Fear of Inflation - Is Germany really exceptional?

Master's Thesis, 2012

40 Pages, Grade: 65


Table of Contents

1. Introduction

2. Historical Background
2.1. The Versailles Years
2.2. Hyperinflation in Germany

3. Contemporary Debate

4. Academic Debate
4.1. Empirical Evidence

5. Empirical Findings
5.1. Methodology
5.2. Cross-country analysis
5.2.1. Findings
5.3. Sub-national analysis

6. Conclusion

7. Reference List

1. Introduction

Germany has long been labeled as the country which fears inflation. The hyperinflation of 1923, with a daily inflation rate roaring as high as 20.9% (Hanke, 2010), has supposedly left the Germans with a deep scar which brings back bad memories every time they are confronted with rising inflation. Pictures of children playing in stacks of paper bills, adults carrying wheelbarrows filled with money to buy bread or walls plastered with Deutschmark have allegedly been implanted into the national conscience. More recently, newspaper articles and books have used these images to discuss more factual details concerning inflationary pressures or measures to combat the same. Germans and their Chancellor Angela Merkel are thought to be extremely wary of the events of the past, leading them to propose and defend anti-inflationary measures against all odds and adversaries.

Besides the anecdotal amusement that this bears for commentators, the question of inflation aversion is of high political salience. It helps explain why monetary institutions in some countries are different than in others, why some countries choose the economic policies they do and why some countries might do better than others. Moreover, with regard to monetary unions, especially the Eurozone, it adds to the basic optimum currency framework by Mundell (1961) by extending it via the dimension of inflation aversion. If countries or rather its citizens have different levels of fear of inflation then this would make a monetary union even more difficult to establish, sustain and defend against the popular demands of the demos. Thus it is imperative to have a more detailed look at the different countries, especially within the Eurozone to establish what their preferences are.

Existing academic literature on the topic of inflation aversion suggests that different countries have different preferences. The scholars Scheve (2003, 2004) and Hayo (1998) have shown that countries indeed have different levels of inflation aversion. Scheve argues that it depends on the macroeconomic conditions that people face whether they prioritize inflation or unemployment while Hayo looks at the influence of independent central banks and the historic feedback effect which establishes an overall stability culture.

Arguably, a more evidence based examination of the phenomenon has been lacking so far in the academic debate. Do Germans actually fear inflation more than the rest of Europe or even the world? One has to investigate what variables influence the behavior of the people and thus directly the perception of the country by the rest of the world. Further, it is of high salience to analyze if certain groups within countries react differently and which independent variables influence the dependent variable, namely inflation aversion. This paper wants to contribute to this debate by investigating whether citizens in Germany actually still perceive inflation as a more serious threat than some of their European neighbors and looks at the sub-national variables. In order to do this, data from a series of Eurobarometer surveys conducted by the European Union from 2003 to 2011 will be examined. It asks EU citizens inter alia the following question “What do you think are the two most important issues facing (OUR COUNTRY) at the moment?”. The respondents can choose from a variety of answers, including crime, unemployment, immigration, health care, economic situation and of course inflation/rising prices. To get a more detailed picture of the inflation aversion in the different countries, the results will also be broken down into different groups, i.e. gender, age and occupation. Thus, the paper will incorporate the actual inflation trend within those countries when considering the results. The findings indicate that German citizens are actually not much more inflation averse than their counterparts and the impact of the hyperinflation seems to have vanished.

The paper is organized as follows. First, it will give a short synopsis of the historical events from the end of the First World War in 1917 until the end of the hyperinflation in 1924

in order to be able to place the current popular debate against a common background. Second, the paper will investigate how the newspaper commentators connect a special inflation aversion with the German population. It will be shown that the majority does indeed suggest that Germans fear inflation more than other people because of the 1923 hyperinflation. This leads to the third section, which will discuss the academic debate about inflation aversion and give more details on the different groups within a country, e.g. age, profession and income. With this theoretical background, the essay will fourthly analyze the citizens’ level of inflation aversion by using Eurobarometer data and compare it across countries as well as within countries. The last section then concludes and points to new research that should be done with regard to this issue.

2. Historical Background

Shiller (1997, p. 31) has observed that economic commentators believe that living through the German hyperinflation of 1923 has had an immense effect on the German population and has made especially older people more inflation averse. Additionally, newspaper articles and commentators of all sorts often refer back to this period to emphasize their point or use it as a hook for a story which deals with current inflation topics which will be shown later. Thus, to understand the particularly strong belief in this narrative, it is imperative to first look at the historical background, looking at the political environment of the early 1920s and what the inflation was like back then.

2.1. The Versailles Years

The disastrous First World War had just come to an end and Germany, as the losing party, had been sentenced by the winning allies to make reparation payments to recover the costs of war. The so-called ‘war guilt clause’ (Art. 231) in the Treaty of Versailles (1919) declared that Germany had to cover all losses and the Inter-Allied Reparations Commission subsequently established in 1921 that a total reparation sum of 132 billion gold Marks (ca. £284 in 2012 terms) had to be paid. Marks (1978, p. 243) points out that the scholarly debate as well as the German opinion back then thought the repatriation payments and the Rhein-Ruhr occupation to be the cause of the ensuing hyperinflation. However, in her opinion the hyperinflation was consequence of the German policy of passive resistance, where steel and coal workers in Western Germany went on strike and would not cooperate with the occupiers. Effectively, no goods were produced but the workers still needed to be paid. Rowley (1994, p. 3) points out that the government needed more money to pay these workers, but that tax income was actually falling. Thus the German government resorted to printing money and inflation soon became unmanageable.

2.2. Hyperinflation in Germany

During the hyperinflation year of 1923 the US dollar exchange rate went from 17,972 Mark in January to 4,200,000,000,000 Mark in December (Hobbing, 1925, p. 10). Additionally, “a 2000-fold rise in the money supply was associated with a 24,618-fold increase in the general level of prices” (Rowley, 1994, p. 3) causing the price of bread to rise from 163 Mark to 233 billion Mark within just ten months (Braun, 2010). The German government lastly issued new bills with a face value of a hundred trillion Mark while the real wages were decreasing to about 40 percent of the pre-war level and great parts of the population were facing great pauperization (Deutsches Historisches Museum). All of this led the German society into a state of chaos, wages were paid on a daily basis, restaurants opened according to the release of the new exchange rates and people lost all of their savings. Overall, there was an increasing money supply chasing a smaller amount of goods. However, it was perceived that there was actually a money shortage and thus the money printing continued and was at first not detected to be the cause of the hyperinflation (Rowley, 1994, p. 3). Seeing how the passive resistance and the hyperinflation were ruining his country, Reich Chancellor Gustav Stresemann soon abandoned the strategy and with that the hyperinflation came to an end (Marks, 1978, p. 246). Shiller (1997, p. 54) claims that this event was so important because “stories about vivid events are much easier to remember and natural to transmit to others” and thus have a long-lasting effect which can supposedly be observed later on in the case of the German hyperinflation. However, this episode in German history happened almost 90 years ago thus one has to wonder whether hyperinflation has a long-lasting effect on society or if the effect fades over time. The next section will consequently look at the contemporary debate about the fear of inflation in Germany that is related to the hyperinflation of 1923.

3. Contemporary Debate

The debate in newspapers and journals about the fear of inflation in Germany ranges from mass tabloids like the Bild in Germany and the Daily Mail in Great Britain to more sophisticated newspapers like the Zeit, the Guardian and the New York Times. In times of a troubled Eurozone, which is at the brink of collapse, and a German government that is unwilling to support the creation of Eurobonds or any other measure that will lead to lower interest rates and consequently to elevated inflation levels, it is not surprising that the German fear of inflation has found some increased media attention. Moreover, former Bundesbank President Weber just recently stepped down in the midst of the Euro crisis because he felt like his counterparts did not accept his views on monetary policies, adding to the perception that Germany will not support any kind of inflationary policy of the European Central Bank (ECB) (Cremer, 2011).

The conservative German tabloid Bild, which is the most widely read newspaper of the country, titled one of their recent articles “inflation alert – the Bundesbank is watering down the Euro”[1] against the backdrop of a trillion Mark Bill from 1923 (Blome & Martens, 2012). This dramatic language continues further down in the article, where they claim that millions of Germans are afraid that the inflation is coming back and predict an inflation rate of up to 10% in the future which would be remarkable increase from the 1.9% rate of May 2012, when the article was published. The British Daily Mail employs the same kind of language and claims that Germans have “an obsessive fear of inflation” (Heffer, 2011) which is supposedly inculcated by a focus on the 1923 hyperinflation in history lessons at German high schools and enhanced by “newsreel images of people pushing wheelbarrow-loads of Reichsmarks to a shop to buy a loaf of bread [which] are branded into the German collective memory” (ibid.). This coincides very much with Shiller’s above mentioned account of vivid stories, which are much easier to transmit and stay with us for longer.

Indeed, it is not only the tabloids jumping on the bandwagon. The New York Times (Kulish, 2011) commences one of its stories by introducing a German auto mechanic who actually did not live through the 1923 hyperinflation but vividly remembers the highly denominated German Marks that were stashed away at his parents’ house years later, showing how the narrative continues even with people who did not actually live through this period. Further, they concur with the Daily Mail that the Germans have an obsession with inflation which is “difficult to overcome” (Kulish, 2011) because the Germans think that their high savings rate and low home owning rate compared to other countries like the US makes them more vulnerable. Phillip Inman (2011) at the British Guardian suggests that the fear of inflation is a “stumbling block in Brussels” (ibid.) which is again put into context with the hyperinflation through a picture where workers collect their wages with big laundry baskets while Carsten Brönstrup (2012) from the Zeit asserts that the German fear is deeply rooted in history and points out that the last currency crises were due to wars leaving unpleasant connotations. Considering the political dimension, Kenneth Rogoff, the head of the World Bank, has said that German politicians have confided in him and told him that inflation is the one issue they cannot mess with, that it “is poison to them” (Rogoff quoted in Kulish, 2011). Along the same lines, Josef Joffe (2012), Zeit editor, has recently emphasized that Germans are allergic to inflation and that this constrains Merkel in her actions when trying to tackle the problems the Eurozone is facing at the moment.

Certainly, there are also other arguments that are brought forward in this context. The Frankfurter Allgemeine Zeitung (FAZ) points out that everyone outside of Germany thinks that the Germans have a trauma, but that it is actually a very rational phenomenon due to the general national inclination of high savings and people renting more often (Petersdorf, 2011).


[1] Inflations-Alarm! – Bundesbank weicht den Euro auf

Excerpt out of 40 pages


Fear of Inflation - Is Germany really exceptional?
London School of Economics
International Political Economy
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ISBN (eBook)
ISBN (Book)
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fear, inflation, germany, international relations, political economy, european union, central bank, case study, fisher
Quote paper
Lea Pfefferle (Author), 2012, Fear of Inflation - Is Germany really exceptional?, Munich, GRIN Verlag, https://www.grin.com/document/208574


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