delanceyplace.com 8/30/13 - printing money

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In today's selection -- in the early 1920s, Germany experienced the worst instance of hyperinflation ever recorded -- it took a wheelbarrow to carry the billions of marks (German dollars) needed to buy a loaf of bread. Hyperinflation came because the German government printed trillions of marks. This was not "printing money" as the term is used today -- a misnomer describing the case where the Federal Reserve Bank directly buys U.S. bonds issued by the Treasury -- but instead a literal printing of money that created a major logistical operation involving "133 printing works with 1,783 machines ... and more than 30 paper mills." And it was not in the amounts sometimes "printed" by governments today -- perhaps 5 to 10% of GDP per annum -- but instead amounts that far exceeded 100% of GDP in a single year:

"While Germany was grimly trying to negotiate relief from the burden of [war] reparations, its domestic economic policy, bad as it had been during the war, became worse. The country was in perpetual turmoil, constantly on the brink of revolution, run by a series of weak coalition governments, and was quite unable to control its finances. In addition to large residual expenses from the war -- pensions to veterans and war widows, compensation for those who had lost private property in the territories forfeited under the Treaty of Versailles -- the governments took on enormous new social obligations: an eight-hour day for workers, insurance for the unemployed, health and welfare payments for the sick and the poor. Germany's financial problems were mostly self-inflicted. Nevertheless, reparation payments made what was already a difficult fiscal situation impossible. To finance the gap, the various governments of Germany resorted to the Reichsbank to print the money.

"In 1914, the mark stood at 4.2 to the dollar, meaning that a mark was worth a little under 24 cents. By the beginning of 1920, after the full effects of the inflationary war finance had worked through the system, there were 65 marks to the dollar -- the mark was now worth only 1.5 cents -- and the price level stood at nine times its 1914 level. Over the next eighteen months, despite an enormous budget deficit and a 50 percent increase in the amount of currency outstanding, inflation actually slowed down and the mark even stabilized. ...

"A series of events, however, in the middle of 1921 -- French inflexibility over reparations, a campaign of political murder by right-wing death squads -- broke the public's confidence that Germany's problems were soluble. It abandoned the mark in droves. The foreign speculators who had bought marks the previous two years also bailed out, losing most of the $2 billion they had pumped in. A visitor in the late 1920s to the game rooms of Milwaukee or Chicago would find the walls papered with German currency and bonds that had become worthless.

"As the mark plummeted, Germany became caught in an ever-deepening downward spiral. On June 24, 1922, the architect of fulfillment, Foreign Minister Walter Rathenau, one of the most attractive political figures in Germany -- cultured, rich, scion of a great industrial family -- was gunned down in his car by yet another group of crazed reactionaries. Panic set in. Prices rose fortyfold during 1922 and the mark correspondingly fell from 190 to 7,600 to the dollar.

"In early 1923, when Germany was late in meeting a reparations payment for that year -- the precipitating incident was the failure to deliver one hundred thousand telephone poles to France -- forty thousand French and Belgian troops invaded Germany and occupied the Ruhr valley, its industrial heartland. The chancellor, Wilhelm Cuno, powerless in every other way, launched a campaign of passive resistance. The budget deficit almost doubled, to around 1.5 billion. To finance this shortfall required the printing of ever-increasing amounts of ever more worthless paper marks. In 1922, around 1 trillion marks of additional currency was issued; in the first months of 1923 it was 17 trillion marks. ...

"The task of keeping Germany adequately supplied with currency notes became a major logistical operation involving '133 printing works with 1783 machines ... and more than 30 paper mills.' By 1923, the inflation had acquired a momentum of its own, creating an ever-accelerating appetite for currency that the Reichsbank, even after conscripting private printers, could not meet. In a country already flooded with paper, there were even complaints of a shortage of money in municipalities, so towns and private companies began to print their own notes.

"Over the next few months, Germany experienced the single greatest destruction of monetary value in human history. By August 1923, a dollar was worth 620,000 marks and by early November 1923, 630 billion.

"Basic necessities were now priced in the billions -- a kilo of butter cost 250 billion; a kilo of bacon 180 billion; a simple ride on a Berlin street car, which had cost 1 mark before the war, was now set at 15 billion. Even though currency notes were available in denominations of up to 100 billion marks, it took whole sheaves to pay for anything. The country was awash with currency notes, carried around in bags, in wheelbarrows, in laundry baskets and hampers, even in baby carriages.

"It was not simply the extraordinary numbers involved; it was the dizzying speed at which prices were now soaring. In the last three weeks of October, they rose ten thousandfold, doubling every couple of days. In the time that it took to drink a cup of coffee in one of Berlin's many cafes the price might have doubled. Money received at the beginning of the week lost nine-tenths of its buying power by the end of the week."