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Hyperinflation
Money you have not raised
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.
Step 1 of 7
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 question
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.
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?
Module 3 of 7 in Hyperinflation
[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).
[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.
[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.
[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.
[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.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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