The German Hyperinflation of 1923

The German hyperinflation of 1923 provides an example of the political and economic driving forces that can cause hyperinflations. After Germany’s defeat in the First World War, there was a threat of a socialist revolution. In order to avoid it, numerous reforms and social concessions were offered, but these were financed at the cost of rising government debt. In addition, reparation payments burdened Germany with high foreign debt. This constellation led to a wage-price spiral. But the key driving force of the hyperinflation was the collapse of the exchange rate and rising import prices which further stimulated higher wages and prices. Central bank money then endogenously increased as the central bank lost its control over money supply.