Although the free fall of the Weimar republic into hyperinflation began in earnest in late August – early September of 1921, its seeds were planted almost exactly seven years earlier.
To pay for the exorbitant costs of fighting the Great War (which Germany was forced into by Serbia, Russia and France – roughly in that order), Germany had no other choice but to suspended the gold standard (the convertibility of its currency to gold) almost immediately after the outbreak of war.
Unlike France, which imposed its first income tax to pay for the war (a politically risky but financially prudent move), Kaiser Wilhelm II and the German parliament decided unanimously to fund the war entirely by public borrowing (i.e. by taking loans from banks and issuing government bonds).
They hoped (as it turned out, incorrectly) that the German government it would be able to pay off its debt to banks and investors by winning the war, annexing resource-rich industrial territory in the West (France, Belgium, Netherlands) and East (in Russia) and imposing massive reparations on the defeated Allies.
Which was a politically comfortable but financially very risky move. Leading financial experts, such as Hjalmar Schacht (who subsequently implemented highly successful) believed it to be far too risky as it could lead (and did lead) to radical currency devaluation and even to hyperinflation.
The abject failure of this financing strategy did not deter Adolf Hitler from pursuing essentially the same strategy prior to and during World War 2 (and thus driving the Third Reich to near-bankruptcy). Which forced Schacht to resign from his positions of Minister of Economics and President of the Reichsbank.
Imperial Germany (the Second Reich) lost the Great War (by committing astonishing blunders such as the Zimmerman Telegram), lost 14% of its territory (and 12.5% of its population) ceded to other nations under the terms of the outright criminal Treaty of Versailles and was stuck with 132 billion marks (US $442 billion in current money) of reparations to the victorious Allies.
To make thing worse (in fact, much worse), Weimar Republic was stuck with the massive war debt that it could not afford (other than printing money and thus fueling runaway inflation). Not exactly the result Kaiser and his government expected in 1914.
However, Germany was significantly helped by two factors – (1) skilled financial management by Finance Minister Matthias Erzberger and (2) the fact that the Western Front battles took place outside of Germany (in France and Belgium), Germany came out of the war with practically of its industrial infrastructure intact.
Consequently, during the first half of 1921, German mark was relatively stable at roughly 90 marks to the US dollar.
And then all hell broke loose.
On May 5th, 1921, victorious Allies issues the so-called London Schedule of Payments (aptly called the London Ultimatum). According to the terms of this ultimatum, World War I reparations had to be paid only in gold, foreign currency or in kind coal, timber, chemical dyes, pharmaceuticals, livestock, agricultural machines, construction materials, and factory machinery.
Although Germany still possessed formidable industrial capacity, it simply did not have enough of “the above” to pay the required reparations (which was political racketeering, plain and simple).
It did meet the first payment of US$ 250 million when it came due in June of 1921, but after that it had no other choice but to print money on a massive scale to buy the foreign currency needed to meet its reparation obligations.
As the mark sank in international markets, more and more marks were required to buy the foreign currency that was demanded by the Reparations Commission. Foodstuffs were almost eight times more expensive in 1921 as they had been at the end of the war. By the next year they would be over 130 times more expensive. It was the beginning of an economic and social nightmare that will last for three long years.
Nightmare engineered (some said deliberately, although I doubt that it was the case) by the same victorious Allies that already robbed Germany at gunpoint in Versailles two years earlier.
Predictably, it radically strengthened the appeal, popularity and power of radical nationalists that called for immediate liberation of Germany from the shackles of the Treaty of Versailles, righting the wrongs committed by the Allied powers and severely punishing the wrongdoers (both internal and external).
Including the appeal, popularity and power of Adolf Hitler and his Nazi party. Who could no longer ignore economic issues that were rapidly becoming not only the most important ones for his audience. But just about the only important ones – at least for the time being.
However, his audience will not be satisfied with just talk. It needed action. It needed someone who will seize power in Germany and solve these damn problems once and for all. It did not want a public speaker – no matter how hypnotic – it needed a political leader. The Führer of the nation.
Hitler – inspired by his now deepest belief (supported by more and more members of his party) that he was the Chosen One, the German Messiah – had exactly the same desire.
However, although by that time he already decided on the general strategy (seize power in Bavaria and then use this semi-autonomous state to come to power in the whole Weimar Republic), did not have a clear vision of the specifics.
Hence, although the authorities in Munich and Berlin considered him a serious political threat, stating that “it’s not impossible that they [i.e. Hitler and his Nazis] will try a putsch here before long, using the mounting inflation as an excuse”, in reality he was not ready to do that yet.
Until October 29th, 1922 when another right-wing, nationalist, populist and fascist leader – in another country – showed him how it could (and very probably should) be done.
Il Duce. Benito Amilcare Andrea Mussolini.