One dollar, one trillion marks: how did the hyperinflation of 1923 change the position of debtor and lender?

In November 1923 one US dollar was worth about one trillion marks. A question arises for the accountant: how are the books kept at such a time, and what does the very word "debt" mean?

In this article we look not at the curious phenomenon itself but at the lessons an accountant can draw from it. The dates and figures rely on the sources listed, while the present-day example is about a hypothetical company we invented ourselves.

Why did money lose its value in 1923?

According to Britannica, the hyperinflation was triggered by the Franco-Belgian occupation of January 1923: the Ruhr industrial region was seized.

The sequence of events was as follows: - In January 1923 French and Belgian troops occupied the Ruhr industrial region (Britannica). - The Cuno government ordered passive resistance to the occupiers' attempts to run the enterprises (Britannica). - On 26 September Stresemann ended passive resistance and ordered work to resume (Britannica).

As a result, in November 1923 one US dollar became equal to about a trillion marks (Britannica). According to the Bundestag material, at the peak in November the rate was 4.2 trillion marks to the dollar. The difference between the two figures may arise because one is a general description and the other a more precise rate. So we write both as "about". Do not confuse them with the rate of 4.20 Rentenmark in the next section: 4.2 trillion old marks and 4.20 Rentenmark are different units of measurement.

Lender and debtor: how did inflation affect them?

A simple calculation shows: a claim fixed in a set amount of money (a deposit, a loan, a receivable) loses its real value when prices rise. An obligation of the same amount, by contrast, becomes lighter for the debtor in real terms.

The Bundesbank shows this with a single figure: the wartime state debt of 154 billion marks was worth about 15.4 pfennigs on the day the Rentenmark was introduced. Let us check by calculation: divide 154 billion marks by the rate of 1 Rentenmark = one trillion old marks and you get 0.154 Rentenmark, that is 15.4 pfennigs. The figures agree.

The Bundesbank writes that the state gained the most from the reform. Britannica notes that inflation impoverished millions of Germans. In balance sheet language: if a claim fixed in a set amount of money loses its value, an obligation of the same amount becomes lighter in real terms.

What did the Rentenmark do?

According to the sources: - The Rentenbank began issuing new banknotes in November 1923. The German Historical Museum gives 15 November; some sources differ by a day or two, so we treat the exact day as disputed and say "mid-November". - 1 Rentenmark was set equal to one trillion old marks, and 1 US dollar became equal to 4.20 Rentenmark (German Historical Museum). The calculation matches: 4.2 trillion marks / 4.2 = 1 trillion marks. - In 1924 the Dawes Plan appeared, addressing the question of reparation payments (Office of the Historian, US Department of State). - According to the Bundesbank, on the day of the reform the state's war debt of 154 billion marks fell to 15.4 pfennigs.

A present-day example: a receivable of 120 million soums

Now let us look at the effect of inflation on a debt in an invented modern situation. This is a hypothetical example prepared by the author, not a real company.

"Nurafshon Mebel" sold a customer a furniture set for 120 000 000 soums on 30 days' credit. The calculation by days:

The annual 10% in the table is taken only for the calculation as a hypothetical figure and is not official data. The calculation: 1.10 to the power of 30/365, that is 1.00786. So with ordinary inflation a 30-day delay eats up about 0.94 million soums of this amount.

The sale and the receipt of payment are recorded as follows, according to the correspondences given in NAS No. 21:

These journal entries do not themselves show the loss of value: the amount in the account stays unchanged in soums. The loss of value is felt not in the books but in the notes and in pricing policy, which is why in practice the terms and price of a credit sale are thought through separately.

What does the accountant measure? A simplified thought experiment

Suppose the accountant of a small shop counts the till every evening. If the monetary unit is stable, the statement "today's takings are higher than yesterday's" means real growth. If the monetary unit is losing value quickly, the figure grows, but the volume of trade may not. So in an inflationary environment the accountant asks two questions: how much is the amount, and in money of what date is it measured? This reflection was composed by the author and is not a historical fact, but it shows why comparable periods matter in accounting.

The same goes for a loan agreement: the lender expects not the amount itself but what that amount will be able to buy later. Stating the payment term and conditions clearly in the contract protects both sides.

Then and now

A lesson for today's accountant

1. A claim fixed in a set amount loses value over time. If a receivable is overdue, the amount in soums does not change, but its purchasing power falls. Controlling overdue debts is part of financial discipline.
2. When selling on credit, think carefully about the term. The real value of a debt falls as the term lengthens. The difference between a 30-day and a 90-day term can be noticeable under inflation.
3. A report must also say "in what unit this figure is measured". A soum of one date and a soum of years ago are not equal. When comparing old reports, take inflation into account.
4. The positions of lender and debtor differ. A claim fixed in a set amount loses its real value, while an obligation fixed in a set amount becomes lighter in real terms. That is why the term and payment conditions in a contract are written with care.
5. Accurate accounting is the basis of trust in reporting. When documents are correct and amounts are verified, trust in the report is formed.
6. Record dates and rates with their source. Even the 1923 rate is given with two different figures (about a trillion and 4.2 trillion). In daily work too, write down from which date and which source a rate was taken.

Short conclusion

Germany in 1923 showed how fast a monetary unit can lose its value. The real value of claims and debts fixed in a set amount of money changed sharply. The lesson for today's accountant is simple: the stability of the monetary unit is the invisible foundation of accounting, and it must not be ignored.