Today,
instead of the traditional market observations by the Chairman of the
Fermentation Committee, we share with readers a critical historical
lesson from Art Cashin, focusing on an event that took place 89 years
ago, which as Cashin says is "one of the most devastating economic
events in recorded history and an important backdrop to Europe today. It
all began with the efforts of a few, well-intentioned government
officials." Many will know what we are talking about already...
An Encore Presentation
Originally,
on this day (-2) in 1922, the German Central Bank and the German
Treasury took an inevitable step in a process which had begun with their
previous effort to "jump start" a stagnant economy. Many months earlier
they had decided that what was needed was easier money. Their initial
efforts brought little response. So, using the governmental "more is
better" theory they simply created more and more money.
But economic
stagnation continued and so did the money growth. They kept making money
more available. No reaction. Then, suddenly prices began to explode
unbelievably (but, perversely, not business activity).
So, on this day
government officials decided to bring figures in line with market
realities. They devalued the mark. The new value would be 2 billion
marks to a dollar. At the start of World War I the exchange rate had
been a mere 4.2 marks to the dollar. In simple terms you needed 4.2
marks in order to get one dollar. Now it was 2 billion marks to get one
dollar. And thirteen months from this date (late November 1923) you
would need 4.2 trillion marks to get one dollar. In ten years the amount
of money had increased a trillion fold.
Numbers like billions
and trillions tend to numb the mind. They are too large to grasp in any
“real” sense. Thirty years ago an older member of the NYSE (there were
some then) gave me a graphic and memorable (at least for me) example.
“Young man,” he said, “would you like a million dollars?” “I sure would,
sir!”, I replied anxiously. “Then just put aside $500 every week for
the next 40 years.” I have never forgotten that a million dollars is
enough to pay you $500 per week for 40 years (and that’s without benefit
of interest). To get a billion dollars you would have to set aside
$500,000 dollars per week for 40 years. And a…..trillion that would
require $500 million every week for 40 years. Even with these examples,
the enormity is difficult to grasp.
Let’s take a
different tack. To understand the incomprehensible scope of the German
inflation maybe it’s best to start with something basic….like a loaf of
bread. (To keep things simple we’ll substitute dollars and cents in
place of marks and pfennigs. You’ll get the picture.) In the middle of
1914, just before the war, a one pound loaf of bread cost 13 cents. Two
years later it was 19 cents. Two years more and it sold for 22 cents. By
1919 it was 26 cents. Now the fun begins.
In 1920, a loaf of
bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of
1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five
months later a loaf went for $1200. By September it was $2 million. A
month later it was $670 million (wide spread rioting broke out). The
next month it hit $3 billion. By mid month it was $100 billion. Then it
all collapsed.
Let’s go back to
“marks”. In 1913, the total currency of Germany was a grand total of 6
billion marks. In November of 1923 that loaf of bread we just talked
about cost 428 billion marks. A kilo of fresh butter cost 6000 billion
marks (as you will note that kilo of butter cost 1000 times more than
the entire money supply of the nations just 10 years earlier).
How Could This All Happen? –
In 1913 Germany had a solid, prosperous, advanced culture and
population. Like much of Europe it was a monarchy (under the Kaiser).
Then, following the assassination of the Archduke Franz Ferdinand in
Sarajevo in 1914, the world moved toward war. Each side was convinced
the other would not dare go to war. So, in a global game of chicken they
stumbled into the Great War.
The German General
Staff thought the war would be short and sweet and that they could
finance the costs with the post war reparations that they, as victors,
would exact. The war was long. The flower of their manhood was killed or
injured. They lost and, thus, it was they who had to pay reparations
rather than receive them.
Things did not go
badly instantly. Yes, the deficit soared but much of it was borne by
foreign and domestic bond buyers. As had been noted by scholars…..“The
foreign and domestic public willingly purchased new debt issues when it
believed that the government could run future surpluses to offset
contemporaneous deficits.” In layman’s English that means foreign bond
buyers said – “Hey this is a great nation and this is probably just a
speed bump in the economy.” (Can you imagine such a thing happening
again?)
When things began to
disintegrate, no one dared to take away the punchbowl. They feared
shutting off the monetary heroin would lead to riots, civil war, and,
worst of all communism. So, realizing that what they were doing was
destructive, they kept doing it out of fear that stopping would be even
more destructive.
Currencies, Culture And Chaos –
If it is difficult to grasp the enormity of the numbers in this tale of
hyper-inflation, it is far more difficult to grasp how it destroyed a
culture, a nation and, almost, the world.
People’s savings were
suddenly worthless. Pensions were meaningless. If you had a 400 mark
monthly pension, you went from comfortable to penniless in a matter of
months. People demanded to be paid daily so they would not have their
wages devalued by a few days passing. Ultimately, they demanded their
pay twice daily just to cover changes in trolley fare. People heated
their homes by burning money instead of coal. (It was more plentiful and
cheaper to get.)
The middle class was
destroyed. It was an age of renters, not of home ownership, so thousands
became homeless. But the cultural collapse may have had other more
pernicious effects.
Some sociologists
note that it was still an era of arranged marriages. Families scrimped
and saved for years to build a dowry so that their daughter might marry
well. Suddenly, the dowry was worthless – wiped out. And with it was
gone all hope of marriage. Girls who had stayed prim and proper awaiting
some future Prince Charming now had no hope at all. Social morality
began to collapse. The roar of the roaring twenties began to rumble.
All hope and belief
in systems, governmental or otherwise, collapsed. With its culture and
its economy disintegrating, Germany saw a guy named Hitler begin a ten
year effort to come to power by trading on the chaos and street rioting.
And then came World War II.
That soul-wrenching
and disastrous experience with inflation is seared into the German
psyche. It is why the populace is reluctant to endorse the bailout. It
is also why all the German proposals have each country taking care of
its own banks. (It gives them more control.) The French plans tend to
socialize the bailout. There’s more disagreement in these plans than the
headlines would indicate.
To celebrate have a
jagermeister or two at the Pre Fuhrer Lounge and try to explain that for
over half a century America's trauma has been depression-era
unemployment while Germany's trauma has been runaway inflation. But
drink fast, prices change radically after happy hour.