Business Math in Action

Chapter 19: Financial Management

How Germany Went Broke Printing Too Much Money

It is a thought you may have had in the past: "If people need money, the government should just print more." Most of us have wondered about that at some point in our lives. In the 1920s, the struggling German government actually went ahead and 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 World War I, 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 did not 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. 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 is worthless 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, 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. 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.

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. 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, and the country 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 economy began to recover. But many of them never regained the money they had lost, and everyone who lived through the inflation was profoundly affected by the crisis. One way Adolf Hitler was able to come to power was by taking advantage of the resentment Germans felt toward other countries for the Treaty of Versailles.

English Language Arts/Writing

Inflation

Many employers offer annual "cost of living" pay increases for employees. Write a short explanation of why such pay increases are important and how they relate to inflation.