The Stabilization of the Mark

How did the German hyperinflation end ? I think the best but totally biased source of information is The Stabilization of the Mark by Hjalmar Horace Greeley Schacht
(just look at the price !?! to understand how German’s felt). The book could be entitled “How I Did It” but the point is that he did do it. My book report after the jump.

How to end a hyperinflation.

In a hyperinflation people learn about the price level. Basically one flexible price is used as a daily index. For some reason this is always the dollar exchange rate. It becomes a valid price index because everyone indexes to it. This means that the Central Bank can end inflation by intervening in the foreign exchange market (this caused a temporary stabilization in early 1923).

Step 1: introduce a parallel currency whose value is indexed to the dollar (it always is the dollar I don’t know why) so it exchanges with the Mark based on the market dollar/Mark exchange rate. This was called the Rentenmark based on the claim that it would be supported with a tax on capital (not capital income – capital). Importantly do *not* declare that this currency is legal tender. The point is that to buy dollars from the central bank, economic agents must pay in Marks not Rentenmarks. Rentenmarks can be exchanged only for marks. This is a universal feature of stabilizations (also in the USSR).

Step 2; declare an exchange rate peg. The Reichsbank promised to sell dollars for 4 billion marks each (I forget this might mean trillion with the old million milliard billion numbering). Notice I didn’t say peg the exchange rate. The Reichsbank didn’t actually do this. There was excess demand for dollars at that price and it made people wait up to 2 weeks.

Those people were mostly speculators who had borrowed marks. Since the stabilization wasn’t absolutely believed, the nominal interest rate was 20% per day. Making people wait a few days for their promised dollars is a way to bankrupt them. Bankrupting all the people betting against the stabilization is a way to make it work.

If the Rentenmark had been legal tender, speculators could have bet against the Mark by showing they had Rentenmarks which they could hold for months without going broke.

The peg was basically fraudulent. It was *not* true that you could get a dollar for $ billion marks. But it worked anyway, because what mattered was the exchange rate published in newspapers not actual exchange of actual currencies.

Hjalmar Schacht became president of the Reichsbank in November 1923. By December 1923 the hyperinflation was finished.

Of course Schacht was very lucky in his predecessor in office (about at the Obama level). The previous president Rudolf Havenstein had just published a pamphlet entitled (translated) “There Has Been No Inflation in Germany”.