How Weimar Germany Got Hyperinflation — and How America Could, Too

By John Banks

The Weimar Germany period is a recurring historical topic. It seems to pop up every few years.

But when historians and columnists refer to Weimar Germany, they are usually focused on the years of 1930-33, when Germany experienced crushing deflation (as did most of the world, after the Crash of 1929, the Smoot-Hawley Tariffs, and the Great Depression) and the Nazis prepared to seize power.

In thinking about hyperinflation, we are interested in events from a full decade earlier, as the peak years of Weimar Germany hyperinflation were 1921-23.

Then, too, after the hyperinflation ended, Germany experienced a time of relative peace and economic recovery between 1924-29. This five-year stretch was prosperous enough to be known as “the Golden Twenties.”

So, while it is true the Weimar Republic ran for fourteen years, from 1919-1933, and then ended disastrously — it was followed by the rise of Hitler and Nazi rule — historically there were at least three distinct chapters to the Weimar era. First came the post-war inflation, and hyperinflation; second came a period of relative peace and prosperity; and then, finally, the crushing deflation of 1930-33 that led to the Weimar Republic’s collapse.

The war-related conditions that produced Weimar Germany, and kicked off the hyperinflation episode that climaxed in 1923, are unique. Weimar’s particular events, in their particular sequence, may never happen again.

But the abstract mechanics of how Weimar Germany got hyperinflation are fascinating, because the political factors and economic mechanisms that brought the hyperinflation about are still the same today.

In looking at the Weimar Germany hyperinflation period with an eye for the mechanics — attempting to discern cause and effect — we see a repeatable combination of political forces, path dependencies, and lock-in effects.

To briefly explain those three concepts:

  • Political forces are pressures that demand a certain policy outcome, or force a given government course of action, given the strength of the particular interest groups involved. Political forces can result in actions like funding a military budget no matter what or meeting union wage demands no matter what. When political forces are strong enough, they can overwhelm economic realities in the sense of politicians making non-economic decisions because they feel they have no other choice.
  • Path dependencies can lead to forced escalation or forced movement down a particular path. When a path dependency kicks in, the current course of action has to be continued, or perhaps even escalated, because there is no way to stop it and no way to reverse it. Like a chain of dominos, the next step has to be taken, and then the next.
  • Lock-in effects can combine with path dependencies to “lock in” a certain strategy or approach, making it hard or even impossible to change course. Lock-in effects can also make it impossible to change a policy or reverse a prior decision, even as headaches and dangers mount.

When two countries go to war, and neither side actually wants war, the whole process can seem like madness in slow motion. Both sides see disaster coming, but neither can change course.

When this happens, it can seem to be a result of all three factors just mentioned — political forces, path dependency, and lock-in effects — working together in tandem. The emergent result, which neither side actually wants, is a result of complex inputs and resonating feedback loops that can’t be controlled.

This is also a recipe for hyperinflation.

The Weimar Republic was created in the aftermath of World War I, shortly after Germany accepted defeat by signing the Treasury of Versailles on June 28, 1919.

Kaiser Wilhelm II, Germany’s ruler, had abdicated the German and Prussian thrones after losing the war, and Germany was changed from a monarchy into a republic. The official position of “President of Germany” was created in February 1919, and a new German constitution was written and ratified in Weimar, a city in central Germany, in August 1919.

While various loose ends remained, World War I essentially ended when Germany negotiated its terms of surrender. Because Europe had been devastated by the war, the immediate business at hand was deciding on reparations, meaning, how much Germany would have to repay.

France, above all other countries, was furious with Germany, and wanted to extract the largest payment amount it could. France also feared the possibility of Germany returning to power and wanted to hobble Germany economically if possible.

There were voices of reason on the winners’ side, arguing against the French push for maximum punishment, on the grounds that it would be self-defeating and dangerous, for Europe on the whole, to try and cripple Germany with war debts.

But the attitude of France won out, and Germany was slapped with a reparations bill it could never hope to fully repay. (And never did fully repay.)

After the war, the German economy was in tatters, and its people in despair. This was true of most of the countries in Europe, including those on the winning side.

But Germany also had its crippling war debts to deal with. There was no feasible way to keep the German economy going and pay off the debts at the same time — except by means of debt devaluation.

So, the printing press started to run.

It is interesting to note, at this point, that Weimar Germany’s chief problem was a crushing mountain of debt. How it wound up with the debt — by losing a war and being saddled with impossible costs — was not as important as the fact that the debt mountain existed in the first place.

After the war ended, Weimar Germany did not get hyperinflation right away. It actually took a few years. It was only in the final year, 1923, when the “wheelbarrow effect” took hold — so dubbed because a wheelbarrow full of currency was needed to buy anything useful.

Before the total collapse of the currency, the German economy managed to live with extreme inflation, as the inflationary build-up grew worse and worse, over the course of multiple years.

This was possible because the system didn’t break down all at once. In most cases it continued to work.

Speculators, industrialists, goods exporters, and the connected financial elite were meanwhile able to preserve their wealth, or even compound it, through a combination of both sidestepping inflation’s terrible effects and actively profiting from those effects.

In the beginning, the logic of the printing press made sense. The German labor force had to be paid, or else German export revenues would dry up and the economy would simply stop. Printing currency to pay workers — while also paying war debts — thus seemed a reasonable move.

The problems started with a loss of faith in the system. As profits were swept out of the country, and accounting ledgers doctored and tax bills dodged, government revenues quickly dried up. This required the printing of more currency, to make up for growing budget gaps and revenue shortfalls.

As German labor unions figured out what was happening, they demanded sharp wage increases. The government agreed to the wage increases, at least at first, to keep the economy going and avoid crippling strikes. The higher wages then required more currency in circulation, even as shortages of goods appeared. It was more sensible for companies to export and receive hard foreign currency, at this point, than it was to get paid in worthless local paper.

As the citizenry saw prices going up due to shortages — and as more currency was produced to pay ever-rising union wages — buying activity became a frenzy.

Shops were routinely emptied of all their goods, as ordinary Germans rushed to get rid of the currency in hand before it fell in value even more. It soon enough reached a point where a cup of coffee cost more in the afternoon than it did in the morning, and then a point where prices were marked up multiple times per day.

The worst year, 1923, kicked off with France and Belgium deciding to occupy the Ruhr region of Germany, a key industrial area, as a punishment for ’Germany’s perceived slowness in paying its war debts. (Even then, the full scope of the reparations was not being paid.)

Lacking the ability to fight back, Germany decided to passively protest the Ruhr occupation with a nationwide strike. At this point, in early 1923, German economic activity really did more or less grind to a halt, and the currency entered its final hyperinflation supernova stage. The ultimate result of the Ruhr occupation was catastrophic for Germany (and horrible for France and Belgium).

In 1924 the hyperinflation was ended, and the German economy rescued, thanks to a combination of new political leadership, the issuance of a new, asset-backed currency that regained the public’s trust, and new loans provided by America, under a reparations rescue package known as the Dawes Plan.

In terms of takeaways for America a hundred years later, the chief lesson comes in the form of a question, or perhaps three questions:

  • What do you do with a mountain of debt that is far too big to repay?
  • What happens if you try to repay that debt via printing press, while granting all manner of political requests?
  • What happens if large amounts of currency are distributed to the populace, even as a shortage of goods appears?

Unfortunately, the United States has the recipe for Weimar well within reach. The mountain of debt already exists and will only grow taller by the month.

What’s more, a very large chunk of that debt (more than a third of it) is held by overseas investors, who are now pondering the combination of losses via inflation and losses via the currency (by way of a declining dollar) simultaneously.

Then, too, we are seeing signs of a greatly increased appetite for large public works projects, and sharp increases in labor and wage costs, even as broken global supply chains contribute to a potential shortage of goods.

We are even seeing, in some areas of the economy, signs of self-reinforcing inflation feedback loops.

Take the auto industry, for example, where car production was cut back due to the pandemic, and also due to an anticipated drop in demand.

As it turns out, stimulus funds and a willingness to spend meant new car demand did not drop as much as new car supply — and so prices of new cars surged higher, to the delight of dealers across the country.

Remember the three factors cited earlier: Political forces, path dependency, and lock-in effects.

One of our chief realizations from studying Weimar Germany is the conviction that, if you take the willingness to inflate away a debt mountain, combine it with the political force to pay wages and spray money around no matter what, and then mix rising prices due to good shortages with a dose of inflationary psychology, runaway inflation is what you get.

And runaway inflation, if allowed to reach full gallop for a period of years, can become hyperinflation if left unchecked.

The last time America had to deal with anything like this, or even close to it, was the late 1970s, when Federal Reserve Chairman Paul Volcker increased interest rates into the high teens to kill off inflation. Does such backbone even still exist today? And would a counter-inflation move that aggressive— given that Volcker’s ruthless interest rate hikes ushered in a brutal recession — even be possible?

We doubt it. But perhaps we’ll find out.