Inflation Blog - Part 3: The Death of Money

Written by Tony, 07 February 2022

In this series of articles, I have set out to examine some of the more extreme inflationary surges that have occurred over the last 700 years or so, looking for common themes between them and wondering whether these historical events might shed any light on the inflationary spike we have seen over the last few months.

Inflation One looks at the period after the Black Death in the late fourteenth century

Inflation Two examines the long inflation of the fifteenth and early sixteenth centuries, under the Tudors and Stuarts in England.

Inflation Three focuses on hyperinflation in Germany between the two World Wars.

Life was madness, nightmare, desperation, chaos’ – Erna von Pustau, contemporary diarist

Germany in 1923 resembled a scene from a painting by Hieronymus Bosch. The government believed that the only way to prevent total economic collapse was to print money – by the time the madness ended it had 1800 printing presses running day and night. Even this wasn’t enough – cities and companies were also printing their own money, which literally ‘wasn’t worth the paper it was printed on’. On one occasion thieves stole boxes of money from a parked lorry – they ran off with the boxes but tipped the worthless money out and left it on the pavement. People would go into a cafe for a cup of coffee costing five thousand marks, only to find as they left that the price was now eight thousand. The price of an egg in November 1923 was equivalent to what five hundred thousand million (500,000,000,000) eggs would have cost five years earlier, at the end of the war, though there were never that many eggs in the whole of Germany. The government’s tax revenues by this stage covered just 1% of its spending. There was no money to pay the army, civil servants or police. Ministry of Finance officials were being paid partly in potatoes. Industrialists and speculators made vast fortunes, while the bodies of those who had starved to death lay uncollected in the streets.

An inevitable consequence of hyperinflation – except when it is happening everywhere at the same time, which in this case it wasn’t, as only Germany and the former Austro-Hungarian Empire were affected – is the collapse of the exchange rate in the country where the hyperinflation is taking place. The collapse of Germany’s currency took a decade, accelerating as it went. Before the First World War, in 1914, a pound sterling would buy 20 marks, and by the end of the war, in November 1918, 43 marks. The following table summarises what transpired. Each figure represents the number of marks which could be exchanged for a pound sterling at various points in time.

DateMark/Pound Exchange Rate
June 1919 60
December 1920185
October 1921500
March 19221,400
August 19229,000
October 192213,000
1st January 1923227,500
25th July 1923600,000
31st July 19235,000,000
1st September 192350,000,000
10th October 19237,000,000,000
21st October 192380,000,000,000
20th November 192318,000,000,000,000

It matters little that a pound would buy you eighteen trillion marks in November 1923, for the fact was, a mark was worth nothing. By this stage, the savings of the entire German people had been wiped out, a loss that no subsequent government ever made good.

How could such a total inflationary meltdown have come about, and does the episode offer any lessons for us today? (I happen to think that it might). To answer this question, we need to go back to the year 1896, when prices first began to rise.

Background - the price revolution of the twentieth century

One characteristic of inflationary periods, noted in the previous two articles in this series, is that they tend to follow several decades of price stability. In less economically aware eras than our own, the inflection point where prices began to rise often went unnoticed for years. Often, when authorities became aware of inflation, they welcomed it as a relief from deflation, which brings its own challenges. In our own more data-conscious age, an inflationary inflection point would be noticed almost immediately, as was the case last year, but the phenomenon was met with the assumption that it would be temporary, and unthreatening. Last year, central bankers took the view that as inflation had been running below its 2% annual target for several years, it should be allowed to run above that level for a while to compensate. Now that inflation in the United States has touched an annual rate of 7.0%, its highest level for thirty years, the ‘compensation’ argument has begun to carry less weight.

To return to 1896 – at this point the purchasing power of a pound sterling was somewhat greater than it had been almost a century earlier. Throughout the nineteenth century, gentle but persistent deflation had been the order of the day. Then prices began to rise. The early stages of this trend were gentle, with prices rising by around 1-2% a year. The inflation began in most industrialised countries at the same time, and was welcomed, as the pre-war years in which it took place were prosperous ones, with wages, profits, employment and farm incomes all rising together.

The most credible explanation of this sustained upturn in inflation is a combination of a rising population and rising living standards, creating conditions of accelerating demand which continually outstripped supply.

World population started rising towards the end of the nineteenth century as medical science discovered effective treatments for killer diseases such as tuberculosis, typhoid, typhus and diphtheria, leading to a revolution in life expectancy. The world population rose from 1.2 billion in 1850 to 1.625 billion in 1900, and to 2.5 billion in 1950. This was an increase of around 35% in the first period, and 54% in the second. The growth is even more striking in numerical terms – a rise of 425 million people from 1850 to 1900, followed by 875 million between 1900 and 1950.

It's worth pausing for a moment to consider how astonishing these figures are. The first period, coinciding with the heyday of the British Empire, was a time of world peace, with only minor wars. The second period contained the two most deadly wars in history, with a global pandemic in between. The most reliable mortality figures are 20 million deaths in the First World War, 50 million in the Spanish Influenza, and 75 million in the Second World War, a total of 145 million deaths from these three events alone. In the absence of these horrors, it can be assumed that world population growth in the first half of the twentieth century would have exceeded one billion, and the population in 1950 would have been at least 63% higher than in 1900. This is one of those occasions where the quiet, unreported statistic turns out to be more significant than the spectacular, high-profile one.

Living standards were rising too. Wealth was being spread more evenly. Universal suffrage compelled politicians to give more consideration to the needs of the wider public. Social welfare, healthcare, state pensions (the British state pension was introduced in 1908), mass education and unemployment insurance, all contributed to a growth in aggregate demand.

It has also been argued that the end of the nineteenth century coincided with the end of an era of exploration and colonisation. By then, the ‘scramble for Africa’ was over. Oceania had been divided up among the Great Powers. New Zealand had become a vast sheep ranch, as had the North American prairies and the Argentine pampas. There were no more frontiers to be rolled back. From now on, supply would need to be met from known resources rather than new ones.

To conclude, it seems reasonable to explain the rebirth of inflation in the early twentieth century as the result of an acceleration in the growth of the human population, combined with a general growth in living standards, creating a two-pronged increase in aggregate demand, with supply unable to keep pace. This is the classic inflationary scenario where ‘too much money is chasing too few goods’.

In Germany, a lost war, followed by the punitive Treaty of Versailles with its deliberately unrealistic demands for reparations, proved too much for a weak government with little grasp of the basic rules of economics. In these circumstances the flames of inflation, already kindled round the world, burst into a roaring inferno which was soon beyond control.

What happened in Germany

During the First World War, Germany was run by the military establishment, with little concern for politics or economics. State Secretary for Finance Helferrich decided that the war would be financed by borrowing. Taxation played only a minor role towards the end of the period. During the war the standard of living in Germany halved as prices rose and wages failed to keep pace.

The war, in which Germany lost 1.6m lives and had 3.5m wounded, ended because the country was exhausted, having neither the men, the materials or the money to prolong a conflict which it was inevitably going to lose. Weeks before the event, the military supremo Paul von Hindenberg had asked the politicians to negotiate a ceasefire as the army was unable to carry on. These realities meant nothing to the embittered, and now unemployed, returning servicemen, among them a young Adolf Hitler, who chose to believe the myth of the ‘stab in the back’, in which ‘the November criminals’ as Hitler always described them – ‘Jewish’ socialist politicians, communists, defeatists and other familiar Hitlerian bogeymen – had betrayed the heroic German soldiers. The goal of Hitler’s political ‘career’ was to avenge the ‘treachery’ of November 1918. The monetary collapse that would unfold in the years 1921-3, which impoverished those classes who would in less troubled times have had the greatest interest in maintaining a stable society, instead radicalised them and opened that brief window in which Hitler was able to seize power. Without this financial crisis, it is possible that we would never have otherwise heard of him.

At the end of the war, Kaiser Wilhelm II was forced to abdicate. His authoritarian government was replaced by the Weimar Republic, a parliamentary democracy with proportional representation (PR). While undoubtedly the fairest electoral system in terms of reflecting the voters’ wishes, PR suffers from the disadvantage that under it there tends to be a large number of political parties in parliament, and it can sometimes be impossible to form a stable coalition. An endless succession of weak coalitions has been a feature of Italian political life for much of the post-war period, and it was certainly true of Weimar Germany. Between 1919 and the accession of Hitler in January 1933, Germany had no less than fourteen Chancellors. Eight of these (Scheidemann, Bauer, Muller, Fehrenbach, Wirth, Cuno, Stresemann and Marx) were in office during the economic crisis of 1919-23, lasting an average of six months each. During this period two prominent politicians were murdered – Erzberger, who had signed the Armistice, and Rathenau, responsible for paying Germany’s war reparations. At the end of the war, large numbers of the German electorate on the extreme left (communists) and the extreme right (nationalists) preferred revolution to stable parliamentary government. By the mid-twenties, the country’s disillusionment with elected politicians was complete.

A new, weak, unpopular democracy was hardly the best tool with which to combat the worst inflationary meltdown in history, even if those in charge had known which policies to adopt – which they didn’t. It was generally believed that the remedy for a decline in the value of money must be to print more of it, and that’s what Germany’s governments did. A leading article in the Vossische Zeitung (August 1922) stated ‘the opinion that the flood of paper is the real origin of inflation is not only wrong, but dangerously wrong’.

More sensible alternatives were at hand had governments been prepared to listen. The economist JM Keynes predicted that while money continued to be printed, the mark must continue to fall. More bluntly, Lord D’Abernon, Britain’s ambassador to Germany at the time, an astute economist, described the government’s economic policy as ‘giving maniacs control of the asylum’.

Few in Germany understood the link between inflation and currency depreciation. The falling exchange rate was thought to be caused by a rise in the value of the dollar, rather than a decline in the value of the mark. Germany’s leading industrialists, more powerful than the politicians, insisted that a falling mark was essential for their country’s exports to remain competitive.

No one who was in any position to oppose the descent into chaos made the slightest effort to do so.

Though the war ended in November 1918, the Treaty of Versailles - which formally concluded it - was not signed for another seven months. During this time the wartime blockade of Germany remained in place. At Versailles, Germany forfeited all its colonies, one tenth of its population, and one-seventh of its pre-war territory, including the industry-rich Rhineland areas of Alsace and Lorraine, which were returned to France.

A further blow fell in 1921, after the people of the ethnically mixed region of Upper Silesia, formerly part of the German empire, voted overwhelmingly in a plebiscite to become part of Germany rather than Poland. The League of Nations, fearing oppression of the Polish minority, ruled that the territory should be divided between the two countries anyway. The rich ‘industrial triangle’ of Upper Silesia became part of the Polish sector.

Germany was universally held responsible for the war. ‘Hang the Kaiser! Make Germany pay!’ screamed the British press. The mood in France was even more vengeful. Prime Minister Poincaré, born in Lorraine and rabidly anti-German, was appointed for the sole purpose of extracting the most punitive possible reparations from Germany. As British Prime Minister David Lloyd George put it ‘he wanted to cripple Germany and render her impotent for future aggression’. As it turned out, Poincare’s success in achieving the first of these goals only increased the likelihood of not achieving the second.

When the reparations settlement was finally agreed, in April 1921, Germany owed the Allies 132 billion gold marks, equivalent to £6,600 million sterling[1], plus an amount equivalent to roughly a quarter of Germany’s annual exports. The money would be paid at the rate of £100m per annum (stretching out until 1985!). It has been suggested that the German government may have depreciated its currency in order to pay less reparation money in real terms, but this is unlikely – no statement to this effect was ever made at the time, either in public or private, and in any case the reparations payments were mandated to be made almost entirely in foreign currency, and in kind.

Three months later, in July 1921, the authorities lost all control of the financial situation and began printing money flat out. The pace of depreciation quickened as the country descended into chaos.

In January 1923, Germany failed to meet a reparations payment. French and Belgian soldiers occupied the Ruhr, Germany’s main industrial heartland. The economy now seized up completely. Poverty, hunger and cold gripped the nation. Overnight, the national mood changed. Up to this point, as Erna von Pustau put it, ‘everyone saw an enemy in everyone else’. Now Germans united in their hatred of the French. A policy of passive resistance prevailed. People stopped work and went home. Germany became ungovernable. Gangs of communist thugs clashed in the streets with gangs of nationalist thugs, while the police looked on. German regions, notably Bavaria, repudiated central government and went their own way. Municipalities and companies printed their own money, but money continued losing value at a sickening pace. People stopped paying taxes. It was no longer feasible to pay salaries by the month, or even by the week. Banks employed staff to close accounts which had become valueless. A waiter told the writer Ernest Hemingway how he had saved up enough money over his working life to buy his own hotel. Now his life-savings were so shrunk that they would not buy four bottles of champagne. School leavers were on average two years shorter and lighter than the norm due to malnutrition. Sickness kept over a quarter of the population from the workplace. Mothers searched through dustbins in wealthy areas looking for scraps of food. Each day’s prices were announced in the morning’s papers, for example ‘Municipal swimming baths – multiply the list price by 150’. Crime was rife. Lead disappeared from roofs and petrol was siphoned from tanks. Better-dressed people had the clothes torn from their backs in broad daylight. In desperation, women turned to prostitution. Workers cycled out to the country to take what they could from the fields.

Winners and losers

In times of high inflation borrowers, including governments, benefit and lenders suffer as the value of loans evaporates. Anyone whose pay is fixed will be a victim of inflation. At times of depreciating currency, holders of foreign currency benefit. Holders of real assets benefit from inflation, and in times of poverty the basic necessities of life are prized above everything by those who can ill afford to buy them, giving power to those who control these necessities.

In Germany, the winners were:

Industrialists – in particular the exporters of manufactured goods. The depreciated mark allowed them to undercut all overseas competitors while still making vast profits. Exporters were paid in foreign currencies, which they held in accounts overseas, their cash making handsome gains against the mark as it continued to fall, and beyond the reach of the taxman. The monetary conditions of the time suited exporters perfectly. Many businessmen were terrified of communism, and to prevent unrest, employed more staff than they needed, which they could easily afford to do. An upsurge in commercial development at the time was another outlet for businesses’ excess profits.

Anyone with foreign currency

Anyone who could obtain foreign currency could soon change it back into marks at a vast profit. By 1923 around a million Germans were speculating in this way. The authorities did all they could to prevent such trading, even sending police around the cafes on Unter den Linden in Berlin to impound any foreign currency that the customers had with them. Many shops refused to be paid in anything other than dollars or sterling. British tourists in Berlin enjoyed the most lavish meals costing the equivalent of a few pennies back home. Overseas students found that their modest grants in pounds or dollars could stretch to buying a house or two. French youths hopped across the border, as Hemingway put it ‘to gorge on fluffy, cream-filled slices of German cake at five marks a slice’.

Meanwhile, the presses turned faster and faster, and the mark continued to plummet. ‘In the course of history’, as Lord D’Abernon put it, ‘no dog has ever run after its own tail with the speed of the Reichsbank’.


Even in the most extreme circumstances, the basic need to eat remains. Farm produce maintained its value well. Farmers held onto their produce in order to get better prices, causing shortages in the shops.


Manual workers’ wages roughly kept pace with inflation right up to the last calamitous months following the occupation of the Ruhr. Astonishingly, 1919-23 was a time of full employment. Business was determined to avoid a communist takeover (‘we will do everything in our power to keep our workmen employed’ said Herr Stinnes, who, in control of one-sixth of German industry, was briefly Germany’s richest man). Local governments had similar concerns and it was common at the time to see gangs at work mending perfectly serviceable roads.


The largest borrower was the German government. By November 1923 their debt was effectively wiped out, as were the fortunes of anyone unlucky enough to have invested in it.


Hans-Georg von der Osten, a Pomeranian aristocrat and First World War air ace, paid four million marks for an estate neighbouring his own in February 1922, using a loan from a friendly banker. Six months later, he was able to repay the loan in full from the sale of half the crop from one of his potato fields. In June of that year, von der Osten bought 100 tons of maize from a dealer for eight million marks. A week later, before the maize had been delivered, he sold it back to the same dealer for sixteen million marks, having doubled his money in a week.

Many Germans bought shares on the stock market, which rose inexorably but not fast enough to keep up with the loss of purchasing power. Investors in shares were losers in real terms, while avoiding the complete obliteration of value experienced by those who left their money on deposit.

However, there were far more losers than winners. This group comprised of everyone not mentioned above and in 1923 meant all except for a tiny minority lost heavily from the hyperinflation.

Anyone on a fixed income

Pensions, including war pensions, rapidly became worthless. Holders of government and company bonds saw their value reduced to nothing. Landlords, whose rents were capped, suffered too. Mortgage issuers watched the values of their loans disappear. Holders of insurance policies saw their protection vanish as the sums assured became meaningless. Insurance companies lacked the money to pay claims. Charities were left without the means to help those in need.


Those who saw the value of their deposit accounts shrink and then vanish.


Middle class incomes lagged far behind those of labourers. In July 1922, an average professional salary was 12,000 marks, while a skilled labourer could command 100,000. Many professions became marginalised. When there isn’t enough money to buy food, who needs artists, architects, booksellers or tutors? As a Hesse professor put it ‘Labour has begun to rule in Germany, and there is no demand for brains; that is to say brains no longer have a marketable value’.

The expropriation of the German middle class was the most significant and lasting effect of the inflation.

How it ended

In November 1923, Hjalmar Schacht became Currency Commissioner for the Weimar Republic. Schacht was undoubtedly an outstanding economist. All trust in the paper mark had disappeared. The death of money was complete. A way had to be found to shift the year’s harvest. Schacht’s solution was a new currency called the Rentenmark, which was secured by mortgages on landed properties and charges over the assets of industry. The Rentenmark was not backed by physical gold and was in a real sense a ‘confidence trick’. Yet somehow it worked. People saw the Rentenmark as separate from the paper mark and accepted it. For savers, the birth of the new currency meant the demise of the old one, and with it the final extinction of any hope of their lost values being restored. For industrialists, it brought an end to an era in which they had prospered mightily. Remarkably, they decided to endorse it.

Sitting chain-smoking in a room which had once been used as a charlady’s cupboard, Schacht managed to transform the German financial system from chaos to stability in less than a week, most of it spent on the telephone.

Very soon the velocity of money dropped and the currency stabilised. The Rentenmark proved an effective stop-gap and was replaced by the new Reichsmark in August 1924.

Despite the bodies in the street, Germany had maintained a superficial appearance of prosperity throughout the years of hyperinflation. It was a time of full though illusory employment. Industry made vast profits, subsidised by the exchange rate. Luxury goods were plentiful. Tourists visited Germany in their droves. Huge budget deficits kept the wheels of government turning somehow. The new stability put an end to all that. The time of inflation was a time of procrastination and soft options. These were no longer available. Speculation ceased. Industry was forced to cut costs, leading to a wave of redundancies. Unemployment began its steady climb to the dangerous levels of the early 1930s. Bankruptcies hit a peak in 1925. The inflation-era magic formula of borrow-and-invest adopted so effectively by Herr von Stinnes became a death trap. In 1926, Herr Stinnes’ debt-fuelled empire collapsed into bankruptcy. The road to recovery passed through economic disaster and mass insolvency. Then, just when it seemed that things were on the mend, came the Wall Street Crash of 1929, the Great Depression and a brutal dictatorship.

Can the Germany of 1919-23 throw any light on the world of today?

Germany’s situation after the First World War was unique, and, one would hope, unrepeatable.

That said, here are a few possibly useful insights:

  • Inflation is rarely seen as a problem in its early stages and indeed is often welcomed as relief from its equally toxic twin, deflation. This relaxed response allows it to become established.
  • At the beginning of an inflationary era, most key decision makers are too young to remember the last one.
  • Behaviours that work well in times of inflation can be disastrous at other times, and vice versa. Inflation kills cash. Savers who left their money on deposit in Weimar Germany saw its value completely disappear. The industrialist Stinnes, who embraced the borrow-to-invest policy that made his fortune in the inflationary years, was unable to adapt when the party ended. His empire collapsed less than three years after November 1923.
  • War is always and everywhere inflationary
  • Private individuals should not rely on governments to protect them, because governments don’t – and sometimes can’t - do the right thing. A modern example is Turkey’s President and quasi-dictator Erdogan, whose policy to curb inflation is to cut interest rates, in defiance of his economic advisers who are telling him to raise them.
  • one should never rule out the unexpected. No one working in the world of finance in the late nineteenth century had any experience of inflation, nor had their parents or grandparents. Yet the Weimar inflation came less than a generation later, following a world war that the late Victorians would not have believed possible.

Let us remember to keep our wits about us.

Tony Yarrow

January 26th 2022


The material for this article has been drawn from a number of sources, but particularly from two books ‘The Great Wave’ by David Hackett Fisher and ‘When Money Dies’ by Adam Fergusson, the latter of which was my main source for the narrative on Weimar Germany. As usual, I have relied heavily on Wikipedia, particularly for the statistics on deaths in the two World Wars. These deaths include battlefield deaths and civilian deaths for example in air raids, together with those resulting from crimes against humanity. I was surprised at the high mortality rate especially in the Second World War, however the numbers include the horrific civilian casualties during the Japanese invasion of China, which are sometimes overlooked. Mortality statistics can never capture the births that didn’t happen on account of the dislocation of war. It is all the more remarkable in light of all this that the world population grew so strongly in the first half of the twentieth century.

Please note, these views represent the opinions of Tony Yarrow and do not constitute investment advice. This document is not intended as a recommendation to invest in any particular asset class, security or strategy. The information provided is for educational purposes only and should not be relied upon as a recommendation to buy or sell securities. Wise Investment is authorised and regulated by the Financial Conduct Authority, number 230553.

[1] Note that the gold mark and the paper mark also appear to have diverged in terms of exchange rate. The Allies demanded to be paid in gold.