WEIMAR: The Hyperinflation Horror Story That Haunts Europe and Bernanke
Posted: November 10, 2012 Filed under: Bernanke, Central Banks, Germany, Inflation | Tags: Adam Fergusson, Deutsche Mark, European Central Bank, German, Germany, Hyperinflation in the Weimar Republic, Money supply, Weimar Leave a commentWEIMAR: The Hyperinflation Horror Story That Haunts Europe and Central Banks
Memories of Weimar still haunt the eurozone today. The European Central Bank, widely considered to be the only institution with the firepower to stem the euro crisis, is somewhat restrained by the legacy of the German Bundesbank.
The Bundesbank – established in 1957 (well after Weimar) – for years before joining the euro was extremely conservative in expanding the money supply because of what happened during the Weimar years. And 90 years later, Germans are reminded of the perils of the printing press, whether or not the comparison is truly apt.
Adam Fergusson authored a book on the subject, entitled When Money Dies – and many consider it to be the definitive work on the Weimar hyperinflation
Germany hoped that it would quickly win the war and reap bounty from the nations it conquered, which – to the government – justified the use of the printing press to fund it:
It may have been true — there is no reason to doubt it — that a short, sharp war and a speedy victory in 1914 had been both hoped for and expected. Together with the prospect of eventual war indemnities extorted from the Entente, this would possibly have justified taking temporary liberties, even outrageous ones, with the known laws of finance…that was indeed how it did begin: in part the natural result of having a self- willed Army itching for war and a Federal Parliament which, though with limited power over the country’s constituent states, still had to find the money to pay for it.
During the war, the German government used extensive propaganda to hide the inflation from the population
The German government appealed to patriotism to fund the conflict, using slogans like “I gave gold for iron,” and “Invest in War Loan.”
Furthermore, it censored information heavily:
Every German stock exchange was closed for the duration, so that the effect of Reichsbank policies on stocks and shares was unknown. Further, foreign exchange rates were not published, and only those in contact with neutral markets such as Amsterdam or Zurich could guess what was going on…Only when the war was over, with the veil of censorship lifted but the Allied blockade continuing, did it become clear to all with eyes to read that Germany had already met an economic disaster nearly as shattering as her military one.
Not only did the Treaty of Versailles impose reparation demands that Germany would never realistically be able to repay, but it also annexed German territory and required the army to fire hundreds of thousands of soldiers:
The implications of these truncations for the German economy were of course enormous: and so were those of the requirement to reduce the German army to a quarter of its size, for it meant that over a quarter of a million more disbanded soldiers were to be thrown on the labour market. Work had to be found for them at any cost, or so it was calculated. What spelt doom were the clauses that made Germany responsible for the war and demanded colossal reparations — in money and in kind — to meet the Allies’ costs.
By September 1920, prices were 12 times as high as they had been before the war
By the autumn of 1920, the strains on the economy in the wake of the war were apparent, but employment was still fairly strong:
Food had accounted for half the family budget then, but now nearly three-quarters of any family’s income went on it. The food for a family of four persons which cost 60 marks a week in April 1919, cost 198 marks by September 1920, and 230 marks by November 1920. Certain items such as lard, ham, tea and eggs rose to between thirty and forty times the pre-war price. On the bright side – in contrast to Austria – the official unemployed figure was low, and only 375,000 people were on the dole.
In August 1921, a major political assassination sent the German mark plunging
Matthias Erzberger, a Socialist leader who was a big proponent of taxation, was assassinated in August 1921.
The murder of Erzberger … undermined any remaining confidence that the German economy might be allowed to recover its health…bankers from Switzerland, Italy and Germany soberly concluded that it was impossible for Germany to continue her payments to the Entente and that sooner or later she would have to declare herself bankrupt, followed (they thought) by first France and then Italy. The mark, at 310 to the pound in mid-August, had sped downwards to over 400 by mid-September, and was still going down.
As February of 1922 approached, it became clear that Germany wouldn’t be able to make its reparation payment
In the inevitable event that Germany was not able to make good on the reparations to the Allies by the end of February, 1922, France would occupy a major economic region of Germany:
Germany now needed to find 500 million gold marks before the end of February to pay the Allies, and knew that she faced sanctions by France — the occupation of the Ruhr — in case of default. Default would come unless London helped. The London bankers, however, refused to give the necessary credits unless Germany put her financial house in order and unless French demands became more reasonable. Since no condition could apparently be met without the fulfilment of the others as its preconditions, German bankers now began to fear that the mark might fall to Austrian levels.
But regardless of the politics, by Christmas 1921 ordinary Germans were feeling the squeeze of inflation
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By the end of 1921, workers had lost so much faith in the government that many just stopped voting. The economic hardships brought about by inflation were evident in everyday prices:
In the eight years since 1913, the price of rye bread had risen by 13 times; of beef by 17. Those were the commodities which had fared best. Sugar, milk (at 4.40 marks a litre), pork and even potatoes (at 1.50 marks a Ib.) had risen between 23 and 28 times; butter had gone up by 33 times. These were only the official prices — real prices were often a third higher — and all these prices were roughly half as much again as in October, only two months before
The relationship between the strong mark and increased bankruptcies also highlighted class tension
Owners of large industrial conglomerates benefitted from the inflation, so they constantly reminded the populace that amid the economic chaos, employment was still very high:
Hugo Stinnes himself, the richest and most powerful industrialist in Germany, whose empire of over one-sixth of the country’s industry had been largely built on the advantageous foundation of an inflationary economy, paraded a social conscience shamelessly. He justified inflation as the means of guaranteeing full employment, not as something desirable but simply as the only course open to a benevolent government. It was, he maintained, the only way whereby the life of the people could be sustained…In the summer of 1922 the small businessman saw his enemy in the big businessman, personified by Herr Stinnes, ‘the greatest obstacle to currency reform’, as Lord D’Abernon described him.
Then, in June of 1922, the German foreign minister, who was in favor of paying reparations, was assassinated
Walter Rathenau was a the German foreign minister, and he was often linked to the unpopular stance that Germany should find a way to pay its reparations. He was not trusted by the right-wingers in government.
Rathenau, a Jew like Erzberger, had just undergone, like Erzberger, a vitriolic attack in the Reichstag from the Rightist leader Dr Helfferich.
A few hours later, as Rathenau was driven from his home to the Foreign Office, the path of his car was blocked deliberately by another, while two assassins in a third car which had been following riddled him with bullets at close range. A bomb, thrown into his car for good measure, nearly cut his body in two.
This further worried the international community, and the mark plunged on the news
And anti-Semitism in Germany was rising in general
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The consul in Frankfort, Germany described a disturbing trend on the rise in 1922:
It is no exaggeration to say that cultured German men and women of high social standing openly advocate the political murder of Jews as a legitimate weapon of defence. They admit, it is true, that the murder of Rathenau was of doubtful advantage … but they say there are others who must go so that Germany shall be saved. Even in Frankfort, with a prepondering Jewish population, the movement is so strong that Jews of social standing are being asked to resign their appointments on the boards of companies …
Then, in the middle of the crisis, the German government took an inopportune holiday, which sent the mark plunging again
In a strange move, the German government decided to go on holiday, which destroyed confidence and exacerbated the crisis:
At what might otherwise have been the height of the immediate crisis at the end of July 1922, the Reparations Commission decided to take its summer holidays, effectively postponing any settlement of the exchange turmoil until mid-August; and [French prime minister] M. Poincare, bent as ever (it was believed) on Germany’s destruction, sent a Note to Berlin accusing the government of wilful default on its debts, and threatening ‘retortion’. The effect on the financial situation was calamitous. The rise in prices intensified the demand for currency, both by the State and by other employers…much business quickly came to a standstill. The panic spread to the working classes when they realised that their wages were simply not available.
However, by the autumn of 1922, inflation started to outpace wages once again, and everyone felt the pain
Inflation was soaring by Autumn of 1922, and the working class began to lose their edge:
Already, however, a new element had joined the economic crisis. For the first time the wages paid for labour began to lag behind the rise in prices, noticeably and seriously, in spite of everything the monopoly of the unions could do about it. President Ebert, pleading…to engineer a further moratorium on reparations, pointed out that the conditions of existence for the working population had become ‘completely impossible’, and that the downfall of Germany’s economic life was imminent
Basic staples were becoming increasingly out of reach as the mark plunged and German consumers lost an extraordinary amount of purchasing power:
A litre of milk, which had cost 7 marks in April 1922 and 16 in August, by mid-September cost 26 marks. Beer had climbed from 5.60 marks a litre to 18, to 30. A single egg, 3.60 in April, now cost 9 marks. In only nine months… [the] weekly bill for an identical food basket had risen from 370 marks to 2,615.
France’s occupation of the Ruhr region to obtain payment for war reperations sent the Mark plummeting into real hyperinflation
Along with economic devastation, Germany’s loss of the Ruhr was the straw that broke the camel’s back for the mark:
The Ruhr basin in 1923 provided nearly 85 per cent of Germany’s remaining coal resources, and 80 per cent of her steel and pig-iron production; accounted for 70 per cent of her traffic in goods and minerals; and contained 10 per cent of her population. The loss of the Ruhr’s production, and all it implied, was therefore a bale of last straws. At 35,000 to the pound at Christmas 1922, the mark fell to 48,000 on the day after the invasion, and at the end of January 1923 touched 227,500, well over 50,000 to the dollar.
And by the summer of 1923, food shortages were hitting Germany hard
The domestic situation in Germany resulting from the French occupation led to a full-blown food emergency by August of 1923:
On August 10, on which date a printers’ strike broke out to the further interruption of the supply of banknotes, the full weight of the shortage of paper money was felt. Stocks of food disappeared entirely in many communities, and factories were able to pay wages on account only. The railway workers in the British zone, with a wage tariff half that of factory workers, attempted to join the passive resisters of the Ruhr, and asked pathetically whether, if they were not allowed to strike, they could at least be guaranteed by the occupation authorities enough food at fixed prices as well as the money to buy it.
At the end of September of 1923, the German Chancellor declared a state of emergency and put Germany under military rule
Seeing the waning confidence of German workers in the Ruhr and Hitler’s rise to power in the Bavarian region, the German chancellor took decisive action to maintain control of the situation:
On September 26 [Chancellor Stresemann] suspended seven articles of the Weimar constitution, himself declared a State of Emergency…Germany had become a military dictatorship, no less, and by the choice, at that, of a largely Socialist cabinet. The country was divided into seven military districts, with a local military dictator over each. Simultaneously President Ebert announced the end of passive resistance in the Ruhr.
However, it was clear by October that Bavaria was out of the hands of the central government in Berlin
Bavaria, where Hitler was active, showed no deference to Berlin or the chancellor, setting the stage for more internal conflict:
Although Munich and the municipalities of Bavaria were suffering no more than the same economic rigours as anywhere else, it was evident that here was the most explosive mixture in Germany…New decrees were issued daily prohibiting public meetings and strikes, and there was no doubt that the two authoritarian friends, von Kahr and General von Lossow, were in full control. So confident were they, indeed, that they were calculatingly ignoring instructions received from Berlin. Their posture even went to the lengths of refusing Berlin’s order to ban Hitler’s newspaper, the Volkischer Beobachter, on October 2, but none the less suspending it for ten days from October 5 for publishing a treasonable article.
Finally, in November of 1923, the German government took action to stabilize the currency
The German government set up the Rentenbank to issue a new currency, the Rentenmark, which would be backed by land and industrial goods.
The Rentenmark finally stabilized the German currency:
As it was, the confidence trick worked. The Rentenmark, the stopgap designed to shift the 1923 harvest, became the weapon which held the field for the billion-mark note until the Reichsmark was brought in a year later. ‘On the basis’, said Bresciani-Turroni, ‘of the simple fact that the new paper money had a different name from the old, the public thought it was something different from the paper mark … The new money was accepted, despite the fact that it was an unconvertible paper currency.It was held and not spent as rapidly.
And the next month, in December, the food shortages of the summer finally began to recede
Finally, a month after the Rentenmark was introduced, everyday Germans were able to feed themselves again:
Food, however, was beginning to appear again in the towns half way through December; and to the Rentenmark alone was this development due. In 1923, before November, the only increase in animals slaughtered for food had occurred in dogs:* (Mainly used to supply a deficiency in pork.) after stabilisation, the consumption of every article of daily need — beer, pork, coffee, sugar, tobacco — increased regularly, except dogmeat.
However, after a recovery in 1924, a whole new crisis hit Germany in 1925 – mass unemployment
The strengthened currency and subsiding hyperinflationary pressures once again brough German industry to its knees as several firms plunged into bankruptcy, and unemployment soared:
The picture in the first week of December 1925 presented the politicians’ nightmare of 1922: the approach of the genuine, unhidden mass unemployment that the policy of inflation had so largely been designed to avoid. The mark stood steady…By February 1926 the number of registered unemployed soared over 2 million, with depression reaching from Hamburg to Bavaria. The average number of registered unemployed stayed at over 2 million throughout 1926 — otherwise a year of rationalisation, and of economic and industrial recovery — and was still at nearly 1.5 million in December.
This was hugely demoralizing for Germany, which thought it had already been through the worst and was staging a recovery.
And this shock brought increasing divergence between the fortunes of the middle and lower classes
With the new crisis, the tables were turned – the lower classes found themselves unemployed while the middle classes did relatively well:
By May of that year the circumstances of doctors, lawyers, professors and writers and the like had radically changed. They were again able to live in circumstances appropriate to their cultural environment: their fees were being paid, and their services were required in full measure…Only the legions of unemployable whose substance had been dissipated and the hundreds of thousands of workers for whom there was no work bore the outward scars of the great inflation and spoilt an otherwise happy picture.
But post-war Germany never fully recovered, and mass unemployment eventually allowed Hitler to rise to power
Hitler leveraged the mass unemployment to gain support for the Nazi party and quickly rose to political power in the 1930s:
To say that inflation caused Hitler, or by extension that a similar inflation elsewhere than in a Weimar Germany could produce other Right or Left wing dictatorships, is to wander into quagmires of irrelevant historical analogy…On the other hand, the vast unemployment of the early 1930s gave Hitler the votes he needed. Just as the scale of that unemployment was part of the economic progression originating in the excesses of the inflationary years, so the considerable successes of the Nazi party immediately after stabilisation and immediately before the recession were linked (pace the observations of the Consul-General Clive) with its advances in 1922 and 1923.
The crisis Europe faces today is way more dangerous than sovereign debt:
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ETFs – Silver and Junior ETFs and Country Reserve Rankings – and Germany Wants Its Gold NOW
Posted: October 31, 2012 Filed under: AMP Books and Seminars, ETF, Gold | Tags: Ambrose Evans-Pritchard, Der Spiegel, Exchange-traded fund, GDX, German, Germany, Goldcorp, IShares, Peter Gauweiler, Precious metal, Silver Wheaton, SPDR Gold Shares, United States, Yamana Gold Leave a comment
- Switzerland’s gold reserves. (Photo credit: Wikipedia)
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More And More Germans Want Their Gold Back ( Der Spiegel)
Germany’s gold reserves are amongst the highest in the world and they have been kept almost entirely overseas due to Cold War fears of a Soviet invasion. Almost half of Germany’s gold is kept in Manhattan — deep in the heart of the Financial District at the New York Fed.
But some German politicians seem to be getting uncomfortable with trusting the US with this system. They want to actually see the gold, to make sure its still there. Some even want it back. A campaign called “Bring back our Gold” was launched in May, and seems to be making an impact on mainstream politics.
Der Spiegel’s Sven Böll and Anne Seith have published a good explainer about the situation. A large part of the movement seems to come from Peter Gauweiler, the head of the conservative Christian Social Union (CSU), who has for years demanded to know exactly where Germany’s gold is (He eventually was allowed to visit the Bundesbank’s domestic gold in storage in Frankfurt).
However, what really got Guaweiler riled up was a secret report from Germany’s Federal Audit Office that sternly criticized the German central bank. The report, while apparently routine, looked like a key piece of evidence to those expecting some sort of conspiracy theory. As Der Spiegel describes it:
I
deed, the partially blacked-out report read like the prologue to an espionage thriller in which the stunned central bankers could end up standing in front of empty vaults in the US.
Germany has almost 3,600 metric tons of gold, second only to the US. Half of that gold has been stored at the NY Fed since the late 70s, sitting fifth sub-floor of the bank’s building on Liberty Street, 80 feet below street level. The Germans were not allowed to see their gold for decades, but in 2007 they were finally allowed in, and, after further inquiries, finally allowed to actually touch some of the gold in 2011.
While this fuels conspiracy theories, it is standard practice for US gold storage institutions. The owners of the gold in Fort Knox have not seen their gold for decades. But that doesn’t stop the rumors and conspiracy theories doing the rounds about missing gold, or secret agreements between the US and German governments.
While the report was mostly calling for better measures to account for the vast amount of gold, the movement to bring it all back is large. As Der Spiegel notes, that’s hugely impractical, “One cannot simply pack 1,500 tons of gold into an Airbus A380 super-jumbo jet and fly it back to Germany.”
But it wouldn’t be entirely unprecedented. Ambrose Evans-Pritchard of The Telegraph notes that secret German reports have revealed that the country took two-thirds of it’s gold back shortly after the start of the Euro a decade ago.
Evans-Pritchard says that the timing of the move makes no sense on the surface — coming as the euro was at its weakest — but may have been ordered as the Bank of England was selling off its own gold and there were fears that the gold may not be clearly allocated to Germany.
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