What would you do if your money lost half of its purchasing power within a month?
Or, what if it only had half it’s purchasing power by this afternoon?
It may just sound like I’m trying to scare you, but, this kind of rapid currency devaluation is exactly what happened in the Weimar Republic from 1918 to 1923 between the two world wars.
I am sure you’ve heard the saying “those who don’t study history are doomed to repeat it”. so let’s see what we can learn.
When Money Dies, by Adam Fergusson, is an exhaustively thorough look into the causes, and effects, of the hyperinflation period that crippled the Weimar Republic during the early 1920’s. It is also an exhaustive read, as Fergusson meticulously describes the exponential increases in the money supply, and subsequent decreases in its purchasing power, number by number, through every order of magnitude (and there are quite a few).
It reads like a research paper, which speaks to the information’s validity, but, makes it hard to digest and process. In this article I’ll give you the most important lessons gleaned from this valuable historical account. The parallels with our own economy today are frightening, To put it bluntly; sometimes it felt effortless to interchange the current United States’ predicament and the situation in Weimar Germany.
“Hyperinflation is inflation that is very high, or, out of control” according to Wikipedia. That sounds about right. For example, Germany’s Papiermark declined from 4.2 per U.S. dollar at the outbreak of World War I to 1 million per dollar by August 1923. To also give you some perspective, toward the end of the hyperinflation period, the Riechbank was printing 100 trillion dollar notes with regularity.
To see what that looks like in a graph, see below:
More Money More Problems
Ultimately, the hyperinflation in the Weimar Republic was caused by the government’s decision to repay its war debts & reparations payments by printing more bank notes. By increasing the money supply exponentially, they also devalued the currency exponentially, sometimes overprinting notes to a thousand times their nominal value. The money became so worthless from this overprinting that millions of papiermarks were needed to buy things like bread or milk.
Look at this commemorative coin, which displays some of the prices for basic goods at the end of hyperinflation in the Weimar Republic:
To the man on the street in Germany, it appeared that the price of goods was increasing dramatically, but in reality, the purchasing power of their currency was decreasing. This is a subtle, but important, dynamic to understand, and it is more representative of the systemic problem from which it derives: a currency which is being devalued.
Does any of this sound familiar? Paying debts off by printing bank notes? Rising cost of living and rising food costs? Deficits piling up with no ability to pay back loans?
Seeing a currency hyper-inflate in a graph is one thing, but to actually see what this all looks like in reality paints a much more grim picture.
Who Was Hurt The Worst?
Pensioners, fixed income retirees, and people who slavishly believed the State would take care of them were the hardest hit. As prices rose, the fixed incomes did not and the purchasing power for these people was reduced to nothing.
Employees of businesses could and did, negotiate for higher wages as the inflation continued. These wage increases generally did not keep up with the loss in purchasing power, but at least they did increase somewhat. Small business owners could also increase prices of their goods to try and keep up, but in general, everyone was hurt in the process.
The primary lesson here is to make sure you are not dependent on Gov’t handouts or a retirement account for your sustenance.
Did Anyone Profit?
The biggest ‘winners’ were the industrialists who used debt effectively by borrowing at one value, holding the produced goods until they sold at inflated prices, and repaying the loan with much left over to spare. They did this over and over again and while it was profitable, they had to keep up the ever increasing pace or they would quickly be destroyed. It was sort of like running on an ever increasing treadmill. While the pressure was immense, and the process very risky, the industrialists did gain a lot of assets.
The main lesson here is if you produce something valuable and useful and you manage your inventory carefully, you’ve got an edge. I am not advocating the use of debt, but it was a successful strategy which made the industrialists incredibly wealthy.
Exodus Of Wealth
With exponential rises in the cost of living the German people were reduced to selling prized possessions and family heirlooms to make ends-meet. The exodus of wealth from Germany was massive as rich foreigners came in from all sides to buy up German goods for a fraction of their former cost. Increasingly destitute and starving Germans sold anything of value to visiting Frenchmen and Englishmen. Musical instruments, jewelry, furs, rugs, china, were all sold off just to pay for meager rations of food. In one journal a woman described selling her family’s grand piano for a sack of potatoes. Another account described an old woman who made ends meet by cutting off links from her gold chain every day. We don’t know what happened to her once the last link was sold.
In some ways this selling-off helped the people survive and hold on for a bit longer. But there were two very painful consequences: the selling stripped the country of almost everything of value, and it created greater animosity between the German people and the rest of Europe. .
This same ‘stripping by foreigners’ is going on right now in Greece as that country falls apart. There are reports of Chinese and other Europeans going into Greece to buy up assets of every kind including precious metals, fine art, land, factories, and other valuables.
A question I wonder about is when the US currency begins to hyper-inflate, will there be any other countries wealthy enough to come in and buy, or will the end of the US dollar cause a world-wide depression?
Appearances, and Stock Markets, Can Be Deceiving
In the midst of all the suffering, as the middle class was destroyed and the gap between rich and poor widened, there were still shops and coffee houses, restaurants, and shows going on. These catered to the wealthy industrialists, the foreigners, and the upper levels of the government, who, of course, managed to keep their incomes up to par. Because of these bustling shops and apparent upscale businesses, it was not so easy to recognize the underlying deprivation going on among the regular people.
Another confusing sign was a strange frivolousness that developed among the common people. With rapidly increasing prices, saving money was sheer stupidity. A ‘spend it while you have it’ and a ‘live for the moment’ attitude developed. People became less careful with their money because of their lack of faith in it. Some people took on an almost with a bizzarre party attitude of TEOTWAWKI because you just didn’t know how long the money would be good – so spend it all NOW on whatever there is, and why not just drink it up? There were numerous stories of people who had a windfall of money and immediately spent it on booze and threw a party.
LESSON: recognize that things are not always as they seem. Just because down town is bustling, and there is a party next door, it doesn’t mean all is well.
With such rapid changes in fortunes and volatility of the economy in general, came all sorts of speculation and ‘get rich quick’ schemes. One woman wrote that it seemed there were financial advisers everywhere telling you what to do. People who wouldn’t have normally participated in the stock market began to gamble there. The prices of stocks did rise, reflecting the increase in prices of everything in general. If all you were doing was watching the stock market you wouldn’t necessarily know how sour the economic downturn was.
The lesson here is: don’t look to the stock market as an indicator of health for the economy! Here in the US today, we see stock market rallies, and jumps upward, all the while unemployment continues to rise and our credit score is down…
When Money Isn’t Trusted, Distribution of Goods Stops
Here is an example of just how business grinds to a halt when money dies. During this time, Germany still had lots of agriculturally productive land all across its countryside; And in fact, bumper crops were produced during several years in this period. But with the money becoming more and more useless, the farmers would not sell their products for the increasingly worthless cash. Food staples like butter, sugar, salt, vegetables, and other necessities became so expensive that many shops couldn’t stock them, people couldn’t afford them, and many businesses closed.
Barter ensued for a while, but once the city people had traded everything of value, there was nothing left to trade, and the abundance of food in the countryside never got distributed to the urban areas.
A big lesson here is to realize how important bartering will be in certain situations. It’s a good idea to get used to trading without money now, before you have to depend on it to get essential supplies. Another lesson is to stock up on useful items just for the purpose of trading them when money no longer works. (Hmmm, I could write up a list of really useful items for trading, and how to go about getting some bartering experience – drop me a note in the comments section if you are interested).
Growing Your Own Food Is Like Printing Your Own Money.
Desperate People Take Desperate Measures
Bands of people from the urban areas were known to go into the small farming villages looking for whatever they could find. These were mostly dis=organized and chaotic groups. Some of the accounts of these raids were horrifying, and remain a testament to how drastically the nature of a people can shift when put under such crushing economic pressure. These people reached a level of desperation we cannot imagine. They no longer had anything of value to trade, no hope of employment, they were cold, and they were starving. Keep in mind that these were people who in normal times were decent, hard-working, capable folks. The extreme duress that made them even consider going out to rob and pillage also made them crazy. Literally insane. There were descriptions of how the city folks needlessly ransacked and destroyed. The written testimonies of the farmers went something like this: “we would have understood if they (the looters) had just stolen food, but we couldn’t understand why they destroyed everything else”. There were descriptions of furniture and household items broken, clothing scattered everywhere, livestock mutilated, granaries ransacked with grain wasted, crops trampled, and tools destroyed. One example was of a highly prized milk cow whose udder was slashed open and the cow left to stand bellowing in pain (the cow was unrecoverable and had to be put out of her misery by the returning farmer).
Who would have thought that a formerly first-world nation could be reduced to pillaging between citizens and sporadic anarchic violence in a matter of a few short years.
The lesson here is a painful and difficult one, be prepared to defend yourself and property with arms. And realize you will not be facing ‘normal’ rational people, but good people driven to insanity by intense deprivation. (While this site focuses mainly on food and medicine, drop me a note in the comments section if you are interested in personal and home security. I’ve been reading, watching videos, and taking training – a lot of which is not really that useful for the average person – but I have found a few gems which I would be glad to share – again, put a comment down below and I’ll get it out to you).
Corruption Becomes Entrenched
Finally, the most insidious consequence of the hyperinflation was that corruption became the norm to what had otherwise been a very honest and trustworthy population. Onerous taxation and laws drove everyone to cheat or lie on taxes or business reports. You could not survive without being involved in black market or illegal trading. Bribing and corruption of police, judges, and government officials became a necessity for even the most common of person. Throughout this period corruption became entrenched in the people and opened the way to tyranny…during this time period, history saw the first appearance of Adolf Hitler, of the National Socialist Party (Nazi’s for short).
Having had their entire way of life stripped from them in less than half a decade, the German people were looking for any way out of their predicament. The fervor-inducing rhetoric of Adolph Hitler’s speeches, which railed against the rich foreigners who had bought up much of Germany’s wealth and promised to restore Germany’s former glory, resonated with the destitute German populace. Jewish Germans were specifically targeted (a stigma that developed during the hyper-inflationary years) because of their wealth, and were an easy scapegoat to create focus on and place blame.
Once brought to their knees, the German people were happy to follow anyone that would lead them out of their current state. We forget sometimes that Hitler was popularly elected. And we all know what happened there…
Ultimately, the corruption at the core of a society spreads to its limbs, like a sickness. The value and stability of a nation’s currency is one of the major indicators of that nation’s economic life.
Again, I don’t really recommend reading this book, as it’s a bit dry and repeats itself often – but the lessons and parallels are essential to look at and consider in a critical, measured way.
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