Hyperinflation in the Weimar Republic



Aug 2, 2020
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I read a book once about the Weimar Republic and its hyperinflation mess. Well, I guess I shouldn't say I read the entire book. I got about half way through it and had to put it down. While the beginning was fun, the end turned into a real drag. I felt like I was back in finance class in college. Far too many numbers. It's a shame I didn't make it all the way through the book because the Weimar issue is a huge example of how a currency can disintegrate into nothing. There are many lessons to be learned through the story. Luckily, I've got a much more entertaining version that'll be very easy to make it through. Mike Maloney broke things down in a straightforward way in this book called A Guide to Investing in Gold & Silver. The entire thing took be about four minutes to read. I'll break it down below. And as always, if you've got any comments on it or any background information, please let me know.

Okay, let's begin. If you're familiar with the financing of wars at all, you know that when one occurs, the nations at war generally disassociate their currencies with gold and silver. It's the only way they can finance the war they're engaged in, other than taking on investors and many, many loans. They simply print money as they need it. And if you're familiar with how wars are fought, many of them are games of attrition. It's who can outlast who and since wars are all about currencies and money, if one nation (or group) can keep the war going long enough to collapse their enemy's currency, they've won the game. It's an interesting strategy and one we see played out in modern times. The Iraq war is a great example. For over a decade the Iraq no-fly zone forced Saddam Hussein to assign resources to essentially nothing. This wore the nation down and when it came time for coalition forces to move in through land and air, the Iraqi defenses were spent. Many people think that long term endeavors are wastes of resources and are for no reason. These long term endeavors are actually some of the most peaceful battles being waged.

Back to the Weimar Republic. During World War One, the republic unlinked its currency from precious metals and wouldn't redeem their "money" for gold and silver any longer. It also printed four times as much currency as was in circulation before the war, during the war, but none of that additional currency was felt through inflation because of all the capital hoarding that was going on. Much like today, those who sense a rocky economy don't spend their money. So no matter how much money gets injected into society, very little of it is spent. The reason so many governments offer stimulus to the lower portion of earners is because those earners will surely spend the money they receive. If government gave money to high income folks, those folks would immediately put it into the bank for later use. Saving stimulus money does absolutely no good if it's saved. It needs to be spent. Even corporations today are hoarding cash. This type of activity creates a huge buildup of currency.

By the time the end of the war rolled around, people began feeling much better about their nation and about their economy, which prompted large amounts of spending. All their savings began pouring out from their bank accounts into every day life. Because of this massive injection of currency, inflation hit, driving up prices of precious metals as well as everything else. On average, prices rose from five to 20 times of what they were just a few years earlier. Those who responsibly saved their earnings felt the effects of this inflation the most. They lost most of their purchasing power through no fault of their own.

After a brief respite, inflation roared back into the economy in 1921 and 1922. Because Germany was forced to pay for war reparations with gold, silver, wood, coal, and the like, they continued to create more and more currency for their populace. The problem was, by this point, no one in the country trusted the currency at all. And because it was devaluing so fast, the moment someone got their hands on it, they spent it, which flooded the market with even more of it, making matters worse and worse. By 1923, Germany was printing 500 quadrillion marks a day. Yes, that's correct. I had to read that one twice. Can you imagine a relatively small government, such as the German government, printing out that much money every single day? Apparently, there were 33 printing plants working round the clock to get this currency into people's hands. But again, because no one trusted the marks, they got rid of them as fast as they acquired them. Their value was falling that fast. Because their value was falling, more and more were being printed. Do you see the problem here?

Here are some examples Mike gave about how much things cost in 1919 and then how much they cost in 1923. Check this out:

Shoes: 12 marks to 30 trillion marks.
Bread: 1/2 mark to 200 billion marks.
Egg: .08 mark to 80 billion marks.
Stock Market: 88 points to 26,890,000,000 points.

Even though the stock market screamed, it's purchasing power had fallen more than 97%. I've read that one strategy to counter inflation is to invest in equities. This new information has given me pause. Although, I will say that today, we have an opportunity to invest in multinational corporations. I'm not sure what the German stock market was comprised of back then. The multinational thing might round things out via diversification, which would help.

By this point, you may be asking yourself if anything outpaced inflation. That's what I was asking before I learned that yes, there was something. It was gold and silver. Gold grew from 100 marks per ounce to 87 trillion marks per ounce. Can you imagine owning ounces of gold while watching everything else burn down around you. But while the cost of gold grew exponentially, its value fared even better. The mark's value had dropped 97% against gold.

Now, here's how inflation works. We always knew this, but we are very slow to act upon it. Poor people don't have much to lose, so they don't feel the effects of inflation very much. If they're on any type of government support, that support should match inflation. The rich know things the rest of us don't know. They've got friends in high places and generally act before they are forced to, which makes them even richer. It's the general citizen who gets crushed. Just think about it. If you had $200k sitting in a savings account today and hyper inflation hit, within a few years time, that 200k would be next to worthless. And you might not even have it anymore because after a year or so, you'd read the writing on the wall and get rid of it. What would you buy? Hopefully something that doesn't squander it. Personally, I'd buy land, real estate, food, medicine, solar panels and batteries, and precious metals. Anything that has any amount of inherent value to it. The only problem with that strategy is faith. Since it's been so long since something drastic has happened with the economy, we'd be very slow to change our ways. I think most of us can smell the fact that something's on the horizon though.

Here's an example from the book for you. In 1923, 25 ounces of gold had the purchasing power of an entire city block of commercial real estate in Berlin. That's how much the value of gold increased compared to the currency the government was trying to pedal. I've read about similar scenarios in Venezuela. People buying cars and houses for just about nothing. Their currency is worthless as well. Anyone who thinks ahead and who's strategic can make out very well during one of these crises. I'll tell you this though, I certainly never want to feel the effects of a drastically devaluing currency. People starve to death during those times. They eat their pets. I've heard it all.

Mike Maloney says that during the worst kinds of economic crisis, wealth doesn't actually evaporate. It merely changes hands. So if you've got tons of currency before hyperinflation and you decide to trade that currency for previous metals or real estate at the right time, you can make out like a bandit. The trick is to know the right time. I suppose this is why planned purchases of gold and silver are probably the best strategy one could follow. Yes, it's boring and it's expensive, but if you look at the value of your currency years into the future, you may be thanking yourself huge when those times roll around.

So there you have it. The story of the Weimar Republic. If this all sounds too out there for you, I suggest you do your reading. You'll see that it's all true. Actually, you'll probably find out even more that'll shock you. Financial crises are not good things. For some of us. For others, they can be very good things. I suppose a hint of paranoia wouldn't hurt to kick us into gear.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
Hyperinflation in the Weimar Republic was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.

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