This is the story of what is possibly the first known instance of a real estate backed stable coin. At Konkrete it is one of our moonshots to establish a real estate backed stable coin and it would be quite interesting to revisit one of the first attempts at establishing a real estate backed stable coin which actually ended up being quite successful.
World war 1 ended in 1918, Germany had lost the war. Unlike France, which imposed its first income tax to pay for the war, Germany had opted to fund the war entirely by borrowing, The government believed that it would be able to pay off the debt by winning the war, when it would be able to annex resource-rich industrial territory in the west and east. Also, it would be able to impose massive reparations on the defeated Allies. Funny how that panned out.
The new Weimar Republic was saddled with a massive war debt that it could not afford. The Treaty of Versailles, with its demand for reparations, further accelerated the decline.
Since reparations were required to be repaid in hard currency, not the rapidly depreciating paper mark, one strategy that Germany used was the mass printing of bank notes to buy foreign currency, which was then used to pay reparations, greatly exacerbating the inflation of the paper mark.
Late in 1922, Germany failed to pay France an instalment of reparations on time, and France responded in January 1923 by sending troops to occupy the Ruhr, Germany’s main industrial region. The German government ordered a policy of passive resistance in the Ruhr. Workers were told to do nothing which helped the invaders in any way. What this meant in practice was a general strike. But all the workers on strike had to be given financial support. The government paid its way by printing more and more banknotes. Germany was soon awash with paper money. The result was a hyperinflation.
A loaf of bread that in Berlin cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks less than a year later. By November 1923, the US dollar was worth 4,210,500,000,000 German marks.
Attempt at stabilization 1: A food backed stablecoin
I am using the term stablecoin here which was clearly not in vogue in the 1920s, but the idea was essentially the same. A unit of money that would be stable.
The hyperinflation crisis led prominent economists and politicians to seek a means to stabilize German currency. In August 1923, an economist, Karl Helfferich, proposed a plan to issue a new currency, the “Roggenmark” (“rye mark”), to be backed by mortgage bonds indexed to the market price of rye grain. The idea was quite sound, food is a basic necessity alongside clothing and shelter. The plan was rejected because of the greatly fluctuating price of rye in paper marks.
A real estate (mortgage) backed stable coin
Agriculture Minister Hans Luther proposed a plan that substituted gold for rye and led to the issuance of the Rentenmark (“mortgage mark”). The newly created Rentenmark replaced the old Papiermark. Because of the economic crisis in Germany after the First World War, there was no gold available to back the currency. Luther thus used the idea of a currency backed by real goods.
The new currency was backed by the land used for agriculture and business. This was mortgaged (Rente is a technical term for mortgage in German.
The amount was to the tune of 3.2 billion Goldmarks, based on the 1913 wealth charge called Wehrbeitrag which had helped fund the German war effort from 1914–1918.
Notes worth 3.2 billion Rentenmarks were issued. The Rentenmark was introduced at a rate of one Rentenmark to equal one trillion (1012) old marks, with an exchange rate of one United States dollar to equal 4.2 Rentenmarks.
The Act creating the Rentenmark backed the currency by means of twice yearly payments on property, due in April and October, payable for five years. Although the Rentenmark was not initially legal tender, it was accepted by the population and its value was relatively stable.
The Act prohibited the recently privatised Reichsbank from continuing to discount bills and the inflation of the Papiermark immediately stopped. The monetary policy spearheaded by Schacht at the Reichsbank and the fiscal policy of Finance Minister Hans Luther brought the period of hyperinflation in Germany to an end.
The world war 1 and the ensuing depression of 1930s decisively buried the gold standard. In its heyday the gold standard and free trade led to great rises in prosperity and reallocation of resources so that national economies ended up being realigned to focus on areas of comparative advantage.
But the ensuing mass manufacturing era proved unable to adapt to a slowdown. Today there is often talk about how Bitcoin is gold and it can act as the settlement layer etc. One should remember how well the gold standard actually fared.
Gold backed currencies eventually faded away due to the fundamental flaw of deflation inherent in a currency with limited supply. While today’s printing mill money is not a great solution either, this does not mean a reversion to a gold backed solution is a good idea.
What is needed is a currency that is backed by productive resources that benefit the common good and whose supply can potentially increase with the size of the economy.
Real estate, along with common infrastructure pool items such as roads etc can serve as a good collateral for such a future currency.
We will discuss the mechanics of how such a currency would work in a later article.