Business Math in Action

How Germany Went Broke Printing Too Much Money

“If people need money so badly, why doesn’t the government just print more?” Most of us have wondered about that at some point in our lives. In the 1920s, the struggling German government actually did it. They just printed more money. What followed was one of the greatest financial disasters of all time; a textbook example of inflation gone wild.

In 1914, on the eve of the First World War, one U.S. dollar was worth about 4 German Marks. In 1918, Germany lost the war. By 1923 one U.S. dollar was worth one trillion Marks. How did it happen?

After the war, Germany had to make payments, or reparations, to the countries it had attacked. The money was intended to pay for rebuilding the towns, roads, and factories destroyed by the German army. The terms of these payments were spelled out in the Treaty of Versailles. France and Belgium had been especially hard-hit by the Germans. To ensure they got their payments, the Treaty of Versailles allowed French forces to occupy German factories and industrial centers so they could control the profits.

The Germans didn’t want the French occupying their businesses. They felt the other countries were asking too much of them. Fair or not, it would have been nearly impossible for Germany to make the huge payments. Feeling cornered, the German government encouraged the factories to shut down rather than hand over their profits. German workers who lost their jobs would be paid by the German government, which simply started to print more money.

But paper money isn’t worth anything unless it stands for something real, such as gold, labor, or goods. In countries with stable economies, the amount of money that is printed is tied to the goods and services generated by the country’s businesses. In Germany, there was nothing real to back up the newly-printed Marks.

As the government printed more and more Marks, people lost confidence in their money. The price of everything began to soar. When prices keep increasing it is called inflation, and in the case of Germany it was hyperinflation. People used wheelbarrows instead of wallets to carry money around. A wheelbarrow full of German Marks might be enough to buy a newspaper or a loaf of bread. In restaurants, menu prices went up during the course of a meal. A person’s monthly salary might buy a cup of coffee. People who had carefully saved all their lives were reduced to poverty, their savings now worth a tiny fraction of what it had been. Those who had goods to trade-be it jewelry or hairpins-could survive. Many died of starvation.

Finally, in 1924, politicians in the U.S. and Great Britain acknowledged that the terms of the Treaty of Versailles were too harsh. They presented a report to the Allied Reparations Committee that outlined a new set of terms for German repayment. The German State Bank began printing different Marks, called Rentenmarks. One Rentenmark was equal to a billion Marks. Psychologically, this made a huge difference to the German people. One woman recalled, “Just to buy something that had a price tag for one Mark was so exciting.”

Germany’s many industries were still intact-it had functioning factories, mines, and farms, and was rich in natural resources like timber. The German State Bank tied the Rentenmark to mortgages on German land and to bonds on its factories. Over time, the German people gained confidence in the Rentenmark, and their economy began to recover. But many of them never regained the money they had lost, and everyone who lived through the German Hyperinflation was profoundly affected by the crisis.