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10/28/2013

Book Review: The Downfall of Money


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I still remember a conversation with Pat Hyland, Chairman of Hughes Aircraft, when I was director of their pension fund investments. Pat recalled being in Germany in the early 1920s, seeing people with wheelbarrows filled with paper money. This lasting memory prompted his concern to protect the pension fund from inflation. In Germany to this day, the hyperinflation era continues to influence government fiscal policy and attitude. Frederick Taylor's The Downfall of Money: Germany's Hyperinflation and the Destruction of the Middle Class recalls that financial crisis, and how it affected the public.

Germany's hyperinflation came out of World War I. The German government realized it would "be short of the money she would need to fight the war and lacking still in ways of acquiring it." The false hope was that a quick victory would bring in the money to pay for the war, which had to be paid for by a big jump in debt. Added to this stress were the demands of reparations by the victors.

After the war, Germany plunged into political violence, and its stability became the number one goal. "For some years social and political priorities took more or less absolute precedence over economics," Taylor writes. Germany drifted into becoming "an inflationary state." The Weimar government decided "the international value of the mark had to be sacrificed to save democracy."

In an inflationary economy, "Expectations of price rises were becoming built into the system." The government in effect became unwilling to take the steps and pay the political price to end the inflation. In July 1922, prices were up 50% in a month. In October 1923 unemployment reached 23%. Eventually the entire value of the government debt vaporized. The currency became worth 1/700,000 of its pre-war value. The hardest hit were the educated middle class. On the other hand, foreigners with hard currency were able to purchase blocks of property for virtually nothing, creating "a wave of anger against foreigners." Meanwhile, the government used 130 printing plants to produce money.

Some, like the industrialist Hugo Stinnes, came out ahead. Stinnes leveraged up with depreciating currency to buy companies in order to create a industrial empire. Others put paper wealth into "material assets." This focus on material assets and access to foreign currency has lasted in Europe to the present day. For today's Germans, "The spectacle of the Anglo-Saxon countries 'solving' the recession by conjuring money up from nowhere to keep the economy going unsettles minds east of the Rhine." What we call "quantitative easing" brings back frightening memories in Germany. 

As U.S. financial professionals ponder quantitative easing and possible government default, they view events with relative confidence of underlying stability, with hopes for a happy ending. But we should also beware of economic history, and possible non-happy endings. Frederick Taylor has produced a clearly written, easily read, well researched book on the German hyperinflation that demands our attentiom almost a hundred years later.

–Bill Hayes

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