Why couldn't the Weimar Republic peg their currency to another one?

score:6

Accepted answer

  1. Most other currencies were on the gold standard. Banknotes are typically "a promise to pay" to whomever holds it. The German banks were not flush: their books were loaded with red ink. Whence the red ink?

  2. Their credit was no good. The Kaiser had funded the war on credit, so Germany was already deep in debt. Unfortunately for them, losing the war meant that they could not make good on the loans. Neither could the successor government, they were short on cash/liquid assets.

    • The indexation of currency or exchange rate often refers to a country pegging its currency to another currency. A country’s central bank would buy or sell (currency x) to maintain a stable exchange rate with (currency X).

      • Having no liquidity, and bad credit, the Germans didn't have and could not raise the money to put together a foreign currency reserve, which meant they had no means to establish an acceptable index protocol.
      • Indexing one's currency to another currency typically cannot be done by solely making a policy decision: it takes the ability to establish that foreign currency reserve. By revoking the relationship of the Reichsmark to gold, the Germans could not set up a successful foundation for an attempt in that direction (even if they had thought of it). See point 1. As their currency floated (in the wrong direction), it became more difficult to procure foreign currency reserves/funds that could have supported an indexing effort.

  3. The London Ultimatum in 1921 required repayment in foreign currency, or gold. "Your money is no good here" could not be overcome by trying to index to another currency, and the Reichsmark would still not be accepted tender for the debt. A bit of a vicious circle.

  4. See also the problem of those holding Confederate dollars after the civil war.

    It was not backed by hard assets, but simply by a promise to pay the bearer after the war, on the prospect of Southern victory and independence.

Upvote:0

In fact, that is exactly what they did.

On 20 November 1923, Germany ended inflation by pegging the mark’s foreign exchange value at its prevailing value of 4,200 billion marks to the dollar. (Hetzel 2002, p. 8)

This worked fine as far as hyperinflation was concerned, but it was too little and too late to reverse the larger political and economic crisis. Germany was under increasing pressure to pay its war debts and a currency peg was unhelpful in that regard. Prices stabilized domestically, but faith in the government had been irreversibly shaken. Hitler's famous Beer Hall Putsch had taken place earlier that same month.

More post

Search Posts

Related post