The Hyperinflation and Currency Depreciation in Germany, 1914–23

  • Andrea Sommariva
  • Giuseppe Tullio


The worst inflation to plague Germany since unification occurred after the end of the First World War. For sixty months, between January 1919 and December 1923, the wholesale price index rose on average by 45.6 per cent per month. Like everyone else living through rapid inflation, the Germans directed their invectives against businessmen, the financial community and farmers, who were thought to have sold goods at higher than ‘fair’ prices. In fact, the rapid increase in the price level was caused by a rapid expansion of the stock of money induced by large government budget deficits.


Exchange Rate Real Exchange Rate Purchase Power Parity Exchange Rate Change Cash Balance 
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  1. 1.
    Average geometric growth rate.Google Scholar
  2. 2.
    See Helferrich (1925) p. 209.Google Scholar
  3. 3.
    The political motivation behind this decision was Bismarck’s desire to keep under the control of the state of Prussia the right to collect direct tax revenues, which were thought to be a more flexible instrument of policy.Google Scholar
  4. 4.
    The nominal short-term private interest rate averaged about 4.1 per cent between 1914 and 1918. With wholesale price inflation averaging 18.1 per cent per year (geometric average), real interest rates turned extre-mely negative, especially in 1915 and 1918.Google Scholar
  5. 5.
    In August 1914, the German government fixed maximum prices for foodstuff and a series of other raw material prices. This system was reinforced successively in 1915 by the extension of controls to other goods and services, including wages. Domestic prices rose substantially during the first part of the year before the reinforcement of controls.Google Scholar
  6. 6.
    See Cassel 1923 p. 57.Google Scholar
  7. 7.
    Measured by the ratio of United States consumer price index, expressed in Marks, to the German consumer price index.Google Scholar
  8. 8.
    Average geometric growth rate.Google Scholar
  9. 9.
    Haller (1976) estimates that war expenditures reached about 50 per cent of NNP at the end of the war.Google Scholar
  10. 10.
    See Bresciani-Turroni (1937).Google Scholar
  11. 11.
    Ibid. p. 144.Google Scholar
  12. 12.
    Average arithmetic growth rate.Google Scholar
  13. 13.
    See Bresciani-Turroni (1937) pp. 144–50.Google Scholar
  14. 14.
    The German coal industry took the commitment to deliver coal on reparation account in exchange for a credit vis-a-vis the government to be repaid later in foreign currencies.Google Scholar
  15. 15.
    Interest and amortisation of the public debt were only 3 per cent of total government expenditures in 1924 as opposed to an estimated 30 per cent in 1919 (see Bresciani-Turroni (1937) p. 356; and also Haller (1976)).Google Scholar
  16. 16.
    Net national product has been deflated by’ population in order to take into account the losses in territories of Germany in the aftermath of the First World War and in 1923.Google Scholar
  17. 17.
    Net national product for Germany for the period 1919 to 1923 are very rough estimates due to the lack of official data, and therefore are to be interpreted with some caution.Google Scholar
  18. 18.
    See Karsten and Pedersen (1964).Google Scholar
  19. 19.
    From 1918 to 1922 the growth rate in Germany averaged only 6.5 per cent per year.Google Scholar
  20. 20.
    A similar development occurred in Spain in the years from 1929 to 1933, when the floating exchange rate isolated the Spanish economy from the fall in the international business cycle.Google Scholar
  21. 21.
    See Cagan (1956).Google Scholar
  22. 22.
    The ratio of commercial bills to Treasury bills in the portfolio of the Reichbank was 2.4 per cent at the end of June 1922 and rose to 36 per cent at the end of December 1922 and to 60 per cent at the end of February 1923.Google Scholar
  23. 23.
    See Bresciani-Turroni (1937) p. 198. 24. For a formal derivation of this condition see the appendix to this chapter.Google Scholar
  24. 25.
    See Bresciani-Turroni (1937) p. 19.Google Scholar
  25. 26.
    Ibid. p. 46.Google Scholar
  26. 27.
    Ibid. p. 72.Google Scholar
  27. 28.
    See Sargent and Wallace (1973), Frenkel (1977), Evans (1978), Salemi and Sargent (1979) and Salemi (1979).Google Scholar
  28. 29.
    The fact that parameters a and b in equations (3.11) and (3.12) are not identified makes it difficult to interpret equation (3.10).Google Scholar
  29. 30.
    The iterative procedure is Newton-Raphson followed by quasi-Newton once the gradient is small or the likelihood is almost stationary.Google Scholar
  30. 31.
    In preliminary estimates, using an approximate discrete version of the continuous model, parameter a, was equal to 5.2 and significantly different from zero. This implies a mean adjustment lag of 5.5 days. Using an exact discrete version of the continuous model, parameter a, is much higher and in the final estimates of the model it was set equal to 227. This implies that equation (3.8) is static, that is that the exchange rate is at its partial equilibrium level.Google Scholar
  31. 32.
    Several estimation attempts were made on slightly different versions of the model presented in Table 3.12. They included: the use of the forward premium or discount as a proxy for the rate of change of the expected exchange rate in the demand for real cash balances; and the introduction of non linearities in equations (3.8) and (3.9). The introduction of non-linearities in equations (3.8) and (3.9) seems to facilitate the estima-tion of the model for a period beyond July 1923. In the version of the model with exogenous nominal cash balances, the value of X remains close to Cagan’s estimate, while it increases remarkably when the supply of nominal cash balances becomes endogenous.Google Scholar
  32. 33.
    A positive sign in front of the derivatives in Table 3.17 indicates that an increase in the value of the parameter makes the real part of the eigenvalue less negative.Google Scholar
  33. 34.
    The RMSE are very similar to those presented in Table 3.14. In addition, the stability analysis indicates that the model is dynamically stable for this subperiod.Google Scholar

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© Andrea Sommariva and Giuseppe Tullio 1987

Authors and Affiliations

  • Andrea Sommariva
  • Giuseppe Tullio

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