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On 11 January 1923 French an Belgian troops entered the Rhur Valley after Germany after Germany had declared that they could not make their second reparations installment. The French and Belgian troops wanted to take matters into their own hands as they refused to believe that Germany was unable to pay. The invasion of the Rhur helped the Germans as they now had a common enemy, the French, and thus united. Previously there had been much unrest in Germany. The Germans, due to the Versailles treaty, did not have a big enough army to defend itself so rather than using force, the German workers refused to work, implementing passive resistance. The government gave its full support. As well as passive resistance, some destroyed railroad, bridges, etc. and others fought the French soldiers. The government continued to print worthless money. Inflation table
In another country, for example Britain, in 1922 a loaf of bread might have cost a few pence and in Germany the same loaf of bread might have cost the same. However, during 1923 the British price might have remained the same yet the German price might have increased. So Germany was affected internationally. This process is normally called inflation but in Germany's case, it was given the name hyperinflation because they were affected so badly, prices rose by the minute. Konrad Heiden described what happened once the workers had collected their pay, "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 2 millions [marks]; but by the time you came to the counter, all you could get for 2 millions was half a pound, and the sales women would say the dollar has just gone up again. With the millions or billions you bought sardines, sausages, sugar, perhaps even a little butter..."
From the middle of 1922 until the middle of 1923, prices increased by over 100 times. Measured by the price of food, prices were 135 times higher at the end of the period than they were at the beginning. Measured by how many marks it took to buy a dollar, prices were 222 times higher. Yet even this horrid inflation was mild compared to what happened from July to November of 1923, when prices increased by somewhere between a million and a billion times their previous level. The rapid increase in German inflation can be seen in the postage stamps that were issued during this period. (See the picture below.) In 1920 the highest valued stamp issued was for four marks. In 1923 the denominations were changing so rapidly that the post office could not design new stamps fast enough and resorted to using old dies and then overprinting them with new values. The highest value reached in 1923 was for 50 billion (50,000,000,000) marks. A great many of these stamps must have been issued and bought, though not necessarily used, because very few of the almost 200 varieties of stamps issued from 1921 to 1923 have more than minimal collector's value. Also, stamps that were postally used during the period have a higher collector's value than stamps which were never used, a pattern that is quite unusual. Inflation hurts some people but helps others by redistributing wealth and income. Buyers, for example, are hurt by higher prices, but offsetting this is the gain which the producers get from the higher prices. People on fixed incomes will suffer, as will creditors, who are owed fixed amounts of money in the future. On the other hand, those making fixed payments, such as most debtors, will benefit. The German hyperinflation illustrates the redistribution which inflation causes in a dramatic way. It eliminated the value of all life insurance policies and all savings left in banks. When life insurance policies were paid in 1923, the value of the check was usually worth much less than the stamp used to post the letter. The hyperinflation eliminated all debts that existed prior to 1921. For example, the value of German mortgages in 1913 measured in U.S. dollars was about $10 billion; in late 1923 these mortgages were worth only one U.S. penny. By 1924 the inflation had radically redistributed the wealth of Germany. The segment of society that was hit the hardest seems to have been the middle class. The poor had little wealth to lose while the rich were often able to get their wealth into forms not adversely affected by inflation. Wealth held in foreign bank accounts, gold and precious metals, and land maintained value. If redistribution were the only effect of inflation, one could argue that it is not a serious problem. Since for every loser, there is a winner, society as a whole may break even (if this redistribution is not seen as being too "unfair"). However, inflation also makes ordinary decisions more difficult to make, and it causes people to change their behavior. The changes in behavior, which cause social losses, are again dramatically illustrated in a hyperinflation. Coping with a situation in which prices could double in a day meant changes in the way people organized their financial affairs. Wages were paid daily or several times a day, and the whole family would immediately go out and spend the money before it lost value. In The Black Obelisk, a novel set in 1923, Erich Maria Remarque describes this practice:
Getting rid of money was the key to financial survival since it lost its value so quickly. Merchants eventually found that they could not mark up prices as fast as they were rising.
The great inflation led to a large waste of society's resources. Just coping with the rapid change required resources--the extra bank clerks that Bopp mentions are but one example. Talented people no longer tried to earn money by productive activity, but sought ways to stay ahead of inflation, an activity unlikely to have any social benefits. Fortunes were made by those who speculated on the continued worsening of inflation. People who borrowed heavily almost always did well. People dislike inflation because it redistributes in ways they consider unfair, because it forces them to take actions to protect themselves, and because it makes decisions more difficult to make. Decisions to buy, sell or invest are based on a person's knowledge of what normal prices are, and this knowledge of normal prices is based on remembering past prices. With inflation, a person must remember not only past prices, but also the dates of those past prices, and then must try to compute what their present equivalents would be. Because our mental capacity to handle large amounts of information is limited, and because inflation requires us to handle more information in order to make decisions, inflation, even when it is perfectly predicted, reduces our ability to make good decisions. People like stable prices because they minimize the cost of making economic decisions. The German hyperinflation came to an abrupt end in November of 1923. The man who received credit for this achievement was named Hjalmar Schacht, the new head of the German central bank. In his autobiography he mentions a little poem that indicated his popularity among common folk:
This can be loosely translated as:
He was less popular with those who borrowed heavily on the assumption that prices would continue to rise. Stabilization led to large losses for them, and in some cases unmade huge fortunes that inflation had built. |