Episode 111 – Hyperinflation and the potential for Back to the Future

Financial Autonomy - Blog
Episode 111 – Hyperinflation and the potential for Back to the Future

Welcome back to another episode in our financial history series. We started with Tulip Mania and the madness of crowds. Then we reviewed the Great Depression and how the lessons learnt continue to have impacts today. One thread of the Great Depression story was the Gold Standard, which we explored in episode 109. An understanding of the Gold Standard is vital to anyone attempting to think through the potential global impacts of Crypto currencies.
This week we look at another moment in financial history – the hyperinflation experienced in Germany during, and especially after, the First World War. It was this experience that made countries so reticent to drop the Gold Standard during the Great Depression. We’re also going to explore why nations today could be planting the seeds for a repeat of this financial disaster.
Prior to World War 1, Europe had experienced its fair share of wars. Germany, under Otto van Bismarck, was pretty accustomed to winning these battles, and through these victories, a template emerged. Go to war, enjoy success, and then have the country you just defeated pay for the whole thing.

And so during World War 1 Germany didn’t raise taxes to pay for its war efforts. Instead it suspended the Gold Standard, and simply printed money, with the intention that once it secured victory, it would take gold and other wealth from its defeated neighbours, most especially France, and return to the Gold Standard with all these newly issued bank notes once again supported by hard assets.
Of course we know that a German victory was not the outcome of this hugely destructive skirmish. And France, finally enjoying some success against their northern neighbours, was determined to make them pay.
It’s worthwhile at this point taking you through a quick recap on what inflation is. Inflation is a rise in the price of goods over time, which results in the value of money falling. A new car might have cost $10,000 in the 1970’s, yet today it costs $40,000. That’s inflation.
A little bit of inflation is good for economies, as it provides a reason for consumers to buy now rather than put purchases off – the longer you delay, the more the item will cost.
But too much inflation is undesirable, because it destroys the value of people’s savings. Money becomes increasingly worthless. This is why most central banks around the world have an inflation target. In the US it is 1-2%, here in Australia it is 2-3%.
So back to Germany. They printed money to fund the war, but more money without more goods doesn’t compute. Prices started to rise. Then with defeat came reparations. Germany was required to pay the equivalent of USD33billion. Given signs of inflation during the war, this added burden saw the German exchange rate fall sharply, significantly increasing the amount Germany had to pay foreigners for key supplies. Its only solution was to print more money, and in so doing, make the value of all the money currently in circulation worth less.
Thus Germany entered a period of Hyperinflation.
A loaf of bread that in 1918 cost half a German Mark, had risen in price to 250 Marks by the start of 1923, and by November of that year was costing 201 billion Marks! For one loaf of bread. There are images of people using German money to light fires, as it was worth less than newspaper. Other images show people taking wheelbarrows of cash to shop for basic goods.
People’s savings were wiped out. Imagine if you’d saved a nest egg of 100,000 marks, a huge sum before the war, only to discover a decade later that all those savings couldn’t even buy you a loaf a bread!
Landowners and industrialists however fared much better, as they continued to own their assets, no matter what the value of the Mark. This fueled resentment amongst the working class – the wealthy seemed to survive and in some cases prosper through this period of Hyperinflation, whilst ordinary workers were left destitute. Conditions were ripe for the Nazi party to rise.
The threat of hyperinflation provided the impetus for those countries who had briefly departed from the Gold Standard to quickly return. The learning taken from the hardship of the German people was that without the handbrake of physical gold required to back up the value of a nation’s currency, a country would simply print money endlessly.
The problem with this thinking, understandable though it was, is that a country which suffers a major fall in the value of its exports – say because there is an oversupply of what it produces – needs to respond by devaluing its currency. But the Gold Standard made that almost impossible. So sticking with the Gold Standard succeeded in avoiding inflation, but did so by crushing the economy. And so we got the Great Depression .
Sadly, German’s experience of Hyperinflation is not unique. Many South American countries in the 1980’s saw average citizens savings destroyed as the money printing presses were put to work in an effort to clear debts. And as recently as 2007 Zimbabwe blew up its currency, with Hyperinflation so severe that by 2009 it ceased printing its own money altogether and used only foreign currencies, mainly the US dollar. The Zimbabwean government reintroduced a local currency only this year, but inflation has returned.
So why is Hyperinflation relevant to us today? Since the conclusion of World War 2, western nations have not adhered to the Gold Standard, yet have managed to avoid excessive money printing. Floating exchange rates and central bank interest rate setting has worked well to provide generally stable economic conditions for the past 70 odd years. But interest rate setting today is reaching the limit of its ability to impact economies. With rates around the world at or very close to zero, the cupboard is almost bare. Should economies slow further, money printing will need to return as a strategy of last resort.
You also have the global battle on exchange rates. Every country wants to act to better the living standards of their people, and so they pursue polices of growing exports. To do that you want as low an exchange rate as possible to make your goods attractively priced. But exchange rates are just the value of one currency vs another. If the Japanese Yen for instance wants to decrease its value against the Euro, then logically the Euro must go up in value against the Yen. That is, they can’t both go down at once. Yet at present, everyone wants their currency to go down. And one way to do that is to print money. If there’s more money in the system, it has to be worth less.
It’s long term crazy, but short term effective, and sadly today, not too many leaders seem to think about the long term.
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