Macro Essay 7 (lecture 7)After Germany lost the World War I, it was asked to pay reparations to the Allies. The value of reparations was set at 2 billion gold marks, where a gold mark was the equivalent of a fixed amount of gold. In addition,Germany had to made payments equivalent to 26% of its exports. The first instalment was made in June 1921. As we can see in the graph below, the value of the “Reichs” mark, the normal currency used in transactions, which was not tied to the value of gold, fell enormously over the following years. (a)Can you see a possible link between the extremely onerous reparations the German government had to pay, and the collapse in the value of the mark?
reached 75 percent. Then things turned ugly. Toward the end of 1922, Germany was accused of having failed to deliver its reparation payments on time. This fall in currency caused unemployment to rise. To end the hyperinflation, “Rentenmark” backed by bonds indexed to the market price of gold were introduced (November 16, 1923). In other words, every time it issued Rentenmarks, the central bank purchased assets whose value moved up or down one-for-one with the price of gold, and stood ready to exchange back the Rentenmarks for these assets, at a one-for-one rate. The prices quoted in the new currency remained stable.(b) Why could the Rentenmark stabilize prices? Would the monetary reform alone end hyperinflation? The miracle of Retenmark allowed depreciation halted in its tracks, business to be revived and inflationary spree to be ended. The government announced the currency would be stable, and people have accepted this, given their desperation to get out of the unstable situation. The property backing seemed to give