Sleepless Serf

Episodes of Hyperinflation

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. Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming. A government in financial straits finds its easiest recourse is to issue more and more money until the money loses its value.

In World War I, Germany borrowed heavily to pay its war costs. This led to inflation. 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. By late 1923, it took 200 billion marks to buy a loaf of bread.

In May 1921, price inflation started and by July 1922 prices had risen 700%. The Reichsbank continued printing new currency, although more slowly than the rate at which prices were rising. The issue of currency proceeded at a fairly smooth steady rate, while the price index moved up in great surges, interspersed by periods of stability. After July 1922, the phase of hyperinflation began. All confidence in money vanished and the price index rose faster and faster for 15 months, outpacing the printing presses which could not run out money as fast as it was depreciating.

From Mid-1922 to November 1923 hyperinflation raged. The real wages of workers dropped badly. Unions obtained frequent increases, but these could not keep pace. Businessmen began to abandon their legitimate occupations to speculate in stocks and in goods. Thousands of small businessmen tried to eke out a living by speculating in fabrics, shoes, meat, soap, clothing - in any produce they could obtain. Each fall in the mark brought a rush to the shops. People bought dozens of hats or sweaters.

By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Businesses started to close down and unemployment suddenly soared. The economy was collapsing.

The inflation was caused by the government issuing a flood of new money, causing prices to rise. As inflation gained momentum, events seemed to demand the printing of larger and larger issues of currency. It would be wrong to think that everyone was opposed to inflation. Many big business leaders accepted it cheerfully. It wiped out their debts. They knew how to protect themselves and even profit - by speculating in foreign exchange, by converting money into goods and fixed plant, by borrowing money from the bank and using it to buy up cheap stocks and competing companies. Their wage costs, in true value, decreased, swelling their profits. Businessmen found it very profitable to borrow money from the bank and buy up goods, shares and companies. Their debt was wiped out within weeks by the rapid inflation, and the businessman remained holding the valuable assets he had bought.

Once people lose confidence in a currency, they try to get rid of it. This makes circulation speed up enormously, and hence prices rise faster than the government can print new money. After the Russian revolution, the Bolsheviks introduced a new currency. They printed huge amounts of it and soon it became almost worthless. At the same time, some of the older Czarist currency still circulated and maintained its value in terms of goods. It appreciated enormously in terms of the new money. Why did this currency hold up? "Because there was nobody to print any more of it."

Effects of Inflation on Business

As inflation proceeded, people rushed to buy goods and get rid of their depreciated money. For similar reasons, businessmen hastened to buy machinery, to build new factories, to buy huge stocks of coal, steel and other raw materials. Those who had access to credit borrowed heavily for these purposes, and inflation wiped out their debt. There was a tremendous conversion of working capital into fixed investments. Business was booming and unemployment virtually vanished until the last stages of the inflation.

Farmers got rid of currency by heavy purchases of equipment, and later many were left holding large supplies of useless machinery. Shipbuilding was expanded beyond all market needs. Marginal mines were opened leading to serious overproduction later on. But while basic industries prospered, there was a severe depression in consumer goods industries such as textiles, meat, beer, sugar and tobacco. Too many workers and persons on fixed incomes had lost their purchasing power.

There was a tremendous move toward concentration of industry. Large firms or combinations found it much easier to raise prices, to obtain raw materials and above all to obtain bank credit. The rising stars were those of shrewd speculators and manipulators geared to quick trading and to jumping from deal to deal and from company to company. The most successful were those who saw the trend of events early, borrowed to the hilt and bought up goods, shares and companies at bargain prices. Most of these new mushroom combinations and conglomerates were speculative bubbles which were only able to survive as long as they benefited from ongoing inflation.

Finally, however, in the last stages of the inflation, the economy began to collapse. Retailers could not get goods or else could not sell at a profit. The money they received was depreciating too fast. More and more stores became empty. Now unemployment began to soar. On the whole, much energy and wealth was wasted in unproductive channels - speculation, paperwork and unprofitable equipment.

How Investments Fared

It is important to understand how hard it was to obtain real income during the inflation. Professionals, skilled workers and others used to enjoying good income found their real salaries disastrously cut. Those who depended on savings, pensions or investment income for a living faced a terrible situation. Interest from bonds or savings deposits soon depreciated to where they had no real value. Stocks paid meager dividends or none at all; corporate managements needed the money for working capital, or used it for capital building and speculation. Owners of rental property fared no better; the government froze rents, which soon meant that tenants were occupying premises virtually rent-free. The urgent need for income had important effects on the true prices of various types of property and investments.

Cash & Bank Deposits: Money held in cash lost value rapidly and soon became completely worthless. Of all investment forms, this was the most disastrous.

Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even faster than cash.

Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

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.

Personal Property: Capital was preserved by those who early changed it into objects of lasting value - rare coins, stamps, jewelry, works of art, antiques - or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. Cash proved an even worse bargain.

Common Stocks: In an inflation, common stocks are generally considered a desirable hedge to protect against or even to profit from the rise in prices. In practice, it is not so simple. Market fluctuations - the rise of exciting new speculative stocks, waves of fear or greed - all make it much too easy to buy or to sell at the wrong time or to go into the wrong stocks.

Those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital.

However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.