Hyperinflation in Germany, 1914-1923
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 redeemabilityof 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.
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.
Minister of Finance and celebrated economist Helfferich repeatedly assured his nation that there was no inflation in Germany since the total value of currency in circulation, when measured in gold, was covered by the gold reserves in the Reichsbank at a much higher ratio than before the war.2 President of the Reichsbank Havenstein categorically denied that the central bank had inflated the German currency. He was convinced that it followed a restrictive policy since its portfolio was worth, in gold marks, less than half its 1913 holdings.
Professor Julius Wolf wrote in the summer of 1922: “In proportion to the need, less money circulates in Germany now than before the war. This statement may cause surprise, but it is correct. The circulation is now 15–20 times that of pre-war days, whilst prices have risen 40–50times.”3 Similarly Professor Elster reassured his people that “however enormous may be the apparent rise in the circulation in 1922, actually the figures show a decline.”4
The Statistical Bureau of the German government even calculated the real values of the per capita circulation in various countries. It, too, concluded that there was a shortage of currency in Germany, but a great deal of inflation abroad.
Gold value of monies in circulation, gold marks per person
1920 1922 Germany 87.63 17.92 England 84.40 110.73 France 180.05 229.90 Switzerland 89.49 103.33 United States of America 101.35 97.66
Source: Wirtschaft und Statistjk, 1923, No. 1.
(To arrive at US dollar amounts these figures should be divided by 4.2)
Of course, this fantastic conclusion drawn by monetary authorities and experts bore ominous consequences for millions of people. Through devious sophisms it simply removed the cause of disaster from individual responsibility and thus also all limits to the issuance of more paper money.
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. It is obvious that goods prices must then rise faster and the value of money depreciate faster than the rate of money creation. If the value of individual cash holdings declines faster than the rate of money printing, the value of the total stock of money must also depreciate faster than this rate. This is so well understood that even the mathematical economists emphasize the money “velocity” in their equations and calculations of money value.5 But the German monetary authorities were unaware of such basic principles of human action.
For Health, Education, Welfare, and Full Employment
Immediately after the war the German government, under the leadership of the Socialist Party, embarked upon heavy expenditures for health, education, and welfare. The demands on the treasury were extremely heavy anyway because of demobilization expenses, the demands of the Armistice, the disord
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