Essay About German Government And Foreign Exchange Value Of A Currency

The Great Inflation
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The Great Inflation
In late-1922 the German government were forced to ask the Allies for a
moratorium on reparations payments; this was refused, and she then
defaulted on shipments of both coal and timber to France. By January of
the following year, French and Belgian troops had entered and occupied the
Ruhr. The German people, perhaps for the first time since 1914, united
behind their government, and passive resistance to the occupying troops
was ordered. A government-funded strike began as thousands of workers
marched out of their factories and steel works. The German economy,
already under massive pressure, gave way. The huge cost of funding the
strike in the Ruhr and the costs of imports to meet basic consumer needs
were met by the familiar expedient of the printing presses. Note
circulation increased rapidly, and by November 1923 had reached almost 92
trillion marks. With less than three per cent of government expenditure
being met from income and with the cost of one dollar at four billion
marks, Germany was in the throes of economic and social chaos. Starvation
became a reality for millions of people, despite a bumper cereal harvest,
as shops reverted to the barter system. Farmers refused to accept the
effectively worthless, banknotes in exchange for grain, and food quickly
began to run short in the cities. Prices rose one trillion-fold from their
pre-war level. More importantly, for the long-term political future of
Germany, the middle and working classes saw their savings wiped out.
These were, in essence, the people who were later to become the hard-core
of the Nazi vote.
Economists will argue that runaway hyperinflation has two sources. Firstly,
it arises through a fall in the foreign exchange value of a currency, when
an adverse balance of payments reduces foreign investors demand for the
currency. A falling exchange rate increases the cost of imports and,
therefore, the cost of living. Wages rise as workers try to maintain their
standard of living, especially if previous institutional arrangements have
linked wages to living costs. Firms paying higher wages raise the price of
the goods they sell, prices rise still further, the foreign exchange value
of the currency falls still more, and the cycle continues. Secondly, it
arises through a large budget deficit which no one believes will narrow in
the future. Faced with the prospect of budget deficits for many years to
come, the usual sources of credit available to the government decline to
make further loans; the government can no longer borrow to cover the
deficit between revenue and expenditure. The only alternative is to print
more and more banknotes. As government workers and suppliers present their
bills to the Treasury, it pays them off with newly-printed pieces of
paper. This puts more banknotes into the hands of the public and they
then spend them. In Germany, as we have seen, the problem was that there
were trillions of marks worth of paper currency in circulation. Prices
could rise one thousand times between a worker being paid and his reaching
the shops. A common analogy used is that if one could afford a bottle of
wine today, one should keep the empty bottle which would be worth more
tomorrow than the full bottle was today.
Eventually, the power to boost government spending by printing money goes.
When the government can no longer gain, even in the short-term, a
budgetary balance through inflation, the situation becomes so intense that
stabilisation through a currency board, a new finance minister or a link
to the gold standard is implemented, and reform can be successful. It was
at this point that some sanity was injected into the German economy by the
election of Gustav Stresemann. He called a halt to resistance in the Ruhr,
and set out to stabilise the mark. Luther, StresemannĆs Finance Minister,
introduced the rentenmark the value of which was based on GermanyĆs staple,
rye, rather than gold. In fact the rentenmark represented a mortgage on
GermanyĆs land and industry, which could never be redeemed. It did not
matter. The point was that the currency was stabilised and became
exchangeable at a rate of one billion old marks to one new mark, and at
the pre-war parity of 4.2 marks to the dollar. The