A Brief History Of Germany’s Currency

Over the last two centuries there have been significant changes in the monetary system of Germany. The reasons for this were far-reaching and stood partly in conjunction with each other.

Far from a unified currency

We start with monetary history in the 19th Century. It should be clear that a number of changes occurred within states on the turn of the 19th century. Influences which were an issue were, for example, the French Revolution, the dissolution of the Holy Roman Empire, the Napoleonic Wars, the Wars of Liberation and the reorganization of the Congress of Vienna. For the first time a German Confederation had been formed; however a uniform currency was not yet in sight.

In the year 1815 there were approximately 35 principalities and cities who were each able to issue their own coins. In the southern states in 1837 an agreement had been reached on a unified currency for the first time. In the following year there was a unification with the Taler coin areas because of the Dresden coin contract, which spread in northern Germany. 3.5 southern German guiler corresponded to two thaler, which was described as a Vereinsmünze. Because of its big size and high value it was unpractical and unpopular.

In 1857, the Vienna Monetary Contract was responsible for a further unification. In nearly all parts of Germany there was a uniform silver coin in circulation; the Vereinstaler. However the gold standard and the decimal classification were not yet achieved. The countries’ coins continued to be valid, but only in the respective countries of issue.

The beginning of a uniform decimal currency

After the Franco-German War of 1870 until 1871 and the subsequent founding of a German Empire, a new and uniform decimal currency could have been established. This was about a kingdom of gold. The gold-backed Mark was considered as a currency unit and could be divided into one hundred Pfennig. The previous regional currencies were dissolved bit by bit. Silver coins were only coined as Kreditmünzen, their value was related to the gold market. The gold-backed Mark was possible because the French had to pay high reparation costs after the war, which were made in gold.

The introduction of the Gold Standard

This was the beginning of the classical gold standard for Germany. The central bank exchanged cash money into an equal amount of gold anytime. If someone was in possession of a bank note he had the right to get a certain amount of gold. If we speak about a pure Gold Standard, the amount of money is equivalent to the gold holdings of the country. This pure Gold Standard only existed in theory. In practice, the Gold Standard countries just possessed a so-called “golden anchor”. This effectively meant that inflation of legal gold-deposit-obligations could only mostly be prevented.

As a functioning international monetary system the Classical Gold Standard ended with World War I.

The Mark’s value falls

Due to high reparation costs for the lost war, there was a fall in value of the Mark. In 1923 hyperinflation reached its peak; one Goldmark corresponded to one trillion Papiermark. Due to its low value, politicians opted to print a lot of paper money between World War I and World War II in order to buy foreign currency to repay reparation costs. As a result hyperinflation ensued.

At the end of 1923 the gold-backed Rentenmark was created, which provided stability; one billion Papiermark could be exchanged for one Rentenmark. With the introduction of the Rentenmark the currency was backed by gold again. In 1924, the Rentenmark was released by the Reichsmark in the ratio 1:1. Until the Great Depression in 1929, the Reichsmark was very stable. During the period of the Nazi regime a lot of unbacked money was spent, which was used to finance the war. There was renewed inflation, which the citizens didn’t realize at first. The gold standard was determined for a second time. After the lost war the so-called “repressed inflation” was unleashed upon the German citizens.

Until 1938, gold coins were used as currency and the copper coins of the German Empire were used until 1942. In parallel to the Reichsmark, the Allied Militärmark was also used as a currency from 1944 until 1948.

A divided Germany

One consequence, amongst other things, of the Second World War was a collapsed German economy. A huge glut of money was offset by only a minimal range of goods. From this date onward Germany had to be regarded as divided because East and West were treated separately. In 1948 in the western zones of Germany, a currency reform was undertaken; the Reichsmark and Alliierte Militärmark were replaced by the Deutsche Mark. Every citizen was allowed to exchange 600 Reichsmark into 60 Deutsche Mark. The Deutsche Mark was very stable and covered by gold up to 1971. In 1975 the silver coin disappeared as a circulating coin and the Deutsche Mark was coined of nickel mostly. Therewith the period of the circulation of silver money ended.

In the former German Democratic Republic (GDR), East Germany, a currency reform was also undertaken in 1948. The Reichsmark was replaced by the Deutsche Mark der Deutschen Notenbank (DM) in the rate of 10:1. Due to the high levels of cash holdings the GDR defined in 1957 that only 300 Deutsche Mark (GDR) could be exchanged; the German central bank got the rest. In 1964 the currency was renamed into the Mark of the German central bank (MDN), which was renamed again in 1974 in Mark of the GDR.

The Bretton Woods agreement

After the end of World War II, the Bretton Woods agreement was introduced. This was a monetary system of fixed exchange rates. The Federal Republic of Germany joined the system of fixed exchange rates in 1949 and in 1952, the Agreement was ratified. This was a monetary system of the Gold Standard. After 1971, the agreement was demonetized and the exchange rates were released. Consequently it was the end of the gold standard.

A crucial step in the history of the German currency

In 1999 there was an important change in the German monetary system; the introduction of the Euro as bank money of the common currency of, at first, 12 European countries. Since 2002, the euro was also used as cash money. Thereby the old national currencies lost their payment function. The exchanging rate of DM into Euro was, and still is 1.96:1.

An interesting aspect at the conversion of the currency from DM into the Euro is that also after many years the DM is still convertible. 10 years after the introduction of Euro as the common currency there are still billions of DM in circulation. The money can be exchanged at the German Bundesbank and in some shops you can still pay with DM, such as C & A and Kaufhof.

At the beginning the fear in German society was large because the people were apprehensive of losing the stable Deutsche Mark and getting a currency that had high rates of inflation. Gradually, the skepticism about the euro disappeared and after a few years it became seen as a stable currency.

However, since the financial crisis in 2008, the Euro as a stable monetary system has been questioned. In recent years the situation has worsened and the future of the Euro in Germany is uncertain. The introduction of a new currency as the solution to the economic crisis is something the experts are unable to agree on.

More and more Germans now call for a return to the DM. They do not want to pay for the debts of other countries. Some experts warn of a return to the DM, they believe this would cause a sharp drop in the German economy; exports would fall and there would be a sharp fall in the gross domestic product. Overall, it would be a heavy financial burden for Germany. However, it should be kept in mind that the financial costs of staying in the Euro could increase to enormous heights. We are curious to see what decision the government may reach.