Hyperinflation in Germany; H. Sennholz

During the 1950's we had grown accustomed to a creeping depreci ation of currencies at an average rate of 2 per cent a year. During the 1960's the rate. had climbed to 4 and 5 per cent; last year it reached 6 per cent, which is well beyond the creeping pace. And, if we project the depreciation growth Dr. Sennholz heads the Department of Eco nomics at Grove City College and· is a noted writer and lecturer for freedoM. 598 rates of the 1960's to the 1970's, we must brace ourselves for infla tion of 10 to 20 per cent· annually. We need not here analyze many political and social aspects of this ominous development in the West ern world. But we should like to review the history of the greatest inflation of the century, the Ger man hyperinflation of the early 1920's, and the ideological causes that brought it about. For history is the glass through which we may behold the deeds. and errors, the foibles and misfortunes of man kind.

The German inflation, too, be gan with a creeping rate of one and two per cent. When World War I broke out, the central bank (Reichsbank) immediately sus pended redeemability of its notes in order to. prevent a run on its gold reserves. Then it offered as sistance. to the central government toward financing the war effort. As taxes are always unpopular the government preferred to borrow huge amounts of money to cover 1970 HYPERINFLATION IN GERMANY 599 its budgetary deficits. And the central bank assisted every issue of new treasury obligations by dis counting much of it. Thus, a large percentage of government. debt . found its way into the vaults of the Reichsbank and an ~quivalent amount of printing-press money into the peoples' cash holdings. As in other belligerent countries, 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 per cent. 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 Decem·· ber 1923, the Reichsbank had is·· sued 496.5 quintillion marks each of which had fallen to one tril·· Honth of its 1914 gold value. 1 1 According to the British and German systems of numeration, the billion is a million of millions, a trillion a million of billions, and each higher denomination (e.g. quadrillion, quintillion, sextillion, etc.) is a million times the one preceding.

In the American system, the billion is a thousand millions, and each higher de nomination is' a thousand times the pre ceding. lt must also be noted that a bil lion in the U.S. system is called milliard in the British and German systems. In German and British texts thesentenc1e would thus read: "Five years later in De cember 1923 the Reichsbank had issued 496.5 trillion marks each of which had fallen to one billionth of its 1914 gold value." How stupendous! Practically ev ery item of trade was costing tril lions of marks. The American dol lar was quoted at 4.2 trillion marks, the American penny at 42 billion marks. How could a Euro pean 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 ram ifications 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 ruin ous financial manipulation and plunder?

Every mark was printed by Ger mans and issued by a central bank that was governed by Germans under a government that was purely German. It was German po litical parties, such as the Social ists, the Catholic Centre Party, and the Democrats, forming vari ous coalition governments, that were solely responsible for gov ernmental policies. Of course, ad mission of responsibility for any calamity cannot be expected from any political party. The reasoning that led these parties to inflate the national cur rency at such astronomical rates is not only interesting for eco nomic historians, but also exposes 600 THE FREEMAN October the rationale of monetary destruc tion. The doctrines and theories that led to the German monetary destruction have been applied with similar consequences in many other countries, and underlie the rampant inflation throughout the Western world today. Four erroneous doctrines or theories guided the German mone tary authorities in those baleful years.

No Inflation in Germany The most amazing economic soph ism advanced by eminent finan ciers, politicians, and, economists endeavored to show that there was neither monetary nor credit inflation in Germany. These ex perts readily admitted that the nominal amount of paper money issued was indeed enormous. But the real value of total currency in circulation, that is, the total value in terms of gold or goods prices, they argued, was much lower than before the war and low relative to that of other industrial countries. The Minister of Finance, cele brated economist Helfferich, re peatedly 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 re serves in the Reichsbank at a much higher ratio than before the war. 2 2 Das Geld, 1923, p. 646. The President of the Reichsbank Havenstein categorically denied that the Central Bank had inflated the German currency. He was con vinced that it followed a restric tive 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 propor tion to the need, less money cir culates in Germany now than be fore the war. This statement may cause surprise, but it is correct. The circulation is now 15 to 20 times that of pre-war days, whilst prices have risen 40 to 50 times." Similarly, Professor Elster re assured his people: "However enormous may be the apparent rise in the circulation in 1922, ac tually the figures show a decline."3 The Statistical Bureau of the German Government even calcu lated the real values of the per capita circulation in various coun tries. It, too, concluded that there was a shortage of· currency in Germany, but a great deal of in flation abroad. Of course, this fantastic con clusion drawn by monetary au thorities and experts bore omi nous consequences for millions of people. Through devious sophisms, it simply denied individual respon sibility for the disaster and thus 3 Von der Mark zur Reichsmark, 1928, p. 167.

1970 HYPERINFLATION IN GERMANY 601 Germany England France Switzerland U.S.A. removed all limits to the issuance of more paper money. GOLD VALUE OF MONIES IN CIRCULATION Gold Marks Per Person 1920 1922 87.63 17.92 84.40 110.73 180.05 229.90 89.49 103.33 101.35 97.66 SOURCE: Wirtschaft und Statistik, 1923, No. l. (To arrive at U.S. dollar amounts these figures should be divided by 4.2.) The source of this momentous error probably lies in failure to understand one of the most im portant determinants of money value: the attitude of people to ward 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 radi cally change their cash holdings, individuals must have cogent rea sons. They naturally enlarge their holdings whenever they anticipate rising money value as, for in stance, in a depression. And they reduce their holdings whenever they expect declining money value.

In the German hyperinflation, they reduced their holdings to an abso lute minimum and finally avoided any possession at all. It is obvious that goods prices must then rise faster and the value of money de preciate faster than the rate of money creation. And if the value of individual cash holdings de clines faster than the rate of money printing, the value of the total stock of money must also de preciate 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. 4 But the German monetary authorities were una ware 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. This added to the already hea vy load on the Treasury for demobili zation expenses, the demands by the Armistice, the disorders of the revolution, staggering deficits of the nationalized industries, espe cially the railroads, postal serv ices, telephone, and telegraph.

The resources made available by the creation of new money were apparently unlimited! A number of measures for the nationalization 4 Cf. my essay on "The Value of Mon ey" in THE FREEMAN, Nov. 1969.

602 THE FREEMAN October of certain industries (e.g., coal, electrical, and potash industries) were introduced, but failed to be come law. The eight-hour day was enacted, and labor unions were given many legal immunities and privileges. In fact, a system of labor councils was set up which authorized the workers in each en terprise to elect representatives who ·shared in the management of the company! While government expenditures rose by leaps and bounds,·.the rev enue suffered a gradual decline; in October 1923, only 0.8 per cent of :government expenses were covered 'by tax revenues. For the period from 1914 to 1923 scarcely 15 per cent of the expenses were covered by means of taxes. In the final phase of the inflation the German government experienced a com plete atrophy of the fiscal system. The depreciation of the currency brought about the destruction of taxable wealth in the form· of mortgages and bonds,annuities and pensions, which in turn re duced government revenue. It is true, some speculators reaped spec tacular profits from the deprecia tion, but they easily evaded the tax collector. Moreover, the fiscal policies of the Socialist govern ment were openly hostile toward capital and frequently endeavored to impose confiscatory capital levies upon all wealth .. Secretary of· the Treasury Erzberger even vowed that "in the future Ger many, the rich should be nomore/' Consequently. a massive "flight of capital" from Germany developed as all classes of savers invested their money in foreign bank ac counts, currencies, bills, securities, and the like. Much taxable wealth was removed from the grip of tax collectors.

Furthermore, the rapid depre ciationof currency greatly reduced all tax liabilities during the time interval between the taxable trans action and the date of tax pay ment. The taxpayer .usually paid a sum the real value of which was greatly reduced by inflation. Nevertheless, government expendi ture accelerated, while revenue in terms of real value continued to decline. The growing deficits then were met with even larger quanti ties of printing press money, which in turn generated ever larger deficits. The German mone tary authorities were trapped in a vicious circle from which they had neither the political courage nor the financial know-how to extricate themselves. The leading monetary authority, Dr. Helfferich, even warned his people against the direconse quences of, monetary stabilization. "To follow the good counsel of stopping the printing of notes would mean refusing to economic 1970 HYPERINFLATION IN GERMANY 603 life the circulating medium nec essary for transactions, payments of salaries and •wages, and so on; it would mean that in a very short time the entire public, and above all the Reich, could no longer pay merchants,employees, or workers.

In a few weeks, besides the print ing of notes, factories, mines, rail ways and post office, national and local government, in short, all na tional and economic life would be stopped."5 The Balance of Payments and the Treaty 0' Versailles Throughout the period of the inflation the most popular explana tion of the monetary depreciation laid the blame on an unfavorable balance of payments, which in turn was blamed on the payment of reparations and other burdens im posed by the Treaty of Versailles. To most German writers and poli ticians, the government deficits and the paper inflation were not the cause, but the consequences, of the external depreciation of the mark. The wide popularity of this ex planation, which charged the vic torious allies with full responsi bility for the German disaster, bore ominous implications for the future. Its simplicity appealed to the masses of economically igno rant people whose chauvinism and 5 Das Geld, p. 650.

nationalism always make the idea of foreign intrigue and conspiracy so palatable. The intellectual and political leaders who actively prop aga ted the doctrine were sowing the seeds for the whirlwind they ultimately reaped a decade later. During those baleful years, Ger many procured gratuitously from abroad large quantities of raw materials and foodstuffs. Accord ing to various authoritative esti mates, foreign individuals and banks bought at least 60 billion paper marks which the Reichs bank had floated abroad at an average price of lJt: gold mark for a paper mark. The depreciation of the mark to one trillionth of its earlier value repudiated these for eign claims to German goods. Thus, foreigners suffered losses of some 15 billion gold marks, or some $3.5 billion U.S. dollars, which was eight times more than Germany had paid in foreign ex change on account of reparations. Even if it had been true that excessive burdens were thrust on Germany by the Allies, there was no need for any monetary depre ciation. The two phenomena are entirely independent. If excessive burdens are thrust upon a govern ment, whether they be foreign or domestic, government must raise taxes, or borrow some funds, or curtail other expenditures. Exces sive reparation payments may ne604 THE FREEMAN October cessitate higher taxes on the popu lace, or large loans that reduce the supply of savings for industry and commerce, or painful cuts in gov ernment service and employment.

The standard of living of the peo ple thus burdened will probably be depressed - unless the reduction of bureaucracy should release new productive energy. But the value of money is not affected by the reparation burden unless economic productivity is impaired by the fund raising. Once government has achieved the necessary budgetary surplus, the payment of reparations is a simple matter of exchange. The Treasury buys the necessary gold or foreign exchange from its cen tral bank and delivers it to the recipient government. The loss of gold or foreign exchange then ne cessitates a corresponding reduc tion of central bank money, which in turn tends to depress the prices of goods. The lowered prices en courage more exports while they discourage imports, that is, gen erate what is commonly called a "favorable balance of payments" or new influx of gold and foreign exchange. In short, there can be no shortage of gold or foreign ex change as long as the central bank refrains from inflation and mone tary depreciation.

The German monetary authori ties flatly denied this economic reasoning. Instead, they preferred to lament the excessive burdens thrust onto Germany and the un favorable balance of payments gen erated thereby. In 1923 they added yet another excuse: the French oc cupation of the Ruhr district. The Central Statistical Officeput it this way: "The fundamental cause of the dislocation of the German monetary system is the disequilib rium of the balance of payments. The disturbance of the national finances and the inflation are in their turn the consequences of the depreciation of the currency. The depreciation of the currency upset the Budget balance, and deter mined with an inevitable necessity a divergence between income and expenditure, which provoked the upheaval."6 Again I quote Dr. Helfferich: "Inflation and the collapse of the exchange are children of the same parent: the impossibility of pay ing the tributes imposed on us.

The problem of restoring the cir culation is not a technical or bank ing problem; it is, in the last analysis, the problem of the equi librium between the burden and the capacity of the German econ omy for supporting this burden."7 Even American economists 6 Deutschlands Wirtschaftslage, March 1923, p. 24. 7 "Die Autonomie der Reichsbank" in Borsen-Courier of Apr. 4, 1922.

1970 HYPERINFLATION IN GERMANY 605 echoed the German theory. Profes sor John H. Williams presented this causal order: "Reparation payments, depreciating exchanges, rising import and export prices, rising domestic prices, consequent budgeting deficits, and at the same time an increased demand for bank credit; and finally increased. note-issue."s And Professor James W. Angell contended that "the reality of the type of analysis which runs from the balance of payments and the exchanges to general prices and the increased. issue of paper seems to be defi·· nitely established."9 Speculators Did It When all other explanations are exhausted, modern government ~ usually falls back on the specula·· tor who is held responsible for an economic and social evils. What the witch was to medieval man:, the capitalist is to socialists and communists, the speculator is to most politicians and statesmen:: the embodiment of eviL He is said to be imbued with ruthless and fickle selfishness that is capable of wrecking the national economy:, governmental plans, and, in the case of the German inflation, the 8 "German Foreign Trade and the Re parations Payments" (Quarterly Journal of Economics, 1922, p. 503).

9 The Theory of International Prices, 192.6, p. 195. national currency. No matter how blatantly contradictory this ex planation may be, it is most popu lar with government authorities in search of a convenient explana tion for the failure of their own policies. The same German officials who denied the very existence of infla tion lamented the depreciation caused by speculators. Or they blamed the Allied reparation bur dens and simultaneously denounced speculators for the depreciation. Dr. Havenstein, the President of the Reichsbank, embracing every conceivable theory that might clear his own policies of blame, also pointed at the speculators. Before a parliamentary committee, he testified: "On the 28th of March began the attack on the foreign exchange market. In very numerous classes of the German economy, from that day onward, thought was all for personal in terests and not for the needs of the country."

In a chorus, the newspapers re peated the charge: "According to all appearances the fall of the mark did not have its origin in the New York exchange, from which it may be concluded that in Germany there was active speculation di.. rected toward the continual rise of the dollar .... We are witnessing a rapid increase in the number of those who speculate. on the fall 606 THE FREEMAN October of the mark and who are acquiring vested interests in a continual de preciation .... The enormous spec ulation on the rise of the American dollar is an open secret. People who, having regard to their age, their inexperience, and their lack of responsibility, do not deserve support, have nevertheless secured the help of financiers, who are thinking exclusively of their own immediate interests .... Those who have studied .seriously the conditions of the money market state that the movement against the German mark remained on the whole independent of foreign mar kets for more than six months. It is the German bears, helped by the inaction of the Reichsbank, who have forced the collapse in the exchange."

In its broadest sense, specula tion is every economic action that makes provision for an uncertain future. The· student who studies aeronautical engineering specu lates on the future demand for his services. The businessman who en larges his inventory speculates· on a profitable market in the future. The housewife who hoards sugar speculates on the availability of sugar in the future. The buyer· or seller of goods or securities hopes to make a profit from future changes in prices. All such actions reflect a natural motivation of free men to improve their material well-being or, at least, to avert losses. When speculators observe or anticipate more inflation and monetary depreciation, they nat urally endeavor to sell the depre ciating currency and buy goods or foreign exchange that do not de preciate. They are preserving their working capital. Thus, they are promoting not only their own in terests but also those of society which benefits from the preserva tion of productive capital. The government that is actively de.., stroying the currency is inj uring the national interest; successful speculators are safeguarding it.

Surely, the speculators who sold German marks and bought U.S. dollars proved to be right in the end. The Current Dilemma in the Light of the German Experience The worldwide inflation that is engulfing the free world now springs from similar doctrines and theories. It is true, there is no Treaty of Versaille$ and no repa. ration payments that can be blamed for the inflation. But in many countries of Central and Western Europe the .responsibility for monetary depreciation is squarely laid on American balance of payments deficits that are flood ing those countries with U. S. dollars. While European monetary 1970 HYPERINFLATlON IN GERMANY 607 authorities a.re actively inflating and depreciating their own cur rencies - although at a slower rate than their American counterparts -they are pointing at the U.S. balance of payments as theulti mate cause of their currency de preciation. As in the German hyperinflation foreign intrigue and artifice are said to be at work again.

And again the speculators are charged for a share of the blame. American investors who buy for-, eign securities or make direct for-, eign investments are said to be largely responsible for the outflow of U.S. funds and loss of gold, which is creating an unfavorable balance of payments and weaken·· ing the U.S. dollar. Moreover" Americans who prefer foreign products over home-made prod·· ucts, or choose to travel abroad rather than stay at home are de·· cried-as selfish a:qd unpatriotic. Numerous regulations imposed by the very monetary authorities who perpetrate the inflation aim to prevent speculation in order to save the dollar. The specious argument that de·· nies the presence of any inflation in terms of purchasing power or gold value may be expected to emerge in later phases of the in·· flation when monetary authorities will desperately seek any argument that promises to hold them blame less~ The most popular contemporary doctrine that advocates inflation and credi t expansion pleads its case in terms of economic boom and full employment. Our econom ic order which is laboring under heavy government intervention and restriction is a stop-and-go system with alternating booms and busts. The booms are generated by heavy budgetary deficits and monetization of government debt.

The busts inevitably follow the booms as soon as stabilization is attempted or the rate of inflation is temporarily slowed in order to prevent a hyperinflation. Under the -sway of the "new economics" of Lord Keynes and his American disciples, our monetary authori ties inflate and depreciate to fi nance the boom, and then "rein flate" when the economy falters, to prevent massive unemployment. Inflation is the modern panacea for political, social, and economic evils most of which were created by the inflation itself. In truth, it is a savory poison that slowly kills not only the patients who take it but also the doctors who prescribe it. I) c. R. BATTEN THE TRAGEDY OF THE COMMONS THE TITLE for this piece was bor rowed from Garrett Hardin and his article that first appeared in Sci ence, and later in The Environ mental Handbook prepared for the First National Environmental TeachIn. I do not want to imply that I agree with all of Hardin's ideas, but he does give a very good ex planation of the tragedy of com monly owned property when each person is free to use it as he sees fit.