While inflation doesn't appear to be
a problem these days, more than a few experts are
beginning to warn that it could be one as early as
perhaps 2004. This may be hard to understand, especially
while some on the other side are still talking of
deflation, but one can't escape the fact that at least
when it comes to monetary policy, the U.S. Federal
Reserve has been running full tilt in priming the
this in mind, and in conjunction with a series on
appeasement before World War II that I am currently
running on my "Hott Spotts" link, I thought I'd take
a second look at a piece I did back in June 2000 concerning
Germany's Weimar Republic, perhaps the single best
example of hyper-inflation in world history. Don't
worry, no one is forecasting this kind of monetary
disaster in the future, but the tale is fascinating
and worth retelling at this time.
the end of World War I, Germany was crushed, Britain
and France emerged exhausted winners, and there were
a lot of big questions at the time, such as, would
revolution in Russia spread to the rest of Europe?
Would Britain and France recover? Would Germany attempt
a war of revenge?
the Treaty of Versailles, June 1919, which placed
responsibility for the war on Germany, while France
demanded that Germany pay in more ways than one. The
German military was to be reduced to a shell of 100,000
volunteers and about 6 cruisers, plus the government
was to pay reparations of some 132 billion marks (about
$35 billion.depending on how you value the currency
at this time), along with other payments such as ¼
of all extracted coal. French Prime Minister Clemenceau
said, "We will squeeze the German lemon 'til the pip
which hadn't suffered the physical damage that France
and Belgium had, for example, wanted to restore the
fledgling German Republic to reasonable economic strength,
feeling that in view of the perceived threat posed
by the Russian Revolution, Germany could be a force
for European stability.
the French position largely won out and Versailles
was a total humiliation for the Germans. Having to
admit responsibility for the outbreak of the war,
the "War Guilt Clause," was especially trying. Henry
century peacemakers would have regarded 'war guilt
clauses' as absurd. For them, wars were amoral inevitabilities
caused by clashing interests. In the treaties that
concluded 18th century wars, the losers paid a price
without its being justified on moral grounds. But
for (U.S. President) Wilson and the peacemakers at
Versailles, the cause of the war of 1914-1918 had
to be abscribed to some evil which had to be punished."
was forced to surrender 13% of its prewar territory.
The key industrial sector of Upper Silesia was turned
over to a newly created Poland. Alsace-Lorraine was
handed to the French and the Rhineland was demilitarized.
Germany was also forced to pay for pensions of war
victims and some compensation for their families,
an unheard of provision. Economists warned of the
implications but the populations of the victors wanted
opposing viewpoint to all this is supplied by author
William Shirer. In his view, Versailles left Germany
geographically and economically largely intact and
preserved her political unity and potential strength
as a great nation.]
Germany was reduced to economic chaos after the armistice.
In 1920, prices plummeted around the world in a great
deflation. This price and wage deflation was reinforced
by the economic policies of conservative governments.
Germany's new Weimar Republic inherited the vast burden
of debt and the crushing weight of reparations. Add
in the fact that tax revenues were low due to the
weak economy, while the outflow of payments in gold-fueled
also quickly became apparent that Germany would be
unable to meet its reparation obligations. In July
1920 the German mark plunged dramatically as the Weimar
government informed the Allies it could not meet the
schedule of payments, but that it would continue disbursements
of coal and other natural resources. With the U.S.
pressuring Britain and France to repay their own war
debts, the Allies grew all the more determined that
Germany pay up. France's new premier, Raymond Poincare,
accused Germany of deliberately withholding payments
and trying to force the Allies to make concessions
by ruining its own currency.
January 11, 1923, French and Belgian troops (against
the advice of the British) occupied the Ruhr, a region
which furnished 4/5's of Germany's coal and steel
production. The miners refused to work for the enemy
and the Germans simply printed more money with which
to pay them not to, allowing inflation to spiral completely
out of control. The economy was strangled and the
free fall in the mark was incredible. Following is
the historic slide:
1914.4.2 marks to the dollar
November 15, 1923.4,200,000,000,000.yes, trillion.
Gordon Craig, "Germany 1866-1945"]
late 1923, the German government required 1,783 printing
presses, running around the clock, to print money.
wheeled shopping carts filled with literally trillions
of marks to pay for a single loaf of bread. Employees
asked to be paid their wages each morning so that
they could shop at noon before merchants posted the
afternoon price rises.
New York Times ran a story on October 30, 1923, datelined
Berlin, which told the tale of an American who went
into a restaurant and handed the waiter a dollar,
asking for "all the food an American dollar will buy."
The waiter recovered from his astonishment and began
to serve the guest.
several meat dishes, fruit and coffee were served.
While the guest was smoking his cigar the waiter brought
another plate of soup, and later another meat dish.
'What does this mean?'" the astonished and satisfied
waiter bowed politely and replied: 'The dollar has
gone up again.'"
inflation also wiped out people on fixed income along
with the small savings they had put aside for retirement.
pensions, proceeds of insurance policies, savings
accounts in the banks, income from bonds and mortgages
- every form of revenue which had been arranged for
at some time in the past, and which often represented
the economy, foresight, and personal planning of many
years - now turned to nothing. The middle class was
pauperized and demoralized."
"A History of the Modern World"]
good were the standards and practices of such a society,
which encouraged savings and investment and solemnly
promised a safe return from them and then defaulted?
Was this not a fraud upon the people?"
say that the inflation could have been halted by balancing
the budget, hard as that may have been given the crushing
debt loads. But the cost of the war - 164 billion
marks - had been met not just by direct taxation,
but rather 93 billion by war loans, 29 billion out
of Treasury bills and the rest by increasing the issuance
of paper money. But not everyone suffered in Germany.
industrialists and landlords goaded the government
to deliberately let the mark tumble in order to free
the State of its public debts, to escape from paying
reparations and to sabotage the French in the Ruhr.
The destruction of the currency enabled German heavy
industry to wipe out its indebtedness by refunding
its obligations in worthless marks. The fall of the
mark wiped out war debts and thus left Germany financially
unencumbered for a new war. The masses of the people
only knew that a large bank account could not buy
a straggly bunch of carrots, a few ounces of sugar.
In their misery the Republic was made the scapegoat
for all that had happened."
in 1924 German inflation was brought to a sudden end
with the help of a Chicago banker, Charles Dawes.
Dawes was the chief architect behind what came to
be known as the Dawes Plan, one that left the Reichsbank
partially under the direction of an American commissioner
who was to oversee German reparation payments. It
did not lower the amount Germany was expected to pay,
but the U.S. reduced the debt obligations of its Allies
by 30-80%. The plan helped improve relations between
the Allies and Germany and, for this, Dawes earned
a share of the 1925 Nobel Peace Prize (the other recipient
being Sir Austen Chamberlain of Britain).
the Dawes Plan wasn't without cost. The banking consortium
he put together reaped 10% of the face value for underwriting
costs, the motto being, "business, not politics."
the next 5 years, Germany paid out about $1 billion
in reparations and received loans of $2 billion, a
sizable portion from the U.S. In effect, America was
paying Germany's reparations, while Germany used the
surplus from American loans to modernize its industry.
then, did not necessarily ruin the economy, but their
psychological impact in Germany did a number on the
people and damaged the very republic the vast majority
of the Allied population wanted to succeed. Confidence
in open, democratic institutions was weakened fatally
in central Europe.
the height of the currency crisis an interested spectator
government calmly goes on printing these scraps of
paper because, if it stopped, that would be the end
of the government. Because once the printing presses
stopped - and that is the prerequisite for the stabilization
of the mark - the swindle would at once be brought
to light. Believe me, our misery will increase. The
scoundrel will get by. The reason: because the State
itself has become the biggest swindler and crook.
A robbers' state!.If the horrified people notice that
they can starve on billions, they must arrive at this
conclusion: we will no longer submit to a State which
is built on the swindling idea of the majority. We
want a dictatorship."
spoke Adolf Hitler.
"The Rise and Fall of the Third Reich" William Shirer
"Twentieth Century" J.M. Roberts
"A History of Modern Europe" John Merriman
"The Great Wave" David Hackett Fischer
"Wall Street: A History" Charles Geisst
"The New York Times Century of Business" Floyd Norris
and Christine Bockelmann
"A History of the Modern World" R.R. Palmer, Joel
Colton, Lloyd Kramer
"The Encyclopedia of World History" Edited by Peter
Street History will return next week.