Inflation in Germany

The term inflation has a very special meaning in Germany and quickly triggers the worst fears and nightmares. For in the last century, inflation has twice completely devalued all of the citizens’ financial assets. Who has not heard these stories of grandparents, when in the early twenties of the last century people collected their daily wages in suitcases and wheelbarrows to immediately stand in the long queue at the bakery and buy bread, before it became many times more expensive the next day. But how did it actually come about back then?

With the outbreak of war in 1914, the possibility of exchanging banknotes for gold was eliminated, and Reich banknotes were backed only by government debt instruments. The steadily rising costs of the war were not financed by tax increases; instead, the state went into debt with its own citizens and with the Reichsbank, which in response printed and circulated more and more money. At the end of the war in 2018, the state faced huge financial problems. In addition to the state’s war debts in Germany itself and to its guarantors, there were high social expenditures and the huge reparation payments demanded by the victorious powers. In order to be able to afford all this, the government took out more and more loans from the Reichsbank without a corresponding increase in the supply of goods. The wage-price spiral was set in motion.

In 1923, galloping inflation finally turned into hyperinflation, and money lost its function as a means of payment and store of value. Subsequently, in November 1923, the Reichsmark was replaced as the official currency in Germany by the Rentenmark. All debts and financial assets were dissolved in one fell swoop. With the introduction of the bond market, Germany’s war debt of 154 billion marks amounted to only 15.4 pennies! So from one day to the next, the state had no more debt, but the citizens had no money either.