A Template for Understanding Big Debt Crises

by Ray Dalio

In a desperate attempt to calm the inflationary spiral, on October 12 1922, the government stepped in to stop the ever-growing flight into foreign currency. Restrictions were put on German citizens purchasing foreign FX.101 Such capital controls are a classic lever to control inflationary depressions; they are rarely successful. The reasons for this are that a) capital controls have limited effectiveness at best because they are usually pretty easy to get around and b) trying to trap people typically leads them to want to escape even more. Not being able to get one’s money out of the country triggers a psychology that is analogous to the inability to get one’s money out of a bank: it produces fear that produces a run.

From July 1922 until November 1923 the mark depreciated by 99.99999997 percent versus the dollar (i.e., the cost of dollars increased 1570 billion percent) and prices rose by 387 billion percent! For some perspective on what these numbers mean, in 1913 a total of six billion marks circulated as currency and coin in the whole German economy. By late October 1923, the entire stock of money in 1913 would just about get you a one kilo-loaf of rye bread.111 Living through such chaos was immensely painful and traumatizing for German citizens—and experiences of the inflation would later serve to validate many of the criticisms made by Nazi politicians of the “disastrous” Weimar era.