The German Inflation of 1920-23

Oscar B. Johannsen

[Reprinted from The Gargoyle, November 1959]

In view of the fact that inflation is uppermost in the minds of the people today, and as it appears that a special session of Congress may have to be called to deal with the problem, it might be instructive to have some understanding of possibly the worst inflation of modern times.

This was the one created by the German government in the early 1920's. Prior to WWI, the Deutsche Reichsmark exchanged at the rate of 4 for $1.00, i.e., a Mark was 25 cents. In the three years, 1920-23, it was reduced to zero as the German Government resorted to the printing press to solve its problems. By the end of 1923, currency circulation had reached such astounding heights that it was 225,000,000 times that of a year earlier! I What was the effect?

Savings were lost. As the Marks dropped in purchasing power, people withdrew their savings. In order to give the people their money, the banks had to sell their bonds and mortgages for whatever they could get. Out of 23,000,000 savings accounts in existence in 1914, only two million remained at the end of 1923, and these accounts were worthless.

Insurance and trust funds also became worthless. The bonds which the insurance companies owned to protect the insured dropped until they were worth only 4% of their original cost. Whatever mortgages they held that matured were paid off in the depreciating Marks. The beneficiaries of the insurance funds who expected to liye off them received just about enough for one day's existence! As an example of how absurd conditions became, the postage stamp which was required to send the claim for insurance, cost more than the face value of many of the insurance policies.

Naturally, the elderly who depended on their investments to pay their living expenses suffered incredible hardship. What may surprise some however, is to learn that many institutions, such as hospitals, were forced to close. Everyone is aware that creditors and the aged suffer during inflation, but few realise that many vital services which are almost taken for granted, as hospitals, may not be able to survive. Many young people look with indifference upon inflation on the assumption that they can adjust to the situation. Certainly, they can do it better than the aged, but what happens when they become sick and find few hospitals available?

Real estate protected the individual to a small degree. While mortgages on the property could be liquidated with depreciating Marks, the real estate owner found himself caught in a vise. On the one hand the taxes and maintenance costs rose to prohibitive heights, About the only thing to be said for real estate was that at the end of the inflation, the owner did have something left whereas the owners of bonds, mortgages and savings deposits, had nothing.

The best hedges were common stocks in natural resource companies as coal, lead, zinc, copper, and such industries as steel, autos and chemicals. Apparently, though, a lot depended on management. Good management meant the difference between survival and destruction. Small companies with little working capital were unable to meet the speedily rising wage and material costs and went bankrupt.

The best defense was the purchase of foreign exchange, as dollars, and holding them abroad until the debacle was over. However, not many Germans had enough understanding of foreign exchange to avail themselves of this hedge.

Two lessons came out of this fiasco. First, practically nobody escaped the effects of the inflation. This should be a warning to those who think that because they know something about inflation they will be able to come out of it ahead. Very few in Germany ware able to.

Second: Once more it was demonstrated that that the thrifty, those who owned the savings deposits, insurance policies, pensions suffered the most.

Not a very pretty picture. Will America learn before it is too late? Time will tell.