World War I victors imposed severe war reparations on Germany. When Germany defaulted, France invaded the Ruhr which was the most heavily industrialized area in Germany to force reparations themselves. If Germany persists in default, it risks further invasion. The easy way out was to print money and inflate the debt away. One can argue that Germany had really no choice but to print money. Because the war reparations were so huge, the money printing was excessive. This created the conditions for hyperinflation to happen later.

Were the heavy war reparations after World War I the main cause of hyperinflation in Germany in 1923?


The WWI reparations were set in gold marks, and the level of the reparations therefore was actually equivalent to a fixed amount of gold. It wasn't payable in paper marks, the actual currency at the time. It was only payable in currencies that had a fixed exchange rate to gold.

The reason for the hyperinflation is that Germany decided to start printing money to buy foreign currency to pay the reparations with. Essentially, they attempted to buy gold from foreign countries with worthless paper and then give the gold back. This, of course, did not work, and only resulted in hyperinflation and a slow-down of the German economy, therefore making it harder for them to pay the reparations.

Therefore, it is not the reparations that caused the inflation, but the Wiemar Republic's decision to try and get money for nothing.

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    One could argue that had it not been for the heavy reparations, the Weimar republic would not have made the decision to print money to buy foreign currency to pay the reparations. The root cause was still the very heavy war reparations. – curious Nov 6 '13 at 14:48
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    +1, although as Yannis mentioned, the need to repay internal war debt as well was also a factor. About the only way the inflation could have been avoided was to win WWI (or better yet, not start the stupid war in the first place). – T.E.D. Nov 6 '13 at 14:48
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    @T.E.D. and Yannis: There were certainly other factors. However, the question centres on whether the severe war reparations was the main cause. After all, other World War I participants also had heavy internal war debts but they did not suffer hyperinflation. It is quite possible that if Germany did not have to carry the extra burden of super heavy war reparations, they might have escaped hyperinflation like the rest. – curious Nov 6 '13 at 14:56
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    @curious Ah, but other countries didn't resort to borrowing (at least not as much as Germany did). France, for example, supported its war effort through taxation (creating war time taxes, etc). – yannis Nov 6 '13 at 15:33
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    @Lennart Regebro : I realized my question is flawed because the reparations were not denominated in paper marks. So, printing money was not a solution anyway. But money printing does help in reducing other debts which were denominated in paper marks. Using paper money to exchange for foreign currencies helped too (at least in the beginning), as you have pointed out. Hyperinflation and Ruhr occupation did help Germany in some ways. It helped Germany gain sympathy among the war creditors and paved the way for debt forgiveness. – curious Nov 7 '13 at 8:12

After an all-out war like WWI or WWII, the losing side has nothing to speak of left: it was "all-out" and they didn't surrender until every resource was found and used.

If, after such a war, there are no reparations, a country may use pretend assets to "pull themselves up by their bootstraps." An example that comes to mind of the bootstrap approach is Germany using pretend assets of the workers' compensation program to back bonds issued for the Autobahn. They existed only on paper, physically, and in peoples' minds since the depression had them on... reduced tax receipts... and there was no physical pile of money any more than the US Social Security program pile of money.

If no reparations, with foreign soldiers coming up and removing whole factories when payments are missed, one can use the not-quite meaningless paper assets to back the money system and keep the hyperinflation spiral from starting and whipping out of control. It also helps if, after a war, the victors take over things for a time and use their own resources to back it, or make implicit promises to the world of such.

But with reparations, the emperor's clothing status is immediately and painfully obvious and everyone begins doing the apparently very human thing of "I gotta get mine while I still can" (and, of course, raising prices and squeezing for payments is also done to make one's own payments and in doing so keep the system fluid and not stuttering to halts so it is admittedly not all selfish). With no gold to put in a bank showroom to let people realize the system is backed (pretend, actually, but you know...), there's mud for everyone's fins.

And then you get hyperinflation. It's not about the reparations themselves, precisely, as in their existence. It is about stripping anything helpful away ('cause you do have your own problems...) and absolutely destroying any pretense that hope exists. Reparations might be required after and several year period of time and actually work. But not probably the "all the money in the world and then some and right this second" kind that they tried then.

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    This doesn't really cover the aspect of the weight of reparations, i.e. the potential that lighter reparations (smaller amounts/shorter terms) would have had less of an impact on the German economy. Could also do with some source references for the monetary theory. – Steve Bird Sep 12 '18 at 20:11
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    I'd like to see a reference for the assertion in the first paragraph - "they didn't surrender until every resource was found and used". I'm doubtful that Germany exhausted all of its resources in WW1. – KillingTime Sep 12 '18 at 20:18

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