Rentenmark

Rentenmark

The Rentenmark was the currency that the German government issued in the aftermath of the hyperinflation that occurred in Germany immediately following World War I. Hyperinflation had completely discredited the mark, leaving the price of something as simple as a newspaper at 70 million marks. Toward the end of 1923 the rentenmark replaced the mark as a new, stable currency.

A costly war and heavy war reparations had left Germany virtually bankrupt, and without the gold and foreign exchange reserves needed to support a paper currency. Usually, governments seeking to restore monetary stability had arranged foreign loans that allowed them to issue a new currency convertible at an official rate into gold and foreign exchange. Germany, lacking access to foreign loans, faced the challenge of establishing a new currency that would command the confidence of the public without the backing of significant reserves of gold and foreign exchange.

Germany handled these monetary difficulties in much the same spirit that France handled similar difficulties in the past. Early in eighteenth-century France John Law’s Banque Royal had issued paper money on the security of land in Louisiana, a financial venture that set the stage for France’s first paper money debacle. Later the revolutionary French government issued paper money called assignats, backed by land confiscated from the church. At first the church land was reserved for sale to owners of assignats, but too many assignats were issued and the plan ended in a storm of hyperinflation.

The Deutsche Rentenbank, a new bank of issue organized to issue rentenmarks, held collateral in the form of agricultural and industrial mortgages. Theoretically, the agricultural and industrial mortgages could have been liquidated and the proceeds used to redeem the rentenmarks, but in practice such a liquidation would have been difficult. One rentenmark was worth 1 billion of the old marks.

In addition to reforming the currency the German government reformed its fiscal affairs, balancing the budget in terms of rentenmarks and ending government dependence on the central bank to purchase government bonds. The German government, by getting its own house in order, diffused the pressure for inflationary finance. In turn the Rentenbank, by strictly limiting the issuance of rentenmarks, ended the spiral of inflation, showing the world that gold and foreign exchange reserves were not necessary for a stable, noninflationary currency. The experience of the rentenmark underlined the role of government fiscal mismanagement as the force that invariably fuels hyperinflation.

Late in 1924 Germany received a sizable loan under the Dawes Plan, enabling it to reorganize the Reichbank, which had suspended the issuance of bank notes after the formation of the Rentenbank. The Reichbank again took over responsibility for issuing bank notes and the rentenmark was renamed the Reichmark. The reichmark was convertible into gold but gold coins did not circulate as currency, a system that spread to the rest of the world during the 1930s. Following World War II the reichmark was discontinued and replaced by the Deutsche Mark.

Although land-secured paper money had twice led France into the chaos of hyperinflation, Germany had embarked upon a land-secured system of paper money determined to contain inflationary pressures. Germany’s experience with the rentenmark demonstrated that a society may avoid inflation and stabilize the value of a currency by strictly limiting currency supplies. By strict monetary discipline, Germany’s experiment succeeded where similar efforts had failed.