This is the first example of an economic collapse situation I want to highlight. I’ll do a couple different ones so that you, my faithful reader, will have an idea of some of the potential chaos that can happen. Normally this would be more of a scenario but as it’s a real historic event I figured I’d lay it out in its own category.
What was the Weimar Republic?
The Weimar Republic was a parliamentary republic in Germany after World War I. There was a constitutional convention of sorts in a town called Weimar which established this form of government to replace the imperial form of government that they had until WWI. The Weimar Republic was formed in 1919 after the period of social and political upheaval that swept Germany during the latter stages of the war.
Internal strife tears apart the Republic
Despite best efforts to the contrary political strife continued and got even worse after the republic was formed. Communists on one side and imperialists on the other violently opposed what the government was trying to establish. Violence spread from the politically involved to the average citizen on the street.
Groups at the extremes of the political spectrum formed paramilitary organizations that would regularly go to war against each other. In one case a coalition of the communists and anarchists took over the state of Bavaria and declared independence as the ‘Bavarian Soviet Republic.’ The imperialist paramilitary group came in and fought against them, effectively neutralizing the act. On the flip side, the imperialists then occupied Berlin and put their own chancellor in power. The legitimate government moved to a different city, calling for a general strike against the usurpers. The new government collapsed within four days.
This back and forth between the right and the left extremes of the political spectrum continued to escalate with entire cities and states being occupied by these paramilitary organizations. The regular army would generally act against the occupiers.
The economic picture
As part of the Treaty of Versailles that ended World War I, Germany was required to make reparation payments to the Allies to compensate them for costs and losses incurred during the war. In today’s dollars they were expected to pay just short of $400 Billion, and would have been making payments until 1984. This was a significant debt owed to foreign countries.
Significant cost inflation was present in post war Germany. Cost of living was twenty times more than it was prior to the outbreak of the war. The political strife and violence continued to interrupt economic activity. The reparation payments weren’t helping either.
Inflation kicks in
Immediately when reparation payments began the real value of the fiat currency plummeted. The currency exchange in early 1921 was 1 USD to 60 Marks. One year later the value had dropped to 320 Marks to 1 Dollar. J.P. Morgan led a group that tried to stabilize the currency but was unsuccessful. By the end of 1922 the Mark was down to 8000 Marks to 1 Dollar. That’s a 16x cost of living increase in six months. The loaf of bread you bought for 1 Mark in June would cost you 16 Marks in December.
In 1923 Germany told the Allies it could no longer afford to make the payments required under the treaty and began to default on foreign held obligations. As a direct result, France and Belgium sent in their army to occupy the main industrial region of Germany, the Ruhr region. By the end of January 1923 most mining and manufacturing in Germany was in the hands of the Allies who had decided to take reparations as physical goods instead of cash.
The Weimar Republic government didn’t like that too much and encouraged the workers in the region to strike and resist the occupiers passively. These strikes lasted for eight months during which the massive industrial machine that was the Ruhr region was brought to a standstill. No goods were being produced and little coal was being mined. The government continued to pay the striking workers and provided other benefits.
Hyperinflation, here we come!
Since the government was out of money yet still had many obligations they fired up the printing presses and starting churning out money. They used this new money to pay back war loans, reparations, and the like. Businessmen used the opportunity to pay back loans with inflated currency, wages rose to keep up with inflation. The snowball continued to tumble.
Eventually the currency had inflated too much to be tenable. In late 1923 the government arbitrarily abolished the current ‘Papiermark’ currency and replaced it with the ‘Rentenmark’ which was based on land. The exchange rate for the US Dollar at that point was 1 USD to 4.2 Rentenmarks. This is great for people outside the country, but the poor citizens had to trade their Papiermarks for Rentenmarks. Unfortunately the exchange rate there was 1,000,000,000,000 Papiermarks to 1 Rentenmark. Remember that 1 Mark loaf of bread we started with in June of 1922? At the end of 1923 the average guy on the street was paying 1 TRILLION Marks for that same loaf of bread.
Once the new currency was introduced and reparation payments were resumed the Allies returned the Ruhr region to Germany and things began to return to some semblance of normalcy. Until Adolf Hilter rose to power, but that’s another story all together.
Wrapping it up
It’s a fascinating study of what happens when you have too much foreign debt, too many internal financial obligations, and too many printing presses churning out cash. Sound familiar?