Germany Hyper Inflation

8/4/2019 Germany Hyper Inflation

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Germany hyperinflationArticle no-#1

Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming.

Any alternative may seem politically disastrous. Whether it be the Roman emperorsrepeatedly debasing their coinage, the French revolutionary government printing a flood ofassignats, John Law flooding France with debased money, or the Continental Congressissuing money until it was literally "not worth a Continental," the story is similar. Agovernment in financial straits finds its easiest recourse is to issue more and more moneyuntil the money loses its value. The entire process is accompanied by a barrage ofexplanations, propaganda and new regulations which hide the true situation from the eyesof most people until they have lost all theirsavings. In World War I, Germany -- likeother governments -- borrowed heavily to payits war costs. This led to inflation, but notmuch more than in the U.S. during the sameperiod. After the war there was a period ofstability, but then the inflation resumed. By1923, the wildest inflation in history wasraging. Often prices doubled in a few hours. Awild stampede developed to buy goods andget rid of money. By late 1923 it took 200billion marks to buy a loaf of bread.

Millions of the hard-working, thrifty Germanpeople found that their life's savings wouldnot buy a postage stamp. They werepenniless. How could this happen in a highlycivilized nation run at the time by intelligent,

democratically chosen leaders? Whathappened to business, to wages andemployment? How did some people manage to save their capital while a few speculatorsmade fortunes?

The Years 1914-1921

When the war broke out on July 31, 1914, the Reichsbank (German Central Bank)suspended redeemability of its notes in gold. After that there was no legal limit as to howmany notes it could print. The government did not want to upset people with heavy taxes.Instead it borrowed huge amounts of money which were to be paid by the enemy afterGermany had won the war, Much of the borrowing was discounted and monetized by the

Reichsbank. As explained later, this amounted to issuing straight printing press money.

By the end of the war, the amount of money in circulation had increased four-fold. In viewof this, the extent of inflation was less than one might have expected. The consumer priceindex had risen 140% by December 1918. This was equal to the inflation during the sametime in England, a little more than in the United States, but less than in France. Yet thefloating debt of the Reichsbank had increased from 3 billion to 55 billion marks!


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Why was inflation kept within bounds? For the same reason that it got off to a slow start inthe Unites States during World War II. Necessities were rationed and luxury goods were noteasily available. Millions of men were at the front and not in the market for goods. Civiliansworked hard and had little leisure for spending. People saved money against peace time,and in some cases to evade taxes. But the fuel for inflation was accumulating in the form ofvast hoards of money.

The harsh reparation payments imposed on Germany led the mark to depreciate againstforeign currencies. Also, the new democratic socialist leaders had promised the people alltypes of bounties--increased wages, reduced hours, an expanded educational system, andnew social benefits. But all this meant a vastly increased demand on a limited productioncapacity.

For these reasons inflation resumed after the peace until by February 1920 the price levelwas five times as high as it had been at the armistice. Yet during this same time theamount of currency in circulation had only doubled. Prices were in fact rising much fasterthan the rate at which money was being printed. Therefore, reasoned the officials, the priceinflation could hardly be blamed on the government. Actually, as we shall see, the ebb and

flow of confidence can play a big role in the short-term trend of prices. Confidence in themark had weakened. At the same time, and as a consequence, billions of hoarded markscame out of hiding and entered the marketplace. The accumulated fuel was burning.

By February 1920 this inflationary episode had run its course. For the next fifteen monthsthe price index held stable. The mark actually gained in value against foreign currencies, sothat prices of imported goods fell by some 50%. Here was a golden opportunity to establisha stable currency. However, during these fifteen months the government kept issuing newmoney. The currency in circulation increased by 50% and the floating debt of theReichsbank by 100%, providing fuel for a new outbreak.

In May 1921, price inflation started again and by July 1922 prices had risen 700%. TheReichsbank continued printing new currency, although more slowly than the rate at whichprices were rising. In fact, all through this period the issue of currency proceeded at a fairlysmooth steady rate, while the price index moved up in great surges, interspersed by periodsof stability.

After July 1922 the phase of hyperinflation began. All confidence in money vanished and theprice index rose faster and faster for fifteen months, outpacing the printing presses whichcould not run out money as fast as it was depreciating.

Wholesale Price Index

July 1914 1.0

Jan 1919 2.6

July 1919 3.4

Jan 1920 12.6

Jan 1921 14.4

July 1921 14.3


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Jan 1922 36.7

July 1922 100.6

Jan 1923 2,785.0

July 1923 194,000.0

Nov 1923 726,000,000,000.0

The Years 1922-1923 -- Hyperinflation!

From Mid-1922 to November 1923 hyperinflation raged. The table above tells the story.Seemingly Reichsbank officials believed that the basic trouble was the depreciation of themark in terms of foreign currencies. In late 1922 they tried to support the mark bypurchasing it in the foreign exchange markets. However, since they continued printing newcurrency at a feverish rate, the attempt failed. They merely succeeded in buying worthlessmarks in return for valuable gold and foreign exchange.

All hope of checking the collapse of the mark vanished in January 1923 when the French--alleging treaty violations--occupied Germany's key industrial district, the Ruhr. Germanysubsidized the occupied companies and financed an expensive program of "passiveresistance." New billions of marks were printing to finance these heavy new costs. By late1923, 300 paper mills were working top speed and 150 printing companies had 2000presses going day and night turning out currency.

Under the forced draft of inflation, business was now operating at feverish speed andunemployment had disappeared. However, the real wages of workers dropped badly. Unionsobtained frequent increases, but these could not keep pace. Workers --domestics, farm

workers and various white collar groups-- fared especially badly. They had no unions tofight for pay boosts for them, and often they were reduced to hunger. Many people showedvisible signs of malnutrition. Skilled workers, writers, artisans and professionals found theirwages lagging until they reached the unskilled worker level, which often meant the bareminimum needed to support life.

Businessmen began to abandon their legitimate occupations to speculate in stocks and ingoods. Thousands of small businessmen tried to eke out a living by speculating in fabrics,shoes, meat, soap, clothing--in any produce they could obtain. Each fall in the mark broughta rush to the shops. People bought dozens of hats or sweaters.

By mid-1923 workers were being paid as often as three times a day. Their wives would

meet them, take the money and rush to the shops to exchange it for goods. However, bythis time, more and more often, shops were empty. Storekeepers could not obtain goods orcould not do business fast enough to protect their cash receipts. Farmers refused to bringproduce into the city in return for worthless paper. Food riots broke out. Parties of workersmarched into the countryside to dig up vegetables and to loot the farms. Businesses startedto close down and unemployment suddenly soared. The economy was collapsing.


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Meanwhile, middle-class people who depended on any sort of fixed income foundthemselves destitute. They sold furniture, clothing, jewelry and works of art to buy food.Little shops became crowded with such merchandise. Hospitals, literary and art societies,charitable and religious institutions closed down as their funds disappeared.

Then by a mere effort of will, the government stepped in and stabilized the currencyovernight.

Throughout the "miracle of the Rentenmark" the depreciation halted in its tracks, businessrevived, the inflationary spree was ended although, as we shall see, there was a nastyhangover yet to come.

Millions of middle-class Germans--normally the mainstay of a republic--were ruined by theinflation. They became receptive to rabid right wing propaganda and formed a fertile soil forHitler. Workers who had suffered through the inflation turned, in many cases, to the

Communists. The biggest beneficiaries of this enormous redistribution of wealth werefeudalistic industrial leaders who distrusted the democracy and who proved willing to dealwith Hitler, thinking that they could control him. The democratic parties and the laborunions lost their capital and were weakened. The liberal democratic regime was discredited.

What caused the inflation?

Our thesis is simple: The inflation was caused by the government issuing a flood of newmoney, causing prices to rise. Then, as the inflation gained momentum, events seemed todemand the printing of larger and larger issues of currency. To half the process would havetaken political courage, and this was lacking. As usual, the true facts were hidden behind abarrage of excuses, explanations and propaganda laying blame on everyone except the true

culprit.

First, it would be wrong to think that everyone was opposed to inflation. Many big businessleaders accepted it cheerfully. It wiped out their debts. They knew how to protectthemselves and even profit--by speculating in foreign exchange, by converting money intogoods and fixed plant, by borrowing money from the bank and using it to buy up cheapstocks and competing companies. Their wage costs, in true value, decreased, swelling theirprofits. Yet many workers also thought that they were benefiting, at least in the earlier


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stages of the inflation. Their wages were increased, and it took time before they recognizedthat, with prices soaring even faster, they were actually suffering a cut in true income.

A crew of speculators arose who traded in goods and foreign exchange; they had a vestedinterest in continued inflations. And the government could not help realizing that theinflation was wiping out its burden of debt and would ease its financial problems.

Above all, it became an article of faith among the political leaders and mostordinary citizens that the inflation was really due to the burden of reparationpayments imposed by the peace treaty. This meant, so the argument ran, thatGermany would be stripped of its gold, foreign exchange and wealth; it wouldbe bankrupt. Hence, the mark fell in value in terms of gold or dollars. This drop

in the foreign exchange value of the mark was said to be the true reason for the inflation.

The German leaders felt that the collapse of the mark was proving how impossible it was forGermany to pay the reparations which were demanded. Stabilization of the mark wouldhave spoiled this "proof." Especially after France occupied the Ruhr in January 1923, it wasfelt that the destruction of the mark was somehow a blow against the hated occupier--the

only patriotic response available to disarmed Germany.

Finally, inflation seemed to bring prosperity. In 1921, when the rest of the world was in asevere post-war recession, production indices in Germany rose sharply. Late in 1921 themark stabilized temporarily, and business promptly weakened. By early 1922 the mark wassliding again, and business immediately revived. People were buying goods as fast as theyobtained money; companies rushed to expand plants and turn money into fixed investment.Germany was actually envied for its "prosperity" by many foreigners. [Does this sound likemodern-day America, albeit with people spending on stocks in addition to goods?]

The mechanism of inflation was simple. The government issued paper promises to pay, andthe Reichsbank issued money on the security of these promises. When a governmentspends more than its income, it must borrow. If it merely borrows money from its citizensby selling them bonds, there need be no inflation. Instead of that money being spent orinvested by the citizen, it is borrowed and spent by the government, but the total amount ofmoney is not increased.

When the government needs more money than its people are able or willing to lend it, itmonetizes the debt. That is what happens in this country when the government runs a bigdeficit. The Federal Reserve (our central bank) "buys" as many bonds as necessary tostabilize the market. It prints money on the security of these bonds. Despite the facade ofthe government supposedly "borrowing," the net result is the creation of printing pressmoney. (Actually these days the money is created in the form of new bank deposits--checkbook money--but the net result is exactly the same as if bills were printed.)

This is what happened in Germany. The government issued notes which were promptlydiscounted by the Reichsbank, i.e., the bank issued money on the "security" of theseworthless notes. To compound the evil, the bank failed to raise its interest rate sufficiently.Businessmen found it very profitable to borrow money from the bank and buy up goods,shares and companies. Their debt was wiped out within weeks by the rapid inflation, andthe businessman remained holding the valuable assets he had bought. The net result was ahuge "private inflation" caused by the rapid expansion of credit. Even foreign exchange wasbought with borrowed money, so that the Reichsbank actually financed speculation against


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its own currency. Yet the bank refused to raise interest rates, arguing that this would onlyadd to the cost of business and thus would increase inflation!

The tax system virtually broke down. Businessmen found that by merely delaying taxpayments, the depreciation in the mark would virtually eliminate their true value. But thegovernment, lacking adequate income, felt forced to resort more and more to creating

money. By October 1923, 1% of government income came from taxes and 99% from thecreation of new money.

But the main force which gave inflation its momentum was the steady decrease in the truevalue of money in circulation. This has been observed in all past rapid inflations and it isvital to understand it if inflation is to be coped with. During the war, as we saw, the priceinflation lagged behind the rate at which money was issued. But now, as people lostconfidence, prices began jumping much faster than the government could generate newmoney. Thus the total circulating currency fell drastically when measured in terms of its truevalue. One economist stated that, "In proportion to the need, less money circulates inGermany now than before the war. This statement may cause surprise but it is correct. Thecirculation is now 15-20 times that of pre-war days, whilst prices have risen 40-50 times."

In fact, the total currency when calculated in gold value fell from 7428 million marks inJanuary 1920 to a mere 168 million by July 1923.

Despite the proliferating billions of trillions of marks, the average citizen found it harder andharder to get enough money for necessities. Banks, short of money, could not honorchecks. Businessmen were strapped for money to buy materials and meet payrolls. Thegovernment faced the same problem. It appeared that there was not too much moneyaround, but rather much too little. The clamor for more money grew on all sides. It seemedthat any halt to the printing presses would bring business to a standstill and throw millionsof workers out on the street. The government itself would be unable to carry on. Riding atiger, it dared not dismount. On October 25, 1923, the Reichsbank noted that it had thatday printed 120,000 trillion marks. Unfortunately, the day's demand had been for onemillion trillion. However, it announced that it was expanding production and the daily issue

would soon be 500,000 trillion!

Once people lose confidence in a currency, they try to get rid of it. As Lord Keynes pointedout, this makes circulation speed up enormously, and hence prices rise faster than thegovernment can print new money. Marshall, studying this process, concluded that, "Thetotal value of an ' inconvertible paper currency cannot be increased by increasing itsquantity; any increase in quantity which seems likely to be repeated will lower the value ofeach unit more than in proportion to the increase."

Customarily, however, governments blame everyone and everything except themselves forinflation. When inflation lags behind issue of money, as it did in the war, they say that thisshows that the issue of money is not dangerously high. Later, when confidence vanishes,

and prices soar ahead of currency issues, that again is taken to prove that the governmentis not to blame--it is only reluctantly issuing money that is desperately needed in view ofrising prices.

We will conclude this discussion with a quotation from Dr. Milton Friedman's book, Dollarsand Deficits. Friedman notes that after the Russian revolution, the Bolsheviks introduced anew currency. They printed huge amounts of it and soon it became almost worthless. At thesame time some of the older Czarist currency still circulated and maintained its value interms of goods. It appreciated enormously in terms of the new money. Why? This money


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was not redeemable. Nobody expected the Czarist government to return. Why did thiscurrency hold up? "Because," says Friedman, "there was nobody to print any more of it."

Effects of Inflation on Business

As inflation proceeded, people rushed to buy goods and get rid of their depreciated money.For similar reasons, businessmen hastened to buy machinery, to build new factories, to buyhuge stocks of coal, steel and other raw materials. Those who had access to credit borrowedheavily for these purposes, and inflation wiped out their debt. There was a tremendousconversion of working capital into fixed investments. Business was booming andunemployment virtually vanished until the last stages of the inflation.

Farmers got rid of currency by heavy purchases of equipment, and later many were leftholding large supplies of useless machinery. Shipbuilding was expanded beyond all marketneeds. Marginal mines were opened leading to serious overproduction later on. But whilebasic industries prospered, there was a severe depression in consumer goods industriessuch as textiles, meat, beer, sugar and tobacco. Too many workers and persons on fixedincomes had lost their purchasing power.

There was a tremendous move toward concentration of industry. Large firms orcombinations found it much easier to raise prices, to obtain raw materials and above all toobtain bank credit. Also, they could issue "notgeld" or emergency money which more andmore came to replace the paper mark as a medium of exchange. Some of these newindustrial combinations were rational and efficient, but many were purely speculativeoperations. A new breed of financier arose.

Earlier the great German industrial leaders--men like Krupp, Thyssen and Siemens--haddeveloped basic new ideas in technology or in organization. But now the rising stars werethose of shrewd speculators and manipulators geared to quick trading and to jumping fromdeal to deal and from company to company. The most successful were those who saw the

trend of events early, who borrowed to the hilt and bought up goods, shares and companiesat bargain prices. Conglomerates sprung up forty years before the heyday of theconglomerate movement in the U.S. Perhaps the biggest operator of the day, Hugo Stinnes,formed a giant conglomerate including companies in oil, coal, steel, shipyards, electricalworks, insurance, newspapers and hotels. He died in 1924, just before his empire fell apartin the cold winds of the stabilization period. Most of these new mushroom combinations andconglomerates were speculative bubbles which were only able to survive as long as theybenefited from ongoing inflation.

Beneath the surface of prosperity there was enormous waste and inefficiency. Much of thenew capital plant proved inefficient or unneeded. Middlemen multiplied like locusts, andmore and more time and energy went to speculation and to endless paperwork generatedby currency fluctuations, new tax law regulations and labor disputes. Speculation caused

banks to multiply; there were 100,000 bank workers in 1913 and 375,000 in 1923. Laborbecame much less productive. Workmen were pre-occupied with their own problems oftrading, getting wage boosts, and staying ahead of inflation. With paper wages rising rapidlyand full employment, they were less inclined to work hard. Despite the surface boom, netproduction was really much less than before the war.

Bewildering fluctuations in costs prices and wages made it impossible to allocate resourcesand production rationally. More and more, the businessman became a speculator in goodsand currencies. However, very few businesses failed, since their debts were constantly


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wiped out by inflation. Bankruptcies had run to 815 per month in 1913; by late 1923 theywere 10 per month.

Finally, however, in the last stages of the inflation, the economy began to collapse. Retailerscould not get goods or else could not sell at a profit. The money they received wasdepreciating too fast. Farmers stopped selling their produce. More and more stores became

empty. Now unemployment began to soar.

Some economists argued that inflation may have helped Germany by stimulating thebuilding of capital plant and the rationalization of industry. But much of this investmentproved to have no value except in the dream world of inflation. Most of the inflationcombinations fell apart after stabilization. On the whole, much energy and wealth waswasted in unproductive channels--speculation, paperwork and unprofitable equipment. Theworking capital of industry was largely dissipated, making that much harder the eventualprocess of economic rebuilding and rationalization.

Stabilization--The Rentenmark Miracle

In November 1923, a currency reform was undertaken. A new bank, the Rentenbank, wascreated to issue a new currency--the Rentenmark. This money was exchangeable for bondssupposedly backed up by land and industrial plant A total of 2.4 billion Rentenmarks wascreated, and each Rentenmark was valued at one trillion old paper marks. From thatmoment on the depreciation stopped--the Rentenmarks held their value; even the old papermarks held stable. Inflation ceased.

What was the secret of the "miracle of the Rentenmark"? After all, the new currency wasnot redeemable in anything. Its backing by real property was a fiction, since there was noway by which property could be foreclosed or distributed. Further, there we have thegovernment distributing a vast new supply of money--2.4 billion trillion in terms of the oldmark. Ought that not have led to a new wild inflation?

To understand this, we must recall that the real value of the money circulating in late 1923was small--equal to a mere 168 million pre-war gold marks. The continued depreciation atthis point was due to utter lack of confidence--to the belief that the printing presses wouldrun indefinitely. But actually there was a great shortage of and need for money. New moneycould be introduced without price inflation if only people had confidence in it. How wasconfidence developed?

First, the government announced that the new currency would be "wertbestaendig"--stablein value. In their hunger for usable money people accepted this, at least until it should beproven false. Then the property backing seemed to give the currency value. True, theAssignats of the French Revolution, backed by fixed property, had depreciated, but still thebacking helped.

Second, and certainly most important, the government limited strictly the amount ofRentenmarks which could be issued and it halted the issue and discounting of notes and thecreation of paper marks. Finally, after April 1924, the Reichsbank stopped the expansion ofcredit to businesses which had been stimulating inflation. Businessmen were required torepay loans in gold marks, equal to the original value of the loan. Thereafter, incentive wasgone to borrow except for legitimate needs.


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In August 1924 the reform was completed by introduction of a new Reichsmark, equal invalue to the Rentenmark. The Reichsmark has a 30% gold backing. It was not redeemablein gold, but the government undertook to support it by buying in the foreign exchangemarkets as necessary. Drastic new taxes were imposed, and with the inflation ended, taxreceipts increased impressively. In 1924-1925 the government had a surplus.

After the stabilization, most companies found that they were critically short of workingcapital. Their funds had been dissipated or converted into goods and plant, and cash wasvery short. They could no longer rely on a stream of incoming capital at the cost of bondholders and workers. Taxes were again a serious burden, as were wage agreements thathad been made under the inflation.

In other ways the business climate changed. Now there was a huge demand for consumergoods, but the capital goods industries which had so overexpanded in the inflation weredepressed. Huge stocks of coal, steel and other materials which had been accumulated werea drug on the market. Agriculture and building, however, flourished.

Many of the speculative and conglomerate companies which had been formed in the

inflation were unable to survive. They failed, or split up into their original components. In1923 there had been only 263 bankruptcies; in 1924 there were 6,033. Most of the greatinflation speculators were ruined or faded from the business scene. However, strong, well-organized companies like Krupp and Thyssen which had resisted overexpansion andspeculation were able to weather the stabilization period and to thrive.

How Investments Fared

At the start it is important to understand how hard it was to obtain real income during theinflation. Professionals, skilled workers and others used to enjoying good income found theirreal salaries disastrously cut. Those who depended on savings, pensions or investmentincome for a living faced a terrible situation.

Interest from bonds or savings deposits soon depreciated to where they had no real value.Stocks paid meager dividends or none at all; corporate managements needed the money forworking capital, or used it for capital building and speculation. Owners of rental propertyfared no better; the government froze rents, which soon meant that tenants were occupyingpremises virtually rent-free. Dipping into capital led to big losses, since cash, bonds andeven stocks quickly shrunk drastically in value. The urgent need for income had importanteffects on the true prices of various types of property and investments.

Cash:Money held in cash lost value rapidly and soon became completely worthless. Of allinvestment forms, this was the most disastrous.

Bank Deposits: In theory, bank deposits became as worthless as cash. However, after thestabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid. Naturally, however, the great majority ofdepositors withdrew their funds at some time during the inflation, after much of the valuehad been lost, and exchanged them for goods. Few Germans held money in depositsthrough the entire period.

Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even fasterthan cash. After the stabilization, some restitution was provided by law. Holders of


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government bonds were reimbursed to the extent of 2.5% of the original bond values.Mortgage holders also received some repayment, while a 1925 law provided for 15-25%reimbursement of corporate bondholders, though the payment was delayed for some years.Here again, few investors held bonds or mortgages throughout the entire period; mostholders got rid of them for whatever pittance they would bring during the inflation.

Real Estate: Farmers and holders of urban property seemed to benefit if their property wasmortgaged; the inflation soon wiped out the mortgage debt. However, they received noincome, as noted above, since rents were frozen. After the stabilization, heavy new taxesand the urgent need for cash forced most holders to remortgage their property, often moreheavily than originally, so that their gains were illusory. Still, those who held real estatethroughout managed to save the capital thus invested. However, those who sold during theinflation (often through desperate need for cash) fared poorly. Because it brought noincome, real estate sold at extremely low real price levels during inflation.

Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, orin gold, saved their capital. The government set up rigid exchange controls asthe inflation proceeded. As usual under such conditions, a black market

flourished. The ones who fared best were the small minority who had theforesight to exchange marks into foreign money or gold very early,before new laws made this difficult and before the mark lost too muchvalue.

Personal Property:Capital was preserved by those who early changed it into objects oflasting value--rare coins, stamps, jewelry, works of art, antiques--or into merchandise suchas clothing, fabrics, etc. Of course, most people did not understand the advantage ofaccumulating such property until the inflation was well along. By that time the prices of allgoods had risen so much that they seemed outrageously bad bargains. In the event,however, cash proved an even worse bargain.

Common Stocks: In an inflation, common stocks are generally considered a desirablehedge to protect against or even to profit from the rise in prices. In practice, it is not sosimple. In this country stock prices have been known to fall violently just when inflation wasmost evident (1946, 1957, 1966, 1969). Market fluctuations--the rise of exciting newspeculative stocks, waves of fear or greed--all make it much too easy to buy or to sell at thewrong time or to go into the wrong stocks.

Getting down to specifics, we can say that those who bought a well-diversified list of stocksin solid, well-established companies quite early in the inflation and who held on throughoutthe period and also through the stabilization crisis saved much or all of their capital.However, there were many pitfalls along the wayside for the greedy, the fearful and theover-clever. Those who did best were investors with a certain unemotional, stolid character,a basic confidence that strong, well-managed companies would come through, and an

immunity to excitement, anxiety and speculative temptations.

Many very sharp but brief advances and declines in the market led to widespreadspeculation, and well-intentioned investors often wound up as traders. Naturally most ofthem did as badly as amateur speculators generally do. Many decided that speculation wasthe only sensible approach; when the


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German hyperinflation from another article #2

In the early 1920s Germany experienced one of the most severe inflations of all time.1 Theinflation was not apparent in 1920, but began showing up in 1921. Thereafter it got steadily

worse until it came to an abrupt halt at the end of 1923. At its worst in the second half of 1923,prices rose more than fivefold each week.

Some idea of the magnitude of this catastrophe can be seen in table below. During 1920 andearly in 1921 the signs of inflation were mixed. The price of food was increasing, but the price ofdollars in terms of marks (the mark was the name of the German currency) was dropping, and sowere the prices of products bought from the United States. However, the signs of inflation wereunmistakable in the next year, from mid 1921 to mid 1922. In this period prices increased aboutsixfold--that is, it took six marks at the end of the period to buy what one mark would havebought at the beginning. But this rapid inflation, greater than any yearly inflation in the history ofthe United States, was only a prelude for what was to happen.

MEASURES OF GERMANY HYPERINFLATION

Percentage Change in Various Measures of Inflation

Dates Internal Prices Price of Dollars Cost of Living*

Feb 1920 to May1921

4.6% -37.2% 39.2%

May 1921 to July1922

634.6% 692.2% 417.9%

July 1922 to June

1923

18094% 22201% 13573%

July 1923 to Nov20 1923

854,000,000,000% 381,700,000,000% 560,000,000,000%

*food until June 1923, thereafter based on all items. These data were calculated by theStatistical Bureau of the Reich. All data are from The Economics of Inflation: A Study ofCurrency Depreciation in Post-War Germany by Costantino Bresciani-Turroni (AugustusKelley), pp. 30, 33, 35-6.


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From the middle of 1922 until the middle of 1923, prices increased by over 100 times. Measuredby the price of food, prices were 135 times higher at the end of the period than they were at thebeginning. Measured by how many marks it took to buy a dollar, prices were 222 times higher.Yet even this horrid inflation was mild compared to what happened from July to November of1923, when prices increased by somewhere between a million and a billion times their previous

level.

The rapid increase in German inflation can be seen in the postage stamps that were issued duringthis period. (See the picture below.) In 1920 the highest valued stamp issued was for four marks.In 1923 the denominations were changing so rapidly that the post office could not design newstamps fast enough and resorted to using old dies and then overprinting them with new values.The highest value reached in 1923 was for 50 billion (50,000,000,000) marks. A great many ofthese stamps must have been issued and bought, though not necessarily used, because very fewof the almost 200 varieties of stamps issued from 1921 to 1923 have more than minimalcollector's value. Also, stamps that were postally used during the period have a higher collector'svalue than stamps that were never used, a pattern that is quite unusual.

Inflation hurts some people but helps others by redistributing wealth and income. Buyers, forexample, are hurt by higher prices, but offsetting this is the gain that the producers get from thehigher prices. People on fixed incomes will suffer, as will creditors, who are owed fixed amountsof money in the future. On the other hand, those making fixed payments, such as most debtors,will benefit. The German hyperinflation illustrates the redistribution that inflation causes in adramatic way. It eliminated the value of all life insurance policies and all savings left in banks.When life insurance policies were paid in 1923, the value of the check was usually worth muchless than the stamp used to post the letter. The hyperinflation eliminated all debts that existedprior to 1921. For example, the value of German mortgages in 1913 measured in U.S. dollarswas about $10 billion; in late 1923 these mortgages were worth only one U.S. penny.

By 1924 the inflation had radically redistributed the wealth of Germany. The segment of societythat was hit the hardest seems to have been the middle class. The poor had little wealth to losewhile the rich were often able to get their wealth into forms not adversely affected by inflation.Wealth held in foreign bank accounts, gold and precious metals, and land maintained value.


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If redistribution were the only effect of inflation, one could argue that it is not a serious problem.Since for every loser there is a winner, society as a whole may break even (if this redistributionis not seen as being too "unfair"). However, inflation also makes ordinary decisions moredifficult to make, and it causes people to change their behavior. The changes in behavior, whichcause social losses, are again dramatically illustrated in a hyperinflation.

Coping with a situation in which prices could double in a day meant changes in the way peopleorganized their financial affairs. Wages were paid daily or several times a day, and the wholefamily would immediately go out and spend the money before it lost value. In The Black Obelisk,a novel set in 1923, Erich Maria Remarque describes this practice:

"Workmen are given their pay twice a day now--in themorning and in the afternoon, with a recessof a

half-houreach timeso that they canrush out and buy things--for if they waited a few hours the valueof

theirmoney would drop so far that their children would not get halfenough food to feel satisfied."2

Getting rid of money was the key to financial survival since it lost its value so quickly.

Merchants eventually found that they could not mark up prices as fast as they were rising.

"So they left the pricemarks as they were and posted (hourly) a new multiplication factor. The actual

pricemarked on the goods had to bemultiplied by this factor to determine the price which had to be

paid for the goods. Every hour themerchant would call up the bank and receive the latest quotation

upon the dollar. He would then alter hismultiplication factor tosuit and would perhaps add a bit in

anticipationof thenext quotation. Banks had whole batteriesof telephone boys who answered each call

as follows: '100 milliarden, bittesehr, guten Tag.' Which meant: 'The present quotationon the dollar is

100 billionmarks, thank you, good day.'"3

The great inflation led to a large waste of society's resources. Just coping with the rapid changerequired resources--the extra bank clerks that Bopp mentions are but one example. Talentedpeople no longer tried to earn money by productive activity, but sought ways to stay ahead ofinflation, an activity unlikely to have any social benefits. Fortunes were made by those whospeculated on the continued worsening of inflation. People who borrowed heavily almost alwaysdid well.

People dislike inflation because it redistributes in ways they consider unfair, because it forcesthem to take actions to protect themselves, and because it makes decisions more difficult tomake. Decisions to buy, sell, or invest are based on a person's knowledge of what normal prices

are and this knowledge of normal prices is based on remembering past prices. With inflation, aperson must remember not only past prices, but also the dates of those past prices, and then musttry to compute what their present equivalents would be. Because our mental capacity to handlelarge amounts of information is limited, and because inflation requires us to handle moreinformation in order to make decisions, inflation, even when it is perfectly predicted, reduces ourability to make good decisions. People like stable prices because they minimize the cost ofmaking economic decisions.


14/14

The German hyperinflation came to an abrupt end in November of 1923. The man who receivedcredit for this achievement was named Hjalmar Schacht, the new currency commissioner of theWeimar Republic. In his autobiography he mentions a little poem that indicated his popularityamong common folk:

"Werhat di

eMa

rkstabil g

emacht,

Das war allein der DoktorSchacht."

This can be loosely translated as:

Who could make themarkstable?

Only HjalmarSchacht was able.

He was less popular with those who borrowed heavily on the assumption that prices wouldcontinue to rise. Stabilization led to large losses for them, and in some cases unmade hugefortunes that inflation had built.

The German hyperinflation is an example of a major economic catastrophe, one that cries out forexplanation. Did some defect in the economic system cause this disaster? Was it accidental, dueto an unlikely combination of circumstances? Was it due to error on the part of governmentpolicy makers? Can a society take steps to insure that a similar disaster does not happen to it?These are important questions, questions that economists have spent years studying. However,the German hyperinflation is an example of only one type of economic disaster. Another typewas illustrated in the United States during the 1930s

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Germany Hyper Inflation

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