Weimar’s woes show economics’ human side

money kite

Economics is often perceived as equal parts boring, dreary and as dry as the Texas high plains in late July.

That view is based in no small part on the experience of decades of college underclassmen driven into a confused stupor by such concepts as marginal cost curves and aggregate demand-aggregate supply models.

If professors and economists want to catch the attention of students and others, they would do well to employ more real-life examples in their teaching and studies.

Case in point is a new book by British historian Frederick Taylor, titled “The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class.”

Taylor’s topic is the financial and social disaster that struck Weimar Germany in the early to mid-1920s, when, after the nation was saddled with a huge war reparations bill following World War I, it began mass printing of bank notes to buy foreign currency, which was in turn used to pay compensation to the Allies.

In November 1921, the date the first reparation payment was due, the rate of exchange was approximately 330 German papiermarks per one US dollar. That was already up sharply from two years earlier, when the ratio was approximately seven to one.

However, what occurred over the next two years was unprecedented in world history. Germany continued to churn out paper money and Allied nations, catching on to the fact they were being paid in nearly worthless paper money, began to accept only goods such as food and coal.

A 5 billion German papiermark note issued in late 1923.

A 5 billion German papiermark note issued in late 1923.

By November 1923, one US dollar was worth more than 4.2 trillion marks as hyperinflation ravaged the German economy.

“This was a particular calamity to the middle and upper classes who held bonds, mortgages, insurance policies, annuities, bank accounts and loans,” according to the Seattle Times’ review of Taylor’s work. “All these evaporated. Borrowers were the winners – and the largest borrower was the German government.”

Taylor writes that by 1924 the German government “had, in practical terms, confiscated the money its most loyal citizens had lent it to fight the First World War.”

As 1923 wound down, the nation was in chaos. Commerce ground to a halt, the Communist Party staged an uprising in Hamburg and in early November a new party, the National Socialists, attempted its now-famous “Beer Hall Putsch” in Munich.

In mid-November 1923, the government introduced a new currency, called the Reichsmark. It was created by lopping an astounding 12 zeros from prices. A pound of bread that had cost 36 billion papiermarks now cost 36 Reichsmarks, for example.

Perhaps surprisingly, the move worked and new currency remained stable. Inflation stopped and the chaos subsided. All debts that had been figured in papiermarks – along with all assets – were wiped clean, according to the Times.

But it also left an indelible impression on German society, a hollowing-out of the middle class, in the words of the Times, and helped pave the way for the Nazis a decade later.

(Top: German boys play with a kite made from practically worthless German money after hyperinflation ravaged the country’s economy.)

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