Article 231 of the 1919 Treaty of Versailles placed sole responsibility for WW1 onto Germany. Consequently, Germany had to pay reparations to the Allies, totalling 132bn Gold Marks (31.4bn USD). This debt represented 120-130% of national output, placing an economic burden on the relatively foreign debt free Germany. Keynes referred to the Reparations Commission as “an instrument of oppression and rapine” (due to its deviation from Wilson’s Fourteen Points.) Adding to Germany’s domestic debts, war pension liabilities and ordinary expenses, this evidently appeared unrealistic, particularly given the political volatility of the time.
P. Michael et al, pinpoint the start of hyperinflation as July 1922, shortly after the murder of foreign minister Rathenau, who believed high inflation “took from those who had and gave to those who had not”. This was also a time when Germany halted reparations payments and escalated their printing of notes, both to profit from seigniorage and increase the money supply, as Germany’s negative balance of payments drove up prices and wages, weakening the mark against foreign currencies. Allan Young contended that inflation was the result, not the cause of the mark’s depreciation, as price levels rose in excess of the increase in money supply.
The French
occupation of the Ruhr in late December 1922 further deepened the crisis, as
national output fell by 50%, while resisting workers had to be paid by the
government. The mark sharply rose to 500,000 per dollar vs 272 in June. Further
evidencing that Germany’s politicians had little freedom in economic policy,
they once again had to choose inflation over revolution, for the democratic
government to survive threats from the far left and right.
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