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 inflation–particularly by the way it destroyed the balance between generations and empowered the inexperienced young–helped 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.

9 thoughts on “An Architect of Hyperinflation”

  1. “I don’t think we’re at serious risk of a Weimar style hyperinflation”

    I hope not also. Bambi and the Dumbocrats were about to start jumping ugly on Ben Bernanke when the market blew up, so they backed off. So far Bambi has been reluctant to mess with Mr. Market, but if he is in the corner after Obamacare melts into a ball of flame. Watch out.

  2. I wouldn’t be surprised if in a couple of years we see inflation in the 5-8% range, representing in effect a partial repudiation of the debt. This would have undesirable social effects, though not on a Weimar scale. Of perhaps greater concern in long-term structural unemploment and underemployment (see the graphs here), something that would definitely be very destructive to the social fabric. See for example the George Will column that is cited here, with accompanying discussion. I don’t think that economic factors are by any means the only ones..maybe not even the primary ones..behind the phenomena that Will is discussion, but they *are* an important influence.

  3. According to Wikipedia Germany was forced to pay reparations for damages in caused in WW I. A commission was set up in 1918 to add up the bill.

    “In January 1921, the total sum due was decided by an Inter-Allied Reparations Commission and was set at 269 billion gold marks (2,790 gold marks equalled 1 kilogram of pure gold), about £23.6 Billion, about $32 billion (roughly equivalent to $393.6 Billion US Dollars as of 2005[1]), a sum that many economists at the time deemed to be excessive.”

    The Germans simply printed 269 billion marks and handed them to the allies. Monster hyper-inflation resulted. The allies accepted this paper as payment and Germany never paid reparations. When they were freed of reparation debt, the Germans fixed their currency.

    Isegoria, as usual, gets it wrong. Von Havenmstein was not to blame. Woodrow Wilson and the allies were to blame.

    After WW1 Wilson and the allies went home and let Germany decide how to rebuild. After WW2 the allies stayed in Germany and told Germany how to rebuild. Had the allies stayed in Germany after WW1 and rebuilt the German government properly (as they did after WW2) WW2 would never have happened the way it did.

  4. Sol…I’m pretty sure that the reparations payments were denominated in *gold*, and other commodities, not in marks. The Allies weren’t *that* dumb.

    The snark directed at Isegoria is not consistent with your usual quality of commentary.

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