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Source link: http://archive.mises.org/5817/hyperinflation-in-germany-1914-1923/

Hyperinflation in Germany, 1914-1923

October 27, 2006 by

The German inflation of 1923

— one dollar worth trillions of marks.

[This article is excerpted from the book The Age of Inflation, by Hans Sennholz.]

The German inflation of 1914–1923 had an inconspicuous beginning, a creeping rate of one to two percent. On the first day of the war, the German Reichsbank, like the other central banks of the belligerent powers, suspended redeemability of its notes in order to prevent a run on its gold reserves.

Like all the other banks, it offered assistance to the central government in financing the war effort. Since taxes are always unpopular, the German government preferred to borrow the needed amounts of money rather than raise its taxes substantially. To this end it was readily assisted by the Reichsbank, which discounted most treasury obligations.

A growing percentage of government debt thus found its way into the vaults of the central bank and an equivalent amount of printing press money into people’s cash holdings. In short, the central bank was monetizing the growing government debt.

By the end of the war the amount of money in circulation had risen fourfold and prices some 140 percent. Yet the German mark had suffered no more than the British pound, was somewhat weaker than the American dollar but stronger than the French franc. Five years later, in December 1923, the Reichsbank had issued 496.5 quintillion marks, each of which had fallen to one-trillionth of its 1914 gold value.[1] 

How stupendous! Practically every economic good and service was costing trillions of marks. The American dollar was quoted at 4.2 trillion marks, the American penny at 42 billion marks. How could a European nation that prided itself on its high levels of education and scholarly knowledge suffer such a thorough destruction of its money? Who would inflict on a great nation such evil which had ominous economic, social, and political ramifications not only for Germany but for the whole world? Was it the victors of World War I who, in diabolical revenge, devastated the vanquished country through ruinous financial manipulation and plunder? Every mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties, such as the Socialists, the Catholic Centre Party, and the Democrats, forming various coalition governments, that were solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.

How could a European nation that prided itself on its high levels of education and scholarly knowledge suffer such a thorough destruction of its money?

The reasoning that led these parties to inflate the national currency at such astronomical rates is not only interesting for economic historians, but also very revealing of the rationale for monetary destruction. The doctrines and theories that led to the German monetary destruction have since then caused destruction in many other countries. In fact, they may be at work right now all over the western world. In our judgment, four erroneous doctrines or theories guided the German monetary authorities in those baleful years.

No Inflation in Germany

The most amazing economic sophism that was advanced by eminent financiers, politicians, and economists endeavored to show that there was neither monetary nor credit inflation in Germany. These experts readily admitted that the nominal amount of paper money issued was indeed enormous. But the real value of all currency in circulation, that is, the gold value in terms of gold or goods prices, they argued, was much lower than before the war or than that of other industrial countries.

FULL ARTICLE

{ 22 comments }

adi October 28, 2006 at 4:46 am

It’s not amazing that the German monetary authorities didnt see the connection between increasing money supply and the balance of payments decifits, since that would put blame on their own door..

I think that it might seem to be possible that the same people who denounced foreign speculators about the fall of value of German Mark, were quick to convert their own domestic assets to foreign ones. Ultimate reason about the economic difficulties was of course states (mis)management of economy.

Politicians are always eager to shift blame even thought in this case war reparations were cause to difficult fiscal position of govt.

mark October 28, 2006 at 8:49 am

If debt to GDP numbers are falling, how does this article apply to the USA today?

Dennis Sperduto October 28, 2006 at 2:16 pm

“How could a European nation that prided itself on its high levels of education and scholarly knowledge suffer such a thorough destruction of its money?”

The reference to Germany’s “high levels of education and scholarly knowledge” is certainly correct, but unfortunately Germany produced very few real economists in the 19th and 20th centuries. As an example of the mindset of the German economists, one of them (whose name eludes me) argued that money was the invention of the state, which was brilliantly refuted by Carl Menger.

A number of excellent, if not world-class, economists were German-speaking, as opposed to German, but these economists belonged to the Austrian school, which engaged in a (sometimes heated) debate, the “methodenstreit”, with the dominant German Historical School. In fact, on page 65 of his “Notes and Recollections,” Ludwig von Mises refers to German economics professors as part of the “intellectual bodyguard of the Hohenzollern.”

Furthermore, thanks to Mises advice, which was finally accepted to some degree by the Austrian government, Austria, which was arguable more dismembered and economically crippled than Germany after World War I, managed to avoid a hyper-inflation.

Kevin October 28, 2006 at 4:46 pm
mark October 29, 2006 at 7:54 am

Thanks Kevin, very insightful.

Putting aside the social security and medicare calamity, how might the distortions of money pumping manifest itself in hyper-inflation?

Or shall I say, how might the distortions of money pumping lead to the general public becoming aware that much of the wealth they conceived of having is illusionary?

Is it that consumer preferences will abruptly change? Or will the cost of basic human neccessities food, medical and shelter simply outstip a large enough segment of the populations income over time?

mark October 29, 2006 at 7:54 am

Thanks Kevin, very insightful.

Putting aside the social security and medicare calamity, how might the distortions of money pumping manifest itself in hyper-inflation?

Or shall I say, how might the distortions of money pumping lead to the general public becoming aware that much of the wealth they conceived of having is illusionary?

Is it that consumer preferences will abruptly change? Or will the cost of basic human neccessities food, medical and shelter simply outstip a large enough segment of the populations income over time?

mark October 29, 2006 at 7:54 am

Thanks Kevin, very insightful.

Putting aside the social security and medicare calamity, how might the distortions of money pumping manifest itself in hyper-inflation?

Or shall I say, how might the distortions of money pumping lead to the general public becoming aware that much of the wealth they conceived of having is illusionary?

Is it that consumer preferences will abruptly change? Or will the cost of basic human neccessities food, medical and shelter simply outstip a large enough segment of the populations income over time?

Todd Marshall October 29, 2006 at 8:52 am

I’m confused.

“The source of this momentous error probably lies in the ignorance of one of the most important determinants of money value, which is the very attitude of people toward money. For one reason or another people may vary their cash holdings. An increase in cash holdings by many people tends to raise the exchange value of money; reduction in cash holdings tends to lower it. Now in order to change radically their cash holdings, individuals must have cogent reasons. They naturally enlarge their holdings whenever they anticipate rising money value as, for instance, in a depression. And they reduce their holdings whenever they expect declining money value. In the German hyperinflation they reduced their holdings to an absolute minimum and finally avoided any possession at all. ”

If the population has reduced their holdings, where did those holdings go?

The governing equation for managing any media of exchange is: DEFAULTS = INTEREST + INFLATION.

We know from the essay that INFLATION was very high. What were the corresponding DEFAULTS and INTEREST amounts during this period?

Todd Marshall
Plantersville, TX

Björn Lundahl October 29, 2006 at 3:54 pm

Age of inflation

Economics teaches us that if the supply of marketable commodities increases, the price of each unit will fall.

As this is true, it is also true that if the supply of money-commodities increases, the price of each unit will fall.

No more theories are needed about this subject! Go home and study something else (joke)!

With the exception of the Austrian School of Economics, other schools are completely messed up.

Björn Lundahl
Göteborg, Sweden

Temibile October 29, 2006 at 6:25 pm

In a hyperinflation scenario, how we can protect our money and savings. Wich asset could be the better one to protect from hyperinflation ?

Many thakns
Temibile, Italy

Mark Brabson October 29, 2006 at 6:37 pm

Temibile:

Gold.

banker October 30, 2006 at 8:51 am

More specifically, gold in your basement as it is harder for Uncle Ben and Uncle Sam to team up and steal your gold.

RogerM October 31, 2006 at 12:56 pm

Todd:”If the population has reduced their holdings, where did those holdings go?”

That’s an economists way of saying people spent it. In periods of high inflation, like Brazil had a few decades ago, people don’t hang on to currency in their pockets or the cash in their checking accounts because it loses value too quickly. So the buy something, anything, with it.

Sometimes interest rates will rise above inflation to compensate the lenders, but if the inflation is climbing at a fast enough pace, interest rates may not keep up.

RogerM October 31, 2006 at 1:12 pm

Mark:”…how might the distortions of money pumping manifest itself in hyper-inflation? I think you answered your question with your last one: “Or will the cost of basic human neccessities food, medical and shelter simply outstip a large enough segment of the populations income over time?”

Hyperinflation become clear to everyone because prices change very rapidly and by large amounts. In a sense, hyperinflation is not as bad as the current policy of low inflation. With hyperinflation, even the uneducated know to protect themselves by purchasing something, anything. But with persistent low levels of inflation, around 2% currently, people forget that the Fed is destroying their money.

Like the other thread about the Dow reaching 12,000. Deflated, it’s actually around 10,000 in terms of the value of dollars just 6 years ago. But people forget about inflation when it’s at low levels. That makes it easier for the Feds to steal our money.

Ray January 14, 2007 at 1:07 pm

Not everyone can afford gold. Actually, silver holds vastly more upside potential than gold – with the same “insurance” properties (i.e. preservation of purchasing power) as does gold. A good starting point as to how to protect yourself in the inevitable collapse of the dollar and ensuing hyperinflationary environment is kitco.com. Also read Jim Puplava’s fine site financialsense.com Silver can be purchased in small affordable lots off ebay, but don’t overbid. Check your current price off Kitco and then price your bid accordingly at about 90% of melt value ($100 face value of pre-1964 silver contains 71.5 ounces of silver). You’ll win some of these bids. Be quick, silver is disappearing fast, even on ebay. Silver face amounts of $1000 used to be common there, but no one has silver in that amount any longer. The two cheapest sites for purchasing precious metals online are Apmex.com and Tulsing.com, but check around. Good luck, and protect yourself by converting our useless monopoly money dollars into something tangible that holds real, lasting value: silver and gold!

Zander C December 3, 2007 at 9:19 am

Here is something to consider: if you were to choose which economic scenario you could be in, would you prefer to be in an economy with 20% inflation or 20% deflation? Clearly both are relatively high rates considering current inflation standards, so ultimately it comes down to whether you would want to endure a period of sustained, high inflation or sustained, high deflation. Considering the relative benefits and disadvantages, it would be interesting as to what people would prefer…?See what you think.Thanks.

Striker March 18, 2008 at 1:20 pm

hmmm, hard to believe this thread has seen no action for over 3 months. We can’t ignore the relevant facts:
~ Over the past few years USA national debt grew 50%, from $6 trillion to over $9 trillion, curiously equaling the cost of the Iraq fiasco, all ‘on the cuff’.
~ Then the politicos voted some $200 billion in tax refunds, again all on the cuff.
~ Now the Fed is acting to increase the money suppy by yet another 50% ??
~ The ‘calls’ are imminent, thus USA will soon default and we’ll all be on the long steep slide down into the pits.

The pundits are only just now beginning to discuss ‘possible hyperinflation’ despite having already passed the point of no return.

The collapse is inevitable and unstoppable. Our only alternative is to stop supporting the system, batten down the hatches, and prepare for basic survival. bon voyage’.

Monika Berlin June 19, 2008 at 4:54 am

@ Zander C: you raised an interesting question. I guess it would be hard for most to answer this though, since we can’t really predict what will happen in either scenario until it actually did happen (if that makes sense at all).

Not sure what I’d choose to be honest either.

P.M.Lawrence June 19, 2008 at 7:02 am

Strictly speaking, you don’t get hyperinflation just because levels of inflation are high as such. It’s just that at high enough levels price signals can no longer propagate adequately and money stops doing its job properly – and we call that hyperinflation.

Marc October 12, 2008 at 9:08 pm

For an intelligent people the Germans made a series of monumental blunders in the first half of the twentieth century. The word delusional comes to mind. Apparently, it is America’s turn now. Adam Smith said that there is a lot of ruin in a country. It looks like we are about to learn that the hard way.

P.M.Lawrence October 13, 2008 at 2:57 am

“There is a great deal of ruin in a nation”, to be precise.

James December 23, 2008 at 9:47 am

We are set for world wide reflation thanks to Mr. Bean, i mean, Mr. Ben bernanke, the money printer.

Money Velocity will soon pick up again, and one must wonder if Mr.bean will avoid an overheat.

We are revisiting the 70′s , the only difference is that now liquidity flows elsewhere (not to the cpi), mainly to create asset bubbles, since US imports goods-price deflation from chinese slave-labor factories.

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