My dad and I recently thought of something. Pegging a currency to another, at least in the modern-day world, helps to keep it stable. So why couldn't the Weimar Republic peg the Mark to another currency, for example the Dollar, to fix their hyperinflation? Was it because of the reparations they needed to pay, or part of the Treaty of Versailles, or something else?
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4Why would they want to do so? What problem would it solve? (remember that inflation is a good thing for a government and other debtors.)– MCW ♦Aug 29, 2016 at 16:04
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1Believe it or not Germany had a massive DEFLATION after World War 1 ended. Its very interesting to ponder why Weimar had a hyperinflation in the first place...but that problem was solved by Hjaljamir Schact so there was no problem with the German money by the mid 1920's.– Doctor ZhivagoAug 29, 2016 at 20:47
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You presume that the Weimar Republic desired to stabilize their currency; I believe this is a false assumption.– Pieter GeerkensAug 29, 2016 at 21:11
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Say they pegged it to the British pound. When they've printed so many German marks that you have one trillion marks in your pocket and ask one trillion British pounds in exchange, what will happen?– Michael HardyAug 30, 2016 at 2:54
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1Nazi Germany had a problem with inflation interestingly...it was a major impairment to rearmament going into World War 2. This problem was rectified in a big way by the successful invasion and conquest of Western Poland which brought massive silver reserves into the Reich. They also reached an agreement with Soviet Russia for the importation of immense quantities of food grains and other raw materials which allowed "National Socialism" to function quite effectively...certainly better than Weimar.– Doctor ZhivagoAug 30, 2016 at 19:37
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2 Answers
Most other currencies were on the gold standard. Banknotes are typically "a promise to pay" to whomever holds it. The German banks were not flush: their books were loaded with red ink. Whence the red ink?
Their credit was no good. The Kaiser had funded the war on credit, so Germany was already deep in debt. Unfortunately for them, losing the war meant that they could not make good on the loans. Neither could the successor government, they were short on cash/liquid assets.
The indexation of currency or exchange rate often refers to a country pegging its currency to another currency. A country’s central bank would buy or sell (currency x) to maintain a stable exchange rate with (currency X).
- Having no liquidity, and bad credit, the Germans didn't have and could not raise the money to put together a foreign currency reserve, which meant they had no means to establish an acceptable index protocol.
- Indexing one's currency to another currency typically cannot be done by solely making a policy decision: it takes the ability to establish that foreign currency reserve. By revoking the relationship of the Reichsmark to gold, the Germans could not set up a successful foundation for an attempt in that direction (even if they had thought of it). See point 1. As their currency floated (in the wrong direction), it became more difficult to procure foreign currency reserves/funds that could have supported an indexing effort.
The London Ultimatum in 1921 required repayment in foreign currency, or gold. "Your money is no good here" could not be overcome by trying to index to another currency, and the Reichsmark would still not be accepted tender for the debt. A bit of a vicious circle.
See also the problem of those holding Confederate dollars after the civil war.
It was not backed by hard assets, but simply by a promise to pay the bearer after the war, on the prospect of Southern victory and independence.
answered Aug 29, 2016 at 15:18
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1I'm not sure I understand; Indexing one's currency to another currency is always done by fiat. How else could you index currency?. And your last point omits something significant - fiat currency works fine if and only if the government exists. The problem of Confederate dollars isn't that they were backed by the promise to pay, the problem was that the government didn't exist; the German government did exist. All in all though, an excellent answer.– MCW ♦Aug 29, 2016 at 16:00
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@MarkC.Wallace Wallace I tried to clear that up with the point that you have to have that other currency held in reserve, which the Germans could not do. I guess I need to rethink how to say that. Aug 29, 2016 at 17:22
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better -we're using the word "fiat" in different senses, and the distinction is beyond the boundaries of this question. You've (more than) answered OP's question. The remaining distinctions are "beer & pretzels" dialogue.– MCW ♦Aug 29, 2016 at 18:08
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2@MarkC.Wallace Ah, I was not intending to wander into 'fiat currency' maybe that was a poor word choice Aug 29, 2016 at 19:49
In fact, that is exactly what they did.
On 20 November 1923, Germany ended inflation by pegging the mark’s foreign exchange value at its prevailing value of 4,200 billion marks to the dollar. (Hetzel 2002, p. 8)
This worked fine as far as hyperinflation was concerned, but it was too little and too late to reverse the larger political and economic crisis. Germany was under increasing pressure to pay its war debts and a currency peg was unhelpful in that regard. Prices stabilized domestically, but faith in the government had been irreversibly shaken. Hitler's famous Beer Hall Putsch had taken place earlier that same month.
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The inflation was stopped by the introduction of the Rentenmark which was a morgage against public property . See answer at history.stackexchange.com/questions/53192/… Jul 25, 2019 at 1:16