-- Posted Thursday, 2 April 2009 | | Source: GoldSeek.com
By R. D. Bradshaw
Since there is some concern over the prospects for hyperinflation in the US, in the sense of what happened in Germany’s Weimar’s Republic in the early 1920s, this Goldsmiths will broach that theme.
Wikipedia’s article on hyperinflation gives us this definition of hyperinflation: “In economics, hyperinflation is inflation that is very high or ‘out of control’, a condition in which prices increase rapidly as a currency loses its value. Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to ‘inflation exceeding 50% a month.’ In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.
“The definition used by most economists is ‘an inflationary cycle without any tendency toward equilibrium.’ A vicious circle is created in which more and more inflation is created with each iteration of the cycle. Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss. Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheaval.”
Going on, Wikipedia adds: “The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run.
“Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralizing their attempts to stimulate the economy.
“Hyperinflation is generally associated with paper money because this can easily be used to increase the money supply: add more zeros to the plates and print, or even stamp old notes with new numbers. Historically there have been numerous episodes of hyperinflation in various countries, followed by a return to ‘hard money’. Older economies would revert to hard currency and barter when the circulating medium became excessively devalued, generally following a ‘run’ on the store of value.
“Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment.”
This definition and explanation brings up a couple of points worth remembering. First, hyperinflation causes a destruction of savings. And second, hyperinflation usually predicates a return to hard money and in older economies, barter. I first mentioned these coming eventualities in the Goldsmiths, published in the fall of 2008—like for an eventual currency which could be partially gold backed. The Goldsmiths, Parts XII and XXIII, specifically mentioned the likelihood of bartering in the future.
The Weimar Republic’s Bout with Inflation
Socyberty.com had an article on hyperinflation which specifically addressed the situation in Weimar Germany in the years 1921-1923. It noted: “The main factor in the hyperinflation, however, were the reparations payments that the Allies demanded of the Germans as part of the Versailles treaty. This treaty demanded that Germany accept full responsibility for World War One and that it pay for the entire cost of the war. In 1921, the Allies set the sum to be paid at about 31.4 billion dollars. This was considerably more than the gross domestic product of the entire country.”
This backdrop set the stage for the German government to renege on the payments. Thereupon, the French and Belgians occupied the Ruhr industrial area to seize what resources they could. The workers there began a general strike.
The Socyberty.com article went on to the fall out from the trouble in the Ruhr by noting that it: “brought the German economy to a standstill. Factories around the country had to shut down because they were not getting the materials they needed from the Ruhr region. At the same time, the German government still (had) numerous responsibilities that it was obliged to meet, such as army pensions and unemployment insurance.
“The effect that all of this instability had on the German economy is astounding. From January 1919 to January 1922, the German Mark fell from 8.9 to 191.8 to the US Dollar. By June of 1922, the Mark had fallen to 350 per USD and by October of that year, it was 4,500 per USD. Between January and November of 1923, the value dropped from 18,000 per USD to 4.2 TRILLION per USD.
“Obviously, this hyperinflation devastated the German economy. Life savings became worthless and loans were essentially wiped out. It got so bad, that workers began demanding that they be paid twice per day, because their wages would otherwise be rendered worthless by the time they got off work. People had to barter for goods and used their currency as wallpaper and fuel for fires because it was more valuable as those things than as money.”
The Stabilization Effort
In late 1922, the German central bank tried to stabilize the falling mark by supporting it by buying up the worthless marks with gold and foreign exchange. But this effort soon fell by the wayside as the inflation continued to expand rapidly.
An excellent article by USA Gold on “Nightmare German inflation” told what happened with the exploding hyperinflation and the inability of the German government to contain it: “Businessmen began to abandon their legitimate occupations to speculate in stocks and in goods. Thousands of small businessmen tried to eke out a living by speculating in fabrics, shoes, meat, soap, and clothing--in any produce they could obtain. Each fall in the mark brought a rush to the shops. People bought dozens of hats or sweaters.”
As the trouble continued, workers were being paid two or three times a day. Wives would meet their husbands, take the money, rush to the shops and buy goods. But, by this time, shops were often empty. Storekeepers could not obtain goods nor do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless money. Food riots broke out. Workers marched into the countryside to dig up vegetables and to loot farms. Businesses started to close down. The German economy began collapsing in earnest.
In time, middle-class people, who depended on any sort of fixed income, found themselves destitute. They had to sell furniture, clothing, jewelry and works of art to buy food. Small shops filled up with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.
USA Gold says that the tax system virtually broke down. Businessmen found that by merely delaying tax payments, the depreciation in the mark would almost eliminate their true value. But the government, lacking needed income, was forced to resort more and more to creating money. By October 1923, per USA Gold, 1% of government income came from taxes and 99% from the creation of new money.
Yet the main force which gave inflation its momentum was the steady decrease in the true value of German money in circulation. Despite the proliferating billions and trillions of marks, the average German found it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks. Businessmen found it hard to find the money needed to buy materials and meet payrolls. The German government also faced the same problem. It seemed that there was not too much money around, but rather much too little. The need for more and more money grew on all sides.
Humor from Weimar Germany
This backdrop on German inflation reminds me of a story from Germany in the 1920s while Germany was facing its hyperinflation crisis. I told this story in my presentation on Editor’s Personal on the left menu of www.analysis-news.com. But it is a good one so I will repeat it here.
Per the story, inflation was so bad that working people had to be paid frequently by their employers (as described in the above comments). Once being paid, the typical German worker would rush home and give his money to his wife to run out to the local food markets and buy some food. To delay spending one’s money meant that the money would depreciate so fast that its ability to purchase food could be destroyed by waiting another day to spend the money.
So one working German man got his pay one day and he rushed home and gave it to his wife so she could go to the store and buy a loaf of bread. There were so many billions of marks needed to buy a loaf of bread that the poor woman could not carry them to the store. So she put them in a wheelbarrow and pushed it down to the store to get her bread.
But when she got to the store, she found that she could not get the wheelbarrow, filled with marks, through the store’s door. She thought for a minute and decided to park the money-filled wheelbarrow at the door and go in, get her bread and have the store owner come out to the wheelbarrow to retrieve his billions of marks.
As planned, she got her bread and the owner agreed to come to the door to get his money. And sure enough, disaster had struck. Here, someone may conclude that some thief found the waiting wheelbarrow full of money and stole the money before the store owner could take possession of it for the loaf of bread. But guess what? It didn’t happen that way at all.
On coming out the door, the woman and store owner found that a thief had indeed struck—but not the way one would first guess. Instead, they found the billions of marks scattered all over the sidewalk. So the thief didn’t steal the money. Instead the culprit dumped the marks on the sidewalk and stole the wheelbarrow.
The Fallout of the German Hyperinflation
The hyperinflation was disastrous for paper currency and paper assets like bonds. Some stocks survived but many became worthless. Real estate was mixed as it ultimately fell sharply in value.
USA Gold today gives this perspective on some of the best investments of all during this hyperinflationary period: “Capital was preserved by those who early changed it into objects of lasting value--rare coins, stamps, jewelry, works of art, antiques--or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain…
“Those who held funds in dollars, pounds or other stable currencies, or in gold,http://www.usagold.com/gold/coins/ger20mark.html saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.”
Stabilization in late 1923
In November 1923, the German government started a currency reform with the creation of the Rentenbank which began issuing a new currency called the Rentenmark. Each new Rentenmark was valued at one trillion of the old inflated marks. Soon, the government was able to stabilize its monetary system and the hyperinflation ended.
While there were several fallouts of the introduction of the new Rentenmarks, perhaps it offered two features which somehow caught on to promote public acceptance and stability. As the USA Gold article noted, the new money restored confidence.
By August 1924, the government introduced a new Reichsmark which was equal in value to the Rentenmark on a one for one basis. And importantly, the new Reichsmark had a 30% gold backing which made it even more attractive.
But There Were some Bad Fallouts by the time of Stabilization
Perhaps the worst fall out of the German bout with hyperinflation is that millions of middle class Germans were wiped out financially and economically. Discontent and dissatisfaction spread. A serious depression followed with much unemployment, fear and apprehension. The loss of confidence in the German money during the days of the hyperinflation was somewhat solved. But there was thereafter a loss of confidence in the government and economy as a whole.
Thus, even middle class people, who would not normally be attracted to radical politics, soon found themselves receptive to ideology which they normally would have rejected. The ruling democratic parties and philosophy soon became discredited and rejected by large numbers of people.
Yes, despite the supposed stabilization in its money by 1924, other serious problems surfaced because of the loss of the German middle class. Thereupon, radical political movements like Communism and Nazism began capturing followers and causing great social and political unrest. The former stable country of Germany, with its respect for law and order, soon found itself propelled into regular street fights and conflicts between the different radical factions. Turmoil prevailed in many German cities.
The loss of the German middle class (which was mostly reduced to poverty and low income levels) set the stage for the rise of Adolf Schicklgruber (who used the alias Hitler to better fool and deceive the German people about his real identity).
The Bottom Line
With this backdrop from Weimar Germany, perhaps the next question is what about the US? Can we learn from history? The turmoil in Germany in the 1920s and early 1930s manifestly brought on the dictatorship of Adolf Schicklgruber. As a minimum, Adolf came to power to restore law and order.
And he did so by imposing a totalitarian state and the abolishment of personal liberties. Once in power, he not only persecuted certain groups but he brought on a confiscation of guns and gold (the Nazi quest for gold was so great that gold tooth fillings were robbed from the dead).
With hyperinflation staring America in the face, and with its accompanying trouble and turmoil, is it conceivable that we will have a new Adolf Schicklgruber take over here to restore prosperity, law and order?
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-- Posted Thursday, 2 April 2009 | Digg This Article
| Source: GoldSeek.com
