The Great Inflation :: American History Essays

The Great InflationIn late-1922 the German government were forced to ask the Allies for amoratorium on reparations payments this was refused, and she whencedefaulted on shipments of both coal and timber to France. By January ofthe following year, French and Belgian troops had entered and occupied theRuhr. The German people, perhaps for the first time since 1914, unitedbehind their government, and passive resistance to the occupying troopswas ordered. A government-funded strike began as thousands of workersmarched out of their factories and steel works. The German economy,already under massive pressure, gave way. The huge damage of funding thestrike in the Ruhr and the costs of imports to meet basic consumer needswere met by the familiar expedient of the printing presses. Notecirculation increased rapidly, and by November 1923 had reached closely 92trillion marks. With less than three per cent of government expenditurebeing met from income and with the cost of one dollar at four billionmarks, Germany was in the throes of economic and social chaos. Starvationbecame a reality for millions of people, despite a bumper cereal harvest,as shops reverted to the barter system. Farmers refused to accept theeffectively worthless, banknotes in alter for grain, and nourishment quicklybegan to run short in the cities. Prices rose one trillion-fold from theirpre-war level. More importantly, for the long-term political future ofGermany, the middle and working classes saw their savings wiped out.These were, in essence, the people who were later to become the hard-coreof 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, whenan adverse balance of payments reduces foreign investors demand for thecurrency. A falling exchange rate increases the cost of imports and,therefore, the cost of living. Wages rise as workers try to maintain theirstandard of living, especially if previous institutional arrangements havelinked wages to living costs. Firms paying higher wages raise the value ofthe goods they sell, prices rise still further, the foreign exchange valueof the currency falls still more, and the cycle continues. Secondly, itarises through a large budget deficit which no one believes will narrow inthe future. Faced with the prospect of budget deficits for many years tocome, the usual sources of credit available to the government decline to perk up further loans the government can no longer borrow to cover thedeficit between revenue and expenditure. The only alternative is to printmore and more banknotes. As government workers and suppliers present their