How Germany Went Back To Gold
June 9, 2011
(This item originally appeared in Forbes.com on June 9, 2011.)
Germany, as is well known now, had a hyperinflation from 1919 to 1923. At the end, the mark was worth one trillionth of its original value. Afterwards, the new German mark was pegged to gold, at its prewar parity.
How did this happen? How did the new gold standard emerge?
The first thing that happened was that Gustav Stresemann was appointed Chancellor on Aug. 13, 1923. On Sept. 26, 1923, in the midst of hyperinflationary chaos, he suspended seven articles of the Weimar constitution, and declared a State of Emergency. This effectively rendered Germany a military dictatorship.
On Oct. 15, the Rentenmark Ordinance was published, which allowed for a new currency to be issued by a new institution, the Rentenbank, equivalent in value to the gold-linked prewar mark, or “gold mark.” It was the invention of Hans Luther of the Finance Ministry, and Hjalmar Schacht, the managing director of the Darmstadt & National Bank.
Hyperinflation reached its ultimate end. Farmers refused to take any form of paper money for their crops. The harvest of 1923 sat in farmers’ warehouses while supermarkets in the cities were empty. Starvation and civil unrest loomed.
The state itself threatened to break apart. On Nov. 9, 1923, Nazi Party leader Adolf Hitler attempted to seize power in Munich, and from there march on Berlin, in the model of Benito Mussolini’s successful March on Rome in October 1922.
On Nov. 13, Schacht was appointed Commissioner for National Currency. On Nov. 15, printing of the devalued mark ceased. On Nov. 16, the very first rentenmarks, linked to gold at the prewar parity, began to emerge. On Nov. 20, the devalued mark was pegged to the rentenmark at a trillion to one. The hyperinflation was over, and Germany was back on a gold standard system.
The Rentenbank apparently held no gold bullion. Instead, the bank held mostly debt, in the form of mortgages on property and bonds on German industry. The rentenmark was not redeemable in gold.
The main thing, with the Rentenmark, was that its value remained equivalent to a “gold mark.” This was accomplished by reducing its issuance if there was any threat of its market value falling below that parity. The mechanism was simple adjustment of supply.
Schacht himself had no staff. Adam Fergusson, in his book When Money Dies, describes how Schacht operated:
“Dr. Schacht sat in a single room which had once been used as a charwoman’s cupboard, looking on to a backyard in the Ministry of Finance. From this post he transformed the German financial system from chaos to stability in less than a week. His secretary, Fraulein Steffeck, was later asked to describe his work as commissioner:
What did he do? He sat on his chair and smoked in his little dark room which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal–he telephoned in every direction and to every German or foreign place that had anything to do with money and foreign exchange as well as with the Reichsbank and the Finance Minister. And he smoked. We usually went home late, often by the last suburban train, traveling third class. Apart from that he did nothing.”
Farmers accepted the rentenmark in trade for their crop, and the crisis was resolved. A new reichsmark replaced the rentenmark a year later, at 1:1, putting Germany’s return to a gold standard on a more long-term basis.
So we see that it takes almost nothing to adopt a gold standard system. The Rentenbank held little if any gold. The rentenmark was not convertible into gold. No preparation was necessary. No staff was necessary. No time was necessary. The only thing that was necessary was a clear policy, namely to maintain the value of the rentenmark equivalent to a prewar gold mark, and a clear means to accomplish this policy, by restricting the supply of rentenmarks to maintain its value.
Germany was not the only country to suffer from hyperinflation after the First World War. Austria returned to gold in 1923, Poland in 1924, and Hungary in 1925.
It amuses me today when people invent this, that or another reason why a gold standard system is “impossible.” What they usually mean by that is: they don’t know how to do it. You can’t be in a worse position than Germany on Nov. 15, 1923. If it was possible then, it is possible at any time.