23,000 percent per month. The inflation story that still warns today

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The term hyperinflation began to be used in the media last fall, when annual price growth approached five percent. “Although today’s experience has nothing to do with the hyperinflation Germany experienced a century ago,” says economist Petr Zahradník. The economic story of Germany in 1923 and the Czech Republic in 2022 still has a few factors in common.

At dawn on January 11, 1923, three military branches crossed the Rhine. From Duisburg and Düsseldorf they continued to the Ruhr, the heart of German industry. French and Belgian troops under General Jean-Marie Degoutt met no resistance. They occupied the area between the Rhine and Dortmund without any problems in three days.

However, the Franco-Belgian invasion had far-reaching consequences. Two governments in Germany and one in France fell, then war criminal Adolf Hitler made his debut, but most importantly, Germany was going through a deep financial crisis like no one had ever experienced before. It became badly known as hyperinflation.

What is certain is that neither General Degoutte nor his direct boss, Prime Minister Raymond Poincare, planned such a thing. In his book “1923: The German Trauma,” popular American historian Mark Jones explains that Poincare wanted to humiliate Germany in the first place. In his view, the great power, recently defeated in the world war, had strayed far from the control that was barely established when it signed a reciprocal support agreement with Soviet Russia in the spring of 1922 in Rapallo, Italy.

According to the Treaty of Versailles, France had the right to intervene in Germany if the Germans did not pay war reparations. Indeed, they delayed their payments, so Poincaré sent troops to the Ruhr under the pretext that they would take control of the coal mines and pay off their German debts with the coal mines.

However, the French prime minister miscalculated, because the Germans reacted to the invasion less than half a century later in a similar way to the Czechs, but with greater determination. Chancellor Wilhelm Cuno spoke at the Reichstag and told deputies: “The Reich government cannot resist such violence, but it is not willing to submit to, or even, as suggested, participate in the realization of French intentions. It rejects this insolence,” he declared with universal applause.

In doing so, he proclaimed a policy of “passive resistance”, which assumed that the German authorities in the Ruhr would not cooperate with the occupying forces and that the mining companies would stop mining to prevent the invaders from seizing coal. But Cuno also miscalculated, because his strategy caused much worse damage than the invasion itself.

“The policy of passive resistance will bring us a series of disasters that will have fatal consequences, especially for the German working class,” warned Communist MP Paul Frölich, one of the few. It was of little use because the situation in the Ruhr had escalated and reconciliation was out of the question. The occupation forces dispersed the non-violent demonstrations with live fire. Casualties did occur occasionally, but logically they caused a hateful reaction among the civilian population, as did the rape of German women by soldiers, which occurred much more frequently, according to historian Jones.

The crux of the problem turned out to be that the German government was compensating the lost wages of all heavy industry workers in the Ruhr area to the order of one trillion marks per month, while at the same time guaranteeing billions of dollars in loans to heavy industry enterprises. industrial enterprises, post office and railways. This was not possible without “printing money”, that is, without distributing large sums that were not covered by any performance.

In the country, Prime Minister Andrej Babiš has chosen a similar procedure during the covid pandemic in 2020 and 2021, in which lost wages are replaced and taxes are reduced. “But in this case, it’s a manageable problem,” explains Petr Zahradník, economist at Česká spořitelna. With the help of the government, five hundred billion kroner has reached the citizens, and the Czech National Bank can siphon such a surplus by raising interest rates.

Germany’s Reichsbank tried to keep the situation under control by selling gold and foreign exchange reserves, strengthening the rating against the dollar. It was successful until April 18, but then failed to meet the growing demand for the dollar. By April, the dollar was sold at a maximum of 25,000 marks, already 120,000 in June, 353,000 in July and 4.5 million in early August.

The worst part was that the prices of consumer goods rose as the brand weakened. Thus, the German economy, by definition, experienced a supply shock where prices would rise sharply and economic performance would decline at the same time. Economist Zahradník reminds that even the Czechs could not escape the supply shock due to the rise in energy prices in the current crisis.

However, annual inflation of 16 percent and monthly price increases of less than two percent do not compare very well to the situation in Germany 99 years ago. There, the rise in prices met the definition of year-round hyperinflation, which assumes a price increase of at least 50 percent over the previous month.

Hyperinflation in 1923 reached an unprecedented level, even under pressure from the unions, even forcing wages to increase automatically in response to the rise in prices in August. But this could not maintain the standard of living, as prices were always ahead, and their growth increased to 23 thousand percent per month. “The workers tried to maximize their interests without addressing the supply side,” explains Petr Zahradník of the ill-conceived strategy that is still supported on a smaller scale by trade unions and many opposition politicians in the Czech Republic today.

With this, Germany gradually woke up from a bad dream that lasted for several months. Already in May, food prices doubled compared to April. Thousands were paid in August, millions in September, and billions in October for the cheapest bread. Women have been particularly hard hit, with the number of illegal abortions and suicides increasing dramatically. With minimal resources, they had to wait in line for up to 24 hours, even with children, for meat or any more nutritious food, to supply food for the entire household, while starving themselves. Families often went to no avail to rural villagers, where, according to the traditional story, when they asked for food for the children they received the answer “Give them stones”.

Increasing malnutrition was described by the mayor of Berlin, Gustav Böss. Milk deliveries to the capital fell to 300,000 liters per day as early as February 1923, a quarter of deliveries from a decade ago. However, 50,000 liters of this could not be sold due to high prices.

Author Elias Canetti summed up his daily experience of life with hyperinflation: “Money turned into a demon with a giant whip that reaches everyone, even in the most secret hiding places.”

In August 1923, he quelled the discontent of Chancellor Cun, who insisted that passive resistance in the Ruhr could not end. But his successor, Gustav Stresemann, realized that the French prime minister would not back down and promised that the Germans would resume coal mining at the end of September. Such a decision required a significant amount of courage. Ending the resistance was seen by the radical opposition as weakness or betrayal. In October, Rhineland separatists, supported by French subsidies, attempted a coup d’etat in Düsseldorf, and in November in Munich, Hitler’s National Socialists. Only the deployment of the army prevented the Communists from taking control of Saxony and Thuringia, with the support of the Soviet Union.

Stresemann remained in office until the end of November, but meanwhile, his minister, Hans Luther, initiated reforms that magically changed the situation once again, this time for the better. The Royal Bank, which discredited it by printing worthless money, was dissolved. The new central bank was the Rentenbank (Pension Bank), whose signs surprisingly retained its value. In addition, the government has increased income taxes and announced in advance that it will raise rates when the currency depreciates. Civil servant salaries were set at 60 percent of the pre-crisis level. Historian Mark Jones sums it up: “As unpopular as Luther’s measures were, they were effective.” In January 1924, hyperinflation ended.

At the same time, American financier Charles Dawes developed a plan where the German recovery began to be supported by American investment. At the same time, it temporarily cut compensation payments to two-fifths. As early as March, the Berlin government reached a balanced budget.

France also paid the price for its intervention in the Ruhr. The cost of the army, as well as the fact that Germany paid only 263 million francs in compensation in the critical 1923 year, or two percent of taxes on the previous year, plunged it into a financial crisis. Poincaré resigned in June 1924, the last French soldier to leave Düsseldorf in August 1925.

The German frustration of 1923 is traditionally cited as one of the sources of German aggression that triggered World War II. As early as 1942, the famous German author Thomas Mann explained to audiences at American Princeton University that there was a direct path from the traumatic experience of hyperinflation in 1923 to mass murder in the name of National Socialism.

But at the same time, historian Jones wonders in his book why Germany does not more often consider the events of 1923 as an achievement of its democracy. “At that time, he had enough power to avert all imminent dangers with the help of the constitution,” he recalls.