Inflation in Nazi Germany

From Mises Wiki, the global repository of classical-liberal thought
Jump to: navigation, search

This period of inflation was remarkable for the success in suppressing an increase in prices, but its effects were not less severe. It was clear to Hitler and the other potentates of the Nazi Germany, that another massive price inflation, like the one in Weimar Republic (1914-1923), was not acceptable to the German people. To finance the coming wars, the prices had to be kept down.[1]

Before the War

After a certain stabilization of the economy from the hyperinflation of the Weimar Republic, foreign capital markets started to grant large loans in Germany. The high interest rates made it attractive, the discount rate of the Reichsbank was set down to 5% in 1927, but was raised again to 7% in 1928 and 7.5% in 1929. Long-term credits of over 1 billion Reichsmark streamed into the country per year; the Reichsbank estimated that at the end of 1930 there was a total of 18.5 billion Reichsmark of long-term foreign loans and 14.5-15 billion of short-term loans. The unemployment rose nonetheless, from a low of 1.012 million in July, 1928, in December it was 2.385 and in December, 1929 2.850 million. The attempts of the Reichsbank to stem this flood of loans with lower discount rates failed, so it limited them directly, leading to the "Black Friday". The Great Depression and the end of prosperity in the USA hit hard its major exporters, England and Germany - and the American investors withdrew many of the loans in Germany, leading to even more unemployment.

The crisis entered its critical phase, when the Austrian Kreditanstalt, the most important bank in Vienna, and one of the major international banks, suspended its payments in May 1932. In Germany, the collapse of the Nordwolle group led to a run of foreign investors on the Darmstädter und Nationalbank, which was strongly associated with the group. The bank fell after Reichsbank stopped extending further credit to it, and practically the whole German banking industry collapsed, with consequences felt around the whole world.

In January, 1933, has unemployment exceeded 6 millions, helping the NSDAP to victory. Adolf Hitler became the Chancellor. Hjalmar Schacht returned to the positions of the president of the Reichsbank and the minister of finances.

To finance the public works projects of the Reichsautobahn (Imperial Highway), Reichspost and Reichsbahn, a number of new loan instruments (the 'Wechsel') was created. Accepted by several institutions, the Reich should redeem them out of future incomes, that should increase, when the economy would improve. The unemployment has in fact decreased:

(millions) Unemployed Employed
August 1932 5.2 12.8
August 1933 4.1 14.1
August 1934 2.4 15.9
August 1935 1.7 17.1

The official money supply did not increase (from June, 1934 to June, 1935, it remained at 3.7 billion). However, the Arbeitsbeschaffungswechseln also circulated to some degree, many corporations passed them to their suppliers etc. before they ended up in the banks. By the end of 1933 was about 1.5 billion of the Wechseln in circulation, 3 billion by the end of 1934.

On March 16th, 1935, the German government announced its intention to rebuild the army, in contradiction to the Treaty of Versailles. This required new ways of financing. The "Mefo-Wechsel" were accepted by the "Metallurgische Forschungsgesellschaft A.G." (Metallurgic Research Stock Company), covered by the empire. These financial instruments did not enter public circulation, to cover up the magnitude of military spending. The increased possibilities of banks to grant loans led to a greater liquidity on the money market. Until 31.3.1938 were 12 billion of of the Mefo-Wechsel in circulation, then was their issue stopped. Other types of "Wechsel" were introduced and accepted by the banks. In this way, much of the liquid money could flow to the state.

Long- and short-term loans were issued to cover the growing demand of the state. To avoid competition, other emissions were forbidden, affecting not only industrial companies, but also the states, districts and mortgage banks, and in turn housing construction and agricultural investment. Savings banks and insurance companies also came under pressure to accept loans and give up their savings and reserves.

The unemployment sank further, in 1938 to 180.000 and in April, 1939 to only 34 000 (the number of employed was 21.3 million), however, tensions in the economy were visible by 1936, leading to an abdication of Schacht.

In March 1938 was Austria occupied and later that year also the Sudetenland. New expenses and growing political tensions led to an enormous increase in state expenses. Since these could not be covered from loans and taxes, Schatzanweisungen (treasury notes) were issued in value of 4.2 billion Reichsmark.

In spring 1939 was created the "N.F.-Steuergutschein" (a tax credit), they could be used to pay taxes after some time. Until the outbreak of war in August, 3 billion were put into circulation, the highest amount was 4.8 billion in November of that year. The Reich paid 40% of payments for supplies and services in these tax credits; they had to be accepted in the same amount from other companies as well. And so, to a degree, they became legal tender. Also in 1939, the Reich began to pay its suppliers with 6-month Lieferungsschatzanweisungen ('supply treasury notes'). In these ways has the state, with more or less force, extended its credit.

Finally, as a measure to prepare for the war, in July, 1939 were all the provisions for the independence of the Reichsbank were removed, and the requirement to back banknotes with gold and foreign currency was removed as well. The treasury notes were allowed as backing instead and the war could be financed directly, without need for roundabout methods.[1]

Budget of the Reich

(in billions of Reichsmark)[1] 1933/34 1934/35 1935/36 1936/37 1937/38 1938/39
Total expenses 8.1 10.4 12.8 15.8 20.1 31.8
- military expenses 1.9 1.9 4.0 5.8 8.2 18.4
Total income 7.8 10.0 12.8 16.0 20.1 28.8
Old debt 4.2 4.0 3.8 3.7 3.5 3.4
New debt 7.6 8.5 10.6 12.4 15.6 27.4
- treasury notes 1.5 2.0 2.4 2.0 1.9 6.1
- Reichswechsel 0.4 0.4 0.4 0.4 0.4 0.4
- Mefo-Wechsel - - 4.9 9.3 12.0 11.9

Export and Import

The foreign trade was heavily regulated since the outbreak of the Great Depression in 1931. The first emergency regulations should block the repayment of foreign loans and capital flight. The English pound has devalued by 40% in 1931, followed by many currencies that were bound to it, the U.S. dollar devalued as well by 40% in 1933. The German mark could not be devalued (especially because of the recent hyperinflation), but lost many export markets. The export would be revived by subsidies.

The imports were overseen through a number of offices ("Überwachungsstellen"), that would expertly decide, whether a particular import was necessary. The trade balance was so under control and the exports could rise - in this way, the exchange rate of the mark could be kept stable as well and was considered a success.[1]

Price controls

An office for the oversight of prices was opened at the end of 1931, during the worst of Depression. It forced a decrease of wages, interest rates and related prices. When in 1936 the general level of prices started to rise as a consequence of the military spending, it was replaced with a 'comissar for the creation of prices'. In November of that year was issued a price stop, that forbade any price or wage increases; very few exceptions were granted. Finally, in June, 1938, were the cartels given the right to set maximum wages, and the Dienstverpflichtung ('service duty') was introduced, ending the free choice of a workplace.

The natural interplay of supply and demand has ceased completely and the price mechanism lost its regulating effect on the market. The foundations of the market economy were destroyed and turned into a system of rationing, a pure command economy. The purchasing power of money seemed to be preserved, but the economy was still doomed. A new wave of inflation was initiated, while the prices were kept low.[1]

World War II, 1939-1945

While it could finance the whole war with inflation, the German government didn't want to repeat the mistakes of World War I - at least a part of the cost should be paid with higher taxes and similar measures. One major problem has been the supplying of small change, this was taken care of by the Rentenbank, whose notes have been well known to the public. Another issue was with the monetary needs in occupied territories. Areas, that were made part of the Reich - Poland, Alsace-Lorraine and Austria, had to use the Reichsmark as money. In other areas - Norway, Ukraine, the Baltic, Netherlands etc. - were issued Reichskreditkassenscheine (Reich's credit treasury notes) to pay the troops.[1]

The "RKK-scheine" were designed to place the entire burden of the occupation on the country in which they were issued and to prevent any indirect drain on German stocks or diversion of German production arising from an unrestricted filtering-back of notes into the Reich. In addition, it was anticipated that the influx of the notes into circulation would alleviate the temporary shortage of local currency resulting from panic hoarding and the exodus of refugees from the area. This proved to be the case, particularly in Poland and Belgium, where the central banks followed the established governments into exile and took the note supply with them.[2]

All important goods were rationed, this forced economizing has been carefully planned and prepared. Another advantage of this well-run system was, that a growing part of the income of the population ended up in banks and savings banks, which allowed the government to deploy massive amounts of medium- and long-term bonds. But in this war, the issues of more debt were not accompanied by any propaganda, it was "noiseless war financing".

The income tax was raised by 50%, to a maximum rate rate of 65% of income, taxes on alcohol and tobacco were also highly increased. German states, districts and other public institutions also had to contribute to the war effort.

Several other taxes have been increased and introduced as the war went on. Various tax discounts and freeing from taxes were offered to the population, mostly set to expire after the war and leading them to deposit more into the banks. The state debt grew even more as evidence of the huge costs of war.

budget of the Reich (in billions of Reichsmark) 1939/40 1940/41 1941/42 1942/43 1943/44 1944/45
Total expenses 52.1 78.0 101.9 128.6 153.0 171.3
- military expenses 32.3 58.1 75.6 96.9 117.9 128.4
Total income* 39.5 57.6 75.0 91.6 96.2 89.7
Yearly deficit 12.6 20.4 26.9 37.0 56.8 81.6
Total debt 47.9 86.0 137.7 195.6 273.4 379.8
Banknotes in circulation 12.2 14.2 22.1 24.4 33.7 60.0**

* Note: medium- and long-term loans were considered income, so they were not counted as part of the deficit
** Note: data is missing, this amount of banknotes was printed, but not all of them were issued, much of it fell into the hands of occupying powers; the estimate at the end of the war was 40 billion in circulation

Money lost its function as a carrier of purchasing power. Important was only to get and spend the rations on bread, fat, shoes and other crucial goods, which became harder and harder.[1]

After the War

Germany was defeated and stopped existing as a state; its economy was heavily damaged. But the money remained and all the 'forced savings', that could not be spent during the war were also left behind. The tensions between the Western and Russian occupation forces led to the separation of Germany into two economically very different parts, exemplified by the currency reform.

In the east have the Russians closed all banks except for savings banks and cooperative institutes. The money overhang was highly reduced, but a new round of money creation has hit the population even harder.

In the western part were the bank holdings preserved, but with the loss of value of the state debt were the banks hopelessly indebted. The command economy was preserved. The public budgets were stabilized with tax increases and a stop in military spending. However, the occupying powers did not dare to end the price controls and create an economic shock. For three years, the population had to suffer hunger and austerity.

The uncertainty and speculations about a currency reform caused the purchasing power of the Reichsmark to fall even further. Barter boomed from humble beginnings during the war to include every possible good and service. Producers, especially the agricultural ones, were well off. The workers, employees and clerks, those living of payments of any kind, were in a miserable position. The merchants, hoping for a new money, hoarded their wares, with a population badly in need.

The American cigarettes played the role of money so well, that an actual 'cigarette currency' was spoken of. Coffee and tea from soldiers were also a favored medium of exchange.

The black market also boomed, delivering food, clothing and all necessities for a high price. In many major cities, like Frankfurt or Munich, was the market out in the open, attempts at its suppression failed. The rations were insufficient, people hungered and froze, and especially the old and children died.[1]

The reform

The currency reform plan was secretly prepared and initiated on the 20th of June, 1948. Before that were created state banks in each state, that took over the former branches of the Reichsbank. The Bank deutscher Länder ('Bank of the German States') was founded for the issuance of notes.

A new currency, the Deutsche Mark (DM), was created and the Reichsmark, Rentenmark and Militärmark lost their validity; so did most of the coins. Every single person received a sum of 60 Deutsche Mark (40 DM immediately, the rest two months later). Employers received 60 DM per employee. The offices received a month's worth of expenses, the railways and the post offices half a month.

The Bank deutscher Länder had the exclusive right to issue banknotes and coins. The new currency was not backed by anything, but the amount in circulation was limited to 10 billion in notes and coins (later extended to 10 billion only in banknotes; in 1952 to 11 and in 1953 to 12 billion).

The old money should be converted in a ratio 10 RM = 1 DM. However, for cash and bank accounts was the effective ratio 100 RM = 6 DM. Larger sums also required a clearance certificate from the tax office, to check for incomes out of the black market.

All payments should be converted in a ratio 10:1. A 1:1 exchange was only applied for wages, rents, pensions and other recurring payments. All liabilities of the state, railway and the post office were freed from the change, effectively releasing the state from its debt. While it simplified the recovery in some respects, it was a grave injustice and made the population very distrustful of state debt.

The exchange rate with the dollar was set to 30 cents = 1 DM. [1]


  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Richard Gaettens. Geschichte der Inflationen Von Altertum bis zum Gegenwart (German: History of Inflations from Old Ages to the Present), Die preisgestoppte Deutsche Inflation von 1936 bis 1948 (The Price-Stopped German Inflation from 1936 to 1948) p. 279-298. ISBN: ISBN 3-87045-211-0. Referenced 2010-11-28.