First World War’s armistice was signed in a railway carriage on November 11, 1919. A large part of Europe was laid waste by the Great War. But the most insidious economic legacy of the war was the mountain of death in Europe. Governments of Europe spent around $ 200 billion in the battle. To finance the war, money supply in Britain doubled, in France tripled and in Germany quadrupled. Now the question of war reparations i.e. how much German should pay the victors, Britain and France, led to a currency war, which can be considered as the first massive debasement of a developed country’s currency. Britain and France advocated for punitive reparations against Germany. Astronomical sums were being demanded from Germany. French Prime minister Clemenceau and Prime Minister of Britain David Llyod George asked for onerous conditions to be put on Germany. At the Paris Peace Conference frantic negotiations commenced. The final terms of the peace treaty were extremely onerous. Large territories were to revert back to France, certain territories were to become part of Denmark and Poland, and both banks of the river Rhine were to be permanently demilitarised. Interim reparation of $5 billion was ordered to be paid by Germany. Later the reparation commission finally asked Germany to pay a whooping $33 billion. Understanding that Germany could never pay such a colossal amount, the reparations bill was reduced to $12.5 billion. But Germany was never willing to honour any commitment regarding war reparations and so never really made any effort to meet the terms of the payment schedule. Even otherwise the country was now run by a series of weak coalition government. Also huge expenses were incurred due to the war and the government also started new social obligations which alongwith the reparation payment made the situation potentially explosive. The solution Germany resorted to was printing unlimited paper money.

At the inception of the war the mark (German currency) stood at 4.2 to the dollar. But by 1920 the price level stood at 9 times the pre war level. Many thought that mark had touched its lowest level and would rather appreciate in future. But a rude shock awaited them. The assassination of the foreign minister in June 1922 and French inflexibility over reparations started showing signs of panic setting in. Prices rose fortyfold during 1922 and the mark fell from 190 to 7600 to the dollar! The final culmination was the French occupation of Ruhr valley, the German industrial heartland. The printing of paper money then increased to an unprecedented maddening level. The Reichsbank mindlessly continued printing money on demand by the government. By 1923, 133 printing works with more than 1500 machines were printing paper currencies. Inflation was increasing at a tremendous speed. Prices were increasing thousand folds!

The collapse of the currency led to the usual capital flight. Many moved their savings abroad. Inflation readjusted relations between certain classes like debtors and creditors. Those who owed debts were very soon relieved of their debts since the debts evaporated as the amounts owned became worthless. Also those who held unionised and government jobs were initially hedged as the government continuously increased their wages commensurate with inflation. But a large section of Germans were financially ruined. They were doctors, teachers, professors, pensioners who had invested in government bonds and bank deposits, suddenly found their investment worthless. They had to now live on meagre pension which was further decimated by high inflation. Currency speculators enriched themselves. German industrialists also profited as their real estate values increased while high inflation wiped away their debts.

Hyperinflation reached its peak in November 1923 when a dollar was worth 630 billion marks! The reasons for this reckless policy of hyperinflation are not clear till date. Many consider it as a ploy of Germany to avoid the onerous war reparations. The monetary explosion which destroyed the financial fabric of Germany ruined a very large section of its people. Reichsbank acceded to government dictate of printing unlimited paper currency as asking to raise taxes or cut domestic expenditures, as the allies were demanding, would have been viewed as antinational. The ruination was finally over by bringing an alternate currency, the Rentenmark, which was now backed by mortgages. The sordid episode of hyperinflation showed that countries could play with fire when it came to paper currency, very well understanding that a simple resort to gold standard or any other tangible asset standard could restore order when the condition seemed felicitous.