The cause of the immense acceleration of prices that occurred during the German hyperinflation of 1922–23 seemed unclear & unpredictable to those who lived through it, but in retrospect was relatively simple. The Treaty of Versailles imposed a huge debt on Germany that could be paid only in gold or foreign currency. With its gold depleted, the German government attempted to buy foreign currency with German currency, but this caused the German Mark to fall rapidly in value, which greatly increased the number of Marks needed to buy more foreign currency. This caused German prices of goods to rise rapidly which increase the cost of operating the German government which could not be financed by raising taxes. The resulting budget deficit increased rapidly & was financed by the central bank creating more money. When the German people realized that their money was rapidly losing value, they tried to spend it quickly. This increase in monetary velocity caused still more rapid increase in prices which created a vicious cycle. This placed the government & banks between two unacceptable alternatives:
Once you start printing money it is really, really hard to stop. By late 1922, inflation was officially out of control. An article in The Economist described what happened next….
Prices roared up. So did unemployment, modest as 1923 began. As October ended, 19% of metal-workers were officially out of work, & half of those left were on short time. Feeble attempts had been made to stabilize prices. Some German states had issued their own would-be stable currency.
Adam Fergusson wrote: The renter classes who depended on savings or pensions, & anyone on a fixed income, were soon in penury, their possessions sold. Barter often took over from purchase. By law rents could not be raised, which allowed employers to pay low wages and impoverished landlords in a country where renting was the norm. The professional classes — lawyers, doctors, scientists, professors — found little demand for their services. In due course, the trade unions, no longer able to strike for higher wages (often uncertain what to ask for, so fast became the mark’s fall from day to day), went to the wall, too.
Workers regularly got wage increases during this time, but they never seemed to keep up with the horrible inflation that was raging all around them. So they steadily became poorer even though the amount of money they were bringing home was steadily increasing.
People started to lose all faith in the currency & in the financial system. This had an absolutely devastating effect on the German population. American author Pearl Buck wrote:
“The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed & inflation-shocked & did not understand how it had happened to them & who the foe was who had defeated them. They worked hard enough; & lost, too, were the old values of morals, of ethics, of decency.”Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only
Of course not everyone in Germany was opposed to the rampant inflation that was happening. There were some business people that became very wealthy during this time. The hyperinflation rendered their past debts meaningless, & by investing paper money (that would soon be worthless) into assets that would greatly appreciate thanks to inflation, many of them made out like bandits.
The key was to take your paper money & spend it on something that would hold value (or even increase in value) as rapidly as possible.
By the end of the decade unemployment really started to take hold in Germany as the following statistics reveal….
September 1928 – 650,000 unemployed
September 1929 – 1,320,000 unemployed
September 1930 – 3,000,000 unemployed
September 1931 – 4,350,000 unemployed
September 1932 – 5,102,000 unemployed
January 1933 – 6,100,000 unemployed
By the end of 1932, over 30 percent of all German workers were unemployed. This created an environment where people were hungry for “change”. On January 30th, 1933 Hitler was sworn in as chancellor, & the rest is history. So where will all of this money printing take America?]
This painful bankrupting of the German people through the misapplication of failed economic policies is what was responsible for the rise to power of Hitler & the subsequent mission of a mad man to conquer Europe. When people are broken they become very susceptible which results in them welcoming radical change.
One major distinction between the lessons of the Weimar Republic & our modern scenario is the fact that when the German currency was destroyed it mostly affected the occupants of the nation as it was a national currency, but in our crisis the FED is eroding the world reserve currency which carries with it global consequences as it affects all fiat currencies that are valued in relation to the dollar itself. For this reason other nations & central banks will be forced, in the name of survival, to work together to fight of their common enemy (dollar devaluation & inflation) so that they can maintain their exports in this globalized economy. Now that the FED has blatantly announced they will directly bailout the US mega banks for the indefinite future with at least $40 billion per month to purchase bad mortgage backed security investments off their balance sheets to recapitalize them & supposedly loan to the public, the world is bracing for impact. The FED also slipped in that they would continue Operation Twist which would also produce an additional roughly $45 billion every month to purchase Treasuries to prop up the govt. at the same time, so in total the world was just informed the FED is so desperate that they are willing to bailout their bankster buddies & the govt. both every month for the foreseeable future. This Hail Mary pass will dump $85 BILLION EVERY MONTH INTO THE GLOBAL ECONOMY & other countries are not delusional about what this will do to the dollars value nor what they need to do to protect their currencies or economies.
“Those who ignore history are doomed to repeat it” (a loose interpretation of George Santayana’s famous quote from ‘Reason in Common Sense’) This is your opportunity to brush up on what has really happened in the past 100 years in order to identify the path we are on so that we may avoid arriving at the same destination the poor souls in Germany did. We are in a full blown currency war that could very well morph into a nasty trade war which then could most certainly ultimately shift into an all out world war if this thing isn’t reigned it soon. Learn from history that at the very minimum the average persons wealth will be sacrificed in the name of protecting the mega banks unless you remove yourself from the currency they are waging the currency war with. Instead of being tossed around like a rag doll hold your wealth in the one asset that can, & historically always has, protected those who hold it from the wages of the currency war which is gold & silver bullion. Establish your “Currency War Safe Zone” by hedging your net worth with physical gold & silver bullion & begin to participate in the sound money debate. Remember that it is a far better strategy to PREPARE your portfolio than to attempt to REPAIR it after the damage has begun. Tick, tock.