Monday, January 2, 2012


The beginning was in the summer of 1914, a day or two before World War I opened, when Germany abandoned its gold standard and began to spend more than it had, run up debt, and expand its money supply. The end came on November 15, 1923, the day Germany shut off its money pump and balanced its budget. Over the nine years in between, Germany’s inflation followed not a constant course but a characteristic ascent and descent, a ripening and a decay.

Germany started by not paying adequately for its war out of the sacrifices of its people—taxes—but covered its deficits with war loans and issues of new paper Reichsmarks. Scarcely an eighth of Germany’s wartime expenses were covered by taxes. This was a failing common to all the combatants. France did even worse than Germany in financing the war, Britain not much better. Germany’s bad financing was due in part to a firm belief that it would be able to collect the price of the war from its enemies, whom it expected to defeat; but to a greater degree it may have sprung from distrust that its people would support the war to the extent not only of fighting it but also of paying for it. Whatever the reason, Germany’s bad war financing did not immediately demand its price. Inflation in the sense of rising prices was moderate. Domestic prices only a bit more than doubled to the end of the war in 1918, while the government’s money supply had increased by more than nine times. The government’s debt increased still more. So long as the government in this way could spend money it did not have faster than its value could fall, Germany had both its war and life as usual at the same time, which was the same as having the war free of charge.

After the war, Germany and all the other combatants underwent price inflations which served as partial corrections for their wartime financing practices. The year 1919 was a year of violent inflation in every country, including the United States. By the spring of 1920, German prices had reached seventeen times their prewar level. From this point, however, the paths of Germany and the other nations diverged. The others, including the United States, stopped their deficit financing and began to take their accumulated economic medicine by way of an acute recession in 1920 and 1921. Their prices fell steeply from the 1920 level. Germany alone continued to inflate and to store up not only the price of the war but also the price of a new boom which it then commenced enjoying. Germany’s remarkable prosperity was the envy of the other leading countries, including the victors, who were in serious economic difficulties at the time. Prices in Germany temporarily stabilized and remained rock-steady during fifteen months in 1920 and 1921, and there was therefore no surface inflation at all, but at the same time the government began again to pump out deficit expenditure, business credit, and money at a renewed rate. Germany’s money supply doubled again during this period of stable prices. It was this time, when Germany was sublimely unconscious of the fiscal monsters in its closet, which was undoubtedly the turning of the tide toward the inflationary smash. The catastrophe of 1923 was begotten not in 1923 or at any time after the inflation began to mount, but in the relatively good times of 1920 and 1921.

The stimulation of the government’s easy money spread through virtually all levels of the German economy. The life of the inflation in its ripening stage was a paradox which had its own unmistakable characteristics. One was the great wealth, at least of those favored by the boom. These were the “profiteers” of whom everyone spoke. Industry and business were going at fever pitch. Exports were thriving; that was one of the problems. Hordes of tourists came from abroad. Many great fortunes sprang up overnight. Berlin was one of the brightest capitals in the world in those days. Great mansions of the new rich grew like mushrooms in the suburbs. The cities, particularly in the eyes of the austere country folk, had an aimless and wanton youth and a cabaret life of an unprecedented splendor, dissolution, and unreality. Prodigality marked the affairs of both the government and the private citizen. When money was so easy to come by, one took less care to obtain real value for it, and frugality came to seem inconsequential. For this reason, Germans did not obtain so much real wealth as the growth of money alone would have indicated.

Side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter. The crime rate soared. Although unemployment became virtually nonexistent and many of the workers were able to keep up with the inflation through their unions, their bargaining, and their cost-of-living escalator clauses, other workers fell behind the rising cost of living into real poverty. Salaried and white-collar workers lost ground in the same way. Even while total production rose, each individual’s own efforts faltered and showed a measurable decline, and the quality of production deteriorated. Accounts of the time tell of a progressive demoralization which crept over the common people, compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich. Feelings of disunity and dissent were epidemic among the Germans, and nationalism among them was never weaker. Regional separatism was so strong that it came close to breaking up Germany into fragments.

Along with the paradoxical wealth and poverty, other characteristics were masked by the boom and less easy to see until after it had destroyed itself. One was the difference between mere feverish activity, which did certainly exist, and real prosperity which appeared, but only appeared, to be the same thing. There was no unemployment, but there was vast spurious employment—activity in unproductive or useless pursuits. The ratio of office and administrative workers to production workers rose out of all control. Paperwork and paperworkers proliferated. Government workers abounded, and heavy restraints against layoffs and discharges kept multitudes of redundant employees ostensibly employed. The incessant labor disputes and collective bargaining consumed great amounts of time and effort. Whole industries of fringe activities, chains of middlemen, and an undergrowth of general economic hangers-on sprang up. Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out. Practically all of this vanished after the inflation blew itself out.

Speculation alone, while adding nothing to Germany’s wealth, became one of its largest activities. The fever to join in turning a quick mark infected nearly all classes, and the effort expended in simply buying and selling the paper titles to wealth was enormous. Everyone from the elevator operator up was playing the market. The volumes of turnover in securities on the Berlin Bourse became so high that the financial industry could not keep up with the paperwork, even with greatly swollen staffs of back-office employees, and the Bourse was obliged to close several days a week to work off the backlog.

Another busy though not directly productive sector of activity was in capital goods and industrial construction. The boom’s excessive emphasis on producing new means of production was striking. Travelers remarked the contrast between Germany’s new, humming factories and the old, depressed ones of neighboring countries. Much of this indiscriminate growth in plant capacity made sense only in the bloated inflationary expansion, but not otherwise. After the inflation ended, much of Germany’s brand new inflation-built plant was “rationalized,” which often meant simply torn down again.

Concentration of wealth and business was still another characteristic trend. The merger, the tender offer, the takeover bid, and the proxy fight were in vogue. Bank mergers were all the rage, while at the same time new and untried banks sprouted. Great ramshackle conglomerates of all manner of unconnected businesses were collected together by merger and acquisition. Armies of lawyers, brokers, accountants, businessmen, and technicians who spent their time pasting together these paper empires bolstered the lists of the more or less employed. The most fabulous of the conglomerates was the empire of Hugo Stinnes, which comprised hundreds of companies at its peak in coal, iron, steel, shipping, transport, paper, chemicals, newspapers, oil, films, banks, hotels, and more. Stinnes was Mr. Everything who had also begun to colonize abroad and is supposed to have contemplated organizing all German industry into a single super-conglomerate. After the inflation ended, Stinnes’ empire and many lesser ones were found to be functionally and financially unsound, and they disintegrated more or less messily. Stinnes died.

It was typically true that the Germans who grew the richest in the inflation were precisely those who, like the speculators, the operators, and the builders of paper empires, were least essential to German industry operating on any basis of stability or real value. With the end of the inflation they disappeared like apparitions in the dawn, and scarcely a one of the “kings of inflation” continued to be important in German industry afterward.


  1. Paul Krugman on how debt doesn't matter: The sad thing is supposedly intelligent people read this ch** and accept it.

  2. he serves his purpose....hehehhehe.....and he earns a handsome income doing so.....

  3. sister: Krugman won't be satisfied until the deficit is 1000% of GDP. And if that doesn't work, he'll push for 2000% Just keep shocking the patient! They'll come back to life one of these times!

  4. Hey all, happy new year!

    it looks like OSIR is being accumulated down here...some good news might make it pop back to $7-8 level


  5. good to see the site back up Kli!