THE FEBRUARY issue of the British magazine, Encounter,
contains a heretofore unpublished lecture by the famous novelist, Thomas
Mann, which recalls his experience with the great German inflation of
1913-1923. "A straight line," he tells us, "runs from the madness of the
German Inflation to the madness of the Third Reich."
Just as the Germans saw their marks inflated into
millions and billions and in the end bursting, so they were later to see
their state inflated into "the Reich of all the Germans", "the German
Living Space", "the New Europe", and "the New World Order", and so too
they will see it burst. In those days the market woman who without
batting an eyelash demanded a hundred million for an egg, lost the
capacity for surprise. And nothing that has happened since has been
insane or cruel enough to surprise her.
It was during the inflation that the Germans forgot how
to rely on themselves as individuals and learned to expect everything
from "politics", from the "state", from "destiny." They learned to look
on life as a wild adventure, the outcome of which depended not on their
own effort but on sinister, mysterious forces. The millions who were
then robbed of their wages and savings became the "masses" with whom Dr.
Goebbels was to operate.
Inflation is a tragedy that makes a whole people
cynical, hardhearted and indifferent. Having been robbed, the Germans
became a nation of robbers.1
This terrible inflation, which Mann credits for the
rise of Hitler, had its origin in another holocaust: World War I. Like
every other nation involved in that conflict, Germany was entirely
unprepared for its intensity. German, French, and British troops all
marched off in August 1914 absolutely convinced they would be home by
Christmas.
The German High Command shared this optimism, having
full faith in the ability of the Schlieffen Plan to bring quick victory.
With the resulting total war, outlasting the enemy became the only path
to victory for either side.
At this point, Germany discovered just how badly it was
prepared for this new kind of warfare. Cut off from its sources of food
by a British blockade and failing to achieve any kind of breakthrough on
the Western front, Germany began to gamble, as it did when it unleashed
its submarines. At home too, the government began to gamble. The people,
having been bled white by taxation already, had to be urged on to
greater sacrifice. Toward this end, the government resorted to inflation
on a mass scale, gambling that the people would be unaware of what was
happening.
Inflation an Indirect Tax
Here, one should keep in mind that inflation, in its
crudest form, is nothing but an indirect tax. The government, with its
monopoly on the issuance of currency, found it simple to play the role
of counterfeiter. It simply paid for the goods it needed with newly
created money. Since an individual's conception of his money's worth is
basically shaped by his past memory of its purchasing power, this
process can go on for some time before it begins to significantly affect
the price level.
During the war, goods were being withdrawn from the
economy for war materiel and, simultaneously, fewer goods were being
produced as workers became soldiers. At the same time, the government
was increasing the money supply rapidly as it became increasingly
difficult to raise needed funds from taxation or direct borrowing.
Historically, the speed at which people spend tends to
remain relatively constant unless they expect a sudden change in
economic relationships. Accelerated spending classically occurs when
people feel that their money is losing its value. At this point, they
begin to spend every cent they can get as quickly as possible before
prices go up again. This only tends to raise prices even higher and drop
the value of the money correspondingly. Economist Ludwig von Mises, a
resident of Austria at the time, graphically described this process:
In normal times, that is in periods in which the
government does not tamper with the. monetary standard, people do not
bother about monetary problems. Quite naively they take it for granted
that the monetary unit's purchasing power is "stable." They pay
attention to changes occurring in the money-prices of the various
commodities. They know very well that the exchange-ratios between
commodities vary. But they are not conscious of the fact that the
exchange-ratio between money on the one side and all commodities and
services on the other side is variable too. When the inevitable
consequences of inflation appear and prices soar, they think that
commodities are becoming dearer and fail to see that money is getting
cheaper. . . . This ignorance of the public is the indispensable basis
of the inflationary policy. Inflation works as long as the housewife
thinks: "I need a new frying pan badly. But prices are too high today; I
shall wait until they drop again." It comes to an abrupt end when people
discover that the inflation will continue, that it causes the rise in
prices, and that therefore prices will skyrocket indefinitely. The
critical stage begins when the housewife thinks: "I don't need a new
frying pan today; I may need one in a year or two. But I'll buy it today
because it will be much more expensive later." Then the catastrophic end
of the inflation is close. In its last stage the housewife, thinks: "I
don't need another table; I shall never need one. But it's wiser to buy
a table than keep these scraps of paper that the government calls money,
one minute longer."2
This entire process was set in motion when the
Reichsbank suspended the redeemability of its notes in gold with the
outbreak of war, As long as the paper currency was tied to a finite
amount of gold, the currency also remained within finite limits. When
this restraint was cast aside, there was no longer any legal limit to
the amount of money that could be manufactured. The government, in turn,
used this freedom to force the bank to buy its bonds, which the bank
paid for by creating deposits in the government's account. In this way,
the German debt became monetized, just as the American debt is today
monetized by the Federal Reserve System. Simply put, this means that the
government's debts are ultimately paid for by the consumer's loss of
purchasing power; the creation of new money serving only to cheapen all
money already in circulation. In Germany, this meant that by the end of
1918, the amount of money in circulation had increased fourfold. One
would have expected this to lead to approximately a fourfold rise in
prices, more when one considers the corresponding cutback in production,
but in fact they only rose 140 per cent. This is because consumers were
not yet fully aware that the rise in prices was due not only to goods
being less available, but also due to inflation of the money supply.
Huge Deficits
To be sure, even the victorious nations had practiced
the German method for financing their debts and experienced a similar
rise in prices. But with the cessation of hostilities, they returned to
sound fiscal and monetary policies. In Germany, the government made no
effort to return to pre-war spending levels and continued to run huge
budget deficits, as the following table demonstrates:3
As one can see, the debt mounted with each passing
year, almost all of it being funded through monetization. The reasons
for this were partly humanitarian, partly political, and partly selfish.
On the one hand, there was terrific pressure for relief and rebuilding.
Then too, the government sought to use inflation as a psychological
weapon against the Allies. Finally, there was pressure from those
benefiting from the inflation, which will be dealt with below. But the
single most important factor in the ensuing hyperinflation was economic
law. As people slowly began to realize that their money was losing its
value, they began drawing out bank deposits and spending what they bad
as quickly as possible. This run on the banks and the tremendous
increase in the demand for cash put fierce pressure on the treasury to
stave off collapse with a flood of freshly minted bills. Thus the
figures for total money in circulation begin to follow a pattern (in
millions of marks): 1913, 6,070; 1920, 81,338; 1921, 122,500; 1922,
1,295,231; 1923, 2,274,000,000.4 And the effect on the price
level inevitably followed a similar pattern:5
Needless to say, the government never admitted its role
in this, but instead sought out easy scapegoats. The most popular one
was the Versailles Treaty. After all, the people already hated the
Allies, so why not exploit it to good use? The campaign was so
successful that even intelligent economists like Dr. Hjalmar Schacht
accepted and perpetuated the myth: "The true cause of the inflation
after the war was the perpetual pressure exercised by the Reparation
Commission on Germany in the attempt to extort payments to foreign
countries which in the nature of things could not be made."6
The truth of the matter is that reparations expenses only made up about
a third of the German budget deficit throughout the entire period. In
his book, The Economics of Inflation, Costantino Bresciani-Turroni
compiled the following figures:7
Consequently, the reparations alone cannot account for
the deficits or the ensuing inflation. The truth of this was, of course,
irrelevant. There were plenty of other causes for the inflation which
could also be exploited. To blame profiteering became particularly
popular because, as in the case of reparations, there was some truth in
it. This is how Thomas Mann saw those who profited from the crisis:
For at least a section of this ruling class, the big
industrialists, the inflation was profitable; they were in no hurry to
stop it. During those years the Krupps, Stinneses, Thyssens, etc., got
rid of their indebtedness, which ran into real millions, by paying their
creditors in inflated millions, and thanks to these same inflated
millions they acquired -real millions-worth of property.
Tough Germany was very poor at that time, it possessed
great wealth in mineral resources and industrial plant. During the
inflation a radical change occurred; this wealth became concentrated in
fewer and fewer hands. The small and medium property-owners lost their
holdings, and the biggest snapped them up. They acquired property and
paid with paper. Years later one could hear it said that such and such a
factory or mine was unproductive and would not be profitable if it had
not been acquired for next-to-nothing during the Inflation . . .
.8
Not a Major Cause
It would be a vast distortion, however, to say that
profiteering in general was a contributing cause to the economic crisis.
It is in the very nature of inflation that some will reap great profits.
It was only those big industrialists like Hugo Stinnes who consciously
realized what was taking place and deliberately sought to influence the
government toward inflation.9 For the rest, who reaped
windfalls through no conscious effort, through simple foresight or luck,
some defense should be made. Many of these entrepreneurs became the
objects of scorn and an easy target for political extremists. The fact
that many were also Jewish cannot be discounted as an explanation for
their persecution. As early as 1920, John Maynard Keynes spoke up for
these innocent entrepreneurs in a moving passage from The Economic
Consequences of the Peace. "Lenin," he wrote, " is said to have declared
that the best way to destroy the Capitalist System was to debauch the
currency."
By a continuing process of inflation, governments can
confiscate, secretly and unobserved, an important part of the wealth of
their citizens. By this method they not only confiscate, but confiscate
arbitrarily; and, while the process impoverishes many, it actually
enriches some. The sight of this arbitrary rearrangement of riches
strikes not only at security, but at confidence in the equity of the
existing distribution of wealth. Those to whom the system brings
windfalls, beyond their deserts and even beyond their expectations or
desires, become "profiteers," who are the object of the hatred of the
bourgeoises, whom the inflationism has impoverished, not less than of
the proletariat.... These "profiteers" are, broadly speaking, the
entrepreneuer class of capitalists, that is to say, the active and
constructive element in the whole capitalist society, who in a period of
rapidly rising prices cannot help but get rich quick whether they wish
it or desire it or not. If prices are continually rising, every trader
who has purchased for stock or who owns property and plant inevitably
makes profits. By directing hatred against this class, therefore, the
European Governments are carrying a step further the fatal process which
the subtle mind of Lenin consciously conceived.10
Thus we find the German government actively appealing
to the lowest human emotions of jealousy, envy, and greed in order to
hide its own responsibility for the economic disruption. And inevitably
this was to play right into the hands of demagogues like Adolf Hitler.
It is no coincidence that he made his first bid for power at the height
of the inflation; in the beerball putsch of November 8, 1923. Historians
and economists, therefore, are in general agreement that the inflation
can be given much credit for the rise of Hitler. For although he did not
come to actual power for another decade, the putdown of the putsch
supplied the Nazis with many martyrs to aggrieve, and it was during his
subsequent prison term that Hilter wrote Mein Kampf. Thus, as early as
1937, Lionel Robbins could declare emphatically that "Hilter is the
foster-child of the inflation."11
The Current Problem
All this is not so say that we can expect another
Hitler here in the United States. But, to this very day, the origin of
inflation is still the same: government deficits financed through
monetization. For too many years, the American government has believed
that it can have occasional wars and an expensive social program at home
and pay for it all by simply increasing the debt limit. Today we are
discovering that there really is a limit to debt. The double-digit
inflation we are experiencing is therefore only a logical consequence of
past policies. And if we want to stop it, the solution is the same as it
was in 1923. The government must learn to live within its means and halt
its abuse of the power to issue currency. The failure to do so may be
catastrophic, just as it was for Germany.
At the time of the original publication, Mr. Bartlett
was a graduate student in history at Georgetown University.
1 Thomas Mann, "Inflation: The Witches' Sabbath,"
Encounter (February, 1975) p. 63. This lecture was originally given in
1942.
2 Ludwig von Mises, The Theory of Money and Credit (New
Haven: Yale University Press, 1953) pp. 418-419. This book was written
in 1913 and Mises used the word inflation to mean an increase in the
quantity of money; see p. 240.
3 Michael A. Heilperin, Aspects of the Pathology of
Money (London: Michael Joseph, 1968) p. 143.
4 Frank D. Graham, Exchange, Prices, and Production in
Hyperinflation: Germany, 1920-1923 (Princeton: Princeton University
Press, 1930) p. 67.
5 The Nightmare German Inflation (Princeton, N.J.:
Scientific Market Analysis, 1970) p. 2.
6 Dr. Hjalmar Schacht, The Stabilization of the Mark
(London: George Allen & Unwin, 1927) p. 55.
7 Costantino Bresciani-Turroni, The Economics of
Inflation (London: George Allen & Unwin, 1937) p. 93.
8 Mann, op. cit., p. 61.
9 See the interview with Stinnes in Fritz K. Ringer,
ed., The German Inflation of 1923 (New York: Oxford University Press,
1969) pp. 90-93.
10 John Maynard Keynes, The Economic Consequences of
the Peace (New York: Harcourt, Brace and Howe, 1920) pp. 235-237.
11 Forward to Bresciani-Turroni, op. cit., p. 5. He had
expressed the same idea even earlier in his The Great Depression
(London: Macmillan, 1934) p. 57: "The Nazi propaganda, hitherto confined
to the worst elements of the ex-military and ex-criminal classes and to
a handful of the less responsible students, was beginning to make itself
felt in high politics. The German middle classes, bereft of their
property during the inflation, their minds besodden with the turgid
anti-rationalism which in that part of the world has for many decades
passed as profundity, were apt soil for such teaching."
The Totalitarian Trap
WHEN IN FACT government supplies most everything we
need, then we find that we cannot get anything we need except from
government; and we are trapped.
J. Kesner Kahn
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
June, 1975, Vol. 25, No. 6.
Yourname@libertyhaven.com
