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The World’s Most Famous Case of Hyperinflation

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The World's Most Famous Case of Hyperinflation (Part 1 of 2)

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:

  1. Accept blame for the war
  2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)
  3. Forfeit territory in Europe as well as its colonies
  4. Forbid Germany to have submarines or an air force, as well as a limited army and navy
  5. 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.

The Catalysts

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.

Hyperinflation

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.

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The World’s Most Powerful Reserve Currencies

Here are the reserve currencies that the world’s central banks hold onto for a rainy day.

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The World’s Most Powerful Reserve Currencies

When we think of network effects, we’re usually thinking of them in the context of technology and Metcalfe’s Law.

Metcalfe’s Law states that the more users that a network has, the more valuable it is to those users. It’s a powerful idea that is exploited by companies like LinkedIn, Airbnb, or Uber — all companies that provide a more beneficial service as their networks gain more nodes.

But network effects don’t apply just to technology and related fields.

In the financial sector, for example, stock exchanges grow in utility when they have more buyers, sellers, and volume. Likewise, in international finance, a currency can become increasingly entrenched when it’s accepted, used, and trusted all over the world.

What’s a Reserve Currency?

Today’s visualization comes to us from HowMuch.net, and it breaks down foreign reserves held by countries — but what is a reserve currency, anyways?

In essence, reserve currencies (i.e. U.S. dollar, pound sterling, euro, etc.) are held on to by central banks for the following major reasons:

  • To maintain a stable exchange rate for the domestic currency
  • To ensure liquidity in the case of an economic or political crisis
  • To provide confidence to international buyers and foreign investors
  • To fulfill international obligations, such as paying down debt
  • To diversify central bank portfolios, reducing overall risk

Not surprisingly, central banks benefit the most from stockpiling widely-held reserve currencies such as the U.S. dollar or the euro.

Because these currencies are accepted almost everywhere, they provide third-parties with extra confidence and perceived liquidity. This is a network effect that snowballs from the growing use of a particular reserve currency over others.

Reserve Currencies Over Time

Here is how the usage of reserve currencies has evolved over the last 15 years:

Currency composition of official foreign exchange reserves (2004-2019)
🇺🇸 U.S. Dollar 🇪🇺 Euro🇯🇵 Japanese Yen🇬🇧 Pound Sterling 🌐 Other
200465.5%24.7%4.3%3.5%2.0%
200962.1%27.7%2.9%4.3%3.0%
201465.1%21.2%3.5%3.7%6.5%
201961.8%20.2%5.3%4.5%8.2%

Over this timeframe, there have been small ups and downs in most reserve currencies.

Today, the U.S. dollar is the world’s most powerful reserve currency, making up over 61% of foreign reserves. The dollar gets an extensive network effect from its use abroad, and this translates into several advantages for the multi-trillion dollar U.S. economy.

The euro, yen, and pound sterling are the other mainstay reserve currencies, adding up to roughly 30% of foreign reserves.

Finally, the most peculiar data series above is “Other”, which grew from 2.0% to 8.4% of worldwide foreign reserves over the last 15 years. This bucket includes the Canadian dollar, the Australian dollar, the Swiss franc, and the Chinese renminbi.

Accepted Everywhere?

There have been rumblings in the media for decades now about the rise of the Chinese renminbi as a potential new challenger on the reserve currency front.

While there are still big structural problems that will prevent this from happening as fast as some may expect, the currency is still on the rise internationally.

What will the composition of global foreign reserves look like in another 15 years?

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Currency

Why Gold is Money: A Periodic Perspective

Gold has been used as money for millennia. People often attribute this to beauty, but there are basic physical properties for why gold is money.

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Why Gold is Money

The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.

However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.

Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.

The Periodic Table

The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.

Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:

  • Gases and Liquids
    Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.
  • Lanthanides and Actinides
    Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.
  • Alkali and Alkaline-Earth Metals
    Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.
  • Transition, Post Transition Metals, and Metalloids
    There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.
  • Super Rare and Synthetic Elements
    Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.

Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.

Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.

Gold as Money

Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.

Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.

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