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Inflation in Germany





Inflation in Germany










The term inflation has a very special meaning in Germany and quickly triggers the worst fears and nightmares. For in the last century, inflation has twice completely devalued all of the citizens’ financial assets. Who has not heard these stories of grandparents, when in the early twenties of the last century people collected their daily wages in suitcases and wheelbarrows to immediately stand in the long queue at the bakery and buy bread, before it became many times more expensive the next day. But how did it actually come about back then?

With the outbreak of war in 1914, the possibility of exchanging banknotes for gold was eliminated, and Reich banknotes were backed only by government debt instruments. The steadily rising costs of the war were not financed by tax increases; instead, the state went into debt with its own citizens and with the Reichsbank, which in response printed and circulated more and more money. At the end of the war in 2018, the state faced huge financial problems. In addition to the state’s war debts in Germany itself and to its guarantors, there were high social expenditures and the huge reparation payments demanded by the victorious powers. In order to be able to afford all this, the government took out more and more loans from the Reichsbank without a corresponding increase in the supply of goods. The wage-price spiral was set in motion.

In 1923, galloping inflation finally turned into hyperinflation, and money lost its function as a means of payment and store of value. Subsequently, in November 1923, the Reichsmark was replaced as the official currency in Germany by the Rentenmark. All debts and financial assets were dissolved in one fell swoop. With the introduction of the bond market, Germany’s war debt of 154 billion marks amounted to only 15.4 pennies! So from one day to the next, the state had no more debt, but the citizens had no money either.















Germany and hidden inflation


Also during World War II, the costs of the war were financed by government borrowing from the central bank. However, this time they tried to prevent the strong expansion of the money supply. By means of goods rationing, price and wage freezes, and a ration coupon system, inflation was barely visible. Thus, there was hidden inflation in Germany. After the end of World War II, another currency reform followed in 1948, and the Reichsmark was exchanged for D-Mark at a ratio of 10:1. And again, 90% of the debt had disappeared, but so had 90% of the financial assets. Thus, these two inflations alone have left Germans traumatized.

As a result of this experience of inflation in Germany, a Bundesbank was created which, as an institution independent of the state, is primarily committed to monetary stability. The aim was to decouple monetary policy from government influence as far as possible, and this worked very well until the 2000s.

Thus, the Bundesbank served as a successful role model in the introduction of the euro system. According to the rule of the euro system, price stability prevails if the inflation rate on the basis of the previous year is below, but also close to, 2% in the medium term. Thus, in the 20 years since its introduction, the euro has also proven to be a stable currency externally, both in Germany and in the euro area as a whole.








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    Corona and inflation in Germany



    D
    ue to the Corona pandemic, the inflation rate in Germany in 2021, as measured by the consumer price index (CPI) compared with 2020, was already 3.1%. Over the course of 2021, inflation accelerated further and further, already reaching +5.3% year-on-year in December 2021. January 2022 is calculated at +4.9%. All figures that are far from the ECB’s price stability target of 2%. The ECB is therefore increasingly caught in a dilemma between safeguarding price stability on the one hand and providing the economy with a cheap supply of money on the other, so as not to stifle a post-pandemic economic recovery. This is likely to be a litmus test for the ECB and the euro system in the months ahead.





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