causes of the great inflation

8/6/2019 Causes of the Great Inflation

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Causes of the Great Inflation


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The causes of the German inflation

y Prices had been rising since the early months of thewar

y The problems came to a head in 1923 withhyperinflation

y Many Germans thought it was an outcome of theTreaty of Versailles, particularly the reparations

y Many blamed it on scapegoats, e.g. Jews


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y The fundamental cause of the hyperinflation was ahuge increase in the amount of paper money in

circulationy These had been printed to pay off the interest on

Germanys massive debts

y There were other causes


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y Long term The military demands of the First World War led to a huge increase

in costs

y Medium term The costs of introducing social reforms and welfare

The demands of reparations from 1921

y Short term

The French occupation of the Ruhr in 1923 led to the governmentencouraging passive resistance - strikes


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The long term causes

y Germany had made no financial provision for a longwar

y The Kaisers government did not increase taxation

y Instead it borrowed massive amounts by selling warbonds to the public, and when this didnt work wellenough it just let the debt grow

y 84% of war expenditure had been borrowed


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The long term causes

y War years had almost full employment, but since itwas military based demand for consumer goods grew

while the amount of consumer goods did not thisled to an increase in prices

y Defeat meant worse economic problems

y Volker Berghahn in 1919 Germanys finances were

an unholy mess


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Medium term causes

y The Weimar government could control inflation onlyby increasing taxation or cutting government

spendingy But due to the domestic situation neither were very

attractive, as both would cause political and socialdifficulties e.g. unemployment, industrial decline


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Medium term causes

y So from 1919, guided by Erzberger, the governmentextensively increased taxes on profits, wealth and

income, but did not aim at balancing the budgety It adopted this policy in the belief that it would Maintain demands for goods and thereby create work

Overcome problems of demobilising millions of returning troops

Cover the cost of public spending on the extensive welfare state

Reduce the real value of the national debt


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Medium term causes

y The government believed a booming economy wouldhelp ex soldiers find jobs

y Unfortunately the essential part of the policy was toallow inflation to continue

y Reparations were only one contributing factor, but itwas the printing of money to pay them off that

caused inflation


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Medium term causes

Date Exchange rate againstdollar

Wholesale price index

July 1914 4.2 1January 1921 64.9 14

January 1923 17,792 2,785

November 1923 200,000,000,000 750,000,000,000


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Short term causes

y Germany had been allowed to postpone manyreparation payments

y It asked for another holiday from making paymentsin July 1922, and Germany was declared in default

y The French government, led by PoincarorderedFrench and Belgian occupation of the Ruhr,

Germanys industrial heartland


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Short term causes

y A policy of passive resistance was taken workers weretold to strike but their wages were still paid

y

At the same time taxes couldnt be collected from theRuhr and the French prevented the delivery of coal to therest of Germany

y It was in this situation that the governments financescollapsed

y By autumn 1923 it cost more to print a bank note thanthe note was worth


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Prices

Item for sale in 1913 Summer 1923 November 1923

1kg of bread 0.29 marks 1,200 428,000,000,000

1kg of butter 2.70 26,000 6,000,000,000,000

1 pair of shoes 12.00 1,000,000 32,000,000,000,000


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y The fundamental cause is to be found in themismanagement of Germanys finances 1914

onwardsy At no time did the government seem willing to bring

spending and borrowing back within reasonablelimits

causes of the great inflation

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