An Architect of Hyperinflation

Even if you’re a very-well-informed individual, I bet you’ve never heard of Rudolf von Havenstein–I certainly hadn’t until I read this piece at Isegoria. (Follow the links for much more detail.)

Havenstein was a “decent, hard-working, intelligent and well-intentioned public servant” who, as president of the Reichsbank, had much control over Germany’s financial policies during WWI and in the early interwar era. These policies ultimately led to the great hyperinflation of 1922-23. Sebastian Haffner, a teenager during this era, describes what it was like:

By the end of 1922, prices had already risen to somewhere between 10 and 100X the pre-war peacetime level, and a dollar could purchase 500 marks. It was inconvenient to work with the large numbers, but life went on much as before.

But the mark now went on the rampage…the dollar shot to 20,000 marks, rested there for a short time, jumped to 40,000, paused again, and then, with small periodic fluctuations, coursed through the ten thousands and then the hundred thousands…Then suddenly, looking around we discovered that this phenomenon had devastated the fabric of our daily lives.

Anyone who had savings in a bank, bonds, or gilts, saw their value disappear overnight. Soon it did not matter whether it ws a penny put away for a rainy day or a vast fortune. everything was obliterated…the cost of living had begun to spiral out of control. ..A pound of potatoes which yesterday had cost fifty thousand marks now cost a hundred thousand. The salary of sixty-five thousand marks brought home the previous Friday was no longer sufficient to buy a packet of cigarettes on Tuesday.

The only people who were able to survive financially were those that bought stocks. (And, of course, were shrewd or lucky enough to buy the right stocks and to sell them at the right times.)

Every minor official, every employee, every shift-worker became a shareholder. Day-to-day purchases were paid for by selling shares. On wage days there was a general stampede to the banks, and share prices shot up like rockets…Sometimes some shares collapsed and thousands of people hurtled towards the abyss. In every shop, every factory, every school, share tips were whispered in one’s ear.

The old and unworldy had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death, but rapid appraisal of new situations and speed of reaction was rewarded with sudden, vast riches. The twenty-one-year-old bank director appeared on the scene, and also the sixth-former who earned his living from the stock-market tips of his slighty older friends. He wore Oscar Wilde ties, organized champagne parties, and supported his embarrassed father.

Haffner believes that the great inflationparticularly by the way it destroyed the balance between generations and empowered the inexperienced younghelped pave the way for Naziism.

In August 1923 the dollar-to-mark ratio reached a million, and soon thereafter the number was much higher. Trade was shutting down, and complete social chaos threatened. Various self-appointed saviors appeared: Hausser, in Berlin…Hitler, in Munich, who at the time was just one among many rabble-rousers…Lamberty, in Thuringia, who emphasized folk-dancing, singing, and frolicking.

The inflation was finally brought to a halt by currency reform, in the shape of the rentenmark–but unhealed social wounds to the social fabric remained.

I don’t think we’re at serious risk of a Weimar style hyperinflation, but I do think we’re at risk–not immediately but over the next couple of years–of a less-extreme but still very damaging inflation. And I think the point about the influence of economic on society is a more general one. Persistent long-term unemployment and underemployment can also do great harm to the social fabric.

My (very long) review of Haffner’s important and well-written book, from which the above excerpt was taken, is here.