Lessons for America from Germany's Hyperinflation By Jim Powell | December
03, 2010
Many Americans may be inclined to assume that Germans were
barbaric because they supported Hitler, and whatever happened
there couldn’t possibly apply to the United States.
But the Germans have had much more in common with Americans
than we might realize.
Germans were educated and industrious. Germany had world-class
universities. Germans long led the world in scientific achievement.
Many German companies were highly efficient producers. German
immigrants contributed a great deal to American cultural
life, including kindergartens, gymnasiums, picnics, hamburgers,
hot dogs, and Christmas trees. The long list of notable
Germans or persons of German descent in America includes
historian Hannah Arendt, astronaut Neil Armstrong, dancer
Fred Astaire, Wizard of Oz author L. Frank Baum, landscape
painter Albert Bierstadt, brewer Adolphus Busch, actor Tom
Cruise, singer John Denver, entertainment entrepreneur Walt
Disney, movie reviewer Roger Ebert, Life magazine photographer
Albert Eisenstadt, physicist Albert Einstein, New York Yankee
legend Lou Gehrig, condiment king Henry J. Heinz, hotelier
Conrad Hilton, comedian David Letterman, novelist Thomas
Mann, dishwasher entrepreneur Frederick Maytag, journalist
H.L. Mencken, movie director Mike Nichols, political cartoonist
Thomas Nast, New York Times publisher Adolph Ochs, pharmaceutical
entrepreneur Charles Pfizer, pioneering modern architect
Ludwig Mies van der Rohe, slugger Babe Ruth, cartoonist
Charles M. Schulz, novelist John Steinbeck, piano maker
Henry E. Steinway, blue jeans peddler Levi Strauss, real-estate
wheeler-dealer Donald Trump, and electrical industry pioneer
George Westinghouse. Despite hideous things that happened
in Germany during the 1930s and 1940s, we are part of a
common civilization and should recognize that what happened
there could happen here.
Effects of war socialism
During World War I, the German government expanded rapidly
and gained pervasive control over the economy. This was
the “war socialism” that inspired Lenin and
his comrades in Russia. After the war, the German government
retained most of its costly bulk. Municipalities were subsidized
by it; similarly, many of today’s financially hard-pressed
states are lobbying Washington for bailouts. There were
government-run pensions not unlike the unfunded pension
liabilities our federal and state governments are struggling
with. The German government provided health insurance for
increasing numbers of people. It supported 1.5 million disabled
veterans. It subsidized artists. There were government theaters
and government opera houses. The government owned many businesses,
including those producing margarine and sausages, and they
lost money. Government-owned railroads were bankrupt because,
among other things, freight rates weren’t increased
fast enough to cover soaring costs. All those programs were
aggressively defended by interest groups who benefited from
them.
So the German government was financially stressed out when
it was hit with external shocks. German political leaders
had expected to win World War I, but they turned out to
be wrong about that. Then they expected a postwar settlement
according to the lofty principles expressed by Woodrow Wilson,
but they were wrong about that, too. The Allies, particularly
Britain and France, demanded substantial reparations. Reparations
by themselves weren’t so bad — at their peak
in 1921, they amounted to 1.2 billion German marks, or about
11.8 percent of the German government’s budget. But
since the government was already stressed out, the reparations
triggered an epic money-printing binge.
Prices of everything soared, and the inflation proved to
be more socially destructive than World War I. It devastated
libraries and museums. They couldn’t afford to maintain
what they had, never mind acquiring new books or works of
art. Scientists couldn’t afford to do their work,
and scholars couldn’t do theirs. As historian Gerald
Feldman observed, “It wasn’t possible any longer
successfully to separate a discussion of the maintenance
of German science, scholarship, and artistic life from a
discussion of the social condition of their practitioners.”
Private home builders couldn’t afford to continue
building new homes. Rather than deal with the interest groups
defending price controls, German cities borrowed money —
repayable in foreign currencies such as Swiss francs and
Dutch gulden — to go into the housing business. As
German marks depreciated, cities had a harder and harder
time paying the interest, and they begged the national government
to help. Government-run enterprises, too, had taken loans
repayable in foreign currency, to import milk and cattle,
and they were desperate. Retailers liked rent controls because
their store space was a bargain, even though landlords couldn’t
afford to maintain it. But retailers lost to inflation anyway,
because price controls made it hard to recover their other
costs.
German inflation, 1923
There was an often-told story about a thief who stole a
useful wheelbarrow and left behind the bundles of paper
money that had been in it, because the money was worthless.
In an effort to prevent the new issues of money from leading
to higher prices, on July 7, 1921, the German Supreme Court
ruled that when sellers priced their goods, they couldn’t
fully factor in the depreciation of the mark. To illustrate
what such a policy led to, Feldman related the story about
“a rope manufacturer who had become convinced he could
do splendid business by selling his rope for ever increasing
amounts of paper marks. He rapidly became a millionaire
and then a billionaire, but each time he used his capital
to buy hemp, he noted that he progressively received less
hemp for more money and that his production steadily decreased.
Finally, the day came when he could produce only one piece
of rope, and he used it to hang himself at the gate of his
desolated factory.”
Government regulations bankrupted most of Germany’s
insurance funds. They had been forced to invest in bonds
issued to finance the government’s failed venture
in the housing business. The value of the bonds was wiped
out by inflation. Inflation devastated German insurance
companies that had business in other countries, because
customers needed payments in their own currencies, not in
marks. German regulations limited the ability of insurance
companies to maintain accounts in other currencies sufficient
to discharge their obligations.
By disrupting all kinds of contracts, inflation led to
the collapse of the German economy. Nobody could count on
anything. Many judges accepted the cancellation of contracts
provided it could be established that inflation was unexpected,
so courts were deluged with claims that nobody could have
foreseen that the inflation would go on for years. According
to Feldman,
German businessmen were sending their domestic and foreign
customers learned summations of cases and opinions by
company lawyers or printed compilations of German court
decisions allegedly sanctifying the cancellation or revision
of contracts.
Debtors were pitted against creditors,
with hundreds of thousands of debtors rushing to pay off their
mortgages and other loans with worthless currency, and creditors
helplessly insisting that the value of money borrowed be repaid.
One embittered banker remarked that “our real estate
credit, to which Germany owes so much for its past reconstruction
and which is also so indispensable for a solid reconstruction,
must be buried in the grave.”
The German inflation, however, meant that everything was
incredibly cheap for foreigners. The Germans knew it and
resented it. The American novelist Ernest Hemingway and
his wife traveled through Germany in 1922, and he reported
that “with marks at 800 to the dollar, or 8 to a cent,
we priced articles in different shops. Peas were 18 marks
a pound, beans 16 marks. Beer was 10 marks a stein or 1-1/4
cents.” A pastry shop they visited “was jammed
with French people of all ages and descriptions, gorging
cakes. The proprietor and his helper didn’t seem happy
when all the cakes were sold. The mark was falling faster
than they could bake.”
By November 1922, the German economy was collapsing. Industries
shut down. The government committed itself to paying money
to the thousands of workers who became unemployed. Within
six months, the government was providing a trillion marks
a month in emergency credits to failing banks, railroads,
manufacturing businesses, and agricultural cooperatives.
On July 1, 1923, one U.S. dollar would buy 160,000 marks;
by August, a million marks.
Government officials blamed the depreciation of the mark
on speculators and tried to make it more difficult for Germans
to exchange their marks for stronger currencies. Traders
left the organized exchanges and conducted their business
in cafes and other “underground” locations.
The inflation made people desperate. They cut up leather
chairs to get leather for their shoes. Draperies were cut
up to make children’s clothing. Thieves stripped railroad
cars for copper wire. Historian Konrad Heiden reported,
On Friday afternoons in 1923, long lines of manual and
white-collar workers waited outside the pay-windows of
the big German factories, department stores, banks, offices….
They all stood in lines outside the pay-windows staring
impatiently at the electric wall clock, slowly advancing
until at last they reached the window and received a bag
full of paper notes. According to the figures inscribed
on them, the paper notes amounted to seven hundred thousand
or five hundred million, or three hundred and eighty billion,
or eighteen trillion marks — the figures rose from
month to month, then from week to week, finally from day
to day. With their bags the people moved quickly to the
doors, all in haste, the younger ones running. They dashed
to the nearest food store, where a line had already formed.
Again they moved slowly, oh, how slowly, forward. When
you reached the store, a pound of sugar might have been
obtainable for two millions; but by the time you came
to the counter, all you could get for two millions was
a half-pound....
People employed in the private sector were
enraged when government employee unions — who carried
out the government’s disastrous economic policies —
succeeded in having their salaries pre-paid, so they could
convert the currency to goods before the currency depreciated
further. The publication Soziale Praxis reported, “Public
opinion is turning against the civil service.”
Bank depositors were wiped out. “A man who thought
he had a small fortune in the bank,” Heiden reported,
might receive a letter from the directors: “The
bank deeply regrets that it can no longer administer your
deposit of sixty-eight thousand marks, since the costs
are all out of proportion to the capital. We are therefore
taking the liberty of returning your capital. Since we
have no bank-notes in small enough denominations at our
disposal, we have rounded out the sum to one million marks.
Enclosure: 1,000,000-mark bill.” A cancelled stamp
for five million marks adorned the envelope.
Professional people were devastated. Most
doctors’ fees were paid by health-insurance funds, and
the lags in receiving such payments meant big losses. Doctors
went on strike in Berlin and elsewhere. Independent lawyers
weren’t able to increase their fees fast enough to keep
up with inflation, since they were regulated by the government.
Many lawyers couldn’t afford to attend a professional
meeting in Hamburg about inflation in the law. German-born
oil consultant Walter Levy recalled, “My father was
a lawyer, and he had taken out a 20-year insurance policy
in 1903. Every month, he made the payments faithfully. When
the policy came due in 1923, he cashed it in and was able
to buy only a loaf of bread.”
Farmers tried to keep the food they produced, rather than
give it up for worthless paper money. That led hungry city
people and gangs of unemployed coal miners to plunder farms.
By that time, of course, not many foreigners were willing
to accept marks, either. The government pressured big businesses
to lend gold marks. Incredibly, the government — which
caused the inflation — tried to put taxes on a gold
basis, meaning that taxes would be indexed and go up exponentially
along with everything else during the inflation.
“The State wiped out property, livelihood, personality,
squeezed and pared down the individual, destroyed his faith
in himself by destroying his property,” Heiden reflected.
“Minds were ripe for the great destruction.”
“The foster child of inflation”
Adolf Hitler was among the unintended consequences of the
inflation. He had been a small-time rabble rouser at the
end of World War I, bitterly lashing out at those he blamed
for Germany’s defeat. He exploited the fear and resentment
caused by the inflation, appealing to those he called “starving
billionaires” who were able to buy pitifully little
with their wads of worthless paper marks. The ranks of Hitler’s
followers expanded dramatically during the inflation. Economist
Constantino Bresciani-Turroni called Hitler “the foster
child of the inflation.” The price of black bread
hit one billion marks, businesses were losing money, and
the government couldn’t meet its own payrolls. “The
crisis, without which Hitler would have been nothing,”
wrote biographer Ian Kershaw,
was deepening by the day. In its wake, the Nazi movement
was expanding rapidly. Some 35,000 were to join between
February and November 1923, giving it a strength of around
55,000.
Hitler staged an inept coup attempt in
a Munich beer hall. He was arrested and imprisoned, but he
had emerged as a public figure determined to rise again when
another crisis gave him an opportunity.
Meanwhile, the inflation helped break the grip of interest
groups, particularly government-employee unions, that always
pushed for more government spending. Desperate citizens
were willing to consider alternatives to politics as usual.
Finance Minister Karl Helfferich proposed some tough reforms,
and they were adopted.
First, he introduced a new currency, the Reichsmark, to
replace the worthless mark. Second, to prevent the Reichsmark
from becoming worthless, he aggressively cut government
spending. He eliminated the government employees’
perk of having their salaries prepaid. He began giving them
weekly paychecks, so they would suffer from inflation like
everybody else, if it returned. They bitterly protested
that the practice would jeopardize the stability of the
government. Next, national government payrolls were cut,
by 396,838 employees, almost 25 percent.
At the bloated nationalized railroads, payrolls were cut
more than half, from 576,083 to 186,658. The government-run
health-care system was cut back, too. There were howls of
protest, but people had lived through the consequences of
runaway government spending. They couldn’t afford
it anymore. The government-run social security program couldn’t
be saved, because inflation had made social security funds
worthless. Retired people, widows, and the disabled who
needed help were given relief, and that was it.
Since the United States is a mighty superpower, many Americans
probably continue to believe that what happened to Germany
can never happen to them. But runaway inflation is driven
by runaway spending financed by money-printing, and the
spending can be on all sorts of things, not just reparations.
Today federal spending on entitlements is skyrocketing,
and in 2009 entitlements consumed all federal tax revenue,
which meant, in effect, that the United States had to go
deeper in debt to cover other costs such as national defense
and interest on existing debt. By any standard, the U.S.
government is financially stressed out. Since the United
States intervenes in the affairs of other countries more
than anyone else, it is likely to become embroiled in future
wars, perhaps in addition to the two wars that have dragged
on in Iraq and Afghanistan. During each of the biggest wars
the United States has been involved with (the Civil War,
World War I, and World War II), federal spending soared
about tenfold. Something like that would certainly qualify
as an external shock. Clearly, the risk of a U.S. inflation
catastrophe is going up.
Jim Powell is policy advisor to the Future of Freedom
Foundation and a senior fellow at the Cato Institute. He
is the author of FDR’s Folly, Bully Boy, Wilson’s
War, Greatest Emancipations, The Triumph of Liberty and
other books.