The Great German Inflation; B. Bartlett

reat ~erman 3Jnflation BRUCE BARTLETT THE FEBRUARYissue of the British magazine, Encounter, contains a heretofore unpublished lecture by the famous novelist, Thomas Mann, which recalls his experience with the great German inflation of 1913 1923. "A straight line," he tells us, "runs from the madness of the German Inflation to the madness of the Third Reich." Just as the Germans saw their marks inflated into millions and bil lions and in the end bursting, so they were later to see their state inflated into "the Reich of all the Germans", "the German Living Space", "the New Europe", and "the New W orId Or der", and so too they will see it burst. In those days the market woman who without batting an eyelash de manded a hundred million for an egg, lost the capacity for surprise. And nothing-that has happened since has been insane or cruel enough to surprise her. Mr. BartIett is a graduate student in history at Georgetown University.

It was during the inflation that the Germans forgot how to rely on them selves as individuals and learned to expect everything from "politics", from the "state", from "destiny." They learned to look on life as a wild adventure, the outcome of which depended not on their own effort but on sinister, mysterious forces. The millions who were then robbed of their wages and savings became the "masses" with whom Dr. Goebbels was to operate. Inflation is a tragedy tha tmakes a whole people cynical, hardhearted and indifferent. Having been robbed, the Germans becarne a nation of rob bers.! This terrible inflation, which Mann credits for the rise of Hitler, had its origin in another holocaust: WorId War 1. Like eyery other na tion involved in that conflict, Ger many was entirely unprepared for its intensity. German,French, and Bri tish troops all marched off in August 1914 absolutely convinced they would be home by Christmas.

367 368 THE FREEMAN June The German High Command shared this optimism, having full faith in the ability of the Schlief fen Plan to bring quick victory. With the resulting total war, out lasting the· enemy became the only path to victory for either side. At this point, Germany discov ered just how badly it,vas prepared for this new kind of warfare. Cut off from its sources of food by a British blockade and failing to achieve any kind of breakthrough on the Western front, Germany be gan to gamble, as it did when it unleashed its submarines. At home too, the government began to gam ble. The people, having been bled white by taxation already, had to be urged on to greater sacrifice. Toward this end, the government resorted to inflation on a mass scale, gambling that the people would be unaware of what was hap pening. Inflation an Indirect Tax Here, one should keep in mind that inflation, in its crudest form, is nothing but an indirect tax. The government, with its monopoly on the issuance of currency, found it simple to play the role of counter feiter. It simply paid for the goods it needed with newly created mon ey. Since an individual's concep tion of his money's worth is basic ally shaped by his past memory of its purchasing power, this process can go on for some time before it begins to significantly affect the price level.

During the war, goods were be ing withdrawn from the economy for war materiel and, simultane ously, fewer goods were being pro duced as workers became soldiers. At the same time, the government was increasing the money supply rapidly as it became increasingly difficult to raise needed funds from taxa tion or direct borrowing. Historically, the speed at which people spend· tends to remain rela tively constant unless they expect a sudden change in economic rela tionships. Accelerated spending classically occurs when people feel that their money is losing its value. At this point, they begin to spend every cent they can get as quickly as possible before prices go up again. This only tends to raise prices even higher and drop the value of the money corresponding br• Economist Ludwig von Mises, a resident of Austria at the time, graphically described this process: In normal times, that is in periods in which the government does not tamper with the monetary standard, people do not bother about monetary problems. Quite naively they take it for granted that the monetary unit's purchasing power is "stable." They pay attention to changes occurring in the money-prices of the various commodities. They know very well 1975 THE GREAT GERMAN INFLATION 369 that the exchange-ratios between commodities vary. But they are not conscious of the fact that the ex change-ratio between money on the one side and all commodities and services on the other side is variable too. When the inevitable conse quences of inflation appear and prices soar, they think that com modities are becoming dearer and fail to see that money is getting chea per. . . . This ignorance of the public is the indispensable basis of the inflationary policy. Inflation works as long as the housewife thinks: "I need a new frying pan badly. But prices are too high to day; I shall wait until they drop again." It comes to an abrupt end when people discover that the infla tion will continue, that it causes the rise in prices, and that therefore prices will skyrocket indefinitely.

The critical stage begins when the housewife thinks: "I don't need a new frying pan to-day; I may need one in a year or two. But I'll buy it to-day because it will be-much more expensive later." Then the cata strophic end of the inflation is close. In its last stage the housewife thinks: "I don't need another table; I shall never need one. But it's wiser to buy a table than keep these scraps of paper that the government calls money, one minute longer."~ This entire process was set in motion when the Reichsbank sus pended the redeemability of its notes in gold with the outbreak of war. As long as the paper currency was tied to a finite amount of gold, the currency also remained within finite limits. When this restraint was cast aside, there was no longer any legal limit to the amount of money that could be manufactured. The government, in turn, used this freedom to force the bank to buy its bonds, which the bank paid for by creating deposits in the govern ment's account. In this way, the German debt became monetized, just as the American debt is today monetized by the Federal Reserve System. Simply put, this means that the government's debts are ultimately paid for by the consum er's loss of purchasing power; the creation of new money serving only to cheapen all money already in circulation. In Germany, this meant that by the end of 1918, the amount of money in circulation had increased fourfold. One would have expected this to lead to approxi mately a fourfold rise in prices, more when one considers the cor responding cutback in production, but in fact they only rose 140 per cent. This is because consumers were not yet fully aware that the rise in prices was due not only to goods being less available, but also due to inflation of the money sup ply.

Huge Deficits To be sure, even the victorious nations had practiced the German method for financing their debts 370 T'HE FREEMAN June and experienced a similar rise in prices. But with the cessation of hostili ties, they returned to sound fiscal and monetary policies. In Germany, the government made no effort to return to pre-war spend ing levels and continued to run huge budget deficits, as the follow ing table demonstrates: 3 As one can see, the debt mounted with each passing year, almost all of it being funded through mone tization. The reasons for this were partly humanitarian, partly politi cal, and partly selfish. On the one hand, there was terrific pressure for relief and rebuilding. Then too, the government sought to use in flation as a psychological weapon against the Allies. Finally, there was pressure from those benefiting from the inflation, which will be dealt with below. But the single most important factor in the ensu ing hyperinflation was economic law. As people slowly began to real ize that their money was losing its value, they began drawing out bank deposits and spending what they had as quickly as possible.

This run on the banks and the tre*In millions of gold marks. **April to October only. mendous increase in the demand for cash put fierce pressure on the treasury to stave off collapse with a flood of freshly minted bills. Thus the figures for total money in cir culation begin to follow a pattern (in millions of marks): 1913, 6,070; 1920, 81,338; 1921, 122,500; 1922, 1,295,231; 1923, 2,274,000, 000.4 And the effect on the price level inevitably followed a similar pattern :0 WHOLESALE PRICE INDEX 1.0 2.6 3.4 12.6 14.4 14.3 36.7 100.6 2,785.0 194,000.0 726,000,000,000.0 YEAR July 1914 Jan. 1919 July 1919 Jan. 1920 Jan. 1921 July 1921 Jan. 1922 July 1922 Jan. 1923 July 1923 Nov. 1923 Search for Scapegoats Needless to say, the government never admitted its role in this, but instead sought out easy scape goats. The most popular one was the Versailles Treaty. After all, the people already hated the Allies, so why not exploit it to good use?

The campaign was so successful that even intelligent economists like Dr. Hjalmar Schacht accepted and perpetuated the myth: "The true cause of the inflation after the DEFICIT* 5,999 6,054 3,676 2,442 4,690 REVENUE* EXPENSE* 2,559 8,560 3,178 9,329 2,927 6,651 1,488 3,951 519 5,278 YEAR 1919 1920 1921 1922 1923** 1975 THE GREAT GERMAN INFLATION 371 war was the perpetual pressure exercised by the Reparation Com mission on Germany in the attempt to extort payments to foreign coun tries which in the nature of things could not be made."6 The truth of the matter is that reparations ex penses only made up about a third of the German budget deficit throughout the entire period. In his book, The Economics of Infla tion, Costantino Bresciani-Tur roni compiled the following fig ures :7 YEAR 1920 1921 1922 1923** DEFICIT* 6,053.6 3,675.8 2,442.3 6,538.3 REPARATlONS* 1,850.9 2,810.3 1,136.7 742.4 ness, which ran into real millions, by paying their creditors in inflated mil lions, and thanks to these same in flated millions they acquired real millions-worth of property.

Though Germany was very poor at that time, it possessed great wealth in mineral resources and in dustrial plant. During the inflation a radical change occurred; this wealth became concentrated in fewer and fewer hands. The small and medium property-owners lost their holdings, and the biggest snapped them up. They acquired property and paid with paper. Years later one could hear it said that such and such a factory or mine was unproductive and would not be profitable if it had not been acquired for next-to-nothing during the Inflation .... 8 *In millions of gold marks. **April to Decemberonly. Consequently, the reparations alone cannot account for the defi cits or the ensuing inflation. The truth of this was, of course, irrele vant. There were plently of other causes for the inflation which could also be exploited. To blame profiteering became particularly popular because, as in the case of reparations, there was some truth in it. This is how Thomas Mann saw those who profited from the crisis: For.at least a section of this ruling class, the big industrialists, the in flation was profitable; they were in no hurry to stop it. During those years the Krupps, Stinneses, Thys sens, etc., got rid of their indebtedNot a Major Cause It would be a vast distortion, however, to say that profiteering in general was a contributing cause to the economic crisis. It is in the very nature of inflation that some will reap great profits. It was only those big industrialists like Hugo Stinnes who consciously realized what was taking place and deliber ately sought to influence the gov ernment toward inflation. 9 For the rest, who reaped windfalls through no conscious effort, through simple foresight or luck, some defense should be made. Many of these en trepreneurs became the obj ects of scorn and an easy target for politi cal extremists. The fact that many 372 THE FREEMAN June were also Jewish cannot be dis counted as an explanation for their persecution. As early as 1920, John Maynard Keynes spoke up for these innocent entrepreneurs in a moving passage from The Econom ic Consequences of the Peace. "Len in," he wrot'e, " is said to have de clared that the best way to des troy the Capitalist System was to debauch the currency."

By a continuing process of infla tion, governments can confiscate, sec retly and unobserved, an important part of the wealth of their citizens. By this method they not only confis cate, but confiscate arbitrarily,. and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoises, whom the inflationism has impoverished, not less than of the proletariat .... These "profiteers" are, broadly speaking, the entrepreneuer class of capitalists, that is to say, the active and construc tive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not. If prices are continually rising, e~ery trader who has pur chased for stock or who owns prop erty and plant inevitably makes profits. By directing hatred against this class, therefore, the European Gov ernments are carrying a step further the fatal process which the subtle mind of Lenin consciously conceived. 1o Thus we find the German gov ernment actively appealing to the lowest human emotions of jealousy, envy, and greed in order to hide its own responsi bili ty for the economic disruption. And inevitably this was to play right into the hands of demagogues like Adolf Hitler. It is no coincidence that he made his first bid for power at the height of the inflation; in the beerhall putsch of November 8, 1923. Historians and economists, therefore, are in general agreement that the infla-· tion can be given much credit for the rise of Hitler. For although he did not come to actual power for another decade, the putdown of the putsch supplied the Nazis with many martyrs to aggrieve, and it was during his subsequent prison term that Hilter wrote Mein Kampf. Thus, as early as 1937, Lio nel Robbins could declare emphati cally that "Hilter is the foster-child of the inflation."ll The Current Problem All this is not so say that we can expect another HitIer here in the United States. ~ut, to this very day, the origin of inflation is still the same: government deficits fi nanced through monetization. For 1975 THE GREAT GERMAN INFLATION 373 too many years, the American gov ernment has believed that it can have occasional wars and an expen sive social program at home and pay for it all by simply increasing the debt limit. Today we are dis covering that there really is a limit to debt. The double-digit inflation we are experiencing is therefore only a logical consequence of past policies. And if we want to stop it, the solution is the same as it was in 1923. The government must learn to live within its means and halt its abuse of the power to issue cur rency. The failure to do so may be catastrophic, just as it was for Germany. ~ - FOOTNOTES 1 Thomas Mann, "Inflation: The Witches' Sabbath," Encounter (February, 1975) p. 63. This lecture was originally given in 1942.

2 Ludwig von Mises, The Theory of Money and Credit (New Haven: Yale University Press, 1953) pp. 418-419. This book was written in 1913 and Mises used the word inflation to mean an increase in the quantity of money; see p. 240. 3 Michael A. Heilperin, Aspects of the Pathology of Money (London: Michael Joseph, 1968) p. 143. 4 Frank D. Graham, Exchange, Prices, and Production in Hyperinflation: Ger many, 1920-1923 (Princeton: Princeton University Press, 1930) p. 67. G The Nightmare German Inflation (Princeton, N.J.: Scientific Market Anal ysis, 1970) p. 2. G Dr. Hjalmar Schacht, The Stabiliza tion of the Mark (London: George Allen & Unwin, 1927) p. 55. 7 Costantino Bresciani-Turroni, The Economics of Inflation (London: George Allen & Unwin, 1937) p. 93. 8 Mann, Ope cit., p. 61. 9 See the interview with Stinnes in Fritz K. Ringer, ed., The German Infla tion of 1923 (New York: Oxford Univer sity Press, 1969) pp. 90-93.

10 John Maynard Keynes, The Eco nomic Consequences of the Peace (New York: Harcourt, Brace and Howe, 1920) pp. 235-237. 11 Forward to Bresciani-Turroni, op. cit., p. 5. He had expressed the same idea even earlier in his The Great Depression (London: Macmillan, 1934) p. 57: "The Nazi propaganda, hitherto confined to the worst elements of the ex-military and ex criminal classes and to a handful of the less responsible students, was beginning to make itself felt in high politics. The German middle classes, bereft of their property during the inflation, their minds be sodden with the turgid anti-rationalism which in that part of the world has for many decades passed as profundity, were apt soil for such teaching." IDEAS ON LIBERTY The Totalitarian Trap WHEN IN FACT government supplies most everything we need, then we find that we cannot get anything we need except from government; and we are trapped.

J. KESNER KAHN PEROYL. GREAVES,JR. Does Gave Brin MANY LEADERS in high places now promise us that our government will never again permit poverty and depression to devastate our land. They propose more government spending as a cure for every eco nomic evil. And millions of people believe that such a program will work. The underlying philosophy be hind political spending is not new. Similar ideas have appeared throughout all history. They came to full flower shortly after the eco nomic collapse of 1929, when un balanced budgets were generally accepted as necessary economic measures for relieving those in dis tress. You could not let innocent people starve, could you? Professor Greaves is a freelance economist and lecturer. His recent books include Understand ing the DoIlar Crisis and Mises Made Easier (Glossary for Human Action). This article is reprinted here, unchanged, from the February 1955 issue of The Freeman.