Excerpt from Paper
Money by "Adam Smith," (George J.W. Goodman), pp. 57-62.
mid-1960s, money manager George J.W. Goodman began to write a series of
irreverent and witty columns for New
York magazine under the borrowed name of
capitalism's founding theorist, Adam Smith. As "Adam Smith,"
Goodman went on to write several bestsellers about economics, the stock
market, and global capitalism, among them The Money Game, Supermoney,
and Paper Money, from which this account of the Weimar Republic's
disastrous hyperinflation is excerpted.
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. 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.
"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.
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 Weimar Republic was politically 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
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.
Pianos, wrote the British historian Adam Fergusson, 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.
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,
-- 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
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.
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 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."
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.
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.
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
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.
But although the country functioned again, the savings were never restored,
nor were the values of hard work and decency that had accompanied the
savings. There was a different temper in the country, a temper that Hitler
would later exploit with diabolical talent. Thomas Mann wrote: "The
market woman who without batting an eyelash demanded 100 million for an egg
lost the capacity for surprise. And nothing that has happened since has been
insane or cruel enough to surprise her."
With the currency went many of the lifetime plans of average citizens. It was
the custom for the bride to bring some money to a marriage; many marriages
were called off. Widows dependent on insurance found themselves destitute.
People who had worked a lifetime found that their pensions would not buy one
cup of coffee.
Pearl Buck, the American writer who became famous for her novels of China, was in Germany in 1923. She wrote later:
"The cities were still there, the houses not yet bombed and in ruins,
but the victims were millions of people. They had lost their fortunes, their
savings; they were dazed and inflation-shocked and did not understand how it
had happened to them and who the foe was who had defeated them. Yet they had
lost their self-assurance, their feeling that they themselves could be the
masters of their own lives if only they worked hard enough; and lost, too,
were the old values of morals, of ethics, of decency."
The fledgling Nazi party, whose attempted coup had failed in 1923, won 32
seats legally in the next election. The right-wing Nationalist party won 106
seats, having promised 100 percent compensation to the victims of inflation
and vengeance on the conspirators who had brought it.