The Idea that Killed the German Mark & Prospects for the Dollar

As a contrarian investor, I abhor mechanistic ways of thinking. So, in defiance of the formula that says ‘money printing leads to hyperinflation’, I ask: what idea killed the paper mark of the Weimar Republic? And does it threaten the dollar today?


The idea that killed the mark was self-sustaining, spiraling and vicious. In short, it was this: any fall in the external value of the mark was deemed to necessitate the unconditional discounting of treasury bills at the Reichsbank. Plainly put, it was; ‘print paper marks when the paper mark falls in value’. Every bout of money printing brought a decline in the mark’s value against the dollar, which brought about fresh rounds of money printing, and so on. The period of inflation in the Weimar Republic was doomed to continue insofar as this idea held its legitimacy.


[EDIT: For a shorter explanation that uses analogies, see here.]


Some insights from the great 19th century economist Frederich Bastiat come to mind;


This explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters—experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight.


The Germans of the early 20th century opted for learning by experience rather than foresight, and boy did they pay for it.


Why did this idea kill the mark?


Retrospectively, it seems patently obvious that the above idea would kill the mark. However, spelling out the reasons in full reveals interesting concepts that can help us with understanding trends occurring today. So, I encourage you to stick with this.


As I discussed here, here and here; for a currency to be a good and functioning currency, there has to be a profit-motive in owning it. Furthermore, for a sophisticated economy to function successfully, there has to be a functioning currency. Our aim, then, is to figure out precisely what the above idea meant for the profit-motive involved in owning paper marks.


Prior to July 1914, the paper mark was redeemable in gold. Meaning, you could go to the bank to redeem your paper mark for a certain quantity of gold at any time you pleased. For fear of a complete drain of their gold reserves, the German Reichsbank suspended payments in gold for paper marks on 31/7/14. So from then onwards, the total stock of paper marks was some claim on the total assets of the Reichsbank, to be redeemed at some distant future. Each individual paper mark was ‘good for’ some small slice of the total assets at the Reichsbank. The assets of the Reichsbank consisted of – by and large – gold and government bonds.


For there to be a profit motive in owning paper marks, the paper mark price of gold and bonds would have to be such that the entire stock of paper marks could not buy the entirety of the assets of the Reichsbank. For example, if a paper mark were backed by 1 ounce of gold, who would pay more than 1 ounce of gold in order to acquire a paper mark?


The Reichsbank was, of course, a friend of the Reich. The consequence was that it would accept treasury bills from the Reich at par, when the market valued those bills at significantly less than par. The implications of this were profound. For, each round of discounting treasury bills at the Reichsbank implied that the volume of paper marks increased in excess of the assets of the Reichsbank. Thus, in order for a profit-motive to be prevalent in the market for paper marks, the paper mark price of gold would have to rise. More often than not, this meant that the paper mark price of dollars would have to rise also. Such falls in the external value of the paper mark were completely unpalatable to the consensual mind. Supposedly great minds vouched for the absolute necessity of discounting more treasury bills at the Reichsbank. For if Germany was dependent on importing ‘necessities’ such as agricultural products, what else could they do? If they didn’t print marks to buy necessities from abroad, what would happen to the people? Thus ensued the spiral that brought one of the greatest inflations in the history of the world.


Can we meaningfully liken the mark to the dollar?


This is the $64’000 question (or perhaps I should say the $64’000’000’000’000’000 question?); are we going through a similar period of history? My personal opinion is that – currently – the stage is not set for a period of viciously destructive inflation. Although, it is not inconceivable to me that social mood and intellectual prejudices could align to imply a severe inflation.


Why? As far as I understand, the dynamism experienced during the German hyperinflation was due to a dogmatic adoption of a spiraling idea. As shown above, the actions instituted by the Reichsbank tended to bring about more actions. ‘Money printing’ brought about more ‘money printing’. In order for there to be a vicious and spiraling inflation today, I contend that there would have to be a spiraling widely held false premise.


What is the false premise that enables ‘money printing’ today? It is the idea that a ‘systemic collapse’ should be avoided at all costs. The idea that holds a redistribution of wealth away from the existing established classes as unfavorable for all. It is the idea that holds potential losses in bank deposits, pensions and insurance programs as completely unpalatable. (For me, these ideas seem preposterous, but if they don’t for you then I urge you to read Jorg Guido Hulsmann’s pamphlet on deflation here.). As I write about here the implication of these ideas is that the dollar (and hence global fiat currencies) will be manipulated to suit the balance sheets of the most ‘socially systemic’ institutions in the economy. These manipulations do not immediately cause further manipulations (as with the paper mark in the Weimar Republic), rather they redistribute wealth to such a great degree that the ‘socially systemic’ institutions survive.




The idea that killed the mark was spiraling and had self-sustaining properties. In contrast, the false premises of today are geared towards outrightly redistributing wealth toward certain established ‘socially systemic’ institutions. It is my contention that today’s false premises lack the immediate dynamism necessary for a vicious inflation. However, things change, and it is conceivable that even less prudent monetary policies will ensue. As I mentioned here, my eyes are peeled for changes in the structure of the supplementary financing account.


See here for our collection of rare historical economic data.

Posted Mar 7, 2011
  • Joe Toronto

    This is an interesting premise. Having done little to no research into this event, my lasting impression is that Germany could not sustain the external payments for its reparations debt and for necessary imports and therefore, printed the Marks necessary to exchange into the proper exchange currencies. This in turn caused those folks/banks exchanging the Marks to continually devalue them on the exchange market which in turn caused internal inflation from more costly imports and external debt, and hence more printing in a vicious cycle. Am I wrong in my assumption that it was Germany’s external trade and exchange accounts that devastated the Mark?

    • Aftab Singh

      @Joe Toronto – Thanks Joe. You’re right about that. By 1920, the German population had almost doubled since 1870 and the economy had shifted away from self-subsistence and towards specialization in industry. Thus, they were reliant on foreign trade for ‘necessities’ such as foodstuffs. So when the crippling reparation burden fell upon them, they went to the printing press to buy foreign currencies. Also, a great deal of Germany’s industries that previously earned foreign currency were outrightly appropriated by the allies (eg all sea vessels, assets in the colonies, coal, iron ore etc.). So the desperation to print must have been very high indeed.

      But the key thing was this: Professional economists & government officials did not think that a fall in the mark had anything to do with increasing the national debt (printing paper marks). Furthermore, they deemed increasing the national debt as an absolute necessity. These things together created the vicious cycle that you mention: Printing money caused a fall in the external value of the mark, which was deemed to necessitate further printing of money. They had to give up that idea in order to restore a functioning currency (and hence economy).

  • Evan Hempel

    Very interesting article. Have you investigated other hyperinflations in history such as Hungary, Argentina, and Zimbabwe? I’d be very curious to see if they had similar underlying ideas.

    • Aftab Singh

      @Evan Hempel – Thanks Evan. Although I haven’t investigated the ones that you mention, I have investigated one other; the hyperinflation of the French Assignat (during the French Revolution). The assignat died in a very similar fashion to the mark: the intellectual convictions of the people at the helm of the printing press meant that printing had to bring about more printing (insofar as they held their false premises). I’ll read over my notes on the assignat and try to post something tomorrow or on Thursday. Thanks.

  • Thom Ketring

    Interesting article. It seems that one difference between Germany’s situation and the United States’ is this: Germany suddenly accrued an enormous burden of punitive war reparations, began the printing press to cover those debts, and erroneously continued printing each the currency devalued. America, on the other hand, has an unsustainable and growing deficit, which cannot be paid away by printing money because every year there is a new, larger hole to fill…but with no other option, printing fiat money is what will happen.

    So, the reasons for the continued printing are different between the two situations, but the result is more or less the same. Doesn’t this foretell a hyper-inflationary event for America?

    • Aftab Singh

      Thanks Thom.

      Well, to be sure, I do believe that they will ‘print money’. It’s just the mechanism and dynamics of that ‘money printing’ that I’m concerned with. During the Weimar hyperinflation, those dynamics were; ‘print when the external value of the mark falls’. Or essentially, ‘print when the paper mark price of gold/dollars rises’. That meant that every money-printing exercise immediately brought about more money printing. Every time they printed money, of course paper marks would fall in value. But the intellectual and emotional prejudices of the day said that this fall should immediately require further money printing. That’s a powerful spiral where the currency can be absolutely annihilated.

      In contrast, we don’t have such a hyperinflationary premise today (yet!). As far as I can see, there is no premise that says ‘we should print exactly in response to printing money’. To put it bluntly, if Bernanke embarked on a policy to print $1000000 every time the price of gold rose by $0.10, then that would be a hyperinflationary premise. That is, every money printing exercise would lead to more money printing.

      The enormous debt-load could be resolved in different ways depending on the path of social mood. It could be resolved by a hyperinflation, I don’t know. We’ll have to see how the paths of social mood and the policy-making progress…

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