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Source link: http://archive.mises.org/15404/the-nightmare-of-1923-and-its-cause/

The Nightmare of 1923 and Its Cause

January 24, 2011 by

Fergusson presents a compelling argument that the central bankers of Europe did not believe that the quantity of money had anything to do with the price level. And I suppose you think that our modern Fed rulers understand at least this much. FULL ARTICLE by Patrick Barron

{ 13 comments }

Mr E January 24, 2011 at 2:49 pm

What also helped lead to the hyperinflation was the creation of new Marks out of thin air lent to speculators by the banks which were sold by the speculators for other currencies. This is naked short selling.

Ellen Brown in her article, Time to Get Out the Wheelbarrows? Another look at the Weimar Hyperinflation wrote:

In Schacht’s 1967 book The Magic of Money, he “let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the ‘accepted wisdom’ the financial community has promulgated on the German hyperinflation.” What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

Time to Get Out the Wheelbarrows? Another look at the Weimar Hyperinflation
http://www.webofdebt.com/articles/hyperinflation.php

Germany’s 1923 Hyperinflation: A Private Affair
http://www.wintersonnenwende.com/scriptorium/english/archives/articles/hyperinflation-e.html

Dick Fox January 24, 2011 at 5:20 pm

The short sale of a currency is not the problem. It only becomes a problem if the monetary authorities actually accomodate the short sale by debasing the currency after the short sale. If the currency stabilizes the short seller takes a loss.

Mr E January 25, 2011 at 4:02 am

Well in my opinion, it wasn’t only the naked short selling which was the creation of new Reichsmarks out of thin air that was sold in exchange for foreign currencies that contributed to the hyperinflation. But I find it interesting that Hjalmar Schacht who became head of the Currency Commission for the Weimar Republic and President of the Reichsbank would write in his book, The Magic of Money that:

What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

I think some more research needs to be done to determine what was the amount of Reichsmarks that was created out of thin air and sold for foreign currencies.

References:

Germany’s 1923 Hyperinflation: A Private Affair
http://www.wintersonnenwende.com/scriptorium/english/archives/articles/hyperinflation-e.html

Time to Get Out the Wheelbarrows? Another look at the Weimar Hyperinflation
http://www.webofdebt.com/articles/hyperinflation.php

Gene Berman January 25, 2011 at 6:40 am

With all due respect, Mr. E., I’ve never yet seen anything approaching an explanation of why short selling–fully clothed or otherwise–could drive the price of the commodity–in the direction and to the extent necessary for the short seller to profit. Though I am, admittedly, not at all experienced in such markets, it seems to me that the reality and the size of the risk is exactly the same whether possessing any of the particular stuff or not (and even whether long or short). And, if this is an area in which you have some expertise, perhaps you could explain whether activity in the options markets has similar influence on price.

Mr E January 26, 2011 at 1:58 am

The rate of the increase of new money above the rate of the increase in the production of new goods is what contributed to the high inflation in Weimar Germany. As the inflation continued to drift higher and higher the smart money sold Reichsmarks for foreign exchange. But even though the naked short selling which was the creation of new Reichsmark out of thin air and then sold for foreign exchange didn’t cause the hyperinflation, it didn’t help either. The naked short selling did increase the supply of Reichsmarks but by how much is the question?I’m not saying the naked short selling at this point caused the hyperinflation but by what amount did it contribute to it?

The following passages I believe merit some further study which are quoted below from: Time to Get Out the Wheelbarrows? Another look at the Weimar Hyperinflation http://www.webofdebt.com/articles/hyperinflation.php

Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.

The article: Time to Get Out the Wheelbarrows? Another look at the Weimar Hyperinflation also makes some interesting points regarding inflation episodes. According to the author the later Weimar inflation took off with the increased creation of Reichsmarks that was sold for foreign exchange. During the 1930s Germany created money for the purpose of funding production and had a growing economy. Zimbabwe in early 2000s created money to purchase dollars to pay back IMF loans and eventually had hyperinflation. So the author is making the point that heavy money creation for speculation and consumption leads to hyperinflation while money creation for production leads to a growing economy. Although potential malinvestments have to be looked at.

The reason I think looking at naked short selling is a valid question is because naked short selling has had detrimental consequences in other markets. When looking at stocks, regular short selling is the borrowing of stock and then selling of the stock to profit off further declines. Naked short selling in stocks is the creation of new stock out of thin air that is sold. Companies that experienced naked short selling had the value of their stock decline enormously fast. Anytime new money is created out of thin and flows heavily into any asset class like tech stocks, real estate, etc. it can form a bubble. Bubbles can be to the upside and also potentially to the downside if naked short selling occurs. But it’s also important to note that if newly created credit out of thin air pushes an asset class way above it’s fundamentals, naked short selling which is money created out of thin air to push asset onto the downside, it can have the affect of putting the asset back into it’s proper valuation range. But that’s a discussion for another day.

When it comes to buying and selling options, it’s a zero sum game. When one party gains it’s the other party’s loss.

Dick Fox January 26, 2011 at 7:57 am

Short selling cannot create money.

Mr E January 27, 2011 at 3:30 am

When it comes to short selling with stocks and bonds, they are borrowed from someone that owns them and then they are sold. Of course no new money is created. Also when naked short selling of bonds and stocks occurs which is the selling of more bonds and stocks than was originally issued, it has the effect of depressing prices for those assets but still no new money is created. When it comes to short selling of currencies, more of that particular currency is created out of thin air to be sold for another currency. So with currencies money is created because the currency being shorted functions as money and more of it was created out of thin air for it to be sold. Also when currencies are bought, usually credit is created in one currency where that currency is sold to purchase another currency. So with currencies it works differently.

Vanmind January 29, 2011 at 3:05 pm

Brown is like Assange: a NWO plant and a fraud.

Dick Fox January 24, 2011 at 2:58 pm

Patrick Barron must have read a different book than I did.

Barron gives two reasons that reparations could not have had anything to do with Weimar Germany’s hyper-inflation:

1. German bankers never pursued solving reparations with this goal.

2. Germany was forced to pay reparations in gold and hard assets.

The first point has nothing to do with either the hyper-inflation or reparations. The intent of German bankers in no way changes the facts. German politicians were being thrown out of office and assassinated every time they attempted to restrain spending. Ferguson specifically speaks of efforts to restrain the inflation through reducing the money supply and being successful only to face rising unemployment. But there were comments by German leaders stating that the inflation was due to reparations, and their only recourse was to continue the expansion of the money supply.

On the second point the Allies, especially France, stripped Germany of any hard assets that could be used to back the Mark. Germany initially attempted to pay in gold, but then they did not have sufficient gold reserves to allow them to exchange gold for marks. The German monetary authorities were forced to suspend then end redemption. Germany was simply stripped of the foundation of its currency. It is amazing to me that Barron could actually make this statement and not see the connection between the loss of gold and hard assets and mark inflation. Not only was the backing of the currency taken by the Allies but productive capacity, machinery and finished goods were taken so that gold could not be reaquired in international trade. And that is not even considering tariffs that were strangling the whole world.

Mark Luedtke January 24, 2011 at 3:37 pm

Ben Bernanke clearly understands the link between inflating the money supply and inflating prices. He’s stated he intends to inflate the money supply with the goal of creating two percent price inflation. That in itself may be stupid, but I’m betting on evil.

Eric January 24, 2011 at 8:14 pm

Maybe Germany didn’t paper over it’s reparations in the beginning, but it didn’t finally pay them until last year, and only started paying them again in 1990. After all is said and done, I doubt that they paid them in the equivalent of the original price in gold (or the amount later reduced by nearly 1/2).

http://uk.news.yahoo.com/38/20100929/twl-first-world-war-officially-ends-on-s-6ae0455.html

Osku r January 25, 2011 at 1:25 pm

Certainly no proof is needed to demonstrate that speculation
is not responsible for the deterioration of the foreign exchange
situation. The foreign exchange speculator tries to anticipate
prospective fluctuations in rates. He may perhaps blunder. In that
case he must pay for his mistakes. However, speculators can
never maintain for any length of time a quotation which is not in
accord with market ratios. Governments and politicians, who
blame the deterioration of the currency on speculation, know
this very well. If they thought differently with respect to future
foreign exchange rates, they could speculate for the government’s
account, against a rise and in anticipation of a decline. By this single
act they could not only improve the foreign exchange rate, but
also reap a handsome profit for the Treasury.

-Mises, 1923: Stabilization of the Monetary Unit—From the Viewpoint of Theory

Sione January 25, 2011 at 6:23 pm

Gotta love those German myths.

There is the famous “stab in the back” excuse, wherein the German military pretended that their utter collapse and defeat during WW1 was really the fault of the crumbling home front, hence blaming civilians for “betraying” the army etc. Laughable. Now we have the German central banker pretending that some naughty, naughty, bad, dirty, rotten little short-selling “speculators” wrecked the entire German economy and that it had nothing to do with the central bankers (who controlled the means of exchange and had monopoly over its issuance).

Ha!

German mythology: so entertaining.

Does anyone really believe in such stupidity?

Sione

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