The Great Inflation


In late-1922 the German government were forced to ask the Allies for a moratorium on reparations payments; this was refused, and she then defaulted on shipments of both coal and timber to France. By January of the following year, French and Belgian troops had entered and occupied the Ruhr. The German people, perhaps for the first time since 1914, united behind their government, and passive resistance to the occupying troops was ordered. A government-funded strike began as thousands of workers marched out of their factories and steel works. The German economy, already under massive pressure, gave way. The huge cost of funding the strike in the Ruhr and the costs of imports to meet basic ...

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the effectively worthless, banknotes in exchange for grain, and food quickly began to run short in the cities. Prices rose one trillion-fold from their pre-war level. More importantly, for the long-term political future of Germany, the middle and working classes saw their savings wiped out. These were, in essence, the people who were later to become the hard-core of the Nazi vote.
Economists will argue that runaway hyperinflation has two sources. Firstly, it arises through a fall in the foreign exchange value of a currency, when an adverse balance of payments reduces foreign investors demand for the currency. A falling exchange rate increases the cost of imports and, therefore, the cost of living. Wages rise as workers try to maintain their standard of living, especially if previous institutional arrangements have linked wages to living costs. Firms paying higher wages raise the price of the goods they sell, prices rise still further, the foreign exchange value of the ...

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finance minister or a link to the gold standard is implemented, and reform can be successful. It was at this point that some sanity was injected into the German economy by the election of Gustav Stresemann. He called a halt to resistance in the Ruhr, and set out to stabilise the mark. Luther, Stresemannˇ¦s Finance Minister, introduced the rentenmark the value of which was based on Germanyˇ¦s staple, rye, rather than gold. In fact the rentenmark represented a mortgage on Germanyˇ¦s land and industry, which could never be redeemed. It did not matter. The point was that the currency was stabilised and became exchangeable at a rate of one billion old marks to one new mark, and at the ...

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PAPER DETAILS
Added: 1/19/2004 02:18:37 PM
Category: Economics
Type: Premium Paper
Words: 1571
Pages: 6

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