The Great Inflation

Book: The Great Inflation Germany 1919 - 1923 Guttman and Meehan

Rather than a book review, this is a summary of takeaways I took from this book. It was a very tough book to find. It's out of print and it's $900 on Amazon. Instead, I found a university that had one and then used Airtasker to find a student to borrow it for me. It’s probably the most extensive work on the Great Inflation. It's an incredible tale.

The period of inflation starts pre-WW1 circa 1913. Wars are generally inflationary so nothing of exceptional note here. In Germany it accelerates from the end of the war particularly due to the uncertainty of what the reparations would ultimately look like. This wasn't fully known until 1922^.

By 1922 money had become very tight. Commerce, industry and agriculture all demanded credits that the banks were unable to give. The Reichsbank, the German central bank, believed it was their duty to provide the economy with all the means of payment in needed. Commercial bills in 1922 had joined the ranks of treasury bills in their role as creators of money. During 1922, commercial bills taken up by the Reichsbank rose from less than 1 billion marks to 422 billion marks.

The mark in 1919 was trading at 2.8 marks to the US dollar. By June 1922 it cost 300 marks to buy a US dollar. That sounds drastic but it had been seen as a gradual decline up to this point. And a key factor during those 3 years was that most of the stakeholders, being business, the central bank and policy makers were pretty happy with the perceived benefits of their profits and rising asset values. By the end of the year 1922, 8,000 marks were needed to buy a US dollar. The unemployment during this time fell to 1%.

The mark continued the decline rapidly in 1923. This year was the elongated funeral of the mark and the social implications were horrific. The mark fell from 18,000 in January to 100 million in September!

There were catalysts along the way. In late 1922 there was ongoing deadlock with the Allies but particularly the French on reparations. The French decided to occupy the Ruhr which was Germany's major industrial region. This choked the German economy and it became all too obvious that the government budget could not be balanced.

Here are some amazing anecdotes of the time:

• The author during 1923 dropped into a cafe and order one cup of coffee. It was 5000 marks. While he had spent an hour in the cafe reading his paper and drinking his coffee, when he asked for the bill it came in at 8000 marks. "Why?" he asked. The index or multiplier had changed during the hour and the price had gone up 60%. In an hour.

• 1 kg of beef in 1913, pre-war was 1.75 marks. Mid 1923 that same kg of beef was 18,800 marks. By November when the mark had stabilized at 'useless' the kg of beef was 5,600 billion marks! A single match at the same time cost 900 million marks.

Many Germans were naive about the true nature of the inflation and there were some winners and many losers. Some would hold off buying a new suit for example, waiting for the prices to come down. That caused demand in the economy to slacken and added to the economic woes of 1923.

Finally, normal economic activity became very difficult.  An English student with foreign currency wanted a coat. She went to the store. Chose a coat. Went to the bank to get her money changed. By the time she got back to the store it was closed for lunch. Whilst the price of the coat had not changed in the afternoon, a new multiplier for the mark was displayed at 50,000,000. It had doubled over lunch. She had now not drawn enough money to buy the coat so had to go back to the bank.

How did stock market investors fair during this turmoil in the currency? If you measure share prices before the war (1913) until the end of the mark (late 1923), then you must conclude they did poorly. The value of shares vs the cost of living index was about one sixth the value after that 10-year period.

Shares during 1920 - 1921 did in fact move lock step with the US dollar. But, during 1922 that relationship broke down. The US dollar rate increased 40 times while the stock market only 12. In 1923, due to the government trying to reign in speculation in foreign currency, money found its way back into the stock market and a fury began. Share values in gold marks briefly matched their pre-war (1913) level. But once the mark was stabilized, there was no use for the stock market and the bubble burst. Active stock market accounts fell from 2.5 million at the peak to less than 650,000 in 1924.

Ultimately the result for stock market investors was to help delay starvation. They used the stock market to buy and sell for quick profits so they could buy some food. Long term shareholders, seeing the enormous paper profits on their shares would slowly sell them off also to pay for basic living costs.

Bond investors of all types were obviously obliterated. Most Germans held their retirement savings in debt instruments. It was a disaster for them.

The few winners from the period were agricultural land owners. As it was a productive asset it held its value very well. Conversely, residential landlords were savaged as rent controls were introduced and the rents withered away to nothing. Bizarrely, subletters did quite well as there were no restrictions on them subletting.

Jewellery became very handy for bartering and was very valuable for the period. Holding foreign currency in foreign jurisdictions held up well, as did gold. There were a few barons of the period including Hugo Stinnes. As cash came in he bought any concern he could building an enormous web of industrial businesses. Not only cash coming in but taking on credit was a no brainer. Whilst a winner over the inflation, his death in 1924 came before his empire collapsed shortly thereafter.

Take down credit! This was a no brainer strategy if you could get it. By the time you needed to pay it back, your debts had disintegrated.

The inflation only ended due to every stakeholder finally agreeing to do something about it. The Rentenmark was created. People chose to believe in it. And it was a miracle that it worked.

The ravages of the inflation on the German people were the breeding ground for the Nazi movement. Hitlers putsch failed just 2 weeks before the stabilization and whilst it was the great depression that got Hitler over the line, the wounds inflicted of the early 1920's were the seeds of the movement.