that same step so the arithmetic can be checked.
[2] A dated German series of what a dollar cost, month by month: Bundeszentrale für politische Bildung: Volker Ullrich, 1923 als Schlüsseljahr für 1933?, Aus Politik und Zeitgeschichte. Fetched, cached and read as rendered HTML; an independent German dating, with its own series, and one of the three institutions behind the exchange rate under signed decision F1. In order: 9.000 Mark for a dollar at the start of November 1922; „rund 21.000 Mark“ held between February and April 1923; „Ende Juli notierte der Dollar bereits mit über einer Million Mark“; „Am 14. November überstieg der Dollarkurs erstmals die Billionengrenze, am 15. stand er bei 2,52 Billionen“; „Am 20. November konnte der Kurs des Dollars bei 4,2 Billionen stabilisiert werden“; and the parity, „Das bedeutete faktisch eine Rückkehr zum Vorkriegs-Dollarkurs von 4,20 Mark.“ The 15 November figure is why no step here writes 4,2 Billionen against that day: bpb puts the market at 2,52 Billionen on it, and 4,2 Billionen is a rate authorities set five days later. Three further sentences from this article carry beats, all read on 5 September. On the occupation: „Doch das war ein Vorwand. In Wirklichkeit ging es Frankreich darum, Deutschland in seiner Wirtschaftskraft nachhaltig zu schwächen“, with the stated grounds „Schnittholz, Telegrafenstangen und Kohle“. On its date: „Am 11. Januar waren französische und belgische Truppen ins Ruhrgebiet einmarschiert“ -- this article gives the day and the other two sources do not, so beat 4 attributes it here. And on the size of the fall: „Als Stresemann sein Amt antrat, stand der Dollarkurs bei 3,7 Millionen Mark, bis Ende September stieg er auf 160 Millionen“, which is the figure beat 5 closes on. On 20 November this article's verb is „stabilisiert werden“ and LeMO's, at the 15 November reform, is „festgesetzt“; beat 2 attributes each verb to the body that used it.
[3] The share of the German budget that reparations took, and the size of the force sent into the Ruhr: Federal Reserve: Bank of San Francisco Working Paper 2018-06, and the Bank of New York's Liberty Street Economics, Inflating Away the Debt, 13 July 2023. The working paper was rendered page by page and read, rather than grepped: printed p.1 footnote 1, "direct taxation to pay for increased expenditure due to the war was fairly low across Europe; e.g., 14% for Germany"; printed p.7, "reparations payments replaced armaments as the single biggest item in the budget – absorbing 48% of it between April 1920 and March 1923 (Young, 1925). Sargent (1982, p.73) argues that, if reparations payments were excluded, Germany's budget deficit was not unsustainable until 1923"; printed p.18, "Belgium and France invaded the Ruhr Valley with more than 60,000 troops"; and, a paragraph earlier on the same printed p.18, "Germany's efforts to secure an international private bank loan to help finance its expenditures were rebuffed", which the sentence before it dates to December 1921. The Liberty Street post gives the pair at each end: "From a value of 4.2 per dollar on the eve of World War I, the mark depreciated to 4.2 trillion per dollar by November 1923." One paper stands behind the Liberty Street post and it is counted once: Brunnermeier, Correia, Luck, Verner and Zimmermann appear at the New York Fed, at CEPR and as NBER Working Paper 31298, and signed decision F1 counts all three as one source. The post carries no day, only the month, which is the second reason no step here dates the figure to a day. THIS PAPER CREDITS THREE OF THE FOUR FIGURES TAKEN FROM IT TO NAMED THIRD PARTIES, so the prose says 'reports' and 'cites' rather than presenting them as the Bank's own findings: 48 per cent is "(Young, 1925)" in the same sentence, 14 per cent is "(Balderston, 1989)" in the same footnote, and the sustainability claim is "Sargent (1982, p.73) argues", an argument in a contested literature rather than a finding relayed. The paper gives NO DAY for the Ruhr invasion -- "in January 1923", and "Jan-23" in its chronology -- so no step takes a date from it. Also read off the rendered page on 5 September, and now carried at beat 3: "in order to enforce their claim to reparations and secure borders shared with Germany, France maintained significantly higher budget shares of military spending into the early 1920s". One internal contradiction, recorded per the 5 September rule and NOT carried as a disagreement between bodies: the paper gives the May 1921 settlement as 123 billion gold marks on printed p.6 and 132 billion on printed p.18. Neither total prints.
[4] The size of a central bank's own spending set beside its government's deficit: International Monetary Fund, Country Report 10/186, Zimbabwe: 2010 Article IV Consultation. Rendered and read as pages. Table 3, Zimbabwe: Central Government Operations, 2008-15 (Baseline), printed pp.22 and 23, gives the same 2008 rows on two bases. In millions of US dollars: overall balance -124, QFA by RBZ 1,135, overall balance including it -1,259. In per cent of GDP: -3.2, 28.9 and -32.1. Footnote 1/ on both pages defines the row as "Subsidies provided by the RBZ to the public sector and producers/exporters", and Figure 1's note lists what they were: "election-related expenses, transfers to parastatals, subsidized directed lending, below-cost provision of equipment and fertilizers to farmers, and allocation of foreign exchange at subsidized exchange rates". The same table's top row gives total revenue and grants for 2008 as US$133m, which is the scale line at beat 6. The two bases agree with each other and with the arithmetic. One disagreement is carried here rather than in a step, per adjudication rule A4 and rule 49: the Reserve Bank's own paragraph 3.47 reports a 2008 central government budget SURPLUS on expenditures that exclude the quasi-fiscal spending, while the Fund's table, on that same exclusion basis but in US dollars, puts the government's overall balance at -124. Neither body mentions the other and neither reconciles the two, so no step asserts that the surplus was caused by the exclusion. The report's claim is attributed to the report and the Fund's figures to the Fund. imf.org/external/pubs refuses this repository's fetcher and is on its blocklist; the imported-full-text path above answers and is the same document. Read again on 5 September, and it narrows the claim: footnote 1/ defines the 1,135 row as "Subsidies provided by the RBZ to the public sector and producers/exporters", which is the Fund's own category and NOT the Reserve Bank's section 8(2) formula 'on behalf of the State' -- producers and exporters are not the State, and the Fund nowhere mentions the Bank's published seven-item list. Beat 6 and beat 7 say subsidies, and neither claims the Fund's row and the Bank's list are the same set.
[5] The list a central bank published of what it had been paying for, and the accounts it kept that spending out of: Reserve Bank of Zimbabwe, 2008 Annual Report. Rendered and read as pages, because the brief required the paragraph numbers to come off a page rather than an extraction. Both are correct as the allocation cited them. Printed p.4, Foreword by the Governor, carries the two tier-2 subheadings Extra Ordinary Interventions and Quasi-Fiscal Operations. Paragraph 1.10, under the first: "Pursuant to section 8(2) of the Reserve Bank of Zimbabwe Act (Chapter 22:15) which empowers the Bank to carry out transactions on behalf of the State if so requested, the Bank embarked on extra-ordinary interventions", followed by the seven-item list quoted in the prose. Paragraph 1.13, under the second: the outlays "have been fully amortized such that there will be absolutely nothing to be transferred as burden on the fiscus, and hence the tax paper" -- the last two words are the report's own. Printed p.20, Fiscal Developments, paragraph 3.47: "Fiscal performance for 2008, excluding Quasi Fiscal expenditures, resulted in an overall central Government budget surplus of $14.9 sextillion", with the table beneath it repeating the exclusion in a footnote. Chapter 8 is the programme list, and its BACOSSI tables give 1,578,365 households served against 2,049,410 counted, which the report puts at 77 per cent. Two things re-read on 5 September. ¶8.4's "established number of households of 2,049,410" is the total of the eight provincial rows in the table beneath it -- Matabeleland North and South, Manicaland, Midlands, Mashonaland East, West and Central, and Masvingo -- and HARARE AND BULAWAYO ARE NOT AMONG THEM, so it is the Bank's own provincial count and not the country's households. And the seven-item list sits wholly under Extra Ordinary Interventions, ¶¶1.9 to 1.10, with Quasi-Fiscal Operations the subheading over ¶1.12 and ¶1.13. Item iv is "Logistical support in the administration of National Schools Examinations in 2008", which is what beat 7's option and reveal now say.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
Games · Learn · Atlas · Privacy