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Dying of Money: Lessons of the Great German and American Inflations
Ludwig von Mises Institute ^ | (1974) | Jens O. Parsson

Posted on 10/15/2010 10:37:25 PM PDT by DeaconBenjamin


Most of us have at least a general idea of what we think inflation is. Inflation is the state of affairs in which prices go up. Inflation is an old, old story. Inflation is almost as ancient as money is, and money is almost as ancient as man himself.

It was probably not long after the earliest cave man of the Stone Age fashioned his first stone spearhead to kill boars with, perhaps thirty or forty thousand years ago, that he began to use boar’s teeth or something of the sort as counters for trading spearheads and caves with neighboring clans. That was money. Anything like those boar’s teeth that had an accepted symbolic value for trading which was greater than their intrinsic value for using was true money.

Inflation was the very next magic after money. Inflation is a disease of money. Before money, there could be no inflation. After money, there could not for long be no inflation. Those early cave men were perhaps already being vexed by the rising prices of spearheads and caves, in terms of boar’s teeth, by the time they began to paint pictures of their boar hunts on their cave walls, and that would make inflation an older institution even than art. Some strong leader among them, gaining greater authority over the district by physical strength or superstition or other suasion, may have been the one who discovered that if he could decree what was money, he himself could issue the money and gain real wealth like spearheads and caves in exchange for it. The money might have been carved boar’s teeth that only he was allowed to carve, or it might have been something else. Whatever it was, that was inflation. The more the leader issued his carved boar’s teeth to buy up spearheads and caves, the more the prices of spearheads and caves in terms of boar’s teeth rose. Thus inflation may have become the oldest form of government finance. It may also have been the oldest form of political confidence game used by leaders to exact tribute from constituents, older even than taxes, and inflation has kept those honored places in human affairs to this day.

Since those dim beginnings in the forests of the Stone Age, governments have been perpetually rediscovering first the splendors and later the woes of inflation. Each new government discoverer of the splendors seems to believe that no one has ever beheld such splendors before. Each new discoverer of the woes professes not to understand any connection with the earlier splendors. In the thousands of years of inflation’s history, there has been nothing really new about inflation, and there still is not.

Around the year 300 A.D., the Roman Empire under the Emperor Diocletian experienced one of the most virulent inflations of all time. The government issued cheap coins called “nummi,” which were made of copper washed with silver. The supply of metals for this ingenious coinage was ample and cheap, and the supply of the coinage became ample and cheap too. The nummi prices of goods began to rise dizzily. Poor Emperor Diocletian became the author of one of the earliest recorded systems of price controls in an effort to remedy the woes without losing the joys of inflation, and he also became one of the earliest and most distinguished failures at that effort. The famous Edict of Diocletian in 301 decreed a complex set of ceiling prices along with death penalties for violators. Many death penalties were actually inflicted, but prices were not controlled. Goods simply could not be bought with nummi. Like every later effort to have the joys without the woes of inflation, the Edict of Diocletian failed totally.

So it has gone throughout the millennia of man’s development. For at least the four thousand years of recorded history, man has known inflation. Babylon and Ancient China are known to have had inflations. The Athenian lawgiver Solon introduced devaluation of the drachma. The Roman Empire was plagued by inflation and, more rarely, deflation. Henry the Eighth of England was a proficient inflationist, as were the kings of France. The entire world underwent a severe inflation in the sixteenth and seventeenth centuries as a result of the Spanish discoveries of huge quantities of gold in the New World. “Continentals” in the American Revolution and the assignats in the French Revolution were precursors of the wild paper inflations of the twentieth century. Steadily rising prices have been the general rule and not the exception throughout man’s history.

The twentieth century brought the institution of inflation to its ultimate perfection. When economic systems are so highly organized as they became in the twentieth century, so that people are completely dependent on money trading for the necessaries of life, there is no place to take shelter from inflation. Inflations in the twentieth century became like inflations in no other century. The two principal inflations that occurred in advanced industrial nations in the twentieth century will probably prove to have done more to influence the course of history itself than any other inflation. One of these was the German inflation that had its roots in World War I, grew to a giddy height and a precipitous fall in 1923, and contributed to the rise of Adolf Hitler and World War II. The other was the great American inflation that had its roots in World War II, grew in the decade of the 1960’s toward an almost equally giddy height, and contributed to results which could not even be imagined at the time this book was written.

This book is not a history of inflation, because most inflations of history hold only a passing interest. This book is written primarily about the great American inflation, and it was written at a time when that inflation was still in mid-career. No one then knew where it might end, but it seemed altogether possible that no inflation of history, not even the German, would appear in retrospect to have troubled the waters of time more deeply than the great American inflation.

Inflations may be of every conceivable variety of degree, from the mildly annoying to the volcanic. Inflations may be fast or slow, accelerating or decelerating, chronic or transitory. A merely annoying inflation usually causes no one very much real harm. A volcanic inflation, on the other hand, is the kind of catastrophe that confiscates wealth, withholds the means of life, breeds revolutions, and precipitates wars. Every volcanic inflation of history began as a mildly annoying inflation. The true nature of any inflation is not often visible on its surface. As with volcanoes, an annoying inflation that is about to subside and die out looks on its surface like one that is about to erupt. It is the disquieting nature of an inflation that no one knows with certainty what it will do next.

The era of the inflation in the United States was an era of many kinds of discomforts. The nation was fighting a small but dismal and unpopular war in distant Southeast Asia. Crime was rampant. Cities were degenerating. Negroes were in ferment, students in rebellion, and youth in general in a state of defection. The illness of inflation might have been lesser or greater than any of these. It might have had nothing to do with any other illness, or it might have lain near the root of them all. There were those who dismissed the inflation as the least of the panoply of American illnesses, but they were less numerous than formerly and might be still less numerous later.

Scarcely a person in America was untouched by inflation’s handiwork. Every citizen, in his daily life and with his earthly fortune, danced to a tune he mostly could not hear, played for him by the government’s inflation. It was up to every citizen to learn for himself what was happening and to look out for himself if anyone was going to, because no one else was looking out for him. The government certainly was not. The government was compelled by its other duties not to protect him but the opposite, to continue to steal from him by the inflation as long as it could. The forces at work were such that there was no practical possibility the inflation would end or abate. The only real question was whether or not it would continue to become steadily worse. A hundred million Americans or more, almost all of them serenely unwitting, lived their lives and made their homes on inflation’s epicenter. They were on ground zero for inflation’s shock waves. Only time would tell whether the tremors rumbling beneath their feet would pass off without a quake.

The past is prologue, it is said. No more instructive prologue to the American inflation, which was still unfinished, could be chosen than the German inflation, which was long since completed. Let us begin then by turning first to that inflation and taking our text for the day from the scripture of history.

Prologue: The German Inflation of 1914-1923

1: The Ascent

In 1923 Germany’s money, the Reichsmark, finally was strained beyond the bursting point, and it burst. Persistent inflation which had steadily eroded the mark since the beginning of World War I at last ran away. Germany’s “disastrous prosperity” came to an end, and in its place the German people suffered a period of hardship and real starvation as well as a permanent obliteration of their life savings. When the debacle was finally stopped, the old mark, which had once been worth a solid 23 cents, was written off at one trillion old marks to one new one of the same par value. The most spectacular part of that loss was lost in the mark’s final dizzy skid; all the marks that existed in the world in the summer of 1922 (190 billion of them) were not worth enough, by November of 1923, to buy a single newspaper or a tram ticket. That was the spectacular part of the collapse, but most of the real loss in money wealth had been suffered much earlier. The first 90% of the Reichsmark’s real value had already been lost before the middle of 1922.

The tragicomic denouement of Germany’s inflation—the workers hastening to the bake shops to spend quickly their day’s pay bundled up in billions of paper marks and carried in wheelbarrows—is perhaps at least vaguely remembered nowadays. The more sinister and more permanent scars which the inflation left are less well known. Still less clearly remembered are the years before the mark blew, with their breakneck boom, spending, profits, speculation, riches, poverty, and all manner of excess. Throughout these years the structure was quietly building itself up for the blow. Germany’s inflation cycle ran not for a year but for nine years, representing eight years of gestation and only one year of collapse.

The beginning was in the summer of 1914, a day or two before World War I opened, when Germany abandoned its gold standard and began to spend more than it had, run up debt, and expand its money supply. The end came on November 15, 1923, the day Germany shut off its money pump and balanced its budget. Over the nine years in between, Germany’s inflation followed not a constant course but a characteristic ascent and descent, a ripening and a decay.

Germany started by not paying adequately for its war out of the sacrifices of its people—taxes—but covered its deficits with war loans and issues of new paper Reichsmarks. Scarcely an eighth of Germany’s wartime expenses were covered by taxes. This was a failing common to all the combatants. France did even worse than Germany in financing the war, Britain not much better. Germany’s bad financing was due in part to a firm belief that it would be able to collect the price of the war from its enemies, whom it expected to defeat; but to a greater degree it may have sprung from distrust that its people would support the war to the extent not only of fighting it but also of paying for it. Whatever the reason, Germany’s bad war financing did not immediately demand its price. Inflation in the sense of rising prices was moderate. Domestic prices only a bit more than doubled to the end of the war in 1918, while the government’s money supply had increased by more than nine times. The government’s debt increased still more. So long as the government in this way could spend money it did not have faster than its value could fall, Germany had both its war and life as usual at the same time, which was the same as having the war free of charge.

After the war, Germany and all the other combatants underwent price inflations which served as partial corrections for their wartime financing practices. The year 1919 was a year of violent inflation in every country, including the United States. By the spring of 1920, German prices had reached seventeen times their prewar level. From this point, however, the paths of Germany and the other nations diverged. The others, including the United States, stopped their deficit financing and began to take their accumulated economic medicine by way of an acute recession in 1920 and 1921. Their prices fell steeply from the 1920 level. Germany alone continued to inflate and to store up not only the price of the war but also the price of a new boom which it then commenced enjoying. Germany’s remarkable prosperity was the envy of the other leading countries, including the victors, who were in serious economic difficulties at the time. Prices in Germany temporarily stabilized and remained rock-steady during fifteen months in 1920 and 1921, and there was therefore no surface inflation at all, but at the same time the government began again to pump out deficit expenditure, business credit, and money at a renewed rate. Germany’s money supply doubled again during this period of stable prices. It was this time, when Germany was sublimely unconscious of the fiscal monsters in its closet, which was undoubtedly the turning of the tide toward the inflationary smash. The catastrophe of 1923 was begotten not in 1923 or at any time after the inflation began to mount, but in the relatively good times of 1920 and 1921.

The stimulation of the government’s easy money spread through virtually all levels of the German economy. The life of the inflation in its ripening stage was a paradox which had its own unmistakable characteristics. One was the great wealth, at least of those favored by the boom. These were the “profiteers” of whom everyone spoke. Industry and business were going at fever pitch. Exports were thriving; that was one of the problems. Hordes of tourists came from abroad. Many great fortunes sprang up overnight. Berlin was one of the brightest capitals in the world in those days. Great mansions of the new rich grew like mushrooms in the suburbs. The cities, particularly in the eyes of the austere country folk, had an aimless and wanton youth and a cabaret life of an unprecedented splendor, dissolution, and unreality. Prodigality marked the affairs of both the government and the private citizen. When money was so easy to come by, one took less care to obtain real value for it, and frugality came to seem inconsequential. For this reason, Germans did not obtain so much real wealth as the growth of money alone would have indicated.

Side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter. The crime rate soared. Although unemployment became virtually nonexistent and many of the workers were able to keep up with the inflation through their unions, their bargaining, and their cost-of-living escalator clauses, other workers fell behind the rising cost of living into real poverty. Salaried and white-collar workers lost ground in the same way. Even while total production rose, each individual’s own efforts faltered and showed a measurable decline, and the quality of production deteriorated. Accounts of the time tell of a progressive demoralization which crept over the common people, compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich. Feelings of disunity and dissent were epidemic among the Germans, and nationalism among them was never weaker. Regional separatism was so strong that it came close to breaking up Germany into fragments.

Along with the paradoxical wealth and poverty, other characteristics were masked by the boom and less easy to see until after it had destroyed itself. One was the difference between mere feverish activity, which did certainly exist, and real prosperity which appeared, but only appeared, to be the same thing. There was no unemployment, but there was vast spurious employment—activity in unproductive or useless pursuits. The ratio of office and administrative workers to production workers rose out of all control. Paperwork and paperworkers proliferated. Government workers abounded, and heavy restraints against layoffs and discharges kept multitudes of redundant employees ostensibly employed. The incessant labor disputes and collective bargaining consumed great amounts of time and effort. Whole industries of fringe activities, chains of middlemen, and an undergrowth of general economic hangers-on sprang up. Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out. Practically all of this vanished after the inflation blew itself out.

Speculation alone, while adding nothing to Germany’s wealth, became one of its largest activities. The fever to join in turning a quick mark infected nearly all classes, and the effort expended in simply buying and selling the paper titles to wealth was enormous. Everyone from the elevator operator up was playing the market. The volumes of turnover in securities on the Berlin Bourse became so high that the financial industry could not keep up with the paperwork, even with greatly swollen staffs of back-office employees, and the Bourse was obliged to close several days a week to work off the backlog.

Another busy though not directly productive sector of activity was in capital goods and industrial construction. The boom’s excessive emphasis on producing new means of production was striking. Travelers remarked the contrast between Germany’s new, humming factories and the old, depressed ones of neighboring countries. Much of this indiscriminate growth in plant capacity made sense only in the bloated inflationary expansion, but not otherwise. After the inflation ended, much of Germany’s brand new inflation-built plant was “rationalized,” which often meant simply torn down again.

Concentration of wealth and business was still another characteristic trend. The merger, the tender offer, the takeover bid, and the proxy fight were in vogue. Bank mergers were all the rage, while at the same time new and untried banks sprouted. Great ramshackle conglomerates of all manner of unconnected businesses were collected together by merger and acquisition. Armies of lawyers, brokers, accountants, businessmen, and technicians who spent their time pasting together these paper empires bolstered the lists of the more or less employed. The most fabulous of the conglomerates was the empire of Hugo Stinnes, which comprised hundreds of companies at its peak in coal, iron, steel, shipping, transport, paper, chemicals, newspapers, oil, films, banks, hotels, and more. Stinnes was Mr. Everything who had also begun to colonize abroad and is supposed to have contemplated organizing all German industry into a single super-conglomerate. After the inflation ended, Stinnes’ empire and many lesser ones were found to be functionally and financially unsound, and they disintegrated more or less messily. Stinnes died.

It was typically true that the Germans who grew the richest in the inflation were precisely those who, like the speculators, the operators, and the builders of paper empires, were least essential to German industry operating on any basis of stability or real value. With the end of the inflation they disappeared like apparitions in the dawn, and scarcely a one of the “kings of inflation” continued to be important in German industry afterward.

2: The Descent

That was how it was in the heyday of the boom, which was the ripening stage of the inflation. Inexorably the inflation began to stalk the boom. From having been steady during the fifteen months preceding July 1921, prices doubled in the next four months and increased by ten times in the year through the summer of 1922. Consumers put on pathetic buyers’ strikes against the rising prices. Interest rates soared as lenders tried to anticipate the loss of value of their principal. Businessmen quoted prices to one another with gold or constant-value clauses, or they did business in foreign currency. The government’s actual deficits were relatively innocuous. In fact, the government’s budget was closer to balance at the brink of the crash in 1922 than at any time since 1914. But while the government’s new deficits diminished, the inflation had become self-sustaining, feeding on the old ones. The government was unable to refinance its existing debts except by printing new money. The government’s creation of paper wealth steadily fell behind the rising prices, and the inflation entered its catastrophic decaying stage.

The final convulsion when it began was at first bizarre and at last became sheer nightmare. Beginning in July 1922, prices rose tenfold in four months, two hundredfold in eleven months. Near the end in 1923, prices were at least quadrupling each week. Prices raced so far ahead of the money-printing plants that, in the end, the total real value of all the Reichsmarks in the world was smaller than it had ever been, a phenomenon which enabled the government’s economists to argue that there was no true inflation at all, it was just numbers. This phenomenon also made money so scarce, even in the face of astronomical prices, that urban Germans could not find the price of their daily bread. The worker had to compute his pay in the trillions, carry it in bales, and spent it instantly lest he lose it. The forlorn buyers’ strikes of earlier days against the mildly higher prices were no more; in their place the buyers were vying with one another to buy up any kind of goods at any price before their little money could evaporate. The seas of marks which had been stored up by Germans and especially by trusting foreigners flooded forth and fought to buy into other investments, foreign currencies, tangible goods, almost anything but marks. Legally “fair” interest rates reached as much as 22% per day. The price of a schnitzel dinner might rise 20% between giving the order and paying the check. Germany’s money printing industry (another impressively large employer with 30 paper mills, 133 printing plants, workers in thousands) could not turn out enough trillions to keep up. States, towns, and companies got into the act by issuing their own “emergency money” (Notgeld). Barter became prevalent. Still money grew scarcer while prices continued to soar. The boom was long since over. Farmers, who were comfortable enough, would not sell their food to the townsmen for their worthless money. Starvation and abject poverty reigned. The middle class virtually disappeared as professors, doctors, lawyers, scientists and artists pawned their earthly goods and turned to field or factory to try to earn a little food. A former conductor of the Boston Symphony Orchestra earned a dollar’s worth of trillions a week conducting an orchestra in North Germany. Every level of life above the barest existence was shed. Malnutrition and the diseases of malnutrition were rife. Production began to fall. As factories closed, the workers too became unemployed and joined the starving. The whole system ground to a halt. Food riots and Marxist terror broke out throughout Germany. Eighty-five persons died in a riot in Hamburg. The famous beer hall Putsch led by Adolf Hitler in Munich in November 1923, the last month of the inflation, was only one of the many and not the worst.

Once the old Reichsmark had been thoroughly obliterated, the return to a stable currency was so absurdly simple as to become known as the “miracle of the Rentenmark.” The Rentenmark, or “investment mark,” was the new interim currency. The government of industrialist Wilhelm Cuno, which had ruled during most of the worst of the inflation, finally fell in August of 1923. Gustav Stresemann, who was later foreign minister throughout the trying 1920’s and has been described as by far the greatest German of the Weimar era, was promptly summoned as chancellor. In October, the Reichstag voted him dictatorial powers under the Weimar constitution. He in turn called upon Dr. Hjalmar Schacht, who was later Hitler’s financial wizard and was tried (but acquitted) at Nuremberg, as the commissioner for the new Rentenmark. As Dr. Schacht relates, he accomplished the introduction of the Rentenmark with no staff but his secretary and no establishment but his dark back office and a telephone. The Rentenmark was placed in circulation beside the devalued Reichsmark and carried no real value of its own but the naked avowal that there would be only so many Rentenmarks and no more. The Germans miraculously believed it and, still more miraculously, it turned out to be true. The old Reichsmark was finally pegged at one trillion to one Rentenmark on November 15, 1923; simultaneously the German finance ministry under the estimable Dr. Hans Luther, who was to become chancellor of one of the later governments, balanced its budget, and that was the end of the inflation.

Stabilization through the Rentenmark was by no means painless. To convince the skeptical required first a series of severe bloodlettings administered by the resolute Dr. Schacht to foreign-exchange speculators, issuers of the Notgeld, and businesses which required credit, all of whom depended on the continued depreciation of the official currency. When the president of the Reichsbank throughout the war and the inflation, Rudolf Havenstein, died at the moment of the stabilization, Schacht was appointed to succeed him. Schacht’s greatest achievement was not so much in the introduction of the Rentenmark but in making a new non-inflationary money policy stick. The grand-daddy of all credit squeezes ensued from Dr. Schacht’s order of April 7, 1924, which stopped all credit from the Reichsbank. New inflation, which had begun to stir again, was then abruptly and finally stopped. The intrenched interests in Germany, especially the industrialists like Stinnes, characteristically fought Schacht every inch of the way, although a few later acknowledged the tightness of his course.

Germany now took its stored-up dose of hard times. Germans who had been caught in the inflation were relieved of their worldly goods. Businesses which were based on nothing but the inflationary boom were swept away. Credit for business was practically impossible to come by. Unemployment temporarily skyrocketed. Government spending was slashed, government workers dismissed, taxes raised, working hours increased, and wages cut. Almost 400,000 government workers alone were discharged. The shock to the German people of the final inflation, the stabilization, and the unemployment was so great that in the elections of May 1924, six months after the close of the inflation, millions of voters flocked from the moderate center parties to either the Communists or the Nazis and Nationalists on the extremes. These parties gained dramatic strength in the “inflation Reichstag,” as it was called.

Germany very quickly began to feel better economically, however, as the stabilization medicine did its work. New elections only seven months later, in December 1924, repudiated the Nazis and Communists and restored the strength of the middle-class parties and of the Social Democrats, the orthodox labor party. Only by the greatest efforts did Germany get itself going again in this way. Even so, because of the permanent shortage of credit Germany’s revival was unhealthily based (against Schacht’s warnings) on new foreign loans. The world depression which followed 1929 knocked debtor Germany flat again, and Hitler followed close behind.

TOPICS: Business/Economy; Germany; Government; News/Current Events
KEYWORDS: mises; teapartyrebellion; voteronpaul; whoisjohngalt

1 posted on 10/15/2010 10:37:31 PM PDT by DeaconBenjamin
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To: DeaconBenjamin; All

I started traveling to Florida in the late 1990s once a year. I was struck by the ever expanding building going on in Miami, especially in the direction of the Everglades. I remember thinking each year, my gosh, where do they expect to get all the people to fill these houses. Well, I guess my instincts were right. And of course this was happening in many other places as well. Thus the unemployment rate was kept artificially low by overbuilding and overconsumption.

So what do we do now? Further cut work weeks from 35 and 40 hours to 30 and 35 hours, so there will be enough work to go around?

2 posted on 10/15/2010 11:04:00 PM PDT by gleeaikin (question authority)
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To: DeaconBenjamin

good article. thanks.

3 posted on 10/15/2010 11:04:17 PM PDT by Bhoy
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To: DeaconBenjamin

Ping for later

4 posted on 10/15/2010 11:17:10 PM PDT by April Lexington (Study the Constitution so you know what they are taking away!)
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To: DeaconBenjamin


5 posted on 10/15/2010 11:28:06 PM PDT by JDoutrider
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To: DeaconBenjamin

Exellent post, thanks. Fills in a little bit of recent history. I used to study wars and battles, now it jst seems too simplistic. I find the study of economics as a prelude to war much more interesting as an explanation of history. Sure, something happened, but WHY did it happen? The answers are seldom pleasant.

6 posted on 10/15/2010 11:32:29 PM PDT by tired1 (Federalize the Fed)
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To: DeaconBenjamin


7 posted on 10/16/2010 12:18:27 AM PDT by onona (dbada)
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To: DeaconBenjamin

What a great post!

Thank you for digging it up.

8 posted on 10/16/2010 4:16:20 AM PDT by Daisyjane69 (Michael Reagan: "Welcome back, Dad, even if you're wearing a dress and bearing children this time)
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To: DeaconBenjamin


9 posted on 10/16/2010 5:23:27 AM PDT by Popman (Obama. First Marxist to turn a five year Marxist plan into a 4 year administration.)
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To: JDoutrider; Bhoy; April Lexington; tired1; onona; Daisyjane69; Popman

It’s actually an online book. I just posted the first two chapters.

10 posted on 10/16/2010 6:55:09 AM PDT by DeaconBenjamin (A trillion here, a trillion there, soon you're NOT talking real money)
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To: DeaconBenjamin

3: The Gains and Losses

When the inflation was over, everyone who had owed marks suddenly and magically owed nothing. This came about because every contract or debt that called for payment in a fixed number of marks was paid off with that many marks, but they were worth next to nothing compared with what they had been worth when they had been borrowed or earned. Germany’s total prewar mortgage indebtedness alone, for example, equal to 40 billion marks or one-sixth of the total German wealth, was worth less than one American cent after the inflation. On the other side, of course, everyone who had owned marks or mark wealth such as bank accounts, savings, insurance, bonds, notes, or any sort of contractual right to money suddenly and magically owned nothing.

The largest gainer by far, because it was the largest debtor, was the Reich government. The inflation relieved it of its entire crushing debt which represented the cost of the war, reconstruction, reparations, and its deficit-financed boom. Others who were debtors emerged like the government with large winnings. Until the last moment of the inflation borrowers continued to make huge profits simply by borrowing money and buying assets, because lenders never stopped underestimating the inflation. The good fortune of the debtors demonstrated the prudence of following the government’s lead: one must beware of being a creditor whenever the government was a huge debtor. Farmers in particular were the classic case of invulnerability to inflation, because they always had food, their farms were constant values, and the many who had mortgages on their farms were forgiven their debts outright.

The debtors’ gain was the creditors’ loss. Foreign holders of marks were huge losers. Germany was estimated to have made a profit of about 15 billion gold marks, or 40% of its annual national product, on sales of its paper marks to foreigners, even after deducting reparations payments. The wealthy in Germany suffered heavily but unevenly; the more nimble perceived early enough the need to invest in something other than mark wealth, while those who were not nimble lost everything. Trustees were forbidden by law until the very end to invest in anything but fixed obligations and consequently lost all the value of their trusts. The endowments of great charitable institutions, similarly invested, were wiped out. Financial institutions such as banks and insurance companies, which were both debtors and creditors in marks, were generally weakened though not destroyed in the inflation because of their inability to see clearly what was happening. Speculators tended to believe in their own game until too late and emerged as net losers. Sound business escaped weaker but intact; their debts were relieved but their boom business was gone. Inflation-born businesses disappeared.

Industrial stocks, the darling of the inflationary speculation, had a peculiar history. At the height of the boom, stock prices had been bid up to astronomical price-earnings ratios while dividends went out of style. Stock prices increased more than fourfold during the great boom from February 1920 to November 1921. Then, however, shortly after the first upturn of price inflation and long before the inflationary engine faltered and business began to weaken, a stock market crash occurred. This was the Black Thursday of December 1,1921. Stock prices fell by about 25% in a short time and hovered for six months while all other prices were soaring. The real value of stocks declined steadily because their prices lagged far behind the prices of tangible goods, until for example the entire stock ownership of the great Mercedes-Benz automobile manufacturer was valued by the market at no more than 327 cars. Investors were extremely slow to grasp that stocks were poles apart from fixed obligations like bonds, quite wrongly thinking that if bonds were worthless stocks must be too. Nearer the end in 1923, relative prices of stocks skyrocketed again as investors returned to them for their underlying real value. Stocks in general were no very effective hedge against inflation at any given moment while inflation continued; but when it was all over, stocks of sound businesses turned out to have kept all but their peak boom values notably well. Stocks of inflation-born businesses, of course, were as worthless as bonds were.

The mass of the workers who lived mostly on their current wages, and who had no savings to lose, suffered only temporarily with privation and unemployment in the very last throes of the inflation; but these problems passed and left them where they had been or not much behind. To them, the agony of the inflation was largely someone else’s, just as the boom had been.

At bottom, it was the unsuspecting middle class who were Germany’s savers, pensioners, purchasers of life insurance, including everyone from workers who saved to the modestly well-off, who not only suffered the worst of the agony while the inflation lasted but also were left after it was over with the most staggering permanent loss in relation to their whole substance. This class paid the piper for all of Germany. Great numbers of pensioners were left totally impoverished and forced back into the work gang to end their days there. The encouragement to thrift, an old German weakness, turned out to have been a complete swindle. Instead of a levy on all the Germans to pay for Germany’s indulgences, a levy which might have been heavy but could have been fair, Germany left the levy to fall on those who were too innocent to evade it, and from them it took everything they owned. In any case, it was not the piper who went unpaid.

The effect was a confiscatory tax on these victims. John Maynard Keynes, who later rightly or wrongly was adopted as patron saint by inflationary governments, excoriated them on this occasion:

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they can not only confiscate, but they confiscate arbitrarily … “

Adolf Hitler, whose economics were far more astute than those of the government’s economists, shared roughly the same view of the inflationary government confiscators with Lord Keynes:

” … once the printing presses stopped—and that is the prerequisite for the stabilization of the mark—the swindle would be at once brought to light … the State itself has become the biggest swindler and crook.”

Despite the obliteration of the wealth of millions of individual Germans, the inflation was merely a transfer of their wealth, like any tax, and not in any sense a destruction of wealth. For every German’s total loss, there was an equivalent gain to some other German debtor or to Germany as a whole, through the discharge of their debts.

11 posted on 10/16/2010 7:00:18 AM PDT by DeaconBenjamin (A trillion here, a trillion there, soon you're NOT talking real money)
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To: DeaconBenjamin

Excellent article. Thanks for the post.

A hero of the stabilization and development of the Rentenmark was Hjalmar Horace Greeley Schacht - whose parents had lived for a time in the U.S. and who admired Horace Greeley.

Later, he served under Hitler but turned against the Nazis and was arrested. He was tried and acquitted at Nuremberg by the Allies. A stubborn half-German, half-Dane, he played an important role in the economic history of the time.

12 posted on 10/16/2010 7:06:48 AM PDT by Malesherbes (Sauve qui peut)
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To: All


13 posted on 10/16/2010 9:01:37 AM PDT by rockrr (Everything is different now)
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To: DeaconBenjamin

Yes I went to the link checked out the TOC and read parts and saved it for later reading. I do look at the site .. but alas think — later later — so it’s nice when someone points out some important parts. Thanks for taking the time to post.

14 posted on 10/16/2010 9:56:00 AM PDT by Bhoy
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To: DeaconBenjamin

Yeah. I looked up the link and finally shut my eyes as the sun was coming up. Thanks, I think.

15 posted on 10/16/2010 12:41:44 PM PDT by tired1 (Federalize the Fed)
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To: DeaconBenjamin

Thanks for posting this, although in our current economic situation this book is beyond worrisome.

16 posted on 10/17/2010 8:31:39 PM PDT by Darnright (There can never be a complete confidence in a power which is excessive. - Tacitus)
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