In the 1920s, Germany experienced one of the most severe episodes of hyperinflation in history. The episode originated in military defeat and revolution, produced instability that figured prominently in the onset of the Great Depression, and created policy dilemmas that present cautionary lessons for leaders in business and government. This note examines the causes, dynamics, and consequences of Germany’s hyperinflation in 1923.
Hyperinflation is an episode of very large price increases across a broad range of goods and services that often arises from excessive expansion of the supply of paper money to finance government expenditures. It causes wasteful distortions in the functioning of markets, including hoarding of goods and commodities, currency depreciation, capital flight, price controls, and black markets. In a self-reinforcing cycle, price increases beget greater issuance of currency, which begets more price increases and so on, until a political regime shift reforms the unit of currency and government spending.