Financial History 142 Summer 2022 - Page 37

Complicating the problem was the German central bank President Rudolf Havenstein ’ s inability to understand the situation . Havenstein was a civil servant , a lawyer , not a banker or economist . His successor , Hjalmar Schacht , later wrote that Havenstein “ would hardly have claimed … [ to be ] a specialist on monetary theory ” and that Havenstein was also “ limited by a certain obstinacy of outlook .” President Havenstein saw the decline in the exchange value of the mark as the core problem , one he stubbornly addressed by printing more currency to ensure that Germans would have the needed purchasing power .
The core problem , of course , was the money printing itself . Thirty paper mills and nearly 150 printing firms and 2,000 printing presses worked round-the-clock to create the blizzard of bank notes that Havenstein thought were needed to compensate for the drop in the exchange value of the mark .
In the end , investors in common stocks could not escape the crazy , neurotic mess . Share prices increased during the period from 1914 through July 1922 by over 13 times in terms of paper marks , but this increase fell far short of the 140- fold decline in the paper mark versus the non-inflated , gold-backed mark . This decline was crystallized in the price of shares of Daimler Motor Company , whose high-quality cars commanded a premium price as the shares languished ; by October 1922 , stock market wags were amused to observe that all the Daimler shares outstanding could be purchased for the same price as 327 of its cars .
The conventional way to discourage speculating on a continued decline in the currency is by increasing interest rates . The German central bank did nothing of the sort . “ The discount rate for commercial bills remained at 6 % throughout August [ of 1922 ],” summarized historian Adam Ferguson , “ while during the same month the mark fell by 250 % against the [ British ] pound .” Under such a monetary policy , speculation against the mark by commercial borrowers with access to this discount rate was a “ no brainer .” ( Those who could not borrow from the central bank paid much higher rates .)
The mark ’ s downward slide accelerated . At roughly 9,000 marks to the dollar on New Year ’ s Day 1923 , it was 26,000 in April ; 55,000 in May ; 4 million in August ; 65 million in September ; 300 million by early October ; and 17 billion by the end of the month . There seemed no bottom to it .
At this point , Hjalmar Schacht — a banker — was appointed to a new position , Commissioner for National Currency . Eight days later , Havenstein died suddenly of a heart attack , and Schacht was given control of monetary policy . Schacht reversed course : He refused to continue to monetize government debts and defined a new “ Rentenmark ” equal in value to one trillion paper marks . He refused to honor the private notes —” Notgeld ”— that had been used by industry and by municipal governments instead of paper marks .
There were howls of protest , but Schacht held firm . He got agreement from London financiers to back the nation ’ s gold ( not the paper ) marks . His secretary recalled that during those hectic days , Herr Schacht often sat in a small makeshift office in the Finance Ministry , chainsmoking , and tirelessly lobbied foreign exchange market-makers via telephone on behalf of the Rentenmark , attempting to peg it to the US dollar and gold .
It worked : The Rentenmark initially declined against the dollar , but by early December 1923 it began to stabilize . ( It would later be replaced by a new Reichsmark based on the Rentenmark .) Distrust of the currency lingered — increasing interest rates to dampen speculative borrowing was thought futile — so credit was frozen and then rationed instead . Unemployment loomed for many industrial workers , but faith in Schacht ’ s new direction was tangible : by mid-December 1923 , farmers began increasing shipments of food to the cities . “ Not even the most fanatical advocate of stabilization ,” wrote the British ambassador on Christmas Day 1923 , “ could have anticipated more remarkable results .”
The damage to the larger society , however , had been done . All the patriotic citizens who had put their savings in government bonds watched those savings wiped out . The deprivation of most and the profligate spending and speculating of some produced cynicism . Inflation picked a few winners and millions of losers , fomenting suspicion and contempt — a dangerous result in a place like Weimar Germany , a fledgling democracy with considerable technological and military resources .
How dangerous ? “ I once studied the curriculum booklet which the Reichstag published of its members ,” Frau von Pustau recalled . “ A high percentage of National Socialist [ i . e ., Nazi ] members gave the same story : War , then demobilization , then college , then the necessity to leave college because of inflation .”
In the same way that the flapping of a butterfly ’ s wings can influence physical events far away , financial policy decisions can reverberate in unexpected ways . Expedient , self-serving monetary policy can result in bizarre , unexpected aftershocks — shocks far removed in time and / or place from the direct financial effects . Citizens placed in difficult financial circumstances by inflation may not respond in ways that policy makers expect or desire , and the response may set in motion bizarre societal changes . A thorough study of the aftershocks wrought upon those Germanspeaking peoples roughly a century ago should give policy makers pause .
Daniel C . Munson enjoys reading and writing economic and scientific history . His writings have appeared in Barron ’ s , Financial History and other publications .
Sources Buck , Pearl S . How It Happens : Talk about the
German People 1914 – 1933 . New York . 1947 .
Eisenmenger , Anna . Blockade : The Diary of an Austrian Middle-Class Woman , 1914 – 1924 . New York . 1932 .
Ferguson , Adam . When Money Dies . London . 1975 .
Keynes , J . Maynard . The Economic Consequences of the Peace . London . 1920 .
Schacht , Hjalmar . The Stabilization of the Mark . London . 1927 .
Taylor , Frederick . The Downfall of Money : Germany ’ s Hyperinflation and the Destruction of the Middle Class . New York . 2013 .
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