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[These few excerpts are from
The Nightmare
German Inflation. Click for full article.]
If
history teaches anything, it is that government cannot be
trusted to manage money. When currency is not redeemable in gold,
its value depends entirely on the judgment and the conscience
of the politicians. (That is the situation in this country today.)
Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming. Any alternative may seem politically disastrous. Whether it be the Roman emperors repeatedly debasing their coinage, the French revolutionary government printing a flood of assignats, John Law flooding France with debased money, or the Continental Congress issuing money until it was literally "not worth a Continental," the story is similar. A government in financial straits finds its easiest recourse is to issue more and more money until the money loses its value. The entire process is accompanied by a barrage of explanations, propaganda and new regulations which hide the true situation from the eyes of most people until they have lost all their savings.
In World War I, Germany--like other governments--borrowed heavily to pay its war costs. This led to inflation, but not much more than in the U.S. during the same period. After the war there was a period of stability, but then the inflation resumed. By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money.
Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless. How could this happen in a highly civilized nation run at the time by intelligent, democratically chosen leaders? What happened to business, to wages and employment? How did some people manage to save their capital while a few speculators made fortunes?
1914 - 1921
When the war broke out on July 31, 1914, the Reichsbank (German Central Bank) suspended redeemability of its notes in gold. After that there was no legal limit as to how many notes it could print. The government did not want to upset people with heavy taxes. Instead it borrowed huge amounts of money which were to be paid by the enemy after Germany had won the war, Much of the borrowing was discounted and monetized by the Reichsbank. As explained later, this amounted to issuing straight printing press money.
...the fuel for inflation was accumulating in the form of vast hoards of money. [...] Actually, as we shall see, the ebb and flow of confidence can play a big role in the short-term trend of prices. Confidence in the mark had weakened. At the same time, and as a consequence, billions of hoarded marks came out of hiding and entered the marketplace. The accumulated fuel was burning.
1922 - 1923
Inflation seemed to bring prosperity. In 1921, when the rest of the world was in a severe post-war recession, production indices in Germany rose sharply. People were buying goods as fast as they obtained money; companies rushed to expand plants and turn money into fixed investment. Germany was actually envied for its "prosperity" by many foreigners. But by 1923 the wildest inflation in history was raging. Prices often doubled in a few hours, and people rushed to buy goods to get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread.
The mechanism of inflation was simple. The government issued paper promises to pay, and the Reichsbank issued money on the security of these promises. When a government spends more than its income, it must borrow. If it needs more money than its people are able or willing to lend it, it monetizes the debt. That is what happens in this country when the government runs a big deficit. The Federal Reserve "buys" as many bonds as necessary to stabilize the market. It prints money on the security of these bonds. Despite the facade of the government supposedly "borrowing," the net result is the creation of printing press money. (Actually these days the money is created in the form of new bank deposits--checkbook money--but the net result is exactly the same as if bills were printed.)
How Investments Fared
Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.
Could it Happen Here?
Once a snowballing financial and economic deflation gets underway, it could develop with breathtaking speed. Soon the government, instead of worrying about inflation, would be using desperation measures to halt the collapse, even if it had to run budgetary deficits of 100 billion or more. In the short run, in a pragmatic sense, Washington would simply feel that it was tackling an overriding emergency, relieving hardship, etc. In the long term, what it would be doing was to inflate up to the point where most of the huge debt burden was wiped out, and a fresh start could be made. Of course, this would be at the expense of millions of savers who would lose most of their capital. Hopefully the expropriation would be less drastic than it was in Germany.
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