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Lessons from the German Hyperinflation of the 1920s

March 25, 2015

Lessons from the German Hyperinflation of the 1920s

The German hyperinflation episode in the early 1920s is often quoted as an example of the dire consequences of excessive money printing – a leading industrial economy succumbing to the dangers of currency debasement promoted by incompetent central bankers.

Alas, the reality is more complex than that, particularly when certain geopolitical and economic constraints of that time are taken into consideration. And as we shall see, we can draw some important lessons from that episode that can help us gauge the effectiveness of our very own currency debasement in the 21st century.

Setting the Stage

Europe radically changed in the aftermath of World War I. Gone were the big empires of Central Europe, and the fragmented states that emerged from them had to cope with a much more modest and uncertain modus operandi. There was a new power emerging farther out in the East, after the Bolsheviks took over Russia, boldly proclaiming that they would not stop there. On the other side of the Atlantic, America demonstrated that it could muster the necessary resources to prevail in a major world conflagration, and that it could become a power to be reckoned with.

 

Great Britain retained its dominant superpower status, no longer challenged by the once mighty German forces. Because it had security, its major concern henceforth was economic, especially as a countermeasure to the rising Bolshevik threat. France, on the other hand, remained exposed to a resurgent Germany, particularly because the latter had come out of the war with its industrial capability largely intact. Consequently, its concerns were mainly political.

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