winners and losers under hyperinflation in Germany

Discussion in 'Economics' started by zdreg, May 27, 2010.

  1. zdreg

    zdreg

    pupose of this thread is to see how germans adjusted to hyperinflation.

    http://www.ingrimayne.com/econ/EconomicCatastrophe/HyperInflation.html

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    A Case of Inflation

    In the early 1920s Germany experienced one of the most severe inflations of all time.1 The inflation was not apparent in 1920, but began showing up in 1921. Thereafter it got steadily worse until it came to an abrupt halt at the end of 1923. At its worst in the second half of 1923, prices rose more than fivefold each week.

    Some idea of the magnitude of this catastrophe can be seen in table below. During 1920 and early in 1921 the signs of inflation were mixed. The price of food was increasing, but the price of dollars in terms of marks (the mark was the name of the German currency) was dropping, and so were the prices of products bought from the United States. However, the signs of inflation were unmistakable in the next year, from mid 1921 to mid 1922. In this period prices increased about sixfold--that is, it took six marks at the end of the period to buy what one mark would have bought at the beginning. But this rapid inflation, greater than any yearly inflation in the history of the United States, was only a prelude for what was to happen.
    MEASURES OF GERMANY HYPERINFLATION
    Percentage Change in Various Measures of Inflation

    Dates


    Internal Prices


    Price of Dollars


    Cost of Living*

    Feb 1920 to May 1921

    4.6%

    -37.2%

    39.2%

    May 1921 to July 1922

    634.6%

    692.2%

    417.9%

    July 1922 to June 1923

    18094%

    22201%

    13573%

    July 1923 to Nov 20 1923

    854,000,000,000%

    381,700,000,000%

    560,000,000,000%

    *food until June 1923, thereafter based on all items. These data were calculated by the Statistical Bureau of the Reich. All data are from The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany by Costantino Bresciani-Turroni (Augustus Kelley), pp. 30, 33, 35-6.

    From the middle of 1922 until the middle of 1923, prices increased by over 100 times. Measured by the price of food, prices were 135 times higher at the end of the period than they were at the beginning. Measured by how many marks it took to buy a dollar, prices were 222 times higher. Yet even this horrid inflation was mild compared to what happened from July to November of 1923, when prices increased by somewhere between a million and a billion times their previous level.
     
  2. zdreg

    zdreg

    The rapid increase in German inflation can be seen in the postage stamps that were issued during this period. (See the picture below.) In 1920 the highest valued stamp issued was for four marks. In 1923 the denominations were changing so rapidly that the post office could not design new stamps fast enough and resorted to using old dies and then overprinting them with new values. The highest value reached in 1923 was for 50 billion (50,000,000,000) marks. A great many of these stamps must have been issued and bought, though not necessarily used, because very few of the almost 200 varieties of stamps issued from 1921 to 1923 have more than minimal collector's value. Also, stamps that were postally used during the period have a higher collector's value than stamps that were never used, a pattern that is quite unusual.
    nflation hurts some people but helps others by redistributing wealth and income. Buyers, for example, are hurt by higher prices, but offsetting this is the gain that the producers get from the higher prices. People on fixed incomes will suffer, as will creditors, who are owed fixed amounts of money in the future. On the other hand, those making fixed payments, such as most debtors, will benefit. The German hyperinflation illustrates the redistribution that inflation causes in a dramatic way. It eliminated the value of all life insurance policies and all savings left in banks. When life insurance policies were paid in 1923, the value of the check was usually worth much less than the stamp used to post the letter. The hyperinflation eliminated all debts that existed prior to 1921. For example, the value of German mortgages in 1913 measured in U.S. dollars was about $10 billion; in late 1923 these mortgages were worth only one U.S. penny.

    By 1924 the inflation had radically redistributed the wealth of Germany. The segment of society that was hit the hardest seems to have been the middle class. The poor had little wealth to lose while the rich were often able to get their wealth into forms not adversely affected by inflation. Wealth held in foreign bank accounts, gold and precious metals, and land maintained value.

    If redistribution were the only effect of inflation, one could argue that it is not a serious problem. Since for every loser there is a winner, society as a whole may break even (if this redistribution is not seen as being too "unfair"). However, inflation also makes ordinary decisions more difficult to make, and it causes people to change their behavior. The changes in behavior, which cause social losses, are again dramatically illustrated in a hyperinflation.

    Coping with a situation in which prices could double in a day meant changes in the way people organized their financial affairs. Wages were paid daily or several times a day, and the whole family would immediately go out and spend the money before it lost value. In The Black Obelisk, a novel set in 1923, Erich Maria Remarque describes this practice:

    "Workmen are given their pay twice a day now--in the morning and in the afternoon, with a recess of a half-hour each time so that they can rush out and buy things--for if they waited a few hours the value of their money would drop so far that their children would not get half enough food to feel satisfied."2

    Getting rid of money was the key to financial survival since it lost its value so quickly.
     
  3. zdreg

    zdreg

    Merchants eventually found that they could not mark up prices as fast as they were rising.

    "So they left the price marks as they were and posted (hourly) a new multiplication factor. The actual price marked on the goods had to be multiplied by this factor to determine the price which had to be paid for the goods. Every hour the merchant would call up the bank and receive the latest quotation upon the dollar. He would then alter his multiplication factor to suit and would perhaps add a bit in anticipation of the next quotation. Banks had whole batteries of telephone boys who answered each call as follows: '100 milliarden, bitte sehr, guten Tag.' Which meant: 'The present quotation on the dollar is 100 billion marks, thank you, good day.'"3

    The great inflation led to a large waste of society's resources. Just coping with the rapid change required resources--the extra bank clerks that Bopp mentions are but one example. Talented people no longer tried to earn money by productive activity, but sought ways to stay ahead of inflation, an activity unlikely to have any social benefits. Fortunes were made by those who speculated on the continued worsening of inflation. People who borrowed heavily almost always did well.

    People dislike inflation because it redistributes in ways they consider unfair, because it forces them to take actions to protect themselves, and because it makes decisions more difficult to make. Decisions to buy, sell, or invest are based on a person's knowledge of what normal prices are and this knowledge of normal prices is based on remembering past prices. With inflation, a person must remember not only past prices, but also the dates of those past prices, and then must try to compute what their present equivalents would be. Because our mental capacity to handle large amounts of information is limited, and because inflation requires us to handle more information in order to make decisions, inflation, even when it is perfectly predicted, reduces our ability to make good decisions. People like stable prices because they minimize the cost of making economic decisions.

    The German hyperinflation came to an abrupt end in November of 1923. The man who received credit for this achievement was named Hjalmar Schacht, the new currency commissioner of the Weimar Republic. In his autobiography he mentions a little poem that indicated his popularity among common folk:

    "Wer hat die Mark stabil gemacht,
    Das war allein der Doktor Schacht."

    This can be loosely translated as:

    Who could make the mark stable?
    Only Hjalmar Schacht was able.

    He was less popular with those who borrowed heavily on the assumption that prices would continue to rise. Stabilization led to large losses for them, and in some cases unmade huge fortunes that inflation had built.

    The German hyperinflation is an example of a major economic catastrophe, one that cries out for explanation. Did some defect in the economic system cause this disaster? Was it accidental, due to an unlikely combination of circumstances? Was it due to error on the part of government policy makers? Can a society take steps to insure that a similar disaster does not happen to it? These are important questions, questions that economists have spent years studying. However, the German hyperinflation is an example of only one type of economic disaster. Another type was illustrated in the United States during the 1930s.
     
  4. NumLock

    NumLock

    There is no need to dig up dead Germans from the grave and ask them how they fared in hyperinflation

    JUST ASK ME !

    I lived through hyperinflation of Dinar in early 1990s

    I remember already telling this story on ET alas American public has a very short memory span. (which coincidentally allows for lot of political bullshit)

    HERE WE GO

    My grandfather phoned my father and said. When are you gonna receive your next salary. My father answered. Granddaddy said make sure you buy as much construction gravel as you can. Spend your entire salary.

    Salaries were preserved in form of construction gravel because paper kept losing value every night.

    I remember my grandfather taking shitload of money from several banks and converting it to foreign currency as fast as humanly possible. I remember banks trying to dissuade him from taking the money and telling him how he is making a mistake and everything is gonna be fine.

    2 months later, EVERYTHING WAS LOST in dinar currency.

    You needed 500 dinars to buy a loaf of bread.

    People were screaming and looting, Bankers fled the country, people burned the banks and killed whoever defended them

    Soon after we had a civil war.
     
  5. NumLock

    NumLock

    For one of these you could have gone for all inclusive 14 day resort vacation.

    After hyperinflation. This was good for a bottle of whiskey or 2 bottles of wine.

    [​IMG]

    That's Tesla on that currency.
     
  6. Mr Pain

    Mr Pain

    http://www.usdebtclock.org/

    I think we are past the tipping point. We will have 1T in new debt in 7 months. There is no easy or responsible way out now. We as a country are the same as the folks living of their home equity loans doing cash outs every year to keep the façade up. I know I am sitting on a bunch of cash and am not sure what to do. I don’t trust bonds, cash or stocks now. I should just buy real-estate I guess but that is still dropping I think. I have 20% in gold.

    I have been looking into historical cases to see what might be a safer way.
     
  7. NumLock

    NumLock

    I am of the view that Gold is the safest bet, most people make the mistake that I mean Gold will make you money.

    No I don't think gold will make anyone money

    I think gold can save what money one has.
     
  8. relative to everyone you will become richer so it will. silver is good.
     
  9. Just to add to the anecdotes about hyper inflation:

    Hungary suffered from hyper inflation after WW2 that exceeded anything recorded before (http://en.wikipedia.org/wiki/Hyperinflation).

    As a kid I was given billion denomination notes to play with and over the years I ended up with a collection.

    I have one that says 1Million Billion Pengo (Pengo was the currency)
    and I have an other one that is 1Billion Million Pengo.:)

    They have simply lost track at some point.


    Best, GC

    http://en.wikipedia.org/wiki/Hyperinflation
     
  10. zdreg

    zdreg

    how did the german stock market perform during this period?
     
    #10     May 27, 2010