Hyperinflation and Stabilization in Weimar Germany
How expectations and fiscal credibility ended the inflation almost overnight.
Summary
Steven Webb applies quantitative economic history to the German inflation of 1919 to 1923 and to the stabilisation that ended it. He tests competing explanations against monthly data on prices, the exchange rate, money supply, fiscal balances and interest rates, using econometric methods that were relatively new to the subject when he wrote.
The two hypotheses he weighs are the fiscal explanation, in which the government printed money because it could not tax or borrow enough to cover reparations and reconstruction, and the balance-of-payments explanation, in which reparations transfers depreciated the mark, which raised import prices and then domestic prices, with money creation following passively. Webb finds evidence for causation in both directions at different periods, with expectations about future policy playing a large role in the final hyperinflationary phase. His treatment of the stabilisation emphasises that the Rentenmark worked because it came with a credible commitment to stop discounting government paper at the Reichsbank, and because the reparations regime changed under the Dawes Plan.
The book is technical and assumes econometrics. It sits alongside Holtfrerich's more institutional account and Feldman's much longer social and political history, and the three disagree about how much room German policymakers had. Webb's contribution is the explicit testing of the causal ordering that the other accounts assert. It is a specialist work and not an introduction to the episode.
Key takeaways 7
- Causation between money supply, prices and the exchange rate ran in both directions at different stages of the German inflation.
- Expectations about future fiscal policy drove the final hyperinflationary phase more than contemporaneous money creation did.
- The German government's inability to tax rested on political deadlock over who would bear the cost, not on administrative incapacity.
- Reparations mattered less through the transfers themselves than through their effect on expectations about future budgets.
- Stabilisation succeeded because the Reichsbank stopped discounting government bills, which was an institutional commitment rather than a currency reform.
- The Rentenmark's supposed land backing was economically meaningless and worked only as a signal of the policy change behind it.
- Real balances collapsed well before the price level peaked, which shows that Germans anticipated the end of the currency.
Who should read it
Economists and investors who want the econometric evidence on causation in a hyperinflation rather than a narrative account of one.
Where it sits in the reference 2
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