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Lessons for America from Germany’s Hyperinflation, Part 2


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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.

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    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.