The German Inflation: Too many claims to too few goods

The claims• German labor…an 8-hour day• German households…money holdings• German rentiers…war bonds• Victorious allies…reparations

Disruptions to output• Strikes … 8-hour day• Altered borders reorganized production

• Reparations in kind

JMK: Europe Before the War

From being agricultural and mainly self-supporting, Germany transformed herself into a vast and complicated industrial machine, dependent for its working on the equipoise of many factors outside Germany as well as within. Only by operating this machine, continuously and at full blast, could she find occupation at home for her increasing population and the means of purchasing their subsistence from abroad. The German machine was like a top which to maintain its equilibrium must spin ever faster and faster. …Round Germany as a central support the rest of the European economic system grouped itself, and on the prosperity and enterprise of Germany the prosperity of the rest of the Continent mainly depended. The increasing pace of Germany gave her neighbors an outlet for their products, in exchange for which the enterprise of the German merchant supplied them with their chief requirements at a low price.

Europe Before the War: The Double Bluff

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the labouring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of society into accepting, a situation in which they could call their own very little of the cake that they and nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.

JMK: The Lenin Dictum• Lenin is said to have declared that the best

way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. … they not only confiscate, but they confiscate arbitrarily… As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

The German Inflation: Milestones and Stages• November 1918: Revolution…armistice• July 1919: Acceptance of Versailles Treaty

Sharp depreciation of the MarkExport driven expansion…low unemployment

• February 1920: Kapp Putsch suppressed Appreciation of Mark/Relative stabilization

• May 1921: London Ultimatum… Assassination of Erzberger

Sharp depreciation of mark…renewed inflationDeclining real wage…heightened conflict

• Movement toward fiscal balance• July 1922: Assassination of Rathenau

… withdrawal of J.P. Morgan loan… Reichsbank discounts commercial billsHeightened inflation…wage-price instabilityheightened unemployment

• January 1923: Occupation of Ruhr…passive resistance Hyperinflation/halting stabilization

• June 1923: Monetary chaos• December 1923: Stabilization crisis

The German Inflation: Early Stages

German Hyperinflation: Late Stages

German Inflation: Deficits and Interest

Hyperinflation Hall of FameContemporary economists• Karl Helfferich – balance of payments/depreciation• John H. Williams, Jr. – “ “ “ “• John Maynard Keynes – quantity theory• Costantino Bresciani-Turroni – quantity theoryPre-Cagan commentators• Frank Graham – depreciation/quantity theory• Joan Robinson – Keynesian wage-price spiral• Ragnar Nurkse – depreciation/wage-price spiral• Laursen & Pedersen – “ “ “

Cagan – Monetarist – Rational Expections• Phillip Cagan Thomas Sargent• Jacob Frenkel Neil Wallace• Rodney Jacobs• Mohsin Khan

Economic historians/Volkswagen project• Gerald Feldman Stephen Webb• Karl-Ludwig Holtfrerich – rational inflation