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Under the Treaty of Versailles, Germany was forced to make heavy war reparations to the victors of World War I. What puzzles me was that the reparations were denominated in Marks (German Currency at that time). This gave Germany the option to default via inflation. It was exactly what happened. Given that war victors have always been able to dictate the terms, why did the victors not denominate the reparations in solid Gold which is unprintable? Given that the world was still on the Gold Standard at that time, it seemed Gold would look like a more logical currency.

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Off hand, I'd say the Inter-Allied Reparations Commission didn't consider that Germany would choose to implode their own economy by printing money - or care if they did. –  LateralFractal Oct 6 '13 at 1:02

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This isn't quite accurate.

After WWI Germany was saddled with two kinds of war debts. The first kind, reparations, were payable to the aggrieved parties. The value of this was set via the Treaty of Versailles in Gold Marks, which are gold backed, and thus cannot inflate or deflate relative to gold.

The second kind was in loans the German government took out from various parties to pay for the war itself. These debt were mostly in papier marks ("floating" paper - not gold backed). The intention was originally to pay back these loans with similar reparations on the allies when they (Germany) won the war. Since that didn't happen, the German government had a serious problem on its hands. The only choices really were either default on the internal debt, or to inflate away the value of those debts. They (probably unwisely) chose the latter.

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Most of the reparations came from cash loans to Germany from New York bankers - whose own promissory notes were backed by a fractional reserve only (i.e. not much gold); especially prior to the 1929 stock market crash when the US money supply grew by 62%.

Most of the remainder came from barter goods (coal, petrochemicals, equipment).

Addendum: The bankers had good reason to believe that Germany would eventually pay its debts, regardless of piffling things like "war" and "suffering", because of the underlying strength of the German economic model. Indeed, even though Nazi Germany reneged on the reparations in the 1930s; Germany resumed payment in the 1950s and finalised all obligations in 2010. That's Lannister-level consistency right there.

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In fact, Germany did not resume payment of reparations. They resumed payment of the loans they took to pay reparations, bit only needed to pay back 50% of them. East Germany's part was only paid back after reunification in 1990, and was paid for 20 years. Around 90% of the East German debt was paid back. And of course, only about one eighth of the original reparations was paid back. –  Lennart Regebro Oct 6 '13 at 6:11
Before anyone cries their eyes out over the injustice of Germany having been made the solely guilty party for the war at Versailles and over the harsh reparations imposed on her, I suggest looking up "Brest-Litovsk" on the Web. There you find evidence of what the Germans had planned for the subjugated peoples in the east post-WW I (if they had won). It makes Versailles look like a picknick... a mere slap on the wrist. –  Eugene Seidel Oct 6 '13 at 8:13
@LennartRegebro The distinction between payment of reparations and payment of the loans of reparations is very interesting. If loans with longer-term debt obligations were used to buy the "gold-backed Gold Marks" used in turn to pay the reparations (whatever percentage was paid); would you like to add an answer describing this? I don't think my or T.E.D's answer covers this nuance of international finance/loan restructuring. –  LateralFractal Oct 6 '13 at 8:17
@EugeneSeidel Yes there is a good argument that, as T.E.D points out, inflationary practices were due to general war-debt and mismanagement in 1920s which Germany blamed on reparations because Germany didn't want to pay the reparations anyway. –  LateralFractal Oct 6 '13 at 8:20
And let's not forget that France paid every sous and centime of the reparations imposed on her after the 1871 Franco-Prussian war -- ahead of time. This bit of information may not be all that relevant to discussion of Versailles and post-WWI reparations, but I hardly ever see it get mentioned. –  Eugene Seidel Oct 6 '13 at 8:23

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