The German Inflation of 1920-23
Oscar B. Johannsen
[Reprinted from The Gargoyle, November 1959]
In view of the fact that inflation is uppermost in the minds of the
people today, and as it appears that a special session of Congress may
have to be called to deal with the problem, it might be instructive to
have some understanding of possibly the worst inflation of modern
This was the one created by the German government in the early
1920's. Prior to WWI, the Deutsche Reichsmark exchanged at the rate of
4 for $1.00, i.e., a Mark was 25 cents. In the three years, 1920-23,
it was reduced to zero as the German Government resorted to the
printing press to solve its problems. By the end of 1923, currency
circulation had reached such astounding heights that it was
225,000,000 times that of a year earlier! I What was the effect?
Savings were lost. As the Marks dropped in purchasing power, people
withdrew their savings. In order to give the people their money, the
banks had to sell their bonds and mortgages for whatever they could
get. Out of 23,000,000 savings accounts in existence in 1914, only two
million remained at the end of 1923, and these accounts were
Insurance and trust funds also became worthless. The bonds which the
insurance companies owned to protect the insured dropped until they
were worth only 4% of their original cost. Whatever mortgages they
held that matured were paid off in the depreciating Marks. The
beneficiaries of the insurance funds who expected to liye off them
received just about enough for one day's existence! As an example of
how absurd conditions became, the postage stamp which was required to
send the claim for insurance, cost more than the face value of many of
the insurance policies.
Naturally, the elderly who depended on their investments to pay their
living expenses suffered incredible hardship. What may surprise some
however, is to learn that many institutions, such as hospitals, were
forced to close. Everyone is aware that creditors and the aged suffer
during inflation, but few realise that many vital services which are
almost taken for granted, as hospitals, may not be able to survive.
Many young people look with indifference upon inflation on the
assumption that they can adjust to the situation. Certainly, they can
do it better than the aged, but what happens when they become sick and
find few hospitals available?
Real estate protected the individual to a small degree. While
mortgages on the property could be liquidated with depreciating Marks,
the real estate owner found himself caught in a vise. On the one hand
the taxes and maintenance costs rose to prohibitive heights, About the
only thing to be said for real estate was that at the end of the
inflation, the owner did have something left whereas the owners of
bonds, mortgages and savings deposits, had nothing.
The best hedges were common stocks in natural resource companies as
coal, lead, zinc, copper, and such industries as steel, autos and
chemicals. Apparently, though, a lot depended on management. Good
management meant the difference between survival and destruction.
Small companies with little working capital were unable to meet the
speedily rising wage and material costs and went bankrupt.
The best defense was the purchase of foreign exchange, as dollars,
and holding them abroad until the debacle was over. However, not many
Germans had enough understanding of foreign exchange to avail
themselves of this hedge.
Two lessons came out of this fiasco. First, practically nobody
escaped the effects of the inflation. This should be a warning to
those who think that because they know something about inflation they
will be able to come out of it ahead. Very few in Germany ware able
Second: Once more it was demonstrated that that the thrifty, those
who owned the savings deposits, insurance policies, pensions suffered
Not a very pretty picture. Will America learn before it is too late?
Time will tell.