The following is an excerpt from an essay written by George Goodman in the 1960’s. I have taken the liberty of juxtaposing our current financial news and some fictional future to the original in order to make the comparison easier to most readers. The original text is in italics in order to make it easier to read.
Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914.
Before the turn of the century the United States was a prosperous country. The technological revolution had rapidly increased the standards of living of most of the population. The fall of the Soviet Union, along with the beginnings of fiscal restraint during the 1990’s and the massive increase in revenue brought in to the Treasury by the expanding market, brought the US Federal Government budget to the closest it had been in two generations to a balanced budget. The United States was the leader in computer and networking equipment. The rapidly growing internet required massive outlays worldwide for infrastructure and software, most of it produced in the United States. The US dollar was the world’s reserve currency and traded close to parity with the British Pound, the European Euro, the Japanese Yen and the Australian and Canadian dollars. That was in 2000.
In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado.
In 2013, at the most fevered moment of the US Hyperinflation, the exchange rate between the US dollar and the Euro was one trillion dollars to one Euro, and a week’s wages could not even pay for a single meal. Most Americans were taken by surprise by the financial tornado.
"My father was a lawyer," says Walter Levy, an internationally known German-born oil consultant in New York, "and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread." The Berlin publisher Leopold Ullstein wrote that an American visitor tipped their cook one dollar. The family convened, and it was decided that a trust fund should be set up in a Berlin bank with the cook as beneficiary, the bank to administer and invest the dollar.
“My father was an HR manager,” says Walt Johnson, an internationally known water consultant in Lima, Peru, “he had contributed to his 401k investments every pay period faithfully. He started it in 1990 and had made maximum contributions even after his mortgage went underwater. By the time he became unemployed in 2012 and cashed out, he bought a gallon of water and a box of ammo. This was before firearms were made illegal.” New York Times publisher Markos Moulitas tweeted that a Chinese visitor tipped the waitress one Yuan. The family convened, and it was decided to purchase a share of Apple Computers with the Yuan as an investment for the future.
In retrospect, you can trace the steps to hyperinflation, but some of the reasons remain cloudy. Germany abandoned the gold backing of its currency in 1914. The war was expected to be short, so it was financed by government borrowing, not by savings and taxation. In Germany prices doubled between 1914 and 1919.
After four disastrous years Germany had lost the war. Under the Treaty of Versailles it was forced to make a reparations payment in gold-backed Marks, and it was due to lose part of the production of the Ruhr and of the province of Upper Silesia. The Wiemar Republic was politically fragile.
In retrospect, you can trace the steps to hyperinflation, but some of the reasons remain cloudy. The information technology business crash, known at the time as the dot com bubble, prompted the US central bank, the Federal Reserve, to lower interest rates in order to stimulate the economy. The US Federal Government abandoned all fiscal restraint and invaded the regions that were then called Iraq and Afghanistan. The wars were expected to be short, so they were financed by borrowing, not by savings or taxation. The Federal Reserve rates, although successful for a while in re-inflating the economy, caused an explosion in home prices. In the US home prices doubled between 2000 and 2007.
After 10 disastrous years the United States abandoned the wars. The bursting of the housing bubble in 2006-2008 caused severe stress to ever extended banks. The banks faced with massive mortgage foreclosures, filed insurance claims against major insurers and financial firms. Financial giants like Lehman Brothers and insurer AIG could not cover the claims. The US government, in an attempt to rescue the financial system, paid the claims shifting the now worthless debt to the public balance sheet instead of the private banks balance sheet. By spring of 2009, the US auto industry, heavily leveraged and with massive labor and retirement costs, demanded that the US government rescue them also. The Federal Government nationalized 2/3 of the domestic auto industries in order to prevent their collapse. The United States was politically divided and fragile.
But the bourgeois habits were very strong. Ordinary citizens worked at their jobs, sent their children to school and worried about their grades, maneuvered for promotions and rejoiced when they got them, and generally expected things to get better. But the prices that had doubled from 1914 to 1919 doubled again during just five months in 1922. Milk went from 7 Marks per liter to 16; beer from 5.6 to 18. There were complaints about the high cost of living. Professors and civil servants complained of getting squeezed. Factory workers pressed for wage increases. An underground economy developed, aided by a desire to beat the tax collector.
But average American habits were very strong. Ordinary citizens worked at their jobs, watched popular TV programs and spent their time lost in social media sites. They generally expected things to get better. But most were living in homes they could not longer afford. Prices of staples doubled from 2009 to 2011. Gasoline reached $6.00 dollars a gallon from $2.50. Milk went from $3.85 a gallon to $7.50. Bread from $1.00 a pound to $3.50 for a ¾ pound loaf. People complained about the high cost of living. Although government employees were receiving cost of living adjustments, the private sector workers complained of getting squeezed. Union workers, especially in nominally recovering factories like Ford Motor Corporation, demanded a return to earlier benefits and salary increases. A small grass root movement, nick named the “Tea Party”, arose from the populace to demand changes in government spending and taxation.
On June 24, 1922, right-wing fanatics assassinated Walter Rathenau, the moderate, able foreign minister. Rathenau was a charismatic figure, and the idea that a popular, wealthy, and glamorous government minister could be shot in a law-abiding society shattered the faith of the Germans, who wanted to believe that things were going to be all right. Rathenau's state funeral was a national trauma. The nervous citizens of the Ruhr were already getting their money out of the currency and into real goods -- diamonds, works of art, safe real estate. Now ordinary Germans began to get out of Marks and into real goods.On June 12, 2012, Lyndon Larouche fanatics assassinated Ben Shalom Bernanke, the chairman of the Federal Reserve Bank. Bernanke was a controversial figure, but the idea that a powerful member of the Federal Government could be killed by a car bomb in the nation’s capital shattered the faith of Americans who wanted to believe that things would get better and that political violence could not happen in their society. Rumors and gossip in the social network sites and talk radio fueled the national trauma. Some nervous citizens had already been getting their money out of the banks and purchasing real goods such as precious metals, food, guns and ammunition. Now ordinary Americans began rushing into the market place to change their currency into real goods.
Pianos, wrote the British historian Adam Ferguson, were bought even by unmusical families. Sellers held back because the Mark was worth less every day. As prices went up, the amounts of currency demanded were greater, and the German Central Bank responded to the demands. Yet the ruling authorities did not see anything wrong. A leading financial newspaper said that the amounts of money in circulation were not excessively high. Dr. Rudolf Havenstein, the president of the Reichsbank (equivalent to the Federal Reserve) told an economics professor that he needed a new suit but wasn't going to buy one until prices came down.
Small farm plots, wrote Canadian historian John English, were bought by city people that had never grown a single crop. Luxury brand items, like coach handbags, were bought by the poor with government assistance cards. Sellers held back because the dollar was worth less every day. As prices went up, the demand for bank credit was greater, and the Federal Reserve Bank responded to the demands. Foodstuffs, skyrocketing in price, prompted the Federal Government to issue additional bonds from the Treasury and issue electronic subsistence cards to the citizens to prevent rioting in the streets. Yet, the ruling authorities did not see anything wrong. Leading financial websites and cable networks would point to the rise of stock prices as proof that the economy was recovering. Nobel Laureate, Paul Krugman wrote articles claiming that the economic recovery could only be accelerated by the Federal Government issuance of more debt.
Why did the German government not act to halt the inflation? It was a shaky, fragile government, especially after the assassination. The vengeful French sent their army into the Ruhr to enforce their demands for reparations, and the Germans were powerless to resist. More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.
Why did the US government not act to halt the inflation? It was a deadlocked government, especially after the tea party movement had elected their candidates to the congress. The Federal Government, divided along ideological lines, became impotent. The President tried to bypass the congress by issuing a series of executive orders in a vain attempt to manage the economy from the oval office. Congress sued the President and defunded most executive branch agencies to prevent the President from dictating national policy from his desk. The Federal Reserve Bank became the de facto government of the US in economic matters. The great US industry giants, Apple, Microsoft, General Motors, Netflix, condoned the inflation and survived it well. A cheaper dollar, they reasoned, would make US products cheap and easy to export, and they needed the export earnings to prop up their balance sheets. Inflation kept the stock market working.
So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."
The presses of the Reichsbank could not keep up though they ran through the night. Individual cities and states began to issue their own money. Dr. Havenstein, the president of the Reichsbank, did not get his new suit. A factory worker described payday, which was every day at 11:00 a.m.: "At 11:00 in the morning a siren sounded, and everybody gathered in the factory forecourt, where a five-ton lorry was drawn up loaded brimful with paper money. The chief cashier and his assistants climbed up on top. They read out names and just threw out bundles of notes. As soon as you had caught one you made a dash for the nearest shop and bought just anything that was going." Teachers, paid at 10:00 a.m., brought their money to the playground, where relatives took the bundles and hurried off with them. Banks closed at 11:00 a.m.; the harried clerks went on strike.
So, the Federal Reserve thru Quantitative Easing, began flooding the banks with credit, and once started it could not stop. The credit demands due to price increases became dizzying. Prices at online retail outlets would update on a minute basis. A house wife in Topeka ordered gifts at Amazon.com and before she could checkout, the prices in her basket had gone up 30%. The online chat support recommended that she chose everything she wanted ahead of time and checked out immediately in order to beat the price increases.
The Federal Reserve Bank could not keep up with the credit demands. Individual Sates began issuing I.O.U.s and collecting property taxes on a weekly basis. A school teacher described payday, which was every day at 11:00. “We would all rush to the nearest ATM hoping to get some dollars and do our shopping for the day at Wal-mart before they changed prices or ran out for the day. You needed cash, because if Wal-Mart ran out of food, you would have to go to the corner market and buy food with cash from the back of a pickup. Sometimes an armored truck would arrive at the ATM and we would have to wait until they reloaded the machine just to get some cash”. People would place on line orders for gold and silver with their credit cards knowing that by the time the bill arrived they could sell off the gold at a local pawnshop, pay off the credit card and make a profit.
The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.
The flight from currency that had begun with the buying of gold, farm plots and luxury clothing now extended to minor electronics and almost useless items. Disposable cell phones, faux jewelry, and name brand jeans were popular. The law-abiding country crumbled into petty thievery. Copper pipe and electrical cable was stripped from empty homes and construction sites. Gasoline was siphoned from cars in mall and airport parking lots. People bought things they didn’t need and used them for barter, portable games for food, leather belts for cigarettes. Rioting became common place in major cities. Prostitutes of both sexes roamed the streets. Common housewives would spend their days in online chat rooms trying to sell themselves. Crack cocaine became a common use drug. In the night clubs the newly rich and their foreign friends, mostly Chinese, could dance and spend money. Young people further disconnected from reality and embraced online societies. Rave clubs became the material world of their online personas and they would live out their online fantasies without any restrictions. Their parents had caused the collapse, so they would not abide by the rules anymore.
The publisher Leopold Ullstein wrote: "People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."
Talk radio host, Mark Levin wrote: “People just didn’t understand what was happening. All the talking heads on cable TV couldn’t explain the phenomenon. There was a feeling of utter dependence on anonymous powers, almost as a primitive people believed in magic, that somebody must be in the know, and that this cabal of somebodies must be a conspiracy”
When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning.
When the 1 Trillion dollar note, the Junior (named after Dr. Martin Luther King Junior) came out, few bothered to collect the change when they spent it. By November 2012, with one Yuan equaling 1 trillion dollars, the breakdown was complete. The currency had lost its meaning.
What happened immediately afterward is as fascinating as the Great Inflation itself. The tornado of the Mark inflation was succeeded by the "miracle of the Rentenmark." A new president took over the Reichsbank, Horace Greeley Hjalmar Schacht, who came by his first two names because of his father's admiration for an editor of the New York Tribune. The Rentenmark was not Schacht's idea, but he executed it, and as the Reichsbank president, he got the credit for it. For decades afterward he was able to maintain a reputation for financial wizardry. He became the architect of the financial prosperity brought by the Nazi party.
What happened immediately afterward is as fascinating and the Great Inflation itself. The tornado of the dollar inflation was succeeded by the “miracle of the mineral credit”. Newly elected President, Chris Christi, appointed Allan Mulally CEO of Ford Motor Corporation, as the Secretary of the Treasury. In March 2013, Secretary Mulally presented President Christi a plan to replace the Federal Reserve Notes with a new currency. The mineral credit was not a new idea. It was similar in basic concept as the German Rentenmark of the 1920s but with a very American twist. Secretary Mullaly ordered an inventory of all mineral assets owned by the US, oil, natural gas, timber and precious metals. He ordered the US mint to coin all gold and silver owned by the US for immediate circulation as hard currency and to issue to the newly created third bank of the US credits based on the market value of the mineral assets. This new currency would float based on the monthly value of the minerals and the inventory of assets, audited quarterly. An initial exchange rate of 1 credit per billion Federal Reserve Notes was established to pay back outstanding debt and ease the transition from notes into the new credits. Although the Federal Reserve Bank and its notes were not abolished, the notes themselves became worthless and the reserve ended issuance by July of 2013.
Obviously, though the currency was worthless, Germany was still a rich country -- with mines, farms, factories, forests. The backing for the Rentenmark was mortgages on the land and bonds on the factories, but that backing was a fiction; the factories and land couldn't be turned into cash or used abroad. Nine zeros were struck from the currency; that is, one Rentenmark was equal to one billion old Marks. The Germans wanted desperately to believe in the Rentenmark, and so they did. "I remember," said one Frau Barten of East Prussia, "the feeling of having just one Rentenmark to spend. I bought a small tin bread bin. Just to buy something that had a price tag for one Mark was so exciting."
Obviously, though the credits were worthless, The United States was still a rich country, oil deposits, natural gas and minerals under Federal control were abundant. The backing of the credits was the value of the resources; but the backing was fiction; the US never intended to sell any of those assets in the open market. Nine zeros were struck from the old currency; that is one credit equaled one billion Federal Reserve notes. Americans wanted so desperately to believe in their currency and return to normalcy, and so they did. The issuance of hard currency helped them believe. “I remember,” said Mrs Potter from Topeka, Kansas, “the feeling of having that silver dollar to spend. I bought me a new handbag. Just to buy something that had a price tag of one dollar was so exciting.”
All money is a matter of belief. Credit derives from Latin, credere, "to believe." Belief was there, the factories functioned, the farmers delivered their produce. The Central Bank kept the belief alive when it would not let even the government borrow further.
All currency is a matter of belief. Credit derives from Latin, credere, "to believe." Belief was there, the factories functioned, the farmers delivered their produce. The restrictions of the mineral credit kept the belief alive when it would not let even the government borrow further.