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Lessons for America from Germanys Hyperinflation, Part 2
by Jim Powell

By November 1922, the German economy was collapsing. Industries shut down. The
government committed itself to paying money to the thousands of workers who became
unemployed. Within six months, the government was providing a trillion marks a month in
emergency credits to failing banks, railroads, manufacturing businesses, and agricultural
cooperatives. On July 1, 1923, one U.S. dollar would buy 160,000 marks; by August, a million
marks.
Government officials blamed the depreciation of the mark on speculators and tried to make
it more difficult for Germans to exchange their marks for stronger currencies. Traders left the
organized exchanges and conducted their business in cafes and other underground locations.
The inflation made people desperate. They cut up leather chairs to get leather for their
shoes. Draperies were cut up to make childrens clothing. Thieves stripped railroad cars for
copper wire. Historian Konrad Heiden reported,

On Friday afternoons in 1923, long lines of manual and white-collar workers waited
outside the pay-windows of the big German factories, department stores, banks,
offices. They all stood in lines outside the pay-windows staring impatiently at the
electric wall clock, slowly advancing until at last they reached the window and
received a bag full of paper notes. According to the figures inscribed on them, the
paper notes amounted to seven hundred thousand or five hundred million, or three
hundred and eighty billion, or eighteen trillion marks the figures rose from
month to month, then from week to week, finally from day to day. With their bags
the people moved quickly to the doors, all in haste, the younger ones running. They
dashed to the nearest food store, where a line had already formed. Again they
moved slowly, oh, how slowly, forward. When you reached the store, a pound of
sugar might have been obtainable for two millions; but by the time you came to the
counter, all you could get for two millions was a half-pound....

People employed in the private sector were enraged when government employee unions
who carried out the governments disastrous economic policies succeeded in having their
salaries pre-paid, so they could convert the currency to goods before the currency depreciated
further. The publication Soziale Praxis reported, Public opinion is turning against the civil
service.
Bank depositors were wiped out. A man who thought he had a small fortune in the bank,
Heiden reported,

might receive a letter from the directors: The bank deeply regrets that it can no
longer administer your deposit of sixty-eight thousand marks, since the costs are all
out of proportion to the capital. We are therefore taking the liberty of returning your
capital. Since we have no bank-notes in small enough denominations at our
disposal, we have rounded out the sum to one million marks. Enclosure: 1,000,000-
mark bill. A cancelled stamp for five million marks adorned the envelope.

Professional people were devastated. Most doctors fees were paid by health-insurance
funds, and the lags in receiving such payments meant big losses. Doctors went on strike in Berlin
and elsewhere. Independent lawyers werent able to increase their fees fast enough to keep up
with inflation, since they were regulated by the government. Many lawyers couldnt afford to
attend a professional meeting in Hamburg about inflation in the law. German-born oil consultant
Walter Levy recalled, My father was a lawyer, and he had taken out a 20-year insurance policy in
1903. Every month, he made the payments faithfully. When the policy came due in 1923, he
cashed it in and was able to buy only a loaf of bread.
Farmers tried to keep the food they produced, rather than give it up for worthless paper
money. That led hungry city people and gangs of unemployed coal miners to plunder farms.
By that time, of course, not many foreigners were willing to accept marks, either. The
government pressured big businesses to lend gold marks. Incredibly, the government which
caused the inflation tried to put taxes on a gold basis, meaning that taxes would be indexed
and go up exponentially along with everything else during the inflation.
The State wiped out property, livelihood, personality, squeezed and pared down the
individual, destroyed his faith in himself by destroying his property, Heiden reflected. Minds
were ripe for the great destruction.

The foster child of inflation
Adolf Hitler was among the unintended consequences of the inflation. He had been a
small-time rabble rouser at the end of World War I, bitterly lashing out at those he blamed for
Germanys defeat. He exploited the fear and resentment caused by the inflation, appealing to
those he called starving billionaires who were able to buy pitifully little with their wads of
worthless paper marks. The ranks of Hitlers followers expanded dramatically during the
inflation. Economist Constantino Bresciani-Turroni called Hitler the foster child of the
inflation. The price of black bread hit one billion marks, businesses were losing money, and the
government couldnt meet its own payrolls. The crisis, without which Hitler would have been
nothing, wrote biographer Ian Kershaw,

was deepening by the day. In its wake, the Nazi movement was expanding rapidly.
Some 35,000 were to join between February and November 1923, giving it a
strength of around 55,000.

Hitler staged an inept coup attempt in a Munich beer hall. He was arrested and
imprisoned, but he had emerged as a public figure determined to rise again when another crisis
gave him an opportunity.
Meanwhile, the inflation helped break the grip of interest groups, particularly government-
employee unions, that always pushed for more government spending. Desperate citizens were
willing to consider alternatives to politics as usual. Finance Minister Karl Helfferich proposed
some tough reforms, and they were adopted.
First, he introduced a new currency, the Reichsmark, to replace the worthless mark.
Second, to prevent the Reichsmark from becoming worthless, he aggressively cut government
spending. He eliminated the government employees perk of having their salaries prepaid. He
began giving them weekly paychecks, so they would suffer from inflation like everybody else, if it
returned. They bitterly protested that the practice would jeopardize the stability of the
government. Next, national government payrolls were cut, by 396,838 employees, almost 25
percent.
At the bloated nationalized railroads, payrolls were cut more than half, from 576,083 to
186,658. The government-run health-care system was cut back, too. There were howls of protest,
but people had lived through the consequences of runaway government spending. They couldnt
afford it anymore. The government-run social security program couldnt be saved, because
inflation had made social security funds worthless. Retired people, widows, and the disabled who
needed help were given relief, and that was it.
Since the United States is a mighty superpower, many Americans probably continue to
believe that what happened to Germany can never happen to them. But runaway inflation is
driven by runaway spending financed by money-printing, and the spending can be on all sorts of
things, not just reparations. Today federal spending on entitlements is skyrocketing, and in 2009
entitlements consumed all federal tax revenue, which meant, in effect, that the United States had
to go deeper in debt to cover other costs such as national defense and interest on existing debt. By
any standard, the U.S. government is financially stressed out. Since the United States intervenes
in the affairs of other countries more than anyone else, it is likely to become embroiled in future
wars, perhaps in addition to the two wars that have dragged on in Iraq and Afghanistan. During
each of the biggest wars the United States has been involved with (the Civil War, World War I,
and World War II), federal spending soared about tenfold. Something like that would certainly
qualify as an external shock. Clearly, the risk of a U.S. inflation catastrophe is going up.

Jim Powell is policy advisor to the Future of Freedom Foundation and a senior fellow at the Cato
Institute. He is the author of FDRs Folly, Bully Boy, Wilsons War, Greatest Emancipations, The
Triumph of Liberty and other books.

This article was originally published in the June 2010 edition of Freedom Daily.