An Inflation Tale

Nothing about the future is set in stone. Actions taken today do not inevitably lead to certain outcomes down the road, because something can happen tomorrow, or next week, or next year, that will negate what happened today. History seldom repeats itself – exactly. But this story about post-war Germany should make you take notice. The implications for our government’s monetization efforts are a little frightening.

At the beginning of World War I, Germany went off the gold standard. The government suspended the right of its citizens to redeem their currency (the mark) for gold and silver. That set the stage for massive currency inflation. The quantity of marks in circulation quadrupled during the war. Prices however did not keep up with the inflation of the currency supply. The effects of the currency inflation were not felt because the German people saved every penny they could lay their hands on, mainly out of fear and uncertainty. So even though the German government was pumping tons of currency into the system, no one was spending it.

But by the war’s end, confidence improved and the currency that had been hoarded by German citizens flooded into circulation creating price inflation.

Just before the end of the war, the exchange rate between gold and the German mark was about 100 marks per ounce. By 1920 the exchange rate was fluctuating between 1,000 and 2,000 marks per ounce – 10 to 20 times higher. Retail prices skyrocketed.

With war reparations to pay, the German government continued to print money at an astounding rate. In mid 1922 everything changed the economy began to collapse. The German people lost confidence in their currency. They realized if they hung onto their currency for any length of time they’d get burned – rising prices would wipe out their purchasing power.

To understand the scope of the German inflation maybe it’s best to start with something basic… like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs.)  In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents.  Two years later it was 19 cents.  Two years more and it sold for 22 cents.  By 1919 it was 26 cents.  Now the fun begins.

In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35.  By the middle of 1922 it was $3.50.  At the start of 1923 it rocketed to $700 a loaf.  Five months later a loaf went for $1200.  By September it was $2 million.  A month later it was $670 million (wide spread rioting broke out).  The next month it hit $3 billion.  By mid month it was $100 billion.  Then it all collapsed.

Let’s go back to “marks.”  In 1913, the total currency of Germany was six billion marks.  In November of 1923 that loaf of bread we just talked about cost 428 billion marks.  A kilo of fresh butter cost 6000 billion marks. That kilo of butter cost 1000 times more than the entire money supply of the nation just 10 years earlier.

How Could This Happen? In 1913 Germany had a solid, prosperous, advanced culture.  Like much of Europe it was a monarchy (under the Kaiser).  Then, following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914, the world moved toward war.  Each side was convinced the other would not dare go to war.  So, in a global game of chicken they stumbled into the Great War.

The German General Staff thought the war would be short and sweet and that they could finance the costs with the post war reparations that they, as victors, would exact.  The war was long.  They lost and, thus, it was they who had to pay reparations rather than receive them.

When things began to disintegrate, no one dared to take away the punchbowl.  They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism.  So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.

People’s savings were suddenly worthless.  Pensions were meaningless.  If you had a 400 mark monthly pension, you went from comfortable to penniless in a matter of months.  People demanded to be paid daily so they would not have their wages devalued by a few days passing.  Ultimately, they demanded their pay twice daily just to cover changes in trolley fare.  People heated their homes by burning money instead of coal.  (It was more plentiful and cheaper to get.)

The middle class was destroyed.  It was an age of renters, not of home ownership, so thousands became homeless.

But the cultural collapse may have had other more insidious effects.

It was still the era of arranged marriages.  Families scrimped and saved for years to build a dowry so that their daughter might marry well.  Suddenly, the dowry was worthless – wiped out.  And with it was gone all hope of marriage.  Girls who had stayed prim and proper awaiting some future Prince Charming now had no hope at all.  Social morality began to collapse.  The roar of the roaring twenties began to rumble.

Belief in systems, governmental or otherwise, collapsed.  With its culture and its economy disintegrating, Germany saw a fringe character named Hitler begin a ten year effort to come to power by trading on the chaos and street rioting.  And then came World War II.

I’d like to close this review with a statement from a man whom many consider (probably incorrectly) the father of modern inflation.  John Maynard Keynes wasn’t writing about some abstract economic issue; he was talking about Germany as it was setting itself on a path of self-destruction. Here’s what Keynes said on the topic in 1919:


“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 not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.

“To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.

“Lenin was certainly right.  There is no subtler, no surer means of over-turning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose….By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract….governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century.

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