The cause of the immense acceleration of prices that occurred during the German hyperinflation of 1922–23 seemed unclear and unpredictable to those who lived through it, but in retrospect was relatively simple. The
Treaty of Versailles imposed a huge debt on Germany that could be paid only in gold or foreign currency. With its gold depleted, the German government attempted to buy foreign currency with German currency,
[31] an action equivalent to selling German currency in exchange for payment in foreign currency, but the resulting increase in the supply of German marks on the market caused the German Mark to fall rapidly in value, which greatly increased the number of Marks needed to buy more foreign currency. This caused German prices of goods to rise rapidly, increasing the cost of operating the German government, which could not be financed by raising taxes because those taxes would be payable in the ever-less-valuable German currency.
The alternative was some combination of running a budget deficit and simply creating more money, each of which increased the supply of German currency on the market and reduced that currency's price. When the German people realized that their money was rapidly losing value, they tried to spend it quickly.
This increase in monetary velocity caused still more rapid increase in prices, creating a vicious cycle.[32] This placed the government and banks between two unacceptable alternatives: if they stopped the inflation this would cause immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order, insurrection, and revolution.
