This year marks the 100th anniversaries of the great German and Austrian inflations that began with the coming of the First World War in 1914 and reached hyperinflationary severity following the war’s end in November 1918. While the German and Austrian inflations were particularly pronounced, all the belligerent countries in the conflict resorted to the monetary printing press to finance their war-related expenditures.
The first step was these governments going off the gold standard, either de facto or de jure. The citizens in these warring counties were often pressured or compelled to hand over their gold to their respective governments in exchange for paper money. Almost immediately, the monetary printing presses were turned on, creating the vast financial means needed to fight an increasingly expensive war.
Wartime inflation in Britain, France, Italy, and America
In 1913, the British money supply amounted to 28.7 billion pounds sterling. But soon, as British economist Edwin Cannan expressed it, the country was suffering from a “diarrhea of pounds.” When the war ended in 1918, Great Britain’s money supply had almost doubled to 54.8 billion pounds, and it continued to increase for three more years of peacetime until it reached 127.3 billion pounds in 1921, a fivefold increase from its level eight years earlier.
The French money supply had been 5.7 billion francs in 1913. By war’s end in 1918, it had increased to 27.5 billion francs, in this case a fivefold increase in a mere five years. By 1920, the French money supply stood at 38.2 billion francs. The Italian money supply had been 1.6 billion lire in 1913 and increased to 7.7 billion lire, for more than a fourfold increase, and stood at 14.2 billion lire in 1921.
In addition, these countries took on huge amounts of debt to finance their war efforts. Great Britain had a national debt of 717 million pounds in 1913. At the end of the war, that debt had increased to 5.9 billion pounds and rose to 7.8 billion pounds by 1920. French national debt increased from 32.9 billion francs before the war to 124 billion francs in 1918 and 240 billion francs in 1920. Italy was no better, with a national debt of 15.1 billion lire in 1913 that rose to 60.2 billion lire in 1918 and climbed to 92.8 billion in 1921.
Though the United States had participated in only the last year and a half of the war, from April 1917 to November 1918, it too created a large increase in its money supply to fund government expenditures, which rose from $1.3 billion in 1916 to $15.6 billion in 1918. The U.S. money supply grew 70 percent during this period, from $20.7 billion in 1916 to $35.1 billion in 1918. Twenty-two percent of America’s war costs were covered by taxation, about 25 percent from printing money, and the remainder, 53 percent, by borrowing.
War and the great German inflation
For decades before the start of the war, German nationalist and imperialist ambitions were directed to military and territorial expansion. A large number of German social scientists known as members of the Historical School had been preaching the heroism of war and the superiority of the German people who deserved to rule over other nationalities in Europe.
Hans Kohn, one of the twentieth century’s leading scholars on the history and meaning of nationalism, explained the thinking of leading figures of the Historical School, who were also known as “the socialists of the chair” in reference to their prominent positions at leading German universities. In Prophets and Peoples: Studies in Nineteenth Century Nationalism (1946), Kohn wrote:
The “socialists of the chair” desired a benevolent paternal socialism to strengthen Germany’s national unity. Their leaders, Adolf Wagner and Gustav von Schmoller, [who were Heinrich von] Treitschke’s colleagues at the University of Berlin and equally influential in molding public opinion, shared Treitschke’s faith in the German power state and its foundations. They regarded the struggle against English and French political and economic liberalism as the German mission, and wished to substitute the superior and more ethical German way for the individualistic economics of the West…. In view of the apparent decay of the Western world through liberalism and individualism, only the German mind with its deeper insight and its higher morality could regenerate the world.
These German advocates of war and conquest also believed that Germany’s monetary system had to be subservient to the wider national interests of the state and its imperial ambitions. Austrian economist Ludwig von Mises met frequently with members of the Historical School at German academic gatherings in the years before World War I. In his essay, “Remarks on the Ideological Roots of the Monetary Catastrophe of 1923” (1959), Mises recalled:
The monetary system, they said, is not an end in itself. Its purpose is to serve the state and the people. Financial preparations for war must continue to be the ultimate and highest goal of monetary policy, as of all policy. How could the state conduct war, after all, if every self- interested citizen retained the right to demand redemption of bank notes in gold? It would be blindness not to recognize that only full preparedness for war [could further the higher ends of the state]…. The gold standard, they alleged, made Germany permanently depend on the gold-producing countries…. It was a vital necessity for the German nation to have a monetary system independent of foreign powers, they claimed.
Germany’s Great Inflation began with the government’s turning to the printing press to finance its war expenditures. Almost immediately after the start of World War I, on July 29, 1914, the German government suspended all gold redemption for the mark. Less than a week later, on August 4, the German Parliament passed a series of laws establishing the government’s ability to issue a variety of war bonds that the Reichsbank — the German central bank — would be obliged to finance by printing new money. The government created a new set of Loan Banks to fund private-sector borrowing, as well as state and municipal government borrowing, with the money for the loans simply being created by the Reichsbank.
During the four years of war, from 1914 to 1918, the total quantity of paper money created for government and private spending went from 2.37 billion to 33.11 billion marks. By an index of wholesale prices (with 1913 equal to 100), prices had increased more than 245 percent (prices failed to increase far more because of wartime controls). In 1914, 4.21 marks traded for $1 on the foreign-exchange market. By the end of 1918, the mark had fallen to 8.28 to the dollar.
The results of Germany’s hyperinflation
But the worst came in the five years following the war. Between 1919 and the end of 1922, the supply of paper money in Germany increased from 50.15 billion to 1,310.69 billion marks. Then in 1923 alone, the money supply increased to a total of 518,538,326,350 billion marks.
By the end of 1922, the wholesale price index had increased to 10,100 (still using 1913 as a base of 100). When the inflation ended in November 1923, this index had increased to 750,000,000,000,000. The foreign-exchange rate of the mark decreased to 191.93 to the dollar at the end of 1919, to 7,589.27 to the dollar in 1922, and then finally on November 15, 1923, to 4,200,000,000,000 marks to the dollar.
During the last months of the Great Inflation, according to Gustav Stolper in The German Economy, 1870–1940 (1940), “more than 30 paper mills worked at top speed and capacity to deliver notepaper to the Reichsbank, and 150 printing firms had 2,000 presses running day and night to print the Reichsbank notes.” In the last year of the hyperinflation, the government was printing money so fast and in such frequently larger and larger denominations that to save time, money, and ink, the bank notes were being produced with printing on only one side.
Even with banknotes issued in September 1923 with a face value of 500 million marks, cash for transactions increased in scarcity due to the rapid and erratic huge rise in prices on a more than daily basis as Germany entered the autumn of 1923. As Ludwig von Mises explained more than a year before the hyperinflation climaxed, in his essay, “Inflation and the Shortage of Money: Stop the Printing Presses” (March 1922), once people come to believe that the depreciation of the currency will have no end, every issuance of more paper money only intensifies people’s desire to spend it as fast as they can, before it becomes even more worthless:
If it is assumed that the monetary depreciation will continue, because the government is unwilling to observe moderation in the demands it makes on the printing press, then the value of the monetary unit will be lower than if no further inflation were expected. Because monetary depreciation is expected to continue, the people try, by the purchase of commodities, bills of exchange, or foreign money to rid themselves as quickly as possible of their domestic money that is daily losing its purchasing power. The panic buying in the shops, where the buyers go in droves in the attempt to acquire anything tangible, anything at all, and the panic buying on the exchange, where the prices of securities and foreign exchange go up leaps and bounds, race ahead of the actual situation. The future is anticipated and discounted in these prices.
Finally, facing a total economic collapse and mounting social disorder, the German government in Berlin appointed the prominent German banker Halmar Schacht as head of the Reichsbank. He publicly declared in November 1923 that the inflation would be ended and a new noninflationary currency backed by gold would be issued. The printing presses were brought to a halt, and the hyperinflation was stopped just as the country stood at the monetary and social precipice of total disaster.
But the statistical figures do not tell the human impact of such a catastrophic collapse of a country’s monetary system. In his book, Before the Deluge: A Portrait of Berlin in the 1920s (1972), Otto Friedrich wrote:
By the middle of 1923, the whole of Germany had become delirious. Whoever had a job got paid every day, usually at noon, and then ran to the nearest store, with a sack full of banknotes, to buy anything that he could get, at any price. In their frenzy, people paid millions and even billions of marks for cuckoo clocks, shoes that didn’t fit, anything that could be traded for anything else.
A story was told of a man going shopping with a wheelbarrow filled with German marks, who took an armful of them into a bakery to buy a loaf of bread. When he came out of the shop, on the sidewalk was a large pile of his billions of German marks; the thief had taken the far more valuable item, the wheelbarrow they had been in. Another story heard was of a successful German novelist, who before the war had saved enough money for a fairly comfortable old age. But in the second half of 1923, he withdrew his entire lifesavings from a bank and found that it was just sufficient to buy one token for a trolley ride in his native Berlin. He bought the token, took a ride around his beloved city, went home and committed suicide by putting his head in the oven with the gas on.
I knew someone who had lived through the hyperinflation during this period. He told me that the price of a cup of coffee could double in the time that a customer took to drink it in a Berlin café in the autumn of 1923. With bemusement, he said that the moral of the story was to “drink fast.”
Food supplies became both an obsession and a currency. The breakdown of the medium of exchange meant that the rural farmers became increasingly reluctant to sell their agricultural goods for worthless paper money in the cities. Urban dwellers streamed back to the countryside to live with relatives in order to have something to eat. Anything and everything were offered and traded directly for food to stave off the pangs of hunger.
Capital consumption and misdirection of resources
The inflation generated a vast and illusionary economic boom. In his classic study, The Economics of Inflation (1931), Constantino Bresciani-Turroni detailed how inflation distorted the structure of prices and wages, generating paper profits that created a false conception of wealth and prosperity. As the inflation pushed the selling price of a manufactured good far above the original costs of production, profits appeared huge. But when the manufacturer went back into the market to begin his production process again, he found that the costs of resources and labor had also dramatically increased. What had looked like a profit was not enough to replace the capital used up earlier. Inflationary profits hid from view what was actually a process of capital consumption.
The distorted relative-price signals during the inflation resulted in misallocations of capital and labor in various investment projects that were found to be unsustainable and unprofitable when the monetary debauchery finally came to an end. Thus, a “stabilization crisis” followed the German inflation. Capital and investment projects were left uncompleted because of a lack of available real resources, and workers faced a period of unemployment as they discovered that the jobs the inflation had drawn them into had now disappeared. The consumption of capital and the misuse of resources and labor during the years of inflation left the German people with a far lower real standard of living, which only years of work, savings, and sound new investment could improve.
Germany’s economic recovery in the middle and late 1920s turned out to be an illusion as well. A game of financial musical chairs was played out in which Germany borrowed money from the United States to pay off reparations to the victorious Allied powers, as well as to finance a vast array of municipal public works projects and business investment activities sponsored by the government. These all came crashing down when the boom of the 1920s turned into the Great Depression of the 1930s. The hyperinflation of the 1920s and subsequent financial and economic crash in the early 1930s also set the political stage for Adolf Hitler’s rise to power in 1933.
The Hapsburg Empire and the great Austrian inflation
As clouds of war were forming in the summer of 1914, Franz Joseph (1830–1916) was completing the 66th year of his reign on the Hapsburg throne. During most of his rule, Austria-Hungary had basked in the nineteenth-century glow of the classical-liberal epoch. The constitution of 1867, which formally created the Austro-Hungarian empire, ensured every subject in Franz Joseph’s domain all the essential personal, political, and economic liberties of a free society.
The empire encompassed a territory of 415,000 square miles and a total population of more than 50 million. The largest linguistic groups in the empire were the German-speaking and Hungarian populations, each numbering about 10 million. The remaining 30 million were Czechs, Slovaks, Poles, Romanians, Ruthenians, Croats, Serbs, Slovenes, Italians, Jews, and a variety of smaller groups of the Balkan region.
In the closing decades of the nineteenth century, the rising ideologies of socialism and nationalism superseded the declining liberal ideal. Most linguistic and ethnic groups clamored for national autonomy or independence and longed for economic privileges at the expense of the other members of the empire. Even if the war had not brought about the disintegration of Austria-Hungary, centrifugal forces were slowly pulling the empire apart because of the rising tide of political and economic collectivism.
As with all the other European belligerent nations, the Austro-Hungarian government immediately turned to the printing press to cover the rising costs of its military expenditures. At the end of July 1914, just after the war had formally broken out, currency in circulation totaled 3.4 billion crowns. By the end of 1916, it had increased to more than 11 billion crowns. At the end of October 1918, shortly before the end of the war, the currency had expanded to a total of 33.5 billion crowns. From the beginning to the close of the war, the Austro-Hungarian money supply in circulation had expanded by 977 percent, or more than ninefold. A cost-of-living index that had stood at 100 in July 1914 had risen to 1,640 by November 1918.
But the worst of the inflationary and economic disaster was about to begin. Various national groups began breaking away from the empire, with declarations of independence by Czechoslovakia and Hungary, and the Balkan territories of Slovenia, Croatia, and Bosnia being absorbed into a new Serb-dominated Yugoslavia. The Romanians annexed Transylvania. The region of Galicia became part of a newly independent Poland. And the Italians laid claim to the southern Tyrol.
The last of the Hapsburg emperors, Karl, abdicated November 11, 1918. A provisional government of the Social Democrats and the Christian Socials declared German-Austria a republic on November 12. Reduced to 32,370 square miles and 6.5 million people — one third of whom resided in Vienna — the new, smaller Republic of Austria now found itself cut off from the other regions of the former empire as the surrounding successor states (as they were called) imposed high tariff barriers and other trade restrictions. In addition, border wars broke out between the Austrians and the neighboring Czech and Yugoslavian armies.
The new Austria and paper-money inflation
Within Austria, the various regions imposed internal trade and tariff barriers on other parts of the country, including Vienna. People in the regions hoarded food and fuel supplies, with black marketeers the primary providers of many of the essentials for the citizens of Vienna. Thousands of Viennese would regularly trudge out to the Vienna Woods, chop down the trees, and carry cords of firewood back into the city to keep their homes and apartments warm in the winters of 1919, 1920, and 1921. Hundreds of starving children begged for food at the entrances of Vienna’s hotels and restaurants.
The primary reason for the regional protectionism and economic hardship was the policies of the new Austrian government. The Social Democrats imposed artificially low price controls on agricultural products and tried to forcibly requisition food for the cities. By 1921, more than half the Austrian government’s budget deficit was attributable to food subsidies for city residents and the salaries of a bloated bureaucracy. The Social Democrats also regulated industry and commerce and imposed higher and higher taxes on the business sector and the shrinking middle class. One newspaper in the early 1920s called Social Democratic fiscal policy in Vienna the “success of the tax vampires.”
The Austrian government paid for its expenditures through the printing press. Between March and December 1919, the supply of new Austrian crowns increased from 831.6 million to 12.1 billion. By December 1920, it increased to 30.6 billion; by December 1921, 174.1 billion; by December 1922, 4 trillion; and by the end of 1923, 7.1 trillion.
Between 1919 and 1923, Austria’s money supply had increased by 14,250 percent. Prices rose dramatically during this period. The cost-of-living index, which had risen to 1,640 by November 1918, had gone up to 4,922 by January 1920. By January 1921, it had increased to 9,956; in January 1922, it stood at 83,000, and by January 1923, it had shot up to 1,183,600.
The foreign-exchange value of the Austrian crown also reflected the catastrophic depreciation. In January 1919, $1 could buy 16.1 crowns on the Vienna foreign-exchange market. By May 1923, a dollar traded for 70,800 crowns
During this period, the printing presses worked night and day churning out the currency. At the meeting of the German Verein für Sozialpolitik (Society for Social Policy) in 1925, Austrian economist Ludwig von Mises told the audience:
Three years ago, a colleague from the German Reich, who is in this hall today, visited Vienna and participated in a discussion with some Viennese economists…. Later, as we went home through the still of the night, we heard in the Herrengasse [a main street in the center of Vienna] the heavy drone of the Austro- Hungarian Bank’s printing presses that were running incessantly, day and night, to produce new bank notes. Throughout the land, a large number of industrial enterprises were idle; others were working part-time; only the printing presses stamping out notes were operating at full speed.
Finally, in late 1922 and early 1923, the Great Austrian Inflation was brought to a halt. The Austrian government appealed for help to the League of Nations, which arranged a loan to cover a part of the state’s expenditures. But the strings attached to the loan required an end to food subsidies and a 70,000-man cut in the Austrian bureaucracy to reduce government spending. At the same time, the Austrian National Bank was reorganized, with the bylaws partly written by Ludwig von Mises. A gold standard was reestablished in 1925, a new Austrian shilling was issued in place of the depreciated crown, and restrictions were placed on the government’s ability to resort to the printing press again.
But continuing government monetary, fiscal, and regulatory mismanagement prevented real economic recovery before 1938. Then Austria fell into the abyss of Nazi totalitarianism, followed by the destruction of World War II.
The 100-year age of inflation
Since World War I, there have been unending experiments with managed paper monies by governments everywhere. No leading countries in the West have collapsed into a German- or Austrian-type hyperinflation, but the post–World-War-II period has seen a continuing pattern of inflationary booms followed by post-bubble recessionary busts.
Expanding money supplies and artificially reduced interest rates have fed misallocations of resources and labor, misdirection of capital investment, and excessive consumer spending. These have necessitated the painful corrections of temporary falling output and rising unemployment that are part of the inescapable adjustments to restore balance in the market and a renewed path for sustainable growth and rising standards of living.
What is needed is to relearn what the older liberals of the nineteenth century had learned from their experiences with inflationary paper money — that only removing the hand of the government from the monetary printing press can permanently end cycles of booms and busts. This requires a return to a commodity-backed currency such as gold and a system of private, competitive free banking.
We can only hope that this earlier wisdom will eventually supersede the legacies of big government and monetary mismanagement that continue to linger 100 years after the end of the great German and Austrian inflations.
This article was published in the March 2023 edition of Future of Freedom.