The World’s Most Famous Case of Hyperinflation
The World’s Most Famous Case of Hyperinflation (Part 1 of 2)
The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.
The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect.
Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.
The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.
The Treaty of Versailles
Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.
The terms of the agreement, which were essentially forced upon Germany, made the country:
- Accept blame for the war
- Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)
- Forfeit territory in Europe as well as its colonies
- Forbid Germany to have submarines or an air force, as well as a limited army and navy
- Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.
“I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.”
– John Maynard Keynes, representative of the British Treasury
Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.
1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.
This created two separate versions of the same currency:
Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks
Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.
In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.
2. Heavy Debt
Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.
Adding together previous debts with the reparations, debt exceeded Germany’s GDP.
3. Inability to Pay
The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.
Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.
Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.
Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.
4. Invasion of The Ruhr
After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.
French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.
German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone.
On top of that, more and more banknotes had to be printed to pay striking workers.
Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.
All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished.
Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2 (released sometime the week of Jan 18-22, 2016).
About the Money Project
The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.
De-Dollarization: Countries Seeking Alternatives to the U.S. Dollar
The U.S. dollar is the dominant currency in the global financial system, but some countries are following the trend of de-dollarization.
De-Dollarization: Countries Seeking Alternatives to U.S. Dollar
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The U.S. dollar has dominated global trade and capital flows over many decades.
However, many nations are looking for alternatives to the greenback to reduce their dependence on the United States.
This graphic catalogs the rise of the U.S. dollar as the dominant international reserve currency, and the recent efforts by various nations to de-dollarize and reduce their dependence on the U.S. financial system.
The Dollar Dominance
The United States became, almost overnight, the leading financial power after World War I. The country entered the war only in 1917 and emerged far stronger than its European counterparts.
As a result, the dollar began to displace the pound sterling as the international reserve currency and the U.S. also became a significant recipient of wartime gold inflows.
The dollar then gained a greater role in 1944, when 44 countries signed the Bretton Woods Agreement, creating a collective international currency exchange regime pegged to the U.S. dollar which was, in turn, pegged to the price of gold.
By the late 1960s, European and Japanese exports became more competitive with U.S. exports. There was a large supply of dollars around the world, making it difficult to back dollars with gold. President Nixon ceased the direct convertibility of U.S. dollars to gold in 1971. This ended both the gold standard and the limit on the amount of currency that could be printed.
Although it has remained the international reserve currency, the U.S. dollar has increasingly lost its purchasing power since then.
Russia and China’s Steps Towards De-Dollarization
Concerned about America’s dominance over the global financial system and the country’s ability to ‘weaponize’ it, other nations have been testing alternatives to reduce the dollar’s hegemony.
As the United States and other Western nations imposed economic sanctions against Russia in response to its invasion of Ukraine, Moscow and the Chinese government have been teaming up to reduce reliance on the dollar and to establish cooperation between their financial systems.
Since the invasion in 2022, the ruble-yuan trade has increased eighty-fold. Russia and Iran are also working together to launch a cryptocurrency backed by gold, according to Russian news agency Vedmosti.
In addition, central banks (especially Russia’s and China’s) have bought gold at the fastest pace since 1967 as countries move to diversify their reserves away from the dollar.
How Other Countries are Reducing Dollar Dependence
De-dollarization it’s a theme in other parts of the world:
- In recent months, Brazil and Argentina have discussed the creation of a common currency for the two largest economies in South America.
- In a conference in Singapore in January, multiple former Southeast Asian officials spoke about de-dollarization efforts underway.
- The UAE and India are in talks to use rupees to trade non-oil commodities in a shift away from the dollar, according to Reuters.
- For the first time in 48 years, Saudi Arabia said that the oil-rich nation is open to trading in currencies besides the U.S. dollar.
Despite these movements, few expect to see the end of the dollar’s global sovereign status anytime soon. Currently, central banks still hold about 60% of their foreign exchange reserves in dollars.
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